<PAGE>
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Securities Act of 1933 File #2-10766
Investment Company Act of 1940 File #811-123
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-
Pre-Effective Amendment No.___
Post-Effective Amendment No. 67
--
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
-
Amendment No. 66
--
The Composite Funds (formerly Composite Bond & Stock Fund, Inc.)/1/
----------------------------------------------------------------
(Exact name of Registrant as specified in Charter)
601 West Main Avenue, Suite 801, Spokane, WA 99201
---------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (509) 353-3486
--------------
John T. West
------------
601 West Main Avenue, Suite 300, Spokane WA 99201
--------------------------------------------------
(Name and address of agent for service)
____________________
/1/ Effective on or before December 31, 1997 (the "Effective Time"),
Composite U.S. Government Securities Fund, Composite Income Fund, Composite
Growth & Income Fund, Composite Cash Management Company Money Market Fund,
Composite Cash Management Company Tax-Exempt Money Market Fund, Composite
Tax-Exempt Bond Fund, Composite Northwest Fund and Composite Bond & Stock
Fund, the eight initial series of shares of The Composite Funds, a
Massachusetts business trust (the "Trust") will succeed to all of the
assets, rights, obligations and liabilities of Composite U.S. Government
Securities, Inc., Composite Income Fund, Inc., Composite Equity Series,
Inc., Composite Cash Management Company Money Market Portfolio, Composite
Cash Management Company Tax-Exempt Portfolio, Composite Tax-Exempt Bond
Fund, Inc., Composite Northwest Fund, Inc., and Composite Bond & Stock
Fund, Inc., respectively. The Trust hereby expressly adopts the
Registration Statement of Composite Bond & Stock Fund, Inc., as its own,
effective as of the Effective Time, for all purposes of the Investment
Company Act of 1940.
<PAGE>
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 99201-3505
_______________
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b) of Rule 485
___ on (date) pursuant to paragraph (b) of Rule 485
___ 60 days after filing pursuant to paragraph (a)(i) of Rule 485
XX 75 days after filing pursuant to paragraph (a)(ii) of Rule 485
- --
___ on (date) pursuant to paragraph (a)(ii) of Rule 485
___ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
An indefinite number of shares has been registered pursuant to Rule 24f-2. A
Notice on Form 24F-2 for the most recent fiscal year was filed on December 19,
1996.
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<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(a)
PART A
<TABLE>
<CAPTION>
N-1A Item No.
Location
<S> <C>
Item 1. Cover Page.............................. Cover Page
Item 2. Synopsis................................ *
Item 3. Condensed Financial Information......... Fee Table
Financial Highlights
Performance
Information
Item 4. General Description of the Registrant... The Fund's Investment
Practices and Risk
Factors
Investment Restrictions
Item 5. Management of the Fund.................. Who We Are
The Cost of Good
Management
Item 6. Capital Stock and Other Securities...... Who We Are
Distribution of
Income and Capital
Gains
Income Taxes on
Dividends and
Capital Gains
We're Here to Help You
Item 7. Purchase of Securities Being Offered.... The Cost of Good
Management
The Value of a Single
Share
How to Buy Shares
Item 8. Redemption or Repurchase................ How to Sell Shares
Item 9. Pending Legal Proceedings............... Not applicable
</TABLE>
<PAGE>
PART B
<TABLE>
<CAPTION>
<S> <C>
Item 10. Cover Page............................................. Cover Page
Item 11. Table of Contents...................................... Table of Contents
Item 12. General Information and History........................ Organization and
Authorized Capital
Who We Are
Item 13. Investment Objectives & Policies....................... See Prospectus Page [ ]
Investment Practices
Investment Restrictions
Brokerage Allocations
and Portfolio
Transactions
Item 14. Management of the Fund................................. The Funds and Their
Management
Item 15. Control Persons and Principal Holders of Securities.... Trustees and Officers
of the Fund
Item 16. Investment Advisory and Other Services................. The Investment
Adviser
Investment Management
Services
Distribution Services
Custodian
Item 17. Brokerage Allocation & Other Practices................. Brokerage
Allocations and
Portfolio
Transactions
Item 18. Capital Stock and Other Securities..................... Organization and
Authorized Capital
Who We Are
Voting Privileges
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered....................................... How Shares are
Valued
How Shares Can Be
Purchased
Redemption of
Shares (Part A)
Exchange Privilege
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Services Provided by
the Fund
Specimen Price
Make-Up Sheet
Item 20. Tax Status............................................. Dividends, Capital
Gain Distributions
and Taxes
Item 21. Underwriters........................................... Distribution Services
Item 22. Performance Information................................ Performance
Information
Item 23. Financial Statements.................................... Financial Statements
and Reports
</TABLE>
<PAGE>
COMPOSITE EQUITY FUNDS
Suite 300
601 W. Main Avenue
Spokane, Washington 99201-0613
Telephone (509) 353-3550 Toll Free (800) 543-8072
A SELECTION OF THREE FUNDS WITH DIFFERENT INVESTMENT OBJECTIVES:
The following three series (the "Composite Equity Funds") of The Composite
Funds (the "Trust") provide a diversified selection of investments in stocks,
bonds, and other securities:
COMPOSITE BOND & STOCK FUND - This Fund, which was established in 1939, is
designed to provide continuity of income, conservation of principal, and long-
term growth of both income and principal. Investments are made in bonds,
preferred stocks, common stocks and convertible bonds.
COMPOSITE GROWTH & INCOME FUND - The primary objective of this Fund is
long-term capital growth. Current income is a secondary consideration.
Investments are made in a diversified pool of common stocks and other
securities. Established in 1949, this is the second oldest of the Composite
Funds.
COMPOSITE NORTHWEST FUND - This Fund seeks long-term growth of capital by
investing in common stocks of companies doing business or located in Alaska,
Idaho, Montana, Oregon and Washington.
Please read this Prospectus dated December __, 1997, and retain it for
future reference. It sets forth information about these Funds that a prospective
investor should know before investing.
OTHER IMPORTANT INFORMATION
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SHARES INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
A STATEMENT OF ADDITIONAL INFORMATION ABOUT THE FUNDS, DATED DECEMBER __,
1997, IS ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION. IT IS INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS. YOU MAY OBTAIN A FREE COPY BY CALLING OR
WRITING THE FUNDS AT THE LOCATION LISTED ABOVE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
<PAGE>
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
CONTENTS Page
<S> <C>
About this Prospectus..................................................
Expense information....................................................
Financial highlights...................................................
The Funds' objectives..................................................
Investment practices and risk factors..................................
Investment restrictions................................................
Who we are.............................................................
The cost of good management............................................
The value of a single share............................................
How to buy shares......................................................
Distribution of income and capital gains...............................
Income taxes on dividends and capital gains............................
Exchanges for other Composite Funds....................................
How to sell shares.....................................................
IRAs and other tax-sheltered retirement plans..........................
Performance information................................................
Reports to shareholders................................................
We're here to help you.................................................
</TABLE>
ABOUT THIS PROSPECTUS
In this Prospectus, you will find basic and in-depth information about the
Composite Equity Funds. Included are such subjects as how to buy and sell
shares, as well as details about the Funds' objectives, investment practices and
restrictions, and other matters.
If you are not familiar with mutual funds, investment terminology, or the
Composite Funds, you may find it useful to understand the following key words
and terms that appear frequently on these pages:
GLOSSARY OF KEY WORDS AND TERMS
ADVISER. Composite Research & Management Co., which is called the "Adviser"
in this Prospectus, is the manager of the Equity Funds and a number of other
mutual funds (excluding series of The [Sierra] Variable Trust that serve as
underlying funding vehicles for variable insurance contracts, the "Composite
Funds")
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<PAGE>
Class A shares. Purchasers of Class A shares generally pay a sales charge
at the time of purchase and Class A shares pay annual operating expenses,
including ongoing service fees.
Class B shares. Purchasers of Class B shares do not pay an initial sales
charge, but class B shares pay higher ongoing distribution and service fees
than Class A shares for eight years, and redemptions of Class B shares are
generally subject to a contingent deferred sales charge (see below). Class B
shares convert to class A shares after eight years.
Class I Shares. 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 distribution fees.
Class S Shares. Class S shares are sold exclusively to investors who open
[SAM] accounts. Purchasers of Class S shares do not pay an initial sales
charge, but Class S shares pay higher ongoing distribution and service fees than
Class A shares for eight years and redemptions of Class S shares are generally
subject to a contingent deferred sales charge (see below). Class S shares
convert to Class A shares after eight years.
CONTINGENT DEFERRED SALES CHARGE. If an investor redeems Class B or Class S
shares within six years of purchase, he or she normally must pay this
charge.
DISTRIBUTOR. Composite Funds Distributor, Inc. distributes the Composite
Equity Funds and other Composite Funds and is referred to as the "Distributor"
in this Prospectus.
EXCHANGE. This privilege allows shareholders to transfer their investment
from one fund to another. Except for exchanges of shares of certain money market
funds that were not subject to any initial or contingent deferred sales charge
at the time of purchase, there is no fee or additional sales charge for an
exchange within the Composite Funds.
FUND. The term "Fund" identifies any one of the three mutual funds offered
through this Prospectus. These "Funds" are identified as follows in this
document:
BOND & STOCK. This Fund's objectives are to provide continuity of
income, conservation of principal, and long-term growth of both income and
principal.
GROWTH & INCOME. This Fund's primary objective is to provide long-
term capital growth by investing in common stocks and other securities.
Current income is a secondary consideration.
NORTHWEST. This Fund invests in common stocks of companies located
or doing business in the Northwest states of Alaska, Idaho, Montana, Oregon
and Washington. The primary objective is long-term growth of capital.
-3-
<PAGE>
NET ASSET VALUE (NAV). This is the term used in this Prospectus and in
daily newspaper financial tables to report the value of a single share of a
mutual fund. It is determined separately for each class by adding the value of a
fund's securities and other assets, subtracting any liabilities, and dividing
the resulting figure by the number of shares outstanding. That provides the
"net asset value" per share, often referred to as "NAV."
REDEMPTION. This refers to the sale of mutual fund shares by an investor.
He or she is said to have "redeemed" the shares.
STATEMENT OF ADDITIONAL INFORMATION. This is a document that has more
detailed information about the Funds than what is contained in this Prospectus.
It is on file with the Securities and Exchange Commission and also is available
through the Funds.
EXPENSE INFORMATION
The table below shows the Funds' costs and expenses that an investor will
bear both directly or indirectly and how they affect share ownership. Operating
expenses are based on the Funds' expenses during the fiscal year ended October
31, 1996. "Other expenses" for Class I and Class S shares are based on actual
"Other expenses" For Class B Shares for The fiscal year ended October 31,
1996.
For further information on costs and expenses, please see "The cost of good
management" on Page __.
SHAREHOLDER TRANSACTION EXPENSES FOR EACH FUND:
<TABLE>
<CAPTION>
Class A Class B Class I Class S
shares shares shares shares
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price) 5.75% None None None
Maximum contingent deferred sales
charge (as a percentage of
purchase price or redemption proceeds,
whichever is lower) None * 5.00% NONE 5.00%
Redemption fee None None None None
Exchange fee None None None None
</TABLE>
-4-
<PAGE>
* Certain investors who purchase class A shares at net asset value may be
subject to a contingent deferred sales charge of 1.00% or .50% on
redemptions of these shares during the first or second year after purchase,
respectively.
<TABLE>
<CAPTION>
ANNUAL FUND BOND & STOCK
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
-------------------------------------------
Class A Class B Class I Class S
shares shares shares shares
-------------------------------------------
<S> <C> <C> <C> <C>
Advisory fees .63% .63% .63% .63%
12b-1 fees .25% 1.00% 0% 1.00%
Other expenses .18% .23% .23% .23%
-------------------------------------------
Total Fund 1.06% 1.86% .86% 1.86%
operating expenses
<CAPTION>
ANNUAL FUND GROWTH & INCOME
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
---------------------------------------------
Class A Class B Class I Class S
Shares Shares Shares Shares
---------------------------------------------
<S> <C> <C> <C> <C>
Advisory fees .63% .63 .63% .63%
12b-1 fees .25% 1.00% 0% 1.00%
Other expenses .23% .31% .31% .31%
---------------------------------------------
Total Fund 1.11% 1.94% .94% 1.94%
operating expenses
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
ANNUAL FUND NORTHWEST
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
---------------------------------------------
Class A Class B Class I Class S
Shares Shares Shares Shares
---------------------------------------------
<S> <C> <C> <C> <C>
Advisory fees .63% .63% .63% .63%
12b-1 fees .25% 1.00% 0% 1.00%
Other expenses .20% .35% .35% .35%
---------------------------------------------
Total Fund 1.08% 1.98% .98% 1.98%
operating expenses
</TABLE>
Sales charge waivers are available Under certain circumstances for Class A,
Class B and Class S shares, and reduced sales charge purchase plans are
available for Class A shares. The 5.00% contingent deferred sales charge on
Class B and Class S Shares declines over time and is eliminated after six years.
Please see "The cost of good management" for further information. There is a $10
charge for redemptions paid by Fed Funds wire, but not for redemptions deposited
to your pre-authorized bank account or paid by check.
Example
You would pay the following expenses on a $1,000 investment in one of
the Funds, assuming you receive a 5% annual return and that the Fund's expenses
are the same as those shown in the Annual Fund Operating Expenses table above.
The 5% figure is a constant rate required for comparative purposes by the
Securities and Exchange Commission. The example should not be considered a
representation of past or future expenses or performance. Actual results will be
greater or less than the illustration.
-6-
<PAGE>
<TABLE>
<CAPTION>
BOND & STOCK
---------------------------------------------
Class A Class B CLASS I Class S
shares shares shares shares
---------------------------------------------
<S> <C> <C> <C> <C>
ASSUMING REDEMPTION AT THE
END OF EACH PERIOD:
1 Year $ $ $ $
3 Years $ $ $ $
5 Years $ $ $ $
10 Years $ $ $ $
ASSUMING YOU KEEP YOUR SHARES
AND NO REDEMPTIONS ARE
MADE:
1 Year $ $ $ $
3 Years $ $ $ $
5 Years $ $ $ $
10 Years $ $ $ $
<CAPTION>
GROWTH & INCOME
-------------------------------------------
Class A Class B Class I Class S
shares shares shares shares
-------------------------------------------
<S> <C> <C> <C> <C>
ASSUMING REDEMPTION AT THE
END OF EACH PERIOD:
1 Year $ $ $ $
3 Years $ $ $ $
5 Years $ $ $ $
10 Years $ $ $ $
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
ASSUMING YOU KEEP
YOUR SHARES AND NO
REDEMPTIONS ARE MADE:
<S> <C> <C> <C> <C>
1 Year $ $ $ $
3 Years $ $ $ $
5 Years $ $ $ $
10 Years $ $ $ $
<CAPTION>
NORTHWEST
-----------------------------------------------
Class A Class B Class I Class S
shares shares shares shares
-----------------------------------------------
<S> <C> <C> <C> <C>
ASSUMING REDEMPTION AT THE
END OF EACH PERIOD:
1 Year $ $ $ $
3 Years $ $ $ $
5 Years $ $ $ $
10 Years $ $ $ $
ASSUMING YOU
KEEP YOUR SHARES AND NO
REDEMPTIONS ARE MADE:
1 Year $ $ $ $
3 Years $ $ $ $
5 Years $ $ $ $
10 Years $ $ $ $
</TABLE>
Class B and Class S shares automatically convert to Class A shares after
eight years without charge or tax impact. Because of that, years nine through
ten reflect Class A operating expenses. Long-term Class B and Class S
shareholders could pay more than the economic equivalent of the maximum front-
end sales charge permitted by the National Association of Securities Dealers,
Inc. The Class B and Class S conversion feature is intended to reduce the
-8-
<PAGE>
likelihood this will occur. See "How to buy shares - Class B conversion feature"
and "How to buy shares - Class S conversion feature" on Pages [_] AND [_]
for more information.
FOR FURTHER INFORMATION
. Advisory fees - See "The cost of good management" Page [_]
. 12b-1 fees - See "The cost of good management" Page [_]
. Sales charge on purchases - See "How to buy shares" Page [_]
. Contingent deferred sales charge - See "How to buy shares" Page [_]
. Conversion of Class B shares to Class A - See "How to buy shares - Class B
conversion feature" Page [_]
. Conversion of Class S shares to Class A - See "How to buy shares - Class S
conversion feature" Page [_]
FINANCIAL HIGHLIGHTS
The tables on the following pages present selected financial information
about the Funds, including per share data, expense ratios and other data based
on average net assets. Information presented for periods ended prior to April
30, 1997 has been audited by LeMaster & Daniels PLLC, the Funds' independent
auditors, whose reports appear in the Funds' annual report. Information
presented for periods ended April 30, 1997 is unaudited. The Funds' 1996 annual
report and 1997 semiannual report are incorporated by reference into the
Statement of Additional Information.
-9-
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period) BOND & STOCK - CLASS A SHARES
<TABLE>
<CAPTION>
Six Eleven
Months Months
Ended Years Ended October 31, Ended
Apr. 30, ----------------------- Oct. 31,
1997 1996 1995 1994 1993 1992/4/
---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ..................... $ 14.71 $ 13.48 $ 11.53 $ 12.23 $ 11.27 $ 11.01
-------- -------- -------- -------- -------- --------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income .................. 0.25 0.52 0.50 0.46 0.48 0.44
Net Gains (Losses) on
Securities (both realized
and unrealized) ....................... 0.85 1.53 2.02 (0.57) 1.06 0.80
-------- -------- -------- -------- -------
Total From Investment
Operations ........................... 1.10 2.05 2.52 (0.11) 1.54 1.24
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income) .................... (0.27) (0.50) (0.49) (0.44) (0.46) (0.53)
Distributions (from
capital gains) ........................ (0.94) (0.32) (0.08) (0.15) (0.12) (0.45)
-------- -------- -------- -------- --------
Total Distributions .................... (1.21) (0.82) (0.57) (0.59) (0.58) (0.98)
-------- -------- -------- -------- --------
NET ASSET VALUE,
END OF PERIOD ........................... $ 14.60 $ 14.71 $ 13.48 $ 11.53 $ 12.23 $ 11.27
======== ======== ======== ======== ======== ========
TOTAL RETURN/1/ ......................... 3.58% 15.66% 22.55% -0.90% 13.99% 11.92%
RATIOS/SUPPLEMENTAL
DATA
Net Assets,
End of Period ($1,000's) .............. $277,506 $255,414 $208,592 $191,615 $180,281 $102,523
Ratio of Expenses to
Average Net Assets/2/.................. 1.02%/5/ 0.98% 1.02% 1.06% 1.13% 1.13%/5/
Ratio of Net Income to
Average Net Assets..................... 3.52%/5/ 3.68% 3.98% 3.97% 4.01% 4.30%/5/
Portfolio Turnover Rate ................ 55%/5/ 46% 32% 25% 19% 15%/5/
Average Commission Paid/3/ ............. $ 0.0571 $ 0.0632 -- -- -- --
<CAPTION>
Years Ended November 30,
------------------------
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ..................... $ 9.90 $ 10.86 $ 10.08 $ 8.85 $ 10.26
------- ------- ------- ------- -------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income .................. 0.55 0.53 0.58 0.53 0.52
Net Gains (Losses) on
Securities (both realized
and unrealized) ....................... 1.10 (0.78) 0.72 1.19 (1.23)
------- ------- ------- ------- -------
Total From Investment
Operations ........................... 1.65 (0.25) 1.30 1.72 (0.71)
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income) .................... (0.54) (0.61) (0.52) (0.44) (0.53)
Distributions (from
capital gains) ........................ 0.00 (0.10) 0.00 (0.05) (0.17)
------- ------- ------- ------- -------
Total Distributions .................... (0.54) (0.71) (0.52) (0.49) (0.70)
------- ------- ------- ------- -------
NET ASSET VALUE,
END OF PERIOD ........................... $ 11.01 $ 9.90 $ 10.86 $ 10.08 $ 8.85
======= ======= ======= ======= =======
TOTAL RETURN/1/ ......................... 16.96% -2.29% 13.21% 19.67% -7.53%
RATIOS/SUPPLEMENTAL
DATA
Net Assets,
End of Period ($1,000's) .............. $66,090 $63,669 $71,771 $69,230 $74,407
Ratio of Expenses to
Average Net Assets/2/.................. 1.14% 1.17% 0.96% 0.87% 1.69%
Ratio of Net Income to
Average Net Assets..................... 4.90% 5.25% 5.42% 5.35% 4.99%
Portfolio Turnover Rate ................ 35% 38% 36% 81% 83%
Average Commission Paid/3/ ............. -- -- -- -- --
</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) Change in Fund's fiscal year-end.
(5) Annualized.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
BOND & STOCK - CLASS B SHARES
<TABLE>
<CAPTION>
Six
Months March 30
Ended Years Ended to
April 30, October 31, Oct. 31,
--------- ----------- --------
1997 1996 1995 1994/(4)/
---- ---- ---- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD.................. $ 14.69 $ 13.47 $11.51 $ 11.49
-------- ------- ------ --------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income...... 0.19 0.41 0.39 0.18
Net Gains on Securities
(both realized and
unrealized).............. 0.84 1.53 2.03 0.04
------- ------ --------
Total From Investment
Operations.............. 1.03 1.94 2.42 0.22
------- ------ --------
LESS DISTRIBUTIONS
Dividends (from net
investment income)........ (0.21) (0.40) (0.38) (0.20)
Distributions (from
capital gains)............ (0.94) (0.32) (0.08) (0.00)
------- ------ --------
Total Distributions....... (1.15) (0.72) (0.46) (0.20)
------- ------ --------
NET ASSET VALUE, END OF
PERIOD.................... $ 14.57 $ 14.69 $13.47 $ 11.51
======== ======= ====== ========
TOTAL RETURN/(1)/.......... 3.26% 14.73% 21.60% 1.94%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
($1,000's)............... $ 31,491 $22,243 $7,372 $ 3,362
Ratio of Expenses to
Average Net Assets/(2)/.. 1.83%/(5)/ 1.86% 1.84% 1.77%/(5)/
Ratio of Net Income to
Average Net Assets....... 2.72%/(5)/ 2.80% 3.10% 3.22%/(5)/
Portfolio Turnover Rate... 55%/(5)/ 46% 32% 25%
Average Commission
Paid/(3)/................ $ 0.0571 $0.0632 -- --
</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.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
GROWTH & INCOME - CLASS A SHARES
<TABLE>
<CAPTION>
Six
Months
Ended Years Ended October 31,
Apr. 30, -----------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR................ $17.26 $14.65 $12.71 $12.81 $12.02 $11.86
------ ------ ------ ------ ------ ------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income........... 0.07 0.20 0.22 0.18 0.21 0.29
Net Gains (Losses) on
Securities (both realized
and unrealized)................ 1.92 3.16 2.31 0.85 1.10 0.80
---- ---- ---- ---- ---- ----
Total From Investment
Operations.................... 1.99 3.36 2.53 1.03 1.31 1.09
---- ---- ---- ---- ---- ----
LESS DISTRIBUTIONS
Dividends (from net
investment income)............. (0.09) (0.21) (0.19) (0.18) (0.21) (0.34)
Distributions (from
capital gains)................. (1.21) (0.54) (0.40) (0.95) (0.31) (0.59)
------ ------ ------ ------ ------ ------
Total Distributions............. (1.30) (0.75) (0.59) (1.13) (0.52) (0.93)
------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD.................... $17.95 $17.26 $14.65 $12.71 $12.81 $12.02
------ ====== ====== ====== ====== ======
TOTAL RETURN/(1)/................ 5.45% 23.61% 20.87% 8.55% 11.06% 9.94%
RATIOS/SUPPLEMENTAL
DATA
Net Assets,
End of Year ($1,000's) $215,534 $178,331 $130,630 $102,837 $95,229 $81,102
Ratio of Expenses to
Average Net Assets/(2)/........ 1.09%/(4)/ 1.03% 1.07% 1.10% 1.17% 1.10%
Ratio of Net Income to
Average Net Assets............. 0.82%/(4)/ 1.26% 1.62% 1.45% 1.67% 2.37%
Portfolio Turnover Rate 59%/(4)/ 52% 39% 34% 54% 18%
Average Commission Paid/(3)/ $0.0600 $0.0654 -- -- -- --
<CAPTION>
Years Ended October 31,
-----------------------
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR................ $9.18 $12.17 $11.10 $ 9.77 $11.57
----- ------ ------ ------ ------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income........... 0.29 0.35 0.46 0.35 0.44
Net Gains (Losses) on
Securities (both realized
and unrealized)................ 2.69 (2.19) 0.96 1.32 (0.45)
---- ------ ---- ---- ------
Total From Investment
Operations.................... 2.98 (1.84) 1.42 1.67 (0.01)
---- ------ ---- ---- ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)............. (0.30) (0.50) (0.35) (0.29) (0.55)
Distributions (from
capital gains)................. 0.00 (0.65) 0.00 (0.05) (1.24)
----- ----- ---- ------ ------
Total Distributions............. (0.30) (1.15) (0.35) (0.34) (1.79)
----- ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD.................... $11.86 $ 9.18 $12.17 $11.10 $ 9.77
====== ====== ====== ====== ======
TOTAL RETURN/(1)/................ 32.69% -16.25% 13.00% 17.36% 0.20%
RATIOS/SUPPLEMENTAL
DATA
Net Assets,
End of Year ($1,000's) $69,365 $68,297 $72,642 $69,117 $67,933
Ratio of Expenses to
Average Net Assets/(2)/........ 1.12% 1.17% 1.06% 0.89% 0.90%
Ratio of Net Income to
Average Net Assets............. 2.73% 3.33% 3.88% 3.33% 3.70%
Portfolio Turnover Rate 26% 37% 37% 45% 71%
Average Commission Paid/(3)/ -- -- -- -- --
</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.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
GROWTH & INCOME FUND - CLASS B SHARES
<TABLE>
<CAPTION>
March 30
Six Months Years Ended to
Ended April 30, October 31, 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 $0.0654 -- --
</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.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
NORTHWEST - CLASS A SHARES
<TABLE>
<CAPTION>
Six
Months
Ended Years Ended October 31,
Apr. 30, -----------------------
1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR.................. $ 19.69 $ 17.40 $ 14.30 $ 14.50 $ 14.04 $ 13.45 $ 8.43
-------- -------- -------- -------- -------- -------- -------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income............. 0.01 0.03 0.07 0.08 0.07 0.08 0.07
Net Gains (Losses) on
Securities (both realized
and unrealized).................. 2.89 2.47 3.10 0.35 0.46 0.69 5.03
-------- -------- -------- -------- -------- -------- -------
Total From Investment
Operations...................... 2.90 2.50 3.17 0.43 0.53 0.77 5.10
-------- -------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)............... -- (0.03) (0.07) (0.08) (0.07) (0.07) (0.08)
Distributions (from
capital gains)................... (1.88) (0.18) 0.00 (0.55) 0.00 (0.11) 0.00
-------- -------- -------- -------- -------- -------- -------
Total Distributions............... (1.88) (0.21) (0.07) (0.63) (0.07) (0.18) (0.08)
-------- -------- -------- -------- -------- -------
NET ASSET VALUE,
END OF PERIOD...................... $ 20.71 $ 19.69 $ 17.40 $ 14.30 $ 14.50 $ 14.04 $ 13.45
-------- ======== ======== ======== ======== ======== =======
TOTAL RETURN/(1)/.................. 5.39% 14.54% 22.24% 2.97% 3.82% 5.77% 60.49%
RATIOS/SUPPLEMENTAL DATA
Net Assets,
End of Period ($1,000's)......... $205,509 $176,706 $157,953 $152,622 $168,840 $167,115 $98,754
Ratio of Expenses to
Average Net Assets/(2)/.......... 1.05%/(5)/ 1.08% 1.10% 1.09% 1.09% 1.11% 1.21%
Ratio of Net Income to
Average Net Assets............... 0.07%/(5)/ 0.16% 0.44% 0.51% 0.48% 0.53% 0.63%
Portfolio Turnover Rate........... 20%/(5)/ 42% 9% 11% 8% 4% 8%
Average Commission Paid/(3)/...... $ 0.0563 $ 0.0665 -- -- -- -- --
<CAPTION>
Years Ended October 31,
-----------------------
1990 1989 1988 1987/(4)/
---- ---- ---- --------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR.................. $ 10.18 $ 7.55 $ 6.02 $ 6.15
------- ------- ------ ------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income............. 0.08 0.08 0.06 0.07
Net Gains (Losses) on
Securities (both realized
and unrealized).................. (1.76) 2.63 1.52 (0.14)
------- ------- ------ ------
Total From Investment
Operations...................... (1.68) 2.71 1.58 (0.07)
------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)............... (0.07) (0.08) (0.05) (0.06)
Distributions (from
capital gains)................... 0.00 0.00 0.00 0.00
------- ------- ------ ------
Total Distributions............... (0.07) (0.08) (0.05) (0.06)
------- ------- ------ ------
NET ASSET VALUE,
END OF PERIOD...................... $ 8.43 $ 10.18 $ 7.55 $ 6.02
======= ======= ====== ======
TOTAL RETURN/(1)/.................. -16.68% 36.14% 26.42% -1.72%
RATIOS/SUPPLEMENTAL DATA
Net Assets,
End of Period ($1,000's)......... $42,647 $18,687 $6,994 $6,589
Ratio of Expenses to
Average Net Assets/(2)/.......... 1.45% 1.50% 1.44% 1.36%
Ratio of Net Income to
Average Net Assets............... 0.72% 0.81% 0.84% 0.48%
Portfolio Turnover Rate........... 7% 12% 17% 40%
Average Commission Paid/(3)/...... -- -- -- --
</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) Class A information is presented from November 24, 1986, the date
registration became effective under the Investment Company Act of 1940, as
amended.
(5) Annualized.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
NORTHWEST - CLASS B SHARES
<TABLE>
<CAPTION>
March 30
Six Months Years Ended to
Ended April 30, October 31, Oct. 31,
-------------- ----------- --------
1997 1996 1995 1994/(4)/
---- ---- ---- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................. $19.45 $17.31 $14.28 $14.42
------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income..... (0.02) (0.08) (0.05) (0.02)
Net Gains on Securities
(both realized and
unrealized)............. 2.79 2.40 3.08 (0.12)
------ ------ ------ ------
Total From Investment
Operations............. 2.77 2.32 3.03 (0.14)
------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)....... 0.00 0.00 0.00 0.00
Distributions (from
capital gains)........... (1.88) (0.18) 0.00 0.00
------ ------ ------ ------
Total Distributions...... (1.88) (0.18) 0.00 0.00
------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD................... $20.34 $19.45 $17.31 $14.28
====== ====== ====== ======
TOTAL RETURN/(1)/......... 5.12% 13.54% 21.25% -0.97%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period ($1,000's)....... $22,041 $14,653 $7,083 $3,102
Ratio of Expenses to
Average Net Assets/(2)/. 1.93%/(5)/ 1.98% 1.95% 1.96%/(5)/
Ratio of Net Income to
Average Net Assets...... -0.81%/(5)/ -0.76% -0.45% -0.39%/(5)/
Portfolio Turnover Rate.. 20%/(5)/ 42% 9% 11%
Average Commission
Paid/(3)/............... $0.0563 $0.0665 -- --
</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.
<PAGE>
THE FUNDS' OBJECTIVES
Composite Research & Management Co., referred to as the "Adviser" in this
Prospectus, manages the Funds. The Adviser attempts to maintain Funds that are
responsive to changes in economic trends and developments, government actions
and regulations, and international monetary conditions. Currently, 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 recognized exchange, over-the-counter, or through the
NASDAQ system.
The investment objectives and policies of each Fund are described below.
These objectives are fundamental and, therefore, cannot be changed without a
majority vote of the Fund's outstanding shares. Other investment policies and
techniques are not fundamental unless this Prospectus or the Statement of
Additional Information state that a particular policy is fundamental. Because
risks are involved, there cannot be any assurance a Fund's objectives will be
attained.
BOND & STOCK: This Fund has three objectives: continuity of income,
conservation of principal, and long-term growth of both income and principal.
The Fund invests in bonds, preferred stocks, common stocks and convertible
bonds. At least 25% of the Fund's assets are invested in fixed income securities
at all times.
GROWTH & INCOME: The primary objective of this Fund is to provide long-term
capital growth by investing in common stocks and other securities. Current
income is a secondary consideration.
NORTHWEST: This Fund invests with the objective of long-term growth of
capital. Common stocks are selected from companies located or doing business in
the Northwest states of Alaska, Idaho, Montana, Oregon, and Washington. Under
normal circumstances, at least 65% of the Fund's total assets will be invested
in companies whose principal executive offices are located in the Northwest.
INVESTMENT PRACTICES AND RISK FACTORS
The Funds' net asset values per share will fluctuate as the values of the
securities they own change. There are many factors that influence fluctuations
in the market value of securities owned by the Funds. These include economic
trends, government actions and regulations, and international monetary
conditions. An individual security's price can be affected by such factors as
poor earnings reports by its issuer, litigation, loss of major customers, or
changes particular to its industry. The Funds attempt to limit risk by
diversifying investments and by carefully researching securities before they are
purchased. Market risks are inherent in all investments.
GENERAL
-16-
<PAGE>
The Funds may employ the following techniques in addition to the primary
investment strategies discussed earlier under "The Funds' objectives."
MONEY MARKET INSTRUMENTS. The Funds are permitted to invest in money market
instruments for temporary or defensive purposes. The money market investments
permitted include obligations of the U.S. government and its agencies and
instrumentalities; short-term corporate-debt securities; commercial paper,
including bank obligations; certificates of deposit; and repurchase agreements.
REPURCHASE AGREEMENTS. The Funds may temporarily invest cash reserves in
repurchase 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 defaults on
its agreement to repurchase the security, the Fund may suffer a loss if it is
delayed or prevented from recovering the underlying debt security.
Repurchase agreements will be entered into only with brokers, dealers or
banks that meet credit guidelines adopted by the Board of Trustees. To limit
risk, repurchase agreements maturing in more than seven days will not exceed 10%
of a Fund's total assets.
REAL ESTATE INVESTMENT TRUSTS. The Funds may invest up to 25% of their
assets in real estate investment trusts, known as "REITs." Factors influencing
the investment 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.
FIXED-INCOME SECURITIES. The Bond & Stock and Growth & Income Funds may
invest in bonds of any maturity, including 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.
Both Funds 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
issuer's creditworthiness. The market price of these securities may fluctuate
more than higher-rated securities. They also may decline significantly in
periods of general economic difficulty, which may follow periods of rising
interest rates.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. The Bond & Stock and Growth &
Income Funds 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 obtain what is considered to be an advantageous yield or
price at the time of the transaction. The Funds may
-17-
<PAGE>
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. Thus, 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.
Each Fund is prohibited from entering into when-issued or delayed-delivery
commitments that, in total, exceed 20% of the market value of its total assets
minus total liabilities (except for the obligations created by these
commitments).
COVERED CALL OPTIONS. Each of the Funds may write (sell) covered call
options. A call option is "covered" if the Fund owns the security underlying the
option it has written or it maintains enough cash, cash equivalents or liquid
securities to purchase the underlying security. If a 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 termination 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.
Foreign securities. The Bond & Stock and Growth & Income Funds may invest
up to 25% of their assets in U.S. dollar-denominated securities of foreign
issuers.
Investments in foreign securities may involve somewhat different risks,
including incomplete or inaccurate financial information, foreign taxes and
restrictions, illiquidity, and fluctuations in currency values.
UNIQUE TO THE NORTHWEST FUND. The Northwest Fund concentrates its
investments in companies located or doing business in the Northwest. Because of
this, the Fund could be adversely impacted by economic trends within the five-
state area. Some of the companies whose securities are held by the Fund may have
significant national or international markets for their products and services.
Therefore, the Fund's performance could also be affected by national or
international economic conditions.
FOR FURTHER INFORMATION. See the Statement of Additional Information for
further information regarding the investment practices summarized in this
section.
INVESTMENT RESTRICTIONS
Although many of the Adviser's decisions depend on flexibility, there are
certain principles so fundamental to a Fund that they may not be changed without
a vote of a majority of the outstanding shares of that Fund.
-18-
<PAGE>
IN ADDITION TO OTHER RESTRICTIONS LISTED IN THE STATEMENT OF ADDITIONAL
INFORMATION, EACH 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
assets may be invested without regard to this 5% limitation.
2) Acquire more than 10%* of the voting securities of any one company.
3) Invest more than 25%* of its total assets in any single industry.
4) Borrow money for investment purposes, although it may borrow up to 5% of
its total net assets for emergency, non-investment purposes.
*Percentage at the time the investment is made.
WHO WE ARE
Composite Bond & Stock Fund, Composite Growth & Income Fund and Composite
Northwest Fund, each a series of The Composite Funds, a Massachusetts business
trust organized on September 18, 1997 (the "Trust"), are open-end diversified
management investment companies. A copy of the Trust's Amended and Restated
Agreement and Declaration of Trust, which is governed by Massachusetts law, is
on file with the Secretary of State of the Commonwealth of Massachusetts. Prior
to December __, 1997, the predecessors of the Funds, Composite Bond & Stock
Fund, Inc., Composite Equity Series, Inc. and Composite Northwest Fund, Inc.,
respectively, were incorporated under the laws of the state of Washington on
June 22, 1939, August 10, 1949, and May 27, 1986, respectively.
The Trust is a "series" investment company with an unlimited number of
authorized shares of beneficial interest. The Trustees may, without shareholder
approval, create two or more series of shares representing separate investment
portfolios. Only shares of Composite Bond & Stock Fund, Composite Growth &
Income Fund and Composite Northwest Fund are offered by this Prospectus. Any
such series of shares may be divided without shareholder approval into two or
more classes of shares having such preferences and special, or relative rights
and privileges as the Trustees determine. Only class A, B, S and I shares are
offered by this Prospectus. The Funds may also offer other classes of shares
with different sales charges and expenses. Because of these different sales
charges and expenses, the investment performance of the classes will vary.
Each share has one vote, with fractional shares voting proportionally.
Shares of all classes will vote together as a single class without regard to
series or classes on all matters except (i) when required by the Investment
Company Act of 1940 and (ii) when the Trustees have determined otherwise.
Shares are freely transferable, are entitled to dividends as declared by the
Trustees, and, if the Funds were liquidated, would receive the net assets of the
Funds. The Funds may suspend the sale of shares at any time and may refuse any
order to purchase shares.
-19-
<PAGE>
ADVISER. The Funds are managed by Composite Research & Management Co.,
which is referred to as the "Adviser" in this Prospectus.
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
Funds.
The Adviser advises the Funds on investment policies and specific
investments. Subject to supervision by the Trust's Board of Trustees, the
Adviser determines which securities are to be bought and sold. These decisions
are based on analyses of the economy, sectors of industry and specific
institutions. They are compiled from extensive data provided by some of the
country's largest investment firms, in addition to the Adviser's own
research.
William G. Papesh is the president of the Trust and of the Adviser. A team
of the Adviser's investment professionals manages each Fund, under supervision
of the Adviser's investment committee. The Equity team 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. Prior to January 1995, Mr. Huffman
[prior employment for 5 years] 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. Prior to March 1993, Mr. Simpson [prior
employment for 5 years] Mr. Huffman and Mr. Simpson are primarily responsible
for Bond & Stock. Mr. Foreman and Mr. Simpson are primarily responsible for
Growth & Income and Northwest, respectively.
DISTRIBUTOR. Composite Funds Distributor, Inc. is the "Distributor" for
these 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
investments is not guaranteed, and loss of principal is possible.
TRANSFER AGENT. Murphey Favre Securities Services, Inc., which serves as
the "Transfer Agent," acts as the Funds' shareholder servicing and dividend
disbursing agent.
THE ADVISER, DISTRIBUTOR, AND TRANSFER AGENT, WHOSE ADDRESSES ARE
LISTED ON THE BACK COVER, ARE AFFILIATES OF WASHINGTON MUTUAL BANK AND
WASHINGTON MUTUAL BANK FSB. THEY ARE ALSO SUBSIDIARIES OF WASHINGTON MUTUAL,
INC.
-20-
<PAGE>
THE COST OF GOOD MANAGEMENT
Composite Research & Management Co. serves as Adviser under investment
management agreements with each Fund. The agreements [are renewable every year,]
subject to the approval of the Trust's Board of Trustees or the shareholders
themselves.
BEFORE READING THIS SECTION, YOU MAY FIND IT USEFUL TO TURN BACK TO
PAGE __ TO REVIEW THE SUMMARY ON "ANNUAL FUND OPERATING EXPENSES." THAT
PROVIDES AN OVERVIEW OF MUCH OF WHAT IS COVERED IN DETAIL HERE.
ADVISORY FEES
A fee based on a percentage of average daily net assets is paid to the
Adviser for its services. This includes investment management and administrative
services and the Adviser's function as an agent for each 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.
Each 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 for Bond & Stock and Growth & Income. For Northwest,
the rate is reduced to .50% of its net assets over $500 million and up to $1
billion, and to .375% of net assets in excess of $1 billion.
DISTRIBUTION PLAN
The Trust's Board of Trustees has approved and monitors a distribution
plan that meets the provisions of Rule 12b-1 under the Investment Company Act of
1940. The plan is intended to benefit shareholders by stimulating interest in
purchasing shares of the Funds 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 plan authorizes each Fund to
reimburse the Distributor for direct costs of marketing, selling and
distributing Class A shares of that Fund, subject to Trustee approval. These
costs include service fees, sales literature and prospectuses (other than those
provided to current shareholders), compensation to sales people, and other costs
of sales and marketing, including state business and occupation tax assessed on
the reimbursements. The Distributor pays authorized dealers service fees in
consideration for account maintenance and other shareholder services. The fees
are equal to an annual rate not to exceed .25% of the average 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 future periods.
-21-
<PAGE>
It is expected that, subject to approval by shareholders, the Trust will
adopt a distribution plan that authorizes each Fund to pay the Distributor
distribution fee at an annual rate of .25% of the Fund's average net assets
attributable to Class A shares, regardless of the Distributor's expenses.
CLASS B SHARES. The plan authorizes each Fund to pay the Distributor a
distribution fee at an annual 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 distribution 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
service. 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 plan authorizes each Fund to pay the Distributor
distribution and service fees at a combined annual rate of 1.00% of each Fund's
average daily net assets 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 Distributor in connection with sales of Class S shares. The service fee is
.25% of each Fund's average daily net assets 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, those plans are characterized by the staff of the Securities and
Exchange Commission as being "compensation" plans -- in contrast to the existing
Class A "reimbursement" plan. The Funds are not liable for any expenses incurred
by the Distributor in excess of the amount of compensation it receives.
TOTAL EXPENSES
Other operating expenses include fees of Trustees not employed by the
Adviser, transfer agent fees, custodial fees, auditing and legal fees, taxes,
costs of issuing and redeeming shares, publishing of reports to shareholders,
corporate meetings, and other normal costs of running a business.
The transfer agent fees are for shareholder servicing and dividend
disbursing services. You may be required to pay a separate fee if you need
special services such as producing and mailing of historical account
transcripts.
-22-
<PAGE>
Under terms of the Northwest Fund's investment management agreement, the
Adviser will reimburse the Fund if certain expenses in any fiscal year are more
than 1.50% of average daily net assets up to $30 million, and 1% of net assets
over $30 million. Expenses excluded from those calculations include taxes,
interest, portfolio brokerage, and the .75% Class B share distribution fee.
THE VALUE OF A SINGLE SHARE
Each 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. That figure is determined separately for each class by adding the value
of its securities and other assets, subtracting its liabilities and dividing the
resulting figure by the number of shares of the class outstanding. That provides
the net asset value per share, which is commonly referred to as "NAV."
Security valuations are provided by independent pricing sources approved by
the Board of Trustees. When such valuations are not available, the Board of
Trustees will determine how they are to be priced at fair value.
HOW TO BUY SHARES
Shares are offered at the NAV that is next calculated after receipt of a
properly completed purchase order, plus, in a case of Class A shares, a sales
charge. This section discusses various options you have in purchasing shares of
the Funds.
You may buy shares of the Funds through the Distributor or through selected
securities dealers. The Funds may not be available in all states. With certain
exceptions, the minimum initial purchase in a Fund is $1,000. IRA accounts may
make initial purchases of $500 in any Fund. Subsequent investments should be at
least $50.
SYSTEMATIC INVESTMENT PROGRAM
For your convenience, you may arrange to have monthly purchases
automatically deducted from your checking account as part of a systematic
investment program. The minimum initial and monthly investments in this program
are $50. You can arrange this at the time of application or you can do it later
by talking to your investment representative or by calling the Trust.
OTHER INFORMATION
The Trust and the Distributor reserve the right to refuse an order to buy
shares.
-23-
<PAGE>
In the interest of economy and convenience, physical certificates
representing Fund shares will be issued only upon written request to the Trust
or by request from your broker.
Alternative sales arrangements
Each Fund offers four classes of shares which represent interests in the
same portfolio of investments:
1) Class A shares are sold to investors who pay a sales charge at the time of
purchase and who pay ongoing service fees.
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 and service
fees than Class A shares for eight years. They also may be subject to a
"contingent deferred sales charge" if redeemed within six years of
purchase. Class B shares convert 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 distribution
fees.
4) Class S shares are sold exclusively to investors who open [SAM] accounts.
Class S shares are sold without an initial sales charge, but pay higher
ongoing distribution and service fees than Class A shares for eight years.
They may also be subject to a contingent deferred sales charge if redeemed
within six years of purchase. Class S shares convert to class a shares
after eight years.
The net income attributable to, and the dividends payable to shares that
pay ongoing distribution and service fees 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 for shares of the same class of
other Composite Funds. In addition, Class B shares of a Composite Fund may be
exchanged for Class S shares of a Composite Fund, and Class S shares of a
Composite Fund may be exchanged for Class B shares of [Sierra] Asset Management
Portfolios. See "Exchanges for other Composite Funds" on Page ___ in
this Prospectus .
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
hares are expected to be held, and other individual circumstances.
To assist investors in making their choice, the table on Page ___ provides
examples of charges that apply to each class of shares. Normally, Class A shares
will be most beneficial
-24-
<PAGE>
to investors who qualify for reduced sales charges, as described below, and who
do not wish to open a [SAM] account or purchase shares of [Sierra] Asset
Management Portfolios.
Investment in Funds through a [SAM] account. In addition to the
diversification among individual securities you receive by investing in a
particular Fund, you may be able to further diversify risk by spreading your
assets among several different Composite Funds that each have different risk and
return characteristics. [SAM] is an active investment management service
offered by [Sierra Investment Services Corporation ("Sierra Services")], the
[SAM] investment adviser, that allocates your investments across a combination
of either Class A or Class S shares of certain of the Composite Funds selected
to meet long-term investment objectives as well as, in certain circumstances,
current income objectives.
[Sierra Services] has developed investment strategies for [SAM] accounts to
meet the diverse financial needs of different investors. You can open a [SAM]
account by meeting with one of the investment professionals of an authorized
dealer who will review your situation and help you identify your long-term
investment objectives. After using [SAM] criteria to determine your long-term
objectives, you can choose one of several investment strategies. Based on your
chosen strategy, your initial investment will be allocated among a number of the
Composite Funds and the Class A or Class S shares of such Composite Funds.
Depending on market conditions, [Sierra Services] from time to time (normally
quarterly) reallocates the combination of Composite Funds or the amounts
invested in the respective Class A or Class S shares of each to implement your
[SAM] investment strategy. In addition, your [SAM] account will be periodically
rebalanced to maintain your [SAM] strategy's current asset allocation mix, if
and when the Composite Funds' performance unbalances the strategy's mix. You
will pay [Sierra Services] a fee for the [SAM] account service that is in
addition to and separate from the fees and expenses you will pay directly or
indirectly as an investor in the Composite Funds.
From time to time, one or more of the Composite Funds used for investment
by the [SAM] accounts may experience relatively large investments or redemptions
due to [SAM] account allocations or rebalancings recommended by [Sierra
Services]. These transactions will affect the 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 invest
it. While it is impossible to predict the overall impact of these transactions
over time, there could be adverse effects on portfolio management to the extent
that 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 increase 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 [Sierra
Services] will nevertheless face conflicts in fulfilling their respective
responsibilities because they are
-25-
<PAGE>
affiliates and employ some of the same professionals. 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 NAV next calculated after
receipt of a properly completed purchase order, plus an initial sales charge
shown in the table below. 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 receive for selling Class A shares.
<TABLE>
<CAPTION>
REALLOWED
SALES CHARGE TO DEALERS
-------- -------- ----------
% OF % OF NET % OF
PURCHASE OF OFFERING AMOUNT OFFERING
CLASS A SHARES PRICE INVESTED PRICE
- -------------- -------- -------- ----------
<S> <C> <C> <C>
Less than $50,000 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.
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.
Here is a summary of information on reduced sales charges for which an
investor may be qualified. This summary refers to the data in the above table
that cover purchases of $50,000 or more.
CUMULATIVE DISCOUNT. This allows current purchases to qualify for the
foregoing discounts by including the value of existing Composite Funds
investments that were purchased subject to an initial or contingent deferred
sales charge. The discount will be based on the amount of the new
-26-
<PAGE>
purchase plus the current offering price of shares owned at the time of the
purchase. Those eligible for a cumulative Discount include individuals,
immediate family members, or trustees purchasing for single fiduciary
accounts.
LETTER OF INTENT. This discount is for purchases made over an extended
period. It provides for a cumulative discount on the same basis as explained in
the previous paragraph if the following conditions are met: Purchases of Class A
shares must be made within a 13-month period that begins no earlier than 90 days
before the submission of a letter of intent from the investor to the Funds. For
more information about this discount, please contact the 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
purchases of $1 million or more but such shares may be subject to a contingent
deferred sales charge of 1.00% or .50%, if redeemed during the first or second
year after purchase, respectively.
Qualified employee benefit plans (including SEPs and SIMPLEs) that have
more than 10 participants or that have more than $25,000 invested in those
Composite Funds may purchase shares without an initial sales charge. However, a
contingent deferred sales charge of 1% may be imposed on the amount that was
invested through such a plan in Class A shares and that is redeemed (i) if,
within the first two years after the plan's initial investment in the Composite
Funds, the named fiduciary of the plan withdraws the plan from investing in the
Composite Funds in a manner that causes all shares held by the plan's
participants to be redeemed; or (ii) by a plan participant within two years of
the plan participant's purchase of such Class A shares. The contingent deferred
sales charge will be waived on redemptions in connection with certain
involuntary distributions, including distributions arising out of the death or
disability of a shareholder (including one who owns the shares as joint
tenant).
Class A shares may be purchased at net asset value, and in any amount, by
officers, directors and employees of the Adviser or its affiliates, or companies
which have entered into selling agreements with the Distributor, and to certain
family members of such individuals. The purchase must be for investment purposes
only and may not be resold other than through redemption by the Funds. The Funds
may also offer their shares at net asset value [to investors who use the
redemption proceeds from mutual funds outside the Composite Funds (excluding
money market funds);] to certain retirement plans; and to brokers, dealers or
registered investment advisers who have entered into arrangements with the
Distributor providing specifically for the shares to be used in particular
investment products made available to their clients for which they may charge a
separate fee. The Distributor will pay authorized dealers commissions on certain
net asset value purchases as described in the Statement of Additional
Information.
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<PAGE>
CONSULT AN INVESTMENT REPRESENTATIVE OR SEE THE STATEMENT OF ADDITIONAL
INFORMATION IF YOU THINK YOU MAY QUALIFY FOR ANY OF THESE PURCHASE PLANS .
You must notify the Fund 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. However, Class B shares
have higher distribution and service fees than Class A shares for eight years.
Also, 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 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
Distributor to defray expenses for providing distribution services for Class B
shares. Examples of such expenses include compensation to sales people and
selected dealers. The Distributor currently pays authorized dealers commissions
of 4.00% of the price of shares sold by them.
CONTINGENT DEFERRED SALES CHARGE. Class B shares redeemed within six years
of purchase are subject to a contingent deferred sales charge according to the
following schedule. Class B shares purchased by exchange will be subject to a
contingent deferred sales charge using the schedule of the Composite Fund into
or from which the shares were exchanged that would result in the greatest
contingent deferred sales charge applicable to such shares. Shares purchased
through reinvestment of dividends or capital gain distributions are not subject
to a contingent deferred sales charge.
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED
AFTER PURCHASE 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>
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<PAGE>
Class B shares purchased prior to DECEMBER __, 1997, MAY BE subject to a
different contingent deferred sales charge schedule, which is shown in the
Statement of Additional Information.
The contingent deferred sales charge is calculated by applying the above
percentages 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; then
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
reinvestment.
At that time, the investor decides to make the first redemption. The
transaction includes 50 shares at $12 per share -- for a total of $600.
The first 10 shares to be redeemed will not be subject to any charge
because of the 10 shares received from dividend reinvestment. See item 1) just
above this example.
As for the other 40 shares, the charge will be applied only to the original
cost of $10 per share. The NAV increase of $2 per share will not be considered.
As a result, $400 of the redemption proceeds (40 x $10) will be charged a rate
of 4%, which is the second-year rate shown in the table ABOVE. The resulting
sales charge will be 4% x $400, which will be $16.
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<PAGE>
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 Statement of Additional Information;
3) According to the Fund's systematic withdrawal plan -- but limited to 12%
annually of the value of the Fund account at the time the plan is
established; then
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 B 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 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.
To make sure you receive waiver or reimbursement of contingent deferred
sales charges, you must notify the Fund whenever you are so entitled.
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
dividends and capital gain distributions also will convert to Class A shares.
The conversion of Class B shares to Class A shares is subject to a
favorable ruling from the Internal Revenue Service or the continuing
availability of an opinion of legal counsel that such conversion will not be
subject to federal income taxes. There cannot be any assurance that a ruling or
opinion will be available. if they should not be available, the conversion of
Class B shares to Class A shares would not occur and those shares would continue
to be subject to higher expenses than Class A shares for an indefinite period.
Class B shares purchased prior to December __, 1997, will generally convert to
Class A shares six years after they were initially purchased.
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
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<PAGE>
S shares of a Composite Fund if the investor has an existing [SAM] account or
opens a [SAM] account and meets the investment minimum for such [SAM]
account.
BUYING CLASS I SHARES
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 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. However, Class S shares
have higher distribution and service fees than Class A shares for eight years.
Also, if Class S 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 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
Distributor to defray expenses for providing distribution services for Class S
shares. Examples of such expenses include compensation to sales people and
selected dealers. [The Distributor currently pays authorized dealers commissions
of 4.00% of the price of shares sold by them.]
CONTINGENT DEFERRED SALES CHARGE. Class 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
contingent deferred sales charge. Shares purchased through reinvestment of
dividends or capital gain distributions are not subject to a contingent deferred
sales charge.
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
-------------- ------------
<S> <C>
First.............................. 5.00%
Second............................. 4.00%
Third.............................. 3.00%
Fourth............................. 3.00%
Fifth.............................. 2.00%
</TABLE>
-31-
<PAGE>
<TABLE>
<S> <C>
Sixth.............................. 1.00%
Seventh............................ 0%
Eighth............................. 0%
</TABLE>
The contingent deferred sales charge is calculated by applying the above
percentages 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 Statement of Additional Information;
3) According to the Fund's systematic withdrawal plan -- but limited to 12%
annually of the value of the Fund account at the time the plan is
established; then
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 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.
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.
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<PAGE>
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
dividends and capital gain distributions also will convert to Class A
shares.
The conversion of Class S shares to Class A shares is subject to a
favorable ruling from the Internal Revenue Service or the continuing
availability of an opinion of legal counsel that such conversion will not be
subject to federal income taxes. There cannot be any assurance that a ruling or
opinion will be available. If they should not be available, the conversion of
Class 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 redeem 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. Class S shares may also be exchanged for Class B shares of [Sierra]
Asset Management Portfolios.
DISTRIBUTION OF INCOME AND CAPITAL GAINS
The Funds 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. Bond & Stock and Growth & Income normally
declare and pay dividends near the end of each calendar quarter, when available,
and Northwest normally declares and pays dividends annually, when available. The
Funds distribute any capital gains annually when available, normally in
December.
You have four choices regarding what you do with dividends and capital gain
distributions. You can make your choice at the time of your initial purchase or
by contacting the Funds' offices or your investment representative. The options
include:
AUTOMATIC REINVESTMENT. Most shareholders elect this procedure. It is
automatically effective unless you choose another option. All dividends and
capital gain distributions are reinvested into additional shares of the Fund.
Automatic reinvestments generally provide the most capital growth.
REINVEST DIVIDENDS IN ANOTHER COMPOSITE FUND. Income dividends may be
automatically invested in the same class of shares of another Composite Fund
provided that Fund is available FOR SALE in your state of residence.
CASH PAYMENT OF INCOME AND REINVESTMENT OF ANY CAPITAL GAINS. With
this option, dividends are deposited to your pre-authorized bank account or paid
by check. Any capital gain distributions are reinvested in additional shares of
the Fund.
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<PAGE>
CASH PAYMENT OF ALL DISTRIBUTIONS. Dividends and capital gain
distributions are deposited to your pre-authorized bank account or paid by
check.
OTHER INFORMATION. Reinvestments of income dividends and capital gain
distributions are made at the closing nav on the day dividends or
distributions are deducted from the Fund's assets.
If you have chosen to receive dividends or capital gain distributions in
cash and the U.S. Postal Service cannot deliver your check, the Funds reserve
the right to reinvest your check at the then-current NAV and to automatically
reinvest subsequent dividends and capital gain distributions in your account.
The Funds may also automatically reinvest dividends or distributions of $10 or
less.
INCOME TAXES ON DIVIDENDS AND CAPITAL GAINS
You are responsible for federal income tax (and state and local income
taxes, if applicable) on dividends and capital gain distributions. This is true
whether they are paid in cash or reinvested in additional shares. You will be
advised annually as to the tax status of these dividends and distributions.
Generally, dividends paid by the Funds from interest, dividends, or net
short-term capital gains will be taxed as ordinary income. Pursuant to the
Taxpayer Relief Act of 1997, two different tax rates apply to net capital gains
(that is, the excess of net gains from capital assets held for more than one
year over net losses from capital assets held for not more than one year)
distributed to you. One rate (generally 28%) applies to net gains on capital
assets held for more than one year but not more than 18 months ("mid-term
gains") and a second, preferred rate (generally 20%) applies to the balance of
such net capital gains ("adjusted net capital gains"). You must treat
distributions of net capital gains as mid-term gains to the extent designated by
the Funds as deriving from net gains from assets held for more than one year but
not more than 18 months. The balance will be treated as adjusted net capital
gains. Distributions of mid-term gains and adjusted net capital gains will be
taxable to you as such, whether or not received by you in cash or in shares of a
Fund and regardless of how long you have held your shares in a Fund. If your
shares are in an IRA or another qualified retirement plan, you will not have to
pay tax on the reinvested amount until funds are withdrawn.
Each Fund complies with provisions of the Internal Revenue Code applicable
to regulated investment companies and distributes its taxable income
accordingly. Because of this, the Funds do not anticipate being subject to
federal income or excise taxes on earnings they distribute to shareholders.
Because of tax law requirements, you must provide the Funds an accurate
Social Security number or taxpayer identification number or make required
certifications to avoid the 31% "back-up" withholding tax.
EXCHANGES FOR OTHER COMPOSITE FUNDS
You may exchange shares of any Composite Fund for the same class of
shares of any other Composite Fund. In addition to the Funds described in this
Prospectus, there are Composite Funds that invest in other types of
securities, including: income-generating securities, tax-exempt bonds, U.S.
government securities, and money market instruments.
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<PAGE>
Contact your investment representative or the Distributor to request a
prospectus 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 Composite Fund
into or from which the shares were exchanged that would result in the greatest
contingent deferred sales charge applicable to such shares. For purposes of
calculating any contingent deferred sales charge, the length of time you have
held your shares will date from your original purchase, and will be unaffected
by any exchanges (or any purchases of shares of Composite Funds in connection
with the acquisition by the Composite Funds of the assets of another investment
company). Shares exchanged from Composite Money Market Fund, Composite Tax-
exempt Money Market Fund or California Money Fund (a series of The [Sierra]
Trust Funds) 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 Exchange
Purposes As Stated In The Prospectus And Statement Of Additional information
("SAI") of [sierra prime income] fund. Also, although shares of [Sierra Prime
Income] Fund may be exchanged for shares of the Funds, such exchanges are
permitted approximately once each calendar quarter so long as [Sierra Prime
Income] Fund makes a repurchase offer for its shares in such quarter and so long
as the [Sierra Prime Income] Fund repurchase offer is sufficiently large to
include [Sierra Prime Income] Fund shares tendered for exchange. For more
information about [Sierra Prime Income] Fund, please consult your investment
representatives or call the Distributor.
All exchanges are subject to the minimum investment requirements of the
Composite 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
disallowed. Exchanges of shares are sales and may result in a gain or loss for
federal and state income tax purposes.
HOW TO SELL SHARES
You may redeem shares at any time. The price paid per share will be the
next NAV that is calculated. 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. You may authorize telephone transactions when you sign your
Fund account application. Or you may choose at that time not to allow such
transactions.
-35-
<PAGE>
Provided you have pre-authorized these transactions, you may redeem or
exchange shares by telephoning 1-800-543-8072. You may also request these
transactions through your investment representative. Proceeds may be directed
to a pre-authorized bank or broker account or to the address of record for the
account. Exchanges also may be made by telephone. (see the previous section for
more information.)
It may be difficult to reach the Trust offices by telephone during periods
of unusual economic or market activity. Please be persistent if this occurs. The
Transfer Agent is committed to extending its availability beyond regular 7 a.m.
to 6 p.m. (Pacific time) customer 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
requesting personal shareholder information, providing written confirmations of
each telephone transaction, and recording telephone instructions. The Transfer
Agent may require a Letter of Authorization, other documents, or authorization
from your broker to initiate telephone redemptions of $25,000 or more that are
not directed to your pre-authorized bank or broker account. If reasonable
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 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
Trust offices. Written requests may require a signature guarantee, as discussed
below, and the return of any outstanding share certificates. Changes in pre-
authorized redemption instructions or your account registration also require
signature guarantees. For your protection, the signature(s) must be guaranteed
by an officer of a U.S. bank belonging to the Federal Reserve System, a member
of the Stock Transfer Association Medallion Program, or a member of the National
Association of Securities Dealers, Inc.
PROMPT PAYMENT. Payment normally will be made on the next business day
after the transaction, but no later than seven days after the transaction,
unless you recently purchased Fund shares by check. In that case, redemption
proceeds may be delayed 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 your bank account without charge.
Wire redemption proceeds may be subject to a $10 fee. The receiving bank also
may charge a fee.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders may choose to receive specific
cash withdrawals on a periodic basis. A $5,000 minimum balance is required to
establish a systematic withdrawal plan in a Fund account. Shares of the Fund
will be redeemed to provide the requested
-36-
<PAGE>
payment. Naturally, withdrawals that continually exceed dividend income and
capital gains will eventually exhaust the account. Class B and Class S
shareholders may use a systematic withdrawal plan to redeem up to 12% of the
beginning balance annually without incurring a contingent deferred sales charge.
The beginning balance is the Fund account balance at the time the plan is
established.
OTHER CONSIDERATIONS. It is costly to maintain small accounts.
Accordingly, an account may be closed after 90 days 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 redeemed at the next calculated NAV on the day the account is closed. To
prevent an account closure, investors may purchase shares to bring their
account balance above the minimum during the 90-day grace period.
IRAS AND OTHER TAX-SHELTERED RETIREMENT PLANS
Shares in the Funds may be appropriate for many retirement plans, including
IRAs. Retirement plan contributions are tax deductible in some cases, and
earnings compound on a tax-deferred basis until withdrawn.
From time to time, Composite Funds Distributor, Inc. or its affiliates may
offer "IRA bonuses" on IRA rollovers and transfers to IRA accounts maintained by
them. The Funds do not pay any portion of these bonuses. The products purchased
through these rollovers and transfers may include the Composite 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 Fund offices or your investment representative.
PERFORMANCE INFORMATION
While past results are not necessarily indicative of future performance,
history provides a basis for comparisons of mutual fund investment strategies
and their execution. Among the factors that influence the Funds' performance
are the type and quality of investments, operating expenses, and the net amount
of new money coming into the 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.
-37-
<PAGE>
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.
OTHER INFORMATION. Each Fund may include performance data in any
advertisement or promotional material of that Fund.
Management has included a discussion of the Funds' performance in
their annual report, which is available upon request and without charge by
calling the Fund offices.
The 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 indices.
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 FUND'S 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 Funds receive
statements at least quarterly. These statements show account transactions, the
total number of shares owned, and any dividends or distributions paid.
Shareholders also receive written confirmation soon after each transaction which
is not a dividend reinvestment, systematic investment program purchase, or
systematic withdrawal plan redemption.
WE'RE HERE TO HELP YOU
Any inquiries you may have about these Funds or your account should be
directed to the Funds at the address or telephone number on the front page and
back cover of this Prospectus. We will be glad to answer your questions.
-38-
<PAGE>
FOR FURTHER INFORMATION, PLEASE CONTACT:
FUND OFFICES
601 West Main Avenue, Suite 300
Spokane, Washington 99201-0613
Phone: (509) 353-3550
1-800-543-8072
ADVISER
Composite Research & Management Co.
1201 Third Avenue, Suite 1400
Seattle, WASHINGTON 98101-3015
DISTRIBUTOR
Composite Funds Distributor, Inc.
1201 Third Avenue, Suite 780
Seattle, Washington 98101
Transfer Agent
Murphey Favre Securities Services, Inc.
601 West Main Avenue, Suite 300
Spokane, Washington 99201
CUSTODIAN
Investors Fiduciary Trust Company
127 W. 10th Street
Kansas City, Missouri 64105-1716
INDEPENDENT PUBLIC ACCOUNTANTS
LeMaster & Daniels PLLC
601 W. Riverside Avenue, Suite 800
Spokane, Washington 99201-0614
COUNSEL
Paine, Hamblen, Coffin, Brooke & Miller LLP
717 W. Sprague Avenue, Suite 1200
Spokane, Washington 99204-0464
BOARD OF TRUSTEES
Wayne L. Attwood, M.D.
Kristianne Blake
Anne V. Farrell
Michael K. Murphy
William G. Papesh
Daniel L. Pavelich
Jay Rockey
Richard C. Yancey
-39-
<PAGE>
THE COMPOSITE FUNDS
THE COMPOSITE EQUITY FUNDS
COMPOSITE BOND &
STOCK FUND
COMPOSITE GROWTH &
INCOME FUND
COMPOSITE
NORTHWEST FUND
PROSPECTUS
DECEMBER __,
1997
[LOGO]
COMPOSITE
GROUP OF FUNDS
-40-
<PAGE>
COMPOSITE BOND FUNDS
Suite 300
601 W. Main Avenue
Spokane, Washington 99201-0613
Telephone (509) 353-3550 Toll Free (800) 543-8072
A SELECTION OF THREE FUNDS WITH DIFFERENT INVESTMENT OBJECTIVES:
The following three series (the "Composite Bond Funds") of The Composite
Funds (the "Trust") are designed for investors who want to generate income from
debt securities and to protect their capital:
COMPOSITE U.S. GOVERNMENT SECURITIES - This Fund is intended to provide a
high level of current income, consistent with safety and liquidity. Investments
are made in obligations issued or guaranteed by the U.S. government. The Fund
also invests in repurchase agreements and collateralized mortgage obligations
that are secured by those types of obligations.
COMPOSITE INCOME FUND - The objective for this Fund is to provide a high
level of current income that is consistent with protection of shareholders'
capital. It pursues this objective through investment in a diversified pool of
debt securities.
COMPOSITE TAX-EXEMPT BOND FUND - This Fund is designed to provide a high
level of income that is exempt from federal taxes and to protect investors'
capital. The Fund invests in a portfolio of bonds issued by states, counties,
cities and other governmental bodies whose bonds generate income exempt from
federal income tax.
Each of the Composite Income Fund and the Composite Tax-Exempt Bond Fund
may invest up to 35% of its assets in lower-rated securities and non-rated
securities of comparable quality, commonly known as "junk bonds." Investments of
this type are subject to a greater risk of loss of principal and non-payment of
interest. Investors should carefully assess the risks associated with an
investment in the Composite Income Fund.
Please read this Prospectus dated December __, 1997, and retain it for
future reference. It sets forth information about these Funds that a prospective
investor should know before investing.
OTHER IMPORTANT INFORMATION
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SHARES INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
A Statement of Additional Information about the Funds, dated December __,
1997, is on file with the Securities and Exchange Commission. It is incorporated
by reference into this Prospectus. You may obtain a free copy by calling or
writing the Funds at the Location listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-2-
<PAGE>
<TABLE>
<CAPTION>
CONTENTS Page
<S> <C>
About this Prospectus............................................. []
Expense information............................................... []
Financial highlights.............................................. []
The Funds' objectives............................................. []
Investment practices and risk factors............................. []
Investment restrictions........................................... []
Who we are........................................................ []
The cost of good management....................................... []
The value of a single share....................................... []
How to buy shares................................................. []
Distribution of income and capital gains.......................... []
Income taxes on dividends and capital gains....................... []
Exchanges for other Composite Funds............................... []
How to sell shares................................................ []
IRAs and other tax-sheltered retirement plans..................... []
Performance information........................................... []
Reports to shareholders........................................... []
We're here to help you............................................ []
</TABLE>
ABOUT THIS PROSPECTUS
In this Prospectus, you will find basic and in-depth information about the
Composite Bond Funds. Included are such subjects as how to buy and sell shares,
as well as details about the Funds' objectives, investment practices and
restrictions, and other matters.
If you are not familiar with mutual funds, investment terminology, or the
Composite Group of Funds, you may find it useful to understand the following key
words and terms that appear frequently on these pages:
GLOSSARY OF KEY WORDS AND TERMS
ADVISER. Composite Research & Management Co., which is called the "Adviser"
in this Prospectus, is the manager of the Bond Funds and a number of other
mutual funds (excluding series of The [Sierra] Variable Trust that serve as
underlying funding vehicles for variable insurance contracts, the "Composite
Funds").
Class A shares. Purchasers of Class A shares generally pay a sales charge
at the time of purchase and Class A shares pay annual operating expenses,
including ongoing service fees.
-3-
<PAGE>
Class B shares. Purchasers of Class B shares do not pay an initial sales
charge, but Class B shares pay higher ongoing distribution and service fees than
Class A shares for eight years, and redemptions of Class B shares are generally
subject to a contingent deferred sales charge (see below). Class B shares
convert to Class A shares after eight years.
Class I shares. 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 distribution fees.
Class S shares. Class S shares are sold exclusively to investors who open
[SAM] accounts. Purchasers of Class S shares do not pay an initial sales charge,
but Class S shares pay higher ongoing distribution and service fees than Class A
shares for eight years and redemptions of Class S shares are generally subject
to a contingent deferred sales charge (see below). Class S shares convert to
Class A shares after eight years.
CONTINGENT DEFERRED SALES CHARGE. If an investor redeems Class B or Class S
shares within six years of purchase, he or she normally must pay this
charge.
DISTRIBUTOR. Composite Funds Distributor, Inc. distributes the Composite
Bond Funds and other Composite Funds and is referred to as the "Distributor" in
this Prospectus.
EXCHANGE. This privilege allows shareholders to transfer their investment
from one fund to another. Except for exchanges of shares of certain money market
funds that were not subject to any initial or contingent deferred sales charge
at the time of purchase, there is no fee or additional sales charge for an
exchange within the Composite Funds.
FUND. The term "Fund" identifies any one of the three mutual funds offered
through this Prospectus. These "Funds" are identified as follows in this
document:
INCOME. This Fund's objective is to provide a high level of current
income, consistent with protection of shareholders' capital. It invests in
a diversified portfolio of debt securities.
TAX-EXEMPT. This Fund's objective is to provide income that is exempt
from federal taxes, and, at the same time, to protect investors' capital.
-4-
<PAGE>
U.S. GOVERNMENT SECURITIES. This Fund's objective is to provide a high
level of current income from U.S. government securities, consistent with
safety and liquidity.
NET ASSET VALUE (NAV). This is the term used in this Prospectus and in
daily newspaper financial tables to report the value of a single share of a
mutual fund. It is determined separately for each class by adding the value of a
fund's securities and other assets, subtracting any liabilities, and dividing
the resulting figure by the number of shares outstanding. That provides the "net
asset value" per share, often referred to as "NAV."
REDEMPTION. This refers to the sale of mutual fund shares by an investor.
He or she is said to have "redeemed" the shares.
REPRESENTATIVE. This is the person who is authorized to purchase or sell
mutual fund shares on your behalf. Your representative may be an investment
representative of Washington Mutual Bank or a registered representative of
Composite Funds Distributor, Inc., or a registered representative or another
securities dealer.
STATEMENT OF ADDITIONAL INFORMATION. This is a document that has more
detailed information about the Funds than what is contained in this Prospectus.
It is on file with the Securities and Exchange Commission and also is available
through the Funds.
EXPENSE INFORMATION
The table below shows the Funds' costs and expenses that an investor will
bear both directly or indirectly and how they affect share ownership. Operating
expenses are based on the Funds' expenses during the fiscal year ended December
31, 1996. "Other expenses" for Class I and Class S shares are based on actual
"other Expenses" for Class B shares for the fiscal year ended December 31, 1996.
The 12b-1 fees shown for Class A shares have been restated to reflect the effect
of an amendment to the Trust's distribution plan pending shareholder approval.
