SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Securities Act of 1933 File #2-57530
Investment Company Act of 1940 File #811-2681
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. ___ / /
POST-EFFECTIVE AMENDMENT NO. 28 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 28 /X/
COMPOSITE TAX-EXEMPT BOND FUND, INC.
- --------------------------------------------------------------------------
(Exact name of Registrant as specified in Charter)
601 W. Main Avenue, Suite 801, Spokane, WA 99201
- --------------------------------------------------------------------------
(Address of principal executive offices)
1-509-353-3486
- --------------------------------------------------------------------------
(Registrant's telephone number, including area code)
JOHN T. WEST, CORPORATE SECRETARY
Composite Group of Funds
601 West Main Avenue, Suite 801, Spokane, WA 99201
- ---------------------------------------------------
(Name and address of agent for service)
Approximate Date of Proposed Public Offering: March 21, 1996
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[xx] on March 21, 1996, pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(i) of Rule 485
[ ] on (date) pursuant to paragraph (a)(i) of Rule 485
[ ] 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 REGISTRATIAON FEE UNDER THE SECURITIES ACT OF 1933
Indefinite amount has been registered pursuant to Rule 24f-2. The Rule 24f-2
Notice for the most recent fiscal year was filed on February 27, 1996.
<PAGE>
PART A
TABLE OF CONTENTS
N-1A Item No. Location
Item 1. Cover Page ......................................... Cover Page
Item 2. Synopsis ........................................... Fee Table
About this
Prospectus
Item 3. Condensed Financial Information .................... Financial
Highlights
Performance
Information
Item 4. General Description of the Registrant .............. Cover Page
The Funds'
Objectives
Investment
Practices and
Risk Factors
Investment
Restrictions
Item 5. Management of the Fund ............................. Who We Are
The Cost of
Good
Management
How to Buy
Shares
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 or negative answer
<PAGE>
PART B
TABLE OF CONTENTS
Item 10. Cover Page ......................................... Cover Page
Item 11. Table of Contents .................................. Table of
Contents
Item 12. General Information and History .................... Organization
and
Authorized
Capital
Item 13. Investment Objectives & Policies ................... See Prospectus
page 8
Investment
Practices
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. Directors &
Officers of
the Funds
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
Voting
Privileges
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered ................................... How Shares are
Valued
How Shares Can
Be Purchased
How to Sell
Shares - See
Prospectus
page 21
Exchange
Privilege
Services
Provided
by the Funds
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
Incorporated
by Reference-
Annual Report
to Share-
holders dated
12/31/95
<PAGE>
COMPOSITE GROUP
BOND
FUNDS
COMPOSITE
U.S. GOVERNMENT
SECURITIES, INC.
COMPOSITE
INCOME FUND, INC.
COMPOSITE
TAX-EXEMPT BOND
FUND, INC.
PROSPECTUS
MARCH 21,
1996
[LOGO]
COMPOSITE GROUP OF FUNDS
COMPOSITE BOND FUNDS
Suite 801
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 Composite Bond Funds are designed for investors who want to generate
income from debt securities and to protect their capital:
COMPOSITE U.S. GOVERNMENT SECURITIES, INC. - 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, INC. - 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 careful investment in a diversified
pool of debt securities.
COMPOSITE TAX-EXEMPT BOND FUND, INC. - 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 carefully selected portfolio of bonds issued by
states, counties, cities and other governmental bodies whose bonds generate
income exempt from federal income tax.
The "Financial highlights" tables in this Prospectus provide information on
the performance of each of the three Funds over a period of several years.
Information that follows those tables explains the detailed investment criteria.
Please read this Prospectus dated March 21, 1996, 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 MARCH 21,
1996, 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 IN THE HEADING OF THIS INTRODUCTION.
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.
<PAGE>
CONTENTS
Page
Fee table ................................... 2
Financial highlights ........................ 4
About this Prospectus ....................... 7
The Funds' objectives ....................... 8
Investment practices and risk factors ....... 9
Investment restrictions ..................... 13
Who we are .................................. 13
The cost of good management ................. 14
The value of a single share ................. 15
How to buy shares ........................... 16
Distribution of income and capital gains .... 19