Actual 12b-1 fees for the fiscal year ended December 31, 1996 were .20%.
For further information on costs and expenses, please see "The cost of good
management" on Page __.
SHAREHOLDER TRANSACTION EXPENSES FOR EACH FUND:
<TABLE>
<CAPTION>
Class A Class B Class I Class S
Shares Shares Shares Shares
<S> <C> <C> <C> <C>
Maximum sales charge imposed 4.50% None None None
on purchases (as percentage of
offering price)
</TABLE>
-5-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Maximum contingent deferred None* 5.00% None 5.00%
sales charge (as percentage of
purchase price or redemption
proceeds, whichever is lower)
Redemption fee None None None None
Exchange fee None None None None
</TABLE>
* Certain investors who purchase Class A shares at net asset value may be
subject to a contingent deferred sales charge of 1.00% or .50% on redemptions of
these shares during the first or second year after purchase, respectively.
-6-
<PAGE>
U.S. Government Securities
<TABLE>
<CAPTION>
Annual fund
operating expenses
(as a percentage of
average net assets
-----------------------------------------
Class A Class B Class I Class S
Shares Shares Shares Shares
-----------------------------------------
<S> <C> <C> <C> <C>
Advisory Fees .63% .63% .63% .63%
12b-1 Fees .25% 1.00% 0% 1.00%
Other Expenses .20% .22% .22% .22%
-----------------------------------------
Total Fund Operating 1.08% 1.85% .85% 1.85%
Expenses
Income
<CAPTION>
Annual fund
operating expenses
(as a percentage of
average net assets
-----------------------------------------
Class A Class B Class I Class S
Shares Shares Shares Shares
-----------------------------------------
<S> <C> <C> <C> <C>
Advisory fees .63% .63% .63% .63%
12b-1 Fees .25% 1.00% 0% 1.00%
Other Expenses .25% .26% .26% .26%
-----------------------------------------
Total Fund Operating 1.13% 1.89% .89% 1.89%
Expenses
</TABLE>
-7-
<PAGE>
Tax-Exempt
<TABLE>
<CAPTION>
Annual fund
operating expenses
(as a percentage of
average net assets
-----------------------------------------
Class A Class B Class I Class S
Shares Shares Shares Shares
-----------------------------------------
<S> <C> <C> <C> <C>
Advisory fees .50% .50% .50% .50%
12b-1 fees .25% 1.00% 0% 1.00%
Other Expenses .10% .15% .15% .15%
-----------------------------------------
Total Fund Operating .85% 1.65% .65% 1.65%
Expenses
</TABLE>
Sales charge waivers are available under certain circumstances for Class A,
Class B and Class S shares, and reduced sales charge purchase plans are
available for Class A shares. The 5.00% contingent deferred sales charge on
Class B and Class S shares declines over time and is eliminated after six years.
Please see "The cost of good management" for further information. There is a $10
charge for redemptions paid by Fed Funds wire but not for redemptions deposited
to your pre-authorized bank account or paid by check.
EXAMPLE
YOU WOULD PAY THE FOLLOWING EXPENSES ON A $1,000 INVESTMENT IN ONE OF THE
FUNDS, ASSUMING YOU RECEIVE A 5% ANNUAL RETURN AND THAT THE FUND'S EXPENSES ARE
THE SAME AS THOSE SHOWN IN THE ANNUAL FUND OPERATING EXPENSES TABLE ON THE
PREVIOUS PAGE. THE 5% FIGURE IS A CONSTANT RATE REQUIRED FOR COMPARATIVE
PURPOSES BY THE SECURITIES AND EXCHANGE COMMISSION. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
RESULTS WILL BE GREATER OR LESS THAN THE ILLUSTRATION.
-8-
<PAGE>
U.S. Government Securities
<TABLE>
<CAPTION>
-----------------------------------------
Expenses assuming Class A Class B Class I Class S
redemption at the Shares Shares Shares Shares
end of each period:
------------------------------------------
<S> <C> <C> <C> <C>
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
Assuming you
keep your shares
and no redemptions
are made:
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
INCOME
<CAPTION>
------------------------------------------
Expenses assuming Class A Class B Class I Class S
redemption at the Shares Shares Shares Shares
end of each period:
------------------------------------------
<S> <C> <C> <C> <C>
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
Assuming you
keep your shares
and no redemptions
are made:
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
</TABLE>
-9-
<PAGE>
Tax-Exempt
<TABLE>
<CAPTION>
-----------------------------------------
Expenses assuming Class A Class B Class I Class S
redemption at the Shares Shares Shares Shares
end of each period:
-----------------------------------------
<S> <C> <C> <C> <C>
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
Assuming you
keep your shares
and no redemptions
are made:
1 year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
</TABLE>
Class B and Class S shares automatically convert to Class A shares after
eight years without charge or tax impact. Because of that, years nine through
ten reflect Class A operating expenses. Long-term Class B and Class S
shareholders could pay more than the economic equivalent of the maximum front-
end sales charge permitted by the National Association of Securities Dealers,
INC. The Class B AND CLASS S conversion feature is intended to reduce the
likelihood this will occur. See "How to buy shares - Class B conversion feature
and "How to buy shares - Class S conversion feature" on pages [ ] and [ ] for
more information.
FOR FURTHER INFORMATION
. Advisory fees - See "The cost of good management" Page [ ]
. 12b-1 fees - See "The cost of good management" Page [ ]
. Sales charge on purchases - See "How to buy shares" Page [ ]
. Contingent deferred sales charge - See "How to buy shares" Page [ ]
. Conversion of Class B shares to Class A - See "How to buy shares - Class B
conversion feature" Page [ ]
. Conversion of Class S shares to Class A - see "How to buy shares - Class S
conversion feature" Page [ ]
FINANCIAL HIGHLIGHTS
-10-
<PAGE>
The tables on the following pages present selected financial information about
the Funds, including per share data, expense ratios and other data based on
average net assets. Information presented for periods ended prior to June 30,
1997 has been audited by LeMaster & Daniels PLLC, the Funds' independent
auditors whose reports appear in the Funds' annual report. Information presented
for periods ended June 30, 1997 is unaudited. The funds' 1996 annual report and
1997 semiannual report are incorporated by reference into the Statement of
Additional Information.
-11-
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
U.S. GOVERNMENT SECURITIES - CLASS A SHARES
<TABLE>
<CAPTION>
Six Ten
Months Years Ended Months
Ended December 31, Ended
June 30, ------------------------------------- ----------
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 $10.53
------ ------ ----- ------ ------ ------
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/
</TABLE>
<TABLE>
<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.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
INCOME - CLASS A SHARES
<TABLE>
<CAPTION>
Six Three
Months Months
Ended Ended
April 30, Years Ended October 31, December
--------- ---------------------------------------- --------
1997 1996 1995 1994 1993 31,1992/3/
---- ---- ---- ---- ---- -------
<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.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
TAX-EXEMPT - CLASS A SHARES
<TABLE>
<CAPTION>
Six
Months
Ended Years Ended December 31,
June 30, -----------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...................... $ 7.83 $ 8.02 $ 7.13 $ 8.04 $ 7.58 $ 7.42
------ ------ ------ ------ ------ ------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income................. 0.19 0.38 0.38 0.39 0.40 0.42
Net Gains (Losses) on
Securities (both realized
and unrealized)...................... 0.01 (0.19) 0.89 (0.91) 0.54 0.23
------ ------ ------ ------ ------ ------
Total From Investment
Operations.......................... 0.20 0.19 1.27 (0.52) 0.94 0.65
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)................... (0.19) (0.38) (0.38) (0.39) (0.40) (0.42)
------ ------ ------ ------ ------ ------
Distributions (from
capital gains)........................ - - - - (0.08) (0.07)
------ ------ ------ ------ ------ ------
Total distributions................ (0.19) (0.38) (0.38) (0.39) (0.48) (0.49)
------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF YEAR.......................... $ 7.84 $ 7.83 $ 8.02 $ 7.13 $ 8.04 $ 7.58
====== ====== ====== ====== ====== ======
TOTAL RETURN/(1)/..................... 2.62% 2.52% 18.25% -6.53% 12.54% 9.00%
RATIOS/
SUPPLEMENTAL DATA
Net Assets, End of
Year (in thousands).................. $192,465 $203,606 $230,055 $215,438 $259,045 $186,861
Ratio of Expenses to
Average Net Assets/(2)/.............. 0.79%/(3)/ 0.75% 0.81% 0.79% 0.81% 0.78%
Ratio of New Income to
Average Net Assets................... 4.97%/(3)/ 4.90% 5.03% 5.23% 4.97% 5.56%
Portfolio Turnover Rate............... 17%/(3)/ 22% 8% 12% 19% 30%
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...................... $ 7.16 $ 7.17 $ 7.20 $ 7.02 $ 7.56
------ ------ ------ ------ ------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income................. 0.45 0.47 0.50 0.52 0.54
Net Gains (Losses) on
Securities (both realized
and unrealized)...................... 0.34 (0.01) 0.07 0.20 (0.45)
------ ------ ------ ------ ------
Total From Investment
Operations.......................... 0.79 0.46 0.57 0.72 0.09
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)................... (0.45) (0.47) (0.50) (0.52) (0.53)
------ ------ ------ ------ ------
Distributions (from
capital gains)........................ (0.08) - (0.10) (0.02) (0.10)
------ ------ ------ ------ ------
Total distributions................ (0.53) (0.47) (0.60) (0.63) (0.63)
------ ------ ------ ------ ------
NET ASSET VALUE,
END OF YEAR.......................... $ 7.42 $ 7.16 $ 7.17 $ 7.20 $ 7.02
====== ====== ====== ====== ======
TOTAL RETURN/(1)/..................... 11.36% 6.71% 8.08% 10.66% 1.25%
RATIOS/
SUPPLEMENTAL DATA
Net Assets, End of
Year (in thousands).................. $140,154 $111,462 $104,208 $94,156 $83,057
Ratio of Expenses to
Average Net Assets/(2)/.............. 0.77% 0.77% 0.80% 0.80% 0.85%
Ratio of Net Income to
Average Net Assets................... 6.16% 6.65% 6.85% 7.34% 7.36%
Portfolio Turnover Rate............... 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.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
CLASS B SHARES
<TABLE>
<CAPTION>
U.S. Governmnent
Securities
----------------------------------------------------
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.................... $10.46 $10.84 $ 9.64 $10.24
------ ------ ------ ------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income................. 0.27 0.54 0.54 0.41
Net Gains or Losses on
Securities (both realized
and unrealized)...................... (0.02) (0.38) 1.20 (0.60)
------ ------ ------ ------
Total From Investment
Operations.......................... 0.25 0.16 1.74 (0.19)
------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)................... (0.27) (0.54) (0.54) (0.41)
NET ASSET VALUE,
END OF PERIOD.......................... $10.44 $10.46 $10.84 $ 9.64
====== ====== ====== ======
TOTAL RETURN/(1)/...................... 2.43% 1.58% 18.48% -1.86%
RATIOS/SUPPLEMENTAL
DATA
Net Assets,
End of Period ($1,000's)............. $2,898 $2,963 $2,206 $1,063
Ratio of Expenses to
Average Net Assets/(1)/.............. 1.85%/(4)/ 1.85% 1.84% 1.76%/(4)/
Ratio of Net Income to
Average Net Assets .................. 5.24%/(4)/ 5.14% 5.20% 5.43%/(4)/
Portfolio Turnover Rate............... 10%/(4)/ 16% 8% 34%
</TABLE>
<TABLE>
<CAPTION>
Income
-------------------------------------------------
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.................... $ 9.17 $ 9.46 $ 8.30 $ 8.85
------ ------ ------ ------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income................. 0.26 0.52 0.51 0.40
Net Gains or Losses on
Securities (both realized
and unrealized)...................... 0.04 (0.29) 1.16 (0.55)
------ ------ ------ ------
Total From Investment
Operations.......................... 0.30 0.23 1.67 (0.15)
------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)................... (0.26) (0.52) (0.51) (0.40)
NET ASSET VALUE,
END OF PERIOD.......................... $ 9.21 $ 9.17 $ 9.46 $ 8.30
====== ====== ====== ======
TOTAL RETURN/(1)/...................... 3.34% 2.59% 20.70% -1.67%
RATIOS/SUPPLEMENTAL
DATA
Net Assets,
End of Period ($1,000's)............. $7,303 $7,122 $4,452 $2,299
Ratio of Expenses to
Average Net Assets/(3)/.............. 1.88%/(4)/ 1.89% 1.91% 1.80%/(4)/
Ratio of Net Income to
Average Net Assets .................. 5.74%/(4)/ 5.69%/(4)/ 5.73% 6.25%/(4)/
Portfolio Turnover Rate............... 19%/(4)/ 42% 43% 26%
</TABLE>
<TABLE>
<CAPTION>
Tax-Exempt
-------------------------------------------------
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.
<PAGE>
THE FUNDS' OBJECTIVES
Composite Research & Management Co., referred to as the "Adviser" in this
Prospectus, manages the Funds. The Adviser attempts to maintain Funds that are
responsive to changes in economic trends and developments, government actions
and regulations, and international monetary conditions.
The investment objectives of each Fund are described below. These
objectives are fundamental and, therefore, cannot be changed without a majority
vote of the Fund's outstanding shares. Other investment policies and techniques
are not fundamental unless this Prospectus or the Statement of Additional
Information state that a particular policy is fundamental. Because risks are
involved, there cannot be any assurance a Fund's objectives will be
attained.
U.S. GOVERNMENT SECURITIES: This Fund has the objective of maintaining a
high level of current income, consistent with safety and liquidity. The Fund
invests in obligations issued or guaranteed by the full faith and credit of the
U.S. government or investments secured by these types of obligations.
INCOME: The objective for this Fund is to provide a high level of current
income that is consistent with protection of shareholders' capital. The Fund
carries out investments in a diversified pool of debt securities, generally
investing in higher grades of debt.
TAX-EXEMPT: This Fund has the objective of maintaining a high level of
federal tax-exempt income while protecting investors' capital. Investments are
made in a portfolio of bonds issued by states, counties, cities and other
governmental bodies whose bonds generate income that is exempt from federal
income tax.
INVESTMENT PRACTICES AND RISK FACTORS
The Funds' net asset values per share will fluctuate as the values of
securities they own change. As with all fixed-income investments, the 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 interest 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. Each Fund 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. Each Fund seeks to invest in securities having maturities
that, in the Adviser's judgment, are consistent with that Fund's investment
objective.
U.S. GOVERNMENT SECURITIES
-16-
<PAGE>
The intention of this Fund is to achieve its objective by investing in a
selection of obligations issued by or guaranteed by the full faith and credit of
the U.S. government. At present, the Fund may also invest in collateralized
mortgage obligations or repurchase agreements which are secured by those types
of obligations. It is currently a fundamental policy of the Fund to invest only
in the following securities:
1) U.S. government obligations issued by the Treasury, including bills,
certificates 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
conventional 30-year fixed-rate mortgages, 15-year fixed-rate 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 fluctuations 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. See Page ___ for a more complete discussion of GNMA
certificates, collateralized mortgage obligations and repurchase
agreements.
It is expected that, subject to shareholder approval, the Fund's
fundamental policies will be amended to permit investment in securities issued
by agencies or instrumentalities of the U.S. government. Such securities may not
be supported by the full faith and credit of the U.S. government.
INCOME
This Fund plans to achieve its objective by investing in debt issues and
obligations that offer high current yields and that are consistent with a low
degree of risk. Accordingly, the Fund invests most of its assets in the
following:
-17-
<PAGE>
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 35% of its assets in lower-rated securities
(sometimes called "junk bonds", see page [ ]). See "Appendix A --
Securities Ratings" for a detailed description of ratings.
2) Debts of the U.S. government and its agencies, including mortgage-backed
securities (see Page [ ]) issued by the GNMA, Federal National Mortgage
Association, and Federal 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
highest 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 are liquid, they may not exceed 10%
of the Fund's total assets.)
TAX-EXEMPT
This Fund is designed to achieve its objective by investing in municipal
bonds. 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.
Generally, they are payable only from the revenues of a particular facility, a
class of facilities, or the proceeds of another specific revenue source.
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,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies or instrumentalities. The Fund
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
(sometimes called junk bonds, see Page [ ]). See the Statement of
Additional Information 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
enjoying 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
-18-
<PAGE>
investments, when it is distributed by the Fund, may result 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.
OTHER INVESTMENT PRACTICES
Several other policies and considerations are important to how the Funds'
assets are invested. They include:
MORTGAGE-BACKED SECURITIES. The U.S. Government Securities and Income Funds
may invest in mortgage-backed securities. These may include "pass-through"
instruments or collateralized mortgage obligations. The holder of a pass-through
instrument receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. Collateralized
mortgage obligations differ from traditional pass-through instruments in that
they generally distribute principal and interest from their underlying pool of
mortgages sequentially rather than on a pro rata basis. Generally there are
multiple classes of ownership providing for successively longer expected
maturities.
Mortgage-backed securities, because of the pass-through of prepayments of
principal on the underlying mortgage obligations, almost always have an
effective maturity that is shorter than the stated maturity. The prepayment
characteristics of the underlying mortgages vary, so it is not possible to
accurately predict the life of a particular mortgage-backed security.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
interest rates rise, prepayments can be expected to slow.
When the mortgage obligations are prepaid, the Funds reinvest the prepaid
amounts in securities whose yields reflect interest rates prevailing at the
time. Therefore, the Funds' ability to maintain high-yielding mortgage-backed
securities in their portfolios will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. In addition, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
-19-
<PAGE>
During periods of rising interest rates, slower prepayments limit the
ability to reinvest in higher yielding securities.
LOWER-RATED SECURITIES. To increase the Income and Tax-Exempt Bond Funds'
yields, the Adviser may invest up to 35% of Income's and 25% of Tax-Exempt's
assets in below investment-grade securities (i.e., securities rated below BBB by
S&P or Baa by Moody's), or in non-rated securities determined by the Adviser to
be of comparable quality. These securities have ratings below the top 4 assigned
by Moody's or S&P and are commonly referred to as "junk bonds". The Funds will
not invest in securities rated lower than CCC by S&P or Caa by Moody's. See
"Appendix A -- Security Ratings" for a detailed description of these
ratings.
The market prices of lower-rated securities generally fluctuate more than
those of higher-rated securities, which may affect the value of the portfolios.
Although they are investment grade and are not subject to the above investment
limitations, securities rated BBB or Baa have speculative characteristics.
Securities that are rated lower than investment grade are generally considered
speculative. They involve greater risk of default or price fluctuations because
of changes in the issuer's creditworthiness.
Lower-rated and comparable non-rated securities tend to offer higher yields
and more limited liquidity than higher-rated securities with the same
maturities. This is because the creditworthiness of the issuers of lower-rated
securities is not as strong as that of other issuers. The market prices of these
securities may fluctuate more than higher-rated securities and may decline
significantly in periods of general economic difficulty. This may happen
following periods of rising interest rates.
MONEY MARKET INSTRUMENTS. The Funds are permitted to invest in money market
instruments for temporary or defensive purposes. The money market investments
permitted include obligations of the U.S. government and its agencies and
instrumentalities; short-term corporate-debt securities; commercial paper,
including bank obligations; certificates of deposit; and repurchase agreements.
The Tax-Exempt Bond Fund will normally make its temporary investments in
tax-exempt money market instruments, but it may purchase taxable securities
during periods of adverse market conditions.
REPURCHASE AGREEMENTS. The Funds may temporarily invest cash reserves in
repurchase 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 defaults on
its agreement to repurchase the security, the Fund may suffer a loss if it is
delayed or prevented from recovering the underlying debt security.
-20-
<PAGE>
Repurchase agreements will be entered into only with brokers, dealers or
banks that meet credit guidelines adopted by the Board of Trustees. To limit
risk, repurchase agreements maturing in more than seven days will not exceed 10%
of a Fund's total assets.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Fund may purchase
securities on what is called a "when-issued" or "delayed-delivery" basis. This
is done to obtain what is considered to be an advantageous yield or price at the
time of the transaction. The Funds 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. Thus, 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.
Each Fund is prohibited from entering into when-issued or delayed-delivery
commitments that, in total, exceed 20% of the market value of its total assets
minus total liabilities (except for the obligations created by these
commitments).
FOREIGN SECURITIES. The Income Fund may invest up to 25% of its assets in
U.S. dollar-denominated securities of foreign issuers, and may invest up to 10%
of its assets in foreign currency-denominated securities of foreign
issuers.
Investments in foreign securities may involve somewhat different risks,
including incomplete or inaccurate financial information, foreign taxes and
restrictions, illiquidity and fluctuations in currency values.
[The Income Fund may also engage in foreign currency exchange transactions
for hedging purposes in connection with the purchase and sale of foreign
securities or to protect against changes in the value of specific securities
held by the Fund. The Fund may purchase and sell currencies on a spot (or 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.]
Real estate investment trusts ("REITs"). The Income 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 affected 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
-21-
<PAGE>
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.
Dollar-Roll Transactions. Each of the Income and U.S. Government Securities
Funds may, subject to such limits as may be imposed from time to time by
policies adopted by the Board of Trustees, simultaneously be obligated with
respect to forward commitments (contracts 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 forward commitment) to repurchase the security at a later
date. Forward commitments 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.
Interest Rate Futures Transactions. The Tax-Exempt Bond Fund may, subject
to such limits as may be imposed from time to time by policies adopted by the
Board of Trustees, invest in interest rate futures transactions. These
transactions involve the risk of loss to the Fund if the Adviser were to
incorrectly predict changes in interest rates.
Rule 144A Securities. Each Fund may, subject to such limits as may be
imposed from time to time by policies adopted by the Board of Trustees, invest
in restricted securities that are eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, as amended. Such securities may be less liquid
and more difficult to value than unrestricted securities.
FOR FURTHER INFORMATION. See the Statement of Additional Information for
further information regarding the investment practices summarized in this
section.
INVESTMENT RESTRICTIONS
Although many of the Adviser's decisions depend on flexibility, there are
certain principles so fundamental to a Fund that they may not be changed without
a vote of a majority of the outstanding shares of that Fund.
IN ADDITION TO OTHER RESTRICTIONS LISTED IN THE STATEMENT OF ADDITIONAL
INFORMATION, EACH 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
assets may be invested without regard to this 5% limitation.
2) Acquire more than 10%* of the voting securities of any one company.
3) Invest more than 25%* of its assets in any single industry.
4) Borrow money for investment purposes, although it may borrow up to 5% of
its total net assets for emergency, non-investment purposes.
*Percentage at the time the investment is made.
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<PAGE>
WHO WE ARE
Composite U.S. Government Securities, Composite Income Fund and Composite
Tax-Exempt Bond Fund, each a series of The Composite Funds, a Massachusetts
business trust organized on September 18, 1997 (the "Trust"), are open-end
diversified management investment companies. A copy of the Trust's Amended and
Restated Agreement and Declaration of Trust, which is governed by Massachusetts
law, is on file with the Secretary of State of The Commonwealth of
Massachusetts. Prior to December __, 1997, the predecessors of the Funds,
Composite U.S. Government Securities, Inc., Composite Income Fund, Inc. and
Composite Tax-Exempt Bond Fund, Inc., respectively, were incorporated under the
laws of the State of Washington on March 5, 1982; October 22, 1975; and
September 16, 1976, respectively.
The Trust is a "series" investment company with an unlimited number of
authorized shares of beneficial interest. The Trustees may, without shareholder
approval, create two or more series of shares representing separate investment
portfolios. Only shares of Composite U.S. Government Securities Fund, Composite
Income Fund and Composite Tax-Exempt Bond Fund are offered by this prospectus.
Any such series of shares may be divided without shareholder approval, into two
or more classes of shares having such preferences and special, or relative
rights and privileges as the Trustees determine. Only Class A, B, S and I shares
are offered by this Prospectus. The Funds may also offer other classes of shares
with different sales charges and expenses. Because of these different sales
charges and expenses, the investment performance of the classes will vary.
Each share has one vote, with fractional shares voting proportionally.
Shares of all classes will vote together as a single class without regard to
series or classes on all matters except (i) when required by the Investment
Company Act of 1940 and (ii) when the Trustees have determined otherwise. Shares
are freely transferable, are entitled to dividends as declared by the Trustees,
and, if the Funds were liquidated, would receive the net assets of the Funds.
the Funds may suspend the sale of shares at any time and may refuse any order to
purchase shares.
ADVISER. The Funds are managed by Composite Research & Management Co.,
which is referred to as the "Adviser" in this Prospectus.
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
Funds.
The Adviser advises the Funds on investment policies and specific
investments. Subject to supervision by the Trust's Board of Trustees, the
Adviser determines which securities are to be bought and sold. These decisions
are based on analyses of the economy, sectors of industry,
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<PAGE>
and specific institutions. They are compiled from extensive data provided by
some of the country's largest investment firms, in addition to the Adviser's own
research.
William G. Papesh is the president of the Trust and of the Adviser. A
team of the Adviser's investment professionals manages the Funds, under
supervision of the Adviser's investment committee. The primary portfolio
managers are Brian L. Placzek, CFA, for Tax-Exempt; and Gary J. Pokrzywinski,
CFA, for Income and U.S. Government.
Mr. Placzek has 12 years of continuous experience in investment and
financial analysis and has been employed by the Adviser since July 1990. 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.
DISTRIBUTOR. Composite Funds Distributor, Inc. is the "Distributor" for
these 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
investments is not guaranteed, and loss of principal is possible.
TRANSFER AGENT. Murphey Favre Securities Services, Inc., which serves as
the "Transfer Agent," acts as the Funds' shareholder servicing and dividend
disbursing agent.
THE ADVISER, DISTRIBUTOR, AND TRANSFER AGENT, WHOSE ADDRESSES APPEAR ON THE
BACK COVER, ARE AFFILIATES OF WASHINGTON MUTUAL BANK AND WASHINGTON MUTUAL FSB.
THEY ARE ALSO SUBSIDIARIES OF WASHINGTON MUTUAL, INC.
THE COST OF GOOD MANAGEMENT
Composite Research & Management Co. serves as Adviser under investment
management agreements with each Fund. The agreements [are renewable every year,]
subject to the approval of the Trust's Board of Trustees or the shareholders
themselves.
BEFORE READING THIS SECTION, YOU MAY FIND IT USEFUL TO TURN BACK TO PAGE [
] TO REVIEW THE SUMMARY ON "ANNUAL FUND OPERATING EXPENSES." THAT PROVIDES AN
OVERVIEW OF MUCH OF WHAT IS COVERED IN DETAIL HERE.
ADVISORY FEES
A fee based on a percentage of average daily net assets is paid to the
Adviser for its services. This includes investment management and administrative
services and the Adviser's function as an agent for each Fund when paying a
portion of the fee to the Distributor and Transfer Agent for their services.
-24-
<PAGE>
Advisory fees are calculated daily and paid monthly.
U.S. Government and Income PAY advisory fees equal to an annual rate of
.625% of the first $250 million of each Fund's respective average daily net
assets. Fees are reduced to .50% of average daily net assets in excess of
$250 million. Tax-Exempt pays advisory fees equal to an annual rate of .50%
of the first $250 million of average daily net assets. Fees are reduced to
.40% on net assets in excess of $250 million.
DISTRIBUTION PLAN
The Trust's Board of Trustees has approved and monitors a distribution
plan that meets the provisions of Rule 12b-1 under the Investment Company Act of
1940. The plan is intended to benefit shareholders by stimulating interest in
purchasing shares of the Funds 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 plan authorizes each Fund to
reimburse the Distributor for direct costs of marketing, selling and
distributing Class A shares of that Fund, subject to Trustee approval. These
costs include service fees, sales literature and prospectuses (other than those
provided to current shareholders), compensation to sales people, and other costs
of sales and marketing, including state business and occupation tax assessed on
the reimbursements. The Distributor pays authorized dealers service fees in
consideration for account maintenance and other shareholder services. The fees
are equal to an annual rate not to exceed .25% of the average 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 future periods.
It is expected that, subject to approval by shareholders, the Trust will
adopt a Distribution plan that authorizes each 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; regardless of the Distributor's expenses.
CLASS B SHARES. The plan authorizes each Fund to pay the Distributor a
distribution fee at an annual 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 distribution 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.
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<PAGE>
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 its expenses, the amount of compensation
may be more or less than the Distributor's actual expenses. For this reason,
the Class B distribution plan may be 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 Funds are not liable for any
expenses incurred by the Distributor in excess of the amount of compensation it
receives.
Class I Shares. Class I Shares do not pay any distribution fees.
Class S Shares. The plan authorizes each Fund to pay the distributor
distribution and service fees at an annual rate of 1.00% of each Fund's average
daily net assets 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
Distributor in connection with sales of Class S shares. The service fee is .25%
of each Fund's average daily net assets attributable to Class S shares.
TOTAL EXPENSES
Other operating expenses include fees of Trustees not employed by the
Adviser, transfer agent fees, custodial fees, auditing and legal fees, taxes,
costs of issuing and redeeming shares, publishing of reports to shareholders,
corporate meetings, and other normal costs of running a business.
The transfer agent fees are for shareholder servicing and dividend
disbursing services. You may be required to pay a separate fee if you need
special services such as producing and mailing of historical account
transcripts.
THE VALUE OF A SINGLE SHARE
Each 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. That figure is determined separately for each class by adding the value
of its securities and other assets, subtracting its liabilities and dividing the
resulting figure by the number of shares of the class outstanding. That provides
the net asset value per share, which is commonly referred to as "NAV."
Security valuations are provided by independent pricing sources approved by
the Board of Trustees. When such valuations are not available, the Board of
Trustees will determine how securities are to be priced at fair value.
HOW TO BUY SHARES
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<PAGE>
Shares are offered at the NAV that is next calculated after receipt of a
properly completed purchase order, plus, in case of Class A shares, a sales
charge. This section discusses various options you have in purchasing shares of
the Funds.
You may buy shares of the Funds through the Distributor, or through
selected securities dealers. The Funds' shares may not be available in all
states. With certain exceptions, the minimum initial purchase in a Fund is
$1,000. IRA accounts may make initial purchases of $500 in any Fund. Subsequent
investments should be at least $50. You can arrange this at the time of
application or you can do it later by talking to your Representative or by
calling the Funds.
SYSTEMATIC INVESTMENT PROGRAM
For your convenience, you may arrange to have monthly purchases
automatically deducted from your checking account as part of a systematic
investment program. The minimum initial and monthly investments in this program
are $50. You can arrange this at the time of application or you can do it later
by talking to your investment representative or by calling the trust.
OTHER INFORMATION
The TRUST and the Distributor reserve the right to refuse an order to buy
shares.
In the interest of economy and convenience, physical certificates
representing Fund shares will be issued only upon written request to the Trust
or by request from your investment representative.
ALTERNATIVE SALES ARRANGEMENTS
Each Fund offers four classes of shares which represent interests in the
same portfolio of investments:
1) Class A shares are sold to investors who pay a sales charge at the time of
purchase and who pay ongoing service fees.
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 and
service fees than Class A shares for eight years. They also may be
subject to a "contingent deferred sales charge" if redeemed within six
years of purchase. Class B shares convert 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 distribution
fees.
4) Class S shares are sold exclusively to investors who open [SAM] accounts.
Class S shares are sold without an initial sales charge, but pay higher
ongoing distribution
-27-
<PAGE>
and service fees than Class A shares for eight years. They may also be
subject to a contingent deferred sales charge if redeemed within six years
of purchase. Class S shares convert to Class A shares after eight
years.
The net income attributable to, and the dividends payable to shares that
pay ongoing distribution and service fees 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 for shares of the same class of other
Composite Funds. In addition, Class B shares of a Composite Fund may be
exchanged for Class S shares of a Composite Fund, and Class S shares of a
Composite Fund may be exchanged for Class B shares of [Sierra] Asset Management
Portfolios. See "Exchanges for other Composite Funds" on Page [ ] in this
Prospectus.
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.
To assist investors in making their choice, the table on Page [ ]
provides examples of charges that apply to each class of shares. Normally, Class
A shares will be most beneficial to investors who qualify for reduced sales
charges, as described below, and who do not wish to open a [SAM] account or
purchase shares of [Sierra] Asset Management Portfolios.
Investment in Funds through a [SAM] account. In addition to the
diversification among individual securities you receive by investing in a
particular Fund, you may be able to further diversify risk by spreading your
assets among several different Composite Funds that each have different risk and
return characteristics. [SAM] is an active investment management service
offered by [Sierra Investment Services Corporation ("Sierra Services")], the
[SAM] investment adviser, that allocates your investments across a combination
of either Class A or Class S shares of certain of the Composite Funds selected
to meet long-term investment objectives as well as, in certain circumstances,
current income objectives.
[Sierra Services] has developed investment strategies for [SAM] accounts to
meet the diverse financial needs of different investors. You can open a [SAM]
account by meeting with one of the investment professionals of an authorized
dealer who will review your situation and help you identify your long-term
investment objectives. After using [SAM] criteria to determine your long-term
objectives, you can choose one of several investment strategies. Based on your
chosen strategy, your initial investment will be allocated among a number of the
Composite Funds and the Class A or Class S shares of such Composite funds.
Depending on market conditions, [Sierra Services] from time to time
(normally
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<PAGE>
quarterly) reallocates the combination of Composite Funds or the amounts
invested in the respective Class A or Class S shares of each to implement your
[SAM] investment strategy. In addition, your [SAM] account will be periodically
rebalanced to maintain your [SAM] strategy's current asset allocation mix, if
and when the Composite Funds' performance unbalances the strategy's mix. You
will pay [Sierra Services] a fee for the [SAM] account service that is in
addition to and separate from the fees and expenses you will pay directly or
indirectly as an investor in the Composite Funds.
From time to time, one or more of the Composite Funds used for investment
by the [SAM] accounts may experience relatively large investments or redemptions
due to [SAM] account allocations or rebalancings recommended by [Sierra
Services]. These transactions will affect the 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
invest it. While it is impossible to predict the overall impact of these
transactions over time, there could be adverse effects on portfolio management
to the extent that 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
increase 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 [Sierra Services] will nevertheless face conflicts in fulfilling
their respective responsibilities because they are affiliates and employ some of
the same professionals. 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 NAV next calculated after
receipt of a properly completed purchase order, plus an initial sales charge as
shown in the table below. 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 receive for selling Class A shares.
<TABLE>
<CAPTION>
REALLOWED
SALES CHARGE TO DEALERS
------------------------- -----------
% OF NET % OF % 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 ---- ----
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
$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>
*See net asset value purchases.
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 4.50%
of the $1,000 would pay for a sales charge. The charge would be $45, which is
____% of the net investment of $____, as the next column shows. The dealer
selling the shares would be paid $___ of the $45 which is ____% of $1,000, as
the last column shows.
Here is a summary of information on reduced sales charges for which an
investor may be qualified. This summary refers to the data in the above table
that cover purchases of $50,000 or more.
CUMULATIVE DISCOUNT. This allows current purchases to qualify for the
foregoing discounts by including the value of existing Composite Funds
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 trustees purchasing for single fiduciary accounts.
LETTER OF INTENT. This discount is for purchases made over an extended
period. It provides for a cumulative discount on the same basis as explained in
the previous paragraph if the following conditions are met: Purchases of Class A
shares must be made within a 13-month period that begins no earlier than 90 days
before the submission of a letter of intent from the investor to the Funds. For
more information about this discount, please contact the 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
purchases of $1 million or more but such shares may be subject to a contingent
deferred sales charge of 1.00% or .50%, if redeemed during the first or second
year after purchase, respectively.
Qualified employee benefit plans (including SEPS and SIMPLES) that have
more than 10 participants or that have more than $25,000 invested in those
Composite Funds may purchase shares without an initial sales charge. However, a
contingent deferred sales charge of 1% may be imposed on the amount that was
invested through such a plan in Class A
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<PAGE>
shares and that is redeemed (i) if, within the first two years after the plan's
initial investment in the Composite Funds, the named fiduciary of the plan
withdraws the plan from investing in the Composite Funds in a manner that causes
all shares held by the plan's participants to be redeemed; or (ii) by a plan
participant within two years of the plan participant's purchase of such Class A
shares. The contingent deferred sales charge will be waived on redemptions in
connection with certain involuntary distributions, including distributions
arising out of the death or disability of a shareholder (including one who owns
the shares as joint tenant).
Class A shares may be purchased at net asset value, and in any amount, by
officers, directors and employees of the Adviser or its affiliates, or officers,
directors, and employees of companies which have entered into selling agreements
with the Distributor, and to certain family members of such individuals. The
purchase must be for investment purposes only and may not be resold other than
through redemption by the Funds. The Funds may also offer their shares at net
asset value [to investors who use the redemption proceeds from mutual funds
outside the Composite Funds (excluding money market funds);] to certain
retirement plans; and to brokers, dealers or registered investment advisers who
have entered into arrangements with the Distributor providing specifically for
the shares to be used in particular investment products made available to their
clients for which they may charge a separate fee. The Distributor will pay
authorized dealers commissions on certain net asset value purchases as described
in the Statement of Additional Information.
Consult an investment representative or see the Statement of Additional
information if you think you may qualify for any of these purchase plans.
You must notify the Fund 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. However, Class B shares
have higher distribution and service fees than Class A shares for eight
years. Also, 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 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
Distributor to defray expenses for providing distribution services for Class B
shares. Examples of such expenses include compensation to sales people and
selected dealers. The Distributor currently pays authorized dealers commissions
of 4.00% of the price of shares sold by them.
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<PAGE>
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. Class B shares purchased by exchange will be subject
to a contingent deferred sales charge using the schedule of the Composite Fund
into or from which the shares were exchanged that would result in the greatest
contingent deferred sales charge applicable to such shares. Shares purchased
through reinvestment of dividends or capital gain distributions are not subject
to a contingent deferred sales charge.
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
-------------- ------------
<S> <C>
First..................... 5%
Second.................... 4%
Third..................... 3%
Fourth.................... 3%
Fifth..................... 2%
Sixth..................... 1%
Seventh................... 0%
Eighth.................... 0%
</TABLE>
Class B shares purchased prior to December __, 1997, may be subject to a
different contingent deferred sales charge schedule which is shown in the
Statement of Additional Information.
The contingent deferred sales charge is calculated by applying the above
percentages 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; then
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
reinvestment.
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<PAGE>
At that time, the investor decides to make the first redemption. The
transaction includes 50 shares at $12 per share -- for a total of $600.
The first 10 shares to be redeemed will not be subject to any charge
because of the 10 shares received from dividend reinvestment. See item 1) just
above this example.
As for the other 40 shares, the charge will be applied only to the original
cost of $10 per share. The NAV increase of $2 per share will not be considered.
As a result, $400 of the redemption proceeds (40 x $10) will be charged at 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 Statement of Additional Information;
3) According to the Fund's systematic withdrawal plan - but limited to 12%
annually of the value of the Fund account at the time the plan is
established; or
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 B 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 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
systematic investment programs or systematic withdrawal plans are not eligible
for this privilege.
To make sure you receive waiver or reimbursement of contingent deferred
sales charges, you must notify the Fund whenever you are so entitled.
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
dividends and capital gain distributions also will convert to Class A shares.
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<PAGE>
The conversion of Class B shares to Class A shares is subject to a
favorable ruling from the Internal Revenue Service or the continuing
availability of an opinion of legal counsel that such conversion will not be
subject to federal income taxes. There cannot be any assurance that a ruling or
opinion will be available. If they should not be available, the conversion of
Class B shares to Class A shares would not occur and those shares would continue
to be subject to higher expenses than Class A shares for an indefinite period.
Class B shares purchased prior to December __, 1997, will generally convert to
Class A shares six years after they were initially purchased.
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
investment 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 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. However, Class S shares
have higher distribution and service fees than Class A shares for eight years.
Also, if Class S 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 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
Distributor to defray expenses for providing distribution services for Class S
shares. Examples of such expenses include compensation to sales people and
selected dealers. [The Distributor currently pays authorized dealers commissions
of 4.00% of the price of shares sold by them.]
Contingent deferred sales charge. Class 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
contingent deferred sales charge. Shares
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purchased through reinvestment of dividends or capital gain distributions are
not subject to a contingent deferred sales charge.
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED
AFTER PURCHASE 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
percentages 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; then
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 Statement of Additional Information;
3) According to the Fund's systematic withdrawal plan -- but limited to 12%
annually of the value of the Fund account at the time the plan is
established; or
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
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previously paid. The reinvested shares will be subject 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.
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
dividends and capital gain distributions also will convert to Class S
shares.
The conversion of Class S shares to Class A shares is subject to a
favorable ruling from the Internal Revenue Service or the continuing
availability of an opinion of legal counsel that such conversion will not be
subject to federal income taxes. There cannot be any assurance that a ruling or
opinion will be available. If they should not be available, the conversion of
Class 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
redeem 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.
Class S shares may also be exchanged for Class B shares of [Sierra] Asset
Management Portfolio.
DISTRIBUTION OF INCOME AND CAPITAL GAINS
The Funds 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. Dividends are declared daily and paid
monthly, when available. Dividends, if declared, begin accruing on the day
following payment for purchase. Any capital gain distributions normally will be
paid in December.
You have four choices regarding what you want to do with dividends and
capital gain distributions. You can make your choice at the time of your initial
purchase or by contacting the Funds' offices or your investment representative.
The options include:
AUTOMATIC REINVESTMENT. Most shareholders elect this procedure. It is
automatically effective unless you choose another option. All dividends and
capital gain distributions are
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reinvested into additional shares of the Fund. Automatic reinvestments generally
provide the most capital growth.
REINVEST DIVIDENDS IN ANOTHER COMPOSITE FUND. Income dividends may be
automatically invested in the same class of shares of another Composite Fund
provided shares of that Fund are available in your state of residence.
CASH PAYMENT OF INCOME AND REINVESTMENT OF ANY CAPITAL GAINS. With this
option, dividends are deposited to your pre-authorized bank account or paid by
check. Any capital gain distributions are reinvested in additional shares of the
Fund.
CASH PAYMENT OF ALL DISTRIBUTIONS. Dividends and capital gain distributions
are deposited to your pre-authorized bank account or paid by check.
OTHER INFORMATION. Reinvestments of income dividends are made at the
closing NAV on the last business day of each month. Reinvestments of capital
gain distributions are made at the closing NAV on the day distributions are
deducted from the Fund's assets.
If you have chosen to receive dividends or capital gain distributions in
cash and the U.S. Postal Service cannot deliver your check, the Funds reserve
the right to reinvest your check at the then-current NAV and to automatically
reinvest subsequent dividends and capital gain distributions in your account.
The Funds may also automatically reinvest dividends or distributions of $10 or
less.
INCOME TAXES ON DIVIDENDS AND CAPITAL GAINS
You are responsible for any federal income tax (and state and local income
taxes, if applicable) on dividends and capital gain distributions. This is true
whether they are paid in cash or reinvested in additional shares. You will be
advised annually as to the tax status of these dividends and distributions.
Generally, dividends (other than exempt-interest dividends) paid by the
Funds from interest, dividends, or net short-term capital gains will be taxed as
ordinary income. Pursuant to the Taxpayer Relief Act of 1997, two different tax
rates apply to net capital gains (that is, the excess of net gains from capital
assets held for more than one year over net losses from capital assets held for
not more than one year) distributed to you. One rate (generally 28%) applies to
net gains on capital assets held for more than one year but not more than 18
months ("mid-term gains") and a second, preferred rate (generally 20%) applies
to the balance of such net capital gains ("adjusted net capital gains"). You
must treat distributions of net capital gains as mid-term gains to the extent
designated by the Funds as deriving from net gains from assets held for more
than one year but not more than 18 months. The balance will be treated as
adjusted net capital gains. Distributions of mid-term gains and adjusted net
capital gains will be taxable to you as such, whether or not received by you in
cash or in shares of a Fund and regardless of how long you have held your shares
in a Fund. If your shares are in an IRA or another qualified retirement plan,
you will not have to pay tax on the reinvested amount until funds are
withdrawn.
Tax-exempt interest earned by the Tax-Exempt Bond 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. You should consult a tax preparer who is familiar with local law.
In addition, if you receive social security or railroad retirement benefits, you
should consult your tax adviser to determine what effect, if any, an investment
in this Fund may have on the taxation of your benefits. Interest income earned
by Tax-Exempt 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.
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<PAGE>
Each Fund complies with provisions of the Internal Revenue Code applicable
to regulated investment companies and distributes its taxable income
accordingly. Because of this, the Funds do not anticipate being subject to
federal income or excise taxes on the earnings they distribute to shareholders.
Because of tax law requirements, you must provide the Funds an accurate
Social Security number or taxpayer identification number or make required
certifications to avoid the 31% "back-up" withholding tax.
EXCHANGES FOR OTHER COMPOSITE FUNDS
You may exchange shares of any Composite Fund for the same class of shares
of any other Composite Fund. In addition to the Funds described in Prospectus,
there are Composite Funds that invest in other types of securities, including:
stocks, a balance between stocks and bonds, and money market instruments.
Contact your investment representative or the Distributor to request a
prospectus 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 Composite Fund
into or from which the shares were exchanged that would result in the greatest
contingent deferred sales charge applicable to such shares. For purposes of
calculating any contingent deferred sales charge, the length of time you have
held your shares will date from your original purchase, and will be unaffected
by any exchanges (or any purchases of shares of Composite Funds in connection
with the acquisition by the Composite Funds of the assets of another investment
company). Shares exchanged from Composite Money Market Fund, Composite Tax-
Exempt Money Market Fund or California Money Fund (a series of the [Sierra]
Trust Funds) 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 exchange
purposes as stated in the prospectus and statement of additional information
("SAI") of [Sierra Prime Income] Fund. Also, although shares of [Sierra Prime
Income] Fund may be exchanged for shares of the funds, such exchanges are
permitted approximately once each calendar quarter so long as [Sierra Prime
Income] Fund makes a repurchase offer for its shares in such quarter and so long
as the [Sierra Prime Income] Fund repurchase offer is sufficiently large to
include [Sierra Prime Income] Fund shares tendered for exchange. for more
information about [Sierra Prime Income] Fund, please consult your investment
representatives or call the Distributor.
All exchanges are subject to the minimum investment requirements of the
Composite Fund being acquired and to its availability for sale in your state of
residence. You may arrange
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<PAGE>
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 disallowed. Exchanges of shares
are sales and may result in a gain or loss for federal and state income tax
purposes.
HOW TO SELL SHARES
You may redeem shares at any time. The price paid per share will be the
next NAV that is calculated. 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. You may authorize telephone transactions when you sign your Fund
account application. Or you may choose at that time not to allow such
transactions.
Provided you have pre-authorized these transactions, you may redeem or
exchange shares by telephoning 1-800-543-8072. You may also request these
transactions through your investment representative. Proceeds may be directed to
a pre-authorized bank or broker account or to the address of record for the
account. Exchanges also may be made by telephone. (See the previous section for
more information.)
It may be difficult to reach the Trust offices by telephone during periods
of unusual economic or market activity. Please be persistent if this occurs. The
Transfer Agent is committed to extending its availability beyond regular 7 a.m.
to 6 p.m. (Pacific time) customer 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
requesting personal shareholder information, providing written confirmations of
each telephone transaction, and recording telephone instructions. The Transfer
Agent may require a Letter of Authorization, other documents, or authorization
from your broker to initiate telephone redemptions of $25,000 or more that are
not directed to your pre-authorized bank or broker account. If reasonable
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 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 Trust
offices. Written requests may require a signature guarantee, as discussed below,
and the return of any
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<PAGE>
outstanding share certificates. Changes in pre-authorized redemption
instructions or your account registration also require signature guarantees. For
your protection, the signature(s) must be guaranteed by an officer of a U.S.
bank belonging to the Federal Reserve System, a member of the Stock Transfer
Association Medallion Program, or a member of the National Association of
Securities Dealers, Inc.
PROMPT PAYMENT. Payment normally will be made on the next business day
after the transaction, but no later than seven days after the transaction unless
you recently purchased Fund shares by check. In that case, redemption proceeds
may be delayed 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 your bank account without charge. Wire
redemption proceeds may be subject to a $10 fee. The receiving bank also may
charge a fee.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders may choose to receive specific
cash withdrawals on a periodic basis. A $5,000 minimum balance is required to
establish a systematic withdrawal plan in a Fund account. Shares of the Fund
will be redeemed to provide the requested payment. Naturally, withdrawals that
continually exceed dividend income and capital gains will eventually exhaust the
account. Class B and Class S shareholders may use a systematic withdrawal plan
to redeem up to 12% of the beginning balance annually without incurring a
contingent deferred sales charge. The beginning balance is the Fund account
balance at the time the plan is established.
OTHER CONSIDERATIONS. It is costly to maintain small accounts. Accordingly,
an account may be closed after 90 days 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 redeemed
at the next calculated NAV on the day the account is closed. To prevent an
account closure, investors may purchase shares to bring their account balance
above the minimum during the 90-day grace period.
IRAS AND OTHER TAX-SHELTERED RETIREMENT PLANS
Shares in the U.S. Government Securities and Income Funds may be
appropriate for many retirement plans, including IRAs. Retirement plan
contributions are tax deductible in some cases, and earnings compound on a tax-
deferred basis until withdrawn.
From time to time, Composite Funds Distributor, Inc. or its affiliates may
offer "IRA bonuses" on IRA rollovers and transfers to its IRA accounts
maintained by them. The Funds do not pay any portion of these bonuses. The
products purchased through these rollovers and transfers may include the
Composite Funds. This payment may be considered a reduction in the Distributor's
sales charge.
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<PAGE>
Information about IRAs and other qualified retirement plans is available
from the Fund offices or your investment representative.
PERFORMANCE INFORMATION
While past results are not necessarily indicative of future performance,
history provides a basis for comparisons of mutual fund investment strategies
and their execution. Among the factors that influence the Funds' performance
are the type and quality of investments, operating expenses, and the net amount
of new money coming into the Funds.
Pertinent information follows:
YIELD. The Funds calculate their current "yields" by dividing annualized
net investment income per share for a stated 30-day period by the maximum
offering price on the last day of the period. The result then is shown as a
percentage of the total investment.
Yields are calculated separately for each class of shares. Because yield
accounting methods differ from the methods used for other accounting purposes,
the Funds' yields may not equal the income paid to your account or the income
reported in the Funds' financial statements.
DISTRIBUTION RATE. The Funds' "distribution rates" are calculated by
dividing 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 period.
TAXABLE-EQUIVALENT YIELD. Because the Tax-Exempt Bond Fund is designed to
shelter shareholders' income from federal income taxes, it may be of interest to
know about "taxable-equivalent yield." This will show you the yield you would
need to receive from a taxable investment to reach the same earnings level as
this Fund. Here is how to do that: 1) Subtract your income tax rate from 1.0. 2)
Divide the Tax-Exempt Fund's stated yield by your answer to the first step.
For example: To calculate a taxable-equivalent yield at a 36% tax rate,
subtract .36 from 1.0, and divide the taxable fund's yield by the resulting .64.
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
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periods; second, they may represent cumulative (rather than average) total
return and third, sales charges may not be deducted.
OTHER INFORMATION. Each Fund may include performance data in any
advertisement or promotional material of that Fund.
Management has included a discussion of the Funds' performance in their
annual report, which is available upon request and without charge by calling the
Fund offices.
The 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 indices.
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 Fund's 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 Funds receive statements at
least quarterly. These statements show account transactions, the total number of
shares owned, and any dividends or distributions paid. Shareholders also receive
written confirmation soon after each transaction which is not a dividend
reinvestment, systematic investment program purchase, or systematic withdrawal
plan redemption.
WE'RE HERE TO HELP YOU
Any inquiries you may have about these Funds or your account should be
directed to the Funds at the address or telephone number on the front page and
back cover of this Prospectus. We will be glad to answer your questions.
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APPENDIX A
DESCRIPTION OF SECURITY RATINGS
Moody's Investors Service, Inc. (Moody's)
Corporate and Municipal Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Standard & Poor's (S&P)
Corporate and Municipal Ratings
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only to a small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC, and C is regarded, on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, or economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy has been filed but debt service payments
are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition of debt service payments are jeopardized.
Commercial Paper
A1 and Prime 1 commercial paper ratings issued by Moody's Investors Services,
Inc. (Moody's) and Standard & Poor's (S&P) are the highest ratings these
corporations issue.
Among factors considered by Moody's in assigning ratings are the following: (1)
evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
maybe inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparation to
meet such obligations.
Commercial paper rated A1 by S&P has the following characteristics: Liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated A
or better. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determine whether the issuer's commercial paper is rated A1, A2 or
A3.
ABSENCE OF RATING:
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to quality of the issue. Should no
rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published.
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FOR FURTHER INFORMATION, PLEASE CONTACT:
FUND OFFICES
601 West Main Avenue, Suite 300
Spokane, Washington 99201-0613
Phone: (509) 353-3550
Toll free:(800) 543-8072
- --------------------------------------------
ADVISER
Composite Research & Management Co.
1201 Third Avenue, Suite 1400
Seattle, Washington 98101-3015
DISTRIBUTOR
Composite Funds Distributor, Inc.
1201 Third Avenue, Suite 780
Seattle, Washington 98101-3015
TRANSFER AGENT
Murphey Favre Securities
Services, Inc.
601 West Main Avenue, Suite 300
Spokane, Washington 99201-0614
CUSTODIAN
Investors Fiduciary Trust Company
127 W. 10th Street
Kansas City, Missouri 64105-1716
INDEPENDENT PUBLIC ACCOUNTANTS
LeMaster & Daniels PLLC
601 W. Riverside Avenue, Suite 800
Spokane, Washington 99201-0614
COUNSEL
Paine, Hamblen, Coffin, Brooke & Miller LLP
717 W. Sprague Avenue, Suite 1200
Spokane, Washington 99204-0464
BOARD OF TRUSTEES
Wayne L. Attwood, M.D.
Kristianne Blake
Anne V. Farrell
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Michael K. Murphy
William G. Papesh
Daniel L. Pavelich
Jay Rockey
Richard C. Yancey
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THE COMPOSITE FUNDS
BOND FUNDS
COMPOSITE
U.S. GOVERNMENT
SECURITIES
COMPOSITE
INCOME FUND
COMPOSITE
TAX-EXEMPT BOND
FUND
PROSPECTUS
DECEMBER __,
1997
[LOGO APPEARS HERE]
COMPOSITE
GROUP OF FUNDS
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<PAGE>
COMPOSITE MONEY MARKET FUNDS
Suite 300
601 W. MAIN AVENUE
SPOKANE, WASHINGTON 99201-0613
TELEPHONE (509) 353-3550 TOLL FREE (800) 543-8072
A Choice of money market funds to meet several investor goals:
The following series (the "Composite Cash Management Company Funds") of the
Composite Funds (the "Trust") provide a choice of diversified money market
investments designed to enable investors to meet several short-term goals, as
summarized below:
. COMPOSITE MONEY MARKET FUND. This Fund is intended to provide maximum
current income, while preserving capital and maintaining liquidity. Investments
are in high-quality money market instruments.
. COMPOSITE TAX-EXEMPT MONEY MARKET FUND. The objective of this
Fund is to provide maximum current income that is exempt from federal income
tax, while preserving capital and maintaining liquidity. Primary investments are
in high-quality, short-term municipal obligations.
Please read this Prospectus dated December __, 1997, and retain it for
future reference. It sets forth information about these Portfolios that a
prospective investor should know before investing.
OTHER IMPORTANT INFORMATION
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED OR GUARANTEED
BY THE UNITED STATES GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. THERE IS NO ASSURANCE THAT THE
$1.00 PER SHARE NET ASSET VALUE (NAV) WILL BE MAINTAINED.
A STATEMENT OF ADDITIONAL INFORMATION ABOUT THIS FUND, DATED DECEMBER
__, 1997, IS ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION. IT IS
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. YOU MAY OBTAIN A FREE COPY BY
CALLING OR WRITING THE FUND AT THE LOCATION LISTED ABOVE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS
-1-
<PAGE>
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
CONTENTS Page
<S> <C>
About this prospectus.....................................................
Expense information.......................................................
Financial highlights......................................................
The Funds' objectives.....................................................
Investment practices and risk factors.....................................
Investment restrictions...................................................
Who we are................................................................
The cost of good management...............................................
The value of a single share...............................................
How to buy shares.........................................................
Distribution of income....................................................
Income taxes on dividends.................................................
Exchanges for other Composite Funds.......................................
How to sell shares........................................................
IRAs and other tax-sheltered retirement plans.............................
Calculation of yields.....................................................
Reports to shareholders...................................................
We're here to help you....................................................
</TABLE>
ABOUT THIS PROSPECTUS
In this Prospectus you will find basic and in-depth information about the
Composite Money Market Funds. Included are such subjects as how to
buy and sell shares, as well as details about the Funds' objectives, investment
practices and restrictions, and other matters.
If you are not familiar with mutual funds, investment terminology, or the
Composite Funds, you may find it useful to understand the following key words
and terms that appear frequently on these pages:
GLOSSARY OF KEY WORDS AND TERMS
ADVISER. Composite Research & Management Co., which is called the
"Adviser" in this Prospectus, is the manager of the Composite Money Market Funds
and a number of other mutual funds (excluding series of The Sierra Variable
Trust that serve as underlying funding vehicles for variable insurance
contracts, the "Composite Funds")
-2-
<PAGE>
CLASS A SHARES. Purchasers of Class A shares do not pay a sales charge at
the time of purchase, but pay annual operating expenses, including ongoing
service fees.
CLASS B SHARES. Purchasers of Class B shares do not pay an initial sales
charge, but Class B shares pay higher ongoing distribution and service fees
than Class A shares for eight years, and redemptions of Class B Shares are
generally subject to a contingent deferred sales charge (see below). Class B
shares convert to Class A shares after eight years.
CLASS I SHARES. 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 distribution fees.
CLASS S SHARES. Class S shares of the Funds are sold exclusively to
investors who, at the time of the exchange, already maintain a Class S account.
Purchasers of Class S shares do not pay an initial sales charge, but Class S
shares pay higher ongoing distribution and service fees than Class A shares for
eight years and redemptions of Class S shares are generally subject to a
contingent deferred sales charge (see below). Class S shares convert to Class A
shares after eight years.
CONTINGENT DEFERRED SALES CHARGE. If an investor redeems Class B or Class
S shares within six years of purchase, he or she normally must pay this
charge.
DISTRIBUTOR. Composite Funds Distributor, Inc. distributes the Composite
Cash Management Company funds and other Composite Funds and is referred to
as the "Distributor" in this Prospectus.
EXCHANGE. This privilege allows shareholders to exchange shares of any
Composite Fund for shares of the same class of any other Composite Fund. Except
for exchanges of shares of certain money market funds that were not subject to
any initial or contingent deferred sales charge at the time of purchase, there
is no fee or additional sales charge for an exchange within the Composite
Funds.
FUND. The term "Fund" identifies one or both of the mutual funds
offered through this Prospectus. These "Funds" are identified as follows in
this document:
MONEY MARKET. This Fund is intended to provide maximum current
income, while preserving capital and maintaining liquidity. Investments are
in high-quality money market instruments.
TAX-EXEMPT. The objective of this Fund is maximum current income
that is exempt from federal income tax, while preserving capital and
maintaining liquidity. Primary investments are in high-quality, short-term
municipal obligations.
-3-
<PAGE>
REDEMPTION. This refers to the sale of mutual fund shares by an investor.
He or she is said to have "redeemed" the shares.
STATEMENT OF ADDITIONAL INFORMATION. This is a document that has more
detailed information about the Funds than what is contained in this prospectus.
It is on file with the Securities and Exchange Commission and also is
available through the Funds.
EXPENSE INFORMATION
The table below shows the Funds' costs and expenses that an investor will
bear both directly or indirectly and how they affect share ownership. Operating
expenses are based on the Funds' expenses during the fiscal year ended
December 31, 1996, "Other expenses".
For further information on costs and expenses, please see "The cost of good
management" on Page __.
SHAREHOLDER TRANSACTION EXPENSES FOR EACH FUND:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS I CLASS S
SHARES SHARES SHARES SHARES
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price) None None None None
Maximum contingent deferred sales
charge (as a percentage of
purchase price or redemption proceeds,
whichever is lower) None * 5.00% None 5.00%
Redemption fee None None None None
Exchange fee None None None None
</TABLE>
* Certain investors who purchase Class A shares at net asset value may be
subject to a contingent deferred sales charge of 1.00% or .50% on
redemptions of these shares during the first or second year after purchase,
respectively.
-4-
<PAGE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES MONEY MARKET FUND
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
-----------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS I SHARES CLASS S SHARES
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADVISORY FEES* .45% .45% .45% .45%
12B-1 FEES 0% 1.00% 0% 1.00%
OTHER EXPENSES .30% .30% .30% .30%
-----------------------------------------------------------------------
TOTAL FUND .75% 1.75% .75% 1.75%
OPERATING EXPENSES
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES TAX-EXEMPT FUND
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
-----------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS I SHARES CLASS S SHARES
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advisory fees* .45% .45% .45% .45%
12b-1 fees 0% 1.00% 0% 1.00%
Other expenses .10% .10% .10% .10%
-----------------------------------------------------------------------
Total Fund .55% 1.55% .55% 1.55%
operating expenses
=======================================================================
</TABLE>
*The Investment Management Agreement has been amended, to be effective upon the
acquisition by the Money Market Funds of the assets of the Global Money Fund and
the U.S. Government Money Fund, each a series of the Sierra Trust Funds. The
Amendment would reduce the advisory fees under the Investment Management
Agreement to .40%.
Absent reimbursements, "Other expenses" would have been .43% for each class
of the Money Market Fund and "Total expenses" would have been .89%, 1.90%, .90%,
and 1.90% for Class A, Class B, Class I and Class S shares, respectively. For
the Tax-Exempt Fund, "Other expenses" would have been .22%
-5-
<PAGE>
for Class A Shares, and 2.77% for Class B, Class S, and Class I shares, and
"Total expenses" would have been .72%, 4.22%, 1.32% and 2.32% for Class A, Class
B, Class I and Class S shares, respectively.
Class S shares may be purchased directly only by investors who, at the time
of the exchange, already maintain a Class S account. Otherwise, Class S shares
are available only through exchange of Class S shares of other Composite Funds.
The 5.00% contingent deferred sales charge on Class B and Class S shares
declines over time and is eliminated after six years. Class B and Class S shares
convert to Class A shares after eight years. Please see "The cost of good
management" for further information. There is a $10 charge for redemptions paid
by Fed Funds wire, but not for redemptions deposited to your pre-authorized bank
account or paid by check.
Example
You would pay the following expenses on a $1,000 investment in one of the
Portfolios, assuming you receive a 5% annual return, that the Portfolio's
expenses are the same as those shown in the Annual fund operating expenses
table above and that you redeemed your shares at the end of the time periods
listed. The 5% figure is a constant rate required for comparative purposes by
the Securities and Exchange Commission. The example should not be considered a
representation of past or future expenses or performance. Actual results will
be greater or less than the illustration.
-6-
<PAGE>
<TABLE>
<CAPTION>
Money Market
Class A shares Class B shares Class I shares CLASS S shares
------------------------------------------------------------------------------------
Assuming
redemption at the
end of each
period:
<S> <C> <C> <C> <C>
1 Year $ $ $ $
3 Years $ $ $ $
5 Years $ $ $ $
10 Years $ $ $ $
Assuming you
keep your shares
and no redemptions
are made:
1 Year $ $ $ $
3 Years $ $ $ $
5 Years $ $ $ $
10 Years $ $ $ $
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Tax-Exempt
Class A shares Class B shares Class I shares Class S shares
------------------------------------------------------------------------------------
Assuming
redemption at the
end of each
period:
<S> <C> <C> <C> <C>
1 Year $ $ $ $
3 Years $ $ $ $
5 Years $ $ $ $
10 Years $ $ $ $
Assuming you
keep your shares
and no redemptions
are made:
1 Year $ $ $ $
3 years $ $ $ $
5 years $ $ $ $
10 years $ $ $ $
</TABLE>
-8-
<PAGE>
Class B and Class S Shares automatically convert to Class A shares after
eight years without charge or tax impact. Because of that, years nine through
ten reflect Class A operating expenses. Redemption at the end of a full year
results in the imposition of the following year's contingent deferred sales
charge. Long-term Class B and Class S shareholders could pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc. The Class B and Class S
conversion feature is intended to reduce the likelihood this will occur.
FOR FURTHER INFORMATION
. Advisory fees - See "The cost of good management" Page____
. 12b-1 fees - See "The cost of good management" Page____
. Conversion of Class B to Class A - See "Exchanges for other Composite
Funds" Page____
. Conversion of Class S to Class A - See "Exchanges for other Composite
Funds" Page ____
FINANCIAL HIGHLIGHTS
The tables on the following pages present selected financial information
about the Funds, including per share data, expense ratios and other data based
on average net assets. Information presented for periods ended prior to June
30, 1997 has been audited by LeMaster & Daniels PLLC, the Fund's independent
auditors, whose reports appear in the Funds' annual report. Information
presented for periods ended June 30, 1997 is unaudited. The Funds' 1996 annual
report and 1997 semiannual report are incorporated by reference into the
Statement of Additional Information.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
MONEY MARKET PORTFOLIO - CLASS A SHARES
<TABLE>
<CAPTION>
Six months
Ended Years Ended October 31,
April 30, -----------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...................... $1.000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------ ------- ------- ------- ------- -------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income................. 0.239 0.0476 0.0519 0.0341 0.0238 0.0302
Total From Investment
Operations.......................... 0.239 0.0476 0.0519 0.0341 0.0238 0.0302
----- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends (from net
investment income)................... (0.0239) (0.0476) (0.0519) (0.0341) (0.0238) (0.0302)
Total Distributions................... (0.0239) (0.0476) (0.0159) (0.0341) (0.0238) (0.0302)
-------- ------- ------- ------- ------- -------
NET ASSET VALUE,
END OF YEAR............................ $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= ======= ======= =======
TOTAL RETURN........................... 4.95%/(2)/ 4.88% 5.33% 3.47% 2.41% 3.07%
RATIOS/
SUPPLEMENTAL DATA
Net Assets, End of Year
(in thousands)...................... $256,222 $229,355 $171,225 $125,651 $135,187 $141,193
Ratio of Expenses to
Average Net Assets/(1)/.............. 0.78%/(2)/ 0.79% 0.92% 0.95% 0.97% 0.88%
Ratio of Net Income to
Average Net Assets................... 4.83%/(2)/ 4.77% 5.19% 3.39% 2.38% 3.04%
<CAPTION>
Years Ended October 31,
-----------------------
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR..................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income................ 0.0526 0.0733 0.0826 0.0668 0.0588
Total From Investment
Operations......................... 0.0526 0.0733 0.0826 0.0668 0.0588
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends (from net
investment income).................. (0.0526) (0.0733) (0.0826) (0.0668) (0.0588)
Total Distributions.................. (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
======= ======== ======= ======= =======
TOTAL RETURN.......................... 5.41% 7.61% 8.60% 6.85% 5.97%
RATIOS/
SUPPLEMENTAL DATA
Net Assets, End of Year
(in thousands)..................... $178,741 $252,051 $256,017 $180,130 $137,737
Ratio of Expenses to
Average Net Assets/(1)/.............. 0.93% 0.97% 1.06% 1.01% 1.05%
Ratio of Net Income to
Average Net Assets................... 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
certain 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.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
TAX-EXEMPT PORTFOLIO - CLASS A SHARES
<TABLE>
<CAPTION>
Six
Months
Ended Years Ended December 31,
June 30, --------------------------------------------
1997 1996 1995 1994 1993 1992
-------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.................... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- -------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income................. 0.0154 0.0301 0.0339 0.0235 0.0203 0.0238
Net Realized Gains on Securities...... - . - 0.0054 . - . - . -
------- ------- ------- ------- ------- -------
Total From Investment Operations.... 0.0154 0.0301 0.0393 0.0235 0.0203 0.0238
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment
income)............................. (0.0154) (0.0301) (0.0339) (0.0235) (0.0203) (0.0238)
Distributions (from capital gains).... - . - (0.0054) . - . - . -
------- ------- ------- ------- ------- -------
Total Distributions................... (0.0154) (0.0301) (0.0393) (0.0235) (0.0203) (0.0238)
NET ASSET VALUE, END OF PERIOD......... $1.0000 $1.0000 $1.0000 $1.0000 $1.00000 $1.00000
======= ======= ======= ======= ======== ========
TOTAL RETURN/(1)/...................... 3.16%/(3)/ 3.05% 4.01% 2.37% 2.06% 2.41%
RATIOS/SUPPLEMENTAL
DATA
Net Assets,
End of Period ($1,000's)............. $31,387 $31,974 $30,988 $33,612 $34,513 $32,425
Ratio of Expenses to
Average Net Assets/(1)/.............. 0.57%/(3)/ 0.57% 0.61% 0.60% 0.50% 0.57%
Ratio of Net Income to
Average Net Assets................... 3.11%/(3)/ 3.01% 3.39% 2.33% 2.03% 2.36%
<CAPTION>
Years Ended December 31,
---------------------------------------
1991 1990 1989 1988/(2)/
---- ---- ---- ---------
<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................. 0.0410 0.0561 0.0587 0.0381
Net Realized Gains on Securities..... . - . - . - . -
------- ------- ------- -------
Total From Investment Operations.... 0.0410 0.0561 0.0587 0.0381
------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment
income)............................. (0.0410) (0.0561) (0.0587) (0.0381)
Distributions (from capital gains).... . - . - . - . -
------- ------- ------- -------
Total Distributions................... (0.0410) (0.0561) (0.0587) (0.0381)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD......... $1.0000 $1.0000 $1.0000 $1.0000
======= ======= ======= =======
TOTAL RETURN/(1)/...................... 4.19% 5.77% 6.05% 4.10%/(3)/
RATIOS/SUPPLEMENTAL DATA
Net Assets,
End of Period ($1,000's)............. $40,060 $43,379 $25,113 $8,031
Ratio of Expenses to
Average Net Assets(1)................ 0.44% 0.24% 0.09% 0.75%
Ratio of Net Income to
Average Net Assets................... 4.11% 5.60% 5.97% 3.81%
</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 .72% for
1996, .81% for 1995, .76% for 1994, .77% for 1993, .81% for 1992, .78% for
1991, .83% for 1990 and .76% for 1989.
/(2)/ Information for 1988 is since the Portfolio's inception on January 28,
1988.
/(3)/ Annualized.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
MONEY MARKET PORTFOLIO - CLASS B SHARES
<TABLE>
<CAPTION>
Six Months Years Ended May 2 to
Ended December 31, Dec. 31,
June 30, ---------------------- --------
1997 1996 1995 1994/(2)/
---- ---- ---- ---------
<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.......................... 0.0162 0.0384 0.0421 0.0184
Total From Investment Operations............. 0.0162 0.0384 0.0421 0.0184
------- ------- -------- --------
LESS DISTRIBUTIONS
Dividends (from net investment income)......... (0.0162) (0.0384) (0.0421) (0.0184)
Total Distributions........................... (0.0162) (0.0384) (0.0421) (0.0184)
------- -------- --------
NET ASSET VALUE, END OF PERIOD................. $1.0000 $1.0000 $ 1.0000 $ 1.0000
======= ======= ======== ========
TOTAL RETURN................................... 4.06%/(3)/ 3.91% 4.30% 2.78%/(3)/
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in thousands)...... $217 $117 $74 $11
Ratio of Expenses to Average Net Assets/(1)/.. 1.63%/(3)/ 1.69% 1.94% 1.93%/(3)/
Ratio of Net Income to Average Net Assets..... 4.06%/(3)/ 3.87% 4.19% 3.29%/(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.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
TAX EXEMPT PORTFOLIO - CLASS B SHARES
<TABLE>
<CAPTION>
Six Months Years Ended May 2 to
Ended December 31, Dec. 31,
June 30, ---------------------- --------
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.
-9-
<PAGE>
THE FUNDS' OBJECTIVES
Composite Research & Management Co., referred to as the "Adviser" in this
Prospectus, manages the Funds. The Funds' objectives are to maximize current
income while, at the same time, preserving capital and maintaining liquidity.
They intend to do this by purchasing high-quality investments which mature in
397 days or less with an average maturity of no more than 90 days. The Tax-
Exempt Fund primarily invests in municipal obligations that pay interest which
is exempt from federal income tax. These objectives are fundamental and,
therefore, cannot be changed without a majority vote of the relevant Funds'
outstanding shareholders. Because risks are involved, there cannot be any
assurance that a Fund's objectives will be attained.
INVESTMENT PRACTICES AND RISK FACTORS
The Adviser intends to pursue the Funds' objectives by following the
carefully chosen investment procedures summarized below. Included is information
about several relatively complex financial instruments. Because the Funds invest
in securities backed by banks and other financial institutions, changes in the
credit quality of these institutions could cause losses to a Fund and affect its
Share price. The Statement of Additional Information contains details concerning
the types, ratings and nature of the investments and the criteria used for
evaluation and selection.
MONEY MARKET FUND
This Fund invests solely in money market instruments. These are selected
from the following five general categories:
1) Obligations issued or guaranteed by the U.S. government, its agencies, or
its instrumentalities.
2) Obligations of U.S. and foreign banks with assets of more than $500
million.
3) Short-term commercial notes issued directly by domestic and foreign non-
financial corporations and governmental entities and banking institutions
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 securities that do not
have a short-term rating and that are 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.
TAX-EXEMPT MONEY MARKET FUND
This Fund invests primarily in a diversified selection of short-term,
investment-grade municipal obligations, whose income is exempt from federal
income tax. Under normal market conditions, the Fund attempts to invest solely
in these type of obligations. The Fund will not invest more than 20% of its
assets in obligations that pay interest subject to alternative minimum tax.
Municipal obligations are debt securities of states, counties, cities,
municipal agencies, and other regional districts. The obligations purchased by
the Fund are rated in the two highest credit categories assigned by the major
rating services, e.g. Moody's and S&P. They consist of:
1) Municipal commercial paper rated Prime-1 or 2 by Moody's or A-1 or 2 by
S&P.
2) Municipal notes rated MIG 1 or 2 by Moody's or rated VMIG 1 or 2 in the
case of floating or variable rate obligations, or SP 1+ or 1 by S&P.
3) Securities of other tax-exempt mutual funds as temporary investments of
cash reserves.
-10-
<PAGE>
If not rated, securities purchased by the Fund will be of comparable
quality to the above ratings as determined by the Adviser under the supervision
of the Board of Trustees.
Short-term municipal notes may include, but are not limited to, tax
anticipation notes ("TANs"), bond anticipation notes ("BANs"), revenue
anticipation notes ("RANs") and project notes ("PNs"), or other forms of short-
term municipal loans and obligations.
When, in the opinion of the Adviser, adverse market conditions exist, the
Tax-Exempt Fund may adopt a "defensive" strategy. In such cases, it may
temporarily invest more than 20% of its assets in taxable money market
instruments. These investments must have the quality and maturity
characteristics comparable to those for the municipal obligations of the Fund,
but they would produce income that is not exempt from federal income taxes. The
Adviser considers that this would be necessary only under highly improbable
circumstances. Taxable investments are limited to:
1) Obligations of the U.S. government and its agencies and instrumentalities.
2) Corporate commercial paper rated in the highest grade by either Moody's or
S&P.
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.
INVESTMENT RESTRICTIONS
Although many of the Adviser's decisions depend on flexibility, there are
certain principles so fundamental to a Fund that they may not be changed without
a vote of a majority of the outstanding shares of that Fund.
In addition to other restrictions listed in the Statement Of Additional
Information, each of the Funds may not:
1) Invest in common stocks or other equity securities.
2) Borrow money for investment purposes, except that a portfolio 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 untimely liquidation of vital parts of its portfolio.
3) Invest more than 5%* of its total assets in the securities of any single
issuer, except for the U.S. government, its agencies, or
instrumentalities.
4) Invest more than 25%* of its total assets in securities of issuers in any
single industry.
*Percentage at the time investment is made.
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WHO WE ARE
Composite Money Market Fund and Composite Tax-Exempt Money Market Fund,
each a series of The Composite Funds, a Massachusetts business trust organized
on September 18, 1997 (the "Trust"), are open-end diversified management
investment companies. A copy of the Trust's Amended and Restated Agreement and
Declaration of Trust, which is governed by Massachusetts law, is on file with
the Secretary of State of The Commonwealth of Massachusetts. Prior to December ,
1997, the predecessors of the Funds, the Money Market Portfolio and the Tax-
Exempt Portfolio, respectively, were each series of Composite Cash Management
Company, which was incorporated on July 2, 1979 under the laws of the state of
Washington .
The Trust is a "series" investment company with an unlimited number of
authorized shares of beneficial interest. The Trustees may, without shareholder
approval, create two or more series of shares representing separate investment
portfolios. Only shares of Composite Cash Management Company Money Market Fund
and Composite Cash Management Company Tax-Exempt Fund are offered by this
Prospectus. Any such series of shares may be divided without shareholder
approval into two or more classes of shares having such preferences and special,
or relative rights and privileges as the Trustees determine. Only class A, B, S
and I shares are offered by this Prospectus. The Funds may also offer other
classes of shares with different sales charges and expenses. Because of these
different sales charges and expenses, the investment performance of the classes
will vary.
Each share has one vote, with fractional shares voting proportionally.
Shares of all classes will vote together as a single class without regard to
series or classes on all matters except (i) when required by the Investment
Company Act of 1940 and (ii) when the Trustees have determined otherwise. Shares
are freely transferable, are entitled to dividends as declared by the Trustees,
and, if the Funds were liquidated, would receive the net assets of the Funds.
The Funds may suspend the sale of shares at any time and may refuse any order to
purchase shares.
ADVISER. The Fund is managed by Composite Research & Management Co., which
is referred to as the "Adviser" in this Prospectus.
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
Funds.
The Adviser advises the Fund on investment policies and specific
investments. Subject to supervision by the Trust's Board of Trustees, the
Adviser determines which securities are to be bought and sold. These decisions
are based on analyses of the economy,
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sectors of industry, and specific institutions. They are compiled from extensive
data provided by some of the country's largest investment firms, in addition to
the Adviser's own research.
DISTRIBUTOR. Composite Funds Distributor, Inc. is the "Distributor" for
these Funds. The Distributor is not a bank. Securities offered by it are not
deposits nor bank obligations, and they are not Backed or guaranteed by a bank
nor insured by the FDIC. The value of investments may fluctuate, return on
investments is not guaranteed, and loss of principal is possible.
TRANSFER AGENT. Murphey Favre Securities Services, Inc., which serves as
the "Transfer Agent," acts as the Funds' shareholder servicing and dividend
disbursing agent.
THE ADVISER, DISTRIBUTOR AND TRANSFER AGENT, WHOSE ADDRESSES APPEAR On
THE BACK COVER, ARE AFFILIATES OF WASHINGTON MUTUAL BANK AND WASHINGTON MUTUAL
FSB. THEY ARE ALSO SUBSIDIARIES OF WASHINGTON MUTUAL, INC.
THE COST OF GOOD MANAGEMENT.
Composite Research & Management Co. serves as Adviser under investment
management agreements with each Fund. The agreements [are renewable every year,]
subject to the approval of the Trust's Board of Trustees or the shareholders
themselves.
BEFORE READING THIS SECTION, YOU MAY FIND IT USEFUL TO TURN BACK TO PAGE 3
TO REVIEW THE FEE TABLE'S SUMMARY ON "ANNUAL FUND OPERATING EXPENSES." THAT
PROVIDES AN OVERVIEW OF MUCH OF WHAT IS COVERED IN DETAIL HERE.
ADVISORY FEES
A fee based on a percentage of average daily net assets is paid to the
Adviser for its services. This includes investment management and administrative
services and the Adviser's function as an agent for the 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 at an annual rate of
.45% of the average daily net assets of each Fund. The rate is reduced to .40%
with respect to each Fund on its average daily net assets in excess of $1
billion (not including assets of the other Fund).
as referenced on page ___ of this prospectus, the Investment Management
Agreement by and between Composite Research & Management Co. and the Trust has
been amended, to be effective upon the acquisition by the Money Market Fund of
the
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assets of the Global Money Fund and the U.S. Government Fund, each a series
of The Sierra Trust Funds. The Amendment would reduce the advisory fees under
the Investment Management Agreement to .40% on all average daily net assets of
each Fund.
DISTRIBUTION PLAN
The Trust's Board of Trustees has approved and monitors a distribution plan
that meets the provisions of Rule 12b-1 under the Investment Company Act of
1940. The plan is intended to benefit shareholders by stimulating interest in
purchasing shares of the 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 plan authorizes each Fund to
reimburse the Distributor for direct costs of marketing, selling and
distributing Class A shares of The Fund, subject to Trustees' approval. These
costs include sales literature and prospectuses (other than those provided to
current shareholders), and other costs of sales and marketing, including ANY
state business and occupation tax assessed on the reimbursements.
The distribution plan allows both Funds to reimburse actual Class A
distribution costs subject to Trustee approval. Reimbursements are not to exceed
annual limits of .15% of a Portfolio's average daily net assets attributable to
Class A shares. No service fees are paid to dealers for Class A shares.
Class B and Class S shares. Class S shares of the Funds may be purchased
only by investors who, at the time of purchase, already maintain a Class S
account. The plan authorizes both Funds to pay the Distributor a distribution
fee of .75% of each Portfolio's average daily net assets attributable to Class B
and Class S shares and a service fee of .25% of such assets. The distribution
fee is designed to permit investors to purchase Class B shares and investors
through [SAM] accounts to purchase Class S shares, without having to pay a
front-end sales charge. At the same time, this allows compensation to the
Distributor in connection with the sale of Class B and Class S 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 and Class S shares in the accounts of
the dealer or its customers.
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 its expenses, the amount of
compensation may be more or less than its actual expenses. For this reason,
those plans are characterized by the staff of the Securities and Exchange
Commission as being "compensation" plans - in contrast to the
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existing Class A "reimbursement" plan. The Fund is not liable for any expenses
incurred by the Distributor in excess of the compensation it receives.
TOTAL EXPENSES. Other operating expenses include fees of Trustees not
employed by the Adviser, transfer agent fees, custodial fees, auditing and legal
Expenses, taxes, costs of issuing and redeeming shares, publishing of reports to
shareholders, corporate meetings, and other normal costs of running a
business.
The Transfer Agent fees are for shareholder services. You may be required
to pay a separate fee if you need special services such as producing and mailing
historical account transcripts.
THE VALUE OF A SINGLE SHARE
The value of each class of shares of each Fund is calculated at the end of
each business day of the New York Stock Exchange or at 1:00 p.m. Pacific time,
whichever is earlier. That figure is determined separately for each class by
adding the value of its securities and other assets, subtracting its liabilities
and dividing the resulting figure by the number of shares of the class
outstanding. That provides the net asset value per share, which is commonly
referred to as "NAV." The securities in each Fund are valued using the amortized
cost method by adjusting the cost of each security for amortization of discount
or premium and accrued interest (unless unusual circumstances indicate another
method of determining fair value should be considered by the Funds' Board of
Trustees).
The NAV per share of most mutual funds fluctuates with the value of its
portfolio holdings. however, many money market funds, including the Funds'
attempt to 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.
HOW TO BUY SHARES
Shares of each class of both Funds are offered continuously at the NAV that
is next calculated after receipt of a properly completed purchase order.
You may buy shares of the Funds through the Distributor or through selected
securities dealers. The Funds' shares may not be available in all states. With
certain exceptions, the minimum initial purchase in a Fund is $1000. IRA
accounts may make initial purchases of $500 in any Fund. Subsequent investments
should be at least $50.
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MAIL. Accounts may be opened by mail by sending an application form
together with a check for $1,000 or more ($500 or more for IRA accounts) to the
address noted below. Application forms are available by requesting one from the
same address or by calling the Fund at 1-800-543-8072.
Composite Money Market Fund
Composite Tax-Exempt Money Market Fund
601 West Main Ave., Suite 300
Spokane, Washington 99201-0613
WIRE TRANSFER. Accounts may be opened even more quickly with a Federal
Reserve wire transfer of $1,000 or more. Instructions are available from the
Fund offices.
SUBSEQUENT INVESTMENTS. Subsequent investments should be in amounts of $50
or more.
SYSTEMATIC INVESTMENT PROGRAM. For your convenience, you may arrange to
have monthly purchases automatically deducted from your checking account as part
of a systematic investment program. The minimum initial and monthly investments
in this program are $50. You can arrange this at the time of your application or
you can do it later by talking to your investment representative or by calling
the Trust.
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 federal
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 Federal Reserve
System may take longer to convert into federal funds. The investment will earn
income starting the day following its effective date.
OTHER INFORMATION. The Trust and the Distributor reserve the right to
refuse an order to buy shares.
In the interest of economy and shareholder convenience, physical
certificates representing Fund shares will only be issued upon written request
to the Trust or by request from your broker. Draft writing and certain other
withdrawal options are not available for certificated shares.
DISTRIBUTION OF INCOME
Both Funds declare dividends from investment income daily. Net investment
income is the difference between interest earned on portfolio securities and
expenses.
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Dividends are reinvested in additional shares at the NAV each day. In
effect, this compounds an investor's income daily. Dividends are earned on the
day of withdrawal, not the day of purchase. You may request to have dividends
deposited to a pre-authorized bank account or paid by check each month. If
you've chosen to receive dividends in cash and the U.S. Postal Service cannot
deliver your check, the Funds reserve the right to reinvest your check and to
automatically reinvest subsequent dividends in your account. The Funds may also
automatically reinvest dividends of $10 or less.
INCOME TAXES ON DIVIDENDS
Here is important information on tax provisions that relate to the
Portfolios:
MONEY MARKET FUND. You are responsible for federal income taxes and any
applicable state and local income taxes on dividends from this Fund. Generally,
dividends paid by the Fund are taxable as ordinary income.
Of course, if your shares are in an IRA or other qualified retirement
plan, you do not have to pay any tax on the reinvested amount until funds are
withdrawn.
TAX-EXEMPT MONEY MARKET FUND. Tax-exempt interest earned by this Fund
retains its tax-advantaged status when it is distributed by the Portfolio to
investors. However, the federal exemption may not result in exemption from any
state and local taxes. A portion of the income may also be subject to
alternative minimum tax. You should consult your tax advisor for more
information. In addition, if you receive social security or railroad retirement
benefits, you should consult your tax adviser to determine what effect, if any,
an investment in this Portfolio may have on the taxation of your benefits.
Interest income earned by the Fund from any investments that are not tax-
exempt is taxable to you as ordinary income. (For information on how this could
happen, please see the closing segment of "How we plan to reach our
objectives.") The same is true for income from any short-term capital
gains.
BOTH FUNDS. Shortly after the end of each year, the Trust will advise you
of the tax status of the dividends from your individual Fund. Most of the Funds'
income is expected to consist of interest.
Each Fund complies with provisions of the Internal Revenue Code that apply
to regulated investment companies and distributes its taxable income
accordingly. Because of this, the Funds do not anticipate being subject to
federal income or excise taxes on the earnings they distribute to shareholders.
In keeping with this, any taxable income is distributed to investors without
making any provision for federal income and excise taxes on those earnings.
To meet federal tax laws, you must provide the Funds with an accurate
Social Security number or taxpayer identification number or make required
certifications to avoid imposition of a 31% "backup" withholding tax.
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EXCHANGES FOR OTHER COMPOSITE FUNDS
You may exchange shares of any Composite Fund for the same class of shares
of any other Composite Fund. In addition to the Portfolios described in this
Prospectus, there are Composite Funds that invest in other types of securities
including: stocks, a balance between stocks and bonds, income-generating
securities, tax-exempt bonds, and U.S. government securities.
Contact your investment Representative or the Distributor to request a
prospectus for the Composite Funds that interest you.
Exchanges are made at the prevailing NAV of the shares being exchanged. Any
contingent deferred sales charge on the subsequent sale of Class B or Class S
shares acquired by exchange will be based on the schedule applicable to the
shares given in exchange. For purposes of calculating any contingent deferred
sales charge, the length of time you have held your shares will date from your
original purchase and will be unaffected by any exchanges (or any purchases of
shares of Composite Funds in conection with the acquisition by the Composite
Funds of the assets of another investment company). Shares exchanged from the
Funds 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. Sales charges are fully
explained in the applicable Composite Fund's prospectus.
All exchanges are subject to the minimum investment requirements of the
Composite Fund being acquired and to its availability for sale in your state of
residence. 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 the Funds and,
consequently, may be disallowed.
HOW TO SELL SHARES
You may redeem shares at any time. Requests received by 1:00 p.m. Pacific
time will result in redemption of shares on the next business day. Several
alternatives are available to you:
DRAFTS. For withdrawals of $500 or more, you may write drafts that are
similar to checks. This option is available for Class A shares and is selected
by filling out the appropriate section of the account application or by
contacting the Fund offices or your investment representative.
TELEPHONE. You may authorize telephone transactions when you sign your Fund
account application or by contacting the Fund offices or your investment
representative.
Provided you have pre-authorized these transactions, you may redeem or
exchange shares by telephoning 1-800-543-8072. You may also request these
transactions through
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your investment representative. Proceeds may be directed to a pre-authorized
bank or brokerage account or to the address of record for the account.
It may be difficult to reach the Trust offices by telephone during periods
of unusual economic or market activity. Please be persistent if this occurs. The
Transfer Agent is committed to extending its availability beyond regular 7 a.m.
to 6 p.m. (Pacific time) customer 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, telephone instructions are verified. This is done by
requesting personal shareholder information, providing written confirmation of
telephone transactions at least monthly, and recording telephone instructions.
The Transfer Agent may require a Letter of Authorization, other documents, or
authorization from your Representative to initiate telephone redemptions of
$25,000 or more that are not directed to your pre-authorized bank or brokerage
account. If reasonable procedures are used, neither the Transfer Agent nor the
Fund 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 Fund 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 Trust
offices. Written requests may require a signature guarantee, as discussed below,
and the return of any outstanding share certificates. Changes in pre-authorized
redemption instructions or your account registration also require signature
guarantees. For your protection, the signature(s) must be guaranteed by an
officer of a U.S. bank belonging to the Federal Reserve System, a member of the
Stock Transfer Association Medallion Program, or a member of the National
Association of Securities Dealers.
PROMPT PAYMENT. Payment normally will be made on the next business day
after the transaction, but no later than seven days after unless you recently
purchased Fund shares by check. In that case, redemption proceeds may be delayed
until the Transfer Agent is reasonably satisfied that the check has been
collected. Generally this occurs within 14 days. Redemption proceeds will be
sent by check or Automated Clearing House transfer to your bank account without
charge. Wire redemption proceeds may be subject to a $10 fee. The receiving bank
also may charge a fee.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders may choose to receive specific
cash withdrawals on a periodic basis. A $5,000 minimum balance is required to
establish a systematic withdrawal plan in a Fund account. Shares of the Fund
will be redeemed to provide the requested payment. Naturally, withdrawals that
continually exceed dividend income will eventually exhaust the account.
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Class B and Class S shareholders may use a systematic withdrawal plan to
redeem up to 12% of the beginning balance annually without incurring a
contingent deferred sales charge.
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 redeemed
at the closing NAV on the day the account is closed. To prevent an account
closure, investors may purchase shares to bring their account balance above the
minimum during the 90-day grace period.
IRAs and other tax-sheltered retirement plans (Money Market Fund only)
Money Market Fund shares may be appropriate for many retirement plans,
including IRAs. Retirement plan contributions are tax-deductible in some cases,
and earnings compound on a tax-deferred basis until withdrawn.
From time to time, Composite Funds Distributor, Inc. or its affiliates may
offer "IRA bonuses" on IRA rollovers and transfers to IRA accounts maintained by
them. The Fund does not pay any portion of these bonuses. The products purchased
through these rollovers and transfers may include the Composite Funds.
Information about IRAs and other qualified retirement plans is available
from the Fund offices or your investment representative.
CALCULATION OF YIELDS.
From time to time, either Fund may advertise its yield and effective
yield.
YIELD. The "yield" refers to the income generated by an investment in the
Fund over a seven-day period that is identified in the advertisement. The income
is then annualized. That amount then is shown as a percentage of the total
investment.
EFFECTIVE YIELD. The "effective yield" is calculated similarly. However,
when it is annualized, the income is assumed to be reinvested, and it will show
growth from compounding. The effective yield will be higher than the yield
because of this assumed compounding.
TAX-EQUIVALENT YIELD. For the Tax-Exempt Money Market Fund, you may want to
calculate the tax-equivalent yield. That will show you the yield you would need
to receive from a taxable investment to reach the same earnings level as this
Fund. Here is how to do that: First, subtract your income tax rate from 1.0.
Second, divide the Tax-Exempt Fund's
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stated yield or effective yield by your answer to the first step. For example,
to calculate a tax-equivalent yield at a 36% tax rate, divide the Fund's yield
by .64.
OTHER INFORMATION. Each Fund will include yields of each class of shares in
any advertisement or promotional material presenting performance data for that
portfolio. The Funds also may quote performance results from recognized services
and publications which monitor the performance of mutual funds. Included, too,
may be comparisons of their performance with various published historical
indices.
ALTERNATIVE SALES ARRANGEMENTS
Each Fund offers four classes of shares which represent interests in the
same portfolio of investments:
1) Class A shares are sold to investors who do not pay a sales charge at the
time of purchase, but who pay ongoing service fees.
2) Class B shares are sold to investors who do not pay a sales charge at the
time of purchase. Instead, but pay higher ongoing distribution and
service fees than Class A shares for eight years. They also may be
subject to a "contingent deferred sales charge" if redeemed within six
years of purchase. Class B shares convert 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 distribution
fees.
4) Class S shares of the Funds are sold exclusively to investors who, at the
time of such purchase already maintain a Class S account. Class S shares
are sold without an initial sales charge, but pay higher ongoing
distribution and service fees for eight years. They may also be subject to
a contingent deferred sales charge if redeemed within six years of
purchase. Class S shares convert to Class A shares after eight years.
The net income attributable to , and the dividends payable to, shares that
pay ongoing distribution and service fees 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 for shares of the same class of
other Composite Funds. In addition, Class B shares of a Composite Fund may be
exchanged for Class S shares of a Composite Fund and Class S shares may be
exchanged for Class B shares of [Sierra] Asset Management Portfolios. See
"Exchanges for other Composite Funds" on Page [ ] in this Prospectus.
Sales personnel of broker-dealers distributing the Funds' shares may
receive differing compensation for selling or servicing different classes of
shares.
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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.
To assist investors in making their choice, the table on Page [ ] provides
examples of charges that apply to each class of shares. Normally, Class A shares
will be Most beneficial to investors who qualify for reduced sales charges, as
described below, and who do not wish to open a [SAM] account or purchase shares
of [Sierra] Asset Management Portfolios.
INVESTMENT IN FUNDS THROUGH A [SAM] ACCOUNT. In addition to the
diversification among individual securities you receive by investing in a
particular Fund, you may be able to further diversify risk by spreading your
assets among several different Composite Funds that each have different risk and
return characteristics. [SAM] is an active investment management service offered
by [Sierra Investment Services Corporation ("Sierra Services")], the [SAM]
investment adviser, that allocates your investments across a combination of
either Class A or Class S shares of certain of the Composite Funds selected to
meet long-term investment objectives as well as, in certain circumstances,
current income objectives.
[Sierra Services] has developed investment strategies for [SAM] accounts to
meet the diverse financial needs of different investors. You can open a [SAM]
account by meeting with one of the investment professionals of an authorized
dealer who will review your situation and help you identify your long-term
investment objectives. After using [SAM] criteria to determine your long-term
objectives, you can choose one of several investment strategies. Based on your
chosen strategy, your initial investment will be allocated among a number of the
Composite Funds and the Class A or Class S shares of such Composite Funds.
Depending on market conditions, [Sierra Services] from time to time (normally
quarterly) reallocates the combination of Composite Funds or the amounts
invested in the respective Class A or Class S shares of each to implement your
[SAM] investment strategy. In addition, your [SAM] account will be periodically
rebalanced to maintain your [SAM] strategy's current asset allocation mix, if
and when the Composite Funds' performance unbalances the strategy's mix. You
will pay [Sierra Services] a fee for the [SAM] account service that is in
addition to and separate from the fees and expenses you will pay directly or
indirectly as an investor in the Composite Funds.
From time to time, one or more of the Composite Funds used for investment
by the [SAM] accounts may experience relatively large investments or redemptions
due to [SAM] Account allocations or rebalancings recommended by [Sierra
Services]. These transactions will affect the 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 invest
it. While it is impossible to predict the overall impact of these transactions
over time, there could be adverse effects on portfolio management to
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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 increase
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
[Sierra Services] will nevertheless face conflicts in fulfilling their
respective responsibilities because they are affiliates and employ some of the
same professionals. 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 NAV next calculated after
receipt of a properly completed purchase order, plus an initial sales charge
shown in the table below. 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 receive for selling Class A shares.
NET ASSET VALUE PURCHASES. There is no initial sales charge on Class A
purchases of $1 million or more but such shares may be subject to a contingent
deferred sales charge of 1.00% or .50%, if redeemed during the first or second
year after purchase, respectively.
Qualified employee benefit plans (including SEPS and SIMPLES) that have
more than 10 participants or that have more than $25,000 invested in those
Composite Funds may purchase shares without an initial sales charge. However, a
contingent deferred sales charge of 1% may be imposed on the amount that was
invested through such a plan 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 manner that causes
all shares held by the plan's participants to be redeemed; or (ii) by a plan
participant within two years of the plan participant's purchase of such Class A
shares. The contingent deferred sales charge will be waived on redemptions in
connection with certain involuntary distributions, including distributions
arising out of the death or disability of a shareholder (including one who owns
the shares as joint tenant).
Class A shares may be purchased at net asset value, and in any amount, by
officers, directors and employees of the Adviser or its affiliates, or companies
which have entered into selling agreements with the Distributor, and to certain
family members of such individuals. The purchase must be for investment purposes
only and may not be resold other than through redemption by the Funds. The Funds
may also offer their shares at net asset value [to investors who use the
redemption proceeds from mutual funds outside the Composite Funds (excluding
money market funds);] to certain retirement plans; and to brokers, dealers or
registered investment advisers who have entered into arrangements with the
Distributor
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providing specifically for the shares to be used in particular investment
products made available to their clients for which they may charge a separate
fee. The Distributor will pay authorized dealers commissions on certain net
asset value purchases as described in the Statement of Additional Information.
CONSULT AN INVESTMENT REPRESENTATIVE OR SEE THE STATEMENT OF ADDITIONAL
INFORMATION IF YOU THINK YOU MAY QUALIFY FOR ANY OF THESE PURCHASE PLANS.
YOU MUST NOTIFY THE FUNDS 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. However, Class B shares
have higher distribution and service fees than Class A shares for eight years.
Also, 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 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
Distributor to defray expenses for providing distribution services for Class B
shares. Examples of such expenses include compensation to sales people and
selected dealers. The Distributor currently pays authorized dealers commissions
of 4.00% of the price of shares sold by them.
CONTINGENT DEFERRED SALES CHARGE. Class B shares redeemed within six
years of purchase are subject to a contingent deferred sales charge according to
the following schedule. Class B shares purchased by exchange will be subject to
a contingent deferred sales charge using the schedule of the Composite Fund into
or from which the shares were exchanged that would result in the greatest
contingent deferred sales charge applicable to such shares. Shares purchased
through reinvestment of dividends or capital gain distributions are not subject
to a contingent deferred sales charge.
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED
AFTER PURCHASE SALES CHARGE
-------------- ------------
<S> <C>
First............................. 5.00%
Second............................ 4.00%
Third............................. 3.00%
</TABLE>
-24-
<PAGE>
<TABLE>
<S> <C>
Fourth.................................. 3.00%
Fifth................................... 2.00%
Sixth................................... 1.00%
Seventh................................. 0%
Eight................................... 0%
</TABLE>
Class B shares purchased prior to December __, 1997, MAY BE subject to a
different contingent deferred sales charge schedule which is shown in the
Statement of Additional Information.
The contingent deferred sales charge is calculated by applying the above
percentages 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
Here is an example:
An investor purchases 100 Class B shares at $10 per share -- for a total
cost of $1,000. In the second year after the purchase, the NAV has risen to $12
per share, and the investor has acquired 10 more shares through dividend
reinvestment.
At that time, the investor decides to make the first redemption. The
transaction includes 50 shares at $12 per share -- for a total of $600.
The first 10 shares to be redeemed will not be subject to any charge
because of the 10 shares received from dividend reinvestment. See item 1) just
above this example.
-25-
<PAGE>
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 Statement of Additional Information;
3) According to the Fund's systematic withdrawal plan -- but limited to 12%
annually of the value of the Fund account at the time the plan is
established; or
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 B 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 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.
To make sure you receive waiver or reimbursement of contingent deferred
sales charges, you must notify the fund whenever you are so entitled.
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
dividends and capital gain distributions also will convert to Class A shares.
The conversion of Class B shares to Class A shares is subject to a
favorable ruling from the Internal Revenue Service or the continuing
availability of an opinion of legal counsel that such conversion will not be
subject to federal income taxes. There cannot be any assurance that a ruling or
opinion will be available. If they should not be available, the conversion of
Class B shares to Class A shares would not occur and those shares would continue
to be subject to higher expenses than Class A shares for an indefinite period.
Class
-26-
<PAGE>
B shares purchased prior to December, [ ] 1997, will generally convert to
Class A shares six years after they were initially purchased.
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
investment 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 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. 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 purchase, 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
Distributor to defray expenses for providing distribution services for Class S
shares. Examples of such expenses include compensation to sales people and
selected dealers. [The Distributor currently pays authorized dealers commissions
of 4.00% of the price of shares sold by them.]
CONTINGENT DEFERRED SALES CHARGE. Class 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
contingent deferred sales charge. Shares purchased through reinvestment of
dividends or capital gain distributions are not subject to a contingent deferred
sales charge.
-27-
<PAGE>
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED
AFTER PURCHASE 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
percentages 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; then
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 Statement of Additional Information;
3) According to the Fund's systematic withdrawal plan -- but limited to 12%
annually of the value of the Fund account at the time the plan is
established; or
4) As a result of the right of the Fund to liquidate a shareholder's account
as described under "How to sell shares."
-28-
<PAGE>
THE PORTFOLIO'S YIELDS ARE NOT FIXED, NOR IS THE PRINCIPAL GUARANTEED.
ANNUALIZATION OF RATES SHOULD NOT BE INTERPRETED AS AN INDICATION OF THE
PORTFOLIOS'S ACTUAL PERFORMANCE IN THE FUTURE. THE PORTFOLIO DOES NOT INTEND ANY
SUCH REPRESENTATION.
REPORTS TO SHAREHOLDERS
Shareholders receive semiannual and annual reports. The financial
statements included in the annual reports are audited by independent
accountants.
Shareholders whose accounts are directly with the Funds also receive
statements at least quarterly. These statements show account transactions, the
total number of shares owned, and any dividends or distributions paid.
Shareholders also receive written confirmation at least once a month reflecting
each transaction which is not a dividend reinvestment, systematic investment
program purchase, or systematic withdrawal plan redemption.
WE'RE HERE TO HELP YOU
Any inquiries you may have about these Funds or your account should be
directed to the Funds at the address or telephone number on the front page and
back cover of this Prospectus. We will be glad to answer your questions.
-29-
<PAGE>
FOR FURTHER INFORMATION, PLEASE CONTACT:
FUND OFFICES
601 WEST Main Avenue, Suite 300
Spokane, Washington 99201-0613
Phone: (509) 353-3550
1-800-543-8072
ADVISER
Composite Research & Management Co.
1201 Third Avenue, Suite 1400
Seattle, Washington 98101-3015
DISTRIBUTOR
Composite Funds Distributors, Inc.
1201 Third Avenue, Suite 780
Seattle, Washington 98101
TRANSFER AGENT
Murphey Favre Securities Services, Inc.
601 West Main Avenue, Suite 300
Spokane, Washington 99201
CUSTODIAN
Investors Fiduciary Trust Company
127 W. 10th Street
Kansas City, MISSOURI 64105-1716
INDEPENDENT PUBLIC ACCOUNTANTS
LeMaster & Daniels PLLC
601 W. Riverside Avenue, Suite 800
Spokane, WASHINGTON 99201-0614
COUNSEL
Paine, Hamblen, Coffin, Brooke & Miller LLP
717 W. Sprague Avenue, Suite 1200
Spokane, WASHINGTON 99204-0464
BOARD OF TRUSTEES
Wayne L. Attwood, M.D.
Kristianne Blake
Anne V. Farrell
-30-
<PAGE>
Michael K. Murphy
William G. Papesh
Daniel L. Pavelich
Jay Rockey
Richard C. Yancey
-31-
<PAGE>
COMPOSITE
MONEY
MARKET
FUNDS
MONEY MARKET
FUND
TAX-EXEMPT
MONEY MARKET
FUND
PROSPECTUS
DECEMBER ,
1997
[LOGO]
COMPOSITE
GROUP OF FUNDS
-32-
<PAGE>
STATEMENT OF
ADDITIONAL
INFORMATION
DECEMBER __, 1997
COMPOSITE EQUITY FUNDS, SERIES OF
THE COMPOSITE FUNDS (THE "TRUST")
601 W. Main Avenue
Suite 300
Spokane, WA 99201-0613
Telephone: 509-353-3550
Toll free: 800-543-8072
COMPOSITE BOND & STOCK FUND ("Bond & Stock") is designed to provide both income
and long-term growth. The Fund has three objectives: (1) continuity of income;
(2) conservation of principal; and (3) long-term growth of both income and
principal. On behalf of these objectives, the Fund invests in bonds, preferred
stocks, common stocks, and convertible bonds.
COMPOSITE GROWTH & INCOME FUND ("Growth & Income") is designed to provide growth
through careful investing in a diversified pool of common stocks and other
securities. The Fund's objective is long-term capital growth, with current
income a secondary consideration.
COMPOSITE NORTHWEST FUND ("Northwest") is designed to provide long-term growth
of capital by investing in common stocks selected from companies doing business
or located in the Northwest (Alaska, Idaho, Montana, Oregon and
Washington).
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus (the "Prospectus") of Bond & Stock, Growth &
Income and Northwest (the "Funds") dated December __, 1997, which can be
obtained without charge by contacting the Funds at the above address.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
---- ----
<S> <C> <C> <C>
The Funds and Their Management Investment Practices
Distribution Services Investment Restrictions
How Shares Are Valued Performance Information
How Shares Can Be Purchased Brokerage Allocations &
Redemption of Shares Portfolio Transactions
Exchange Privilege General Information
Services Provided by the Funds Financial Statements and
Tax-Sheltered Retirement Plans Reports
Dividends, Capital Gain Appendix A
Distributions and Taxes Appendix B
</TABLE>
<PAGE>
THE FUNDS AND THEIR MANAGEMENT
THE INVESTMENT ADVISER
As discussed under "Who We Are" in the Prospectus, the Funds are managed and
investment decisions are made under the supervision of Composite Research &
Management Co. (the "Adviser"). Decisions to buy, sell, or hold a particular
security are made by an investment team of the Adviser, approved by an
investment committee of the Adviser, subject to the control and final direction
of the Board of Trustees.
Composite Research & Management Co. is Adviser for the five investment companies
(currently 36 separate portfolios) in the "Composite funds," namely: The
Composite Funds, Consisting of Composite Bond & Stock Fund, Composite Growth &
Income Fund, Composite Income Fund, Composite Tax-Exempt Bond Fund, Composite
Money Market Fund, Composite Tax-Exempt Money Market Fund, Composite U.S.
Government Securities Fund and Composite Northwest Fund; The [Sierra] Trust
Funds, consisting of Short Term High Quality Bond Fund, Growth Fund, Emerging
Growth Fund, International Growth Fund, California Municipal Fund, California
Insured Intermediate Municipal Fund, California Money Fund, Florida Insured
Municipal Fund and Target maturity 2002 fund; [sierra] prime income fund; and
[Sierra] Asset Management Portfolios, consisting of CApital Growth Portfolio,
Growth Portfolio, Balanced Portfolio, Value Portfolio and Income Portfolio. In
addition, the Advisor serves as investment adviser of [Sierra] Variable Trust,
consisting of Global Money Fund, Short Term High Quality Bond Fund, U.S.
Governmental Fund, Corporate Income Fund, Growth and Income Fund, Growth Fund,
Emerging Growth Fund, International Growth Fund, Capital Growth Portfolio,
Growth Portfolio, Balanced Portfolio, Value Portfolio and Income Portfolio. The
Adviser also provides investment advice to institutional clients.
INVESTMENT MANAGEMENT SERVICES
Management fees and services performed by the Adviser are discussed under "The
Cost of Good Management" in the Prospectus. The Investment Management Agreements
(the "Agreements") between each Fund and the Adviser to furnish suitable office
space, research, statistical and investment management services to each Fund
were approved by shareholders. These Agreements continue in effect from year-to-
year provided their continuation is specifically approved at least annually by
the Board of Trustees (including a majority of the Trustees who are not parties
to, or "interested persons," as defined in the Investment Company Act of 1940,
of parties to, the Agreements) by votes cast in person at a meeting called for
the purpose of voting on such approval; or by vote of a majority of the
outstanding shares of each Fund. The Agreements can be terminated by either
party on sixty (60) days' notice, without penalty, and each provides for
automatic termination upon its assignment.
-2-
<PAGE>
Under the provisions of the Investment Company Act of 1940 and as used elsewhere
in the Prospectus and this Statement of Additional Information, the phrase
"vote of the majority of the outstanding shares of the Fund" means the vote at
any meeting of shareholders of (a) 67% or more of the shares present at such
meeting, if the shareholders of more than 50% of the outstanding shares are
present or represented by proxy; or (b) more than 50% of the outstanding shares,
whichever is less.
BOND & STOCK AND GROWTH & INCOME
In payment for its services, the Adviser receives a monthly fee equal to .625%
per annum of the first $250 million of the average daily net assets of each Fund
and .50% of such assets in excess of $250 million. Bond & Stock paid fees of
$__________, $1,555,733 and $1,230,409 for the fiscal years ended October 31,
1997, 1996 and 1995, respectively. Growth & Income paid fees of $_______,
$1,065,507 and $738,064, respectively, to the Adviser during the fiscal years
ended October 31, 1997, 1996 and 1995.
NORTHWEST
In payment for its services, the Adviser receives a monthly fee equal to .625%
per annum of the first $500 million of the average daily net assets of the Fund,
.50% of such assets in excess of $500 million but less than $1 billion and .375%
of such assets in excess of $1 billion. Fees paid to the Adviser, before expense
reimbursements, during the fiscal years ended October 31, 1997, 1996 and 1995
amounted to $______, $1,123,204 AND $973,877, respectively. The Adviser has
agreed that should the expenses of the Fund (excluding taxes, interest,
portfolio brokerage and the .75% Class B share distribution fees) exceed in any
fiscal year 1.50% of the average net assets of the Fund up to $30 million and 1%
of average net assets over $30 million, it will reimburse the Fund for such
excess.
The Agreements provide that the advisory fees paid to the Adviser by each Fund
will be based solely on the individual assets of that Fund. Under the terms of
the Agreements, each Fund is required to pay fees of Trustees not employed by
the Adviser or its affiliates, custodial expenses; brokerage fees, taxes,
auditing and legal expenses, costs of issue, transfer, registration or
redemption of shares for sale, costs relating to disbursement of dividends,
shareholder meetings, shareholder reports and the maintenance of its shareholder
existence.
Investment decisions for each Fund are made independently of those for other
funds in the Composite Funds. However, the Adviser may determine that the same
security is suitable for more than one of the Composite Funds. If more than one
of the funds is simultaneously engaged in the purchase or sale of the same
security, the transactions are allocated as to price and amount in accordance
with a formula considered to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of the
security as far as the Funds are concerned. In other cases, however, it is
believed that the ability to
-3-
<PAGE>
participate in volume transactions may provide better executions for each Fund.
It is the opinion of the Board of Trustees that these advantages, when combined
with the personnel and facilities of the Adviser's organization, outweigh
possible disadvantages which may exist from participation in simultaneous
transactions.
The Funds have adopted a code of ethics that is intended to prevent access
persons from conducting personal securities transactions that interfere with
Fund portfolio transactions or otherwise take unfair advantage of their
relationship to the Funds. In general, the personal securities transactions of
individuals with access to information regarding Fund portfolio transactions
must be pre-cleared by the Adviser's Compliance Officer and must not occur when
similar transactions are contemplated by a Fund.
GLASS-STEAGALL
The Glass-Steagall Act, among other things, generally prohibits member banks of
the Federal Reserve System from engaging to any extent in the business of
issuing, underwriting, selling or distributing securities and generally
prohibits management interlocks and affiliations between member banks and
companies engaged in certain activities. In a Statement of Policy dated
September 1, 1982, the Federal Deposit Insurance Corporation concluded that the
investment restrictions of the Glass-Steagall Act do not apply to banks or their
affiliates if the banks are not members of the Federal Reserve System.
Washington Mutual Bank is not a member bank. The Adviser has advised the Funds
that, in its view, the Glass-Steagall Act does not prohibit the activities of
the Adviser and that it may perform the services for the Funds contemplated by
the Investment Management Agreements without violation of the Glass-Steagall Act
or other applicable banking laws or regulations.
Trustees and Officers of the Funds
The Board of Trustees is elected by the shareholders of the Trust, including the
Funds. Interim vacancies may be filled by the current Trustees so long as at
least two-thirds were previously elected by shareholders. The board has
responsibility for the overall management of the Funds, including general
supervision and review of their investment activities. The Trustees, in turn,
elect the officers of the Trust who are responsible for administering the Fund's
day-to-day operations. Trustees and officers hold identical positions with each
of the Composite Funds. Trustees and officers of the Trust and their business
experience for the past five years are set forth below. Unless otherwise noted,
the address of each officer is 601 W. Main Avenue, Suite 801, Spokane,
Washington 99201-0613.
WAYNE L. ATTWOOD, MD
Trustee
2931 S. Howard
Spokane, Washington 99203
-4-
<PAGE>
Dr. Attwood is a retired doctor of internal medicine and gastroenterology in
Spokane, Washington.
KRISTIANNE BLAKE
Trustee
705 W. 7th, Suite D
Spokane, Washington 99204
Mrs. Blake is president of Kristianne Gates Blake, PS, an accounting services
firm specializing in personal financial planning and tax planning.
*ANNE V. FARRELL
Trustee
425 Pike Street, Suite 510
Seattle, Washington 98101
Mrs. Farrell is president and CEO of The Seattle Foundation (a charitable
foundation). In addition, she serves as a director of Washington Mutual, Inc.
* MICHAEL K. MURPHY
Trustee
PO Box 3366
Spokane, Washington 99220-3366
Mr. Murphy is Chairman and CEO of CPM Development Corporation (a holding company
which includes Central Pre-Mix Concrete Company). In addition, he serves as a
director of Washington Mutual, Inc.
*WILLIAM G. PAPESH
President and Trustee
Mr. Papesh is president and a director of the Adviser and Transfer Agent, and an
executive vice president and a director of Composite Funds Distributor, Inc.
(the "Distributor").
DANIEL L. PAVELICH
Trustee
Two Prudential Plaza
180 North Stetson Avenue, Suite 4300
Chicago, Illinois 60601
Mr. Pavelich is Chairman and CEO of BDO Seidman, a leading national accounting
and consulting firm.
-5-
<PAGE>
JAY ROCKEY
Trustee
2121 - Fifth Avenue
Seattle, Washington 98121
Mr. Rockey is Chairman and CEO of The Rockey Company (a regional public
relations firm).
RICHARD C. YANCEY
Trustee
535 Madison Avenue
New York, New York 10022
Mr. Yancey is senior advisor to Dillon, Read & Co., Inc. (a registered broker-
dealer and investment banking firm), New York, New York.
*These Trustees are "interested persons" of the Funds as that term is defined in
the Investment Company Act of 1940 because they are affiliated persons of the
Funds, the Adviser, or the Distributor.
GENE G. BRANSON
Vice President
Suite 780
1201 Third Avenue
Seattle, Washington 98101
Mr. Branson is a senior vice president and director of the Distributor and
Murphey Favre Securities Services, Inc. (the "Transfer Agent") and a vice
president and director of the Adviser.
MONTE D. CALVIN, CPA
Vice President and Treasurer
Mr. Calvin is executive vice president of the Transfer Agent and serves as chief
financial officer of the Funds.
CASSIE L. FOWLER, CPA
Assistant Secretary
Ms. Fowler is an employee of the Transfer Agent.
-6-
<PAGE>
JEFFREY L. LUNZER, CPA
Assistant Treasurer
Mr. Lunzer is a vice president of the Transfer Agent.
CONNIE M. LYONS
Assistant Secretary
Ms. Lyons is an employee of the Transfer Agent.
DOUGLAS D. SPRINGER
Vice President
Suite 780
1201 Third Avenue
Seattle, Washington 98101
Mr. Springer is president and a director of the Distributor and a director of
the Adviser and the Transfer Agent.
JOHN T. WEST, CPA
Clerk
Mr. West is a vice president of the Transfer Agent.
The Trust paid no remuneration to any of its officers, including Mr. Papesh ,
during the fiscal year ended October 31, 1997. The Trust paid Trustees' fees
during the fiscal year ended October 31, 1997, in the amounts indicated
below:
<TABLE>
<CAPTION>
BOND & GROWTH & TOTAL
TRUSTEE STOCK INCOME NORTHWEST COMPLEX (1)
------- ------ -------- --------- ----------
<S> <C> <C> <C> <C>
Wayne L. Attwood, MD _____ _____ _____ _____
Kristianne Blake _____ _____ _____ _____
</TABLE>
-7-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Edwin J. McWilliams _____ _____ _____ _____
Jay Rockey (2) _____ _____ _____ _____
Richard C. Yancey _____ _____ _____ _____
</TABLE>
(1) Each Trustee serves in the same capacity for each Fund for the other
Composite Funds (five companies) comprising 36 individual investment
portfolios.
(2) Mr. Rockey is Chairman and CEO of the Rockey Company, a public relations
firm which has received revenue from the Funds and Washington Mutual, Inc.,
parent company of the Adviser , Distributor and Transfer Agent, during the
1996 fiscal year.
As of [October 31], 1997, officers, Trustees and their immediate families as a
group owned of record and beneficially less than 1% of the outstanding shares of
each Fund. The Retirement Savings and Investment Plan of Washington Mutual, Inc.
owned of record _____ shares of Bond & Stock, _____ shares of Growth & Income,
and _____ shares of Northwest for the benefit of plan participants. These shares
amounted to __%, __% and __%, respectively, of each Fund's outstanding shares.
The Retirement Savings and Investment Plan retains voting rights to these
shares.
Kristianne Blake, *Anne V. Farrell, *Michael K. Murphy, and Daniel L. Pavelich
serve as members of the Board's audit committee. The committee meets
periodically with each Fund's independent accountants and officers to review
accounting principles used by each Fund and the adequacy of the Fund's internal
controls.
The investment committee performs interim functions for the Board of Trustees,
including dividend declaration and portfolio pricing matters. Members are *Anne
V. Farrell, *Michael K. Murphy, and Richard C. Yancey.
The valuation committee is comprised of any two Trustees or officers of the
Trust and one or more portfolio managers, as designated by the Trusts' chairman,
president or vice president/treasurer. The committee is called upon to value
any security held by the Funds whenever the security cannot otherwise be valued
under the Trust's guidelines for valuation.
Responsibilities of the Board's nominating committee include preparing for and
recommending replacements for any vacancies in Trustees' positions, and initial
review of policy issues regarding the size, composition, and compensation of the
Board. Members of the nominating committee are Wayne L. Attwood, MD, Daniel L.
Pavelich, and Jay Rockey.
-8-
<PAGE>
The Board's distribution committee is responsible for reviewing distribution
activities and 12b-1 expenditures to determine that there is a reasonable
likelihood the 12b-1 plan will benefit each Fund and its shareholders. The
committee meets at least annually and is responsible for making recommendations
to the board regarding renewal or changes to the distribution plan. Committee
members are Wayne L. Attwood, MD, Kristianne Blake, Jay Rockey, and Richard C.
Yancey.
*These Trustees are considered "interested persons" of the Trust as that term is
defined in the Investment Company Act of 1940, because they are either
affiliated persons of the Trust, the Adviser, or THE Distributor.
DISTRIBUTION SERVICES
12B-1 PLAN
As discussed in the Prospectus under "The Cost of Good Management," the Trustees
have approved a plan for Class A, Class B and Class S shares of each Fund (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940, which
provides that investment companies may pay distribution expenses, directly or
indirectly, according to a plan adopted by the Board of Trustees.
Under the existing Plan, the Fund may reimburse the Distributor for Class A
shareholder servicing expenses, including the cost of printing and distributing
prospectuses (to other than current shareholders), statements of additional
information and other promotional and sales literature, compensation to sales
personnel for their services, and reimbursement to the Distributor for the
direct and indirect cost of furnishing services of its personnel to assist in
the entire shareholder servicing process but excluding general and
administrative expenses.
The maximum annual reimbursement allowed by the existing Plan and authorized by
the Trustees for such Class A Shareholder servicing expenses may not exceed .25%
of the average daily net assets attributable to Class A shares. Shareholder
servicing activities for Fund may benefit other composite Funds. Bond & Stock,
Growth & Income and Northwest reimbursed the Distributor in the amounts of
$_____, $_____ and $_____, respectively, for distribution expenses incurred on
behalf of Class A shares during fiscal 1997.
During fiscal years 1996 and 1995, Bond & Stock reimbursed the Distributor
$394,279 and $356,379, respectively; Growth & Income reimbursed the Distributor
$265,579 and $203,566, respectively; and Northwest reimbursed the Distributor
$360,642 and $279,851, respectively for shareholder servicing expenses related
to Class A shares.
It is currently expected that, subject to shareholder approval, the Plan will be
amended to provide that each Fund will compensate the Distributor with a service
fee at an annual rate of .25% of the average daily net assets of the Fund
attributable to Class A shares.
-9-
<PAGE>
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,
those plans are characterized by the staff of the Securities and Exchange
Commission as being "compensation" plans -- in contrast to the existing Class A
"reimbursement" plan. The Funds are not liable for any expenses incurred by the
Distributor in excess of the amount of compensation it receives.
Under the plan, each Fund compensates the Distributor with a distribution fee at
an annual rate of .75% of the Fund's average daily net assets attributable to
Class B and Class S shares and a service fee at an annual rate of .25% of such
assets. During fiscal years 1997, 1996 and 1995, Bond & Stock compensated the
Distributor in the amounts of $_______, $148,688 and $46,435, respectively;
Growth & Income compensated the Distributor in the amounts of $________,
$151,222 and $49,988, respectively; and Northwest compensated the Distributor in
the amounts of $________, $106,606 and $49,126, respectively, for distribution
expenses related to Class B shares.
The Distributor pays dealers an amount equal to an annual rate of .25% of total
net assets of all accounts, of Class A, Class B and Class S Shares, serviced by
their representatives.
Under the Plan, the Distributor will report at least quarterly to the Board of
Trustees the amounts and purposes of all distribution expense payments. During
the continuance of the Plan, as required by Rule 12b-1, the selection and
nomination of the Trustees who are not "interested persons," as defined in the
Investment Company Act of 1940, of any Fund will be at the discretion of such
disinterested Trustees then in office.
The Plan has been approved unanimously by the Trustees including a majority of
the disinterested Trustees who have no direct or indirect interest in the Plan.
The Plan will remain in effect for one year, may be terminated at any time by a
vote of a majority of the disinterested Trustees or by a vote of a majority of
the outstanding voting securities of the applicable Fund and may be renewed from
year to year thereafter only if approved by a vote of disinterested Trustees. In
approving the Plan and submitting it to shareholders, the Trustees determined,
in the exercise of their business judgment and in light of their fiduciary
duties as Trustees that there is a reasonable likelihood that the Plan will
benefit each Fund and its shareholders. All material amendments to the Plan must
be approved by a vote of the Board of Trustees including the disinterested
Trustees, and by shareholders. The Plans will be renewed only if the Trustees
make a similar determination for each subsequent year of the Plans.
DISTRIBUTOR
The Distributor purchases shares of each Fund in a continuous offering to fill
orders placed with it by investors and investment dealers. It purchases shares
at net asset value and resells shares at the offering price in accordance with
terms of the Distribution Contract with the Trust. The offering price may
include a sales charge as discussed in the Prospectus under "How to buy shares."
Each Fund receives the entire net asset value of all of its shares sold. The
Distributor or designated dealer retains their appropriate portion of the
initial sales charge. The Distributor pays sales commissions to dealers from its
own resources for Class B and Class S sales and retains contingent deferred
sales charge payments. The Distributor acts in a similar capacity for all other
Composite Funds.
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The Distributor may compensate its sales people or selected dealers for shares
sold without a sales charge according to various Class A "Net Asset Value
Purchase" provisions. The compensation is based on a percentage of the net
asset value of the shares sold.
During the 1997, 1996 and 1995 fiscal years, the Distributor received $______,
$1,064,004 and $471,479, respectively, for the sale of Bond & Stock Class A
shares. The Distributor retained $______, $1,047,926 and $471,445, respectively,
for the same time periods, with the balance paid to dealers for their sales of
Bond & Stock Class A shares.
During the 1997, 1996 and 1995 fiscal years, the Distributor received $_______,
$586,437 and $384,766, respectively, for the sale of Growth & Income Class A
shares. The Distributor retained $_______, $563,398 and $384,647, respectively,
for the same time periods, with the balance paid to dealers for their sales of
Growth & Income Class A shares.
During the fiscal years 1997, 1996 and 1995, the Distributor received $______,
$517,022 and $348,729, respectively for the sale of Northwest Class A shares.
The Distributor retained $465,694, $337,189 and $386,198, respectively, for the
same time periods, with the balance paid to dealers for their sales of Northwest
Class A shares.
The Distributor has not received any earnings or profits from the redemption of
Class A shares. During the fiscal year ended October 31, 1997, the Distributor
received contingent deferred sales charge payments of $________, $28,776 and
$24,626 upon redemption of Class B shares of Bond & Stock, Growth & Income, and
Northwest, respectively. No brokerage fees were paid by the Funds to the
Distributor during the year, but the Distributor may act as a broker on
portfolio purchases and sales should it become a member of a securities
exchange.
No Class I or Class S shares of the Funds were outstanding prior to October 31,
1997.
The Funds bear the cost of registering their shares with federal and state
securities commissions and printing prospectuses and statements of additional
information used for its shareholders. The Distributor pays for information
intended for potential shareholders but may be reimbursed by the Funds under the
Distribution Plan for such expenses applicable to Class A shares.
TRANSFER AGENT
The Transfer Agent furnishes necessary personnel and other transfer agent
services required by each Fund. The Shareholders Service Contract for each Fund
was originally approved by shareholders.
During the 1997, 1996 AND 1995 fiscal years, Bond & Stock paid $______, $222,913
and $194,112, respectively, for these services. During the 1997, 1996 and 1995
fiscal years, Growth & Income paid $_______, $193,784 and $142,648,
respectively. During the 1997,
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1996 and 1995 fiscal years, Northwest paid $______, $320,799 and $292,144,
respectively, for these services.
At the date of this Statement of Additional Information, the monthly shareholder
servicing fee was [$1.35] per Class A account [$1.45] per Class B account,
[$_____] for each Class I account and [$_____] for each Class S account in each
Fund. All requests for transfer of shares should be directed to the Funds or to
the Transfer Agent.
HOW SHARES ARE VALUED
Investment securities are valued on the basis of valuations provided by an
independent pricing service, approved by the Board of Trustees, which uses
information with respect to valuations based upon transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities in determining value. Investment
securities not currently quoted as described above will be priced at fair market
value as determined in good faith in a manner prescribed by the Board of
Trustees.
HOW SHARES CAN BE PURCHASED
Information concerning the purchase of shares is discussed under "How to Buy
Shares" in the Prospectus. Shares of each class of each Fund are sold in a
continuous offering and may be purchased from the Distributor or a designated
dealer at the public offering price the public offering prize which is the net
asset value per share next determined after receipt of a properly completed
purchase order, plus, in the case of Class A shares, an initial sales charge
which is a percentage of the public offering price and varies as shown in the
Prospectus. The Distributor or designated dealer retains their appropriate
portion of the initial sales charge.
Class B shares are sold without an initial sales charge but are subject to
higher ongoing distribution and service fees and may be subject to a contingent
deferred sales charge if redeemed within six years of purchase. The current
contingent deferred sales charge schedule is shown in the Prospectus. Class B
shares purchased prior to December __, 1997 are subject to a contingent deferred
sales charge of 4% if redeemed in the first year after purchase, 3% if redeemed
in the second year, 2% if redeemed in the third year, 1% in the fourth year and
0% after the fourth year. Class B shares purchased prior to January 15, 1996 are
subject to a contingent deferred sales charge of 3% if redeemed the first or
second year after purchase, 2% in the third or fourth year, 1% in the fifth year
and 0% after fifth year. (See Appendix A for a specimen price-make-up
sheet.)
Class I shares are sold exclusively to the various investment portfolios of
[Sierra] Asset Management Portfolios.
Class S shares are sold exclusively to investors who open [SAM] accounts. Class
S shares are sold without an initial sales charge but are subject to higher
ongoing distribution and service fees and may be subject to a contingent sales
charge if redeemed within six years of purchase. The current contingent deferred
sales charge is shown in the Prospectus.
The minimum initial investment for each Fund is currently $1,000 ($500 in IRA
accounts), and additional investments should be at least $50 (unless the
transaction is via a systematic investment program where the initial and
additional monthly investments must be at least $50). Investments made by an
agent or fiduciary (such as a bank trust department, investment adviser, broker,
or
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employee benefit or retirement plan), pursuant to a periodic investment plan,
may have the minimum purchase requirements on initial and subsequent investments
waived.
Shareholders who have redeemed Class A shares initially subject to a sales
charge may reinvest their redemption proceeds in Class A shares of any Composite
Fund at net asset value provided that reinvestment is effected within 120 days
of the redemption. Contingent deferred sales charges assessed on any redemption
may be reimbursed if such proceeds are reinvested in shares of the same class
within 120 days. The shareholder is responsible for notifying the Transfer Agent
of such reinvestments. If a loss is realized on the redemption of Fund shares,
the reinvestment may be subject to the "wash sale" rule, resulting in a
disallowance of such loss for federal income tax purposes.
Class A shares may be sold at net asset value and in any amount to current and
retired directors, officers and employees of Washington Mutual, Inc., its
affiliates (including the Adviser, the Distributor and the Transfer Agent), and
their children, step-children, grandchildren, step-grandchildren and parents,
as well as to any trust, pension, profit-sharing or other benefit plan for such
persons. The foregoing privilege is also extended to directors, officers and
employees of other companies which enter into selling arrangements with the
Distributor. Such shares are sold for investment purposes and on the condition
that they will not be resold except through redemption by the Fund.
Each Fund may also issue Class A shares at net asset value in connection with
the acquisition of assets, merger or consolidation with, another investment
company, or to shareholders in connection with reinvestment of income dividends
and capital gain distributions. Qualified employee benefit plans (including SEPs
and SIMPLEs) that have more than 10 participants or that have more than $25,000
invested in those Composite Funds offered with an initial or contingent deferred
sales charge are also entitled to buy Class A shares without a sales charge.
Individual retirement accounts that are not part of an employee benefit plan are
ineligible for this privilege. [In addition, shareholders of mutual funds (other
than money market funds), may redeem those shares and use their sale proceeds to
purchase Class A shares of a Composite Fund at net asset value provided the
proceeds are reinvested within 90 days of such sale and proof of the sale is
provided.]
The Distributor may enter into arrangements with brokers, dealers or registered
investment advisers to sell Class A shares at net asset value for use in
particular investment products made available to their clients. The other
parties may charge their clients a fee for these products.
PURCHASE PLANS
CUMULATIVE DISCOUNTS: The initial sales charges on Class A shares are applicable
to purchases made at one time by a "purchaser" who may be one of the following:
an individual, and/or the individual's spouse, and/or children (including step-
children) under age 21; a trustee or other
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fiduciary of a single trust estate or single fiduciary account; an organization
exempt from federal income tax under Section 501(c)(3) or (13) of the Internal
Revenue Code; a pension, profit-sharing or other employee benefit plan qualified
or non-qualified under Section 401 of the Internal Revenue Code; or any other
organized group of persons whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be identified as originating from a
qualifying "purchaser." Upon such notification, the investor will receive the
lowest applicable sales charge. Discounts may be modified or terminated at
anytime.
Each Fund's Class A shares may also be purchased at the reduced sales charge
based on shares currently owned by the investor (excluding [Class A] shares of
Composite Cash Management Company Money Market Fund, Composite Cash Management
Company Tax-Exempt Fund and California Money Fund (a series of The [Sierra]
Trust Funds), unless exchanged from another Composite Fund). The sales charge
reduction is determined by adding the value of all Composite Fund Class A
shares (at maximum offering price) and Class B shares (at net asset value) to
the amount of the Fund's shares being purchased.
LETTER OF INTENT: This Letter provides for a price adjustment depending upon the
actual amount purchased within a 13-month period. If total investments under the
Letter exceed the intended amount and thereby qualify for a lower initial sales
charge, a retroactive price adjustment is made and the difference is used to
purchase additional shares. A shareholder may include the value of all of
Class A shares (at maximum offering price) and Class B shares (at net asset
value) held by such shareholder in Composite Funds (excluding Composite Cash
Management Company Money Market Fund, Composite Cash Management Company Tax-
Exempt Fund and California Money Fund (a series of The [Sierra] Trust Funds),
unless exchanged from another Composite Fund) that were held on the effective
date of the Letter of Intent as an "accumulation credit" toward completion of
the Letter.
The Letter of Intent, which imposes no obligation to purchase or sell additional
shares, provides that 5% of the amount of the intended purchase will be held in
escrow (in the form of shares) pending completion of the Letter.
CERTIFICATES
Ordinarily certificates for shares purchased will not be issued unless requested
by the investor. There is no charge for such issuance.
REDEMPTION OF SHARES
When the Fund or Transfer Agent receives: 1) a written request in proper form,
for redemption of shares, and 2) the return of any issued certificates for
shares being redeemed, a check for payment of shares will normally be sent the
next business day, and no later than seven business
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days, except as indicated below. If the account is pre-authorized for telephone
transfer, payment may be made to a designated bank account or broker, providing
such accounts are identically registered. Telephone redemptions may also be
directed to the shareholder's address of record. No wire fee will be charged for
transfers to Washington Mutual Bank[, Great Western] or Seafirst Bank. There is
a $10.00 transmittal wire fee (which is subject to change) to wire to all other
banks. This fee will be subtracted from the account balance prior to making the
transfer. You should be aware that certain banks also charge a receiving wire
fee which is beyond the control of the Transfer Agent.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority must be submitted before the request will be
accepted.
Shares tendered for redemption will be redeemed at the net asset value next
determined less any applicable contingent deferred sales charge as described in
the Prospectus under "How to Buy Shares." The amount received may be more or
less than the cost of the shares, depending on fluctuations in the market value
of securities owned by the Fund. If the shares have been purchased recently,
this redemption payment may be delayed until the Fund verifies that the
instrument used in the purchase (e.g., a check) has been collected, which may
take up to 14 days.
As discussed in the Prospectus, the [Class A,] Class B[, and Class S] contingent
deferred sales charge may be waived under certain circumstances. In addition to
the specific cases outlined in the Prospectus, the charge may be waived for any
total or partial redemption in connection with a lump-sum or other distribution
from an Individual Retirement Account ("IRA"), a custodial account maintained
pursuant to section 403(b)(7) of the Internal Revenue Code of 1986, as amended
("IRC") or a qualified pension or profit sharing plan ("Retirement Plans")
following retirement or, in the case of an IRA or Keogh Plan or custodial
account pursuant to IRC section 403(b)(7), after attaining age 59 1/2. The
charge also may be waived on any redemption which results from a tax-free return
of an excess contribution pursuant to section 408(d)(4) or (5) of the IRC, the
return of excess deferral amounts pursuant to IRC section 401(k)(8) or
402(g)(2), or from the death or disability of the employee. In summary, the CDSC
may be waived on redemptions of shares which constitute Retirement Plan
distributions which are permitted to be made without penalty pursuant to the
IRC, other than tax-free rollovers or transfers of assets.
EXCHANGE PRIVILEGE
Shareholders may exchange shares of each Fund for the same class of shares in
any other Composite Fund. In addition, Class B shares may be exchanged for Class
S shares, and Class S shares may be exchanged for Class B shares of [Sierra]
Asset Management Portfolios. A brief discussion of such privileges is in the
Prospectus under "Exchanges for other Composite Funds." Exchanges will be made
at the respective net asset values in effect on the date of such exchange.
Shares previously subject to a sales charge may be exchanged without incurring
any additional initial or contingent deferred sales charge. Any gains or losses
realized on an exchange should be recognized for federal income tax purposes, as
required. This privilege is not an option or right to purchase securities but is
a revocable privilege
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permitted under the present policies of each of the Funds. This privilege is not
available in any state or other jurisdiction where the shares of the Fund into
which the transfer is to be made are not available for sale, or when the value
of the shares presented for exchange is less than the minimum dollar purchase
required by the appropriate prospectus. Each Fund reserves the right to
terminate or end the privilege of any shareholder who attempts to use the
privilege to take advantage of short-term swings in the market.
An investor may exchange some or all of his shares in a Fund for the same class
of any other Composite Fund. These currently include:
COMPOSITE FUNDS
I. Composite Bond & Stock Fund: primary objective is continuity of income and
conservation of capital with long-term growth a secondary objective.
II. Composite Growth & Income Fund: primary objective is long-term growth of
principal with current income a secondary objective.
III. Composite Northwest Fund: designed to provide long-term growth of capital
by investing in a broadly diversified portfolio of common stocks selected
from companies located or doing business in the Northwest.
IV. Composite U.S. Government Securities Fund: primary objective is to provide
a high level of current income, consistent with safety and liquidity, by
investing in U.S. government-backed securities.
V. Composite Income Fund: primary objective is current income with
preservation of principal a secondary consideration.
VI. Composite Tax-Exempt Bond Fund: primary objective is as high a level of
current income exempt from federal income taxes as is consistent with
prudent investment risk and protection of capital. (Not allowed in
IRAs)
VII. Composite Money Market Fund: invests in high grades of money market
instruments for maximum current income, while preserving capital and
allowing liquidity.
VIII. Composite Tax-Exempt Money Market Fund: invests in high-quality,
short-term municipal obligations for maximum current income exempt from
federal income tax while preserving capital and allowing liquidity. (Not
allowed in IRAs)
IX. Sierra Asset Management ("SAM") Accounts: an active investment management
service offered by Sierra Investment Services Corporation ("Sierra
Services") that
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allocates SAM Account investments across a combination of either Class A
or Class S shares of the Funds selected to meet long-term investment
objectives as well as, in certain circumstances, current income
objectives.
X. Sierra Prime Income Fund ("SPIF"): primary objective is to provide a high
level of current income, consistent with preservation of capital. The Fund
will seek to achieve its objective by investing in a professionally
managed portfolio of interests in floating or variable rate senior loans
made primarily to U.S. corporations, partnerships and other entities.
XI. Sierra Short Term High Quality Bond: designed to provide as high a level
of current income as is consistent with prudent investment management and
stability of principal.
XII. Sierra Growth Fund: primary objective is long-term capital appreciation
through investing primarily in common stock of U.S., multinational and
foreign companies of all sizes that offer potential for growth.
XIII. Sierra Emerging Growth Fund: designed for long-term capital appreciation
by investing primarily in equity securities.
XIV. Sierra International Growth Fund: designed for long-term capital
appreciation by investing primarily in equity securities of foreign
issuers.
XV. Sierra California Municipal Fund: primary objective is to provide as high
a level of current income that is excluded from gross income for federal
income tax purposes and is exempt from California state personal income
tax as is consistent with prudent investment management and preservation
of capital.
XVI. Sierra California Insured Intermediate Municipal Fund: designed to provide
California investors with as high a level of current income exempt from
federal and California State income tax as is consistent with prudent
investment management and preservation of capital.
XVII. Sierra California Money Fund: designed to maximize current income
that is excluded from gross income for federal tax purposes and is exempt
from California State personal income taxation, consistent with safety of
principal and maintenance of liquidity.
XVIII Sierra Florida Insured Municipal Fund: primary objective is to seek as
high a level of current income, exempt from federal income tax, as is
consistent with the prudent investment management and preservation of
capital, and to offer shareholders the
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opportunity to own shares the value of which is exempt from Florida
intangible personal property tax.
XIX. Sierra Target Maturity 2002 Fund: designed to provide as high a level of
return by December 31, 2002 as is consistent with preservation of capital
at the end of the target maturity year and, therefore, current income
consistent with creditworthiness of the U.S. Treasury securities.
SERVICES PROVIDED BY THE FUNDS
SYSTEMATIC WITHDRAWAL PLAN
As described in the Prospectus, each Fund offers a Systematic Withdrawal Plan.
All dividends and distributions on shares owned by shareholders participating in
this plan are reinvested in additional shares. Since withdrawal payments
represent the proceeds from sales of shares, any gain or loss on such
redemptions must be reported for tax purposes. In each case, shares will be
redeemed at the close of business on or about the 25th day of each month
preceding payment, and payments will be distributed within three business days
thereafter.
The Systematic Withdrawal Plan may involve the use of principal and is not a
guaranteed annuity. Payments under such a plan do not represent income or a
return on investment but instead are made from the redemption of Fund shares.
Naturally, withdrawals that continually exceed reinvested dividend income and
capital gains will eventually exhaust the account.
Class B [or Class S] shareholders who establish a Systematic Withdrawal Plan may
make annual redemptions up to 12% of the value of the account, measured at the
time the plan is established, without paying a contingent deferred sales
charge.
A Systematic Withdrawal Plan may be terminated at any time by directing a
written request to the Trust or the Transfer Agent. Upon termination, all future
dividends and capital gain distributions will continue to be reinvested in
additional shares unless a shareholder requests otherwise.
TAX-SHELTERED RETIREMENT PLANS
As described in the Prospectus, shares of Bond & Stock, Growth & Income, and
Northwest may be purchased as an investment medium for various tax-sheltered
retirement plans. The amounts of contributions to such plans are generally
limited by the Internal Revenue Code. Each of these plans involves a long-term
commitment of assets, and participants may be subject to possible regulatory
penalties for excess contributions, premature distributions, or for insufficient
distributions after age 70 1/2.
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QUALIFIED RETIREMENT PLANS
Self-employed individuals (as sole proprietors or partnerships) or corporations
may wish to purchase Fund shares in a retirement plan. Investors may obtain
information regarding these plans by contacting an investment representative or
the Trust.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
IRA contributions are invested when received. However, individuals establishing
a new IRA plan may rescind their plan within seven days. In the event of such
termination, their entire purchase price will be refunded by the Distributor
provided they notify the Distributor of their desire to rescind the purchase.
Termination during the seven-day period through regular redemption rather than
through rescission will result in adverse tax consequences. Internal Revenue
Service regulations prohibit revocation of rollover contributions. Any losses
derived through rescission will be absorbed by the Distributor.
Persons who request information regarding IRA plans will be provided with
application forms and information regarding eligibility and permissible
contributions.
IRA CUSTODY AGREEMENT AND SERVICE CHARGES
The IRA plan provides that the Distributor will furnish custodial services
either as agent for Washington Mutual Bank or as the named custodian. There are
set annual fees for IRA plans per participant unless made under an employer-
sponsored plan, in which case the custodial fee is negotiable. If custodial fees
are not paid annually by separate check, shares will automatically be liquidated
to cover such fees.
Unless participants elect otherwise, any capital gain distributions and income
dividends are reinvested on the ex-dividend date in full and fractional shares
of the applicable Fund at net asset value.
IRA BONUSES
"IRA Bonuses" may periodically be credited to IRA accounts for contributions,
transfers and/or rollovers. Payments will be made at a uniform rate determined
by the Distributor or its affiliates and will be based on the value of the
rollovers and/or transfers. IRA Bonuses are not paid by the applicable Fund.
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES
Each Fund intends to continue to conduct its business and maintain the necessary
diversification of assets and source of income requirements to qualify as a
diversified management investment company under the Internal Revenue Code of
1986, as amended (the "Code"). Each Fund so qualified during the
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1997 fiscal year. As a result, under Subchapter M of the Code, each Fund is
accorded conduit or "pass through" treatment for federal income tax purposes
during each year in which it (i) derives at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale of stock, securities and foreign currencies, or other
income (including but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; (ii) distributes at least 90% of the sum of its
taxable net investment income, its net tax-exempt income, and the excess, if
any, of net short-term capital gains over net long-term capital losses for such
year; and (iii) diversifies its holdings so that, at the end of each fiscal
quarter, at least 50% of the market value of the Fund's assets is represented by
cash and cash items, U.S. government securities, securities of other regulated
investment companies, and other securities limited in respect of any one issuer
to a value not greater than 5% of the value of the Fund's total assets and to
not more than 10% of the outstanding voting securities of such issuer, and not
more than 25% of the value of its assets is invested in the securities (other
than those of the U.S. government or other regulated investment companies) of
any one issuer or of two or more issuers which the Fund controls and which are
engaged in the same, similar or related trades or businesses. In addition, until
the start of a Fund's first tax year beginning after August 5, 1997, each Fund
must derive less than 30% of its gross income from the sale or other disposition
of certain assets (including stock or securities and certain options, futures
contracts, forward contracts and foreign currencies) held for less than three
months in order to qualify as a regulated investment company and be accorded
"pass through" treatment. Furthermore, if each Fund distributes 98% of its
ordinary income and capital gain net income for each calendar year, plus any
retained amount from the prior year, it will not be subject to excise tax on
undistributed amounts. Each Fund intends to distribute such amounts as necessary
to avoid federal income and excise taxes.
A portion of dividends paid by Bond & Stock, Growth & Income, or Northwest from
net investment income will generally qualify for the 70% dividends received
deduction for corporate shareholders. In order to be eligible to take this
deduction, a corporate shareholder must have held its shares of the Fund with
respect to which a dividend is paid on the ex-dividend date and for at least 45
more days during the 90-day period surrounding the ex-dividend date. The
qualifying portion is based on the aggregate amount of that income derived by
the Fund from the dividends of domestic corporations. Dividends in excess of the
foregoing are treated as non-qualifying income. As such, they are taxed as
ordinary income, as are any net realized short-term capital gains.
Pursuant to the Taxpayer Relief Act of 1997, two different tax rates apply to
net capital gains (that is, the excess of net gains from capital assets held for
more than one year over net losses from capital assets held for not more than
one year) distributed to shareholders. One rate (generally 28%) applies to net
gains on capital assets held for more than one year but not more than 18 months
("mid-term gains") and a second, preferred rate (generally 20%) applies to the
balance of such net capital gains ("adjusted net capital gains"). Distributions
of net capital gains will be treated in the hands of shareholders as mid-term
gains to the extent designated by a Fund as deriving from net gains from assets
held for more than one year but not more than 18 months, and the balance will be
treated as adjusted net capital gains. Distributions of mid-term gains and
adjusted net capital gains will be taxable to a shareholder as such, whether or
not received in cash or in shares of a Fund and regardless of how long a
shareholder has held the shares in a Fund. Because long-term capital gain
distributions reduce the value of the shares, losses may occur upon subsequent
sale. Special holding period requirements may make the losses long-term rather
than short-term under the Internal Revenue Code.
Advice as to the tax status of each year's dividends and distributions will be
mailed annually to each shareholder. Shareholders are urged to consult their own
tax advisors regarding specific questions about federal, state and local taxes.
Shareholders not subject to tax on their income will not be required to pay tax
on amounts distributed to them.
Income dividends and capital gain distributions recorded and made shortly after
a purchase of shares by an investor will have the effect of reducing the net
asset value per share by the per share amount of the distribution. They are,
nevertheless, subject to income taxes despite the fact that this is, in effect,
a return of capital.
INVESTMENT PRACTICES
BOND & STOCK AND GROWTH & INCOME
Investments may include mortgage-backed securities including those representing
an undivided ownership interest in a pool of mortgages, e.g., GNMA, FNMA and
FHLMC certificates. The mortgages backing these securities include conventional
fixed rate mortgages, graduated payment mortgages and adjustable rate mortgages.
The U.S. government or the issuing agency guarantees the payment of interest and
principal of these securities. The guarantees, however, do not extend
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to the securities' yield or value, which are likely to vary inversely with
changes in interest rates, nor do the guarantees extend to the yield or value of
the Funds' shares. These certificates are, in most cases, "pass-through"
instruments through which the holder receives a share of all interest and
principal payments from the mortgages underlying the certificate, net of certain
fees. Because the prepayment characteristics of the underlying mortgages vary,
it is not possible to predict accurately the average life or realized yield of a
particular issue of pass-through certificates. Mortgage-backed securities are
often subject to more rapid repayment than their stated maturity date would
indicate as a result of the pass-through of prepayments of principal on the
underlying mortgage obligations. For example, securities backed by mortgages
with thirty-year maturities are customarily treated as prepaying fully in the
twelfth year, and securities backed by mortgages with fifteen-year maturities
are customarily treated as prepaying fully in the seventh year. While the timing
of prepayments of graduated-payment mortgages differs somewhat from that of
conventional mortgages, the prepayment experience of graduated-payment mortgages
is basically the same as that of the conventional mortgages of the same maturity
dates over the life of the pool. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected to
accelerate. When the mortgage obligations are prepaid, the Funds reinvest the
prepaid amounts in securities whose yields reflect interest rates prevailing at
the time. Therefore, each Fund's ability to maintain high-yielding, mortgage-
backed securities in its portfolio will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
Each Fund may also purchase or sell securities on a when-issued or delayed-
delivery basis (known generally as forward commitments). Delayed-delivery or
when-issued transactions arise when securities are purchased or sold by a Fund
with payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. However, the yield on a comparable security
available when delivery takes place may vary from the yield on the security at
the time that the when-issued or delayed-delivery transaction was entered into.
When the Fund engages in delayed-delivery or when-issued transactions, it relies
on the seller or buyer, as the case may be, to consummate the transaction.
Failure to consummate the transaction may result in a missed opportunity by the
Fund to obtain a price or yield considered to be advantageous. When-issued and
delayed delivery transactions may be expected to settle within three months from
the date the transactions are entered into. No payment or delivery, however, is
made by the Fund until it receives delivery or payment from the other party to
the transaction.
Neither Fund currently intends to invest more than 35% of its assets in debt
securities rated lower than investment grade.
BOND & STOCK
The investment objective and policies of the Fund are described in the
Prospectus. The Fund endeavors to function as a conservative, well-rounded,
investment account with the long-range
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<PAGE>
objectives of: (1) continuity of income; (2) conservation of principal; and (3)
long-term growth of both principal and income. Investments in bonds and
preferred stocks are made with the objectives of continuity of income and
conservation of principal. Investments in common stocks and convertible bonds
are made with the objective of long-term growth of principal and income. The
proportion of each will vary because management will make such changes from time
to time as it believes necessary to meet the objectives of the Fund and the best
interests of the shareholders. At least 25% of its assets will be invested in
fixed income senior securities. Investments are diversified among industries as
well as among individual companies. Depending on market conditions, the Fund may
also invest in mortgage-backed securities, including those on a forward
commitment basis, and repurchase agreements, and may write covered call options.
The average ratings of all debt securities held by the Fund, expressed as a
percentage of total assets, during the fiscal year ended October 31, 1997 is
presented below:
<TABLE>
<CAPTION>
Percentage of Average
S&P Rating Total Assets
- ---------- ------------
<S> <C>
AAA (or US Treasury)
AA
A
BBB
BB
B
Not Rated
</TABLE>
GROWTH & INCOME
The investment objective and policies of the Fund are described in the
Prospectus. The Fund aims to achieve long-term growth of principal with current
income a secondary consideration. It pursues its objective by placing emphasis
on the selection and ownership of common stocks (although the Fund may also
invest in bonds, preferred stocks, U.S. Treasury bills, certificates of deposit,
mortgage-backed securities including those on a forward commitment basis, and
repurchase agreements, and may write covered call options). There may be times
when it appears prudent to reduce the proportion of common stocks held. During
such periods, the investment in the above-noted alternative instruments may
exceed that of common stocks.
NORTHWEST
The Fund's investment objective is to provide long-term growth of capital by
investing in common stocks of companies doing business or located in the
Northwest region (Alaska, Idaho, Montana,
-22-
<PAGE>
Oregon, and Washington). Portfolio investments are adjusted in accordance with
management's evaluation of changing market risks and economic conditions. Such
changes are made as management believes necessary to meet the objectives of the
Fund and the best interest of shareholders.
ALL FUNDS
In pursuit of the Funds' investment objectives, they may engage in repurchase
agreement transactions. Under the terms of a typical repurchase agreement, a
Fund would acquire an underlying debt obligation for a relatively short period,
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. Under each repurchase agreement, the selling
institution will be required to maintain the value of the securities subject to
the repurchase agreement at not less than 102% of their repurchase price,
including accrued interest earned on the underlying securities. Repurchase
agreements could involve certain risks in the event of default or insolvency of
the other party, including possible delays or restrictions upon a Fund's ability
to dispose of the underlying securities. The Adviser, acting under the
supervision of the Board of Trustees, reviews the creditworthiness of those
banks and dealers with which the Funds enter into repurchase agreements to
evaluate these risks, and monitors on an ongoing basis the value of the
securities subject to repurchase agreements to ensure that the collateral is
maintained at the required level. To limit risk, repurchase agreements maturing
in more than seven (7) days will not exceed 10% of the total assets of the Fund.
The Funds may lend their securities to brokers, dealers, domestic and foreign
banks, or other financial institutions to increase their net investment income.
These loans must be secured continuously in one of these ways: (1) by cash, (2)
by equivalent collateral, or (3) by a letter of credit at least equal to the
market value of the securities loaned plus accrued interest or income. There may
be risks of delay in recovery of the securities or even loss of rights in the
collateral if the borrower of the securities fails financially.
A Fund will not enter into securities loan transactions exceeding, in aggregate,
33% of the market value of the Fund's total assets. They would consider such
transactions only with National Association of Securities Dealers' registered
broker or member banks of the Federal Reserve.
A Fund will enter into securities lending and repurchase transactions only with
parties who meet creditworthiness standards approved by the Board of Trustees
and monitored by the Adviser. In the event of a default or bankruptcy by a
seller or borrower, the Fund will promptly liquidate collateral. However, the
exercise of the Fund's right to liquidate such collateral could involve certain
costs or delays and, to the extent that proceeds from any sales of collateral on
a default of the seller or borrower were less than the seller's or borrower's
obligation, the Fund could suffer a loss.
INVESTMENT RESTRICTIONS
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<PAGE>
While many decisions of the Adviser depend on flexibility, there are several
principles so fundamental to each Fund's philosophy that neither they, nor the
investment objective, may be changed without a vote of a majority of the
outstanding shares of that Fund.
Each Fund may not:
. 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
assets may be invested without regard to this 5% limitation;
. acquire more than 10%* of the voting securities of any one company;
. invest in any company for the purpose of management or exercising control;
. invest in real estate (except publicly traded real estate investment
trusts);
. invest in commodities;
. invest in oil, gas or other mineral leases;
. invest in other investment companies (except as part of a merger);
. invest more than 20%* of its total assets in forward commitments or
repurchase agreements;
. invest more than 25%* of its total assets in any single industry;
. act as underwriter of securities issued by others;
. borrow money for investment purposes (it may borrow up to 5% of its total
net assets for emergency, non-investment purposes);
. lend money (except for the execution of repurchase agreements);
. issue senior securities;
. buy or sell options, with the exception of covered call options which must
be limited to 20% of total assets;
. buy or sell futures-related securities;
. invest in securities restricted under federal securities laws (other than
securities eligible for resale under Rule 144A under the Securities Act of
1933, as amended);
. invest more than 15%* of its net assets in illiquid securities;
. buy securities on margin, mortgage or pledge its securities, or engage in
"short" sales;
. invest more than 5%* of its net assets in warrants including not more than
2% of such net assets in warrants that are not listed on either New York
Stock Exchange or American Stock Exchange; however, warrants acquired in
units or attached to securities may be deemed to be without value for the
purpose of this restriction;
. invest more than 25%* of its total assets in foreign securities and then
only in U.S dollar-denominated foreign securities.
* Percentage at the time the investment is made.
PERFORMANCE INFORMATION
Except as otherwise noted, total returns quoted in advertising include the
effect of applicable sales charges, reinvesting dividends and capital gain
distributions (at net asset value), and any change in net asset value per share
over the period. The following total returns reflect the
-24-
<PAGE>
maximum 5.75% initial sales charge for Class A shares and the contingent
deferred sales charge appropriate to the period for Class B or Class S shares.
Average annual total returns are calculated by determining the change in value
of a hypothetical investment over a stated period of time and then calculating
the annual compounded rate of return that would have produced the same result
had the rate of growth or decline in value been constant over the entire period.
Cumulative total return is the simple change in value of a hypothetical
investment over a stated period of time. The cumulative total return may be
quoted as a percentage or a dollar amount and may be presented numerically or in
a table, graph, or similar illustration.
No Class I or Class S shares were outstanding as of October 31, 1997.
<TABLE>
<CAPTION>
Periods Ended October 31, 1996
1 Year 5 Years 10 Years
<S> <C> <C> <C>
Average Annual Total Return
Bond & Stock, Class A % % %
Bond & Stock, Class B % %
Growth & Income, Class A % % %
Growth & Income Class B % %
Northwest, Class A % % %*
Northwest, Class B % %**
Cummulative Total Return
Bond & Stock, Class A % % %
Bond & Stock, Class B % %**
Growth & Income, Class A % % %
Growth & Income, Class B % %**
Northwest, Class A % % %*
Northwest, Class B % %**
</TABLE>
* SINCE 11/86 (LIFE OF FUND)
** CLASS B SHARES' TOTAL RETURNS FROM THE COMMENCEMENT OF PUBLIC OFFERING ON
MARCH 30, 1994.
The total returns are calculated as follows:
Average annual total return: ERV = P(1+A)/n/
Cumulative total return (as a percentage): T = (ERV-P)/P
-25-
<PAGE>
Where:
P = a hypothetical initial investment of $1,000
A = average annual total return
T = total return
n = number of years
ERV = ending redeemable value of a $1,000 hypothetical investment
COMPARATIVE PERFORMANCE DATA
Fund literature may occasionally refer to information about the Fund which is
published by mutual funds rating services. Comparisons of fund performance may
be made to various market, economic or other indices. Industry publications may
also be referred to from time to time.
BROKERAGE ALLOCATIONS AND PORTFOLIO TRANSACTIONS
Under terms of the Investment Management Agreements, Composite Research &
Management Co. acts as agent for each Fund in entering orders with broker-
dealers to execute portfolio transactions and in negotiating commission rates
where applicable. Decisions as to eligible broker-dealers are approved by the
president of the Trust.
In executing portfolio transactions and selecting broker-dealers, the Adviser
uses its best efforts to seek, on behalf of each Fund, the best overall terms
available. In assessing the best overall terms available for any transaction,
the Adviser may consider all factors it deems relevant, including the breadth of
the market in the security, the price of the security, the size of the
transaction, the timing of the transaction, the reputation, financial condition,
experience and execution capability of a broker-dealer, and the amount of the
commission and the value of any brokerage and research services, (as those terms
are defined in Section 28(e) of the Securities Exchange Act of 1934, as amended)
provided by a broker-dealer.
The Adviser is authorized to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Fund which is in excess of the amount of commission another
broker or dealer would have charged for effecting the transaction if the Adviser
determines in good faith that such commission was reasonable in relation to the
value of the brokerage and research services provided by such broker or dealer,
viewed in terms of that particular transaction or in terms of the overall
responsibilities of the Adviser to the Funds and/or other accounts over which
the Adviser exercises investment discretion. The Adviser may commit to pay
commission dollars to brokers or financial institutions for specific research
materials or products that it considers useful in advising the Funds and/or its
other clients. Research services furnished to the Adviser include, for example,
written and electronic reports analyzing economic and financial characteristics,
telephone conversations between brokerage securities analysts and members of the
Adviser's staff, and personal visits by such analysts, brokerage strategists and
economists to the Adviser's office.
-26-
<PAGE>
Some of these services are of value to the Adviser in advising clients, although
not all of these services are necessarily useful and of value in managing the
Funds. The management fee paid to the Adviser is not reduced because it receives
those services, even though it might otherwise be required to purchase these
services for cash.
The staff of the Securities and Exchange Commission has expressed the view that
the best price and execution of over-the-counter transactions in portfolio
securities may be secured by dealing directly with principal market makers,
thereby avoiding the payment of compensation to another broker. In certain
situations, the Adviser believes that the facilities, expert personnel and
technological systems of a broker often enable the Funds to secure a net price
by dealing with a broker that is as good as or better than the price the Funds
could have received from a principal market maker, even after payment of the
compensation to the broker. The Adviser places its over-the-counter transactions
with principal market makers, but may also deal on a brokerage basis when
utilizing electronic trading networks or as circumstances warrant.
Total Brokerage Commissions Paid by each Fund:
<TABLE>
<CAPTION>
Bond & Stock Growth & Income Northwest
------------ --------------- ---------
<S> <C> <C> <C>
1997 $ $ $
1996 $199,663 $292,486 $123,164
1995 $137,742 $163,180 $ 37,280
</TABLE>
None of the brokers with whom the Funds deal have any interest in the Adviser or
the Distributor. The Distributor did not execute any portfolio orders for the
Funds during the fiscal year, nor did the Distributor or the Adviser receive any
direct or indirect compensation as a result of portfolio transactions of the
Funds. Shares may be sold by brokers who execute portfolio transactions for the
Fund; however, no brokerage fees will be allocated for such sales.
The Funds do not trade in securities for short-term profits but, if the
circumstances warrant, securities may be sold without regard to the length of
time held. Therefore, the Funds cannot accurately predict their portfolio
turnover rate. Portfolio turnover rates are shown in the Prospectus in the
section entitled "Financial Highlights."
GENERAL INFORMATION
VOTING PRIVILEGES
Although the Funds are not required to hold annual meetings of their
shareholders, shareholders holding at least 10% of the outstanding shares
entitled to vote have the right to
-27-
<PAGE>
call a meeting to elect or remove Trustees, or to take other actions as provided
in the Agreement and Declaration of Trust.
CUSTODIAN
The securities and cash owned by each Fund are held in safekeeping by Investors
Fiduciary Trust Company ("IFTC"), 127 West 10th, Kansas City, MO 64105. IFTC is
a wholly owned subsidiary of State Street Bank. The custodian's responsibilities
include collecting dividends, interest and principal payments on each Fund's
investments.
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of LeMaster & Daniels PLLC, Certified Public Accountants, has been
selected as the independent public accountants of each Fund. LeMaster & Daniels
performs audit services for each Fund including the examination of the financial
statements included in annual reports to shareholders, which are incorporated by
reference into this Statement of Additional Information.
PORTFOLIO MANAGER COMMENTARY
In communications with the public, portfolio managers may discuss the economic
outlook for each Fund, which might include a discussion of specific securities
in which the Fund may invest, and/or specific characteristics of each investment
portfolio.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain all
of the information set forth in the registration statements each Fund has filed
with the Securities and Exchange Commission. Complete registration statements
may be obtained from the Securities and Exchange Commission upon payment of the
fee prescribed by the rules and regulations of the Commission.
FINANCIAL STATEMENTS AND REPORTS
Semiannual and annual reports are issued to shareholders. The annual reports
include audited financial statements. The Funds' annual report to shareholders
dated October 31, 1996, and the Funds' semiannual report to shareholders dated
April 30, 1997, which are incorporated by reference into this Statement of
Additional Information, may be obtained without charge by contacting the Trust.
-28-
<PAGE>
APPENDIX A
SPECIMEN PRICE MAKE-UP SHEET
COMPOSITE BOND & STOCK FUND
COMPOSITE GROWTH & INCOME FUND
COMPOSITE NORTHWEST FUND
October 31, 1997
<TABLE>
<CAPTION>
GROWTH &
BOND & STOCK INCOME NORTHWEST
------------ -------- ---------
<S> <C> <C> <C>
Assets $_______ $_______ $_______
Liabilities $_______ $_______ $_______
Net Assets $_______ $_______ $_______
CLASS A SHARES
Net Assets $_______ $_______ $_______
Shares Outstanding $_______ $_______ $_______
Net Asset Value Per Share $_______ $_______ $_______
Maximum Offering Price
(Net Asset Value
Per Share division 9425/10000) $_______ $_______ $_______
CLASS B SHARES
Net Assets $_______ $_______ $_______
Shares Outstanding $_______ $_______ $_______
Net Asset Value and
Offering Price Per Share $_______ $_______ $_______
</TABLE>
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<PAGE>
APPENDIX B
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Corporate and Municipal Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack out- standing investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
-30-
<PAGE>
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Standard & Poor's (S&P)
Corporate and Municipal Ratings
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only to a small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC, and C is regarded, on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating
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<PAGE>
category is also used for debt subordinated to senior debt that is assigned an
actual or implied BB or BB-rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default and
is dependent upon favorable business, financial, or economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition of debt service payments are jeopardized.
COMMERCIAL PAPER
A1 and Prime 1 commercial paper ratings issued by Moody's Investors Services,
Inc. (Moody's) and Standard & Poor's Corporation (S&P) are the highest ratings
these corporations issue.
Among factors considered by Moody's in assigning ratings are the following: (1)
evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
maybe inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparation to
meet such obligations.
Commercial paper rated A1 by S&P has the following characteristics: Liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated A
or better. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determine whether the issuer's commercial paper is rated A1, A2 or
A3.
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<PAGE>
ABSENCE OF RATING:
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to quality of the issue. Should no
rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as
a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published.
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<PAGE>
STATEMENT OF
ADDITIONAL
INFORMATION
December __, 1997
COMPOSITE BOND FUNDS, series of
The Composite Funds (the "Trust")
601 W. Main Avenue
Suite 300
Spokane, WA 99201-0613
Telephone: 509-353-3550
Toll free: 800-543-8072
COMPOSITE U.S. GOVERNMENT SECURITIES FUND ("Government") is designed to provide
a high level of current income, consistent with safety and liquidity. On behalf
of this objective, the Fund invests in obligations issued or guaranteed by the
U.S. government. The Fund also invests in repurchase agreements and
collateralized mortgage obligations that are secured by these types of
obligations.
COMPOSITE INCOME FUND ("Income") is designed to provide current income through
careful investment in a diversified pool of debt securities. The Fund's
objective is to provide a high level of current income that is consistent with
protection of shareholders' capital.
COMPOSITE TAX-EXEMPT BOND FUND ("Tax-Exempt") is designed to provide a high
level of federal tax-exempt income while at the same time protecting investors
capital. On behalf of this objective, the Fund invests in a portfolio of bonds
issued by states, counties, cities and other governmental bodies whose bonds
generate income that is exempt from federal income tax.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS (THE "PROSPECTUS") OF GOVERNMENT, INCOME AND
TAX-EXEMPT (THE "FUNDS") DATED DECEMBER ___, 1997, WHICH CAN BE OBTAINED WITHOUT
CHARGE BY CONTACTING THE FUNDS AT THE ABOVE ADDRESS.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page Page
---- ----
<S> <C> <C> <C>
The Funds and Their Management Investment Practices
Distribution Services Investment Restrictions
How Shares Are Valued Performance Information
How Shares Can Be Purchased Brokerage Allocations &
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Redemption of Shares Portfolio Transactions
Exchange Privilege General Information
Services Provided by the Funds Financial Statements and
Tax-Sheltered Retirement Plans Reports
Dividends, Capital Gain Appendix A
Distributions and Taxes Appendix B
</TABLE>
THE FUNDS AND THEIR MANAGEMENT
The Investment Adviser
As discussed under "Who We Are" in the Prospectus, the Funds are managed and
investment decisions are made under the supervision of Composite Research &
Management Co. (the "Adviser"). Decisions to buy, sell, or hold a particular
security are made by an investment team of the Adviser, approved by an
investment committee of the Adviser, subject to the control and final direction
of the Board of Trustees.
Composite Research & Management Co. is Adviser for the five investment companies
(currently 36 separate portfolios) in the "Composite Funds," namely: The
Composite Funds, consisting of Composite Bond & Stock Fund, Composite Growth &
Income Fund, Composite Income Fund, Composite Tax-Exempt Bond Fund, Composite
Money Market Fund, Composite Tax-Exempt Money Market Fund, Composite U.S.
Government Securities Fund and Composite Northwest Fund; The [Sierra] Trust
Funds, consisting of Short Term High Quality Bond Fund, Growth Fund, Emerging
Growth Fund, International Growth Fund, California Municipal Fund, California
Insured Intermediate Municipal Fund, California Money Fund, Florida Insured
Municipal Fund and Target Maturity 2002 Fund; [Sierra] Prime Income Fund; and
[Sierra] Asset Management Portfolios, consisting of Capital Growth Portfolio,
Growth Portfolio, Balanced Portfolio, Value Portfolio and Income Portfolio. In
addition, the Advisor serves as investment adviser of [Sierra] Variable Trust,
consisting of Global Money Fund, Short Term High Quality Bond Fund, U.S.
Governmental Fund, Corporate Income Fund, Growth and Income Fund, Growth Fund,
Emerging Growth Fund, International Growth Fund, Capital Growth Portfolio,
Growth Portfolio, Balanced Portfolio, Value Portfolio and Income Portfolio. The
Adviser also provides investment advice to institutional clients.
Investment Management Services
Advisory fees and services performed by the Adviser are discussed under "The
Cost of Good Management" in the Prospectus. The Investment Management Agreements
(the "Agreements") between each Fund and the Adviser require the Adviser to
furnish suitable office space, research, statistical and investment management
services to each Fund. They were approved by
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<PAGE>
shareholders and will continue in effect provided each is approved at least
annually by the Board of Trustees (including a majority of the Trustees who are
not parties to, or "interested persons," as defined in the Investment Company
Act of 1940, of parties to, the Agreements) by votes cast in person at a meeting
called for the purpose of voting on such approval; or by vote of a majority of
the outstanding shares of each Fund. The Agreements can be terminated by either
party on sixty (60) days' notice, without penalty, and each provides for
automatic termination upon its assignment.
Under the provisions of the Investment Company Act of 1940 and as used elsewhere
in the Prospectus and this statement of additional information, the phrase "vote
of the majority of the outstanding shares of the Fund" means the vote at any
meeting of shareholders of (a) 67% or more of the shares present at such
meeting, if the shareholders of more than 50% of the outstanding shares are
present or represented by proxy; or (b) more than 50% of the outstanding shares,
whichever is less.
U.S. Government Securities and Income each pay a monthly fee to the Adviser for
its services equal to .625% per annum computed on the average daily net assets
of each Fund. For each of these two Funds, the fee will decrease to .50% on its
average daily net assets in excess of $250 million. For Tax-Exempt, the Adviser
receives a monthly fee for its services equal to .50% per annum computed on the
average daily net assets]
U.S. Government paid management fees of $984,485, $1,156,052 and $1,417,336, for
the fiscal years ended December 31, 1996, 1995 and 1994, respectively.
Income paid management fees of $599,008, $598,377 and $612,811, for the fiscal
years ended December 31, 1996, 1995 and 1994, respectively.
Tax-Exempt paid management fees of $1,065,379, $1,120,096 and $1,180,145, for
the fiscal years ended December 31, 1996, 1995 and 1994, respectively.
The Adviser has agreed that should the expenses of U.S. Government Securities
(excluding taxes, interest and any portfolio brokerage and the .75% Class B and
Class S distribution fees) exceed in any fiscal year 1.5% of the average net
assets of the Fund up to $30 million and 1% of average net assets over $30
million, it will reimburse the Fund for such excess. There were no
reimbursements by the Adviser under the expense limitations of the Fund during
1996, 1995 and 1994.
The Adviser has agreed that should the expenses of Income or Tax-Exempt
(excluding taxes, interest and any portfolio brokerage and the .75% Class B
distribution fee) exceed in any fiscal year 1.5% of the average net assets of
the Fund up to $30 million; 1% of average net assets between $30 million and
$130 million; and .75% of such net assets over $130 million,
-3-
<PAGE>
it will reimburse the respective Fund for such excess. There were no
reimbursements by the Adviser under the expense limitations of either Fund
during 1996, 1995 and 1994.
The Agreements provide that the advisory fees paid to the Adviser by each Fund
will be based solely on the individual assets of that Fund. Under the terms of
the Agreements, each Fund is required to pay fees of Trustees not employed by
the Adviser or its affiliates, custodial expenses, brokerage fees, taxes,
auditing and legal expenses, costs of issue, transfer, registration or
redemption of shares for sale, costs relating to disbursement of dividends,
shareholder meetings, shareholder reports, and the maintenance of each Fund's
shareholder existence.
Investment decisions for each Fund are made independently of those for other
funds in the Composite Funds. However, the Adviser may determine that the same
security is suitable for more than one of the Composite Funds. If more than one
of the funds is simultaneously engaged in the purchase or sale of the same
security, the transactions are allocated as to price and amount in accordance
with a formula considered to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of the
security as far as a Fund is concerned. In other cases, however, it is believed
that the ability to participate in volume transactions may provide better
executions for each Fund. It is the opinion of the Board of Trustees that these
advantages, when combined with the personnel and facilities of the Adviser's
organization, outweigh possible disadvantages which may exist from participation
in simultaneous transactions.
The Trust have adopted a code of ethics that is intended to prevent access
persons from conducting personal securities transactions that interfere with
Fund portfolio transactions or otherwise take unfair advantage of their
relationship to the Funds. In general, the personal securities transactions of
individuals with access to information regarding Fund portfolio transactions
must be pre-cleared by the Adviser's Compliance Officer and must not occur when
similar transactions are contemplated by a Fund.
Glass-Steagall
The Glass-Steagall Act, among other things, generally prohibits member banks of
the Federal Reserve System from engaging to any extent in the business of
issuing, underwriting, selling or distributing securities and generally
prohibits management interlocks and affiliations between member banks and
companies engaged in certain activities. In a Statement of Policy dated
September 1, 1982, the Federal Deposit Insurance Corporation concluded that the
investment restrictions of the Glass-Steagall Act do not apply to banks or their
affiliates if the banks are not members of the Federal Reserve System. Neither
Washington Mutual Bank [Great Western nor American Savings Bank] is not a member
bank. The Adviser has advised the Funds that, in its view, the Glass-Steagall
Act does not prohibit the activities of the Adviser and that it may perform the
services for the Funds contemplated by the Investment Management Agreements
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations.
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<PAGE>
Trustees and Officer of the Funds
The Board of Trustees is elected by the shareholders of the Trust, including the
Funds. Interim vacancies may be filled by the current Trustees so long as at
least two-thirds were previously elected by shareholders. The Board has
responsibility for the overall management of the Funds, including general
supervision and review of their investment activities. The Trustees, in turn,
elect the officers of the Trust who are responsible for administering the Fund's
day-to-day operations. Trustees and officers of the Trust and their business
experience for the past five years are set forth below. Unless otherwise noted,
the address of each officer is 601 W. Main Avenue, Suite 300, Spokane,
Washington 99201-0613.
WAYNE L. ATTWOOD, MD
Trustee
2931 S. Howard
Spokane, Washington 99203
Dr. Attwood is a retired doctor of internal medicine and gastroenterology in
Spokane, Washington.
KRISTIANNE BLAKE
Trustee
705 W. 7th, Suite D
Spokane, Washington 99204
Mrs. Blake is president of Kristianne Gates Blake, PS, an accounting services
firm specializing in personal financial planning and tax planning.
*ANNE V. FARRELL
Trustee
425 Pike Street, Suite 510
Seattle, Washington 98101
Mrs. Farrell is president and CEO of The Seattle Foundation (a charitable
foundation). In addition, she serves as a director of Washington Mutual, Inc.
*MICHAEL K. MURPHY
Trustee
PO Box 3366
Spokane, Washington 99220-3366
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<PAGE>
Mr. Murphy is Chairman and CEO of CPM Development Corporation (a holding company
which includes Central Pre-Mix Concrete Company). In addition, he serves as a
director of Washington Mutual, Inc.
*WILLIAM G. PAPESH
President and Trustee
Mr. Papesh is president and a director of the Adviser and Transfer Agent, and an
executive vice president and a director of Composite Funds Distributor, Inc.
(the "Distributor").
DANIEL L. PAVELICH
Trustee
Two Prudential Plaza
180 North Stetson Avenue, Suite 4300
Chicago, Illinois 60601
Mr. Pavelich is Chairman and CEO of BDO Seidman, a leading national accounting
and consulting firm.
JAY ROCKEY
Trustee
2121 - Fifth Avenue
Seattle, Washington 98121
Mr. Rockey is Chairman and CEO of The Rockey Company (a regional public
relations firm).
RICHARD C. YANCEY
Trustee
535 Madison Avenue
New York, New York 10022
Mr. Yancey is senior advisor to Dillon, Read & Co., Inc. (a registered broker-
dealer and investment banking firm), New York, New York.
*These Trustees are "interested persons" of the Funds as that term is defined in
the Investment Company Act of 1940 because they are affiliated persons of the
Funds, the Adviser, or the Distributor.
GENE G. BRANSON
Vice President
601 West Main Avenue
Spokane, Washington 99201
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<PAGE>
Mr. Branson is a senior vice president and director of the Distributor and
Murphey Favre Securities Services, Inc. (the "Transfer Agent") and a vice
president and director of the Adviser.
MONTE D. CALVIN, CPA
Vice President and Treasurer
Mr. Calvin is an executive vice president of the Transfer Agent and serves as
the chief financial officer of the Funds.
JEFFREY L. LUNZER, CPA
Assistant Treasurer
Mr. Lunzer is a vice president of the Transfer Agent.
JOHN T. WEST, CPA
Clerk
Mr. West is a vice president of the Transfer Agent.
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<PAGE>
The Funds paid no remuneration to any of its officers, including Mr. Papesh,
during the year ended December 31, 1996. The Funds paid Trustees' fees, during
the year ended December 31, 1996, in the amounts indicated below./(1)/
<TABLE>
<CAPTION>
Total
Trustee Government Income Tax-Exempt Complex/(2)/
- ------- ---------- ------ ---------- ------------
<S> <C> <C> <C> <C>
Wayne L. Attwood, MD $1,265 $1,265 $1,265 $15,000
Kristianne Blake $1,265 $1,265 $1,265 $15,000
Edwin J. McWilliams $1,265 $1,265 $1,265 $15,000
Jay Rockey/(3)/ $1,265 $1,265 $1,265 $15,000
Richard C. Yancey $1,178 $1,178 $1,178 $14,000
</TABLE>
/(1)/ Amounts shown in the table reflect amounts paid by the predecessor of each
series of The Composite Funds. For more information, see "Who we are" in
the Prospectus.
/(2)/ Each Trustee serves in the same capacity for each Fund for the other
Composite Funds (five companies) comprising 36 individual investment
portfolios.
/(3)/ Mr. Rockey is Chairman and CEO of The Rockey Company, a public relations
firm which has received revenue from the Funds and Washington Mutual,
Inc., parent company of the Adviser , Distributor and Transfer Agent
during the 1996 fiscal year.
As of March 31, 1997, officers, Trustees and their immediate families as a group
owned of record and beneficially less than 1% of the outstanding shares of each
Fund.
Kristianne Blake, *Anne V. Farrell, *Michael K. Murphy, and Daniel L. Pavelich
serve as members of the Board's audit committee. The committee meets
periodically with each Fund's independent accountants and officers to review
accounting principles used by each Fund and the adequacy of the Fund's internal
controls.
The investment committee performs interim functions for the Board of Trustees
including dividend declaration and portfolio pricing matters. Members are *Anne
V. Farrell, *Michael K. Murphy, and Richard C. Yancey.
The valuation committee is comprised of any two trustees or officers of the
Trust and one or more portfolio managers, as designated by the Trusts' chairman,
president, or vice
-8-
<PAGE>
president/treasurer . The committee is called upon to value any security held by
the Funds whenever the security cannot otherwise be valued under the Trusts'
guidelines for valuation.
Responsibilities of the Board's nominating committee include preparing for and
recommending replacements for any vacancies in the Board and initial review of
policy issues regarding the size, composition and compensation of the Boards.
Members of the nominating committee are Wayne L. Attwood, MD, Daniel L.
Pavelich, and Jay Rockey.
The Board's distribution committee is responsible for reviewing distribution
activities and 12b-1 expenditures to determine that there is a reasonable
likelihood the 12b-1 plan will benefit each Fund and its shareholders. The
committee meets at least annually and is responsible for making recommendations
to the Boards regarding renewal or changes to the distribution plans. Committee
members are Wayne L. Attwood, MD, Kristianne Blake, Jay Rockey and Richard C.
Yancey.
*These trustees are considered "interested persons" of the Trust as that term is
defined in the Investment Company Act of 1940, because they are either
affiliated persons of the Trust, the Adviser or the Distributor.
DISTRIBUTION SERVICES
12b-1 Plan
As discussed in the Prospectus under "The Cost of Good Management," the Trustees
of the Trust have approved a plan for Class A, Class B and Class S shares of
each Fund (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act
of 1940, which provides that investment companies may pay distribution expenses,
directly or indirectly, according to a plan adopted by the Board of Trustees.
Under the existing Plan, the Fund may reimburse the Distributor for Class A
shareholder servicing expenses, including the cost of printing and distributing
prospectuses (to other than current shareholders), statements of additional
information and other promotional and sales literature, compensation to sales
personnel for their services, and reimbursement to the Distributor for the
direct and indirect cost of furnishing services of its personnel to assist in
shareholder servicing but excluding general and administrative expenses.
The annual reimbursement allowed by the existing Plan and authorized by the
Trustees for such Class A shareholder servicing expenses may not exceed .25% of
the average daily net assets attributable to Class A shares. Shareholder
servicing activities for Fund may benefit other Composite Funds. Government,
Income, and Tax-Exempt reimbursed the Distributor in the amounts of $218,510,
$133,600, and $315,034, respectively, for distribution expenses incurred on
behalf of Class A shares during fiscal year 1996. Of this amount, $156,811,
$91,335, and $219,963 was paid on behalf of Government, Income, and Tax-Exempt,
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<PAGE>
respectively, to selected dealers and registered representatives of the
Distributor for their shareholder servicing activities, and $61,699, $42,305,
and $95,071, respectively, was paid for other distribution related expenses.
During the fiscal years 1995 and 1994, Government reimbursed the Distributor
$343,633 and $399,592, respectively; Income reimbursed the Distributor $168,531
and $189,136, respectively; and Tax-Exempt reimbursed the Distributor $432,854
and $449,602, respectively, for distribution expenses related to Class A shares.
It is currently expected that, subject to shareholder approval, the Plan will be
amended to provide that each Fund will compensate the Distributor with a service
fee at an annual rate of .25% of the average daily net assets of the Fund
attributable to Class A shares.
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 its expenses, the amount of compensation
may be more or less than the Distributor's actual expenses. For this reason, the
Class B distribution plan may be 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 Funds are not liable for any expenses
incurred by the Distributor in excess of the amount of compensation it
receives.
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, those plans are characterized by the staff of the Securities and
Exchange Commission as being "compensation" plans -- in contrast to the existing
Class A "reimbursement" plan. The Funds are not liable for any expenses incurred
by the Distributor in excess of the amount of compensation it receives.
Under the Plan, each Fund compensates the Distributor with a distribution fee
at an annual rate of .75% of the Fund's average daily net assets attributable to
Class B and Class S shares and a service fee at an annual rate of .25% of such
assets. During the fiscal years 1996 and 1995, Government compensated the
Distributor in the amounts of $26,484 and $15,425, respectively; Income
compensated the Distributor in the amounts of $57,828 and $32,833, respectively;
and Tax-Exempt compensated the Distributor $40,939 and $18,879, respectively,
for the sale of Class B shares.
The Distributor pays dealers an amount equal to an annual rate of .25% of total
net assets of all accounts, of Class A, Class B and Class S shares, serviced by
their representatives.
Under the Plan, the Distributor will report at least quarterly to the Board of
Trustees the amounts and purposes of all distribution expense payments. During
the continuance of the Plan, as required by Rule 12b-1, the selection and
nomination of the Trustees who are not "interested persons," as defined in the
Investment Company Act of 1940, of the Trust will be at the discretion of such
disinterested Trustees then in office.
The Plan has been approved unanimously by the Trustees including a majority of
the disinterested Trustees who have no direct or indirect interest in the Plan
("Qualified Trustees"). The Plan will remain in effect for one year, may be
terminated at any time by a vote of a majority of the disinterested Trustees or
by a vote of a majority of the outstanding voting securities of the applicable
class of the applicable Fund and may be renewed from year to year thereafter
only if approved by a vote of Qualified Trustees.
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<PAGE>
Distributor
The Distributor purchases shares of each Fund in a continuous offering to fill
orders placed with it by investors and investment dealers. It purchases shares
at net asset value and resells shares at the offering price in accordance with
terms of the Distribution Contract with the Trust. The offering price may
include a sales charge as discussed in the Prospectus under "How to buy shares."
Each Fund receives the entire net asset value of all of its shares sold. The
Distributor or designated dealer retains their appropriate portion of any
initial sales charge. The Distributor pays sales commissions to dealers from its
own resources for Class B and Class S sales and retains contingent deferred
sales charge payments. The Distributor acts in a similar capacity for all other
Composite Funds.
The Distributor may compensate its sales people or selected dealers for shares
sold without a sales charge according to various Class A "Net Asset Value
Purchase" provisions. The compensation is based on a percentage of the net asset
value of the shares sold.
During the 1996, 1995 and 1994 fiscal years, the Distributor received $89,694,
$150,970 and $336,055, respectively, for the sale of Government Class A shares;
$156,410, $209,703 and $340,052, respectively, for the sale of Income Class A
shares; and $282,768, $341,454 and $552,555, respectively, for the sale of Tax-
Exempt Class A shares.
The Distributor has not received any contingent deferred sales charges from the
redemption of Class A shares. During the fiscal year ended December 31, 1996,
the Distributor received contingent deferred sales charge payments of $3,051,
$7,284 and $10,102 upon redemption of Class B shares of U.S. Government, Income,
and Tax-Exempt, respectively. No brokerage fees were paid by the Funds to the
Distributor during the year, but the Distributor may act as a broker on
portfolio purchases and sales should it become a member of a securities
exchange.
No Class I or Class S shares of the Funds were outstanding prior to December 31,
1996.
The Funds bear the cost of registering their shares with federal and state
securities commissions and printing prospectuses and statements of additional
information sent to its existing shareholders. The Distributor pays for
information intended for potential shareholders but may defray some or all those
expenses with revenues received from the Funds under the Distribution Plan
applicable to Class A shares.
Transfer Agent
The Transfer Agent furnishes necessary personnel and other transfer agent
services required by each Fund. The Shareholders Service Contract for each Fund
was originally approved by shareholders.
-11-
<PAGE>
During the 1996, 1995 and 1994 fiscal years, Government paid $146,145, $165,595
and $175,549, respectively, for these services; Income paid $114,258, $114,938
and $104,897, respectively, and Tax-Exempt paid $102,716, $107,114 and $102,778,
respectively.
At the date of this Statement of Additional Information, the monthly shareholder
servicing fee is $1.35 per Class A account and $1.45 per Class B account,
[$____] for each Class I account and [$____] for each Class S account in each
Fund. All requests for transfer of shares should be directed to the Trust or to
the Transfer Agent.
HOW SHARES ARE VALUED
Investment securities are valued on the basis of valuations provided by an
independent pricing service, approved by the Board of Trustees, which uses
information with respect to valuations based upon transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities in determining value. Investment
securities not currently quoted as described above will be priced at fair market
value as determined in good faith in a manner prescribed by the Board of
Trustees. For more information, see "How shares are valued," in the Prospectus.
HOW SHARES CAN BE PURCHASED
Information concerning the purchase of shares is discussed under "How to Buy
Shares" in the Prospectus. Shares of each class of each Fund are sold in a
continuous offering and may be purchased from the Distributor or a designated
dealer at the public offering price, which is the net asset value per share next
determined after receipt of a properly completed purchase order, plus, in the
case of Class A shares, an initial sales charge which is a percentage of the
public offering price and varies as shown in the Prospectus. The Distributor or
designated dealer retains their appropriate portion of the initial sales charge.
Class B shares are sold without an initial sales charge but are subject to
higher ongoing distribution and service fees and may be subject to a contingent
deferred sales charge if redeemed within six years of purchase. The current
contingent deferred sales charge schedule is shown in the Prospectus. Class B
shares purchased prior to March 15, 1996 are subject to a contingent deferred
sales charge of 4% if redeemed in the first year after purchase, 3% if redeemed
in the second year, 2% if redeemed in the third year, 1% in the fourth year and
0% after the fourth year. Class B shares purchased prior to January 15, 1996 are
subject to a contingent deferred sales charge of 3% if redeemed the first or
second year after purchase, 2% in the third or fourth year, 1% in the fifth year
and 0% after fifth year. (See Appendix A for a specimen price make-up sheet.)
Class I shares are sold exclusively to the various investment portfolios of
[Sierra] Asset Management Portfolios.
Class S shares are sold exclusively to investors who open [SAM] accounts. Class
S shares are sold without an initial sales charge but are subject to higher
ongoing distribution and service fees and may be subject to a contingent sales
charge if redeemed within six years of purchase. The current contingent deferred
sales charge is shown in the Prospectus.
The minimum initial investment for each Fund is currently $1,000 ($500 in IRA
accounts), and additional investments should be at least $50 (unless the
transaction is via a systematic investment program where the initial and
additional monthly investments must be at least $50). Investments
-12-
<PAGE>
made by an agent or fiduciary (such as a bank trust department, investment
adviser, broker, or employee benefit or retirement plan), pursuant to a periodic
investment plan, may have the minimum purchase requirements on initial and
subsequent investments waived.
Shareholders who have redeemed Class A shares initially subject to a sales
charge may reinvest their redemption proceeds in Class A shares of any Composite
Fund at net asset value provided that reinvestment is effected within 120 days
of the redemption. Contingent deferred sales charges assessed on any redemption
may be reimbursed if such proceeds are reinvested in shares of the same class
within 120 days. The shareholder is responsible for notifying the Transfer Agent
of such reinvestments. If a loss is realized on the redemption of Fund shares,
the reinvestment may be subject to the "wash sale" rule, resulting in a
disallowance of such loss for federal income tax purposes.
Class A shares may be sold at net asset value and in any amount to current and
retired directors, officers and employees of Washington Mutual, Inc., its
affiliates (including the Adviser, the Distributor, and the Transfer Agent), and
their children, step-children, grandchildren, step-grandchildren and parents, as
well as to any trust, pension, profit-sharing or other benefit plan for such
persons. The foregoing privilege is also extended to directors, officers, and
employees of other companies which enter into selling arrangements with the
Distributor. Such shares are sold for investment purposes and on the condition
that they will not be resold except through redemption by the Fund.
Each Fund may also issue Class A shares at net asset value in connection with
the acquisition of assets, merger or consolidation with, another investment
company, or to shareholders in connection with reinvestment of income dividends
and capital gain distributions. Qualified employee benefit plans (including SEPs
and SIMPLEs) that have more than 10 participants or that have more than $25,000
invested in those Composite Funds offered with an initial or contingent deferred
sales charge are also entitled to buy Class A shares without a sales charge.
Individual retirement accounts that are not part of an employee benefit plan are
ineligible for this privilege. [In addition, shareholders of mutual funds (other
than money market funds), may redeem those shares and use their sale proceeds to
purchase Class A shares of a Composite Fund at net asset value provided the
proceeds are reinvested within 90 days of such sale and proof of the sale is
provided.]
The Distributor may enter into arrangements with brokers, dealers or registered
investment advisers to sell Class A shares at net asset value for use in
particular investment products made available to their clients. The other
parties may charge their clients a fee for these products.
Purchase Plans
Cumulative Discounts: The initial sales charges on Class A shares are applicable
to purchases made at one time by a "purchaser" who may be one of the following:
an individual, and/or the
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<PAGE>
individual's spouse, and/or children (including step-children) under age 21; a
trustee or other fiduciary of a single trust estate or single fiduciary account;
an organization exempt from federal income tax under Section 501(c)(3) or (13)
of the Internal Revenue Code; a pension, profit-sharing or other employee
benefit plan qualified or non-qualified under Section 401 of the Internal
Revenue Code; or any other organized group of persons whether incorporated or
not, provided the organization has been in existence for at least six months and
has some purpose other than the purchase of redeemable securities of a
registered investment company at a discount. In order to qualify for a lower
sales charge, all orders from an organized group will have to be identified as
originating from a qualifying "purchaser." Upon such notification, the investor
will receive the lowest applicable sales charge. Discounts may be modified or
terminated at any time.
Each Fund's Class A shares may also be purchased at the reduced sales charge
based on shares currently owned by the investor (excluding [Class A] shares of
Composite Cash Management Company Money Market Fund, Composite Cash Management
Company Tax-Exempt Fund and California Money Fund (a series of The [Sierra]
Trust Funds), unless exchanged from another Composite Fund). The sales charge
reduction is determined by adding the value of all Composite Fund Class A shares
(at maximum offering price) and Class B shares (at net asset value) to the
amount of the Fund's shares being purchased.
Letter of Intent: This Letter provides for a price adjustment depending upon the
actual amount purchased within a 13-month period. If total investments under the
Letter exceed the intended amount and thereby qualify for a lower initial sales
charge, a retroactive price adjustment is made and the difference is used to
purchase additional shares. A shareholder may include the value of all of Class
A shares (at maximum offering price) and Class B shares (at net asset value)
held by such shareholder in Composite Funds (excluding Composite Cash Management
Company Money Market Fund, Composite Cash Management Company Tax-Exempt Fund and
California Money Fund (a series of The [Sierra] Trust Funds), unless exchanged
from another Composite Fund) that were held on the effective date of the Letter
of Intent as an "accumulation credit" toward completion of the Letter.
The Letter of Intent, which imposes no obligation to purchase or sell additional
shares, provides that 5% of the amount of the intended purchase will be held in
escrow (in the form of shares) pending completion of the Letter.
Certificates
Ordinarily certificates for shares purchased will not be issued unless requested
by the investor. There is no charge for such issuance.
REDEMPTION OF SHARES
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<PAGE>
When the Fund or Transfer Agent receives: 1) a written request in proper form,
for redemption of shares, and 2) the return of any issued certificates for
shares being redeemed, a check for payment of shares will normally be sent the
next business day, and no later than seven business days, except as indicated
below. If the account is pre-authorized for telephone transfer, payment may be
made to a designated bank account or broker, providing such accounts are
identically registered. Telephone redemptions may also be directed to the
shareholder's address of record. No wire fee will be charged for transfers to
Washington Mutual Bank [Great Western] or Seafirst Bank. There is a $10.00
transmittal wire fee (which is subject to change) to wire to all other banks.
This fee will be subtracted from the account balance prior to making the
transfer. You should be aware that certain banks also charge a receiving wire
fee which is beyond the control of the Transfer Agent.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority must be submitted before the request will be
accepted.
Shares tendered for redemption will be redeemed at the net asset value next
determined less any applicable contingent deferred sales charge as described in
the Prospectus under "How to Buy Shares." The amount received may be more or
less than the cost of the shares, depending on fluctuations in the market value
of securities owned by the Fund. If the shares have been purchased recently,
this redemption payment may be delayed until the Transfer Agent is reasonably
satisfied that the instrument used in the purchase (e.g., a check) has been
collected, which may take up to 14 days.
As discussed in the prospectus, the [Class A,] Class B [and Class S] contingent
deferred sales charge may be waived under certain circumstances. In addition to
the specific cases outlined in the Prospectus, the charge may be waived for any
total or partial redemption in connection with a lump-sum or other distribution
from an Individual Retirement Account ("IRA"), a custodial account maintained
pursuant to Section 403(b)(7) of the Internal Revenue Code of 1986, as amended
("IRC") or a qualified pension or profit sharing plan ("Retirement Plans")
following retirement or, in the case of an IRA or Keogh Plan or custodial
account pursuant to IRC section 403(b)(7), after attaining age 59 1/2. The
charge also may be waived on any redemption which results from a tax-free return
of an excess contribution pursuant to section 408(d)(4) or (5) of the IRC, the
return of excess deferral amounts pursuant to IRC section 401(k)(8) or
402(g)(2), or from the death or disability of the employee. In summary, the CDSC
may be waived on redemptions of shares which constitute Retirement Plan
distributions which are permitted to be made without penalty pursuant to the
IRC, other than tax-free rollovers or transfers of assets.
EXCHANGE PRIVILEGE
Shareholders may exchange shares of each Fund for the same class of shares in
any other Composite Fund. In addition Class B shares may be exchanged for Class
S shares, and Class S shares may be exchanged for Class B shares of [Sierre]
Asset Management Portfolios. A brief discussion of such privileges is in the
Prospectus under "Exchanges for other Composite Funds." Exchanges will be made
at the respective net asset
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<PAGE>
values in effect on the date of such exchange. Shares previously subject to an
initial sales charge may be exchanged without incurring any additional initial
or contingent deferred sales charge. Any gains or losses realized on an exchange
should be recognized for federal income tax purposes, as required. This
privilege is not an option or right to purchase securities but is a revocable
privilege permitted under the present policies of each of the Funds. This
privilege is not available in any state or other jurisdiction where the shares
of the fund into which the transfer is to be made are not available for sale, or
when the value of the shares presented for exchange is less than the minimum
dollar purchase required by the appropriate prospectus. Each Fund reserves the
right to terminate or end the privilege of any shareholder who attempts to use
the privilege to take advantage of short-term swings in the market.
An investor may exchange some or all of his shares in a Fund for the same class
of any other Composite Fund. These currently include:
Composite Funds
I. Composite Bond & Stock Fund: primary objective is continuity of income and
conservation of capital with long-term growth a secondary objective.
II. Composite Growth & Income Fund: primary objective is long-term growth of
principal with current income a secondary objective.
III. Composite Northwest Fund: designed to provide long-term growth of capital
by investing in a broadly diversified portfolio of common stocks selected
from companies located or doing business in the Northwest.
IV. Composite U.S. Government Securities Fund: primary objective is to provide
a high level of current income, consistent with safety and liquidity, by
investing in U.S. government-backed securities.
V. Composite Income Fund: primary objective is current income with
preservation of principal a secondary consideration.
VI. Composite Tax-Exempt Bond Fund: primary objective is as high a level of
current income exempt from federal income taxes as is consistent with
prudent investment risk and protection of capital. (Not allowed for IRAs)
VII. Composite Money Market Fund: invests in high grades of money market
instruments for maximum current income, while preserving capital and
allowing liquidity.
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VIII. Composite Tax-Exempt Money Market Fund: invests in high-quality, short-
term municipal obligations for maximum current income exempt from federal
income tax while preserving capital and allowing liquidity. (Not allowed
in IRAs)
IX. Sierra Asset Management Portfolios: a group of five asset allocation funds
that invest within specified ranges, in shares of other Composite Funds.
X. Sierra Prime Income Fund ("SPIF"): primary objective is to provide a high
level of current income, consistent with preservation of capital. The Fund
will seek to achieve its objective by investing in a professionally
managed portfolio of interests in floating or variable rate senior loans
made primarily to U.S. corporations, partnerships and other entities.
XI. Sierra Short Term High Quality Bond: designed to provide as high a level
of current income as is consistent with prudent investment management and
stability of principal.
XII. Sierra Growth Fund: primary objective is long-term capital appreciation
through investing primarily in common stock of U.S., multinational and
foreign companies of all sizes that offer potential for growth.
XIII. Sierra Emerging Growth Fund: designed for long-term capital appreciation
by investing primarily in equity securities.
XIV. Sierra International Growth Fund: designed for long-term capital
appreciation by investing primarily in equity securities of foreign
issuers.
XV. Sierra California Municipal Fund: primary objective is to provide as high
a level of current income that is excluded from gross income for federal
income tax purposes and is exempt from California State personal income
tax as is consistent with prudent investment management and preservation
of capital.
XVI. Sierra California Insured Intermediate Municipal Fund: designed to provide
California investors with as high a level of current income exempt from
federal and California State income tax as is consistent with prudent
investment management and preservation of capital.
XVII. Sierra California Money Fund: designed to maximize current income that is
excluded from gross income for federal tax purposes and is exempt from
California State personal income taxation, consistent with safety of
principal and maintenance of liquidity.
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XVIII. Sierra Florida Insured Municipal Fund: primary objective is to seek as
high a level of current income, exempt from federal income tax, as is
consistent with the prudent investment management and preservation of
capital, and to offer shareholders the opportunity to own shares the
value of which is exempt from Florida intangible personal property tax.
XIX. Sierra Target Maturity 2002 Fund: designed to provide as high a level of
return by December 31, 2002 as is consistent with preservation of capital
at the end of the target maturity year and, therefore, current income
consistent with creditworthiness of the U.S. Treasury securities.
SERVICES PROVIDED BY THE FUNDS
Systematic Withdrawal Plan
As described in the Prospectus, each Fund offers a Systematic Withdrawal Plan.
All dividends and distributions on shares owned by shareholders participating in
this plan are reinvested in additional shares. Since withdrawal payments
represent the proceeds from sales of shares, any gain or loss on such
redemptions must be reported for tax purposes. In each case, shares will be
redeemed at the close of business on or about the 25th day of each month
preceding payment, and payments will be mailed within three business days
thereafter.
The Systematic Withdrawal Plan may involve the use of principal and is not a
guaranteed annuity. Payments under such a plan do not represent income or a
return on investment but instead are made from the redemption of Fund shares.
Naturally, withdrawals that continually exceed reinvested dividend income and
capital gains will eventually exhaust the account.
Class B [or Class S] shareholders who establish a Systematic Withdrawal Plan may
make annual redemptions of up to 12% of the value of the account, measured at
the time the plan is established, without paying a contingent deferred sales
charge.
A Systematic Withdrawal Plan may be terminated at any time by directing a
written request to the Trust or the Transfer Agent. Upon termination, all future
dividends and capital gain distributions will continue to be reinvested in
additional shares unless a shareholder requests otherwise.
TAX-SHELTERED RETIREMENT PLANS (U.S. Government Securities and Income)
As described in the Prospectus, shares of U.S. Government Securities and
Income may be purchased as an investment medium for various tax-sheltered
retirement plans. The amounts of contributions to such plans are generally
limited by the Internal Revenue Code. Each of these plans involves a long-term
commitment of assets, and participants may be subject to possible
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regulatory penalties for excess contributions, premature distributions, or for
insufficient distributions after age 70 1/2.
Qualified Retirement Plans
Self-employed individuals (as sole proprietors or partnerships) or corporations
may wish to purchase Fund shares in a retirement plan. Investors may obtain
information regarding these plans by contacting an investment representative or
the Trust.
Individual Retirement Accounts (IRAs)
IRA contributions are invested when received. However, individuals establishing
a new IRA plan may rescind their plan within seven days. In the event of such
termination, their entire purchase price will be refunded by the Distributor
provided they notify the Distributor of their desire to rescind the purchase.
Termination during the seven-day period through regular redemption rather than
through rescission will result in adverse tax consequences. Internal Revenue
Service regulations prohibit revocation of rollover contributions. Any losses
derived through rescission will be absorbed by the Distributor.
Persons who request information regarding IRA plans will be provided with
application forms and information regarding eligibility and permissible
contributions.
IRA Custody Agreement and Service Charges
The IRA plan provides that the Distributor will furnish custodial services
either as agent for Washington Mutual Bank or as the named custodian. There are
set annual fees for IRA plans per participant unless made under an employer-
sponsored plan, in which case the custodial fee is negotiable. If custodial fees
are not paid annually by separate check, shares will automatically be liquidated
to cover such fees.
Unless participants elect otherwise, any capital gain distributions and income
dividends are reinvested on the ex-dividend date in full and fractional shares
of the Fund at net asset value.
IRA Bonuses
"IRA Bonuses" may periodically be credited to IRA accounts for contributions,
transfers and/or rollovers. Payments will be made at a uniform rate determined
by the Distributor or its affiliates and will be based on the value of the
rollovers and/or transfers. IRA Bonuses are not paid by the applicable Fund.
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES
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Each Fund intends to continue to conduct its business and maintain the necessary
diversification of assets and source of income requirements to qualify as a
diversified management investment company under the Internal Revenue Code of
1986, as amended (the "Code"). Each Fund so qualified during the 1997 fiscal
year. As a result, under Subchapter M of the Code, each Fund is accorded conduit
or "pass through" treatment for federal income tax purposes during each year in
which it (i) derives at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans, and gains from the sale of
stock, securities and Foreign currencies, or other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
(ii) distributes at least 90% of the sum of its taxable net investment income,
its net tax-exempt income, and the excess, if any of net short-term capital
gains over net long-term capital losses for such year; and (iii) diversifies its
holdings so that, at the end of each fiscal quarter, at least 50% of the market
value of the Fund's assets is represented by cash and cash items, U.S.
government securities, securities of other regulated investment companies, and
other securities limited in respect of any one issuer to a value not greater
than 5% of the value of the Fund's total assets and to not more than 10% of the
outstanding voting securities of such issuer, and not more than 25% of the value
of its assets is invested in the securities (other than those of the U.S.
government or other regulated investment companies) of any one issuer or of two
or more issuers which the Fund controls and which are engaged in the same,
similar or related trades or businesses. In addition, until the start of a
Fund's first tax year beginning after August 5, 1997, each Fund must derive less
than 30% of its gross income from the sale or other disposition of certain
assets (including stock or securities and certain options, futures contracts,
forward contracts and foreign currencies) held for less than three months in
order to qualify as a regulated investment company and be accorded "pass
through" treatment. Furthermore, if each Fund distributes 98% of its ordinary
income and capital gain net income for each calendar year, plus any retained
amount from the prior year, it will not be subject to excise tax on
undistributed amounts. Each Fund intends to distribute such amounts as necessary
to avoid federal income and excise taxes.
Net realized capital gains represent the total profit from sales of securities
minus total losses from sales of securities, including losses carried forward
from prior years. Pursuant to the Taxpayer Relief Act of 1997, two different tax
rates apply to net capital gains (that is, the excess of net gains from capital
assets held for more than one year over net losses from capital assets held for
more than one year) distributed to shareholders. One rate (generally 28%)
applies to the gain on capilal assets held for more than one year but not more.
Because long-term capital gain distributions reduce the value of the shares,
losses may occur upon subsequent sale. Special holding period requirements may
make the losses long-term rather than short-term under the Code.
Advice as to the tax status of each year's dividends and distributions will be
mailed annually to each shareholder. Shareholders are urged to consult their own
tax advisors regarding specific questions about federal, state and local taxes.
Shareholders not subject to tax on their income will not be required to pay tax
on amounts distributed to them.
Income dividends and capital gain distributions recorded and made shortly after
a purchase of shares by an investor will have the effect of reducing the net
asset value per share by the per share amount of the distribution. They are,
nevertheless, subject to income taxes despite the fact that this is, in effect,
a return of capital.
INVESTMENT PRACTICES
Tax-Exempt
Congressional legislation allows income received by the Fund which is excludable
from gross income under the Code to retain its status as exempt from federal
income tax when distributed to Fund shareholders as exempt-interest dividends.
This allowance is based on the Fund holding 50% of the value of its total assets
in obligations the interest on which is exempt from federal income tax, at each
quarter end of its fiscal year. Exempt-interest dividends, such as those
deriving from interest earned by the Fund on municipal bonds, is not includable
by shareholders in their respective gross incomes for federal income tax
purposes. Net interest income received by the Fund from other obligations (e.g.,
certificates of deposit, commercial paper,
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and obligations of the United States government, its agencies or
instrumentalities) and net short-term capital gains realized by the Fund, if
any, will be taxable to shareholders as ordinary income. Section 265 of the Code
in effect provides that interest on indebtedness (and associated expenses) used
to purchase or carry exempt interest obligations is not deductible. In addition,
interest on indebtedness incurred or continued to purchase or carry shares of a
fund which distributes exempt-interest dividends is not deductible.
Interest on certain "private activity" bonds (referred to as "qualified bonds"
in the Code) is subject to the federal alternative minimum tax ("AMT"), although
the interest continues to be excludable from gross income for other purposes.
Interest from private activity municipal obligations is a tax preference item
for the purposes of determining whether a taxpayer is subject to AMT and the
amount of AMT tax to be paid, if any. Private activity obligations issued after
August 7, 1986, to benefit a private or industrial user or to finance a private
facility are affected by this rule. In addition, exempt-interest dividends
attributable to interest received on certain private activity obligations and
certain industrial development bonds will not be tax-exempt to any shareholders
who are "substantial users" of the facilities financed by such obligations or
bonds or who are "related persons" to such substantial users. It is the current
position of the staff of the Securities and Exchange Commission that income from
municipal obligations that is a preference item for purposes of the AMT is not
deemed to be "tax-exempt." Under this position, at least 80% of the funds'
income distributions would have to be exempt from the AMT as well as exempt from
federal taxes.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal bonds. It can be expected that similar proposals may be
introduced in the future. If such a proposal were enacted, the availability of
municipal bonds for investment by the Fund and the value of the Fund's portfolio
would be affected. Additionally, the Fund would re-evaluate its investment
objective and policies and consider changes in the structure of the Fund.
State and Local Tax Aspects
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. The laws of the several state and local taxing
authorities vary with respect to the taxation of such interest income and each
holder of shares of the Fund is advised to consult his or her own tax advisor in
that regard. Upon request, the Fund will report the state-by-state percentages
of federally tax-exempt interest received during the preceding year.
Government and Income
Under the Internal Revenue Code, dividends from net investment income (including
realized net short-term capital gains, if any) are taxable to Fund investors as
dividend income. Since the net investment income of these two Funds is normally
derived from interest income, not dividends from domestic corporations, these
Funds' dividends are generally not eligible for the dividends received deduction
for corporate shareholders owning shares of either of these Funds.
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For federal tax purposes, carryovers of realized loss on investments of
Government and Income may be applied against capital gains realized in future
years. This has the effect of reducing capital gain distributions the Funds may
otherwise be required to make.
All Funds
The Funds' management aims to achieve these objectives through the use of a
flexible investment policy. Management attempts to anticipate market conditions
and places emphasis on economic changes. Portfolio investments are adjusted in
accordance with management's evaluation of changing market risks. Thus, the
relative proportion of various types of securities held may vary significantly.
Government
The investment objectives of the Fund are to seek as high a level of current
income as is considered consistent with safety and liquidity. It is a
fundamental policy of the Fund to invest in the following securities:
1. Obligations issued or guaranteed by the full faith and credit of the United
States government: U.S. government obligations are issued by the Treasury
and include bills, certificates of indebtedness, notes, bonds, and
obligations secured by the full faith and credit of the U.S. government
issued by agencies including, but not limited to, the Small Business
Administration, the Farmers Home Administration, the Federal Deposit
Insurance Corporation, the D.C. Armory Board, the Export Import Bank, the
Federal Housing Authority, the General Services Administration, the
Washington Metropolitan Transit Authority, the Department of Housing and
Urban Development, and the Private Export Funding Corporation.
2. Government National Mortgage Association ("GNMA") certificates of the
modified pass-through type: these GNMA certificates are debt securities
issued by a mortgage banker or other mortgagee and represent an interest in
one or a pool of mortgages insured by the Federal Housing Administration or
the Farmers Home Administration or guaranteed by the Veterans
Administration. GNMA guarantees the timely payment of monthly installments
of principal and interest on modified pass-through certificates at the time
such payments are due, whether or not such amounts are collected by the
issuer of these certificates on the underlying mortgages. (The Fund does
not propose to invest in GNMA certificates of the straight pass-through
type in which the payment of principal and interest on a timely basis is
not guaranteed.) The Fund may purchase GNMAs on an immediate cash delivery
basis or on a when-issued/future delivery basis. GNMAs and forward
commitments are further discussed in the Fund's prospectus.
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3. Collateralized Mortgage Obligations (CMOs) and Real Estate Mortgage
Investment Conduits (REMICs) owned by the Fund represent ownership in
underlying GNMA certificates. They differ from pass-through securities in
that principal and interest from the underlying mortgages is made
sequentially rather than pro-rata. Generally, there are multiple classes of
ownership providing for successively longer expected average maturities.
CMOs and REMICs may be used to manage prepayment risk.
The Fund will adjust its portfolio as considered advisable in view of prevailing
or anticipated market conditions and the Fund's investment objective.
Accordingly, the Fund may sell portfolio securities in anticipation of a rise in
interest rates and anticipation of a decline in interest rates (see Brokerage
Allocations and Portfolio Transactions). The portfolio maturity should
approximate 7 to 12 years under normal circumstances.
Income
As discussed in the prospectus, the Fund may invest in debt and convertible debt
securities (payable in U.S. funds) which have a rating within the four highest
grades as determined by Standard & Poor's (AAA, AA, A, or BBB) or Moody's
Investors Service, Inc. (Aaa, Aa, A or Baa). Under present commercial bank
regulations, bonds rated in these categories generally are regarded as eligible
for bank investment. Securities rated BBB or Baa may have speculative
characteristics. Up to 20% of the Fund's total assets may be invested in debt
securities, convertible debt securities, preferred stocks, and convertible
preferred stocks which are not rated within the four highest grades by Standard
& Poor's or Moody's. The Fund may invest in issues rated CCC (Standard & Poor's)
or Caa (Moody's) or better, or non-rated obligations which the Adviser believes
to be of comparable quality. This practice may involve higher risks, but the
Adviser will only use such practices if it believes the income and yield is
sufficient to justify such risks. See Appendix B for a detailed description of
these ratings.
Although no more than 20% of the Fund's total assets may be invested in "high-
yield" securities (i.e., not rated among the four highest grades and sometimes
referred to as "junk" bonds), these securities, whether rated or unrated, may be
subject to greater market fluctuations and risks of loss of income and principal
than the lower yielding, higher-rated, fixed-income securities which comprise
most of the Fund's portfolio. 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 creditworthiness and potential for insolvency during periods of
rising interest rates and economic downturn.
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The Fund will not directly purchase common stocks. However, it may retain up to
10% of the value of its total assets in common stocks acquired either by
conversion of fixed-income securities or by the exercise of warrants or rights
attached thereto. A percentage restriction on investment or utilization of
assets for the Fund is adhered to at the time the investment is made. A later
change in percentage resulting from changing values or a change in any rating of
a portfolio security will not be considered a violation.
The Fund considers electric utilities, electric and gas utilities, gas
utilities, and telephone utilities to be separate industries and may at times
invest more than 25% of its assets in utilities as a whole. In view of such
possible concentration in these industries, an investment in the Fund should be
made with an understanding of their characteristics and the risks which such an
investment may entail. General problems of the utility industries include the
difficulty in obtaining an adequate return on invested capital, in spite of
frequent increases in rates which have been granted by the public service
commissions having jurisdiction, the difficulty in financing large construction
programs during an inflationary period, the restrictions on operations and
considerations, the difficulty in obtaining fuel from electric generation at
reasonable prices, the difficulty in obtaining natural gas for resale and the
effects of energy conservation.
Federal, state and municipal governmental authorities may, from time to time,
review existing and impose additional regulations governing the licensing,
construction and operation of nuclear power plants. Any delays in the licensing,
construction and operation of nuclear power plants or the suspension of
operations of such plants which have been or are being financed by proceeds of
certain obligations held in the portfolio may affect the payment of interest on
or the repayment of principal amount of such obligations. The Fund is unable to
predict the ultimate form any such regulations may take or the impact such
regulations may have on the obligations of the portfolio.
The Adviser believes that in many instances foreign securities provide a higher
yield than securities of domestic issuers with similar maturities. Therefore,
such securities should enhance the Adviser's ability to fulfill the investment
objective of "providing a high level of current income." Foreign investments
generally, however, have risk elements which exceed those of comparable domestic
securities. Among these risk elements are potentially reduced domestic
marketability of such securities, the lower reserve requirements 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 taxes, less
government supervision of issuers, difficulty in enforcing contractual
obligations, and lack of uniform accounting standards. All trading activities
will be conducted on U.S. securities markets. The Fund will purchase foreign
securities only when the Adviser feels incremental returns from the same are
sufficient to justify assuming these increased risks. In all cases, foreign
investments will be payable in U.S. dollars.
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Under present regulatory policies, including those of the board of governors of
the Federal Reserve System and the Securities and Exchange Commission, the Fund
may lend its portfolio securities to member firms of the New York Stock
Exchange. Any such loans would be required to be secured continuously by
collateral in cash or cash equivalents maintained on a current basis at an
amount at least equal to the market value of the securities loaned. The Fund
would have the right to call a loan and obtain the securities loaned at any time
on five days' notice. During the existence of a loan, the Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned and would also receive the interest on investment of the
collateral. The Fund would not have the right to vote the securities during the
existence of such a loan but would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or withholding
of consent on a material matter affecting the investment. As with other
extensions 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.
However, any such loans would be made only to firms deemed by the Fund's
management to be of good standing, and only when, in its judgment, the
consideration which could be earned currently from such a loan would justify the
attendant risk.
No such loans are in existence at the present time. If, in the future, the
management of the Fund determines to make securities loans, it is intended that
the value of portfolio securities loaned would not exceed 50% of total assets.
In addition, it is intended that the 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, would not exceed in aggregate 10% of the
Fund's annual gross income (without offset for realized capital losses) unless
counsel for the Fund determines that such amounts are qualifying income under
federal income tax provisions applicable to regulated investment companies.
Tax-Exempt
In seeking its objectives, the Fund will, under normal market conditions, invest
substantially all (at least 80%) of its portfolio 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, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("municipal bonds" or "tax-exempt securities"). As a defensive measure during
times of adverse market conditions, up to 50% of the Fund's portfolio may be
invested in short-term investments described in the Prospectus.
The Fund may invest no more than 10% of its total assets in other investment
companies which invest in tax-exempt securities. No more than 5% of the Fund's
total assets may be invested in a single investment company nor may the Fund
purchase more than 3% of the total voting securities of a single investment
company. The Adviser will reduce its advisory fees on such investments to offset
management fees paid to the other investment company.
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The foregoing restrictions and other limitations discussed herein will apply
only at the time of purchase of securities and will not be considered violated
unless an excess occurs or exists immediately after and as a result of an
acquisition of securities.
In the event the Fund acquires illiquid assets as a result of the exercise of a
security interest relating to municipal bonds, the assets will be disposed of as
promptly as possible.
In addition to these policies, each Fund is subject to investment restrictions
which cannot be changed without approval of a majority of outstanding shares.
These restrictions are discussed under "Investment Restrictions." There are no
significant investment policies that can be changed without shareholder
approval.
In pursuit of the Funds' investment objectives, they may engage in repurchase
agreement transactions. Under the terms of a typical repurchase agreement, a
Fund would acquire an underlying debt obligation for a relatively short period,
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. Under each repurchase agreement, the selling
institution will be required to maintain the value of the securities subject to
the repurchase agreement at not less than 102% of their repurchase price,
including accrued interest earned on the underlying securities. Repurchase
agreements could involve certain risks in the event of default or insolvency of
the other party, including possible delays or restrictions upon a Fund's ability
to dispose of the underlying securities. The Adviser, acting under the
supervision of the Boards of Directors, reviews the creditworthiness of those
banks and dealers with which the Funds enter into repurchase agreements to
evaluate these risks, and monitors on an ongoing basis the value of the
securities subject to repurchase agreements to ensure that the collateral is
maintained at the required level. To limit risk, repurchase agreements maturing
in more than seven (7) days will not exceed 10% of the total assets of the Fund.
Municipal Bonds
Municipal bonds include obligations issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, housing, hospitals, mass transportation, schools, streets
and water and sewer works. Other public purposes for which municipal bonds may
be issued include the refunding of outstanding obligations, obtaining funds for
general operating expenses and the obtaining of funds to loan to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide privately operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, port or parking
facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity for sewage or solid waste
disposal. Such obligations are included within the term municipal bonds if the
interest paid thereon qualifies as exempt from federal income tax. Other types
of industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of
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privately operated industrial or commercial facilities, may constitute municipal
bonds, although the current federal tax laws place substantial limitations on
the size of such issues.
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 faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source. Industrial development bonds
which are municipal bonds are in most cases revenue bonds and do not generally
constitute the pledge of the credit of the issuer of such bonds. There are, of
course, variations in the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors.
The yields on municipal bonds are dependent on a variety of factors, including
general money market conditions, general conditions of the municipal bond
market, size of a particular offering, the maturity of the obligation and rating
of the issue. The ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P") represent their opinions as the quality of the
municipal bonds which they undertake to rate. It should be emphasized, however,
that ratings are general and are not absolute standards of quality.
Consequently, municipal bonds with the same maturity, coupon and rating may have
different yields while bonds of the same maturity and coupon with different
ratings may have the same yield. See Appendix B for a detailed description of
these security ratings.
Only under exceptional circumstances would the Fund invest up to 25% of its
total assets in municipal obligations rated from Ba to Caa (Moody's) or BB to
CCC (Standard & Poor's). Obligations which carry these ratings are considered
speculative with respect to their capacity to pay interest and repay principal,
the danger of default may also be present. Such debt instruments may have some
quality and protective elements, but they are subject to major risk exposures
under adverse conditions. The Adviser currently has no intention to purchase
obligations of this nature.
The commercial paper ratings of A-1 by Standard & Poor's and P-1 Moody's are the
highest commercial paper ratings of the respective agencies. The issuer's
earnings, quality of long-term debt, management and industry position are among
the factors considered in assigning such ratings. See Appendix B for a detailed
description of these security ratings.
Subsequent to its purchase by the Fund, an issue of municipal bonds or other
investments may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event requires the elimination of
such obligations from the Fund's portfolio, but the Adviser will consider such
an event in its determination of whether the Fund should continue to hold such
obligation in its portfolio. To the extent that the ratings accorded by Standard
& Poor's or Moody's for municipal bonds or other investments may change as a
result of changes in such organizations, or changes in their rating systems, the
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<PAGE>
Fund will attempt to use comparable rating as standards for its investments in
accordance with the investment policies contained herein.
INVESTMENT RESTRICTIONS
While many decisions of the Adviser depend on flexibility, there are several
principles so fundamental to each Fund's philosophy that neither they, nor the
investment objective, may be changed without a vote of a majority of the
outstanding shares of that Fund.
Each Fund may not:
. invest more than 5%* of its total assets in any single issuer other than
U.S. government securities, except that up to 25% of a Fund's assets may be
invested without regard to this 5% limitation;
. acquire more than 10%* of the voting securities of any one company;
. invest in any company for the purpose of management or exercising control;
. invest in real estate or commodities;
. invest in oil, gas or other mineral leases;
. invest in securities restricted under federal securities laws;
. invest more than 20%* of its assets in forward commitments;
. invest more than 25%* of its assets in any single industry;**
. invest more than 15%* of its net assets in illiquid securities;
. buy foreign securities not payable in U.S. dollars;
. buy securities on margin, mortgage or pledge its securities, or engage in
"short" sales;
. invest more than 5%* of its net assets in warrants including not more than
2%* of such net assets in warrants that are not listed on either the New
York Stock Exchange or American Stock Exchange; however, warrants acquired
in units or attached to securities may be deemed to be without value for
the purpose of this restriction;
. act as underwriter of securities issued by others;
. borrow money for investment purposes (it may borrow up to 5% of its total
assets for emergency, non-investment purposes);
. lend money (except for the execution of repurchase agreements);
. buy or sell put or call options;
. issue senior securities.
Government may not:
. invest less than 80%* of its assets in obligations guaranteed by the U.S.
government or in repurchase agreements or collateralized mortgage
obligations secured by these obligations.
Tax-Exempt may not:
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<PAGE>
. buy or hold securities which directors or officers of the Fund or its
Adviser hold more than .50% of the outstanding securities.
Government and Income may not:
. invest in other investment companies (except as part of a merger).
Government and Tax-Exempt may not:
. buy common stocks or other equity securities except that Tax-Exempt may
invest in other investment companies.
* Percentage at the time the investment is made.
** It is a policy of Income to consider Electric Utilities, Electric and Gas
Utilities, Gas Utilities, and Telephone Utilities to be separate industries. The
Fund also considers foreign issues to be a separate industry. It is a policy of
Tax-Exempt to apply this restriction only to its assets in non-municipal bond
holdings, pollution control revenue bonds and industrial development revenue
bonds. These policies may result in increased risk.
Proposed Changes to Investment Restrictions
It is expected that, subject to approval by shareholders, there will be certain
changes in the fundamental investment restrictions to the Funds.
Each Fund would be permitted to:
. invest in securities that have been issued in accordance with the
provisions of Rule 144A.
Government would be permitted to:
. invest in debt securities issued by U.S. government agencies
. invest up to 33 1/3% in dollar rolls.
Income would be permitted to:
. invest up to 35% in below investment grade bonds.
. purchase securities denominated in currencies other that the U.S. Dollar
and receive interest, dividends and sale proceeds in currencies other than
the U.S. Dollar.
. invest in up to 10% of assets in foreign currency transactions, interest
rate futures and real estate investment trusts.
. invest up to 33 1/3% in dollar rolls.
-29-
<PAGE>
Tax-Exempt would be permitted to:
. invest up to 35% in below investment grade or nonrated securities.
. invest in interest rate futures.
PERFORMANCE INFORMATION
Yield
Each Fund's current yield used in advertising is calculated by dividing net
investment income per share (annualized) for a stated 30-day period by the
Fund's maximum offering price (including, in the case of Class A shares, the
4.5% maximum sales charge) at the end of the period. Yields will generally be
lower for Class B shares than Class A shares because of the higher distribution
expenses incurred by Class B shares. Yields will be quoted for each class of
shares in any advertisement presenting the yield of either class.
Interest income for yield purposes is calculated by computing interest income
based on standardized methods applicable to mutual funds. In general, interest
income is reduced on a daily basis with respect to bonds trading at a premium
over par value by a portion of that premium, or increased similarly with respect
to bonds trading at a discount.
Because yield accounting methods differ from the methods used for other
accounting purposes, a Fund's yield may not equal the income paid to your
account or the income reported in the financial statements.
Government
The Fund's yield for the 30 days ended December 31, 1996, was calculated based
on the following formula:
-30-
<PAGE>
<TABLE>
<CAPTION>
Class A Class B
<S> <C> <C>
Yield = 2{((a-b)/cd + 1)6-1} 5.1% 5.08%
Where:
a = interest income earned during the period $ 792,121 $ 16,588
b = expenses accrued during the period $ 110,584 $ 4,403
c = daily average number of shares eligible to receive
dividends during the period 13,287,624 278,242
d = maximum offering price at 12/31/96 $ 10.90 $ 10.46
</TABLE>
-31-
<PAGE>
Income
The Fund's yield for the 30 days ended [December 31, 1996], was calculated based
on the following formula:
<TABLE>
<CAPTION>
Class A Class B
<S> <C> <C>
Yield = 2{((a-b)/cd + 1)6 -1} 5.95% 5.34%
Where:
a = interest income earned during the period $ 514,275 $ 41,626
b = expenses accrued during the period $ 73,041 $ 10,813
c = daily average number of shares eligible to
receive dividends during the period 9,453,739 764,076
d = maximum offering price at [12/31/97] $ 9.53 $ 9.17
</TABLE>
Tax-Exempt
The Fund's yield for the 30 days ended [December 31, 1997], was calculated based
on the following formula:
<TABLE>
<CAPTION>
Class A Class B
<S> <C> <C>
Yield = 2{((a-b)/cd + 1)6 -1} 4.28% 3.56%
Where:
a = interest income earned during the period $ 873,985 $ 21,818
b = expenses accrued during the period $ 122,541 $ 6,821
c = daily average number of shares eligible to
receive dividends during the period 26,029,100 649,655
d = maximum offering price at 12/31/96 $ 8.16 $ 7.83
</TABLE>
Taxable-Equivalent Yield
Taxable-equivalent yield is calculated by dividing the Fund's tax-exempt current
yield by the number one minus a particular income tax rate. For example, the
Class A current yield for the 30 days ended December 31, 1996, would result in a
7.09% taxable-equivalent yield at the 39.6% tax rate according to the following
calculation: 4.28% divided by (1.00 - .396) =7.09%. The Class B taxable-
equivalent yield at the 39.6% tax rate for the 30 days ended December 31, 1995
was 5.89%.
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<PAGE>
From time to time, the Fund may present illustrations of the relationship
between various tax-exempt yields and taxable yields for various tax brackets.
Distribution Rate
Each Fund may quote a distribution rate in sales literature. The distribution
rate is calculated by dividing the actual ordinary income dividends per share
(annualized) over a one-month or twelve-month period by the maximum offering
price at the end of the period. The distribution rates for Government Class A,
Class B [and Class S] shares for the month ended December 31, 1996, were 5.83%
and 5.06%, respectively. The distribution rates for Income Class A and Class B
shares for the month ended December 31, 1997, were 6.28% and 5.56%,
respectively. The distribution rates for Tax-Exempt Class A and Class B shares
for the month ended December 31, 1997, were 4.91% and 4.07%, respectively.
Generally, a Fund's distribution rate reflects amounts of net investment income
actually paid to shareholders while yield reflects the earning power of the
fund's portfolio (net of expenses).
Total Returns
Except as otherwise noted, total returns quoted in advertising include the
effect of applicable sales charges, reinvesting dividends and capital gain
distributions (at net asset value), and any change in net asset value per share
over the period. The following total returns reflect the maximum 4.5% initial
sales charge for Class A shares and the contingent deferred sales charge
appropriate to the period for Class B shares. Class B shares redeemed at the end
of a full year are assessed the following year's contingent deferred sales
charge. Class B returns assume contingent deferred sales charges of 3% for one
year and 1% since March 1994.
Average annual total returns are calculated by determining the change in value
of a hypothetical investment over a stated period of time and then calculating
the annual compounded rate of return that would have produced the same result
had the rate of growth or decline in value been constant over the entire period.
Cumulative total return is the simple change in value of a hypothetical
investment over a stated period of time. The cumulative total return may be
quoted as a percentage or a dollar amount and may be presented numerically or in
a table, graph, or similar illustration.
-33-
<PAGE>
No Class I or Class S shares were outstanding as of [December 31, 1997].
<TABLE>
<CAPTION>
Periods Ended December 31, 1996
1 Year 5 Years 10 years
Average Annual Total Return
<S> <C> <C> <C>
Government, Class A (1.60)% 5.09% 7.24%
Government, Class B (1.31)% 5.57%
Income, Class A (0.64)% 6.47% 7.72%
Income, Class B (0.31)% 6.76%
Tax-Exempt, Class A (1.53)% 5.94% 6.74%
Tax-Exempt, Class B (1.32)% 5.34%*
<CAPTION>
Cumulative Total Return
<S> <C> <C> <C>
Government, Class A (1.60)% 28.18% 101.11%
Government, Class B (1.31)% 16.12%*
Income, Class A (0.64)% 36.83% 110.36%
Income, Class B (0.31)% 19.77%*
Tax-Exempt, Class A (1.53)% 33.43% 91.93%
Tax-Exempt, Class B (1.32)% 15.45%
</TABLE>
* Class B shares' total returns from the commencement of public offering on
March 30, 1994.
The total returns are calculated as follows:
Average annual total return: ERV = P(1+A)/n/
Cumulative total return (as a percentage): T = (ERV-P)/P
Where:
P = a hypothetical initial investment of $1,000
A = average annual total return
T = total return
n = number of years
ERV = ending redeemable value of a $1,000 hypothetical investment
-34-
<PAGE>
Comparative Performance Data
Fund literature may occasionally refer to information about the Fund which is
published by mutual funds rating services. Comparisons to fund performance may
be made to various market, economic or other indices. Industry publications may
also be referred to from time to time.
BROKERAGE ALLOCATIONS AND PORTFOLIO TRANSACTIONS
Under terms of the Investment Management Agreements, Composite Research &
Management Co. acts as agent for each Fund in entering orders with broker-
dealers to execute portfolio transactions and in negotiating commission rates
where applicable. Decisions as to eligible broker-dealers are approved by the
president of the Trust.
In executing portfolio transactions and selecting broker-dealers, the Adviser
shall use its best efforts to seek, on behalf of each Fund, the best overall
terms available. In assessing the best overall terms available for any
transaction, the Adviser may consider all factors it deems relevant, including
the breadth of the market in the security, the price of the security, the size
of the transaction, the timing of the transaction, the reputation, financial
condition, experience and execution capability of a broker-dealer, and the
amount of the commission and the value of any brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934, as amended) provided by a broker-dealer.
The Adviser is authorized to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Fund . This commission may be in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction if the Adviser determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of that particular
transaction or in terms of the overall responsibilities of the Adviser to the
Funds and/or other accounts over which the Adviser exercises investment
discretion. The Adviser may commit to pay commission dollars to brokers or
financial institutions for specific research materials or products that it
considers useful in advising the Funds and/or its other clients. Research
services furnished to the Adviser include, for example, written and electronic
reports analyzing economic and financial characteristics, telephone
conversations between brokerage securities analysts and members of the Adviser's
staff, and personal visits by such analysts, brokerage strategists and
economists to the Adviser's office.
Some of these services are of value to the Adviser in advising clients, although
not all of these services are necessarily useful and of value in managing the
Funds. The management fee paid to the Adviser is not reduced because it receives
those services, even though it might otherwise be required to purchase these
services for cash.
-35-
<PAGE>
The staff of the Securities and Exchange Commission has expressed the view that
the best price and execution of over-the-counter transactions in portfolio
securities may be secured by dealing directly with principal market makers,
thereby avoiding the payment of compensation to another broker. In certain
situations, the Adviser believes that the facilities, expert personnel and
technological systems of a broker often enable the Funds to secure a net price
by dealing with a broker that is as good as or better than the price the Funds
could have received from a principal market maker, even after payment of the
compensation to the broker. The Adviser places its over-the-counter transactions
with principal market makers, but may also deal on a brokerage basis when
utilizing electronic trading networks or as circumstances warrant.
None of the brokers with whom the Funds deal have any interest in the Adviser or
the Distributor. The Distributor did not execute any portfolio orders for the
Funds during the fiscal year, nor did the Distributor or the Adviser receive any
direct or indirect compensation as a result of portfolio transactions of the
Funds. Shares may be sold by brokers who execute portfolio transactions for the
Trust; however, no brokerage fees will be allocated for such sales.
The Funds intend to actively manage the portfolio to take advantage of
anticipated movements in the general level of interest rates and temporary
disparities in the normal yield relationship between two securities. While such
portfolio management may result in the sale of securities held for a short
period of time, it is anticipated that the annual portfolio turnover rate will
not generally exceed 100% (excluding turnover of securities having a maturity of
one year or less).
The net asset value of the shares of an open-end investment fund investing
primarily in fixed-income securities changes as the general level of interest
rates fluctuate. When interest rates decline, the market value of a portfolio
invested in higher yields can be expected to rise. Conversely when interest
rates rise, the market value of a portfolio invested in higher yields can be
expected to decline.
GENERAL INFORMATION
Voting Privileges
Although the Funds are not required to hold annual meetings of their
shareholders, shareholders holding at least 10% of the outstanding shares
entitled to vote have the right to call a meeting to elect or remove Trustees,
or to take other actions as provided in the Agreement and Declaration of
Trust.
Custodian
-36-
<PAGE>
The securities and cash owned by each Fund are held in safekeeping by Investors
Fiduciary Trust Company ("IFTC"), 127 West 10th, Kansas City, MO 64105. IFTC is
a wholly owned subsidiary of State Street Bank. The custodian's responsibilities
include collecting dividends, interest and principal payments on each Fund's
investments.
Independent Public Accountants
The firm of LeMaster & Daniels PLLC, Certified Public Accountants, has been
selected as the independent public accountants of each Fund. LeMaster & Daniels
performs audit services for each Fund including the examinations of the
financial statements included in annual reports to shareholders, which are
incorporated by reference into this statement of additional information.
Portfolio Manager Commentary
In communications with the public, portfolio managers may discuss the economic
outlook for each Fund, which might include a discussion of specific securities
in which the Fund may invest, and/or specific characteristics of each investment
portfolio.
Registration Statement
This statement of additional information and the Prospectus do not contain all
of the information set forth in the registration statements each Fund has filed
with the Securities & Exchange Commission. Complete registration statements may
be obtained from the Securities & Exchange Commission upon payment of the fee
prescribed by the rules and regulations of the Commission.
FINANCIAL STATEMENTS AND REPORTS
Semiannual and annual reports are issued to shareholders. The annual reports
include audited financial statements. The Trusts' annual report to shareholders
dated [December 31, 1996], which is incorporated by reference into this
statement of additional information, may be obtained without charge by
contacting the Trusts.
-37-
<PAGE>
APPENDIX A
SPECIMEN PRICE MAKE-UP SHEET
COMPOSITE U.S. GOVERNMENT SECURITIES FUND
COMPOSITE INCOME FUND
COMPOSITE TAX-EXEMPT FUND
December 31, 1997
<TABLE>
<CAPTION>
GOVERNMENT INCOME TAX-EXEMPT
<S> <C> <C> <C>
Assets $141,639,195 $94,019,168 $212,991,303
Liabilities $ 517,201 $ 239,890 $ 4,119,520
Net Assets $141,121,994 $93,779,278 $208,871,783
Class A Shares
Net Assets $138,159,478 $86,657,040 $203,606,240
Shares Outstanding $ 13,204,217 $ 9,467,260 $ 26,002,410
Net Asset Value Per Share $10.46 $9.15 $7.83
Maximum Offering Price
(Net Asset Value
Per Share / 9425/10000) $10.90 $9.53 $8.16
Class B Shares
Net Assets $ 2,962,516 $ 7,122,238 $ 5,265,543
Shares Outstanding $ 283,151 $ 776,973 $ 672,375
Net Asset Value and
Offering Price Per Share $10.46 $9.17 $7.83
</TABLE>
-38-
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITY RATINGS
Moody's Investors Service, Inc. (Moody's)
Corporate and Municipal Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack out- standing investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
-39-
<PAGE>
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Standard & Poor's (S&P)
Corporate and Municipal Ratings
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only to a small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC, and C is regarded, on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, or economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is
-40-
<PAGE>
not likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy has been filed but debt service payments
are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition of debt service payments are jeopardized.
Commercial Paper
A1 and Prime 1 commercial paper ratings issued by Moody's Investors Services,
Inc. (Moody's) and Standard & Poor's (S&P) are the highest ratings these
corporations issue.
Among factors considered by Moody's in assigning ratings are the following: (1)
evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
maybe inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparation to
meet such obligations.
Commercial paper rated A1 by S&P has the following characteristics: Liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated A
or better. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determine whether the issuer's commercial paper is rated A1, A2 or
A3.
-41-
<PAGE>
ABSENCE OF RATING:
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to quality of the issue. Should no
rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published.
-42-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER _____, 1997
COMPOSITE MONEY MARKET FUND
A CHOICE OF MONEY MARKET FUNDS DESIGNED TO MEET SEVERAL INVESTOR GOALS
601 W. MAIN AVENUE, SUITE 300
Spokane, WA 99201-0613
Telephone: 509-353-3550
Toll free: 800-543-8072
COMPOSITE MONEY MARKET FUND: ("Money Market") is designed to provide maximum
current income while preserving capital and maintaining liquidity. The Fund
pursues this objective through investment in high-quality money market
instruments.
COMPOSITE TAX-EXEMPT MONEY MARKET FUND: ("Tax-Exempt") is designed to provide
maximum current income exempt from federal income tax while preserving capital
and allowing liquidity. The Fund pursues this objective through investment in
high-quality, short-term municipal obligations
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the prospectus (the "Prospectus") of Money Market and
Tax-Exempt (the "Funds"), each a series of The Composite Funds (the "Trust"),
Dated December ___, 1997, which can be obtained without charge by contacting the
Fund at the above address.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
---- ----
<S> <C> <C> <C>
The Fund and its Management Investment Practices
Distribution Services Investment Restrictions
How Shares Are Valued Performance Information
How Shares Can Be Brokerage Allocations and
Purchased Portfolio Transactions
Redemption of Shares General Information
Exchange Privilege Financial Statements and
Services Provided by the Fund Reports
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Tax-Sheltered Retirement Plans APPENDIX A
Dividends, Capital Gain Appendix B
Distributions and Taxes
</TABLE>
THE FUND AND ITS MANAGEMENT
THE INVESTMENT ADVISER
As discussed under "Who We Are" in the Prospectus, the Funds are managed and
investment decisions are made under the supervision of Composite Research &
Management Co. (the "Adviser"). Decisions to buy, sell, or hold a particular
security are made by an investment team of the Adviser, subject to the control
and final direction of the Board of Trustees.
Composite Research & Management Co. is Adviser for the five investment companies
(currently 36 separate portfolios) in the "Composite Funds," namely: The
Composite Funds, Consisting of Composite Bond & Stock Fund, Composite Growth &
Income Fund, Composite Income Fund, Composite Tax-Exempt Bond Fund, Composite
Money Market Fund, Composite Tax-Exempt Money Market Fund, Composite U.S.
Government Securities Fund and Composite Northwest Fund; The [Sierra] Trust
Funds, consisting of Short Term High Quality Bond Fund, Growth Fund, Emerging
Growth Fund, International Growth Fund, California Municipal Fund, California
Insured Intermediate Municipal Fund, California Money Fund, Florida Insured
Municipal Fund and Target Maturity 2002 Fund; [Sierra] Prime Income Fund; and
[Sierra] Asset Management Portfolios, consisting of Capital Growth Portfolio,
Growth Portfolio, Balanced Portfolio, Value Portfolio and Income Portfolio. In
addition, the Advisor serves as investment adviser of [Sierra] Variable Trust,
Consisting of Global Money Fund, Short Term High Quality Bond Fund, U.S.
Governmental Fund, Corporate Income Fund, Growth and Income Fund, Growth Fund,
Emerging Growth Fund, International Growth Fund, Capital Growth Portfolio,
Growth Portfolio, Balanced Portfolio, Value Portfolio and Income Portfolio. The
Adviser also provides investment advice to institutional clients.
INVESTMENT MANAGEMENT SERVICES
Management fees and services performed by the Adviser are discussed under "The
Cost of Good Management" in the Prospectus. The present Investment Management
Agreements (the "Agreements") between each Fund and the Adviser to furnish
suitable office space, research, statistical and investment management services
to each Fund were approved by shareholders. These Agreements continue in effect
from year-to-year provided their continuation is specifically approved at least
annually by the Board of Trustees (including a majority of the Trustees who are
not parties to, OR "Interested persons," as defined in the Investment Company
act of 1940, of parties to, the Agreements) by votes cast in person at a meeting
called for the purpose of voting on such
-2-
<PAGE>
approval; or by vote of a majority of the outstanding shares of each Fund. The
Agreements can be terminated by either party on sixty (60) days' notice, without
penalty, and each provides for automatic termination upon its assignment.
Under the provisions of the Investment Company Act of 1940 and as used elsewhere
in the Prospectus and this Statement of Additional Information, the phrase
"vote of the majority of the outstanding shares of the Fund" means the vote at
any meeting of shareholders of (a) 67% or more of the shares present at such
meeting, if the shareholders of more than 50% of the outstanding shares are
present or represented by proxy; or (b) more than 50% of the outstanding shares,
whichever is less.
In payment for its services, the Adviser receives a monthly fee from the Funds
equal to .45% per annum computed on average daily net assets of The first $1
billion and .40% on such assets in excess of $1 billion. Prior to July 1, 1995,
the fee was .50% of average daily net assets. Fees paid to the Adviser during
the fiscal years ended December 31, 1996, 1995 and 1994 for Money Market were
$916,867, $688,617 and $635,990, Respectively. Fees paid during 1996, 1995 and
1994 for Tax-Exempt were $139,482, $143,292 and $168,779, respectively.
The Agreements require that, should the expenses of the Funds (excluding taxes,
interest, portfolio brokerage and the .75% Class B and Class S Distribution fee)
exceed in any fiscal year 1.5% of the average net assets of the Funds up to $30
million and 1% of average net assets over $30 million, it will reimburse the
Funds for such excess. No reimbursements were required by these Agreements
during 1996, 1995 and 1994.
Under the terms of the Agreements, the Funds are required to pay fees of
Trustees not employed by the Adviser or its affiliates, custodial expenses,
brokerage fees, taxes, auditing and legal expenses, costs of issue, transfer,
registration or redemption of shares for sale, costs relating to disbursement
of dividends, shareholder meetings, shareholder reports and the maintenance of
The Funds' shareholder existence.
The Adviser, Murphey Favre Securities Services, Inc. (the "Transfer Agent"), and
Composite Funds Distributor, Inc. (the "Distributor") jointly agreed to
reimburse Tax-Exempt for a portion of its expenses during 1996, 1995 and 1994.
Such reimbursements and waivers may continue at their discretion. Additionally,
effective September 1, 1995, the Transfer Agent agreed to waive shareholder
servicing fees for accounts below $1,000 and the Distributor reimbursed printing
and postage expenses attributable to these accounts. Money Market's expense
waivers and reimbursements totaled $202,612 during 1996. Amounts waived and
reimbursed to Tax-Exempt for the years ended December 31, 1996, 1995 and 1994
totaled $47,274, $57,104 and $55,629, respectively.
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<PAGE>
Investment decisions for the Funds are made independently of those for other
Composite Funds. However, the Adviser may determine that the same security is
suitable for more than one of the Funds. If more than one of the Funds is
simultaneously engaged in the purchase or sale of the same security, the
transactions are allocated as to price and amount in accordance with a formula
considered to be equitable to each. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as a Fund is concerned. In other cases, however, it is believed that the
ability to participate in volume transactions may provide better executions for
each Fund. It is the opinion of the Board of Trustees that these advantages,
when combined with the personnel and facilities of the Adviser's organization,
outweigh possible disadvantages which may exist from participation in
simultaneous transactions.
The Trust has adopted a code of ethics that is intended to prevent access
persons from conducting personal securities transactions that interfere with
Fund portfolio transactions or otherwise take unfair advantage of their
relationship with the Funds. In general, the personal securities transactions
of individuals with access to information regarding Fund portfolio transactions
must be pre-cleared by the Adviser's Compliance Officer and must not occur when
similar transactions are contemplated by a Fund.
GLASS-STEAGALL
The Glass-Steagall Act, among other things, generally prohibits member banks of
the Federal Reserve System from engaging to any extent in the business of
issuing, underwriting, selling or distributing securities and generally
prohibits management interlocks and affiliations between member banks and
companies engaged in certain activities. In a Statement of Policy dated
September 1, 1982, the Federal Deposit Insurance Corporation concluded that the
investment restrictions of the Glass-Steagall Act do not apply to banks or their
affiliates if the banks are not members of the Federal Reserve System. Neither
Washington Mutual Bank [Great Western nor American Savings Bank] is a member
bank. The Adviser has advised the Fund that, in its view, the Glass-Steagall Act
does not prohibit the activities of the Adviser and that it may perform the
services for the Fund contemplated by the Investment Management Agreements
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations.
TRUSTEES AND OFFICERS OF THE FUNDS
The Board of Trustees is elected by the shareholders of the Trust, including the
Funds. Interim vacancies may be filled by the current Trustees so long as at
least two-thirds were previously elected by shareholders. The Board has
responsibility for the overall management of the Funds, including general
supervision and review of their investment activities. The Trustees, in turn,
elect the officers of the Trust who are responsible for administering the fund's
day-to-day operations. Trustees and officers of the Trust and their business
experience for
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<PAGE>
the past five years are set forth below. Unless otherwise noted, the address of
each officer is 601 W. Main Avenue, Suite 300, Spokane, Washington
99201-0613.
WAYNE L. ATTWOOD, MD
Trustee
2931 S. Howard
Spokane, Washington 99203
Dr. Attwood is a retired doctor of internal medicine and gastroenterology in
Spokane, Washington.
KRISTIANNE BLAKE
Trustee
705 W. 7th, Suite D
Spokane, Washington 99204
Mrs. Blake is president of Kristianne Gates Blake, PS, an accounting services
firm specializing in personal financial planning and tax planning.
*ANNE V. FARRELL
Trustee
425 Pike Street, Suite 510
Seattle, Washington 98101
Mrs. Farrell is president and CEO of The Seattle Foundation (a charitable
foundation). In addition, she serves as a Trustee of Washington Mutual,
Inc.
*MICHAEL K. MURPHY
Trustee
PO Box 3366
Spokane, Washington 99220-3366
Mr. Murphy is Chairman and CEO of CPM Development Corporation (a holding company
which includes Central Pre-Mix Concrete Company). In addition, he serves as a
Trustee of Washington Mutual, Inc.
*WILLIAM G. PAPESH
President and Trustee
Mr. Papesh is president and a Trustee of the Adviser and Transfer Agent, and an
executive vice president and a director of the Distributor.
DANIEL L. PAVELICH
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Trustee
Two Prudential Plaza
180 North Stetson Avenue, Suite 4300
Chicago, Illinois 60601
Mr. Pavelich is Chairman and CEO of BDO Seidman, a leading national accounting
and consulting firm.
JAY ROCKEY
Trustee
2121 - Fifth Avenue
Seattle, Washington 98121
Mr. Rockey is Chairman and CEO of The Rockey Company (a regional public
relations firm).
RICHARD C. YANCEY
Trustee
535 Madison Avenue
New York, New York 10022
Mr. Yancey is senior advisor to Dillon, Read & Co., Inc. (a registered broker-
dealer and investment banking firm), New York, New York.
*These Trustees are "interested persons" of the Funds as that term is defined
in the Investment Company Act of 1940 because they are either affiliated
persons of the Funds, its Adviser, or Distributor.
GENE G. BRANSON
Vice President
601 West Main Avenue
Spokane, Washington 99201
Mr. Branson is a senior vice president and director of the Distributor and the
Transfer Agent and a vice president and director of the Adviser.
MONTE D. CALVIN, CPA
Vice President and Treasurer
Mr. Calvin is an executive vice president of the Transfer Agent and serves as
the chief financial officer of the Fund.
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<PAGE>
JEFFREY L. LUNZER, CPA
Assistant Treasurer
Mr. Lunzer is a vice president of the Transfer Agent.
JOHN T. WEST, CPA
Clerk
Mr. West is a vice president of the Transfer Agent.
The Funds paid no remuneration to any of its officers, including Mr. Papesh
during the year ended December 31, 1996. The Funds and other Composite Funds
paid trustees' fees during the year ended December 31, 1996, in the amounts
indicated below. /(1)/
<TABLE>
<CAPTION>
TOTAL
TRUSTEE MONEY MARKET TAX-EXEMPT COMPLEX/(2)/
<S> <C> <C> <C>
WAYNE L. ATTWOOD, MD $1,265 $1,265 $15,000
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
KRISTIANNE BLAKE $1,265 $1,265 $15,000
EDWIN J. MCWILLIAMS $1,265 $1,265 $15,000
JAY ROCKEY /(3)/ $1,265 $1,265 $15,000
RICHARD C. YANCEY $1,178 $1,178 $14,000
</TABLE>
/(1)/ Amounts shown in the table reflect amount paid by the predecessor by each
series of The Composite Funds. For more information wee "Who we are" in
the prospectus.
/(2)/ Each Trustee serves in the same capacity for each Fund of the other
Composite Funds (five companies) comprising 36 individual investment
portfolios.
/(3)/ Mr. Rockey is Chairman and CEO of THE Rockey Company, a public relations
firm which has received revenue from the Funds and Washington Mutual,
Inc., parent company of the Adviser, TRANSFER AGENT and Distributor,
during the 1996 fiscal year.
As of March 31, 1997, officers, Trustees and their immediate families as a
group owned of record and beneficially 2,598,452 shares of Money Market and
326,223 Shares of Tax-Exempt which in both cases amounted to 1% of the
outstanding shares of the respective Funds. On that date no individual owned
of record or beneficially more than 5% of the outstanding voting securities in
the Funds.
Kristianne Blake, *Anne V. Farrell, *Michael K. Murphy, and Daniel L. Pavelich
serve as members of the Board's audit committee. The committee meets
periodically with the Fund's independent accountants and officers to review
accounting principles used by the Funds and the adequacy of the Funds' internal
controls.
The investment committee performs interim functions for the Board of Trustees
including dividend declaration and portfolio pricing matters. Members are *Anne
V. Farrell, *Michael K. Murphy, and Richard C. Yancey.
The valuation committee is comprised of any two Trustees or officers of the
Trust and one or more portfolio managers, as designated by the Trust chairman,
president or vice president/treasurer. The committee is called upon to value any
security held by the Funds whenever the security cannot otherwise be valued
under the Trust's guidelines for valuation.
Responsibilities of the Board's nominating committee include preparing for and
recommending replacements for any vacancies in the Board and initial review of
policy issues regarding the size, composition, and compensation of the Board.
Members of the nominating committee are Wayne L. Attwood, MD, Daniel L.
Pavelich, and Jay Rockey.
The Board's distribution committee is responsible for reviewing distribution
activities and 12b-1 expenditures to determine that there is a reasonable
likelihood the 12b-1 plan will benefit each
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<PAGE>
Fund and its shareholders. The committee meets at least annually and is
responsible for making recommendations to the Board regarding renewal or changes
to the distribution plan. Committee members are Wayne L. Attwood, MD, Kristianne
Blake, Jay Rockey, and Richard C. Yancey.
*These Trustees are "interested persons" of the Trust as that term is defined in
the Investment Company Act of 1940, because they are either affiliated persons
of the Trust, its Adviser, or Distributor.
DISTRIBUTION SERVICES
12B-1 PLAN
As discussed in the Prospectus under "The Cost of Good Management," the Trustees
have approved a plan for Class A, Class B and Class S shares of each Fund (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940, which
provides that investment companies may pay distribution expenses, directly or
indirectly, according to a plan adopted by the Board of Trustees.
Under the existing Plan, the Fund may reimburse the Distributor for Class A
shareholder servicing expenses, including the cost of printing and distributing
prospectuses (to other than current shareholders), statements of additional
information and other promotional and sales literature, compensation to sales
personnel for their services, and reimbursement to the Distributor for the
direct and indirect cost of furnishing services of its personnel to assist in
the entire shareholder servicing process but excluding general and
administrative expenses.
The annual reimbursement allowed by the Plan and authorized by the Trustees for
such Class A distribution expenses may not exceed .15% of a Fund's average daily
net assets attributable to Class A shares. Distribution expenses incurred in
Money Market in 1996 were .01% of average daily net assets. No distribution
expenses were incurred by the Tax-Exempt. Trustees accepted a proposal by the
Distributor to limit distribution expenses to .07% in Money Market but reserve
the right to increase future expenses to the maximum limit. Money Market
reimbursed the Distributor $20,720 for distribution expenses incurred on behalf
of the Fund during 1996. Of this amount, $8,115 was paid for printing and
$12,605 was for other distribution-related expenses. During 1995 and 1994,
Tax-Exempt reimbursed the Distributor $8,754 and $29,207, respectively.
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,
those plans are characterized by the staff of the Securities and Exchange
Commission as being "compensation" plans -- in contrast to the existing Class A
"reimbursement" plan. The Funds are not liable for any expenses incurred by the
Distributor in excess of the amount of compensation it receives.
Under the Plan, each Fund compensates the Distributor with a distribution fee
at an annual rate of .75% of the Funds' average daily net assets attributable to
Class B and Class S shares and a service fee at an annual rate of .25% of such
assets. During 1996, Money Market and Tax-Exempt compensated the Distributor
$1,270 and $16, respectively, for the sale of Class B shares. During 1995, Money
Market and Tax-Exempt compensated the Distributor $702 and $11, respectively,
for the sale of CLass B shares.
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<PAGE>
Under the Plan, the Distributor will report at least quarterly to the Board of
Trustees the amounts and purposes of all distribution expense payments. The
continuance of the Plan, as required by Rule 12b-1, the selection and nomination
of the Trustees who are not "interested persons," as defined in the Investment
Company act of 1940, of the Trust will be at the discretion of such
disinterested Trustees then in office.
The Plan has been approved unanimously by the Trustees including a majority of
the disinterested Trustees who have no direct or indirect interest in the Plan
("Qualified Trustees"). The Plan will remain in effect for one year, may be
terminated at any time by a vote of a majority of the Disinterested Trustees or
by a vote of a majority of the outstanding voting securities of the applicable
class of the applicable Fund and may be renewed from year to year thereafter
only if approved by a vote of Qualified Trustees.
DISTRIBUTOR
The Distributor purchases shares of each Fund in a continuous offering to fill
orders placed with it by investors and investment dealers. It purchases shares
at net asset value and resells shares at the offering price in accordance with
terms of the Distribution Contract with the Trust. The offering price may
include a sales charge as discussed in the Prospectus under "How to buy shares."
Each Fund receives the entire net asset value of all of its shares sold. The
Distributor or designated dealer retains their appropriate portion of any
initial sales charge. The Distributor pays sales commissions to dealers from its
own resources for Class B and Class S sales and retains contingent deferred
sales charge payments. The Distributor acts in a similar capacity for all other
Composite Funds.
The Distributor has not received any contingent deferred sales charges from the
redemption of Class A shares. During the fiscal year ended December 5, 1996,
the Distributor received contingent deferred sales charge payments of $5,275 and
$0 upon redemption of Class B shares of Money Market and Tax-Exempt,
respectively. No brokerage fees were paid by the Funds to the Distributor during
the year, but the Distributor may act as broker on Fund purchases and sales
should it become a member of a securities exchange.
No Class I or CLass S shares of the Funds were outstanding prior to October 31,
1997.
The Funds bear the cost of registering their shares with federal and state
securities commissions and printing prospectuses and statements of additional
information sent to its existing shareholders. The
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<PAGE>
Distributor pays for information intended for potential shareholders but may
defray some or all of those expenses with revenues received from the Funds under
the Distribution Plan for such expenses applicable to Class A shares.
TRANSFER AGENT
The Transfer Agent furnishes necessary personnel and other transfer agent
services required by each Fund. The Shareholders Service Contract was originally
approved by shareholders.
Money Market paid the sums of $410,863, $268,265 and $259,630, during 1996, 1995
and 1994, respectively, for these services. During the 1996, 1995 and 1994
fiscal years, Tax-Exempt paid $26,696, $32,355 and $37,138, respectively, for
these services.
At the date of this Statement of Additional Information, each Fund's monthly
shareholder servicing fee was $1.85 per account for the first 25,000 accounts,
$1.55 per account thereafter for Class A accounts, $1.95 per account for the
first 25,000 Class B accounts and $1.65 per each Class B account thereafter, [$
] for each Class I account and [$ ] for each Class S account in each Fund. The
transfer agent has agreed to waive its fees for all accounts with a balance of
under $1,000. All requests for transfer of shares should be directed to the
Trust or to the Transfer Agent.
HOW SHARES ARE VALUED
Please see "The value of a single share" in the Prospectus for more information.
(See "Appendix A" for a specimen price make-up sheet).
Management of the Trust has designed procedures which it believes will stabilize
each Fund's net asset value per share for the purposes of distribution,
redemption, and repurchase at a single value of $1.00. In the event that, on any
business day, either Fund's net asset value per share substantially deviates
(exceeds 1/2 of 1 percent) from $1.00, that Fund may (in lieu of reducing the
net asset value below $1.00 per share) apply net income to the extent available
and, if not sufficient, that Fund will reduce the number of shares outstanding
in order to maintain a net asset value per share of $1.00. Investment securities
are valued at cost as adjusted for amortization of premiums and discounts where
applicable. The Board of Trustees regularly and routinely monitors amortized
cost value assigned to these securities to insure that carrying value
approximates market valuation.
HOW SHARES CAN BE PURCHASED
Information concerning the purchase of shares is discussed under "How to buy
shares" in the Prospectus. Shares in each class of the Funds are sold in a
continuous offering at a net asset value of $1.00 per share on any regular
business day. There is no initial sales charge on Class A shares.
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<PAGE>
Class B shares may be subject to a contingent deferred sales charge for shares
purchased by exchange as discussed in the prospectus.
Class I shares are sold exclusively to the various portfolios of [Sierra] Asset
Management Portfolios.
Class B shares may be purchased directly only by investors who, at the time of
the purchase, already maintain a Class S account. Class S shares are sold
without an initial sales charge but are subject to a contingent sales charge if
redeemed within six years of purchase. The current contingent deferred sales
charge is shown in the Prospectus.
Investments made by an agent or fiduciary (such as a bank trust department,
investment adviser, broker or employee benefit or retirement plan) pursuant to a
periodic investment plan may have the minimum purchase requirements on initial
and subsequent investments waived. The funds further intend to waive the minimum
purchase requirements for directors, officers and employees of Washington
Mutual, Inc. and its affiliates (including the Adviser, the Distributor, and the
Transfer Agent ), as well as Trustees and officers of the Trust, or to any
trust, pension, profit-sharing or other benefit plan for such persons. The
foregoing privilege also will be extended to directors, officers and employees
(including their benefit plans), of other companies which enter into selling
arrangements with the Distributor. Persons may also invest in the Trust by
purchasing shares with the assistance of non-affiliated broker-dealers, who may
charge a fee to investors for their service. All investments will be credited to
investors' accounts in full and fractional shares carried to the second decimal
place. The Trust reserves the right to reject any order. Certificates for full
shares will be issued at no cost upon written request only. No certificates will
be issued to accounts having telephone redemption or draft (check) writing
privileges.
REDEMPTION OF SHARES
Investors may withdraw all or any portion of collected funds credited to their
account in the Funds at any time. Such withdrawal constitutes a redemption of
shares which will occur at the net asset value of $1.00 after receipt of the
redemption request at the Trust's office prior to 1:00 p.m. Pacific time as
described below.
DRAFT (CHECK) WITHDRAWAL
Investors may elect to withdraw funds from their account by writing drafts
(similar to checks) on an account established by the Distributor. The
distributor shall have the right to select the bank at which the account will be
maintained. This arrangement does not establish an account for investors with
the depository institution.
Investors must indicate their preference for the draft-writing privilege on the
new account application or other forms required by the Transfer Agent. All
drafts must be signed exactly as the account is registered. Joint registrants
may authorize one registrant to sign.
Upon request, each Fund will provide each investor with forms of drafts which
may be made payable in any amount of $500 or more. Investors using the drafts to
make withdrawals from the account will continue to earn income on the amount of
the draft until the item is presented to the Trust. Processing of these drafts
will be subject to the rules and regulations of the bank maintaining the
account.
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<PAGE>
Draft-writing will constitute instruction and authorization to the Trust, as
agent, to redeem the indicated amounts from the investor's account. All drafts
presented are subject to the approval of the Trust and will not be paid unless
the investor's account has sufficient collected balances. The bank maintaining
the account will not provide immediate cash for drafts presented by investors,
and clearance time may be as much as ten business days. Although other banks
receiving a draft for deposit generally will process it as a regular check, they
also may not provide immediate credit.
There is currently no charge for the maintenance of this draft privilege, but
each Fund reserves the right, at any time and without notice, to impose charges
or to terminate this privilege.
General Redemption Information
Investors may withdraw all or any portion of their account upon written request
[and upon the return of any outstanding stock certificates to the Trust.]
Signatures on the request must correspond with those on the account application
and must be guaranteed by party acceptable to the Trust.
In each of the above cases, sufficient full and fractional shares will be
redeemed to cover the amount of money withdrawn. Accounts registered in the name
of institutions, corporations, and fiduciaries may require additional
documentation prior to any withdrawal. Please contact the Trust if your account
is carried in one of these registration forms.
Investors should be certain that adequate shares and collected balances are in
their account to cover any redemption request. Requests for the withdrawal of
amounts in excess of account balances will be automatically dishonored.
Purchases made by cashier's check, certified funds, or bank wire are available
for immediate redemptions.
The right of redemption may be suspended or the date of payment postponed: (a)
during any period when the New York Stock Exchange is closed (other than
customary weekend and holiday closings); (b) when trading in the markets a
Fund normally utilizes is restricted, or an emergency exists as determined by
the Securities and Exchange Commission so that disposal of the Fund's
investments or determination of its Fund's net asset value is not reasonably
practicable; or (c) for such other periods as the commission by order may permit
to protect the Fund's investors. In the event of suspension of the right to
redeem, investors may withdraw their redemption request or receive payment based
upon the net asset value computed upon the termination of the suspension.
EXCHANGE PRIVILEGE
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<PAGE>
Shareholders may exchange shares of their funds for the same class of shares in
another of Composite fund. In addition, Class B shares may be exchanged for
Class S shares, and Class S shares may be exchanged for Class B shares of
[Sierra] Asset Management Portfolios. A brief discussion of such privileges is
in the Prospectus under "Exchanges for Other Composite Funds." Exchanges will be
made at the respective net asset values in effect on the date of such exchange.
Shares previously subject to an initial sales charge may be exchanged without
incurring any additional initial or contingent deferred sales charge. Exchanged
Class B and Class S shares will continue to be subject to contingent deferred
sales charges according to the schedule applicable to the originally purchased
shares. Sales charges are fully explained in the prospectuses of the applicable
funds. Any gains or losses realized on an exchange should be recognized for
federal income tax purposes, as required. This privilege is not an option or
right to purchase securities but is a revocable privilege permitted under the
present policies of each of the Funds. This privilege is not available in any
state or other jurisdiction where the shares of the fund into which the exchange
is to be made are not available for sale, or when the value of the shares
presented for exchange is less than the minimum dollar purchase required by the
appropriate prospectus.
An investor may exchange some or all of his shares in a Fund for the same class
of any other Composite Funds. These currently include:
COMPOSITE FUNDS
I. Composite Bond & Stock Fund: primary objective is continuity of income and
conservation of capital with long-term growth a secondary objective.
II. Composite Growth & Income Fund: primary objective is long-term growth of
principal with current income a secondary objective.
III. Composite Northwest Fund: designed to provide long-term growth of capital
by investing in a broadly diversified portfolio of common stocks selected
from companies located or doing business in the Northwest.
IV. Composite U.S. Government Securities Funds: primary objective is to provide
a high level of current income, consistent with safety and liquidity, by
investing in U.S. government-backed securities.
V. Composite Income Fund: primary objective is current income with
preservation of principal a secondary consideration.
VI. Composite Tax-Exempt Bond Fund: primary objective is as high a level of
current income exempt from federal income taxes as is consistent with
prudent investment risk and protection of capital. (Not allowed for
IRAs)
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<PAGE>
VII. Composite Money Market Fund: invests in high grades of money market
instruments for maximum current income, while preserving capital and
allowing liquidity.
VIII. Composite Tax-Exempt Money Market Fund: invests in high-quality, short-
term municipal obligations for maximum current income exempt from federal
income tax while preserving capital and allowing liquidity. (Not allowed
in IRAs)
IX. Sierra Asset Management Portfolios: a group of five asset allocation funds
that invest within specified ranges in shares of other Composite
Funds.
X. Sierra Prime Income Fund ("SPIF"): primary objective is to provide a high
level of current income consistent with preservation of capital. The Fund
will seek to achieve its objective by investing in a professionally
managed portfolio of interests in floating or variable rate senior loans
made primarily to U.S. corporations, partnerships and other entities.
XI. Sierra Short Term High Quality Bond: designed to provide as high a level
of current income as is consistent with prudent investment management and
stability of principal.
XII. Sierra Growth Fund: primary objective is long-term capital appreciation
through investing primarily in common stock of U.S., multinational and
foreign companies of all sizes that offer potential for growth.
XIII. Sierra Emerging Growth Fund: designed for long-term capital appreciation
by investing primarily in equity securities.
XIV. Sierra International Growth Fund: designed for long-term capital
appreciation by investing primarily in equity securities of foreign
issuers.
XV. Sierra California Municipal Fund: primary objective is to provide as high
a level of current income that is excluded from gross income for federal
income tax purposes and is exempt from California State personal income
tax as is consistent with prudent investment management and preservation
of capital.
XVI. Sierra California Insured Intermediate Municipal Fund: designed to provide
California investors with as high a level of current income exempt from
federal and California State income tax as is consistent with prudent
investment management and preservation of capital.
XVII. Sierra California Money Fund: designed to maximize current income that is
excluded from gross income for federal tax purposes and is exempt from
California State
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personal income taxation, consistent with safety of principal and
maintenance of liquidity.
XVIII. Sierra Florida Insured Municipal Fund: primary objective is to seek as
high a level of current income, exempt from federal income tax, as is
consistent with the prudent investment management and preservation of
capital, and to offer shareholders the opportunity to own shares the
value of which is exempt from Florida intangible personal property
tax.
XIX. Sierra Target Maturity 2002 Fund: designed to provide as high a level of
return by December 31, 2002 as is consistent with preservation of capital
at the end of the target maturity year and, therefore, current income
consistent with creditworthiness of the U.S. Treasury securities.
SERVICES PROVIDED BY THE FUNDS
SYSTEMATIC WITHDRAWAL PLAN
As described in the Prospectus, each Fund offers a Systematic Withdrawal Plan.
All dividends and distributions on shares owned by shareholders participating in
this plan are reinvested in additional shares. Shares will be redeemed at the
close of business on or about the 25th day of each month preceding payment, and
payments will be mailed within three business days thereafter.
The Systematic Withdrawal Plan may involve the use of principal and is not a
guaranteed annuity. Payments under such a plan do not represent income or a
return on investment but instead are made from the redemption of Fund shares.
Naturally, withdrawals that continually exceed reinvested dividend income will
eventually exhaust the account.
A Systematic Withdrawal Plan may be terminated at any time by directing a
written request to the Trust or the Transfer Agent. Upon termination, all future
dividends and capital gain distributions will continue to be reinvested in
additional shares unless a shareholder requests otherwise.
TAX-SHELTERED RETIREMENT PLANS (MONEY MARKET ONLY)
As described in the Prospectus, shares of Money Market may be purchased as an
investment medium for various tax-sheltered retirement plans. The amounts of
contributions to such plans are generally limited by the Internal Revenue Code.
Each of these plans involves a long-term commitment of assets, and participants
may be subject to possible regulatory penalties for excess contributions,
premature distributions, or insufficient distributions after age 70 1/2.
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QUALIFIED RETIREMENT PLANS
Self-employed individuals (as sole proprietors or partnerships) or corporations
may wish to purchase Fund shares in a retirement plan. Investors may obtain
information regarding these plans by contacting a Representative or the
Trust.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
IRA contributions are invested when received. However, individuals establishing
a new IRA plan may rescind their plan within seven days. In the event of such
termination, their entire purchase price will be refunded by the Distributor
provided they notify the Distributor of their desire to rescind the purchase.
Termination during the seven-day period through regular redemption rather than
through rescission will result in adverse tax consequences. Internal Revenue
Service regulations prohibit revocation of rollover contributions. Any losses
derived through rescission will be absorbed by the Distributor.
Persons who request information regarding IRA plans will be provided with
application forms and information regarding eligibility and permissible
contributions.
IRA CUSTODY AGREEMENT AND SERVICE CHARGES
The IRA plan provides that the Distributor will furnish custodial services
either as agent for Washington Mutual Bank or as the named custodian. There are
set annual fees for IRA plans per participant unless made under an employer-
sponsored plan, in which case the custodial fee is negotiable. If custodial fees
are not paid annually by separate check, shares will automatically be liquidated
to cover such fees.
Unless participants elect otherwise, any capital gain distributions and income
dividends are reinvested on ex-dividend date in full and fractional shares of
the Fund at net asset value.
IRA BONUSES
IRA Bonuses may periodically be credited to IRA accounts for contributions,
transfers and/or rollovers. Payments will be made at a uniform rate determined
by the Distributor or its affiliates and will be based on the value of the
rollovers and/or transfers. IRA Bonuses are not paid by the Fund.
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES
Each Fund intends to continue to conduct its business and maintain the necessary
diversification of assets and source of income requirements to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). Each Fund so qualified during the
-17-
<PAGE>
1997 fiscal year. As a result, under Subchapter M of the Code, each Fund is
accorded conduit or "pass through" treatment for federal income tax purposes
during each year in which it (i) derives at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale of stock, securities and foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; (ii) distributes at least 90% of the sum of its taxable net
investment income, its net tax-exempt income, and the excess, if any, of net
short-term capital gains over net long-term capital losses for such year; and
(iii) diversifies its holding so that, at the end of each fiscal quarter, at
least 50% of the market value of the Fund's assets is represented by cash items,
U.S. government securities, securities of other regulated investment companies,
and other securities limited in respect of any one issuer to a value not greater
than 5% of the value of the Fund's total assets and to not more than 10% of the
outstanding voting securities of such issuer, and not more than 25% of the value
of its assets is invested in the securities (other than those of the U.S.
government or other regulated investment companies) of any one issuer or of two
or more issuers which the Fund controls and which are engaged in the same,
similar or related trades or businesses. In addition, until the start of a
Fund's first tax year beginning after August 5, 1997, each Fund must derive less
than 30% of its gross income from the sale or other disposition of certain
assets (including stock or securities and certain options, futures contracts,
forward contracts and foreign currencies) held for less than three months in
order to qualify as a regulated investment company and be accorded "pass
through" treatment. Furthermore, if each Fund distributes 98% of its ordinary
income and capital gain net income for each calendar year, plus any retained
amount from the prior year, it will not be subject to excise tax on
undistributed amounts. Each Fund intends to distribute such amounts as necessary
to avoid federal income and excise taxes.
MONEY MARKET
Under the Code, dividends from net investment income (including realized net
short-term capital gains, if any) are taxable to the Funds' investors as
dividend income. Since the Fund's net investment income is derived from interest
income, not dividends from domestic corporations, the Fund's dividends are not
eligible for the 70% corporate dividends received deduction. Dividends may also
be subject to state and local taxes.
TAX-EXEMPT FUND
Income received by the Fund that is excludable from gross income under the
Code retains its exempt status after it is distributed to shareholders as
exempt-interest dividends. This allowance is based on the Fund holding 50% of
the value of its total assets in obligations the interest on which is exempt
from Federal income tax at each quarter end of its fiscal year. Exempt-interest
dividends, such as these deriving from interest earned by the Fund on municipal
bonds, is not includable by the shareholders in their respective gross incomes
for federal income tax purposes. Net interest income received by the Fund from
other obligations (e.g., certificates of deposit, commercial paper, and
obligations of the U.S. government, its agencies or instrumentalities) and net
short-term capital gains realized by the Funds, if any, will be taxable to
shareholders as ordinary income. Dividend distributions are calculated and
recorded daily and distributed on the last day of each month under the "actual
earned" method. Under this method, the portion of each distribution which is
tax-exempt may vary. Any reinvestments will be taxed to the shareholder in the
same manner as if they had been distributed.
Section 265 of the Code in effect provides that interest on indebtedness
incurred, and expenses associated therewith, or used to purchase or carry
obligations with tax-exempt interest is not deductible. In addition, interest on
indebtedness incurred or continuing to purchase or carry shares of the Fund is
not deductible.
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<PAGE>
Interest on certain "private activity" bonds (referred to as "qualified bonds"
in the Code) is subject to the federal alternative minimum tax ("AMT"), although
the interest continues to be excluded from gross income for other purposes.
Interest from private activity municipal obligations is a tax preference item
for the purposes of determining whether a taxpayer is subject to AMT and the
amount of AMT to be paid, if any. Private activity obligations issued after
August 7, 1986, to benefit a private or industrial user or to finance a private
facility are affected by this rule. In addition, exempt-interest dividends
attributable to interest received on certain private activity obligations and
certain industrial development bonds will not be tax-exempt to any shareholders
who are "substantial users" of the facilities financed by such obligations or
bonds or who are "related persons" to such substantial users. It is the current
position of the staff of the Securities and Exchange Commission that income from
municipal obligations that is a preference item for purposes of the AMT is not
deemed to be "tax-exempt." Under this position, at least 80% of the FUNDS'S
income distributions would have to be exempt from the AMT as well as exempt from
federal taxes.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal bonds. It can be expected that similar proposals may be
introduced in the future. If such a proposal were enacted, the availability of
municipal bonds for investment by the Fund and the value of the Fund's portfolio
would be affected. Additionally, the Fund would re-evaluate its investment
objective and policies and consider changes in the structure of the Fund.
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. The laws of the several states and local taxing
authorities vary with respect to the taxation of such interest income and each
holder of shares of the Fund is advised to consult his or her own tax advisor in
that regard. Upon request, the Fund will report the source of tax-exempt income
by state. Shareholders are urged to consult their own tax advisors regarding
specific questions about federal, state and local taxes.
INVESTMENT PRACTICES
MONEY MARKET
Investment objectives and policies of Money Market are described in the
Prospectus. The investment objective of the Fund is to provide a high level of
current income while at the same time preserving capital and maintaining
liquidity. It is a fundamental policy of the Fund to invest only in the
following money market instruments which at the time of purchase mature within
397 days:
1. Obligations issued or guaranteed by the United States government or any
agency or instrumentality thereof. U.S. government obligations are issued
by the Treasury and include bills, certificates of indebtedness, notes, and
bonds. Agencies and instrumentalities of the U.S. government are
established under the authority of an act of Congress and include, but are
not limited to: the Government National Mortgage Association, the Tennessee
Valley Authority, the Bank for Cooperatives, the Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Land Banks and the Federal National Mortgage Association.
2. Obligations of domestic and foreign banks having total assets in excess of
500 million U.S. dollars as of the date of their most recently published
financial statement:
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The bank agrees to pay the amount deposited, plus
interest, to the bearer of the receipt on
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<PAGE>
the date specified on the certificate. Because the certificate is
negotiable, it can be traded in the secondary market before maturity.
Certificates of deposit purchased by the Fund will not be fully
insured.
Bankers' acceptances are time drafts drawn on a U.S. bank by an exporter or
importer to obtain a stated amount of funds to pay for specific merchandise
or, less frequently, foreign exchange. The draft is then "accepted" by the
U.S. bank (the drawee) which in effect unconditionally guarantees to pay
the face value of the instrument on its maturity date. The face of the
instrument specifies the terms and the nature of the underlying
transaction.
Letters of credit are issued by U.S. banks and authorize the beneficiary to
draw drafts upon such U.S. banks for acceptance payment under specified
conditions. All of the securities in the Fund and income thereon are
payable in U.S. dollars.
3. Commercial paper (unsecured short-term notes of indebtedness issued by
business and banking firms to finance their short-term needs) purchased by
the Fund will consist only of direct obligations which, at the time of
their purchase, are (a) rated in the two highest ratings by Moody's
Investors Service, Inc. or by Standard & Poor's , or (b) issued by
companies having an outstanding unsecured debt issue currently rated A or
better by Moody's or by Standard & Poor's (see "Appendix B").
4. Short-term corporate obligations which at the date of investment are rated
A or better by Moody's or by Standard & Poor's (see "Appendix B").
5. Repurchase agreements: The Fund may acquire an underlying debt instrument
for a relatively short period (usually not more than one business day)
subject to an obligation of the seller to repurchase and the Fund to sell
the instrument at a fixed price. In the event the seller defaults on his
agreement to repurchase the instrument, the Fund may suffer a loss because
of a decline in the value of the underlying debt instrument. The Fund will
enter into repurchase agreements only with domestic banks or recognized
money market securities dealers, with respect to any of the above-mentioned
securities. To limit risk, repurchase agreements maturing in more than
seven days will not exceed ten percent of the total assets of the Fund. The
Fund requires daily valuation of the underlying debt instrument for any
repurchase agreement maturing in more than one (1) business day and
requires that the market value of the collateral be maintained at a minimum
of 102 percent of the current value. The Fund maintains constructive
possession of the securities through a safekeeping arrangement with parties
who qualify as custodians under Section 17(f) of the Investment Company Act
of 1940.
The Fund will invest less than 25% of its assets in bank obligations, including
foreign banks and foreign branches of U.S. domestic banks. These investments
involve risks that are different in some respects from an investment in an
investment company which invests only in debt
-20-
<PAGE>
obligations of U.S. domestic issuers. Among the items to be considered are
possible differences in foreign versus domestic reserve regulations, future
political and economic developments, the possible imposition of withholding
taxes on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on the foreign bank
obligations. Foreign reserve requirements are lower than domestic ones, and
currency blockage may develop which may prevent the Fund from moving the
proceeds of its investments out of foreign countries. Any foreign bank
obligations purchased will be readily marketable at the time of purchase;
however, such marketability and corresponding liquidity may change at any
time.
TAX-EXEMPT FUND
Investment objectives and policies of the Tax-Exempt Fund are described in the
Prospectus. The investment objective of the Fund is to provide maximum current
interest income which is exempt from federal income taxes while at the same time
preserving capital and maintaining liquidity. It is a fundamental policy of the
Fund to invest only in municipal obligations which at the time of purchase
mature within 397 days.
1. Municipal commercial paper represents very short-term, unsecured,
negotiable promissory notes issued by states, municipalities and their
agencies. Payment of principal and interest on issues of municipal paper
may be made from various sources, to the extent the funds are available
therefrom. Maturities of municipal paper generally will be shorter than the
maturities of Tax anticipation notes ("TANs"), Bond anticipation notes
("BANs"), Revenue anticipation notes ("RANs") or Project notes ("PNs").
2. Tax anticipation notes ("TANs") are issued by state and local governments
to finance their current operations. Repayment is generally to be derived
from specific future tax revenues. TANs are usually general obligations of
the issuer. A weakness in an issuer's capacity to raise taxes due to, among
other things, a decline in its tax base or a rise in delinquencies, could
adversely affect the issuer's ability to meet its obligations on
outstanding TANs.
3. Bond anticipation notes ("BANs") are usually general obligations of state
and local governmental issuers which are sold to obtain interim financing
for projects that will eventually be funded through the sale of long-term
debt obligations or bonds. The ability of an issuer to meet the obligations
on its BANs is primarily dependent on the issuer's access to the long-term
municipal bond market and the likelihood that the proceeds of such bond
sales will be used to pay the principal and interest on the BANs.
4. Revenue anticipation notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a
designated source will be used to repay the notes. In general, they also
constitute general obligations of the issuer. A decline in the receipt of
projected revenues, such as anticipated revenues from another level of
government, could adversely affect an issuer's ability to meet its
obligations on
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<PAGE>
outstanding RANs. In addition, the possibility that the revenues would,
when received, be used to meet other obligations could affect the ability
of the issuer to pay the principal and interest on RANs.
5. Project notes (PNs) are issued on behalf of local authorities at auctions
conducted by the United States Department of Housing and Urban Development
to raise funds for federally sponsored urban renewal, neighborhood
development and housing programs. PNs are backed by the full faith and
credit of the federal government through agreements with local authorities
which provide that, if required, the federal government will lend the
issuer an amount equal to the principal of and interest on the PN.
Ordinarily, PNs are repaid by rolling over the notes, or from the proceeds
of new bonds or other securities, which are issued to provide permanent
financing.
Certain municipal obligations may carry variable or floating interest rates.
Variable rate instruments bear interest at rates which are readjusted at
periodic intervals so as to cause the instruments' market value to approximate
par. Floating rate instruments bear interest at rates which vary automatically
with changes in specified market rates or indices, such as the bank prime rate.
The Fund may invest in variable and floating rate instruments even if they
carry stated maturities in excess of 397 days, but only if the period to the
next interest change is less than 397 days. The Fund will only purchase these
instruments if there is a secondary market for such instruments or if they carry
demand features permitting the Fund to redeem upon notice of seven days or less
at par, or both. The Fund's right to obtain payment at par on a demand
instrument upon demand could be affected by events occurring between the date
the Fund elects to redeem the instrument and the date redemption proceeds are
due which affect the ability of the issuer to pay the instrument at par
value.
Although the ultimate maturity of such variable rate obligations may exceed 397
days, Tax-Exempt will treat the maturity of each variable rate demand
obligation, for purposes of computing its dollar-weighted average fund maturity,
as the longer of (i) the notice period required before the Fund is entitled to
payment of the principal amount upon demand, or (ii) the period remaining until
the next interest rate adjustment.
The Fund may invest no more than 10% of its total assets in other investment
companies which invest in tax-exempt securities. No more than 5% of the Fund's
total assets may be invested in a single investment company nor may the Fund
purchase more than 3% of the total voting securities of a single investment
company. The Adviser will reduce its advisory fees on such investments to offset
management fees paid to the other investment company.
GENERAL POLICIES
The Funds may attempt to increase yields by trading to take advantage of short-
term market variations. This policy is expected to result in high portfolio
turnover. This turnover may (but
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<PAGE>
in the opinion of management should not) adversely affect the Funds since it
does not usually pay brokerage commissions when it purchases short-term debt
obligations.
Because of the many factors which influence fluctuations in the market value of
securities owned by the Funds, including economic trends, government actions and
regulations and international monetary conditions, there can be no assurance
that the Funds' objectives will be achieved because of market risks inherent in
all investments. The Trust believes, however, that through professional
management, the prospects for investment success are enhanced.
INVESTMENT RESTRICTIONS
While many decisions of the Adviser depend on flexibility, there are several
principles so fundamental to the Fund's philosophy that neither they, nor the
investment objective, may be changed without a vote of a majority of the
outstanding shares of the Fund.
Each Fund may NOT:
. invest in common stocks or other equity securities;
. 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
untimely liquidation of vital parts of its portfolio;
. buy securities on margin, mortgage or pledge its securities, or engage in
"short" sales;
. buy or sell options;
. act as underwriter of securities issued by others;
. buy securities subject to restrictions on sale (except in connection with
repurchase agreements);
. buy or sell real estate, real estate investment trust securities,
commodities, or oil, gas and mineral interests;
. lend money, except in connection with repurchase agreements and for
investments made in accordance with Fund policies discussed in the
prospectus;
. issue senior securities;
. invest more than 5%* of its total assets in the securities of any single
issuer (except for the United States government, its agencies or
instrumentalities);
. invest more than 25%* of its total assets in securities of issuers in any
single industry;
. invest more than 10%* of its net assets in illiquid securities; and
. invest in companies for the purpose of exercising control.
Money Market ONLY may NOT:
. invest in other investment companies (except as part of a merger).
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<PAGE>
Tax-exempt ONLY may NOT:
. invest more than 20%* of its assets in obligations that pay interest subject
to federal alternative minimum tax.
* Percentage at the time the investment is made.
Proposed changes to Investment Restrictions
It is expected that, subject to approval by shareholders, there will be certain
changes in the fundamental investment restrictions to Money Market.
Each Fund would be permitted to:
. invest in securities that have been issued in accordance with the
provisions of Rule 144A.
Money Market 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;
. invest in securities offered by foreign governments, their agencies and
instrumentalities, and supranationals like the World Bank;
. invest in obligations of foreign financial institutions, including
brokerage, finance and insurance companies;
PERFORMANCE INFORMATION
YIELD
The current yield for each class of shares within each Fund is determined by
dividing the net change, exclusive of capital changes, in a hypothetical account
for a given seven calendar day period, by the value of the account at the
beginning of the period. The resulting base period return is multiplied by 365
divided by seven. The effective yield is determined by compounding for 365 days
the base period return divided by seven. The results are expressed as a
percentage and yield figures are carried to the nearest hundredth of one
percent.
Class A: share yields for the seven-day period ended December 31, 1996:
<TABLE>
<CAPTION>
Money Market Tax-Exempt
------------ ----------
<S> <C>
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Ending account value
(includes the value of any additional shares purchased with $1.000934331 $1.000655500
dividends from the original share, and all dividends declared
on both the original share and any such additional shares)
Less beginning account value $1.000000000 $1.000000000
Net Change in Account Value $ .000934331 $ .000655500
Base Period Return: Money Market
(Net Change in Account Value) $ .000934331 = .000934331
- ---------------------------------------------
(Beginning Account Value) $1.000000000
Current Yield = .000934331 x 365/7 4.87%
Effective Yield =
Current Yield compounded for 365 days = 4.99%
Base Period Return: Tax-Exempt
(Net Change in Account Value) $ .000655500 = .000655500
- ---------------------------------------------
(Beginning Account Value) $1.000000000
Current Yield = .000655500 x 365/7 3.42%
Effective Yield = Current Yield compounded for 365 days = 3.48%
</TABLE>
Class B: share yields for the seven-day period ended on December 31, 1996:
<TABLE>
<CAPTION>
Money Market Tax-Exempt
-------------- -------------
<S> <C> <C>
Ending account value
(includes the value of any additional shares purchased with $ 1.000764469 $1.000474410
dividends from the original share, and all dividends declared
on both the original share and any such additional shares)
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Less beginning account value 1.000000000 1.000000000
Net Change in Account Value $ .000764469 $ .000474410
Base Period Return: Money Market Funds
(Net Change in Account Value) $.000764469 = .000764469
- ---------------------------------------------
(Beginning Account Value) $ 1.000000000
Current Yield = .000764469 x 365/7 = 3.99%
Effective Yield =
Current Yield compounded for 365 days = 4.07%
Base Period Return: Tax-Exempt Funds
(Net Change in Account Value) $.000474410 = .000474410
- ---------------------------------------------
(Beginning Account Value) $1.000000000
Current Yield = .00047441 x 365/7 = 2.47%
Effective Yield =
Current Yield compounded for 365 days = 2.50%
</TABLE>
As of October 31, 1997 there are no Class I or Class S shares outstanding.
Among the factors determining yields are portfolio quality, type of investments,
operating expenses, the relative amount of new money coming into the portfolio
and the portfolio maturity.
Publishing the above yields as of a given period provides investors with a basis
for comparing each Fund's yield with that of other managed funds and with the
yields on savings accounts and money market instruments (which are normally
stated on the basis of a full year's interest). In making any such comparisons
care must be taken to consider the differences of the investment media, as well
as the differences in the methods of computing yields.
Neither Fund's yield is fixed, nor is principal guaranteed. Yields fluctuate
daily and the annualization of rates is not a representation by the Fund as to
what an investment in either Fund will actually yield for any given
period.
The weighted average maturity as of December 31, 1996, for the Money Market
Funds was 18 days; for the Tax-Exempt Funds it was 64 days.
Tax-equivalent yield for the Tax-Exempt is calculated by dividing the Fund's
current yield or effective yield by the number one minus a stated income tax
rate. For example, the Fund's Class A share effective yield of 3.48%, for the
seven day period ended December 31, 1996, would result in a tax-equivalent yield
of 5.76%, at the maximum federal tax rate of 39.6%: 3.49% divided by (1.00 -
.396) = 5.76%.
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<PAGE>
From time to time, Tax-Exempt may present illustrations of the relationship
between tax-exempt yields and taxable yields at various tax rates.
BROKERAGE ALLOCATIONS AND FUND TRANSACTIONS
Portfolio securities are normally purchased directly from the issuer or from an
underwriter or a market maker for money market instruments. Usually no brokerage
commissions are paid by the Fund for these purchases. Purchases from
underwriters of portfolio securities include a concession paid by the issuer
to the underwriter and the purchase price paid to market makers for money market
instruments may include the spread between the bid and asked price.
Under the terms of the Investment Management Agreements, Composite Research &
Management Co. acts as agent for the Fund in entering orders with broker-dealers
to execute portfolio transactions and in negotiating commission rates where
applicable. Decisions as to eligible broker-dealers are approved by the
president of the Trust.
In executing portfolio transactions and selecting broker-dealers, the Adviser
uses its best efforts to seek, on behalf of each Fund, the best overall terms
available. In assessing the best overall terms available for any transaction,
the Adviser may consider all factors it deems relevant, including the breadth of
the market in the security, the price of the security, the size of the
transaction, the timing of the transaction, the reputation, financial condition,
experience and execution capability of a broker-dealer, and the amount of the
commission and the value of any brokerage and research services, (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934, as
amended) provided by a broker-dealer.
The Adviser is authorized to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Fund which is in excess of the amount of commission
another broker or dealer would have charged for effecting the transaction if the
Adviser determines in good faith that such commission was reasonable in relation
to the value of the brokerage and research services provided by such broker or
dealer, viewed in terms of that particular transaction or in terms of the
overall responsibilities of the Adviser to the Funds and/or other accounts
over which the Adviser exercises investment discretion. The Adviser may commit
to pay commission dollars to brokers or financial institutions for specific
research materials or products that it considers useful in advising the Funds
and/or its other clients. Research services furnished to the Adviser include,
for example, written and electronic reports analyzing economic and financial
characteristics, telephone conversations between brokerage securities analysts
and members of the Adviser's staff, and personal visits by such analysts,
brokerage strategists and economists to the Adviser's office.
Some of these services are of value to the Adviser in advising clients, although
not all of these services are necessarily useful and of value in managing the
Funds. The management fee paid
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<PAGE>
to the Adviser is not reduced because it receives those services, even though it
might otherwise be required to purchase these services for cash.
The staff of the Securities and Exchange Commission has expressed the view that
the best price and execution of over-the-counter transactions in portfolio
securities may be secured by dealing directly with principal market makers,
thereby avoiding the payment of compensation to another broker. In certain
situations, the Adviser believes that the facilities, expert personnel and
technological systems of a broker often enable the Funds to secure a net price
by dealing with a broker that is as good as or better than the price the Funds
could have received from a principal market maker, even after payment of the
compensation to the broker. The Adviser places its over-the-counter transactions
with principal market makers, but may also deal on a brokerage basis when
utilizing electronic trading networks or as circumstances warrant.
None of the brokers with whom the Fund executes portfolio transactions has any
interest in the Adviser or the Distributor. The Distributor did not execute any
portfolio orders for the Fund during the fiscal year, nor did the Distributor or
the Adviser receive any direct or indirect compensation as a result of portfolio
transactions of the Funds. Shares may be sold by brokers who execute portfolio
transactions for a Fund; however, no brokerage fees will be allocated for such
sales.
GENERAL INFORMATION
CUSTODIAN
The securities and cash owned by each Fund are held in safekeeping by
Investors Fiduciary Trust Company ("IFTC"), 127 West 10th, Kansas City, MO
64105. IFTC is a wholly owned subsidiary of State Street Bank. The custodian's
responsibilities include collecting dividends, interest and principal payments
on each Fund's investments
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The firm of LeMaster & Daniels PLLC, Certified Public Accountants, has been
selected as the independent certified public accountants of the Fund. LeMaster &
Daniels performs audit services for the Funds including the examination of the
financial statements included in annual reports to shareholders, which financial
statements are incorporated by reference into this Statement of Additional
Information.
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<PAGE>
FUND MANAGER COMMENTARY
In communications with the public, Fund managers may discuss the economic
outlook for each Fund, which might include a discussion of specific securities
in which the Fund may invest, and/or specific characteristics of each investment
Fund.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain all
of the information set forth in the registration statement the Fund has filed
with the Securities and Exchange Commission. The complete registration statement
may be obtained from the Securities and Exchange Commission upon payment of the
fee prescribed by the rules and regulations of the Commission.
FINANCIAL STATEMENTS AND REPORTS
Semiannual and annual reports are issued to shareholders. The annual reports
include audited financial statements. The Fund's financial statements and
schedules for fiscal year 1996 appear in the annual report to shareholders dated
December 31, 1996, which is incorporated by reference into this Statement of
Additional Information and may be obtained without charge by contacting the
Trust.
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<PAGE>
APPENDIX A
SPECIMEN PRICE MAKE-UP SHEET
COMPOSITE MONEY MARKET FUND
at December 31, 1996
<TABLE>
<CAPTION>
Money Market Tax-Exempt
------------ -----------
<S> <C> <C>
Assets $233,143,865 $32,164,617
Liabilities 3,671,608 188,475
----------- ----------
Net Assets $229,472,257 $31,976,142
Shares Outstanding
Class A 229,355,308 31,973,937
Class B 116,949 2,205
Net Assets Per Share
(Net Assets/Shares Outstanding)
Class A $1.00 $1.00
Class B $1.00 $1.00
</TABLE>
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<PAGE>
APPENDIX B
COMMERCIAL PAPER RATINGS (TAXABLE AND TAX-EXEMPT)
STANDARD & POOR'S : Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.
Ratings are graded into four categories, ranging from 'A' for the highest
quality obligations to 'D' for the lowest. The top two categories are as
follows:
'A': Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
'A-1': This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
'A-2': Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
MOODY'S INVESTORS SERVICE, INC.: "Prime-1" and "Prime-2" are the two highest
commercial paper rating categories. The ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months.
Issuers rated "Prime-1" have a superior capacity for repayment of short-term
promissory obligations. "Prime-1" repayment capacity will normally be evidenced
by the following characteristics:
- --Leading market positions in well established industries.
- --High rates of return on funds employed.
- --Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- --Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- --Well established access to a range of financial markets and sources of
alternate liquidity.
Issuers rated "Prime-2" have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
CORPORATE BOND RATINGS
-31-
<PAGE>
Standard & Poor's ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
II. Nature of and provisions of the obligation.
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
`AAA': Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
`AA': Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
`A': Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
`BBB': Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC.: Its ratings for investment-grade corporate
bonds are as follows:
Bonds rated "Aaa" are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edge". Interest
payments are protected by a large or by an exceptionally stable margin, and
principal is secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Bonds rated "A" possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
TAX-EXEMPT NOTE RATINGS
-32-
<PAGE>
Standard & Poor's rating of short-term notes evolved from its long-standing
practice of evaluating the effect of such debt on bond ratings. Its note rating
symbols and definitions are as follows:
`SP-1': Very strong or strong capacity to pay principal and interest. Issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
`SP-2': Satisfactory capacity to pay principal and interest.
`SP-3': Speculative capacity to pay principal and interest.
Moody's Investors Service, Inc. municipal note ratings are as follows:
`MIG' OR 'VMIG' 1 Best quality
`MIG' OR 'VMIG' 2 High quality
`MIG' OR 'VMIG' 3 Favorable quality
`MIG' OR 'VMIG' 4 Adequate quality
-33-
<PAGE>
THE COMPOSITE FUNDS
FORM N-1A
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Index to Financial Statements and Supporting Schedules:
(1) Financial Statements:
Composite U.S. Government Securities Fund
Composite Income Fund
Composite Cash Management Company Money Market Fund
Composite Cash Management Company Tax-Exempt Money Market Fund
Statement of assets and liabilities -- June 30, 1997 (a).
Statement of operations -- year ended June 30, 1997 (a).
Statement of changes in net assets -- years ended June 30, 1997
and June 30, 1996 (a).
Financial highlights (a) (b).
Notes to financial statements (a).
Composite Growth & Income Fund
Composite Northwest Fund
Composite Bond & Stock Fund
Statement of assets and liabilities -- April 30, 1997 (a).
Statement of operations -- year ended April 30, 1997 (a).
Statement of changes in net assets -- years ended April 30, 1997
and April 30, 1996 (a).
Financial highlights (a) (b).
Notes to financial statements (a).
(2) Supporting Schedules:
Composite U.S. Government Securities Fund
Composite Income Fund
Composite Cash Management Company Money Market Fund
<PAGE>
Composite Cash Management Company Tax-Exempt Money Market Fund
Schedule I -- Portfolio of investments owned -- April 30, 1997
(a).
Schedules II through IX omitted because the required matter is
not present.
Composite Growth & Income Fund
Composite Northwest Fund
Composite Bond & Stock Fund
Schedule I -- Portfolio of investments owned -- April 30, 1997
(a).
Schedules II through IX omitted because the required matter is
not present.
Exhibits.
(1) Form of Amended and Restated Agreement and Declaration of Trust dated
as of September 19, 1997 -- Filed herewith.
(2) By-Laws of The Composite Funds -- Filed herewith.
(3) None
(4) (a) (See Exhibit (1)) Article III (Shares), Article IV (Shareholders'
Voting Powers and Meetings) and Article VI (Net Income, Distributions,
and Redemptions and Repurchases) of the Amended and Restated Agreement
and Declaration of Trust.
(b) (See Exhibit (2)) Article 10 (Provisions Relating to the Conduct
of the Trust's Business ) and Article 11 (Shareholders' Voting Powers
and Meetings) of the By-Laws.
(5) Form of Investment Management Agreement with Composite Research and
Management Company
(6) (a)(i) Form of Distribution Contract and Distribution Plan with
Composite Funds Distributor, Inc. (assuming shareholder approval of
proposed charges) -- Filed herewith.
(a)(ii) Form of Distribution Contract and Distribution Plan with
Composite Funds Distributor, Inc. (assuming no shareholder approval of
proposed charges) -- Filed herewith.
-2-
<PAGE>
(b) Form of Selected Dealer Agreement -- Filed herewith.
(7) None
(8) Form of Custody Agreement with Investors Fiduciary Trust Company --
Filed herewith.
(9) Shareholders Service Contract -- Filed herewith.
(10) Opinion and consent of counsel as to legality of securities being
issued -- Filed herewith.
(11) Accountants' Consent -- LeMaster & Daniels PLLC -- Filed herewith.
(12) None
(13) None
(14) None
(15) See Exhibit 6.
(16) Schedule for Computation of Performance Information -- to be filed by
amendment.
(17) (a) Financial Data Schedule for Composite U.S. Government Securities
Fund -- Filed herewith.
(b) Financial Data Schedule for Composite Income Fund -- Filed
herewith.
(c) Financial Data Schedule for Composite Growth & Income Fund --
Filed herewith.
(d) Financial Data Schedule for Composite Money Market Fund -- Filed
herewith.
(e) Financial Data Schedule for Composite Tax-Exempt Money Market
Fund -- Filed herewith.
(f) Financial Data Schedule for Composite Tax-Exempt Bond Fund --
Filed herewith.
-3-
<PAGE>
(g) Financial Data Schedule for Composite Northwest Fund -- Filed
herewith.
(h) Financial Data Schedule for Composite Bond & Stock Fund -- Filed
herewith.
(18) Multi-Class Plan adopted pursuant to Rule 18f-3 -- Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant.
The Registrant is operated under the supervision of Composite Research &
Management Co. ("Composite Research"). Composite Research is affiliated with
Murphey Favre Securities Services, Inc., which serves as transfer agent for the
Registrant. An affiliate of Composite Research, Composite Funds Distributor,
Inc. serves as the principal underwriter and distributor for the Registrant.
Composite Research, Murphey Favre Securities Services, Inc. and Composite Funds
Distributor, Inc. serve in their same capacities for the four other registered
investment companies (constituting [36] portfolios).
Composite Research, Murphey Favre Securities Services, Inc. and Composite
Funds Distributor, Inc. are all wholly-owned subsidiaries of Washington Mutual,
Inc. and are all incorporated under the laws of the State of Washington.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Record Holders
Title of Series (as of October __, 1997)
--------------- ------------------------
- --------------------------------------------------------------------------------
Class A Class B Class S Class I
Shares Shares Shares Shares
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Composite U.S. Government Securities Fund
- --------------------------------------------------------------------------------
Composite Income Fund
- --------------------------------------------------------------------------------
Composite Growth & Income Fund
- --------------------------------------------------------------------------------
Composite Money Market Fund
- --------------------------------------------------------------------------------
Composite Tax-Exempt Bond Fund
- --------------------------------------------------------------------------------
Composite Northwest Fund
- --------------------------------------------------------------------------------
Composite Bond & Stock Fund
- --------------------------------------------------------------------------------
Composite Tax-Exempt Money Market Fund
- --------------------------------------------------------------------------------
</TABLE>
-4-
<PAGE>
Item 27. Indemnification.
Reference is made to Article VIII, Section 1 of the Amended and Restated
Agreement and Declaration of Trust (the "Agreement and Declaration of Trust") of
the Registrant.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant by the Registrant pursuant to the Agreement and
Declaration of Trust, its By-Laws or otherwise, the Registrant is aware that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and, therefore, is unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by directors,
officers or controlling persons of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted by such
directors, officers or controlling persons in connection with shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issues.
Item 28. Business and Other Connections of Investment Advisor.
Registrant's Investment Advisor is Composite Research & Management Co. (the
"Advisor"), a wholly-owned subsidiary of Washington Mutual, Inc., a Washington
corporation. The Advisor serves in that capacity for the four other registered
investment companies (constituting [36] portfolios).
Item 29. Principal Underwriters.
The principal underwriter for the Registrant is Composite Funds
Distributor, Inc. which also serves in the same capacity for the four other
registered investment companies (constituting [36] portfolios).
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder
will be maintained at the offices of the Registrant at 601 West Main Avenue,
Suite 300, Spokane, Washington 99201. The Registrant's custodian activities are
performed at Investors Fiduciary Trust Company ("IFTC"), 127 West 10th, Kansas
City, Missouri 64105.
-5-
<PAGE>
Item 31. Management Services.
Registrant is not a party to any management related contract, other than as
set forth in the Prospectus.
Item 32. Undertakings.
(a) The Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
-6-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Seattle in the State of
Washington on the 24th 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
WILLIAM G. PAPESH* President and September 24, 1997
- ----------------------- Trustee
William G. Papesh
MONTE D. CALVIN Vice President and
- ----------------------- Treasurer September 24, 1997
Monte D. Calvin
WAYNE L. ATTWOOD, M.D.* Trustee September 24, 1997
- -----------------------
Wayne L. Attwood, M.D.
</TABLE>
-7-
<PAGE>
<TABLE>
<S> <C> <C>
KRISTIANNE BLAKE* Trustee September 24, 1997
- ------------------
Kristianne Blake
ANNE V. FARRELL* Trustee September 24, 1997
- ------------------
Anne V. Farrell
Trustee September __, 1997
- ------------------
Michael K. Murphy
DANIEL PAVELICH* Trustee September 24, 1997
- ------------------
Daniel Pavelich
JAY ROCKEY* Trustee September 24, 1997
- ------------------
Jay Rockey
RICHARD C. YANCEY* Trustee September 24, 1997
- ------------------
Richard C. Yancey
</TABLE>
*By: MONTE D. CALVIN
---------------------------------
Monte D. Calvin
Attorney-in-Fact
Pursuant to Power of Attorney filed herewith
-8-
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No.
<S> <C>
1 Amended and Restated Agreement and Declaration of Trust
2 By-Laws of The Composite Funds
5 Form of Investment Management Agreement with Composite
Research & Management
6(a)(i) Form of Distribution Contract and Distribution Plan
with Composite Funds Distributor, Inc. (assuming
shareholder approval of proposed charges)
6(a)(ii) Form of Distribution Contract and Distribution Plan
with Composite Funds Distributor, Inc. (assuming no
shareholder approval of proposed charges)
6(b) Form of Selected Dealer Agreement
8 Form of Custody Agreement with Investors Fiduciary
Trust
9 Shareholders Service Contract
10 Opinion and consent of counsel regarding legality of
securities being registered
11 Accountants' Consent
17 Financial Data Schedules
18 Multi-Class Plan
19 Powers of Attorney for N-1A
</TABLE>
-9-
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
OF
THE COMPOSITE FUNDS
THIS AGREEMENT AND DECLARATION OF TRUST made in Boston, Massachusetts this
19th day of September, 1997 by the Trustee hereunder and the holders of shares
of beneficial interest issued hereunder and to be issued hereunder as
hereinafter provided:
WITNESSETH that
WHEREAS the Trustees have agreed to manage all property coming into their
hands as trustees of a Massachusetts business trust in accordance with the
provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby direct that this Agreement and
Declaration of Trust be filed with the Secretary of State of The Commonwealth of
Massachusetts and with the Clerk of every city or town where such association or
trust has a usual place of business, and do hereby declare that they will hold
all cash, securities and other assets, which they may from time to time acquire
in any manner as Trustees hereunder IN TRUST to manage and dispose of the same
upon the following terms and conditions for the pro rata benefit of the holders
from time to time of Shares in this trust as hereinafter set forth.
ARTICLE I
Name and Definitions
Section 1. This Trust shall be known as The Composite Funds, and the
---------
Trustees shall conduct the business of the Trust under that name or any other
name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required by
--------- -----------
the context or specifically provided
(a) "Trust" refers to the Massachusetts business trust established by this
Agreement and Declaration of Trust, as amended from time to time;
(b) "Trustees" refers to the Trustee of the Trust named in Article IV
hereof or any Trustees elected in accordance with such Article;
(c) "Shares" means the equal proportionate units or interests into which
the beneficial interest in the Trust or in the Trust property belonging to any
Series of the Trust (or
<PAGE>
in the property belonging to any Series allocable to any Class of that Series)
(as the context may require) shall be divided from time to time;
(d) "Shareholder" means a record owner of Shares;
(e) "1940 Act" refers to the Investment Company Act of 1940 and the Rules
and Regulations thereunder, all as amended from time to time;
(f) The terms "Commission" and "principal underwriter" shall have the
meanings given them in the 1940 Act;
(g) "Declaration of Trust" and "this Declaration" shall mean this Agreement
and Declaration of Trust, as amended or restated from time to time;
(h) "Bylaws" shall mean the Bylaws of the Trust as amended from time to
time;
(i) "Series Company" refers to the form of registered open-end investment
company described in Section 18(f)(2) of the 1940 Act or in any successor
statutory provision;
(j) "Series" refers to Series of Shares established and designated under or
in accordance with the provisions of Article III; and
(k) "Class" refers to any Class of Shares of a Series established and
designated under or in accordance with the provisions of Article III. The
Shares of a Class shall represent a subset of Shares of a Series and the Shares
of each Class, together with the Shares of all other Classes of the same Series,
shall constitute all Shares of that Series.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to provide investors a managed investment
primarily in securities (including options), debt instruments, money market
instruments, commodities, commodity contracts and options thereon.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial interest in
--------- -------------------------------
the Trust shall at all times be divided into an unlimited number of Shares,
without par value. Subject to the provisions of Section 6 of this Article III,
each Share shall have the voting rights as provided in Article V hereof, and
holders of the Shares of any Series or Class shall be entitled to receive
dividends, when and as declared with respect thereto in the manner provided in
Article VI, Section 1 hereof. No Share shall have any priority or preference
over any other Share of
-2-
<PAGE>
the same Series and Class with respect to dividends or distributions upon
termination of the Trust or of such Series or Class made pursuant to Article IX,
Section 4 hereof. Unless the Trustees have authorized the issuance of Shares of
a Series in two or more Classes, all dividends and distributions shall be made
ratably among all Shareholders of a particular Series from the assets belonging
to such Series according to the number of Shares of such Series held of record
by such Shareholders on the record date for any dividend or on the date of
termination, as the case may be. The Trustees may from time to time divide or
combine the Shares of any particular Series or Class into a greater or lesser
number of Shares of that Series or Class without thereby changing the
proportionate beneficial interest of the Shares of that Series or Class in the
assets belonging to that Series (or allocable to the Shares of that Class) or in
any way affecting the rights of Shares of any other Series or Class.
Section 2. Ownership of Shares. The ownership of Shares shall be recorded
--------- -------------------
on the books of the Trust or a transfer or similar agent for the Trust, which
books shall be maintained separately for the Shares of each Series. No
certificates certifying the ownership of Shares shall be issued except as the
Trustees may otherwise determine from time to time. The Trustees may make such
rules as they consider appropriate for the transfer of Shares of each Series and
Class and similar matters. The record books of the Trust as kept by the Trust
or any transfer or similar agent, as the case may be, shall be conclusive as to
who are the Shareholders of each Series and Class and as to the number of Shares
of each Series and Class held from time to time by each.
Section 3. Investments in the Trust. The Trustees shall accept
--------- ------------------------
investments in the Trust from such persons and on such terms and for such
consideration as they from time to time authorize.
Section 4. Status of Shares and Limitation of Personal Liability. Shares
--------- -----------------------------------------------------
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder during the continuance of the
Trust shall not operate to terminate the same nor entitle the representative of
any deceased Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees, but entitles such representative
only to the rights of said deceased Shareholder under this Trust. Ownership of
Shares shall not entitle the Shareholder to any title in or to the whole or any
part of the Trust property or right to call for a partition or division of the
same or for an accounting, nor shall the ownership of Shares constitute the
Shareholders partners of each other. Neither the Trust nor the Trustees, nor
any officer, employee or agent of the Trust shall have any power to bind
personally any Shareholders, nor except as specifically provided herein to call
upon any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder may at any time personally agree
to pay.
-3-
<PAGE>
Section 5. Power of Trustees to Change Provisions Relating to Shares.
--------- ---------------------------------------------------------
Notwithstanding any other provisions of this Declaration of Trust and without
limiting the power of the Trustees to amend the Declaration of Trust as provided
elsewhere herein, the Trustees shall have the power to amend this Declaration of
Trust, at any time and from time to time, in such manner as the Trustees may
determine in their sole discretion, without the need for Shareholder action, so
as to add to, delete, replace or otherwise modify any provisions relating to the
Shares contained in this Declaration of Trust for the purpose of (i) responding
to or complying with any regulations, orders, rulings or interpretations of any
governmental agency or any laws, now or hereafter applicable to the Trust, or
(ii) designating and establishing Series or Classes in addition to the Series or
Classes established in Section 6 of this Article III; provided that before
adopting any such amendment in clause (i) without Shareholder approval the
Trustees shall determine that it is consistent with the fair and equitable
treatment of all Shareholders. The establishment and designation of any Series
or Class of Shares in addition to the Series or Classes established and
designated in Section 6 of this Article III shall be effective upon the
execution by a majority of the then Trustees of an amendment to this Declaration
of Trust, taking the form of a complete restatement or otherwise, setting forth
such establishment and designation and the relative rights and preferences of
such Series or Class, or as otherwise provided in such instrument.
Without limiting the generality of the foregoing, the Trustees may, for the
above-stated purposes, amend the Declaration of Trust to:
(a) create one or more Series or Classes of Shares (with respect to or in
addition to any Series or Classes already existing or otherwise) with such
rights and preferences and such eligibility requirements for investment therein
as the Trustees shall determine, and reclassify any or all outstanding Shares as
shares of particular Series or Classes in accordance with such eligibility
requirements;
(b) amend any of the provisions set forth in paragraphs (a) through (j) of
Section 6 of this Article III;
(c) combine one or more Series or Classes of Shares into a single Series or
Class on such terms and conditions as the Trustees shall determine;
(d) change or eliminate any eligibility requirements for investment in
Shares of any Series or Class, including without limitation the power to provide
for the issue of Shares of any Series or Class in connection with any merger or
consolidation of the Trust with another trust or company or any acquisition by
the Trust of part or all of the assets of another trust or company;
(e) change the designation of any Series or Class of Shares;
-4-
<PAGE>
(f) change the method of allocating dividends among the various Series and
Classes of Shares;
(g) allocate any specific assets or liabilities of the Trust or any
specific items of income or expense of the Trust to one or more Series or
Classes of Shares;
(h) specifically allocate assets to any or all Series or Classes of Shares
or create one or more additional Series or Classes of Shares which are preferred
over all other Series or Classes of Shares in respect of assets specifically
allocated thereto or any dividends paid by the Trust with respect to any net
income, however determined, earned from the investment and reinvestment of any
assets so allocated or otherwise and provide for any special voting or other
rights with respect to such Series or Classes; or
(i) divide one or more Series of Shares into one or more Classes on such
terms and conditions as the Trustees may determine.
Section 6. Establishment and Designation of Series. Without limiting the
--------- ---------------------------------------
authority of the Trustees set forth in Section 5, inter alia, to establish and
----- ----
designate any further Series or Classes or to modify the rights and preferences
of any Series or Classes, the "Composite Bond & Stock Fund," the "Composite
Growth & Income Fund," the "Composite Income Fund," the "Composite Cash
Management Company Money Market Fund," the "Composite Northwest Fund," the
"Composite Cash Management Company Tax-Exempt Money Market Fund," the "Composite
Tax-Exempt Bond Fund," and the "Composite U.S. Government Securities Fund" shall
be, and hereby are, established and designated as separate Series of the Trust.
Shares of each Series established in this Section 6 shall have the
following relative rights and preferences:
(a) Assets Belonging to Series. All consideration received by the Trust
--------------------------
for the issue or sale of Shares of a particular Series, together with all assets
in which such consideration is invested or reinvested, all income, earnings,
profits, and proceeds thereof from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such proceeds
in whatever form the same may be, shall irrevocably belong to that Series for
all purposes, subject only to the rights of creditors, and shall be so recorded
upon the books of account of the Trust. Such consideration, assets, income,
earnings, profits and proceeds thereof, from whatever source derived, including,
without limitation, any proceeds derived from the sale, exchange or liquidation
of such assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
belonging to" that Series. In the event that there are any assets, income,
earnings, profits and proceeds thereof, funds or payments which are not readily
identifiable as belonging to any particular Series (collectively "General
Assets"), the Trustees shall allocate such General Assets to, between or among
any one or more of the
-5-
<PAGE>
Series established and designated from time to time in such manner and on such
basis as they, in their sole discretion, deem fair and equitable, and any
General Asset so allocated to a particular Series shall belong to that Series.
Each such allocation by the Trustees shall be conclusive and binding upon the
Shareholders of all Series for all purposes.
(b) Liabilities Belonging to Series. The assets belonging to each
-------------------------------
particular Series shall be charged solely with the liabilities of the Trust in
respect to that Series, expenses, costs, charges and reserves attributable to
that Series, and any general liabilities of the Trust which are not readily
identifiable as belonging to any particular Series but which are allocated and
charged by the Trustees to and among any one or more of the Series established
and designated from time to time in a manner and on such basis as the Trustees
in their sole discretion deem fair and equitable. The liabilities, expenses,
costs, charges, and reserves so charged to a Series are herein referred to as
"liabilities belonging to" that Series. Each allocation of liabilities,
expenses, costs, charges and reserves by the Trustees shall be conclusive and
binding upon the shareholders of all Series for all purposes.
(c) Dividends, Distributions, Redemptions, and Repurchases.
------------------------------------------------------
Notwithstanding any other provisions of this Declaration, including, without
limitation, Article VI, no dividend or distribution (including, without
limitation, any distribution paid upon termination of the Trust or of any
Series) with respect to, nor any redemption or repurchase of, the Shares of any
Series shall be effected by the Trust other than from the assets belonging to
such Series, nor shall any Shareholder of any particular Series otherwise have
any right or claim against the assets belonging to any other Series except to
the extent that such Shareholder has such a right or claim hereunder as a
Shareholder of such other Series.
(d) Voting. Notwithstanding any of the other provisions of this
------
Declaration, including, without limitation, Section 1 of Article V, the
Shareholders of any particular Series or Class shall not be entitled to vote on
any matters as to which such Series or Class is not affected. On any matter
submitted to a vote of Shareholders, all Shares of the Trust then entitled to
vote shall be voted with other Series or Classes entitled to vote on such
matters as a single class, unless otherwise required by the 1940 Act or other
applicable law or as specifically required under this Declaration or the Bylaws
or as otherwise determined by the Trustees.
(e) Equality. All the Shares of each particular Class of a Series shall
--------
represent an equal proportionate interest in the assets and liabilities
belonging to that Series allocable to that Class and all Shares of each
particular Series shall represent an equal proportionate interest in the assets
belonging to that Series (subject to the liabilities belonging to that Series),
and each Share of any particular Series shall be equal to each other Share of
that Series.
(f) Fractions. Any fractional Share of a Series or Class shall carry
---------
proportionately all the rights and obligations of a whole share of that Series
or Class, including rights with
-6-
<PAGE>
respect to voting, receipt of dividends and distributions, redemption of Shares
and termination of the Trust.
(g) Exchange Privilege. The Trustees shall have the authority to provide
------------------
that the holders of Shares of any Series or Class shall have the right to
exchange said Shares for Shares of one or more other Series or Classes of Shares
in accordance with such requirements and procedures as may be established by the
Trustees.
(h) Combination of Series. The Trustees shall have the authority, without
---------------------
the approval of the Shareholders of any Series or Class unless otherwise
required by applicable law, to combine the assets and liabilities belonging to
any two or more Series or Classes into assets and liabilities belonging to a
single Series or Class.
(i) Elimination of Series. At any time that there are no Shares
---------------------
outstanding of any particular Series previously established and designated, the
Trustees may amend this Declaration of Trust to abolish that Series and to
rescind the establishment and designation thereof, such amendment to be effected
in the manner provided in Section 5 of this Article III.
(j) Assets and Liabilities Allocable to a Class. The assets and
-------------------------------------------
liabilities belonging to a Series shall be fully allocated among all the Classes
of that Series. For purposes of determining the assets and liabilities
belonging to a Series which are allocable to a Class of that Series, subject to
the provisions of paragraph (g) of Section 5 of this Article III, the provisions
of paragraphs (a) and (b) of this Section 6 shall apply, mutatis mutandis, as if
------- --------
each Class were a Series.
Section 7. Indemnification of Shareholders. In case any Shareholder or
--------- -------------------------------
former Shareholder shall be held to be personally liable solely by reason of his
or her being or having been a Shareholder of the Trust or of a particular Series
and not because of his or her acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled out of
the assets of the Series of which he is a Shareholder or former Shareholder to
be held harmless from and indemnified against all loss and expense arising from
such liability.
Section 8. No Preemptive Rights. Shareholders shall have no preemptive or
--------- --------------------
other right to subscribe to any additional Shares or other securities issued by
the Trust.
Section 9. Derivative Claims. No Shareholder shall have the right to
--------- -----------------
bring or maintain any court action, proceeding or claim on behalf of this Trust
or any Series without first making demand on the Trustees requesting the
Trustees to bring or maintain such action, proceeding or claim. Such demand
shall be excused only when the plaintiff makes a specific showing that
irreparable injury to the Trust or Series would otherwise result. Such demand
shall be mailed to the Clerk of the Trust at the Trust's principal office and
shall set forth in
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reasonable detail the nature of the proposed court action, proceeding or claim
and the essential facts relied upon by the Shareholder to support the
allegations made in the demand. The Trustees shall consider such demand within
45 days of its receipt by the Trust. In their sole discretion, the Trustees may
submit the matter to a vote of Shareholders of the Trust or Series, as
appropriate. Any decision by the Trustees to bring, maintain or settle (or not
to bring, maintain or settle) such court action, proceeding or claim, or to
submit the matter to a vote of Shareholders shall be made by the Trustees in
their business judgment and shall be binding upon the Shareholders. Any
decision by the Trustees to bring or maintain a court action, proceeding or suit
on behalf of the Trust or a Series shall be subject to the right of the
Shareholders under Article V, Section 1 hereof to vote on whether or not such
court action, proceeding or suit should or should not be brought or maintained.
ARTICLE IV
The Trustees
Section 1. Election and Tenure. The initial Trustee shall be Monte D.
--------- -------------------
Calvin. Trustees may fix the number of Trustees, fill vacancies in the Trustees,
including vacancies arising from an increase in the number of Trustees, or
remove Trustees with or without cause. Each Trustee shall serve during the
continued lifetime of the Trust until he dies, resigns or is removed, or, if
sooner, until the next meeting of Shareholders called for the purpose of
electing Trustees and until the election and qualification of his successor.
Any Trustee may resign at any time by written instrument signed by him and
delivered to any officer of the Trust or to a meeting of the Trustees. Such
resignation shall be effective upon receipt unless specified to be effective at
some other time. Except to the extent expressly provided in a written agreement
with the Trust, no Trustee resigning and no Trustee removed shall have any right
to any compensation for any period following his resignation or removal, or any
right to damages on account of such removal. The Shareholders may fix the
number of Trustees and elect Trustees at any meeting of Shareholders called by
the Trustees for that purpose.
Section 2. Effect of Death, Resignation, Etc. of a Trustee. The death,
--------- -----------------------------------------------
declination, resignation, retirement, removal or incapacity of the Trustees, or
any of them, shall not operate to annul the Trust or to revoke any existing
agency created pursuant to the terms of this Declaration of Trust.
Section 3. Powers. Subject to the provisions of this Declaration of
--------- ------
Trust, the business of the Trust shall be managed by the Trustees, and they
shall have all powers necessary or convenient to carry out that responsibility
including the power to engage in securities transactions of all kinds on behalf
of the Trust. Without limiting the foregoing, the Trustees may adopt Bylaws not
inconsistent with this Declaration of Trust providing for the regulation and
management of the affairs of the Trust and may amend and repeal them to the
extent that such Bylaws do not reserve that right to the Shareholders; they may
fill vacancies in or remove from their number (including any vacancies created
by an increase in the number of Trustees);
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they may remove from their number with or without cause; they may elect and
remove such officers and appoint and terminate such agents as they consider
appropriate; they may appoint from their own number and terminate one or more
committees consisting of two or more Trustees which may exercise the powers and
authority of the Trustees to the extent that the Trustees determine; they may
employ one or more custodians of the assets of the Trust and may authorize such
custodians to employ subcustodians and to deposit all or any part of such assets
in a system or systems for the central handling of securities or with a Federal
Reserve Bank; they may retain a transfer agent or a shareholder servicing agent,
or both; they may provide for the distribution of Shares by the Trust, through
one or more principal underwriters or otherwise; they may set record dates for
the determination of Shareholders with respect to various matters; and in
general they may delegate such authority as they consider desirable to any
officer of the Trust, to any committee of the Trustees and to any agent or
employee of the Trust or to any such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and
authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or write
options with respect to or otherwise deal in any property rights relating to any
or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
proxies or powers of attorney to such person or persons as the Trustees shall
deem proper, granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(d) To exercise powers and rights of subscription or otherwise which in any
manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form, or in its own name or
in the name of a custodian or subcustodian or a nominee or nominees or
otherwise;
(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which is
held in the Trust; to consent to any contract, lease, mortgage, purchase or sale
of property by such corporation or issuer; and to pay calls or subscriptions
with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and
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authority with relation to any security (whether or not so deposited or
transferred) as the Trustees shall deem proper, and to agree to pay, and to pay,
such portion of the expenses and compensation of such committee, depositary or
trustee as the Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of or
against the Trust or any matter in controversy, including but not limited to
claims for taxes;
(i) To enter into joint ventures, general or limited partnerships and any
other combinations or associations;
(j) To borrow funds or other property;
(k) To endorse or guarantee the payment of any notes or other obligations
of any person; to make contracts of guaranty or suretyship, or otherwise assume
liability for payment thereof;
(l) To purchase and pay for entirely out of Trust property such insurance
as they may deem necessary or appropriate for the conduct of the business,
including without limitation, insurance policies insuring the assets of the
Trust and payment of distributions and principal on its portfolio investments,
and insurance policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers, principal underwriters, or independent contractors
of the Trust individually against all claims and liabilities of every nature
arising by reason of holding, being or having held any such office or position,
or by reason of any action alleged to have been taken or omitted by any such
person as Trustee, officer, employee, agent, investment adviser, principal
underwriter, or independent contractor, including any action taken or omitted
that may be determined to constitute negligence, whether or not the Trust would
have the power to indemnify such person against liability; and
(m) To pay pensions as deemed appropriate by the Trustees and to adopt,
establish and carry out pension, profit-sharing, share bonus, share purchase,
savings, thrift and other retirement, incentive and benefit plans, trusts and
provisions, including the purchasing of life insurance and annuity contracts as
a means of providing such retirement and other benefits, for any or all of the
Trustees, officers, employees and agents of the Trust.
(n) To enter into forward commitments, futures contracts and swap
contracts and to buy and sell options on futures contracts or swap contracts and
to buy and or to enter into transactions with respect to any other securities or
derivative instruments.
(o) To engage in any other lawful act or activity in which corporations
organized under the Massachusetts Business Corporation Act may engage.
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<PAGE>
The Trustees shall not in any way be bound or limited by any present or
future law or custom in regard to investments by trustees. The Trustees shall
not be required to obtain any court order to deal with any assets of the Trust
or take any other action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are authorized
--------- --------------------------------
to pay or cause to be paid out of the principal or income of the Trust, or
partly out of principal and partly out of income, as they deem fair, all
expenses, fees, charges, taxes and liabilities incurred or arising in connection
with the Trust, or in connection with the management thereof, including but not
limited to, the Trustees' compensation and such expenses and charges for the
services of the Trust's officers, employees, investment adviser or manager,
principal underwriter, auditor, counsel, custodian, transfer agent, shareholder
servicing agent, and such other agents or independent contractors and such other
expenses and charges as the Trustees may deem necessary or proper to incur.
Section 5. Payment of Expenses by Shareholders. The Trustees shall have
--------- -----------------------------------
the power, as frequently as they may determine, to cause each Shareholder, or
each Shareholder of any particular Series or Class, to pay directly, in advance
or arrears, for charges of the Trust's custodian or transfer, shareholder
servicing or similar agent, an amount fixed from time to time by the Trustees,
by setting off such charges due from such Shareholder from declared but unpaid
dividends owed such Shareholder and/or by reducing the number of Shares in the
account of such Shareholder by that number of full and/or fractional Shares
which represents the outstanding amount of such charges due from such
Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of the assets
--------- --------------------------------
of the Trust shall at all times be considered as vested in the Trustees.
Section 7. Advisory, Management and Distribution Contracts. Subject to
--------- -----------------------------------------------
such requirements and restrictions as may be set forth in the Bylaws, the
Trustees may, at any time and from time to time, contract for exclusive or
nonexclusive advisory and/or management services for the Trust or for any Series
with Composite Research & Management Co. or any other partnership, corporation,
trust, association or other organization (the "Manager"); and any such contract
may contain such other terms as the Trustees may determine, including without
limitation, authority for a Manager to determine from time to time without prior
consultation with the Trustees what investments shall be purchased, held, sold
or exchanged and what portion, if any, of the assets of the Trust shall be held
uninvested and to make changes in the Trust's investments. The Trustees may
also, at any time and from time to time, contract with the Composite Funds
Distributor, Inc. or any other partnership, corporation, trust, association or
other organization, appointing it exclusive or nonexclusive distributor,
principal underwriter or placement agent for the Shares, every such contract to
comply with such requirements and restrictions as may be set forth in the
Bylaws; and any such contract may contain such other terms as the Trustees may
determine.
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<PAGE>
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager, adviser,
principal underwriter, placement agent, distributor or affiliate or agent of or
for any partnership, corporation, trust, association, or other organization, or
of or for any parent or affiliate of any organization, with which an advisory or
management contract, or principal underwriter's or distributor's contract, or
placement agreement, or transfer, shareholder servicing or other agency contract
may have been or may hereafter be made, or that any such organization, or any
parent or affiliate thereof, is a Shareholder or has an interest in the Trust,
or that
(ii) any partnership, corporation, trust, association or other
organization with which an advisory or management contract or principal
underwriter's or distributor's contract, or placement agreement, or transfer,
shareholder servicing or other agency contract may have been or may hereafter be
made also has an advisory or management contract, or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or other agency
contract with one or more other corporations, trusts, associations, or other
organizations, or has other business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. The Shareholders shall have power to vote only
--------- -------------
(i) for the election of Trustees as provided in Article IV, Section 1, (ii) with
respect to any amendment of this Declaration of Trust to the extent and as
provided in Article IX, Section 8, (iii) to the same extent as the stockholders
of a Massachusetts business corporation as to whether or not a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of the Trust or the Shareholders, (iv) with
respect to the termination of the Trust or any Series to the extent and as
provided in Article IX, Section 4, and (v) with respect to such additional
matters relating to the Trust as may be required by this Declaration of Trust,
the Bylaws or any registration of the Trust with the Commission (or any
successor agency) or any state, or as the Trustees may consider necessary or
desirable. Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them.
A proxy purporting to be
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<PAGE>
executed by or on behalf of a Shareholder shall be deemed valid unless
challenged at or prior to its exercise and the burden of proving invalidity
shall rest on the challenger. At any time when no Shares of a Series or Class
are outstanding, the Trustees may exercise all rights of Shareholders of that
Series or Class with respect to matters affecting that Series or Class and may
with respect to that Series or Class take any action required by law, this
Declaration of Trust or the Bylaws to be taken by the Shareholders.
Section 2. Voting Power and Meetings. Meetings of the Shareholders may be
--------- -------------------------
called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 and for such other purposes as may be prescribed by law,
by this Declaration of Trust or by the Bylaws. Meetings of the Shareholders may
also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by the
Trustees. Written notice of any meeting of Shareholders shall be given or caused
to be given by the Trustees by mailing such notice at least seven days before
such meeting, postage prepaid, stating the time and place of the meeting, to
each Shareholder at the Shareholder's address as it appears on the records of
the Trust. Whenever notice of a meeting is required to be given to a
Shareholder under this Declaration of Trust or the Bylaws, a written waiver
thereof, executed before or after the meeting by such Shareholder or his
attorney thereunto authorized and filed with the records of the meeting, shall
be deemed equivalent to such notice.
Section 3. Quorum and Required Vote. Except when a larger quorum is
--------- ------------------------
required by law, by the Bylaws or by this Declaration of Trust, 10% of the
Shares entitled to vote shall constitute a quorum at a Shareholders' meeting.
When any one or more Series or Class is to vote as a single class separate from
any other Shares which are to vote on the same matters as a separate class or
classes, 10% of the Shares of each such class entitled to vote shall constitute
a quorum at a Shareholder's meeting of that class. Any meeting of Shareholders
may be adjourned from time to time by a majority of the votes properly cast upon
the question, whether or not a quorum is present, and the meeting may be held as
adjourned within a reasonable time after the date set for the original meeting
without further notice. When a quorum is present at any meeting, a majority of
the Shares voted shall decide any questions and a plurality shall elect a
Trustee, except when a larger vote is required by any provision of this
Declaration of Trust or the Bylaws or by law. If any question on which the
Shareholders are entitled to vote would adversely affect (as defined in Rule
18f-2 under the 1940 Act) the rights of any Series or Class of Shares, the vote
of a majority (or such larger vote as is required as aforesaid) of the Shares of
such Series or class which are entitled to vote, voting separately, shall be
required to decide such question.
Section 4. Action by Written Consent. Any action taken by Shareholders
--------- -------------------------
may be taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the Bylaws)
and/or holding a majority (or such larger proportion as aforesaid) of the Shares
of any Series or Class entitled to vote separately on the matter consent
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<PAGE>
to the action in writing and such written consents are filed with the records of
the meetings of Shareholders. Such consent shall be treated for all purposes as
a vote taken at a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the Shareholders
--------- ------------
of any Series or Class who are entitled to vote or act at any meeting or any
adjournment thereof, the Trustees may from time to time fix a time as the record
date for determining the Shareholders of such Series or Class having the right
to notice of and to vote at such a meeting and any adjournment thereof, and in
such case only Shareholders of record on such record date shall have such right,
notwithstanding any transfer of Shares on the books of the Trust after the
record date. For the purpose of determining the Shareholders of any Series or
Class who are entitled to receive payment of any dividend or of any other
distribution, the Trustees may from time to time fix a date, which shall be
before the date for the payment of such dividend or such other payment, as the
record date for determining the Shareholders of such Series or Class having the
right to receive such dividend or distribution. Without fixing a record date
the Trustees may for voting and/or distribution purposes close the register or
transfer books for one or more Series or Class for all or any part of the period
between a record date and a meeting of shareholders or the payment of a
distribution. Nothing in this section shall be construed as precluding the
Trustees from setting different record dates for different Series or Classes.
Section 6. Additional Provisions. The Bylaws may include further
--------- ---------------------
provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Income, Distributions, and Redemptions and Repurchases
Section 1. Distributions of Net Income. The Trustees may each year, or
--------- ---------------------------
more frequently if they so determine in their sole discretion, distribute to the
Shareholders of each Series or Class, in shares of that Series or Class, cash or
otherwise, some or all of the net income attributable to the assets belonging to
such Series or Class, and may from time to time distribute to the Shareholders
of each Series or Class, in shares of that Series or Class, cash or otherwise,
after providing for actual and accrued expenses and liabilities of such Series
or Class, such additional amounts as they may authorize, but only from the
assets belonging to such Series (or allocable to such Class). All dividends and
distributions on Shares of a particular Series or Class shall be distributed pro
rata to the holders of that Series or Class in proportion to the number of
Shares of that Series or Class held by such holders and recorded on the books of
the Trust at the date and time of record established for that payment of such
dividend or distributions.
The manner of determining net income, income, asset values, capital gains,
expenses, liabilities and reserves of any Series or Class may from time to time
be altered as necessary or desirable in the judgment of the Trustees to conform
such manner of determination to any
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other method prescribed or permitted by applicable law. Net income shall be
determined by the Trustees or by such person as they may authorize at the times
and in the manner provided in the Bylaws. Determinations of net income of any
Series or Class and determinations of income, asset values, capital gains,
expenses, and liabilities made by the Trustees, or by such person as they may
authorize, in good faith, shall be binding on all parties concerned. The
foregoing sentence shall not be construed to protect any Trustee, officer or
agent of the Trust against any liability to the Trust or its security holders to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
If, for any reason, the net income of any Series or Class determined at any
time is a negative amount, in the discretion of the Trustees the pro rata share
of such negative amount allocable to each Shareholder of such Series or Class
may constitute a liability of such Shareholder to that Series or Class which
shall be paid out of such Shareholder's account at such times and in such manner
as the Trustees may from time to time determine (x) out of the accrued dividend
account of such Shareholder, (y) by reducing the number of Shares of that Series
or Class in the account of such Shareholder, or (z) otherwise.
Section 2. Redemptions and Repurchases. The Trust shall purchase such
--------- ---------------------------
Shares as offered by any Shareholder for redemption, upon the presentation of a
proper instrument of transfer together with a request directed to the Trust or a
person designated by the Trust that the Trust purchase such Shares or in
accordance with such other procedures for redemption as the Trustees may from
time to time authorize; and the Trust will pay therefor the net asset value
thereof, as determined in accordance with the Bylaws, the 1940 Act and the rules
of the Commission. Payment for said Shares shall be made by the Trust to the
Shareholder within seven days after the date on which the request is made or in
accordance with such other procedures, consistent with the 1940 Act and the
rules of the Commission, as the Trustees may from time to time authorize. The
obligation set forth in this Section 2 is subject to the provision that in the
event that at any time the New York Stock Exchange (the "Exchange") is closed
for other than weekends or holidays, or if permitted by the rules of the
Commission during periods when trading on the Exchange is restricted or during
any emergency which makes it impracticable for the Trust to dispose of the
investments of the applicable Series or to determine fairly the value of the net
assets belonging to such Series or during any other period permitted by order of
the Commission for the protection of investors, such obligations may be
suspended or postponed by the Trustees. The Trust may also purchase or
repurchase Shares at a price not exceeding the net asset value of such Shares in
effect when the purchase or repurchase or any contract to purchase or repurchase
is made.
The redemption price may in any case or cases be paid wholly or partly in
kind if the Trustees determine that such payment is advisable in the interests
of the remaining Shareholders of the Series or Class the Shares of which are
being redeemed. In making any such payment wholly or partly in kind, the Trust
shall, so far as may be practicable, deliver assets which approximate the
diversification of all of the assets belonging at the time to the
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Series or Class the Shares of which are being redeemed. Subject to the
foregoing, the fair value, selection and quantity of securities or other
property so paid or delivered as all or part of the redemption price may be
determined by or under authority of the Trustees. In no case shall the Trust be
liable for any delay of any corporation or other person in transferring
securities selected for delivery as all or part of any payment in kind.
Section 3. Redemptions at the Option of the Trust. The Trust shall have
--------- --------------------------------------
the right at its option and at any time to redeem Shares of any Shareholder at
the net asset value thereof as described in Section 2 of this Article VI: (I) if
at such time such Shareholder owns Shares of any Series or Class having an
aggregate net asset value of less than an amount determined from time to time by
the Trustees; or (ii) to the extent that such Shareholder owns Shares equal to
or in excess of a percentage determined from time to time by the Trustees of the
outstanding Shares of the Trust or of any Series or Class.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees as such shall be entitled to
--------- ------------
reasonable compensation from the Trust; they may fix the amount of their
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
services and payment of the same by the Trust.
Section 2. Limitation of Liability. The Trustees shall not be responsible
--------- -----------------------
or liable in any event for any neglect or wrong-doing of any officer, agent,
employee, Manager or principal underwriter of the Trust, nor shall any Trustee
be responsible for the act or omission of any other Trustee, but nothing herein
contained shall protect any Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever issued, executed or done by or on behalf of
the Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their or his capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
ARTICLE VIII
Indemnification
Section 1. Trustees, Officers, Etc. The Trust shall indemnify each of its
--------- -----------------------
Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise) (hereinafter referred to
as a "Covered Person") against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as
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fines and penalties, and counsel fees reasonably incurred by any Covered Person
in connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a Covered Person except with respect to any matter as to which such
Covered Person shall have been finally adjudicated in any such action, suit or
other proceeding to be liable to the Trust or its Shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office. Expenses,
including counsel fees so incurred by any such Covered Person (but excluding
amounts paid in satisfaction of judgments, in compromise or as fines or
penalties), shall be paid from time to time by Trust in advance of the final
disposition of any such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that indemnification of such expenses
is not authorized under this Article, provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (provided that a majority of the disinterested Trustees then in office
act on the matter), or independent legal counsel in a written opinion, shall
have determined, based upon a review of readily available facts (as opposed to a
full trial type inquiry) that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Article.
Section 2. Compromise Payment. As to any matter disposed of (whether by a
--------- ------------------
compromise payment, pursuant to a consent decree or otherwise) without an
adjudication by a court, or by any other body before which the proceeding was
brought, that such Covered Person is liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, indemnification
shall be provided if (a) approved, after notice that it involves such
indemnification, by at least a majority of the disinterested Trustees acting on
the matter (provided that a majority of the disinterested Trustees then in
office act on the matter) upon a determination, based upon a review of readily
available facts (as opposed to a full trial type inquiry) that such Covered
Person is not liable to the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, or (b) there has been obtained an
opinion in writing of independent legal counsel, based upon a review of readily
available facts (as opposed to a full trial type inquiry) to the effect that
such indemnification would not protect such Person against any liability to the
Trust to which he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office. Any approval pursuant to this Section shall not
prevent the recovery from any Covered Person of any amount paid to such Covered
Person in accordance with this Section as indemnification if such Covered Person
is subsequently adjudicated by a court of competent jurisdiction to have been
liable to the Trust or its Shareholders by reason of
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<PAGE>
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office.
Section 3. Indemnification Not Exclusive. The right of indemnification
--------- -----------------------------
hereby provided shall not be exclusive of or affect any other rights to which
such Covered Person may be entitled. As used in this Article VIII, the term
"Covered Person" shall include such person's heirs, executors and administrators
and a "disinterested Trustee" is a Trustee who is not an "interested person" of
the Trust as defined in Section 2(a)(19) of the 1940 Act (or who has been
exempted from being an "interested person" by any rule, regulation or order of
the Commission), and against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been pending. Nothing contained in this Article shall
affect any rights to indemnification to which personnel of the Trust, other than
Trustees or officers, and other persons may be entitled by contract or otherwise
under law, nor the power of the Trust to purchase and maintain liability
insurance on behalf of any such person; provided, however, that the Trust shall
not purchase or maintain any such liability insurance in contravention of
applicable law, including without limitation the 1940 Act.
Section 4. Shareholders. In case any Shareholder or former Shareholder
--------- ------------
shall be held to be personally liable solely by reason of his or her being or
having been a Shareholder and not because of his or her acts or omissions or for
some other reason, the Shareholder or former Shareholder (or his or her heirs,
executors, administrators or other legal representatives or in the case of a
corporation or other entity, its corporate or other general successor) shall be
entitled to be held harmless from and indemnified against all loss and expense
arising from such liability, but only out of the assets of the particular Series
of Shares of which he or she is or was a Shareholder.
ARTICLE IX
Miscellaneous
Section 1. Trustees, Shareholders, Etc. Not Personally Liable; Notice.
--------- ----------------------------------------------------------
All persons extending credit to, contracting with or having any claim against
the Trust or any Series shall look only to the assets of the Trust or to the
assets of that particular Series for payment under such credit, contract or
claim; and neither Shareholders nor the Trustees, nor any of the Trust's
officers, employees or agents, whether past, present or future, shall be
personally liable therefor. Nothing in this Declaration of Trust shall protect
any Trustee against any liability to which such Trustee would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of
Trustee.
Every note, bond, contract, instrument, certificate or undertaking made or
issued on behalf of the Trust by the Trustees, by any officers or officer or
otherwise shall give notice that this Declaration of Trust is on file with the
Secretary of State of The Commonwealth of
-18-
<PAGE>
Massachusetts and shall recite that the same was executed or made by or on
behalf of the Trust or by them as Trustee or Trustees or as officer or officers
or otherwise and not individually and that the obligations of such instrument
are not binding upon any of them or the shareholders individually but are
binding only upon the assets and property of the Trust or upon the assets
belonging to the Series for the benefit of which the Trustees have caused the
note, bond, contract, instrument, certificate or undertaking to be made or
issued, and may contain such further recital as he or they may deem appropriate,
but the omission of any such recital shall not operate to bind any Trustee or
Trustees or officer or officers or Shareholders or any other person
individually.
Section 2. Trustee's Good Faith Action, Expert Advice, No Bond or Surety.
--------- -------------------------------------------------------------
The exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable for his or her own
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee, and for nothing else,
and shall not be liable for errors of judgment or mistakes of fact or law. The
Trustees may take advice of counsel or other experts with respect to the meaning
and operation of this Declaration of Trust, and shall be under no liability for
any act or omission in accordance with such advice or for failing to follow such
advice. The Trustees shall not be required to give any bond as such, nor any
surety if a bond is required.
Section 3. Liability of Third Persons Dealing with Trustees. No person
--------- ------------------------------------------------
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
Section 4. Termination of Trust or Series. Unless terminated as provided
--------- ------------------------------
herein, the Trust shall continue without limitation of time. The Trust may be
terminated at any time by vote of at least 50% of the Shares of each Series
entitled to vote and voting separately by Series or by the Trustees by written
notice to the Shareholders. Any Series may be terminated at any time by vote of
at least 50% of the Shares of that Series or by the Trustees by written notice
to the Shareholders of that Series.
Upon termination of the Trust (or any Series, as the case may be), after
paying or otherwise providing for all charges, taxes, expenses and liabilities
belonging, severally, to each Series (or the applicable Series, as the case may
be), whether due or accrued or anticipated as may be determined by the Trustees,
the Trust shall in accordance with such procedures as the Trustees consider
appropriate reduce the remaining assets belonging, severally, to each Series (or
the applicable Series, as the case may be), to distributable form in cash or
shares or other securities, or any combination thereof, and distribute the
proceeds belonging to each Series (or the applicable Series, as the case may
be), to the Shareholders of that Series, as a Series, ratably according to the
number of Shares of that Series held by the several Shareholders on the date of
termination.
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<PAGE>
Section 5. Merger and Consolidation. The Trustees may cause the Trust to
--------- ------------------------
be merged into or consolidated with another trust or company or its shares
exchanged under or pursuant to any state or federal statute, if any, or
otherwise to the extent permitted by law, if such merger or consolidation or
share exchange has been authorized by vote of a majority of the outstanding
Shares, as such phrase is defined in the 1940 Act; provided that in all respects
not governed by statute or applicable law, the Trustees shall have power to
prescribe the procedure necessary or appropriate to accomplish a merger,
consolidation or share exchange.
Section 6. Filing of Copies, References, Headings. The original or a copy
--------- --------------------------------------
of this instrument and of each amendment hereto shall be kept at the office of
the Trust where it may be inspected by any Shareholder. A copy of this
instrument and of each amendment hereto shall be filed by the Trust with the
Secretary of State of The Commonwealth of Massachusetts and with any other
governmental office where such filing may from time to time be required. Anyone
dealing with the Trust may rely on a certificate by an officer of the Trust as
to whether or not any such amendments have been made and as to any matters in
connection with the Trust hereunder; and, with the same effect as if it were the
original, may rely on a copy certified by an officer of the Trust to be a copy
of this instrument or of any such amendments. In this instrument and in any such
amendment, references to this instrument, and all expressions like "herein,"
"hereof" and "hereunder" shall be deemed to refer to this instrument as amended
or affected by any such amendments. Headings are placed herein for convenience
of reference only and shall not be taken as a part hereof or control or affect
the meaning, construction or effect of this instrument. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original.
Section 7. Applicable Law. This Declaration of Trust is made in The
--------- --------------
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth. The
Trust shall be of the type commonly called a Massachusetts business trust, and
without limiting the provisions hereof, the Trust may exercise all powers which
are ordinarily exercised by such a trust.
Section 8. Amendments. This Declaration of Trust may be amended at any
--------- ----------
time by an instrument in writing signed by a majority of the then Trustees when
authorized so to do by vote of a majority of the Shares entitled to vote, except
that amendments described in Article III, Section 5 hereof or having the purpose
of changing the name of the Trust or of supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision contained herein shall not require authorization by Shareholder vote.
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<PAGE>
IN WITNESS WHEREOF, the initial Trustee as aforesaid does hereto set his
hand this 19th day of September, 1997.
MONTE D. CALVIN
--------------------------------
Monte D. Calvin
Initial Trustee
Dated: September 19, 1997
The address of the Trust is:
601 West Main Avenue, Suite 801
Spokane, Washington 99201-0613
The address of the Initial Trustee is c/o:
Murphey Favre Securities
601 West Main Avenue, Suite 801
Spokane, Washington 92201-0613
The Trust's resident agent is:
CT Corporation System:
2 Oliver Street
Boston, MA 02109
The address of the Initial Trustee is c/o
Murphey Favre Securities
601 West Main Avenue, Suite 801
Spokane, Washington 92201-0613
The Trust's resident agent is:
CT Corporation System:
2 Oliver Street
Boston, MA 02109
<PAGE>
BYLAWS
OF
THE COMPOSITE FUNDS
ARTICLE 1
Agreement and Declaration of Trust and
Principal Office
1.1. Agreement and Declaration of Trust. These Bylaws shall be subject to
----------------------------------
the Agreement and Declaration of Trust, as from time to time in effect (the
"Declaration of Trust"), of The Composite Funds, the Massachusetts business
trust established by the Declaration of Trust (the "Trust").
1.2. Principal Office of the Trust. The initial principal office of the
-----------------------------
Trust shall be located at 601 West Main Avenue, Suite 801, Spokane, Washington
99201-0613. The Trust may have such other offices within or without
Massachusetts as the Trustee may determine or as they may authorize.
ARTICLE 2
Meetings of Trustees
2.1. Regular Meetings. Regular meetings of the Trustees may be held
----------------
without call or notice at such places and at such times as the Trustees may from
time to time determine, provided that notice of the first regular meeting
following any such determination shall be given to absent Trustees.
2.2. Special Meetings. Special meetings of the Trustees may be held at
----------------
any time and at any place designated in the call of the meeting when called by
the Chairman of the Trustees, the President or the Treasurer or by two or more
Trustees, sufficient notice thereof being given to each Trustee by the Clerk or
an Assistant Clerk or by the officer or the Trustees calling the meeting.
2.3. Notice. It shall be sufficient notice to a Trustee of a special
------
meeting to send notice by mail at least forty-eight hours or by telegram, telex
or telecopy or other electronic facsimile transmission method at least twenty-
four hours before the meeting addressed to the Trustee at his or her usual or
last known business or residence address or to give notice to him or her in
person or by telephone at least twenty-four hours before the meeting. Notice of
a meeting need not be given to any Trustee if a written waiver of notice,
executed by him or her before the meeting, is filed with the records of the
meeting, or to any Trustee who attends the meeting without protesting prior
thereto or at its commencement the lack of notice to him or her. Neither notice
of a meeting nor a waiver of a notice need specify the purposes of the meeting.
<PAGE>
2.4. Quorum. At any meeting of the Trustees a majority of the Trustees
------
then in office shall constitute a quorum. Any meeting may be adjourned from
time to time by a majority of the votes cast upon the question, whether or not a
quorum is present, and the meeting may be held as adjourned without further
notice.
2.5. Action by Vote. When a quorum is present at any meeting, a majority
--------------
of Trustees present may take any action, except when a larger vote is expressly
required by law, by the Declaration of Trust or by these Bylaws.
2.6. Action by Writing. Except as required by law, any action required or
-----------------
permitted to be taken at any meeting of the Trustees may be taken without a
meeting if a majority of the Trustees (or such larger proportion thereof as
shall be required by any express provision of the Declaration of Trust or these
Bylaws) consent to the action in writing and such written consents are filed
with the records of the meetings of Trustees. Such consent shall be treated for
all purposes as a vote taken at a meeting of Trustees.
2.7. Presence through Communications Equipment. Except as required by
-----------------------------------------
law, the Trustees may participate in a meeting of Trustees by means of a
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other at the same time and
participation by such means shall constitute presence in person at a meeting.
ARTICLE 3
Officers
3.1. Enumeration; Qualification. The officers of the Trust shall be a
--------------------------
President, a Treasurer, a Clerk, and such other officers, including a Chairman
of the Trustees and a Controller, if any, as the Trustees from time to time may
in their discretion elect. The Trust may also have such agents as the Trustees
from time to time may in their discretion appoint. The Chairman of the Trustees,
if one is elected, shall be a Trustee and may but need not be a Shareholder; and
any other officer may but need not be a Trustee or a Shareholder. Any two or
more offices may be held by the same person.
3.2. Election. The President, the Treasurer, and the Clerk shall be
--------
elected annually by the Trustees. Other officers, if any, may be elected or
appointed by the Trustees at such or any other time. Vacancies in any office
may be filled at any time.
3.3. Tenure. The Chairman of the Trustees, if one is elected, the
------
President, the Treasurer and the Clerk shall hold office until their respective
successors are chosen and qualified, or in each case until he or she sooner
dies, resigns, is removed or becomes disqualified. Each other officer shall
hold office and each agent shall retain authority at the pleasure of the
Trustees.
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<PAGE>
3.4. Powers. Subject to the provisions of these Bylaws, each officer
------
shall have, in addition to the duties and powers herein and in the Declaration
of Trust set forth, such duties and powers as are commonly incident to the
office occupied by him or her as if the Trust were organized as a Massachusetts
business corporation and such other duties and powers as the Trustees may from
time to time designate.
3.5. Chairman; President. Unless the Trustees otherwise provide, the
-------------------
Chairman of the Trustees or, if there is none or in the absence of the Chairman,
the President shall preside at all meetings of the Shareholders and of the
Trustees. The President shall be the chief executive officer.
3.6. Treasurer and Controller. The Treasurer shall be the chief financial
------------------------
officer and, if no Controller is elected, chief accounting officer of the Trust,
and shall, subject to the provisions of the Declaration of Trust and to any
arrangement made by the Trustees with a custodian, investment adviser or
manager, or transfer, shareholder servicing or similar agent, be in charge of
the valuable papers and, if no Controller is elected, the books of account and
accounting records of the Trust, and shall have such other duties and powers as
may be designated from time to time by the Trustees or by the President.
The Controller, if any, shall be the chief accounting officer of the Trust
and shall be in charge of its books of account and accounting records. The
Controller shall be responsible for preparation of financial statements of the
Trust and shall have such other duties and powers as may be designated from time
to time by the Trustees or the President.
3.7. Clerk. The Clerk shall record all proceedings of the Shareholders
-----
and the Trustees in books to be kept therefor, which books or a copy thereof
shall be kept at the principal office of the Trust. In the absence of the Clerk
from any meeting of the Shareholders or Trustees, an assistant clerk or, if
there be none or if he or she is absent, a temporary clerk chosen at such
meeting shall record the proceedings thereof in the aforesaid books.
3.8. Resignations. Any officer may resign at any time by written
------------
instrument signed by him or her and delivered to the Chairman, the President or
the Clerk or to a meeting of the Trustees. Such resignation shall be effective
upon receipt unless specified to be effective at some other time. Except to the
extent expressly provided in a written agreement with the Trust, no officer
resigning and no officer removed shall have any right to any compensation for
any period following his or her resignation or removal, or any right to damages
on account of such removal.
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<PAGE>
ARTICLE 4
Committees
4.1. Quorum; Voting. A majority of the members of any Committee of
--------------
the Trustees shall constitute a quorum for the transaction of business, and any
action of such a Committee may be taken at a meeting by a vote of a majority of
the members present (a quorum being present) or evidenced by one or more
writings signed by such a majority. Members of a Committee may participate in a
meeting of such Committee by means of a conference telephone or other
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting.
ARTICLE 5
Reports
5.1. General. The Trustees and officers shall render reports at the
-------
time and in the manner required by the Declaration of Trust or any applicable
law. Officers and Committees shall render such additional reports as they may
deem desirable or as may from time to time be required by the Trustees.
ARTICLE 6
Fiscal Year
6.1. General. Except as from time to time otherwise provided by the
-------
Trustees, the initial fiscal year of the Trust shall end on such date as is
determined in advance or in arrears by the Treasurer, and subsequent fiscal
years shall end on such date in subsequent years.
ARTICLE 7
Seal
7.1. General. The Trust shall have no seal.
-------
ARTICLE 8
Execution of Papers
8.1. General. Except as the Trustees may generally or in particular
-------
cases authorize the execution thereof in some other manner, all deeds, leases,
contracts, notes and other obligations made by the Trustees shall be signed by
the President or by the Treasurer.
-4-
<PAGE>
ARTICLE 9
Share Certificates
9.1. Share Certificates. No certificates certifying the ownership of
------------------
Shares shall be issued except as the Trustee may otherwise authorize. In the
event that the Trustees authorize the issuance of Share certificates, subject to
the provisions of Section 9.3, each Shareholder shall be entitled to a
certificate stating the number of Shares and the series or class owned by him or
her, in such form as shall be prescribed from time to time by the Trustees.
Such certificates shall be signed by the President or any Vice-President and by
the Treasurer or any Assistant Treasurer. Such signatures may be facsimiles if
the certificate is signed by a transfer agent, or by a registrar, other than a
Trustee, officer or employee of the Trust. In case any officer who has signed
or whose facsimile signature has been placed on such certificate shall cease to
be such officer before such certificate is issued, it may be issued by the Trust
with the same effect as if he or she were such officer at the time of its issue.
In lieu of issuing certificates for Shares, the Trustees or the
transfer agent may either issue receipts therefor or may keep accounts upon the
books of the Trust for the record holders of such Shares, who shall in either
case be deemed, for all purposes hereunder, to be the holders of certificates
for such Shares as if they had accepted such certificates and shall be held to
have expressly assented and agreed to the terms hereof.
9.2. Loss of Certificates. In case of the alleged loss or
--------------------
destruction or the mutilation of a Share certificate, a duplicate certificate
may be issued in place thereof, upon such terms as the Trustees may prescribe.
9.3. Discontinuance of Issuance of Certificates. The Trustees may at
------------------------------------------
any time discontinue the issuance of Share certificates and may, by written
notice to each Shareholder, require the surrender of Share certificates to the
Trust for cancellation. Such surrender and cancellation shall not affect the
ownership of Shares in the Trust.
ARTICLE 10
Provisions Relating to the Conduct of the Trust's Business
10.1. Determination of Net Asset Value Per Share. Net asset value
------------------------------------------
per Share of each series or class of Shares of the Trust shall mean: (i) the
value of all the assets of such series or class of Shares; (ii) less total
liabilities of such series or class of Shares; (iii) divided by the number of
Shares of such series or class of Shares outstanding, in each case at the time
of each determination. The net asset value per Share of each series or class of
Shares shall be determined at such times as determined by the Trustees.
In valuing the portfolio investments of any series or class of Shares
for determination of net asset value per Share of such series, securities for
which market quotations are readily available shall be valued at prices which,
in the opinion of the Trustees or the person
-5-
<PAGE>
designated by the Trustees to make the determination, most nearly represent the
market value of such securities, and other securities and asset shall be valued
at their fair value as determined by or pursuant to the direction of the
Trustees, which in the case of short-term debt obligations, commercial paper and
repurchase agreements may, but need not, be on the basis of quoted yields for
securities of comparable maturity, quality and type, or on the basis of
amortized cost. Expenses and liabilities of the Trust shall be accrued each
day. Liabilities may include such reserves for taxes, estimated accrued
expenses and contingencies as the Trustees or their designates may in their sole
discretion deem fair and reasonable under the circumstances. No accruals shall
be made in respect of taxes on unrealized appreciation of securities owned
unless the Trustees shall otherwise determine. Dividends payable by the Trust
shall be deducted as at the time of but immediately prior to the determination
of net asset value per Share on the record date thereof.
10.2. Derivative Claims. No Shareholder shall have the right to
-----------------
bring or maintain any court action, proceeding or claim on behalf of this Trust
or any series without first making demand on the Trustees requesting the
Trustees to bring or maintain such action, proceeding or claim. Such demand
shall be excused only when the plaintiff makes a specific showing that
irreparable injury to the Trust or Series would otherwise result. Such demand
shall be mailed to the Clerk of the Trust at the Trust's principal office and
shall set forth in reasonable detail the nature of the proposed court action,
proceeding or claim and the essential facts relied upon by the Shareholder to
support the allegations made in the demand. The Trustees shall consider such
demand within 45 days of its receipt by the Trust. In their sole discretion,
the Trustees may submit the matter to a vote of Shareholders of the Trust or
series, as appropriate. Any decision by the Trustees to bring, maintain or
settle (or not to bring, maintain or settle) such court action, proceeding or
claim, or to submit the matter to a vote of Shareholders shall be made by the
Trustees in their business judgment and shall be binding upon the Shareholders.
Any decision by the Trustees to bring or maintain a court action, proceeding or
suit on behalf of the Trust or a series shall be subject to the right of the
Shareholders under Article V, Section 1 of the Declaration of Trust to vote on
whether or not such court action, proceeding or suit should or should not be
brought or maintained.
10.3. Securities and Cash of the Trust to be held by Custodian
--------------------------------------------------------
Subject to Certain Terms and Conditions.
- ---------------------------------------
(a) All securities and cash owned by this Trust shall be held by or
deposited with one or more banks or trust companies having
(according to its last published report) not less than $5,000,000
aggregate capital, surplus and undivided profits (any such bank
or trust company being hereby designated as "Custodian"),
provided such a Custodian can be found ready and willing to act;
subject to such rules, regulations and orders, if any, as the
Securities and Exchange Commission may adopt, this Trust may, or
may permit any Custodian to, deposit all or any part of the
securities owned by this Trust in a system for the central
handling of securities pursuant to which all securities of any
particular
-6-
<PAGE>
class or series of any issue deposited within the system may be
transferred or pledged by bookkeeping entry, without physical
delivery. The Custodian may appoint, subject to the approval of
the Trustees, one or more subcustodians.
(b) The Trust shall enter into a written contract with each Custodian
regarding the powers, duties and compensation of such Custodian
with respect to the cash and securities of the Trust held by such
Custodian. Such contract and all amendments thereto shall be
approved by the Trustees.
(c) The Trust shall upon the resignation or inability to serve of any
Custodian or upon change of any Custodian:
(i) in case of such resignation or inability to serve, use its
best efforts to obtain a successor Custodian;
(ii) require that the cash and securities owned by the Trust be
delivered directly to the successor Custodian; and
(iii) in the event that no successor Custodian can be found,
submit to the Shareholders, before permitting delivery of
the cash and securities owned by the Trust to a successor
Custodian, the question whether the Trust shall be
liquidated or shall function without a Custodian.
ARTICLE 11
Shareholders' Voting Powers and Meetings
11.1. Voting Powers. The Shareholders shall have power to vote only
-------------
(i) for the election of Trustees as provided in Article IV, Section 1 of the
Declaration of Trust, provided, however, that no meeting of Shareholders is
-------- -------
required to be called for the purpose of electing Trustees unless and until such
time as less than a majority of the Trustees have been elected by the
Shareholders, (ii) with respect to any investment adviser as provided in Article
IV, Section 7 of the Declaration of Trust to the extent required by the 1940
Act, (iii) with respect to any plan of distribution adopted by the Trustees with
respect to one or more series or classes pursuant to Rule 12b-1 under the 1940
Act, (iv) with respect to any termination of this Trust to the extent and as
provided in Article IX, Section 4 of the Declaration of Trust, (v) with respect
to any amendment of the Declaration of Trust to the extent and as provided in
Article IX, Section 8 of the Declaration of Trust, (vi) to the same extent as
the stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
and (vii) with respect to such additional matters relating to the Trust as may
be required by law, the Declaration of Trust, these Bylaws or any registration
of the Trust with the Commission (or any successor agency) or any state, or as
the Trustees may consider necessary or desirable. Annual meetings of
Shareholders are not required by these
-7-
<PAGE>
Bylaws. Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. The Shareholders of any particular series or
class shall not be entitled to vote on any matters as to which such series or
class is not affected. Except with respect to matters as to which the Trustees
have determined that only the interests of one or more particular series or
classes are affected or as required by law, all of the Shares of each series or
class shall, on matters as to which such series or class is entitled to vote,
vote with other series or classes so entitled as a single class.
Notwithstanding the foregoing, with respect to matters which would otherwise be
voted on by two or more series or classes as a single class, the Trustees may,
in their sole discretion, submit such matters to the Shareholders of any or all
such series or classes, separately. There will be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them.
A proxy purporting to be executed by or on behalf of a Shareholder shall be
deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger. The placing of a Shareholder's
name on a proxy pursuant to telephonic or electronically transmitted
instructions obtained pursuant to procedures reasonably designed to verify that
such instructions have been authorized by such Shareholder shall constitute
execution of such proxy by or on behalf of such Shareholder. Until Shares are
issued, the Trustees may exercise all rights of Shareholders and may take action
required by law, the Declaration of Trust or these Bylaws to be taken by
Shareholders.
11.2. Voting Power and Meetings. Meetings of the Shareholders of the
-------------------------
Trust or of one or more series or classes of Shares may be called by the
Trustees for the purpose of electing Trustees as provided in Article IV, Section
1 of the Declaration of Trust and for such other purposes as may be prescribed
by law, by the Declaration of Trust or by these Bylaws. Meetings of the
Shareholders of the Trust or of one or more series or classes of Shares may also
be called by the Trustees from time to time for the purpose of taking action
upon any other matter deemed by the Trustees to be necessary or desirable. A
meeting of Shareholders may be held at any place designated by the Trustees.
Written notice of any meeting of Shareholders shall be given or caused to be
given by the Trustees by mailing such notice at least seven days before such
meeting, postage prepaid, stating the time and place of the meeting, to each
Shareholder at the Shareholder's address as it appears on the record of the
Trust. Whenever notice of a meeting is required to be given to a Shareholder
under the Declaration of Trust or these Bylaws, a written waiver thereof,
executed before or after the meeting by such Shareholder or his attorney
thereunto authorized and filed with the records of the meeting, shall be deemed
equivalent to such notice.
11.3. Quorum and Required Vote. Ten percent (10%) of Shares entitled
------------------------
to vote shall be a quorum for the transaction of business at a Shareholders'
meeting, except that where any provision of law or of the Declaration of Trust
or these Bylaws permits or requires that holders of any series or class of
Shares shall vote as a series or class, as the case may be, then
-8-
<PAGE>
ten percent (10%) of the aggregate number of Shares of that series or that class
entitled to vote shall be necessary to constitute a quorum for the transaction
of business by that series or class. Any lesser number shall be sufficient for
adjournments. Any adjourned session or sessions may be held, within a
reasonable time after the date set for the original meeting, without the
necessity of further notice. Except when a larger vote is required by any
provision of law or the Declaration of Trust or these Bylaws, a majority of the
Shares voted shall decide any questions and a plurality shall elect a Trustee,
provided that where any provision of law or of the Declaration of Trust or these
Bylaws permits or requires that the holders of any series or class shall vote as
a series or class, as the case may be, then a majority of the Shares of that
series or that class voted on the matter (or a plurality with respect to the
election of a Trustee) shall decide that matter insofar as that series or class
is concerned.
11.4. Action by Written Consent. Any action taken by Shareholders
-------------------------
may be taken without a meeting if a majority of Shareholders entitled to vote on
the matter (or such larger proportion thereof as shall be required by any
express provision of law or the Declaration of Trust or these Bylaws) consent to
the action in writing and such written consents are filed with the records of
the meetings of Shareholders. Such consent shall be treated for all purposes as
a vote taken at a meeting of Shareholders.
11.5. Record Dates. For the purpose of determining the Shareholders
------------
who are entitled to vote or act at any meeting or any adjournment thereof, or
who are entitled to receive payment of any dividend or of any other
distribution, the Trustees may from time to time fix a time, which shall be not
more than 60 days before the date of any meeting of Shareholders or the date for
the payment of any dividend or of any other distribution, as the record date for
determining the Shareholders having the right to notice of and to vote at such
meeting and any adjournment thereof or the right to receive such dividend or
distribution, and in such case only Shareholders of record on such record date
shall have such right notwithstanding any transfer of Shares on the books of the
Trust after the record date; or without fixing such record date the Trustees may
for any of such purposes close the register or transfer books for all or any
part of such period.
ARTICLE 12
Amendments to the Bylaws
12.1. General. These Bylaws may be amended or repealed, in whole or
-------
in part, by a majority of the Trustees then in office at any meeting of the
Trustees, or by one or more writings signed by such a majority.
-9-
<PAGE>
EXHIBIT 5
INVESTMENT MANAGEMENT AGREEMENT
-------------------------------
INVESTMENT MANAGEMENT AGREEMENT (this "Agreement"), dated _______________,
1997, between Composite Bond & Stock Fund, a separate series (the "Fund") of The
Composite Funds, a Massachusetts business trust (the "Trust"), and Composite
Research & Management Co., a Washington corporation (the "Manager").
W I T N E S S E T H
-------------------
WHEREAS, the Trust is a diversified, open-end series management investment
company, registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Fund desires to retain the Manager to render investment
management services to the Fund, and the Manager is willing to render such
services;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto agree as follows:
1. Appointment. The Fund hereby appoints the Manager to act as investment
-----------
manager to the Fund for the period and on the terms set forth in this Agreement.
The Manager accepts such appointment and agrees to render the services herein
described, for the compensation herein provided.
2. Management. Subject to the supervision of the Board of Trustees of the
----------
Trust, the Manager shall manage the investment operations of the Fund and the
composition of the Fund's portfolio, including the purchase, retention and
disposition of securities therefor, in accordance with the Fund's investment
objectives, policies and restrictions as stated in the Prospectus and Statement
of Additional Information (as such terms are hereinafter defined) and
resolutions of the Trust's Board of Trustees and subject to the following
understandings:
(a) The Manager shall provide supervision of the Fund's investments,
furnish a continuous investment program for the Fund's portfolio and
determine from time to time what securities will be purchased, retained, or
sold by the Fund, and what portion of the assets will be invested or held
as cash.
(b) The Manager shall use reasonable care and judgment in the management of
the Fund's portfolio.
(c) The Manager, in the performance of its duties and obligations under
this Agreement, shall act in conformity with the Declaration of Trust (as
hereinafter defined) of the Trust and by the investment policies of the
Fund as determined by the Board of Trustees of the Trust and set forth in
the Prospectus and Statement of Additional Information. All acts of the
Manager shall conform to and comply
<PAGE>
with the requirements of the 1940 Act and all other applicable federal and
state laws and regulations.
(d) The Manager shall determine the securities to be purchased or sold by
the Fund and at the Fund's expense, and shall place orders for the purchase
and sale of portfolio securities pursuant to its determinations with
brokers or dealers selected by the Manager. In executing portfolio
transactions and selecting brokers or dealers, the Manager shall use its
best efforts to seek on behalf of the Fund the best overall terms
available. In assessing the best overall terms available for any
transaction, the Manager may consider all factors it deems relevant,
including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In evaluating the best
overall terms available, and in selecting the broker or dealer to execute a
particular transaction, the Manager also may consider the brokerage and
research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934, as amended) provided to the Fund and/or
other accounts over which the Manager exercises investment discretion. The
Manager is authorized to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Fund which is in excess of the amount of commission
another broker or dealer would have charged for effecting the transaction
if the Manager determines in good faith that such commission was reasonable
in relation to the value of the brokerage and research services provided by
such broker or dealer, viewed in terms of that particular transaction or in
terms of the overall responsibilities of the Manager to the Fund and/or
other accounts over which the Manager exercises investment discretion.
(e) On occasions when the Manager deems the purchase or sale of a security
to be in the best interest of the Fund as well as other fiduciary accounts
for which it has investment responsibility, the Manager, to the extent
permitted by applicable laws and regulations, may aggregate the securities
to be so sold or purchased in order to obtain the best execution, most
favorable net price or lower brokerage commissions. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, shall be made by the Manager in the manner it
considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other fiduciary accounts.
(f) On each business day the Manager shall provide a list of all
transactions concerning the Fund's assets.
(g) When the Manager makes investment recommendations for the Fund, its
personnel shall not inquire or take into consideration whether the issuer
of the securities proposed for purchase or sale for the Fund's account is a
customer of any affiliate of the Manager. In dealing with commercial
customers, the Manager's affiliates shall not inquire or take into
consideration whether securities of those customers are held by the Fund.
<PAGE>
3. Services Not Exclusive. The investment management services rendered by the
----------------------
Manager hereunder to the Fund are not to be deemed exclusive, and the Manager
shall have the right to render similar services to others, including, without
limitation, other investment companies.
4. Expenses. During the term of this Agreement, the Manager shall pay all
--------
expenses incurred by it in connection with its activities under this Agreement
including the salaries and expenses of any of its officers or employees who act
as officers, Trustees or employees of the Fund or the Trust but excluding the
cost of securities purchased for the Fund and the amount of any brokerage fees
and commissions incurred in executing portfolio transactions for the Fund, and
provide the Fund with suitable office space. Other expenses to be incurred in
the operation of the Fund (other than those borne by any third party), including
taxes, interest, brokerage fees and commissions, if any, fees of Trustees who
are not officers, directors, employees or holders of 5% or more of the
outstanding voting securities of the Manager or the Fund's administrator or any
of their affiliates, Securities and Exchange Commission fees and state Blue Sky
qualification fees, advisory and administration fees, bookkeeping, charges of
custodians, transfer and dividend disbursing agents' fees, certain insurance
premiums, industry association fees, outside auditing and legal expenses, costs
of maintaining corporate existence, costs of independent pricing services, costs
attributable to investor services (including, without limitation, telephone and
personnel expenses), costs of preparing, printing and distributing prospectuses,
costs of stockholders' reports and corporate meetings, costs of implementing and
operating the Fund's service plan, and any extraordinary expenses will be borne
by the Fund.
5. Compensation. For the services provided pursuant to this Agreement, the
------------
Fund shall pay to the Manager as full compensation therefor a monthly fee
computed on the average daily net assets of the Fund equal to .625% per annum up
to the first $250 million of such assets; and .50% per annum on such assets in
excess of $250 million. The Fund acknowledges that the Manager, as agent for the
Fund, will allocate a portion of the fee equal to .15% of such assets to Murphey
Favre Securities Services, Inc. for administrative services, portfolio
accounting and regulatory compliance systems and a portion of the fee equal to
.125% of such assets to Composite Funds Distributor, Inc. for facilitating
distribution of the Funds.
6. Limitation of Liability. The Manager shall not be liable for any error of
-----------------------
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which this Agreement relates, except a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services (in which case any award of damages shall be limited to the period and
the amount set forth in Section 36(b) of the 1940 Act) or a loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement.
<PAGE>
7. Delivery of Documents. The Fund has heretofore delivered to the Manager
---------------------
true and complete copies of each of the following documents and shall promptly
deliver to it all future amendments and supplements thereto, if any:
(a) Agreement and Declaration of Trust of the Trust (such Agreement and
Declaration as presently in effect and as amended from time to time, the
"Declaration of Trust");
(b) Bylaws of the Trust;
(c) Resolutions of the Board of Trustees of the Trust authorizing the
appointment of the Manager and approving the form of this Agreement;
(d) Registration Statement under the Securities Act of 1933 and under the
1940 Act of the Trust on Form N-1A, and all amendments thereto, as filed
with the Securities and Exchange Commission (the "Registration Statement")
relating to the Fund and the shares of the Fund's common stock;
(e) Notification of Registration of the Trust under the 1940 Act on Form
N-8A;
(f) Prospectus of the Fund (such prospectus as presently in effect and/or
as amended or supplemented from time to time, the "Prospectus"); and
(g) Statement of Additional Information of the Fund (such statement as
presently in effect and/or as amended or supplemented from time to time,
the "Statement of Additional Information").
8. Duration and Termination. This Agreement shall become effective as of the
------------------------
date the Fund commences its investment operations. Unless terminated as
provided herein, this Agreement shall thereafter continue in effect provided
such continuance is specifically approved at least annually (a) by the vote of a
majority of those members of the Trust's Board of Trustees who are not parties
to this Agreement or "interested persons" to any such party, cast in person at a
meeting called for that purpose, or by vote of a majority of the outstanding
voting securities of the Fund. Notwithstanding the foregoing, (a) this
Agreement may be terminated at any time, without the payment of any penalty, by
either the Fund (by vote of the Trust's Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund) or the Manager, on
sixty (60) days prior written notice to the other and (b) shall automatically
terminate in the event of its assignment. As used in this Agreement, the terms
"majority of the outstanding voting securities," "interested persons" and
"assignment" shall have the meanings assigned to such terms in the 1940 Act.
9. Amendments. No provision of this Agreement may be amended, modified,
----------
waived or supplemented except by a written instrument signed by the party
against which enforcement is sought. No amendment of this Agreement shall be
effective until approved in accordance with the provisions of the 1940 Act.
<PAGE>
10. Use of Name and Logo. The Fund agrees that it shall furnish to the
--------------------
Manager, prior to any use or distribution thereof, copies of all prospectuses,
statements of additional information, proxy statements, reports to stockholders,
sales literature, advertisements, and other material prepared for distribution
to stockholders of the Fund or to the public, which in any way refer to or
describe the Manager or which include any trade names, trademarks or logos of
the Manager or of any affiliate of the Manager. The Fund further agrees that it
shall not use or distribute any such material if the Manager reasonably objects
in writing to such use or distribution within five (5) business days after the
date such material is furnished to the Manager.
The Manager owns the name "Composite", which may be used by the Fund or the
Trust only with the consent of the Manager. The Manager consents to the use by
the Trust of the name "Composite" and the use by the Fund of the name
"Composite" or any other name embodying the name "Composite", but only on
condition and so long as (i) this Agreement shall remain in full force, (ii) the
Fund and the Trust shall fully perform, fulfill and comply with all provisions
of this Agreement expressed herein to be performed, fulfilled or complied with
by it, and (iii) the Manager is the manager of the Fund and the Trust. No such
name shall be used by the Fund or the Trust at any time or in any place or for
any purposes or under any conditions except as provided in this section. The
foregoing authorization by the Manager to the Fund and the Trust to use the name
"Composite" as part of a business or name is not exclusive of the right of the
Manager itself to use, or to authorize others to use, the same; the Fund and the
Trust acknowledge and agree that as between the Manager and the Fund or the
Trust, the Manager has the exclusive right so to use, or authorize others to
use, such name, and the Fund and the Trust agree to take such action as may
reasonably be requested by the Manager to give full effect to the provisions of
this section (including, without limitation, consenting to such use of such
name). Without limiting the generality of the foregoing, the Fund and the Trust
agree that, upon (i) any violation of the provisions of this Agreement by the
Fund or the Trust or (ii) any termination of this Agreement, by either party or
otherwise, the Fund and the Trust will, at the request of the Manager made
within six months after such violation or termination, use its best efforts to
change the name of the Fund and the Trust so as to eliminate all reference, if
any, to the name "Composite" and will not thereafter transact any business in a
name containing the name "Composite" in any form or combination whatsoever, or
designate itself as the same entity as or successor to an entity of such name,
or otherwise use the name "Composite" or any other reference to the Manager.
Such covenants on the part of the Fund and the Trust shall be binding upon it,
its Trustees, officers, stockholders, creditors and all other persons claiming
under or through it.
The provisions of this section shall survive termination of this Agreement.
11. Notices. Any notice or other communication required to be given pursuant
-------
to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, if to the Fund: 601 W. Main Ave., Suite 300,
Spokane, Washington 99201; or if to the Manager: 1201 Third Avenue, Suite
1220, Seattle, Washington 98101; or to either
<PAGE>
party at such other address as such party shall designate to the other by a
notice given in accordance with the provisions of this section.
12. Miscellaneous.
-------------
(a) Except as otherwise expressly provided herein or authorized by the
Board of Trustees of the Trust from time to time, the Manager for all
purposes herein shall be deemed to be an independent contractor and shall
have no authority to act for or represent the Fund in any way or otherwise
be deemed an agent of the Fund.
(b) The Fund shall furnish or otherwise make available to the Manager such
information relating to the business affairs of the Fund as the Manager at
any time or from time to time reasonably requests in order to discharge its
obligations hereunder.
(c) This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts and shall inure to the
benefit of the parties hereto and their respective successors.
(d) If any provision of this Agreement shall be held or made invalid or by
any court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
13. Declaration of Trust and Limitation of Liability. A copy of the
------------------------------------------------
Declaration of Trust of the Trust is on file with the Secretary of State of the
Commonwealth of Massachusetts, and notice is hereby given that this Agreement is
executed by an officer of the Trust on behalf of the Trustees of the Trust, as
trustees and not individually, on further behalf of the Fund, and that the
obligations of this Agreement shall be binding upon the assets and properties of
the Fund only and shall not be binding upon the assets and properties of any
other series of the Trust or upon any of the Trustees, officers, employees,
agents or shareholders of the Fund or the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the date first above-written.
THE COMPOSITE FUNDS, on behalf of its
series COMPOSITE BOND & STOCK FUND
By:
---------------------------------
William G. Papesh
President
<PAGE>
Attest:
By:
------------------------------
John T. West
Secretary
COMPOSITE RESEARCH &
MANAGEMENT CO.
By:
------------------------------
William G. Papesh
President
Attest:
By:
------------------------------
Sharon L. Howells
Secretary
<PAGE>
SCHEDULE OF DIFFERENCES AMONG
INVESTMENT MANAGEMENT AGREEMENTS
PURSUANT TO RULE 483(d)(2) UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
The Investment Management Agreements between, on the one hand, Composite
Research & Management Co. and, on the other, The Composite Funds on behalf of
each of series thereof are identical in all respects with the exception of the
compensation specified in Section 5 of each Agreement, which varies as follows:
<TABLE>
<CAPTION>
FUND FEE
- ---- ---
<S> <C>
Composite Bond & Stock Fund Monthly fee equal to .625% per annum
Composite Growth & Income Fund computed on the average daily net assets
Composite Income Fund of the Fund; on assets in excess of $250
Composite U.S. Government Securities million, the fee decreases to .50% per
Fund annum.
Composite Tax-Exempt Bond Fund Monthly fee equal to .50% per annum
computed on the average daily net assets
of the Fund; on assets in excess of $250
million, the fee decreases to .40% per
annum.
Composite Cash Management Company Monthly fee computed on the average
Money Market Fund daily net assets of the Fund equal to
Composite Cash Management Company .45% per annum up to the first $1
Tax-Exempt Money Market Fund billion of assets; .40% per annum on
assets of $1 billion and above.*
Composite Northwest Fund Monthly fee computed on the average
daily net assets of the Fund equal to
.625% per annum up to the first $500
million of assets; .50% per annum on
assets of $500 million to $1 billion;
.375% per annum on assets of $1 billion
and above.
</TABLE>
The Management Contract has been amended, effective (if at all) upon the
acquisition by Composite Cash Management Company Money Market Fund of the assets
of Global Money Fund and U.S. Government Money Fund, each a series of The Sierra
Trust Funds, to reduce the fees payable by Composite Cash Management Money
Market Fund and Composite Cash Management Company Tax-Exempt Money Market Fund
to .40% per annum on the average daily net assets of each Fund.
<PAGE>
EXHIBIT 6(a)(i)
DISTRIBUTION CONTRACT
AND
DISTRIBUTION PLAN
-----------------
THIS DISTRIBUTION CONTRACT AND DISTRIBUTION PLAN (this "Agreement"), dated this
______ day of ____________, 1997, between The Composite Funds, a Massachusetts
business trust (the "Trust"), on behalf of each of its series which are listed
on the signature page of this Agreement (each a "Fund"), and Composite Funds
Distributor, Inc., a Washington corporation doing business at Seattle,
Washington, herein sometimes referred to as the "Distributor."
RECITALS
WHEREAS, the Trust is registered as an open-end, series management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act")
and the Funds are separate series of the Trust;
WHEREAS, each Fund and the Distributor desire to enter into an agreement that
sets forth standard terms and conditions for distribution services for certain
classes of shares of each Fund (specifically, Class A, Class B and Class S), in
accordance with the schedule of fees attached as Exhibit A;
WHEREAS, certain payments to the Distributor provided herein (other than front-
end loads and contingent deferred sales charges) may be considered the financing
of activities intended to result in the sale of the Class A, Class B and Class S
shares of each Fund;
WHEREAS, this Agreement, therefore, is intended to include in Section 6, among
other things, a separate and severable "written plan" of the compensation type
for each of the Class A, Class B and Class S shares of each Fund as contemplated
by Rule 12b-1 promulgated pursuant to the provisions of the 1940 Act;
NOW, THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration the receipt where of is hereby
acknowledged, the parties hereto agree as follows:
1. APPOINTMENT. The Trust hereby affirms the appointment of Composite Funds
Distributor, Inc., as the distributor for each Fund and grants Distributor
the right to sell Class A, Class B and Class S shares on behalf of the Fund
and on terms set forth in this Agreement. The Distributor accepts such
appointment and agrees to render the services herein set forth, for the
payments herein provided (including reimbursement of expenses).
2. DELIVERY OF DOCUMENTS. The Trust and/or each Fund has furnished the
Distributor with copies of:
(a) Agreement and Declaration of Trust and all amendments thereto for the
Trust (as amended from time to time, the "Declaration of Trust");
<PAGE>
(b) Bylaws and all amendments thereto for the Trust (as amended from time
to time, the "Bylaws"); and
(c) Each Fund's most recent prospectus and recent registration statement
(as amended or supplemented from time to time, the "Prospectuses and
"Registration Statements").
From time to time, each Fund will furnish the Distributor with current
copies of all amendments or supplements to the foregoing, if any, and all
documents, notices and reports filed with the Securities and Exchange
Commission (the "SEC") and will make available, upon request, evidence of
payment of registration fees imposed from time to time by the State in which
securities of each Fund are sold by the Distributor.
3. DUTIES OF THE DISTRIBUTOR. The Distributor shall provide each Fund with the
benefit of its best judgment, efforts and facilities in rendering its
services as Distributor. The Distributor will act as the exclusive
Distributor of the Class A, Class B and Class S shares of each Fund, subject
to the supervision of the Trust's board of trustees and the following
understandings: (i) the Trust's board of trustees shall be responsible for
and control the conduct of each Fund's affairs; (ii) in all matters relating
to the performance of this Agreement, the Distributor will act in conformity
with the Declaration of Trust and Bylaws of the Trust and the Prospectus and
Registration Statement of each Fund and with the instructions and directions
of the Trust's board of trustees; (iii) the Distributor will conform to and
comply with applicable requirements of the 1940 Act, the Securities Act of
1933 ("1933 Act") and all other applicable federal or state laws and
regulations. In carrying out its obligations hereunder, the Distributor
shall:
(a) provide to the Trust's board of trustees, at least quarterly, a written
report of the amounts expended in connection with all distribution
services rendered pursuant to this Agreement, including an explanation
of the purposes for which such expenditures were made; and
(b) take, on behalf of each Fund, all actions which appear to be necessary
to carry into effect the distribution of each Fund's shares as provided
in paragraph 4.
4. DISTRIBUTION OF SHARES. It is mutually understood and agreed that the
Distributor does not undertake to sell all or any specific portion of the
Class A, Class B or Class S shares of any Fund. Distributor shall have the
right to enter into sales agreements with dealers of its choice for the sale
of the Class A, Class B or Class S shares of each Fund to the public at the
public offering price. Distributor shall set forth in such agreements the
portion of the sales charge which may be retained by such dealers. If any
Fund determines that it is necessary to file the form of dealer agreement
and amendments thereto as an exhibit to its currently effective Registration
Statement under the 1933 Act, then the Distributor shall provide the Fund
with currently effective documents. A Fund shall not sell any of its Class
A, Class B or Class S shares except through the Distributor. Notwithstanding
the provisions of the foregoing sentence:
-2-
<PAGE>
(a) A Fund may issue its Class A, Class B or Class S shares at their net
asset value to any shareholder of the Fund purchasing such shares with
dividends or other cash distributions received from the Fund pursuant
to any special or continuing offer made to shareholders;
(b) The Distributor may, and when requested by a Fund, shall, suspend its
efforts to effectuate sales of the Class A, Class B or Class S shares
of a Fund at any time when in the opinion of the Distributor or of the
Fund no sales should be made because of a need to revise a prospectus
or registration statement, market or other economic considerations or
abnormal circumstances of any kind and either party in its sole
discretion may reject orders for the purchase of such shares;
(c) A Fund may withdraw the offering of its Class A, Class B or Class S
shares (i) at any time with the consent of the Distributor or (ii)
without such consent when so required by the provisions of any statute
or of any order, rule or regulation of any governmental body having
jurisdiction;
(d) The price at which the Class A, Class B or Class S shares will be sold
to investors (the "offering price") shall be the net asset value per
share, determined in accordance with the Fund's current Prospectus
and/or Statement of Additional Information (as amended or supplemented
from time to time, "SAI") plus a sales charge determined in the amount
and manner established from time to time by the Distributor and set
forth in a Fund's current Prospectus and/or SAI. The Fund shall receive
the net asset value per share for the sale of its Class A, Class B or
Class S shares;
(e) If a sales charge is in effect, the Distributor shall have the right,
subject to such rules or regulations of the Securities and Exchange
Commission as may then be in effect pursuant to Section 22 of the 1940
Act, to pay a portion of the sales charge to dealers who have sold
Class A, Class B or Class S shares of the Fund in accordance with
provisions of dealer agreements; and
(f) The Distributor is not authorized by any Fund to provide any
information or to make any representations other than those contained
in the appropriate Registration Statements, Prospectuses and SAI's
filed with the Securities and Exchange Commission under the 1933 Act,
or contained in shareholder reports or other material that may be
prepared by or on behalf of a Fund for Distributor's use. This shall
not be construed to prevent the Distributor from preparing and
distributing sales literature or other material as it may deem
appropriate.
5. COMPENSATION FOR SERVICING SHAREHOLDER ACCOUNTS. As compensation for its
services hereunder, the Distributor shall be entitled to receive all front-
end loads and all contingent deferred sales charges described from time to
time in the Prospectus and/or SAI, as well as the service fees set forth in
the schedule of fees attached as Exhibit A, calculated and paid as an annual
percentage of the average daily net assets attributable
-3-
<PAGE>
to the relevant classes of each Fund. Composite acknowledges that the
Distributor and its dealers may compensate their investment representatives
for opening accounts, processing investors' purchase and redemption orders,
responding to inquiries from Fund shareholders concerning the status of
their accounts and the operations of a Fund, and communicating with a Fund
and its transfer agent on behalf of Fund shareholders in such manner and
amount as the Distributor may deem appropriate.
6. EXPENSES. The expenses connected with distribution shall be allocable
between the Funds and the Distributor as follows:
(a) The Distributor shall furnish the services of personnel to the extent
that such services are required to carry out its obligations under this
Agreement.
(b) Each Fund assumes and shall pay or cause to be paid the following
expenses incurred on its behalf:
registration of shares including the expense of printing and
distributing prospectuses to existing shareholders; expenses incurred
for corporate services; taxes and expenses related to portfolio
transactions; charges and expenses of any registrar, custodian or
depository for portfolio securities and other property, and any stock
transfer, dividend or account agent or agents; brokers' commissions
chargeable in connection with portfolio securities transactions; all
taxes, including securities issuance and transfer taxes, and corporate
fees payable to federal, state or other governmental agencies; the
costs and expenses of engraving or printing of stock certificates, if
any; costs and expenses in connection with the registration and
maintenance of registration of a Fund and its shares with the SEC and
various states and other jurisdictions (including filing fees, legal
fees and disbursements of counsel); expenses of shareholders' and
directors' meetings and preparing, printing, and mailing of proxy
statements and reports to shareholders; fees and travel expenses of
"disinterested" directors; expenses incident to the payment of any
dividend, distribution, withdrawal or redemption, whether in shares or
in cash; charges and expenses of any outside service used for pricing
of a Fund's shares; fees and expenses of legal counsel and of
independent accountants; membership dues of industry associations;
postage (excluding postage for promotional and sales literature);
insurance premiums on property of personnel (including, but not limited
to legal claims and liabilities and litigation costs and any
indemnification related thereto); and all other charges and costs of a
Fund's operation unless otherwise explicitly provided herein.
(c) Subject to the schedule of fees set forth in Exhibit A as from time to
time approved by the Board of Trustees and agreed to by the Trust and
the Distributor, each Fund shall be permitted to compensate the
Distributor for distribution expenses in accordance with the provisions
of this section, which shall constitute a "distribution plan" as
contemplated by Rule 12b-1 promulgated pursuant to the 1940 Act, as
follows:
-4-
<PAGE>
(i) With respect to Class A shares, each Fund shall be authorized to
pay a service fee equal to an annual rate of (i) .15% of a Fund's
average daily net assets attributable to Class A shares in the
case of Composite Money Market Fund and Composite Tax-Exempt
Money Market Fund and (ii) .25% of such assets in the case of the
other Funds.
(ii) With respect to Class B shares, each Fund shall be authorized to
pay a distribution fee equal to an annual rate of .75% of a
Fund's average daily net assets attributable to Class B shares
and a service fee equal to an annual rate of .25% of such assets.
(iii) With respect to Class S shares, each Fund shall be authorized to
pay a distribution fee equal to an annual rate of .75% of a
Fund's average daily net assets attributable to Class S shares
and a service fee equal to an annual rate of .25% of such assets.
(d) Proceeds from any contingent deferred sales charges applicable to Class
A shares, Class B shares or Class S shares shall be paid to the
Distributor.
(e) The Distributor will furnish the board of trustees statements of
distribution revenues and expenditures at least quarterly with respect
to each class of shares of each Fund as required by Rule 12b-1.
(f) Each Fund will record all payments made under the distribution plan as
expenses in the calculation of its net investment income. The amount of
distribution expenses incurred by the Distributor that may be paid
pursuant to the plan in future periods will not be incurred as a
liability, unless the standards for accrual of a liability under
generally accepted accounting principles have been satisfied. Such
distribution expenses will be recorded as an expense in future periods
as they are paid by a Fund.
(g) For purposes of Section 6 of this Distribution Contract, the
Distributor shall not be responsible for the payment of distribution
expenses that are subject to reimbursement, as the Distributor has
acted solely as the agent of Composite or of a specific Fund in
connection therewith.
7. NON-EXCLUSIVITY. The services of the Distributor are not exclusive and the
Distributor shall be entitled to render distribution or other services to others
(including other investment companies) and to engage in other activities. It is
understood and agreed that officers of the Distributor may serve as officers or
trustees of the Trust, and that officers or trustees of the Trust may serve as
officers of the Distributor to the extent permitted by law; and that officers of
the Distributor are not prohibited from engaging in any other business activity
or from rendering services to any other person, or from serving as partners,
officers or directors of any other firm or corporation, including other
investment companies and broker/dealers.
-5-
<PAGE>
8. TERM AND APPROVAL. This Agreement shall become effective as of
______________________, and shall continue in force and effect from year to
year thereafter, provided that, with respect to any Fund or Class, such
continuance is specifically approved at least annually:
(a) By the Trust's board of trustees or by the vote of a majority of the
outstanding voting securities of the Fund (as defined in Section
2(a)(42) of the 1940 Act), and
(b) The affirmative vote of a majority of the board of trustees of the
Trust who are not (i) parties to this Agreement, (ii) interested
persons of any such party (as defined in Section 2(a)(19) of the 1940
Act) or (iii) persons having a direct or indirect financial interest in
the operation of this Agreement or any agreement related to this
Agreement ("Qualified Trustees"), by votes cast in person at a meeting
called for the purpose of voting on such approval.
9. TERMINATION. This Agreement may be terminated, with respect to any Fund or
Class, at any time, without the payment of any penalty, by vote of the board
of trustees of the Trust, or by a vote of a majority of the Qualified
Trustees, or by a vote of a majority of the outstanding voting securities of
the Fund (as defined in Section 2(a)(42) of the 1940 Act), or by the
Distributor on sixty (60) days' written notice to the Fund. The notice
provided for herein may be waived by either party. This Agreement shall
automatically terminate in the event of its assignment, the term
"assignment" for this purpose having the meaning defined in Section (a)(4)
of the 1940 Act.
10. AMENDMENTS. This Agreement may be amended, with respect to any Fund or
Class, by the parties hereto only if such amendment is specifically approved
(i) by the board of trustees of the Trust or by the vote of majority of
outstanding voting securities of the Fund, and (ii) by a majority of those
trustees who are not parties to this Agreement or interested persons of any
such party, which vote must be cast in person at a meeting called for the
purpose of voting on such approval; provided, however, that any such
amendment that constitutes an amendment of the distribution plan for any
Class of the Fund shall be approved by shareholders pursuant to Rule 12b-1
to the extent required by applicable law.
11. LIABILITY OF THE DISTRIBUTOR. In the performance of its duties hereunder,
the Distributor shall be obligated to exercise care and diligence and to act
in good faith and to use its best efforts within reasonable limits to insure
the accuracy of all services performed under this Agreement, but the
Distributor shall not be liable for any act or omission which does not
constitute willful misfeasance, bad faith or gross negligence on the part of
the Distributor or reckless disregard by the Distributor of its duties under
this Agreement.
12. NOTICES. Any notices under this Agreement shall be in writing, addressed and
delivered or mailed postage paid to the other party at such address as such
other party may designate for the receipt of such notice. Until further
notice to the other party, it is agreed that the
-6-
<PAGE>
address of each Fund shall be 601 West Main Avenue, Spokane, WA 99201, and
the address of the Distributor shall be 1201 Third Avenue, Seattle, WA
98101.
13. DECLARATION OF TRUST AND LIMITATION OF LIABILITY. A copy of the Declaration
of Trust of the Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts, and notice is hereby given that this
Agreement is executed by an officer of the Trust on behalf of the trustees
of the Trust, as trustees and not individually, on further behalf of each
Fund, and that the obligations of this Agreement with respect to each Fund
shall be binding upon the assets and properties of the Fund only and shall
not be binding upon the assets and properties of any other Fund or series of
the Trust or upon any of the trustees, officers, employees, agents or
shareholders of the Fund or the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the day and year first above
written.
THE COMPOSITE TRUST,
on behalf of its series
COMPOSITE BOND & STOCK FUND,
COMPOSITE GROWTH & INCOME FUND,
COMPOSITE NORTHWEST FUND,
COMPOSITE U.S. GOVERNMENT SECURITIES FUND,
COMPOSITE INCOME FUND,
COMPOSITE TAX-EXEMPT BOND FUND,
COMPOSITE MONEY MARKET FUND, and
COMPOSITE TAX-EXEMPT MONEY MARKET FUND
By:
-----------------------------------
William G. Papesh
President
Attest:
By:
--------------------
John T. West
Secretary
-7-
<PAGE>
COMPOSITE FUNDS DISTRIBUTOR, INC.
By:
------------------------------------
William G. Papesh
President
Attest:
By:
-----------------------
Sharon L. Howells
Secretary
-8-
<PAGE>
EXHIBIT A
THE COMPOSITE FUNDS
1997 ANNUAL 12b-1 RATES
<TABLE>
<CAPTION>
MAXIMUM CURRENT* REVISED**
------- -------- ---------
<S> <C> <C> <C>
COMPOSITE GROWTH & INCOME FUND
CLASS A 0.25% 0.25% 0.25%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE NORTHWEST FUND
CLASS A 0.25% 0.25% 0.25%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE BOND & STOCK FUND
CLASS A 0.25% 0.25% 0.25%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE U.S. GOVERNMENT
SECURITIES FUND
CLASS A 0.25% 0.20% 0.25%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE INCOME FUND
CLASS A 0.25% 0.20% 0.25%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE TAX-EXEMPT BOND FUND
CLASS A 0.25% 0.20% 0.25%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE MONEY MARKET FUND
CLASS A 0.15% 0.07% 0.00%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE TAX-EXEMPT MONEY
MARKET FUND
CLASS A 0.15% 0.00% 0.00%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
</TABLE>
* As currently in effect for the Funds as Washington corporations (or
series thereof).
** Rates approved by the board of trustees of the Trust. The first 25 basis
points of each fee shall be "service fees" under the rules of the NASD.
-9-
<PAGE>
EXHIBIT 6(a)(ii)
DISTRIBUTION CONTRACT
AND
DISTRIBUTION PLAN
-----------------
THIS DISTRIBUTION CONTRACT AND DISTRIBUTION PLAN (this "Agreement"), dated this
______ day of ____________, 1997, between The Composite Funds, a Massachusetts
business trust (the "Trust"), on behalf of each of its series which are listed
on the signature page of this Agreement (each a "Fund"), and Composite Funds
Distributor, Inc., a Washington corporation doing business at Seattle,
Washington, herein sometimes referred to as the "Distributor."
RECITALS
WHEREAS, the Trust is registered as an open-end, series management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act")
and the Funds are separate series of the Trust;
WHEREAS, each Fund and the Distributor desire to enter into an agreement that
sets forth standard terms and conditions for distribution services for certain
classes of shares of each Fund (specifically, Class A, Class B and Class S), in
accordance with the schedule of fees attached as Exhibit A;
WHEREAS, certain payments to the Distributor provided herein (other than front-
end loads and contingent deferred sales charges) may be considered the financing
of activities intended to result in the sale of the Class A, Class B and Class S
shares of each Fund;
WHEREAS, this Agreement, therefore, is intended to include in Section 6, among
other things, a separate and severable "written plan" of the compensation type
for each of the Class A, Class B and Class S shares of each Fund as contemplated
by Rule 12b-1 promulgated pursuant to the provisions of the 1940 Act;
NOW, THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration the receipt where of is hereby
acknowledged, the parties hereto agree as follows:
APPOINTMENT. The Trust hereby affirms the appointment of Composite Funds
Distributor, Inc., as the distributor for each Fund and grants Distributor
the right to sell Class A, Class B and Class S shares on behalf of the Fund
and on terms set forth in this Agreement. The Distributor accepts such
appointment and agrees to render the services herein set forth, for the
payments herein provided (including reimbursement of expenses).
DELIVERY OF DOCUMENTS. The Trust and/or each Fund has furnished the
Distributor with copies of:
<PAGE>
Agreement and Declaration of Trust and all amendments thereto for the
Trust (as amended from time to time, the "Declaration of Trust");
Bylaws and all amendments thereto for the Trust (as amended from time
to time, the "Bylaws"); and
Each Fund's most recent prospectus and recent registration statement
(as amended or supplemented from time to time, the "Prospectuses and
"Registration Statements").
From time to time, each Fund will furnish the Distributor with current
copies of all amendments or supplements to the foregoing, if any, and all
documents, notices and reports filed with the Securities and Exchange
Commission (the "SEC") and will make available, upon request, evidence of
payment of registration fees imposed from time to time by the State in
which securities of each Fund are sold by the Distributor.
DUTIES OF THE DISTRIBUTOR. The Distributor shall provide each Fund with
the benefit of its best judgment, efforts and facilities in rendering its
services as Distributor. The Distributor will act as the exclusive
Distributor of the Class A, Class B and Class S shares of each Fund,
subject to the supervision of the Trust's board of trustees and the
following understandings: (i) the Trust's board of trustees shall be
responsible for and control the conduct of each Fund's affairs; (ii) in all
matters relating to the performance of this Agreement, the Distributor will
act in conformity with the Declaration of Trust and Bylaws of the Trust and
the Prospectus and Registration Statement of each Fund and with the
instructions and directions of the Trust's board of trustees; (iii) the
Distributor will conform to and comply with applicable requirements of the
1940 Act, the Securities Act of 1933 ("1933 Act") and all other applicable
federal or state laws and regulations. In carrying out its obligations
hereunder, the Distributor shall:
provide to the Trust's board of trustees, at least quarterly, a
written report of the amounts expended in connection with all
distribution services rendered pursuant to this Agreement, including
an explanation of the purposes for which such expenditures were made;
and
take, on behalf of each Fund, all actions which appear to be necessary
to carry into effect the distribution of each Fund's shares as
provided in paragraph 4.
DISTRIBUTION OF SHARES. It is mutually understood and agreed that the
Distributor does not undertake to sell all or any specific portion of the
Class A, Class B or Class S shares of any Fund. Distributor shall have the
right to enter into sales agreements with dealers of its choice for the
sale of the Class A, Class B or Class S shares of each Fund to the public
at the public offering price. Distributor shall set forth in such
agreements the portion of the sales charge which may be retained by such
dealers. If any Fund determines that it is necessary to file the form of
dealer
<PAGE>
agreement and amendments thereto as an exhibit to its currently effective
Registration Statement under the 1933 Act, then the Distributor shall
provide the Fund with currently effective documents. A Fund shall not sell
any of its Class A, Class B or Class S shares except through the
Distributor. Notwithstanding the provisions of the foregoing sentence:
A Fund may issue its Class A, Class B or Class S shares at their net
asset value to any shareholder of the Fund purchasing such shares with
dividends or other cash distributions received from the Fund pursuant
to any special or continuing offer made to shareholders;
The Distributor may, and when requested by a Fund, shall, suspend its
efforts to effectuate sales of the Class A, Class B or Class S shares
of a Fund at any time when in the opinion of the Distributor or of the
Fund no sales should be made because of a need to revise a prospectus
or registration statement, market or other economic considerations or
abnormal circumstances of any kind and either party in its sole
discretion may reject orders for the purchase of such shares;
A Fund may withdraw the offering of its Class A, Class B or Class S
shares (i) at any time with the consent of the Distributor or (ii)
without such consent when so required by the provisions of any statute
or of any order, rule or regulation of any governmental body having
jurisdiction;
The price at which the Class A, Class B or Class S shares will be sold
to investors (the "offering price") shall be the net asset value per
share, determined in accordance with the Fund's current Prospectus
and/or Statement of Additional Information (as amended or supplemented
from time to time, "SAI") plus a sales charge determined in the amount
and manner established from time to time by the Distributor and set
forth in a Fund's current Prospectus and/or SAI. The Fund shall
receive the net asset value per share for the sale of its Class A,
Class B or Class S shares;
If a sales charge is in effect, the Distributor shall have the right,
subject to such rules or regulations of the Securities and Exchange
Commission as may then be in effect pursuant to Section 22 of the 1940
Act, to pay a portion of the sales charge to dealers who have sold
Class A, Class B or Class S shares of the Fund in accordance with
provisions of dealer agreements; and
The Distributor is not authorized by any Fund to provide any
information or to make any representations other than those contained
in the appropriate Registration Statements, Prospectuses and SAI's
filed with the Securities and Exchange Commission under the 1933 Act,
or contained in shareholder reports or other material that may be
prepared by or on behalf of a Fund for Distributor's use. This shall
not be construed to prevent the Distributor from
<PAGE>
preparing and distributing sales literature or other material as it
may deem appropriate.
COMPENSATION FOR SERVICING SHAREHOLDER ACCOUNTS. As compensation for its
services hereunder, the Distributor shall be entitled to receive all front-
end loads and all contingent deferred sales charges described from time to
time in the Prospectus and/or SAI, as well as the service fees set forth in
the schedule of fees attached as Exhibit A, calculated and paid as an
annual percentage of the average daily net assets attributable to the
relevant classes of each Fund. Composite acknowledges that the Distributor
and its dealers may compensate their investment representatives for opening
accounts, processing investors' purchase and redemption orders, responding
to inquiries from Fund shareholders concerning the status of their accounts
and the operations of a Fund, and communicating with a Fund and its
transfer agent on behalf of Fund shareholders in such manner and amount as
the Distributor may deem appropriate.
EXPENSES. The expenses connected with distribution shall be allocable
between the Funds and the Distributor as follows:
The Distributor shall furnish the services of personnel to the extent
that such services are required to carry out its obligations under
this Agreement.
Each Fund assumes and shall pay or cause to be paid the following
expenses incurred on its behalf:
registration of shares including the expense of printing and
distributing prospectuses to existing shareholders; expenses incurred
for corporate services; taxes and expenses related to portfolio
transactions; charges and expenses of any registrar, custodian or
depository for portfolio securities and other property, and any stock
transfer, dividend or account agent or agents; brokers' commissions
chargeable in connection with portfolio securities transactions; all
taxes, including securities issuance and transfer taxes, and corporate
fees payable to federal, state or other governmental agencies; the
costs and expenses of engraving or printing of stock certificates, if
any; costs and expenses in connection with the registration and
maintenance of registration of a Fund and its shares with the SEC and
various states and other jurisdictions (including filing fees, legal
fees and disbursements of counsel); expenses of shareholders' and
directors' meetings and preparing, printing, and mailing of proxy
statements and reports to shareholders; fees and travel expenses of
"disinterested" directors; expenses incident to the payment of any
dividend, distribution, withdrawal or redemption, whether in shares or
in cash; charges and expenses of any outside service used for pricing
of a Fund's shares; fees and expenses of legal counsel and of
independent accountants; membership dues of industry associations;
postage (excluding postage for promotional and sales literature);
insurance premiums on property of personnel (including, but not
<PAGE>
limited to legal claims and liabilities and litigation costs and any
indemnification related thereto); and all other charges and costs of a
Fund's operation unless otherwise explicitly provided herein.
Subject to the schedule of fees set forth in Exhibit A as from time to
time approved by the Board of Trustees and agreed to by the Trust and
the Distributor, each Fund shall be permitted to compensate the
Distributor for distribution expenses in accordance with the
provisions of this section, which shall constitute a "distribution
plan" as contemplated by Rule 12b-1 promulgated pursuant to the 1940
Act, as follows:
(i) With respect to Class A shares, each Fund shall be authorized to
pay a service fee equal to an annual rate of (i) .15% of a Fund's
average daily net assets attributable to Class A shares in the
case of Composite Money Market Fund and Composite Tax-Exempt
Money Market Fund and (ii) .25% of such assets in the case of the
other Funds.
(ii) With respect to Class B shares, each Fund shall be authorized to
pay a distribution fee equal to an annual rate of .75% of a
Fund's average daily net assets attributable to Class B shares
and a service fee equal to an annual rate of .25% of such assets.
(iii) With respect to Class S shares, each Fund shall be authorized
to pay a distribution fee equal to an annual rate of .75% of a
Fund's average daily net assets attributable to Class S shares
and a service fee equal to an annual rate of .25% of such assets.
Proceeds from any contingent deferred sales charges applicable to
Class A shares, Class B shares or Class S shares shall be paid to the
Distributor.
The Distributor will furnish the board of trustees statements of
distribution revenues and expenditures at least quarterly with respect
to each class of shares of each Fund as required by Rule 12b-1.
Each Fund will record all payments made under the distribution plan as
expenses in the calculation of its net investment income. The amount
of distribution expenses incurred by the Distributor that may be paid
pursuant to the plan in future periods will not be incurred as a
liability, unless the standards for accrual of a liability under
generally accepted accounting principles have been satisfied. Such
distribution expenses will be recorded as an expense in future periods
as they are paid by a Fund.
For purposes of Section 6 of this Distribution Contract, the
Distributor shall not be responsible for the payment of distribution
expenses that are subject to reimbursement, as the Distributor has
acted solely as the agent of Composite or
<PAGE>
of a specific Fund in connection therewith.
NON-EXCLUSIVITY. The services of the Distributor are not exclusive and the
Distributor shall be entitled to render distribution or other services to
others (including other investment companies) and to engage in other
activities. It is understood and agreed that officers of the Distributor
may serve as officers or trustees of the Trust, and that officers or
trustees of the Trust may serve as officers of the Distributor to the
extent permitted by law; and that officers of the Distributor are not
prohibited from engaging in any other business activity or from rendering
services to any other person, or from serving as partners, officers or
directors of any other firm or corporation, including other investment
companies and broker/dealers.
TERM AND APPROVAL. This Agreement shall become effective as of
______________________, and shall continue in force and effect from year to
year thereafter, provided that, with respect to any Fund or Class, such
continuance is specifically approved at least annually:
By the Trust's board of trustees or by the vote of a majority of the
outstanding voting securities of the Fund (as defined in Section
2(a)(42) of the 1940 Act), and
The affirmative vote of a majority of the board of trustees of the
Trust who are not (i) parties to this Agreement, (ii) interested
persons of any such party (as defined in Section 2(a)(19) of the 1940
Act) or (iii) persons having a direct or indirect financial interest
in the operation of this Agreement or any agreement related to this
Agreement ("Qualified Trustees"), by votes cast in person at a meeting
called for the purpose of voting on such approval.
TERMINATION. This Agreement may be terminated, with respect to any Fund or
Class, at any time, without the payment of any penalty, by vote of the
board of trustees of the Trust, or by a vote of a majority of the Qualified
Trustees, or by a vote of a majority of the outstanding voting securities
of the Fund (as defined in Section 2(a)(42) of the 1940 Act), or by the
Distributor on sixty (60) days' written notice to the Fund. The notice
provided for herein may be waived by either party. This Agreement shall
automatically terminate in the event of its assignment, the term
"assignment" for this purpose having the meaning defined in Section (a)(4)
of the 1940 Act.
AMENDMENTS. This Agreement may be amended, with respect to any Fund or
Class, by the parties hereto only if such amendment is specifically
approved (i) by the board of trustees of the Trust or by the vote of
majority of outstanding voting securities of the Fund, and (ii) by a
majority of those trustees who are not parties to this Agreement or
interested persons of any such party, which vote must be cast in person at
a meeting called for the purpose of voting on such approval; provided,
however, that any such amendment that constitutes an amendment of the
distribution plan for any Class of the Fund shall be approved by
shareholders pursuant to Rule 12b-1 to the extent required
<PAGE>
by applicable law.
LIABILITY OF THE DISTRIBUTOR. In the performance of its duties hereunder,
the Distributor shall be obligated to exercise care and diligence and to
act in good faith and to use its best efforts within reasonable limits to
insure the accuracy of all services performed under this Agreement, but the
Distributor shall not be liable for any act or omission which does not
constitute willful misfeasance, bad faith or gross negligence on the part
of the Distributor or reckless disregard by the Distributor of its duties
under this Agreement.
NOTICES. Any notices under this Agreement shall be in writing, addressed
and delivered or mailed postage paid to the other party at such address as
such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of each
Fund shall be 601 West Main Avenue, Spokane, WA 99201, and the address of
the Distributor shall be 1201 Third Avenue, Seattle, WA 98101.
DECLARATION OF TRUST AND LIMITATION OF LIABILITY. A copy of the
Declaration of Trust of the Trust is on file with the Secretary of State of
The Commonwealth of Massachusetts, and notice is hereby given that this
Agreement is executed by an officer of the Trust on behalf of the trustees
of the Trust, as trustees and not individually, on further behalf of each
Fund, and that the obligations of this Agreement with respect to each Fund
shall be binding upon the assets and properties of the Fund only and shall
not be binding upon the assets and properties of any other Fund or series
of the Trust or upon any of the trustees, officers, employees, agents or
shareholders of the Fund or the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the day and year first above
written.
THE COMPOSITE TRUST,
on behalf of its series
COMPOSITE BOND & STOCK FUND,
COMPOSITE GROWTH & INCOME FUND,
COMPOSITE NORTHWEST FUND,
COMPOSITE U.S. GOVERNMENT SECURITIES FUND,
COMPOSITE INCOME FUND,
COMPOSITE TAX-EXEMPT BOND FUND,
COMPOSITE MONEY MARKET FUND, and
COMPOSITE TAX-EXEMPT MONEY MARKET FUND
<PAGE>
By: ___________________________________
William G. Papesh
President
Attest:
By: _________________________
John T. West
Secretary
<PAGE>
COMPOSITE FUNDS DISTRIBUTOR, INC.
By: ___________________________________
William G. Papesh
President
Attest:
By: _________________________
Sharon L. Howells
Secretary
<PAGE>
EXHIBIT A
THE COMPOSITE FUNDS
1997 ANNUAL 12b-1 RATES
<TABLE>
<CAPTION>
MAXIMUM CURRENT* REVISED**
------- -------- ----------
<S> <C> <C> <C>
COMPOSITE GROWTH & INCOME FUND
CLASS A 0.25% 0.25% 0.25%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE NORTHWEST FUND
CLASS A 0.25% 0.25% 0.25%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE BOND & STOCK FUND
CLASS A 0.25% 0.25% 0.25%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE U.S. GOVERNMENT SECURITIES FUND
CLASS A 0.25% 0.20% 0.25%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE INCOME FUND
CLASS A 0.25% 0.20% 0.25%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE TAX-EXEMPT BOND FUND
CLASS A 0.25% 0.20% 0.25%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
COMPOSITE MONEY MARKET FUND
CLASS A 0.15% 0.07% 0.00%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
COMPOSITE TAX-EXEMPT MONEY MARKET FUND
CLASS A 0.15% 0.00% 0.00%
CLASS B 1.00% 1.00% 1.00%
CLASS S 1.00% 1.00% 1.00%
</TABLE>
* As currently in effect for the Funds as Washington corporations (or series
thereof).
** Rates approved by the board of trustees of the Trust. The first 25 basis
points of each fee shall be "service fees" under the rules of the NASD.
<PAGE>
EXHIBIT 6(b)
Composite Funds Distributor, Inc.
601 West Main Ave., Suite 300
Spokane, WA 98201
SELECTED DEALER AGREEMENT
(Proposed)
Dear Sirs:
As the principal underwriter of shares in regulated investment companies
managed by Composite Research and Management Co. which are distributed by us at
their respective net asset values plus any sales charges pursuant to each Fund's
prospectus, we invite you to participate as principal in the distribution of
shares of any of the Funds upon the following terms:
1. You are to offer and sell the Shares only at the public offering price
(current net asset value plus any applicable sales charge) described in the
applicable current prospectus of the Funds, as supplemented or amended from time
to time and in full accord with all Securities Exchange Commission ("SEC") and
National Association of Securities Dealers ("NASD") securities regulations. You
agree to act only as principal in such transactions or as agent for your
customer, and you shall not have authority to act as agent for the Funds, the
Fund Group or for us in any respect. All orders for Shares are subject to
acceptance by us and become effective only upon confirmation by the applicable
Fund or its shareholder servicing agent (the "Transfer and Shareholder Services
Agent"). No conditional orders for Shares will be accepted. The procedures
<PAGE>
Page 2
relating to orders for Shares and the handling thereof will be subject to the
Funds' description thereof set forth in the Prospectus and Statement of
Additional Information (defined below) and to written instructions released by
us from time to time.
2. Remittance for each such order, if made by check, should be payable to
the applicable Fund and promptly delivered to the Transfer and Shareholder
Services Agent at the address appearing on the face of the confirmation of such
order. Remittance for orders for Shares to be purchased through an individual
retirement account, as described in each Prospectus, should be payable by check
to "Investors Fiduciary Trust Company, Custodian." Payment must be received by
the Transfer and Shareholder Services Agent within five business days (or such
shorter period as may hereafter be required by law or regulation) after
acceptance and confirmation of your order; otherwise we reserve the right,
without notice, to cancel the sale, in which event you will be held responsible
for any loss to the applicable Fund, or to us. You agree to provide us with
written notice of any application by you to any regulatory authority for any
extension of the time for such payment prior to your submission of such
application.
3. As a selected dealer, you are hereby authorized to place orders
directly with the Funds for their shares to be resold by us
<PAGE>
Page 3
to you subject to the applicable terms and conditions governing the placement of
orders by us set forth in the Distribution Contract with each Fund and subject
to the applicable compensation provisions set forth in each Fund's then current
prospectus. You may tender shares directly to the Funds or their transfer
agent, Murphey Favre Securities Services, Inc., for redemption. Redemption and
repurchases of shares will be made at the net asset value of such shares in
accordance with the then current prospectuses of the Funds.
4. (a) For your services hereunder, you will receive a dealer concession
("Dealer Concession") from us equal to the following percentages
of the public offering price of the Shares:
There is no Dealer Concession on Shares purchased through the
reinvestment of dividends or distributions or on Shares purchased
at net asset value. The Dealer Concession is subject to change
from time to time, and orders placed after the date of any such
change shall be subject to the Dealer Concession in effect at the
time the order is
<PAGE>
Page 4
received by the Transfer and Shareholder Services Agent. Upon the
purchase of Shares pursuant to a Letter of Intent or Right of
Accumulation (as set forth in the Prospectus and Statement of
Additional Information), you will promptly return to us any
excess of the Dealer Concession previously allowed or paid to you
over that allowable with respect to such later purchase. Unless
you advise us to the contrary at the time of transmitting a
purchase order, we will consider that the investor owns no other
Shares and is not entitled to any lower sales charge than that
accorded to a single transaction in the amount of the purchase
order.
(b) To the extent you provide distribution, marketing, and other
services to the Funds which have distribution plans (as described
in the Prospectus or Statement of Additional Information) in
effect pursuant to the provisions of Rule 12b-1 (the "12b-1
Plan") promulgated pursuant to the provisions of the Investment
Company Act of 1940 (the "1940 Act"), in connection with the
promotion of the sale of Shares and the retention of assets
<PAGE>
Page 5
by such Funds, including furnishing services and assistance to
your customers who invest in or own Shares of such Funds and
including, but not limited to, answering routine inquiries
regarding such Funds and assisting in changing distribution
options, account designations and addresses, we shall pay you
quarterly, in accordance with the then prevailing guidelines, a
portion of the fee ("Distribution Fee") paid by such Fund to us
pursuant to its 12b-1 Plan, as set forth below as Additional
Compensation. Such Additional Compensation shall be payable only
with respect to Shares which are owned of record by your firm as
nominee of your customers or which are owned by those customers
of your firm whose records, as maintained by the Funds or their
agents, designate your firm as the customer's dealer of record.
Subject to the provisions of the 12b-1 Plan, as in effect from
time to time, the Additional Compensation shall be computed at
the following rates, and for each calendar quarter shall be based
on the average daily net asset value of the Shares
<PAGE>
Page 6
of each Fund that remain outstanding during such period, subject
to such computation and accrual:
Payment of such Additional Compensation to you shall be made
within 30 days after the close of each quarter for which such
Additional Compensation is payable. If the amount of the
Additional Compensation based upon the value of any customer's
account is less than $1.00 for any Fund for any quarter, such
Additional Compensation will not be paid. If the aggregate
Additional Compensation exclusive of Additional Compensation not
paid under the preceding sentence for all your customer accounts
is less than $15.00 for all Funds for any quarter, such
Additional Compensation will not be paid. In addition (i) you
shall not be paid such Additional Compensation until we are in
receipt of the Distribution Fee described in that Fund's
Prospectus for the period in which you provide the services
described above; and (ii) our liability to
<PAGE>
Page 7
you for the payment of such quarterly Additional Compensation is
limited solely to your pro rata proceeds of that Fund's
Distribution Fee. The provisions of this paragraph may be
terminated with respect to any Fund in accordance with the
provisions of Rule 12b-1 under the 1940 Act, and thereafter no
such Additional Compensation will be paid to you.
Where payment is due hereunder, we agree to send checks for
the Dealer Concession and Additional Compensation to your address
as it appears on our records. You must notify us of address
changes and promptly negotiate such checks. Any such check that
remains outstanding for 12 months shall be void and the
obligation represented thereby shall be extinguished.
5. You represent that you are a member in good standing of the National
Association of Securities Dealers, Inc., you further agree that this Agreement
shall terminate automatically on the date you cease to be a member of the NASD.
It is further agreed that all rules or regulations of the NASD now in effect or
hereafter adopted, which are binding upon underwriters and dealers in the
<PAGE>
Page 8
distribution of the securities of open-end investment companies, shall be deemed
to be part of this Agreement to the same extent as if set forth in full herein.
6. You agree:
(a) To purchase shares from us only for the purpose of covering purchase
orders already received or for your own bona fide investment.
(b) That you will not purchase any shares from your customers at prices
lower than the redemption or purchase prices then quoted by the Funds.
You shall, however, be permitted to sell shares for the account of
their record owners to the Funds at the repurchase prices currently
established for such shares and may charge the owner a fair commission
for handling the transaction.
(c) That you will not withhold placing customers' orders for shares solely
for the purpose of increasing your profit as a result of such
withholding.
(d) That if any shares confirmed to you hereunder are redeemed or
repurchased by any of the Funds within seven business days after such
confirmation of your original order, you shall forthwith refund to us
the full discount reallowed to you on such sales. We shall forthwith
pay
<PAGE>
Page 9
to the appropriate Funds our share of the "charge" on the original
sale, and shall also pay to such Fund the refund from you as herein
provided. We shall notify you of such redemption or repurchase within
ten days from the date of delivery of the certificate or certificates
to us or such Fund. Termination or cancellation of this Agreement
shall not relieve you or us from the requirements of this
subparagraph.
7. We shall not accept from you any conditional order for shares.
Delivery of certificates for shares purchased (if requested) shall be made by
the Funds only against receipt of the purchase price, subject to deduction for
the discount reallowed to you and our portion of the sales charge on such sale.
If payment for the shares purchased is not received within the time customary
for such payments, the sale may be cancelled without any responsibility or
liability on our part or on the part of the Funds (in which case you will be
responsible for any loss, including loss of profit, suited by the Funds
resulting from your failure to make payment as aforesaid), or at our option, we
may sell the shares ordered back to the Funds (in which case we may hold you
responsible for any loss, including loss of profit suffered by us resulting from
your failure to make payment as aforesaid).
<PAGE>
Page 10
8. You will not offer or sell any of the shares except under
circumstances that will result in compliance with the applicable Federal and
State securities laws and, in connection with sales and offers to sell shares,
you will furnish to each person to whom any such sale or offer is made a copy of
the applicable then current prospectus. We shall be under no liability to you
except for obligations expressly assumed by us herein. Nothing herein contained,
however, shall be deemed to be a condition, stipulation or provision binding any
persons acquiring any security to waive compliance with any provision of the
Securities Act of 1933, or of the regulations of the SEC or NASD or to relieve
the parties hereto from any liability arising under the Securities Act of 1993
or the 1940 Act.
9. No person is authorized to make any representations concerning shares
of the Funds except those contained in the current prospectus and printed
information issued by each Fund or by us as information supplemental to each
prospectus. We shall supply prospectuses, reasonable quantities of supplemental
sales literature, and additional information as issued. You agree not to use
other advertising or sales material relating to the Funds unless approved in
writing by us in advance of such use. Any printed information furnished by us
other than the then current
<PAGE>
Page 11
prospectus for each Fund, periodic reports and proxy solicitation materials are
our sole responsibility and not responsibility of the Funds, and you agree that
the Funds shall have no liability or responsibility to you in these respects
unless expressly assumed in connection therewith.
10. You agree that, to the maximum extent permitted by applicable law, you
will indemnify and hold harmless Composite Funds Distribution, Inc., each Fund,
the Fund Group, and the officers, directors, employees, agents and affiliates
thereof of Composite Funds Distribution, Inc. from any liability, claims, loss,
damage, costs, settlements and expenses on account of any act or omission by
you, your representatives, agents or subagents in connection with any orders or
solicitation of orders of Shares of the Funds by you, your representatives,
agents or subagents. You agree to offer and sell Shares only in the states and
other jurisdictions in which we have indicated in writing that such offers and
sales can be made and in which you are legally qualified and permitted to so
act. If you effect a telephone redemption or telephone exchange of any Shares
on behalf of your customer, you hereby indemnify each Fund, the Fund Group,
Composite Funds Distributor, Inc., and the Transfer and Shareholder Services
Agent against any loss, injury, damage, expense, or liability as a result
<PAGE>
Page 12
of acting or relying upon your telephone instructions and information.
We agree to indemnify and hold harmless you and your respective officers,
employees and directors from and against any and all claims, liabilities,
expenses or losses in any way arising out of or connected with the negligence,
recklessness or intentional conduct of us or our affiliates, officers,
representatives or employees or in any way arising out of or connected with any
breach of any representation, warranty, covenant or agreement made by us in this
Agreement or in any way connected with any untrue statement or alleged untrue
statement of a material fact contained in the registration statement or
prospectus of any Fund or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated in order to make
the statements therein not misleading. Our indemnification obligations to you
hereunder shall survive the termination of this Agreement for any reason.
11. You acknowledge by your execution hereof that all payments by any Fund
to us under its 12b-1 Plan and all payments by Fund shareholders of sales
charges shall be paid in accordance with Article III, Section 26 of the Rules of
Fair Practice of the NASD, as such Section may change from time to time
("Section 26"),
<PAGE>
Page 13
including, without limitation, the limitations set forth in Section 26 on the
maximum asset-based sales charges (as defined in Section 26) payable with
respect to a Fund's Shares. Accordingly, it is agreed that to the extent the
fees payable to us under a 12b-1 Plan with respect to a Fund or the sales
charges payable by a Fund shareholder for the purchase of Fund shares are
reduced or prohibited by the operation of Section 26, our payments to you
hereunder of the Dealer Concession or Additional Compensation, as the case may
be, will likewise be reduced or will cease. You further agree that we shall be
obligated to pay you a Dealer Concession or Additional Compensation hereunder
only if and to the extent we actually receive a fee from such Fund pursuant to
its 12b-1 Plan or a sales charge from such shareholder, as the case may be. You
also agree to remit promptly to us any dealer Concession or Additional
Compensation paid to you that we subsequently determine was paid in connection
with 12b-1 Plan fees or sales charges paid to us in violation of Section 26.
12. All notices, requests, demands and other communications required by,
or made in connection with this Agreement shall be in writing and shall be
deemed to have been duly given on the date of delivery, if delivered in person,
or three days after mailing if mailed by certified or registered mail, postage
prepaid, return
<PAGE>
Page 14
receipt requested, addressed, if to you, as set forth on the signature page of
this Agreement, or, if to us, as follows:
Composite Funds Distributor, Inc.
601 West Main Ave., Suite 801
Spokane, WA 99201
Attention: President
13. Either party to this Agreement may cancel this Agreement by giving
written notice to the other. Such notice shall be deemed to have been given on
the date on which it was either delivered personally to the other party or any
officer or member thereof, or was mailed postpaid or delivered to a telegraph
office for transmission to the other party at his or its address as shown below.
This Agreement may be amended by us at any time and your placing of an order
after the effective date of any such amendment shall constitute you acceptance
thereof.
14. This Agreement shall be construed in accordance with the laws of the
State of Washington and shall be binding upon both parties hereto when signed by
us and accepted by you in the space provided.
Very truly yours,
COMPOSITE FUNDS DISTRIBUTOR, INC.
By:
---------------------------------------
William G. Papesh, President
<PAGE>
Page 15
Firm Name
------------------------------------------------------------
Address
--------------------------------------------------------------
City State Zip Code
------------------------------- ------- --------------
ACCEPTED BY (signature)
----------------------------------------------
Name (print) Title
---------------------------- ------------------------
Date 19
------------------------ ---
Please return two signed copies of this Agreement (one of which will be signed
by us and thereafter returned to you).
Composite Funds Distributor, Inc.
601 West Main Ave., Suite 801
Spokane, WA 99201
<PAGE>
CUSTODY AGREEMENT
-----------------
THIS AGREEMENT made the 1st day of September, 1992 by and between INVESTORS
FIDUCIARY TRUST COMPANY, a trust company chartered under the laws of the state
of Missouri, having its trust office located at 127 West 10th Street, Kansas
City, Missouri 64105 ("Custodian"), and COMPOSITE BOND AND STOCK FUND, INC., a
Washington corporation, having its principal office and place of business at 601
West Riverside Avenue, Spokane Washington 99201 ("Fund").
WITNESSETH:
WHEREAS, Fund desires to appoint Investors Fiduciary Trust Company as
Custodian of the securities and monies of Fund's investment portfolio; and
WHEREAS, Investors Fiduciary Trust Company is willing to accept such
appointment;
NOW THEREFORE, for and in consideration of the mutual promises contained
herein, the parties hereto, intending to be legally bound, mutual covenant and
agree as follows:
1. APPOINTMENT OF CUSTODIAN. Fund hereby constitutes and appoints Custodian
-------------------------
as custodian of the securities and monies at any time owned by the Fund.
2. DELIVERY OF CORPORATE DOCUMENTS. Fund has delivered or will deliver to
--------------------------------
Custodian prior to the effective date of this Agreement, copies of the following
documents and all amendments or supplements thereto, properly certified or
authenticated:
A. Resolutions of the Board of Directors of the Fund appointing Custodian
as custodian hereunder and approving the form of this Agreement; and
B. Resolutions of the Board of Directors of the Fund designating certain
persons to give instructions on behalf of the Fund to Custodian and
authorizing Custodian to rely upon written instructions over their
signatures.
3. DUTIES AND RESPONSIBILITIES OF CUSTODIAN.
-----------------------------------------
A. Delivery of Assets. Fund will deliver or cause to be delivered to
------------------
Custodian on the effective date of this Agreement, or as soon
thereafter as practicable, and from time to time thereafter, all
portfolio securities acquired by it and monies then owned by it except
as permitted by the Investment Company Act of 1940 or from time to time
coming into its possession during the time this Agreement shall
continue in effect. Custodian shall have no responsibility or liability
whatsoever for or on account of securities or monies not so delivered.
All securities so delivered to Custodian (other than bearer securities)
shall be registered in the
-1-
<PAGE>
name of Fund or its nominee, or of a nominee of Custodian, or shall be
properly endorsed and in form for transfer satisfactory to Custodian.
B. Delivery of Accounts and Records. Fund shall turn over to Custodian
--------------------------------
all of the Fund's relevant custody accounts and records previously
maintained by it or a prior custodian in order to perform its duties
hereunder. Custodian shall be entitled to rely conclusively on the
completeness and correctness of the accounts and records turned over
to it by Fund, and Fund shall indemnify and hold Custodian harmless of
and from any and all expenses, damages and losses whatsoever arising
out of or in connection with any error, omission, inaccuracy or other
deficiency of such accounts and records or in the failure of Fund to
provide any portion of such or to provide any information needed by
the Custodian knowledgeably to perform its function hereunder.
C. Delivery of Assets to Third Parties. Custodian will receive delivery
-----------------------------------
of and keep safely the assets of Fund delivered to it from time to
time and the assets of each Portfolio segregated in a separate
account. Custodian will not deliver, assign, pledge or hypothecate any
such assets to any person except as permitted by the provisions of
this Agreement or any agreement executed by it according to the terms
of Section 3.S. of this Agreement. Upon delivery of any such assets to
a subcustodian pursuant to Section 3.S. of this Agreement, Custodian
will create and maintain records identifying those assets which ave
been delivered to the subcustodian as belonging to the applicable
Portfolio of the Fund. The Custodian is responsible for the
safekeeping of the securities and monies of Fund only until they have
been transmitted to and received by other persons as permitted under
the terms of this Agreement, except for securities and monies
transmitted to United Missouri Bank of Kansas City, N.A. (UMBKC),
United Missouri Trust Company of New York (UMBTC), and First National
Bank of Chicago (FNBC) for which Custodian remains responsible.
Custodian shall be responsible for the monies and securities of
Fund(s) held by eligible foreign subcustodians to the extent the
domestic subcustodian with which the Custodian contracts is
responsible to Custodian. Custodian may participate directly or
indirectly through a subcustodian in the Depository Trust Company,
Treasury/Federal Reserve Book Entry System, Participant Trust Company,
Treasury/Federal Reserve Book Entry System, Participant Trust Company
or other depository approved by the Fund (as such entities are defined
at 17 CFR Section 270.17f(b)).
D. Registration of Securities. Custodian will hold stocks and other
--------------------------
registerable portfolio securities of Fund registered in the name of
the Fund or in the name of any nominee of Custodian for whose fidelity
and liability Custodian will be fully responsible, or in street
certificate form, so-called, with or without any indication of
fiduciary capacity. Unless otherwise instructed, Custodian will
register all such portfolio securities in the name of its authorized
nominee. All securities, and the
-2-
<PAGE>
ownership thereof by Fund, which are held by Custodian hereunder,
however, shall at all times be identifiable on the records of the
Custodian. The Fund agrees to hold Custodian and its nominee harmless
for any liability as a record holder of securities held in custody.
E. Exchange of Securities. Upon receipt of instructions as defined herein
----------------------
in Section 4.A, Custodian will exchange, or cause to be exchanged,
portfolio securities held by it for the account of Fund for other
securities or cash issued or paid in connection with any
reorganization, recapitalization, merger, consolidation, split-up of
shares, change of par value, conversion or otherwise, and will deposit
any such securities in accordance with the terms of any reorganization
orprotective plan. Without instructions, Custodian is authorized to
exchange securities held by it in temporary form for securities in
definitive form, to effect an exchange of shares when the par value of
the stock is changed, and upon receiving payment therefor, to
surrender bonds or other securities held by it at maturity or when
advised of earlier call for redemption, except that Custodian shall
receive instructions prior to surrendering any convertible security.
F. Purchases of Investments of the Fund. Fund will, on each business day
------------------------------------
on which a purchase of securities shall be made by it, deliver to
Custodian instructions which shall specify with respect to each such
purchase;
1. The name of the Portfolio making such purchase;
2. The name of the issuer and description of the security;
3. The number of shares or the principal amount purchased, and
accrued interest, if any;
4. The trade date;
5. The settlement date;
6. The purchase price per unit and the brokerage commission, taxes
and other expenses payable in connection with the purchase;
7. The total amount payable upon such purchase; and
8. The name of the person from whom or the broker or dealer through
whom the purchase was made.
In accordance with such instructions, Custodian will pay for out of
monies held for the account of Fund, but only insofar as monies are available
therein for such purpose, and receive the portfolio securities so purchased by
or for the account of Fund except that Custodian may in its sole discretion
advance funds to the Fund which may result in an overdraft because the monies
held by the Custodian on behalf of the Fund are insufficient to pay the total
amount payable upon such purchase. Such payment will be made only upon receipt
by Custodian of the securities so purchased in form for transfer satisfactory to
Custodian.
-3-
<PAGE>
G. Sales and Deliveries of Investments of the Fund - Other than Options
--------------------------------------------------------------------
and Futures. Fund will, on each business day on which a sale of
-----------
investment securities of Fund has been made,deliver to Custodian
instructions specifying with respect to each such sale:
1. The name of the Portfolio making such sale;
2. The name of the issuer and description of the securities;
3. The number of shares or principal amount sold, and accrued
interest, if any;
4. The date on which the securities sold were purchased or other
information identifying the securities sold and to be delivered;
5. The trade date;
6. The settlement date;
7. The sale price per unit and the brokerage commission, taxes or
other expenses payable in connection with such sale;
8. The total amount to be received by Fund upon such sale; and
9. The name and address of the broker or dealer through whom or
person to whom the sale was made.
In accordance with such instructions, Custodian will deliver or cause to be
delivered the securities thus designated as sold for the account of Fund to the
broker or other person specified in the instructions relating to such sale, such
delivery to be made only upon receipt of payment therefor in such form as is
satisfactory to Custodian, with the understanding that Custodian may deliver or
cause to be delivered securities for payment in accordance with the customs
prevailing among dealers in securities.
H. Purchases or Sales of Security Options, Options on Indices and
--------------------------------------------------------------
Security Index Futures Contracts. Fund will, on each business day on
--------------------------------
which a purchase or sale of the following options and/or futures shall
be made by it, deliver to Custodian instructions which shall specify
with respect to each such purchase or sale:
1. The name of the Portfolio making such purchase or sale;
2. Security Options
a. The underlying security;
b. The price at which purchased or sold;
c. The expiration date;
d. The number of contracts;
e. The exercise price;
f. Whether the transaction is an opening, exercising, expiring or
closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased;
i. Market on which option traded;
-4-
<PAGE>
j. Name and address of the broker or dealer through whom the sale or
purchase was made.
3. Options on Indices
a. The index;
b. The price at which purchased or sold;
c. The exercise price;
d. The premium;
e. The multiple;
f. The expiration date;
g. Whether the transaction is an opening, exercising, expiring or
closing transaction;
h. Whether the transaction involves a put or call;
i. Whether the option is written or purchased;
j. The name and address of the broker or dealer through whom the
sale or purchase was made, or other applicable settlement
instructions.
4. Security Index Futures Contracts
a. The last trading date specified in the contract and, when
available, the closing level, thereof;
b. The index level on the date the contract is entered into;
c. The multiple;
d. Any margin requirements;
e. The need for a segregated margin account (in addition to
instructions, and if not already in the possession of Custodian, Fund
shall deliver a substantially complete and executed custodial
safekeeping account and procedural agreement which shall be
incorporated by reference into this Custody Agreement); and
f. The name and address of the futures commission merchant through
whom the sale or purchase was made, or other applicable settlement
instructions.
5. Option on Index Future Contracts
a. The underlying index futures contract;
b. The premium;
c. The expiration date;
d. The number of options;
e. The exercise price;
f. Whether the transaction involves an opening, exercising, expiring
or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased; and
I. The market on which the option is traded.
I. Securities Pledged or Loaned
----------------------------
If specifically allowed for in the prospectus of Fund:
-5-
<PAGE>
1. Upon receipt of instructions, Custodian will release or cause to be
released securities held in custody to the pledgee designated in such
instructions by way of pledge or hypothecation to secure any loan incurred by
Fund; provided, however, that the securities shall be released only upon payment
to Custodian of the monies borrowed, except that in cases where additional
collateral is required to secure a borrowing already made, further securities
may be released or caused to be released for that purpose upon receipt of
instructions. Upon receipt of instructions, Custodian will pay, but only from
funds available for such purpose, any such loan upon redelivery to it of the
securities pledged or hypothecated therefor and upon surrender of the note or
notes evidencing such loan.
2. Upon receipt of instructions, Custodian will release securities held in
custody to the borrower designated in such instructions; provided, however, that
the securities will be released only upon deposit with Custodian of full cash
collateral as specified in such instructions, and that Fund will retain the
right to any dividends, interest or distribution on such loaned securities. Upon
receipt of instructions and the loaned securities, Custodian will release the
cash collateral to the borrower.
J. Routine Matters. Custodian will, in general, attend to all routine and
---------------
mechanical matters in connection with the sale, exchange, substitution,
purchase, transfer, or other dealings with securities or other property of Fund
except as may be otherwise provided in this Agreement or directed from time to
time by the Board of Directors of Fund.
K. Deposit Account. Custodian will open and maintain a special purpose
---------------
deposit accounts in the name of Custodian ("Account"), subject only to draft or
order by Custodian upon receipt of instructions. All monies received by
Custodian from or for the account of a portfolio shall be deposited in said
Account, barring events not in the control of the Custodian such as strikes,
lockouts or labor disputes, riots, war or equipment or transmission failure or
damage, fire, flood, earthquake or other natural disaster, action or inaction of
governmental authority or other causes beyond its control, at 9:00 a.m., Kansas
City time, on the second business day after deposit of any check into Fund's
Account, Custodian agrees to make Fed Funds available to the Fund in the amount
of the check. Deposits made by Federal Reserve wire will be available to the
Fund immediately and ACH wires will be available to the Fund on the next
business day. Income earned on the portfolio securities will be credited to the
applicable portfolio of the Fund based on the schedule attached as Exhibit A.
The Custodian will be entitled to reverse any credited amounts where credits
have been made and monies are not finally collected. If monies are collected
after such reversal, the Custodian will credit the applicable portfolio in that
amount. Custodian may open and maintain an Account in such other banks or trust
companies as may be designated by it or by properly authorized resolution of the
Board of Directors of Fund, such Account, however, to be in the name of
custodian and subject only to its draft or order.
L. Income and other Payments to Fund
---------------------------------
Custodian will:
-6-
<PAGE>
1. Collect, claim and receive and deposit for the Account of Fund all
income and other payments which become due and payable on or after the
effective date of this Agreement with respect to the securities
deposited under this Agreement, and credit the account of Fund in
accordance with the schedule attached hereto as Exhibit A. If for any
reason, the Fund is credited with income that is not subsequently
collected, Custodian may reverse that credited amount;
2. Execute ownership and other certificates and affidavits for all federal,
state and local tax purposes in connection with the collection of bond
and note coupons; and
3. Take such other action as may be necessary or proper in connection with:
a. The collection, receipt and deposit of such income and other
payments, including but not limited to the presentation for payment
of:
1. all coupons and other income items requiring presentation; and
2. all other securities which may mature or be called, redeemed,
retired or otherwise become payable and regarding which the
Custodian has actual knowledge, or notice of which is contained in
publications of the type to which it normally subscribes for such
purpose; and
b. the endorsement for collection, in the name of the Fund, of all
checks, drafts or other negotiable instruments.
Custodian, however, will not be required to institute suit or take other
extraordinary action to enforce collection except upon receipt of instructions
and upon being indemnified to its satisfaction against the costs and expenses
of such suit or other actions. Custodian will receive, claim and collect all
stock dividends, rights or other similar items and will deal with the same
pursuant to instructions. Unless prior instructions have been received to the
contrary, Custodian will, without further instructions, sell any rights held
for the account of Fund on the last trade date prior to the date of expiration
of such rights.
M. Payment of Dividends and other Distributions
--------------------------------------------
On the declaration of any dividend or other distribution on the shares
of Capital Stock of Fund ("Fund Shares") by the Board of Directors of
Fund, Fund shall deliver to Custodian instructions with respect thereto,
including a copy of the Resolution of said Board of Directors certified
by the Secretary or Assistant Secretary of Fund wherein there shall be
set forth the record date as of which shareholders entitled to receive
such dividend or other distribution shall be determined, the date of
payment of such dividend or distribution, and the amount payable per
share on such dividend or distribution. Except if the ex-dividend date
and the reinvestment date of any dividend are the same, in which case
funds shall remain in the Custody Account, on the date specified in such
Resolution for the payment of such dividend or other distribution,
Custodian will pay out of the monies held for the account of Fund,
insofar as the same shall be available for such purposes, and credit to
the account of the Dividend Disbursing Agent for Fund, such amount as
may be necessary to pay the amount per share payable in cash on Fund
Shares issued and outstanding on the record date established by such
Resolution.
-7-
<PAGE>
N. Shares of Fund Purchased by Fund
--------------------------------
Whenever any Fund Shares are repurchased or redeemed by Fund, Fund or
its agent shall advise Custodian of the aggregate dollar amount to be
paid for such shares and shall confirm such advice in writing. Upon
receipt of such advice, Custodian shall charge such aggregate dollar
amount to the Account of Fund and either deposit the same in the
account maintained for the purpose of paying for the repurchase or
redemption of Fund Shares or deliver the same in accordance with such
advice. Custodian shall not have any duty or responsibility to
determine that Fund Shares have been removed from the proper
shareholder account or accounts or that the proper number of such
shares have been cancelled and removed from the shareholder records.
O. Shares of Fund Purchased from Fund
----------------------------------
Whenever Fund Shares are purchased from Fund, Fund will deposit or
cause to be deposited with Custodian the amount received for such
shares. Custodian shall not have any duty or responsibility to
determine that Fund Shares purchased from Fund have been added to the
proper shareholder account or accounts or that the proper number of
such shares have been added to the shareholder records.
P. Proxies and Notices
-------------------
Custodian will promptly deliver or mail or have delivered or mailed to
Fund all proxies properly signed, all notices of meetings, all proxy
statements and other notices, requests or announcements affecting or
relating to securities held by Custodian for Fund and will, upon
receipt of instructions, execute and deliver or cause its nominee to
execute and deliver or mail or have delivered or mailed such proxies
or other authorizations as may be required. Except as provided by this
Agreement or pursuant to instructions hereafter received by Custodian,
neither it nor its nominee will exercise any power inherent in any
such securities, including any power to vote the same, or execute any
proxy, power of attorney, or other similar instrument voting any of
such securities, or give any consent, approval or waiver with respect
thereto, or take any other similar action.
Q. Disbursements
-------------
Custodian will pay or cause to be paid insofar as funds are available
for the purpose, bills, statements and other obligations of Fund
(including but not limited to obligations in connection with the
conversion, exchange or surrender of securities owned by Fund,
interest charges, dividend disbursements, taxes, management fees,
custodian fees, legal fees, auditors' fees, transfer agents' fees,
brokerage commissions, compensation to personnel, and other operating
expenses of Fund) pursuant to instructions of Fund setting forth the
name of the person to whom payment is to be made, the amount of the
payment, and the purpose of the payment.
-8-
<PAGE>
R. Daily Statement of Accounts
---------------------------
Custodian will, within a reasonable time, render to Fund as of the
close of business on each day, a detailed statement of the amounts
received or paid and of securities received or delivered for the
account of Fund during said day. Custodian will, from time to time,
upon request by Fund, render a detailed statement of the securities
and monies held for Fund under this Agreement, and Custodian will
maintain such books and records as are necessary to enable it to do so
and will permit such persons as are authorized by Fund including
Fund's independent public accountants, access to such records or
confirmation of the contents of such records; and if demanded, will
permit federal or state regulatory agencies to examine the securities,
books and records. Upon the written instructions of Fund or as
demanded by federal or state regulatory agencies, Custodian will
instruct any subcustodian to give such persons as are authorized by
Fund including Fund's independent public accountants, access to such
records or confirmation of the contents of such records; and if
demanded, to permit federal and state regulatory agencies to examine
the books, records and securities held by subcustodian which relate to
Fund.
S.Appointment of Subcustodians
----------------------------
1. Notwithstanding any other provisions of this Agreement, all or any of
the monies or securities if Fund may be held in Custodian's own
custody or in the custody of one or more other banks or trust
companies selected by Custodian. Any such subcustodian selected by the
Custodian must have the qualifications required for custodian under
the Investment Company Act of 1940, as amended. The Custodian may
participate directly or indirectly in the Depository Trust Company,
Treasury/Federal Reserve Book Entry System, Participant Trust Company
(as such entities are defined at 17 CFR Sec. 270.17f-4(b)), or other
depository approved by the Fund and with which Custodian has a
satisfactory direct or indirect contractual relationship. Custodian
will appoint UMBKC and UMBNY as subcustodians and Custodian shall be
responsible for UMBKC and UMBNY to the same extent it is responsible
to the Fund under Section 5 of this Agreement. Custodian is not
responsible for DTC, the Treasury/Federal Reserve Book Entry System,
and PTC except to the extent such entities are responsible to
Custodian. Upon instruction of the Fund, Custodian shall be willing to
contract with such entities as Bank of New York (BONY), Morgan
Guaranty and Trust Company (MGTC), Chemical Bank (CB), and Bankers
Trust Company (BT) for variable rate securities and Custodian will be
responsible to the Fund to the same extent those entities are
responsible to Custodian. The Fund shall be entitled to review
Custodian's contracts with BONY, MGTC, CB, and BT.
T. Accounts and Records Property of Fund
-------------------------------------
Custodian acknowledges that all of the accounts and records maintained by
Custodian pursuant to this Agreement are the property of Fund, and will
be made available to
-9-
<PAGE>
Fund for inspection or reproduction within a reasonable period of time,
upon demand. Custodian will assist Fund's independent auditors, or upon
approval of Fund, or upon demand, any regulatory body having jurisdiction
over the Fund or Custodian, in any requested review of Fund's accounts
and records but shall be reimbursed for all expenses and employee time
invested in any such review outside of routine and normal periodic
reviews.
U. Adoption of Procedures
----------------------
Custodian and Fund may from time to time adopt procedures as they agree
upon, and Custodian may conclusively assume that no procedure approved by
Fund, or directed by Fund, conflicts with or violates any requirements of
its prospectus, "Articles of Incorporation," Bylaws, or any rule or
regulation of any regulatory body or governmental agency. Fund will be
responsible to notify Custodian of any changes in statutes, regulations,
rules or policies which might necessitate changes in Custodian's
responsibilities or procedures.
V. Overdrafts
----------
If Custodian shall in its sole discretion advance funds to the account of
the Fund which results in an overdraft because the monies held by
Custodian on behalf of the Fund are insufficient to pay the total amount
payable upon a purchase of securities as specified in a Fund's
instructions or for some other reason, the amount of the overdraft shall
be payable by the Fund to Custodian upon demand and shall bear an
interest rate determined by Custodian from the date advanced until the
date of payment. Custodian shall have a lien on the assets of Fund in the
amount of any outstanding overdraft.
4. INSTRUCTIONS.
-------------
A. The term "instructions," as used herein, means written or oral
instructions to Custodian from a designated representative of Fund.
Certified copies of resolutions of the Board of Directors of Fund naming
one or more designated representatives to give instructions in the name
and on behalf of Fund, may be received and accepted from time to time by
Custodian as conclusive evidence of the authority of any designated
representative to act for Fund and may be considered to be in full force
and effect (and Custodian will be fully protected in acting in reliance
thereon) until receipt by Custodian of notice to the contrary. Unless the
resolution delegating authority to any person to give instructions
specifically requires that the approval of anyone else will first have
been obtained, Custodian will be under no obligation to inquire into the
right of the person giving such instructions to do so. Notwithstanding
any of the foregoing provisions of this Section 4. no authorizations or
instructions received by Custodian from Fund, will be deemed to authorize
or permit any director, trustee, officer, employee, or agent of Fund to
withdraw any of the securities or
-10-
<PAGE>
similar investments of Fund upon the mere receipt of such authorization
or instructions from such director, trustee, officer, employee or agent.
B. No later than the next business day immediately following each oral
instruction, Fund will send Custodian written confirmation of such oral
instruction. At Custodian's sole discretion, Custodian may record on
tape, or otherwise, any oral instruction whether given in person or via
telephone, each such recording identifying the parties, the date and the
time of the beginning and ending of such oral instruction.
5. LIMITATION OF LIABILITY OF CUSTODIAN.
A. Custodian shall hold harmless and indemnify Fund from and against any
loss or liability arising out of Custodian's negligence or bad faith.
Custodian shall not be liable for consequential damages, special, or
punitive damages. Custodian may request and obtain the advice and opinion
of counsel for Fund, or of its own counsel with respect to questions or
matters of law, and it shall be without liability to Fund for any action
taken or omitted by it in good faith, in conformity with such advice or
opinion. If Custodian reasonably believes that it could not prudently act
according to the instructions of the Fund or the Fund's counsel, it may
in its discretion, with notice to the Fund, not act according to such
instructions.
B. Custodian may rely upon the advice of Fund and upon statements of Fund's
accountants and other persons believed by, it in good faith, to be expert
in matters upon which they are consulted, and Custodian shall not be
liable for any actions taken, in good faith, upon such statements.
C. If Fund requires Custodian in any capacity to take, with respect to any
securities, any action which involves the payment of money by it, or
which in Custodian's opinion might make it or its nominee liable for
payment of monies or in any other way, Custodian, upon notice to Fund
given prior to such actions, shall be and be kept indemnified by Fund in
an amount and form satisfactory to Custodian against any liability on
account of such action.
D. Custodian shall be entitled to receive, and Fund agrees to pay Custodian,
on demand, reimbursement for such cash disbursements, costs and expenses
as may be agreed upon from time to time by Custodian and Fund.
E. Custodian shall be protected in acting as custodian hereunder upon any
instructions, advice, notice, request, consent, certificate or other
instrument or paper reasonably appearing to it to be genuine and to have
been properly executed and shall, unless otherwise specifically provided
herein, be entitled to receive as conclusive proof of any fact or matter
required to be ascertained from Fund hereunder, a certificate signed by
the Fund's President, or other officer specifically authorized for such
purpose.
-11-
<PAGE>
F. Without limiting the generality of the foregoing, Custodian shall be
under no duty or obligation to inquire into, and shall not be liable for:
1. The validity of the issue of any securities purchased by or for Fund,
the legality of the purchase thereof or evidence of ownership required
by Fund to be received by Custodian, or the propriety of the decision
to purchase or amount paid therefor;
2. The legality of the sale of any securities by or for Fund, or the
propriety of the amount for which the same are sold;
3. The legality of the issue or sale of any shares of the Capital Stock
of Fund, or the sufficiency of the amount to be received therefor;
4. The legality of the repurchase or redemption of any Fund Shares, or
the propriety of the amount to be paid therefor; or
5. The legality of the declaration of any dividend by Fund, or the
legality of the issue of any Fund Shares in payment of any stock
dividend.
G. Custodian shall not be liable for, or considered to be Custodian of, any
money represented by any check, draft, wire transfer, clearing house
funds, uncollected funds, or instrument for the payment of money received
by it on behalf of the Fund, until Custodian actually receives such
money, provided only that it shall advise Fund promptly if it fails to
receive any such money in the ordinary course of business, and use its
best efforts and cooperate with Fund toward the end that such money shall
be received.
H. Custodian shall not be responsible for loss occasioned by the acts,
neglects, defaults or insolvency of any broker, bank, trust company, or
any other person with whom Custodian may deal in the absence of
negligence, or bad faith on the part of the Custodian.
I. Notwithstanding anything herein to the contrary, Custodian may, and with
respect to any foreign subcustodian appointed under Section 3.S.2. must,
provide the Fund for its approval, agreements with banks or trust
companies which will act as subcustodians for Fund pursuant to Section
3.S of this Agreement.
6. COMPENSATION. Fund will pay Custodian such compensation as is stated in the
-------------
Fee Schedule attached hereto as Exhibit B which may be changed from time to
time as agreed to in writing by Custodian and Fund. Custodian may charge
such compensation against monies held by it for the account of Fund.
Custodian will also be entitled, notwithstanding the provisions of Sections
5.C. or 5.D. hereof, to charge against any monies held by it for the account
of Fund the amount of any loss, damage, liability, advance, or expense for
which it shall be entitled to reimbursement under the provisions of this
Agreement including fees or expenses due to Custodian for other services
provided to the Fund by the Custodian.
-12-
<PAGE>
7. TERMINATION. Either party to this Agreement may terminate the same by notice
------------
in writing, delivered or mailed, postage prepaid, to the other party hereto
and received not less than ninety (90) days prior to the date upon which
such termination will take effect. Upon termination of this Agreement, Fund
will pay to Custodian such compensation for its reimbursable disbursements,
costs and expenses paid or incurred to such date and Fund will use its best
efforts to obtain a successor custodian. Unless the holders of a majority of
the outstanding shares of "Capital Stock" of Fund vote to have the
securities, funds and other properties held under this Agreement delivered
and paid over to some other person, firm or corporation specified in the
vote, having not less than Two Million Dollars ($2,000,000) aggregate
capital, surplus and undivided profits, as shown by its last published
report, and meeting such other qualifications for custodian as set forth in
the Bylaws of Fund, the Board of Directors of Fund will, forthwith upon
giving or receiving notice of termination of this Agreement, appoint as
successor custodian a bank or trust company having such qualifications.
Custodian will, upon termination of this Agreement, deliver to the successor
custodian so specified or appointed, at Custodian's office, all securities
then held by Custodian hereunder, duly endorsed and in form for transfer, all
funds and other properties of Fund deposited with or held by Custodian
hereunder, or will cooperate in effecting changes in book-entries at the
Depository Trust Company or in the Treasury/Federal Reserve Book-Entry System
pursuant to 31 CFR Sec. 306.118. In the event no such vote has been adopted
by the stockholders of Fund and no written order designating a successor
custodian has been delivered to Custodian on or before the date when such
termination becomes effective, then Custodian will deliver the securities,
funds and properties of Fund to a bank or trust company at the selection of
Custodian and meeting the qualifications for custodian, if any, set forth in
the Bylaws of Fund and having not less than Two Million Dollars ($2,000,000)
aggregate capital, surplus and undivided profits, as shown by its last
published report. Upon either such delivery to a successor custodian,
Custodian will have no further obligations or liabilities under this
Agreement. Thereafter such bank or trust company will be the successor
custodian under this Agreement and will be entitled to reasonable
compensation for its services. In the event that no such successor custodian
can be found, Fund will submit to its shareholders, before permitting
delivery of the cash and securities owned by Fund to anyone other than a
successor custodian, the question of whether Fund will be liquidated or
function without a custodian. Notwithstanding the foregoing requirement as
to delivery upon termination of this Agreement, Custodian may make any other
delivery of the securities, funds and property of Fund which is permitted by
the Investment Company Act of 1940, Fund's Certificate of Incorporation and
Bylaws then in effect or apply to a court of competent jurisdiction for the
appointment of a successor custodian.
8. NOTICES. Notices, requests, instructions and other writings received by Fund
--------
at 601 West Riverside Avenue, Suite 900, Spokane, Washington, 99201 or at
such other address as Fund may have designated to Custodian in writing, will
be deemed to have been properly given to Fund hereunder; and notices,
requests, instructions and other writings received by Custodian at its
offices at 127 West 10th Street, Kansas City, Missouri 64105, or to such
-13-
<PAGE>
other address as it may have designated to Fund in writing, will be deemed to
have been properly given to Custodian hereunder.
9. MISCELLANEOUS.
--------------
A. This Agreement is executed and delivered in the State of Missouri and
shall be governed by the laws of said state.
B. All the terms and provisions of this Agreement shall be binding upon,
inure to the benefit of, and be enforceable by the respective successor
and assigns of the parties hereto.
C. No provisions of the Agreement may be amended or modified, in any manner
except by a written agreement properly authorized and executed by both
parties hereto.
D. The captions in this Agreement are included for convenience of reference
only, and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
E. This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original but all of which
together will constitute one and the same instrument.
F. If any part, term or provision of this Agreement is by the courts held to
be illegal, in conflict with any law or otherwise invalid, the remaining
portion or portions shall be considered severable and not be affected,
and the rights and obligations of the parties shall be construed and
enforced as if the Agreement did not contain the particular part, term or
provision held to be illegal or invalid.
G. Custodian will not release the identity of Fund to an issuer which
requests such information pursuant to the Shareholder Communications Act
of 1985 for the specific purpose of direct communications between such
issuer and Fund unless the Fund directs the Custodian otherwise.
H. This Agreement may not be assigned by either party without prior written
consent of the other party.
I. If any provision of the Agreement, either in its present form or as
amended from time to time, limits, qualifies, or conflicts with the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder, such statutes, rules and regulations shall be
deemed to control and supercede such provision without nullifying or
terminating the remainder of the provisions of this Agreement.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly respective authorized officers.
INVESTORS FIDUCIARY TRUST
COMPANY
By: Allen Strain???
---------------------
Title: Senior V.P.
-----------
COMPOSITE BOND & STOCK
FUND, INC.
By: William G. Papesh
-----------------
Title: President
---------
-15-
<PAGE>
<TABLE>
<CAPTION>
TRANSACTION DTC PHYSICAL FED
- ----------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
TYPE CR DATE FDS TYPE CR DATE FDS TYPE CR DATE FDS TYPE
Calls Puts As Received C of F* As Received C or F*
Maturities As Received C or F* Mat. Date C or F* Mat. Date F
Tender As Received C or F* As Received C N/A
Reorgs.
Dividends Paydate C Paydate C N/A
Floating Rate Paydate C Paydate C N/A
Int.
Floating Rate N/A As Rate C N/A
Int. (No Received
Rate)
Mtg. Backed Paydate C Paydate + 1 C Paydate F
P&I Bus. Day
Fixed Rate Paydate C Paydate C Paydate F
Int.
Euroclear N/A C Paydate C
</TABLE>
Legend
- ------
C = Clearinghouse Funds
F = Fed Funds
N/A = Not Applicable
* Availability based on how received.
-16-
<PAGE>
INVESTORS FIDUCIARY TRUST COMPANY
COMPOSITE GROUP OF FUNDS
FEE SCHEDULE
I. SECURITY CUSTODY
A. Domestic Securities
-------------------
Asset-Based Fee on a total relationship basis:
1.0/100 of 1% (1 basis point) on the first $500 million in assets
.75/100 of 1% (.75 basis points) on the next $500 million in assets
.5/100 of 1% (.5 basis points) on all assets over $1 billion in assets
Transaction Fee, per transaction:
Physical Delivery - $20.00
Depository Eligible - $8.00
Participant Trust Company (PTC) Eligible - $12.00
PTC Asset-backed Security Paydown - $7.50
Other Asset-backed Security Paydown - $10.00
Overnight Sweeps - $5.00 (buy-side only)
Federal Funs Wire Received or Delivered - $6.00
B. Foreign Securities
------------------
See Appendix I for Global Fee Agreement.
C. Balance Credits
---------------
IFTC will offset fees with balance credits calculated at 75% of the
bank credit rate (see below) applied to average custody collected
cash balances for the month. Balance credits can be used to offset
fees. Any credits in excess of fees will be carried forward from
month to month through the end of the calendar year. For
calculation purposes, IFTC uses an actual/actual basis.
Note: The bank credit rate is the equivalent to the lesser of:
The average 91-day Treasury Bill discount rate for the month
or
The average Federal Funds rate for the month less 50 basis
points.
NOVEMBER 30, 1995 PAGE 1 OF 2
-17-
<PAGE>
COMPOSITE GROUP OF FUNDS
FEE SCHEDULE (CONT.)
II. NOTES TO THE ABOVE FEE SCHEDULE
A. Asset based fees will be billed monthly at 1/12th of the annual stated
rate based on monthly average net assets. Annual maintenance fees are
payable monthly at 1/12th of the annual stated rate.
B. The above schedule does not include out-of-pocket expenses that would
be incurred by IFTC on the client's behalf. Examples of out-of-pocket
expenses include but are not limited to microfiche, disaster recovery,
pricing services, overnight mailing services, FDIC insurance, foreign
registration and script fees, etc. IFTC bills out-of-pocket expenses
separately from service fees.
C. The fees stated above are exclusive of terminal equipment required in
the client's location(s) and communication line costs.
D. Any fees or out-of-pocket expenses not paid within 30 days of the date
of the original invoice will be charged a late payment fee of 1% per
month until payment of the fees are received by IFTC.
E. The above fee schedule is applicable for selections made and
communicated within 90 days of the date of this proposal. The fees are
guaranteed for a three year period commencing on the effective date of
the service agreement between IFTC and the client. All changes to the
fee schedule will be communicated in writing at least 60 days prior to
their effective date.
F. Overdrafts will be calculated at the Prime rate (as published in the
Wall Street Journal) and charged on a daily basis.
/s/ Gerald P. Depolo (lc) /s/ Monte D. Calvin, CFO
- ---------------------------------- -----------------------------
Investors Fiduciary Trust Company Composite Group of Funds
1/1/96 January 1, 1996
- ---------------------------------- -----------------------------
Date Date
NOVEMBER 30, 1995 PAGE 2 OF 2
-18-
<PAGE>
APPENDIX I
MURPHEY FAVRE (COMPOSITE 9/95)
GLOBAL CUSTODY FEES
I. Country Based Charges:
---------------------
<TABLE>
<CAPTION>
Market Asset Transaction Market Asset Transaction
Charge Charge Charge Charge
<S> <C> <C> <C> <C> <C>
Argentina 40 $120 Malaysia 15 $ 20
Australia 15 $ 20 Mauritius 40 $120
Austria 14 $ 20 Mexico 15 $ 20
Bangladesh 40 $120 Morocco 40 $120
Belgium 15 $ 20 Namibia 40 $ 20
Belize 40 $120 Netherlands 15 $ 20
Botswana 40 $120 New Zealand 15 $ 20
Brazil 40 $120 Norway 15 $ 20
Canada 15 $ 20 Pakistan 40 $120
Euroclear 5 $ 25 Peru 40 $120
Chile 40 $120 Philippines 15 $120
Colombia 40 $120 Poland 40 $120
Czech 40 $120 Portugal 15 $120
Republic
Denmark 15 $ 20 Shanghai 35 $120
(China)
Egypt 40 $120 Shenzhen 35 $120
(China)
ECU* 15 $ 20 Singapore 15 $ 20
Finland 15 $ 20 South Africa 15 $ 20
France 15 $ 20 South Korea 40 $120
Germany 15 $ 20 Spain 15 $ 20
Ghana 40 $120 Sri Lanka 35 $120
Greece 40 $120 Swaziland 40 $120
Hong Kong 15 $ 20 Sweden 15 $ 20
Hungary 40 $120 Switzerland 15 $ 20
India 40 $120 Taiwan 35 $120
Indonesia 15 $120 Thailand 15 $ 20
Ireland 15 $ 20 Turkey 40 $120
Israel 40 $120 United 15 $ 20
Kingdom
Italy 15 $ 20 Uruguay 40 $120
Japan 10 $ 20 Venezuela 40 $120
Jordan 45 $120 Zimbabwe 40 $120
Luxembourg 15 $ 20
</TABLE>
-19-
<PAGE>
NOTE: Any country not listed above will be negotiated at time of investment.
Out of Pocket Expenses: As incurred (e.g. stamp taxes, registration costs,
script fees, special transportation costs, etc.). *ECU = European Currency Unit
-20-
<PAGE>
SHAREHOLDERS SERVICE CONTRACT
-----------------------------
SHAREHOLDERS SERVICE CONTRACT (this "Agreement"), dated ________, 1997,
between COMPOSITE BOND & STOCK FUND (the "Fund"), a separate series of The
Composite Funds (the "Trust"), a Massachusetts business trust with offices
located at 601 West Main Avenue, Suite 300, Spokane, Washington 99201, and
MURPHEY FAVRE SECURITIES SERVICES, INC. (the "Transfer Agent"), a Washington
corporation with offices located at 601 West Main Avenue, Suite 300, Spokane,
Washington 99201:
W I T N E S S E T H
-------------------
WHEREAS, the Trust is a diversified, open-end series management investment
company registered under the Investment Company Act of 1940, whose shares are or
will be registered under the Securities Act of 1933; and
WHEREAS, the Transfer Agent engages in the business of rendering computer
and related services and acting as transfer agent and shareholder servicing
agent for investment companies;
WHEREAS, the Fund desires the Transfer Agent to perform the services set
forth in Schedule A attached hereto and incorporated herein by reference, and
the Transfer Agent is willing to perform such services;
NOW THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the Fund and the Transfer Agent agree as follows:
1. The Transfer Agent shall perform for the Fund the services set forth
in Schedule A for a monthly fee set forth in Schedule C attached hereto and
incorporated herein by reference (or in the case of certain identified extra
charge services, a charge set forth in Exhibit B attached hereto and
incorporated herein by reference).
2. The Fund agrees to reimburse the Transfer Agent for postage, the
procurement and/or printing of share certificates (if any), statements,
envelopes, checks, reports, tax forms, proxies, or other forms of printed
material required in the performance of its services to the Fund under this
Agreement.
3. The Fund agrees to reimburse the Transfer Agent for all freight and
other delivery charges and insurance or bonding charges incurred by the Transfer
Agent in delivering materials to and from the Fund and for certificates (if any)
delivered to shareholders.
4. The Fund agrees to reimburse the Transfer Agent for all direct
telephone expenses incurred by the Fund in calling shareholders regarding their
Fund transactions, accounts, and for any other Fund business.
<PAGE>
5. The Transfer Agent at the end of each month during the term of this
Agreement will render an itemized statement to the Fund for its charges under
this Agreement. Payment by the Fund is due 10 (ten) days from the date such
statement is received.
6. The Fund agrees that all computer programs and procedures developed to
perform services required under this Agreement are the property of the Transfer
Agent and the Transfer Agent agrees that all records and other data, except
computer programs and procedures, are the property of the Fund. The Transfer
Agent agrees that it will furnish all records and other data as may be requested
to the Fund immediately upon termination of this Agreement for any reason
whatsoever.
7. The Transfer Agent agrees to treat all records and other information
relative to the Fund with utmost confidence and further agrees that all records
maintained by the Transfer Agent for the Fund shall be open to inspection and
audit at reasonable times by the officers, agents or auditors employed by the
Fund and that such records shall be preserved and retained by the Transfer Agent
so long as this Agreement shall remain in effect.
8. The Transfer Agent shall not be liable for any damage, loss of data,
delay or any other loss caused by any such power failure or machine breakdown,
except that the Transfer Agent shall be liable for actual out-of-pocket costs
caused by any such power failure or machine breakdown, and the Transfer Agent
shall recover the data in process that is assumed lost during any power failure
or machine breakdown.
9. The Transfer Agent will maintain in force through the duration of this
Agreement at least $1,000,000 or more fidelity bond written by a reputable
bonding company, covering theft, embezzlement, forgery and other acts of
malfeasance by the Transfer Agent, its employees, or agents in connection with
services performed for the Fund.
10. This Agreement may be terminated without the payment of any penalty by
either party upon (180) days' written notice thereof given by the Fund to the
Transfer Agent and upon one hundred eighty (180) days' written notice thereof
given by the Transfer Agent to the Fund.
11. Any notice shall be officially given when sent by registered or
certified mail by either party to the foregoing addresses, provided that either
party may notary the other of any changed address to which such notices should
be mailed thereunder.
12. This Agreement constitutes the entire Agreement between the parties
and shall be governed by, and its provisions shall be governed by, and construed
in accordance with, the laws of the Commonwealth of Massachusetts.
13. This Agreement will be subject to review annually.
14. A copy of the Declaration of Trust of the Trust is on file with the
Secretary of State
-2-
<PAGE>
of the Commonwealth of Massachusetts, and notice is hereby given that this
Agreement is executed by an officer of the Trust on behalf of the trustees of
the Trust, as trustees and not individually, on further behalf of the Fund, and
that the obligations of this Agreement shall be binding upon the assets and
properties of the Fund only and shall not be binding upon the assets and
properties of any other series of the Trust or upon any of the trustees,
officers, employees, agents or shareholders of the Fund or the Trust
individually.
IN WITNESS WHEREOF, the parties hereto cause this Agreement to be executed
by their officers designated below as of the date first above-written.
THE COMPOSITE FUNDS, on behalf of its
series COMPOSITE BOND & STOCK FUND
By: __________________________________
President
MURPHEY FAVRE SECURITIES SERVICES, INC.
By: __________________________________
Executive Vice President
-3-
<PAGE>
SCHEDULE A
I. Shareholder Services
A. Maintain all shareholder records on electronic data processing
equipment, including:
1. Share balances
2. Account transaction history
3. Names and addresses
4. Certificate records
5. Distribution records
6. Transfer records
7. Over-all control records
B. New Accounts
1. Deposit all monies received into a Fund custody account
maintained by the Custodian
2. Set up account according to shareholders' instructions as to:
a. Amount of shares purchased
b. Retain shares or deliver to shareholder
3. Issue and mail shareholder confirmations
C. Additional Purchases
1. Deposit monies received into a Fund custody account maintained by
the Custodian
2. Issue shareholder confirmations
-4-
<PAGE>
D. Liquidations - Full and Partial
1. Liquidate shares upon shareholder request
2. Issue checks for amount of liquidation
3. Issue and mail shareholder confirmation
E. Transfer shares as requested which includes obtaining necessary papers
and documents to satisfy transfer requirements. On irregular transfers
requiring special legal opinions, such special legal fees, if any, are
to be paid for by the Fund.
F. Prepare and mail certificates as requested by shareholders
G. Process changes, corrections of addresses and registrations
H. Maintain service with shareholders as follows:
1. Activity required to receive, process and reply to shareholders'
correspondence regarding account matters
2. Refer correspondence regarding investment matters to the Fund
with sufficient account data to answer
3. Contact shareholders directly to settle problems and answer
questions
I. Compute distributions, dividends and capital gains
1. Reinvest in additional shares
2. Advise each shareholder of amount of dividends received and tax
status annually
J. Replace lost certificates
K. Produce transcripts of shareholder account history as required
L. Maintain the controls associated with the computer programs and manual
systems to arrive at the Company's total shares outstanding.
M. Receive mail and perform other administrative functions relating to
transfer agent work.
-5-
<PAGE>
II. Reports and Schedules
A. Daily
1. Name and address changes
2. Name and address additions and deletions
3. Transaction Register
a. Purchases
b. Sales
c. Adjustments
4. Cash reconciliation - cash received for day
5. Check reconciliation - checks issued for day
6. Transaction reconciliation
a. Amount received
b. Total shares purchased
c. Number of purchase transactions
d. Amount liquidated
e. Total shares liquidated
f. Number of liquidations
g. Checks issued for liquidations
B. Monthly
1. Purchases, sales and adjustments
2. Certificates issued
-6-
<PAGE>
3. Certificate, redemptions and transfers
4. Certificate reconciliation by certificate number
5. Sales by states for month
C. Periodically
1. Alphabetical account listing
III. Other Services
*A. Mailing labels or other mailing services to shareholders
*B. Services in connection with any stock splits
*C. Develop special reports for Fund officers regarding statistical and
accounting data pertaining to the Fund. Fund shall pay for out-of-
pocket expenses charged by vendors to develop such reports or portions
thereof.
* Extra charge services, per Schedule B.
-7-
<PAGE>
SCHEDULE B
TIME AND MATERIAL SERVICES
<TABLE>
<S> <C>
Computer...................... $50/hour
Keypunch...................... $10/hour
Clerical...................... $10/hour
Programming and Direct Technical Management $25/hour
Travel and per diem expenses (chargeable only
when authorized by Company).. At Cost
Mailing Services.............. At Cost
</TABLE>
Any of the above services when performed outside regular working hours of
Murphey may be billed at 150 percent of the above.
-8-
<PAGE>
SCHEDULE C: MONTHLY SHAREHOLDER SERVICING FEES
_____________________ , 1997
<TABLE>
<CAPTION>
Fee Per Account Per Month
-------------------------
Class A Class B Class I Class S
------- ------- ------- -------
<S> <C> <C> <C> <C>
Composite Bond & Stock Fund $1.25 $1.35 -0- $1.35
Composite Growth & Income Fund $1.25 $1.35 -0- $1.35
Composite Northwest Fund $1.25 $1.35 -0- $1.35
Composite Income Fund $1.45 $1.55 -0- $1.55
Composite Tax-Exempt Bond Fund $1.45 $1.55 -0- $1.55
Composite U.S. Government Securities $1.45 $1.55 -0- $1.55
Composite Cash Management Company
Money Market Fund
First 25,000 accounts $1.85 $1.95 - 0- $1.95
Each additional account $1.55 $1.65 - 0- $1.65
Composite Cash Management Company
Tax-Exempt Money Market
Fund $1.85 $1.95 - 0- $1.95
First 25,000 accounts $1.55 $1.65 - 0- $1.65
Each additional account
</TABLE>
-9-
<PAGE>
EXHIBIT 99.10
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 0211-2624
(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-1A 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 Cash Management Company Money Market Fund, Composite Cash Management
Company Tax-Exempt Money Market Fund, Composite Tax-Exempt Bond Fund, Composite
Northwest Fund and Composite Bond & Stock Fund (the "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
<PAGE>
The Composite Funds -2- September 30, 1997
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 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 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 the offering and sale
pursuant to the Act. We content to the filing of this opinion with and as part
of your Registration Statement on Form N-1A relating to such offering and sale.
Very truly yours,
Ropes & Gray
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference of our reports dated
November 20, 1996 and January 25, 1997, relating to the financial statements and
financial highlights appearing in the Annual Reports to Shareholders dated
October 31, 1996 and December 31, 1996, of Composite Growth & Income Fund,
Composite Northwest Fund, Composite Bond & Stock Fund, Inc., Composite U.S.
Government Securities, Inc., Composite Income Fund, Inc., Composite Tax-Exempt
Bond Fund, Inc., and Composite Cash Management Company, which have been further
incorporated into this registration statement on Form N-1A of The Composite
Funds. We also consent to the references to our Firm under the heading
"Financial Highlights" in the Prospectuses and under the heading "Independent
Public Accountants" in the Statements of Additional Information which are parts
of this registration statement on Form N-1A of The Composite Funds. We also
consent to our appointment as auditors for The Composite Funds.
LeMASTER & DANIELS PLLC
Spokane, Washington
September 30, 1997
<PAGE>
EXHIBIT 18
THE COMPOSITE FUNDS
MULTI-CLASS PLAN
Effective Date (_______________, 1997)
WHEREAS, the Board of Trustees of The Composite Funds (the "Trust") have
considered the following Multi-Class Plan (the "Plan") under which the Trust may
offer multiple classes of shares of its now existing and hereafter created
series pursuant to Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, a majority of the Trustees of the Trust and a majority of the
Trustees who are not interested persons of the Trust ("Independent Trustees")
have found the Plan, as proposed, including the expense allocations thereunder,
to be in the best interests of each class individually and of each Fund (as
defined below) and the Trust as a whole;
NOW, THEREFORE, the Trust hereby approves and adopts the following Plan
pursuant to Rule 18f-3(d) under the 1940 Act.
1. FEATURES OF THE CLASSES
Each now existing and hereafter created series (each a "Fund") of the Trust
is authorized to issue from time to time its shares of beneficial interest in
four classes: Class A shares, Class B shares, Class I shares, and Class S
shares. Each class is subject to such investment minimums and other conditions
of eligibility as are set forth in the Trust's prospectus or prospectuses as
from time to time in effect (together with all relevant Statements of Additional
Information, the "Prospectus"). Each Fund offers such classes of shares to such
classes of persons as are set forth in the Prospectus.
Shares of each class of a Fund shall represent an equal pro rata interest
in such Fund and, generally, shall have identical voting, dividend, liquidation,
and other rights, preferences, powers, restrictions, limitations, qualifications
and terms and conditions, except that: (a) each class shall have a different
designation; (b) each class of shares shall bear any Class Expenses, as defined
in Section 4 below; and (c) each class shall have separate voting rights on any
matter submitted to shareholders in which the interests of one class differ from
the interests of any other class and shall have exclusive voting rights on any
matter submitted to shareholders that relates solely to that class.
In addition, Class A, Class B, Class I, and Class S shares shall have the
features described in Sections 2, 3, 4, 5, 6 and 7 below. These features are
subject to change, to the extent permitted by law and by the Declaration of
Trust and By-laws of the Trust, by action of the Board of Trustees of the Trust.
<PAGE>
2. SALES CHARGE STRUCTURE
(a) Initial Sales Charge. Class A shares of the "Non-Money Funds", which
--------------------
are the Funds other than Composite Money Market Fund and Composite Tax-Exempt
Money Market Fund (the "Money Funds"), are offered at a public offering price
that is equal to their net asset value ("NAV") plus an initial sales charge
expressed as a percentage of the NAV per share, as described in the Prospectus.
Class A shares of Money Funds are offered at their NAV, without an initial sales
charge.
The initial sales charge on Class A shares are subject to reduction or
waiver as permitted by Rule 22d-1 under the 1940 Act, as described in the
Prospectus.
The exact terms and conditions of any initial sales charge applicable to
Class A shares, which may vary among Funds, will be as described in the
Prospectus.
Class B, Class I and Class S shares of the Funds are offered at their NAV,
without an initial sales charge.
(b) Contingent Deferred Sales Charge. A contingent deferred sales charge
--------------------------------
(a "CDSC") may be imposed on Class A, Class B or Class S shares under certain
circumstances, as described in the Prospectus. However, no CDSC is imposed if
the shares redeemed have been acquired through the reinvestment of net
investment income or capital gains distributions or if the amount redeemed is
derived from increases in the value of the account above the amount of purchase
payments subject to a CDSC. In determining whether a CDSC is payable, a Fund
will first redeem shares not subject to a CDSC. Thereafter, to determine the
applicability and rate of any CDSC, it will be assumed that shares representing
the reinvestment of dividends and capital gain distributions are redeemed first
and shares held for the longest period of time are redeemed next.
Class A shares of Non-Money Funds that are purchased at no initial sales
charge or a reduced initial sales charge and that are redeemed within two years
of their purchase may, under certain circumstances, be subject to a CDSC of up
to 1% of the redemption amount to which the CDSC applies, with the percentage
declining eventually to zero the longer the shares are held, as described in the
Prospectus.
Class B shares that are redeemed within up to six years from purchase are
subject to a CDSC of up to 5% of the redemption amount to which the CDSC
applies, with the percentage declining eventually to zero the longer the shares
are held, as described in the Prospectus.
Class S shares that are redeemed within up to six years from purchase are
subject to a CDSC of up to 5% of the redemption amount to which the CDSC
applies, with the percentage declining eventually to zero the longer the shares
are held, as described in the Prospectus.
-2-
<PAGE>
As permitted by Rule 6c-10 under the 1940 Act and as described in the
Prospectus, the CDSC otherwise applicable to Class A, Class B and Class S shares
is subject to reduction or waiver in connection with particular classes of
transactions provided the conditions in Rule 22d-1 under the 1940 Act are
satisfied.
The exact terms and conditions of any CDSC applicable to Class A, Class B
or Class S shares, which may vary among Funds, are as described in the
Prospectus.
Class I shares of each Fund are not subject to a CDSC.
3. SERVICE, DISTRIBUTION AND ADMINISTRATIVE FEES
(a) Service and Distribution Fees. Class A, Class B and Class S shares
-----------------------------
pay Composite Funds Distributor, Inc. (the "Distributor") fees for services
rendered and expenses borne in connection with personal services rendered to
shareholders of that class and the maintenance of shareholder accounts ("Service
Fees"). Class A, Class B and Class S shares of each Fund pay a Service Fee of up
to 0.25% per annum of the average daily net assets of such Fund attributable to
such class, as described in the Prospectus. In addition, Class B and Class S
shares pay the Distributor fees in connection with the distribution of shares of
such class ("Distribution Fees"). Class B and Class S shares of each Fund pay a
Distribution Fee of up to 0.75% per annum of the average daily net assets of
such Fund attributable to such class, as described in the Prospectus. Class A,
Class B and Class S Service Fees and Class B and Class S Distribution Fees
("12b-1 Fees") are paid pursuant to plans adopted for each class pursuant to
Rule 12b-1 under the 1940 Act.
(b) Administration Fees. Each Fund pays Composite Research & Management
-------------------
Co. fees pursuant to an investment management agreement, which may be amended or
replaced from time to time, for investment management services; a portion of the
fee is allocated to Murphey Favre Securities Services, Inc. for administrative
services to provide or procure such services as custody, accounting, legal and
printing services (the portion of the fee allocated to such administrative
services, the "Administration Fees"). Class A, Class B, Class I and Class S
shares of each Fund initially will pay their respective allocable share of
Administration Fees incurred by such Fund (currently at the rate of .15% per
annum of the average daily net assets of such Fund), based on the average daily
net asset value of such Fund attributable to such class.
(c) Transfer Agency Fees. Each class of shares of each Fund pays Murphey
--------------------
Favre Securities Services, Inc. fees pursuant to a Shareholder Services
Contract, which may be amended or replaced from time to time, for services to
provide or procure such services as transfer agency services (the "Transfer
Agent Fees"). Class A, Class B, Class I and Class S shares of each Fund
initially will pay their respective Transfer Agent Fees (for most services,
currently on a per account basis at different rates for different classes of
different Funds),
-3-
<PAGE>
based on the incurrence of Transfer Agent Fees attributable in the aggregate to
each such class of such Fund.
4. ALLOCATION OF INCOME AND EXPENSES
(a) Class A, Class B, Class I and Class S shares pay the expenses
associated with their different distribution and shareholder servicing
arrangements. Each class pays their respective allocable share of
Administration Fees. Each class pays their respective Transfer Agent Fees. Each
class may, at the Trustees' discretion, also pay a different share of other
expenses (together with 12b-1 Fees, Administration Fees and Transfer Agent Fees,
"Class Expenses"), not including advisory fees or other expenses related to the
management of the Trust's assets, if these expenses are actually incurred in a
different amount by that class, or if the class receives services of a different
kind or to a different degree than other classes.
(b) The gross income of each Fund generally shall be allocated to each
class on the basis of net assets. To the extent practicable, certain expenses
(other than Class Expenses as defined above, which shall be allocated more
specifically) shall be subtracted from the gross income on the basis of the net
assets of each class of the Fund. These expenses include:
(1) Expenses incurred by the Trust (including, but not limited to,
fees of Trustees, insurance and legal counsel) not attributable
to a particular Fund or to a particular class of shares of a Fund
("Trust Expenses"); and
(2) Expenses incurred by a Fund not attributable to any particular
class of the Fund's shares (for example, advisory fees, custodial
fees or other expenses relating to the management of the Fund's
assets) ("Fund Expenses").
Expenses of a Fund shall be apportioned to each class of shares depending
on the nature of the expense item. Trust Expenses and Fund Expenses shall be
allocated among the classes of shares based on their relative net asset values
in relation to the net asset value of the Trust or the Fund, as appropriate.
Class Expenses shall be allocated to the particular class to which they are
attributable. In addition, certain expenses may be allocated differently if
their method of imposition changes. Thus, if a Class Expense can no longer be
attributed to a class, it shall be charged to a Fund for allocation among
classes, as determined by the Board of Trustees. Any additional Class Expenses
not specifically identified above which are subsequently identified and
determined to be properly allocated to one class of shares shall not be so
allocated until approved by the Board of Trustees of the Trust in light of the
requirements of the 1940 Act and the Internal Revenue Code of 1986, as amended
(the "Code").
-4-
<PAGE>
5. EXCHANGE PRIVILEGES
Shareholders may exchange (i) shares of one class of a Fund for shares of
the same class offered by another Fund or by certain other mutual funds from
time to time advised by Composite Research & Management Co. and (ii) Class B
shares of a Fund for Class S shares, or Class S shares of a Fund for Class B
shares, offered by another Fund or by certain other mutual funds from time to
time advised by Composite Research & Management Co, as described in the
Prospectus and provided that the exchange is made in states where the shares
being acquired upon exchange are properly registered. An exchange shall be made
at net asset value without the imposition of any CDSC upon the exchange and,
except as otherwise described in the Prospectus, without the imposition of any
sales charge upon the exchange. The applicability and rate of any CDSC with
respect to a subsequent redemption of shares acquired upon an exchange will be
determined as described in the Prospectus. The exact terms and conditions of an
exchange, which may vary among the Funds, will be as described in the
Prospectus.
6. CONVERSION FEATURES
Class B and Class S shares of each Fund will convert, after they are held
for approximately eight years from purchase, at net asset value without the
imposition of any CDSC or sales charge upon the conversion, into Class A shares
of the same Fund, which thereafter will be subject to the lower fees charged to
Class A shares. The exact terms and conditions of a conversion will be as
described in the Prospectus. No other conversion features exist between classes
of shares of the Funds.
7. SPECIAL PROVISIONS FOR CARRY-OVER SHARES
In the case of Class A and Class B shares issued in connection with the
Agreements and Plans of Reorganization (the "Reorganization Plans") between the
Trust and Composite Bond & Stock Fund, Inc., Composite Growth & Income Fund,
Composite Northwest Fund, Inc., Composite Income Fund, Inc., Composite U.S.
Government Securities, Inc., Composite Tax-Exempt Bond Fund, Inc., and Composite
Cash Management Company (Money Market Portfolio) and Composite Cash Management
Company (Tax-Exempt Portfolio) (the "Prior Funds"), respectively, or issued upon
any subsequent exchange thereof, the terms and conditions of any CDSC, exchange
or conversion features applicable to such shares shall be no less favorable than
the ones applicable to the Class A and Class B shares of the respective Prior
Fund, as described in the prospectus or prospectuses of the Prior Funds as in
effect from time to time prior to the consummation of the Reorganization Plans.
In addition, for purposes of calculating any CDSC or making any conversion,
shares issued in connection with the above-referenced or any other acquisition
of the assets of a mutual fund shall be deemed to
-5-
<PAGE>
have been purchased on the same dates as the corresponding shares of the
acquired mutual fund.
-6-
<PAGE>
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-1A 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>
WAYNE L. ATTWOOD Trustee September 23, 1997
- ---------------------
Wayne L. Attwood, M.D.
KRISTIANNE BLAKE Trustee September 23, 1997
- ---------------------
Kristianne Blake
ANNE V. FARRELL Trustee September 23, 1997
- --------------------
Anne V. Farrell
Trustee September , 1997
- --------------------
Michael K. Murphy
DANIEL L. PAVELICH Trustee September 23, 1997
- --------------------
Daniel L. Pavelich
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
JAY ROCKEY Trustee September 23, 1997
- --------------------
Jay Rockey
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-1A 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>
WILLIAM G. PAPESH President and Trustee September 23, 1997
- ----------------------
William G. Papesh
</TABLE>
-3-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> COMPOSITE U.S. GOVERNMENT SECURITIES CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 122,152,208
<INVESTMENTS-AT-VALUE> 121,557,004
<RECEIVABLES> 1,099,915
<ASSETS-OTHER> 23,917
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 122,680,836
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 352,583
<TOTAL-LIABILITIES> 352,583
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 130,506,213
<SHARES-COMMON-STOCK> 11,437,387
<SHARES-COMMON-PRIOR> 13,204,217
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,582,756)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (595,204)
<NET-ASSETS> 122,328,253
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,610,844
<OTHER-INCOME> 0
<EXPENSES-NET> (674,217)
<NET-INVESTMENT-INCOME> 3,936,627
<REALIZED-GAINS-CURRENT> (747,914)
<APPREC-INCREASE-CURRENT> 326,683
<NET-CHANGE-FROM-OPS> 3,515,396
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,860,714)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 256,211
<NUMBER-OF-SHARES-REDEEMED> (2,295,144)
<SHARES-REINVESTED> 272,103
<NET-CHANGE-IN-ASSETS> 3,515,396
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (6,834,842)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 405,280
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 674,217
<AVERAGE-NET-ASSETS> 130,909,084
<PER-SHARE-NAV-BEGIN> 10.46
<PER-SHARE-NII> 0.31
<PER-SHARE-GAIN-APPREC> (0.02)
<PER-SHARE-DIVIDEND> (0.31)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.44
<EXPENSE-RATIO> 1.02
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> COMPOSITE U.S. GOVERNMENT SECURITIES CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 122,152,208
<INVESTMENTS-AT-VALUE> 121,557,004
<RECEIVABLES> 1,099,915
<ASSETS-OTHER> 23,917
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 122,680,836
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 352,583
<TOTAL-LIABILITIES> 352,583
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 130,506,213
<SHARES-COMMON-STOCK> 277,515
<SHARES-COMMON-PRIOR> 283,151
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,582,756)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (595,204)
<NET-ASSETS> 122,328,253
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,610,844
<OTHER-INCOME> 0
<EXPENSES-NET> (674,217)
<NET-INVESTMENT-INCOME> 3,936,627
<REALIZED-GAINS-CURRENT> (747,914)
<APPREC-INCREASE-CURRENT> 326,683
<NET-CHANGE-FROM-OPS> 3,515,396
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (75,913)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,080
<NUMBER-OF-SHARES-REDEEMED> (28,633)
<SHARES-REINVESTED> 5,917
<NET-CHANGE-IN-ASSETS> 3,515,396
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (6,834,842)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 405,280
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 674,217
<AVERAGE-NET-ASSETS> 130,909,084
<PER-SHARE-NAV-BEGIN> 10.46
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> (0.02)
<PER-SHARE-DIVIDEND> (0.27)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.44
<EXPENSE-RATIO> 1.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> COMPOSITE TAX-EXEMPT BOND FUND, INC. CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 182,228,123
<INVESTMENTS-AT-VALUE> 196,962,283
<RECEIVABLES> 3,135,491
<ASSETS-OTHER> 19,288
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 200,117,062
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 987,691
<TOTAL-LIABILITIES> 987,691
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 185,941,294
<SHARES-COMMON-STOCK> 24,539,546
<SHARES-COMMON-PRIOR> 26,002,410
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,546,083)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,734,160
<NET-ASSETS> 199,129,371
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,805,302
<OTHER-INCOME> 0
<EXPENSES-NET> (816,389)
<NET-INVESTMENT-INCOME> 4,988,913
<REALIZED-GAINS-CURRENT> 445,364
<APPREC-INCREASE-CURRENT> (183,704)
<NET-CHANGE-FROM-OPS> 5,250,573
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,868,975)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 652,450
<NUMBER-OF-SHARES-REDEEMED> (2,601,765)
<SHARES-REINVESTED> 486,451
<NET-CHANGE-IN-ASSETS> 5,250,573
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,991,447)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 496,566
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 816,389
<AVERAGE-NET-ASSETS> 203,705,412
<PER-SHARE-NAV-BEGIN> 7.83
<PER-SHARE-NII> 0.19
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> (0.19)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.84
<EXPENSE-RATIO> 0.79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> COMPOSITE TAX-EXEMPT BOND FUND, INC. CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 182,228,123
<INVESTMENTS-AT-VALUE> 196,962,283
<RECEIVABLES> 3,135,491
<ASSETS-OTHER> 19,288
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 200,117,062
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 987,691
<TOTAL-LIABILITIES> 987,691
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 185,941,294
<SHARES-COMMON-STOCK> 849,640
<SHARES-COMMON-PRIOR> 672,375
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,546,083)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,734,160
<NET-ASSETS> 199,129,371
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,805,302
<OTHER-INCOME> 0
<EXPENSES-NET> (816,389)
<NET-INVESTMENT-INCOME> 4,988,913
<REALIZED-GAINS-CURRENT> 445,364
<APPREC-INCREASE-CURRENT> (183,704)
<NET-CHANGE-FROM-OPS> 5,250,573
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (119,938)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 231,138
<NUMBER-OF-SHARES-REDEEMED> (65,585)
<SHARES-REINVESTED> 11,712
<NET-CHANGE-IN-ASSETS> 5,250,573
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,991,447)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 496,566
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 816,389
<AVERAGE-NET-ASSETS> 230,705,412
<PER-SHARE-NAV-BEGIN> 7.83
<PER-SHARE-NII> 0.16
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> (0.16)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.84
<EXPENSE-RATIO> 1.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> COMPOSITE NORTHWEST FUND, INC. CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 155,412,596
<INVESTMENTS-AT-VALUE> 228,690,510
<RECEIVABLES> 460,893
<ASSETS-OTHER> 28,573
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 229,179,976
<PAYABLE-FOR-SECURITIES> 1,194,700
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 435,061
<TOTAL-LIABILITIES> 1,629,761
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 136,443,175
<SHARES-COMMON-STOCK> 9,922,336
<SHARES-COMMON-PRIOR> 8,972,376
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 4,381
<ACCUMULATED-NET-GAINS> 17,833,507
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 73,277,914
<NET-ASSETS> 227,550,215
<DIVIDEND-INCOME> 1,089,246
<INTEREST-INCOME> 92,555
<OTHER-INCOME> 0
<EXPENSES-NET> (1,187,628)
<NET-INVESTMENT-INCOME> (5,827)
<REALIZED-GAINS-CURRENT> 17,919,611
<APPREC-INCREASE-CURRENT> 11,418,818
<NET-CHANGE-FROM-OPS> 29,332,602
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (16,815,469)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 747,437
<NUMBER-OF-SHARES-REDEEMED> (652,900)
<SHARES-REINVESTED> 855,423
<NET-CHANGE-IN-ASSETS> 36,190,797
<ACCUMULATED-NII-PRIOR> 1,446
<ACCUMULATED-GAINS-PRIOR> 18,297,956
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 663,425
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,187,628
<AVERAGE-NET-ASSETS> 209,454,817
<PER-SHARE-NAV-BEGIN> 19.69
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 2.89
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.88)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 20.71
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> COMPOSITE NORTHWEST FUND, INC. CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 155,412,596
<INVESTMENTS-AT-VALUE> 228,690,510
<RECEIVABLES> 460,893
<ASSETS-OTHER> 28,573
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 229,179,976
<PAYABLE-FOR-SECURITIES> 1,194,700
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 435,061
<TOTAL-LIABILITIES> 1,629,761
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 136,443,175
<SHARES-COMMON-STOCK> 1,083,885
<SHARES-COMMON-PRIOR> 753,528
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 4,381
<ACCUMULATED-NET-GAINS> 17,833,507
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 73,277,914
<NET-ASSETS> 277,550,215
<DIVIDEND-INCOME> 1,089,246
<INTEREST-INCOME> 92,555
<OTHER-INCOME> 0
<EXPENSES-NET> (1,187,628)
<NET-INVESTMENT-INCOME> (5,827)
<REALIZED-GAINS-CURRENT> 17,919,611
<APPREC-INCREASE-CURRENT> 11,418,818
<NET-CHANGE-FROM-OPS> 29,332,602
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (1,448,706)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 302,861
<NUMBER-OF-SHARES-REDEEMED> (42,279)
<SHARES-REINVESTED> 74,775
<NET-CHANGE-IN-ASSETS> 36,190,797
<ACCUMULATED-NII-PRIOR> 1,446
<ACCUMULATED-GAINS-PRIOR> 18,297,956
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 663,425
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,187,628
<AVERAGE-NET-ASSETS> 209,454,817
<PER-SHARE-NAV-BEGIN> 19.45
<PER-SHARE-NII> (0.02)
<PER-SHARE-GAIN-APPREC> 2.79
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.88)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 20.34
<EXPENSE-RATIO> 1.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 041
<NAME> COMPOSITE INCOME FUND, INC. CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 84,833,119
<INVESTMENTS-AT-VALUE> 86,394,037
<RECEIVABLES> 1,533,944
<ASSETS-OTHER> 17,920
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 87,945,901
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 341,451
<TOTAL-LIABILITIES> 341,451
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 100,241,361
<SHARES-COMMON-STOCK> 8,734,395
<SHARES-COMMON-PRIOR> 9,467,260
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,197,829)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,560,918
<NET-ASSETS> 87,604,450
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,382,296
<OTHER-INCOME> 0
<EXPENSES-NET> (497,843)
<NET-INVESTMENT-INCOME> 2,884,453
<REALIZED-GAINS-CURRENT> 639,526
<APPREC-INCREASE-CURRENT> (328,204)
<NET-CHANGE-FROM-OPS> 3,195,775
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,680,346)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 490,968
<NUMBER-OF-SHARES-REDEEMED> (1,440,448)
<SHARES-REINVESTED> 216,615
<NET-CHANGE-IN-ASSETS> 3,195,775
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (14,596,958)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 277,115
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 497,843
<AVERAGE-NET-ASSETS> 89,673,767
<PER-SHARE-NAV-BEGIN> 9.15
<PER-SHARE-NII> 0.30
<PER-SHARE-GAIN-APPREC> 0.04
<PER-SHARE-DIVIDEND> (0.30)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.19
<EXPENSE-RATIO> 1.06
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 042
<NAME> COMPOSITE INCOME FUND, INC. CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 84,833,119
<INVESTMENTS-AT-VALUE> 86,394,037
<RECEIVABLES> 1,533,944
<ASSETS-OTHER> 17,920
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 87,945,901
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 341,451
<TOTAL-LIABILITIES> 341,451
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 100,241,361
<SHARES-COMMON-STOCK> 793,230
<SHARES-COMMON-PRIOR> 776,973
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,197,829)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,560,918
<NET-ASSETS> 87,604,450
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,382,296
<OTHER-INCOME> 0
<EXPENSES-NET> (497,843)
<NET-INVESTMENT-INCOME> 2,884,453
<REALIZED-GAINS-CURRENT> 639,526
<APPREC-INCREASE-CURRENT> (328,204)
<NET-CHANGE-FROM-OPS> 3,195,775
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (204,107)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 147,806
<NUMBER-OF-SHARES-REDEEMED> (150,609)
<SHARES-REINVESTED> 19,060
<NET-CHANGE-IN-ASSETS> 3,195,775
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (14,596,958)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 277,115
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 497,843
<AVERAGE-NET-ASSETS> 89,673,767
<PER-SHARE-NAV-BEGIN> 9.17
<PER-SHARE-NII> 0.26
<PER-SHARE-GAIN-APPREC> 0.04
<PER-SHARE-DIVIDEND> (0.26)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.21
<EXPENSE-RATIO> 1.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 051
<NAME> COMPOSITE GROWTH & INCOME FUND CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 192,537,901
<INVESTMENTS-AT-VALUE> 250,067,146
<RECEIVABLES> 1,175,447
<ASSETS-OTHER> 29,926
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 251,272,519
<PAYABLE-FOR-SECURITIES> 963,747
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 412,904
<TOTAL-LIABILITIES> 1,376,651
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 177,486,475
<SHARES-COMMON-STOCK> 12,009,817
<SHARES-COMMON-PRIOR> 10,334,058
<ACCUMULATED-NII-CURRENT> 82,956
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,797,192
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 57,529,245
<NET-ASSETS> 249,895,868
<DIVIDEND-INCOME> 2,099,383
<INTEREST-INCOME> 79,018
<OTHER-INCOME> 0
<EXPENSES-NET> (1,360,147)
<NET-INVESTMENT-INCOME> 818,254
<REALIZED-GAINS-CURRENT> 15,241,364
<APPREC-INCREASE-CURRENT> 8,457,148
<NET-CHANGE-FROM-OPS> 24,516,766
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (984,921)
<DISTRIBUTIONS-OF-GAINS> (12,746,652)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,523,244
<NUMBER-OF-SHARES-REDEEMED> (615,563)
<SHARES-REINVESTED> 768,078
<NET-CHANGE-IN-ASSETS> 48,713,972
<ACCUMULATED-NII-PRIOR> 275,454
<ACCUMULATED-GAINS-PRIOR> 14,044,609
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 714,834
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,360,147
<AVERAGE-NET-ASSETS> 225,538,882
<PER-SHARE-NAV-BEGIN> 17.26
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 1.92
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> (1.21)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 17.95
<EXPENSE-RATIO> 1.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 052
<NAME> COMPOSITE GROWTH & INCOME FUND CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 192,537,901
<INVESTMENTS-AT-VALUE> 250,067,146
<RECEIVABLES> 1,175,447
<ASSETS-OTHER> 29,926
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 251,272,519
<PAYABLE-FOR-SECURITIES> 963,747
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 412,904
<TOTAL-LIABILITIES> 1,376,651
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 177,486,475
<SHARES-COMMON-STOCK> 1,925,896
<SHARES-COMMON-PRIOR> 1,331,165
<ACCUMULATED-NII-CURRENT> 82,956
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,797,192
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 57,529,245
<NET-ASSETS> 249,895,868
<DIVIDEND-INCOME> 2,099,383
<INTEREST-INCOME> 79,018
<OTHER-INCOME> 0
<EXPENSES-NET> (1,360,147)
<NET-INVESTMENT-INCOME> 818,254
<REALIZED-GAINS-CURRENT> 15,241,364
<APPREC-INCREASE-CURRENT> 8,457,148
<NET-CHANGE-FROM-OPS> 24,516,766
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (25,831)
<DISTRIBUTIONS-OF-GAINS> (1,708,904)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 591,275
<NUMBER-OF-SHARES-REDEEMED> (97,769)
<SHARES-REINVESTED> 101,225
<NET-CHANGE-IN-ASSETS> 48,713,972
<ACCUMULATED-NII-PRIOR> 275,454
<ACCUMULATED-GAINS-PRIOR> 14,044,609
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 714,834
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,360,147
<AVERAGE-NET-ASSETS> 225,538,882
<PER-SHARE-NAV-BEGIN> 17.17
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 1.90
<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> (1.21)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 17.84
<EXPENSE-RATIO> 1.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 061
<NAME> MONEY MARKET PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 260,818,394
<INVESTMENTS-AT-VALUE> 260,818,394
<RECEIVABLES> 3,458,723
<ASSETS-OTHER> 328,433
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 264,605,550
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,167,003
<TOTAL-LIABILITIES> 8,167,003
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 256,438,547
<SHARES-COMMON-STOCK> 256,221,535
<SHARES-COMMON-PRIOR> 229,355,308
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 256,438,547
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,747,798
<OTHER-INCOME> 0
<EXPENSES-NET> (910,227)
<NET-INVESTMENT-INCOME> 5,837,571
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 5,837,571
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,835,076)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 338,775,131
<NUMBER-OF-SHARES-REDEEMED> (317,679,785)
<SHARES-REINVESTED> 5,770,881
<NET-CHANGE-IN-ASSETS> 26,966,290
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 543,906
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,023,377
<AVERAGE-NET-ASSETS> 242,930,108
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.024
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.024)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 062
<NAME> MONEY MARKET PORTFOLIO CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 260,818,394
<INVESTMENTS-AT-VALUE> 260,818,394
<RECEIVABLES> 3,458,723
<ASSETS-OTHER> 328,433
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 264,605,550
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,167,003
<TOTAL-LIABILITIES> 8,167,003
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 256,438,547
<SHARES-COMMON-STOCK> 217,012
<SHARES-COMMON-PRIOR> 116,949
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 256,438,547
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,747,798
<OTHER-INCOME> 0
<EXPENSES-NET> (910,227)
<NET-INVESTMENT-INCOME> 5,837,571
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 5,837,571
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,495)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 287,240
<NUMBER-OF-SHARES-REDEEMED> (189,471)
<SHARES-REINVESTED> 2,294
<NET-CHANGE-IN-ASSETS> 26,966,290
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 543,906
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,023,377
<AVERAGE-NET-ASSETS> 242,930,108
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.016
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.016)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 071
<NAME> TAX-EXEMPT PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 31,851,138
<INVESTMENTS-AT-VALUE> 31,851,138
<RECEIVABLES> 573,380
<ASSETS-OTHER> 114,839
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32,539,357
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,140,481
<TOTAL-LIABILITIES> 1,140,481
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31,398,876
<SHARES-COMMON-STOCK> 31,386,522
<SHARES-COMMON-PRIOR> 31,973,937
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 31,398,876
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 587,501
<OTHER-INCOME> 0
<EXPENSES-NET> (88,401)
<NET-INVESTMENT-INCOME> 499,100
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 499,100
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (499,031)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 28,151,353
<NUMBER-OF-SHARES-REDEEMED> (29,234,863)
<SHARES-REINVESTED> 496,095
<NET-CHANGE-IN-ASSETS> (577,266)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 71,755
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 115,061
<AVERAGE-NET-ASSETS> 31,792,923
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.015
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.015)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 072
<NAME> TAX-EXEMPT PORTFOLIO CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 31,851,138
<INVESTMENTS-AT-VALUE> 31,851,138
<RECEIVABLES> 573,380
<ASSETS-OTHER> 114,839
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 32,539,357
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,140,481
<TOTAL-LIABILITIES> 1,140,481
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31,398,876
<SHARES-COMMON-STOCK> 12,353
<SHARES-COMMON-PRIOR> 2,205
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 31,398,876
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 587,501
<OTHER-INCOME> 0
<EXPENSES-NET> (88,401)
<NET-INVESTMENT-INCOME> 499,100
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 499,100
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (946,927)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,714
<NUMBER-OF-SHARES-REDEEMED> (1,623)
<SHARES-REINVESTED> 58
<NET-CHANGE-IN-ASSETS> (577,266)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 71,755
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 115,061
<AVERAGE-NET-ASSETS> 31,792,923
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.009
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.009)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 081
<NAME> COMPOSITE BOND & STOCK FUND, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 263,879,468
<INVESTMENTS-AT-VALUE> 307,041,901
<RECEIVABLES> 3,723,333
<ASSETS-OTHER> 31,640
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 310,796,874
<PAYABLE-FOR-SECURITIES> 1,335,125
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 464,986
<TOTAL-LIABILITIES> 1,800,111
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 249,165,945
<SHARES-COMMON-STOCK> 19,003,496
<SHARES-COMMON-PRIOR> 17,361,806
<ACCUMULATED-NII-CURRENT> 959,261
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 15,709,124
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 43,162,433
<NET-ASSETS> 308,996,763
<DIVIDEND-INCOME> 2,755,799
<INTEREST-INCOME> 3,929,607
<OTHER-INCOME> 0
<EXPENSES-NET> (1,604,557)
<NET-INVESTMENT-INCOME> 5,080,849
<REALIZED-GAINS-CURRENT> 15,839,638
<APPREC-INCREASE-CURRENT> 630,386
<NET-CHANGE-FROM-OPS> 21,550,873
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,039,783)
<DISTRIBUTIONS-OF-GAINS> (16,337,631)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,604,484
<NUMBER-OF-SHARES-REDEEMED> (1,394,458)
<SHARES-REINVESTED> 1,431,644
<NET-CHANGE-IN-ASSETS> 31,339,197
<ACCUMULATED-NII-PRIOR> 1,322,002
<ACCUMULATED-GAINS-PRIOR> 17,743,293
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 892,166
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,604,557
<AVERAGE-NET-ASSETS> 293,327,165
<PER-SHARE-NAV-BEGIN> 14.71
<PER-SHARE-NII> 0.25
<PER-SHARE-GAIN-APPREC> 0.85
<PER-SHARE-DIVIDEND> (0.27)
<PER-SHARE-DISTRIBUTIONS> (0.94)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.60
<EXPENSE-RATIO> 1.02
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEMIANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH DOCUMENTS.
</LEGEND>
<SERIES>
<NUMBER> 082
<NAME> COMPOSITE BOND & STOCK FUND, INC. CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 263,879,468
<INVESTMENTS-AT-VALUE> 307,041,901
<RECEIVABLES> 3,723,333
<ASSETS-OTHER> 31,640
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 310,796,874
<PAYABLE-FOR-SECURITIES> 1,335,125
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 464,986
<TOTAL-LIABILITIES> 1,800,111
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 249,165,945
<SHARES-COMMON-STOCK> 2,160,691
<SHARES-COMMON-PRIOR> 1,514,671
<ACCUMULATED-NII-CURRENT> 959,261
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 15,709,124
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 43,162,433
<NET-ASSETS> 308,996,763
<DIVIDEND-INCOME> 2,755,799
<INTEREST-INCOME> 3,929,607
<OTHER-INCOME> 0
<EXPENSES-NET> (1,604,557)
<NET-INVESTMENT-INCOME> 5,080,849
<REALIZED-GAINS-CURRENT> 15,839,638
<APPREC-INCREASE-CURRENT> 630,386
<NET-CHANGE-FROM-OPS> 21,550,873
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (403,807)
<DISTRIBUTIONS-OF-GAINS> (1,513,284)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 617,228
<NUMBER-OF-SHARES-REDEEMED> (103,315)
<SHARES-REINVESTED> 132,107
<NET-CHANGE-IN-ASSETS> 31,339,197
<ACCUMULATED-NII-PRIOR> 1,322,002
<ACCUMULATED-GAINS-PRIOR> 17,743,293
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 892,166
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,604,557
<AVERAGE-NET-ASSETS> 293,327,165
<PER-SHARE-NAV-BEGIN> 14.69
<PER-SHARE-NII> 0.19
<PER-SHARE-GAIN-APPREC> 0.84
<PER-SHARE-DIVIDEND> (0.21)
<PER-SHARE-DISTRIBUTIONS> (0.94)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.57
<EXPENSE-RATIO> 1.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
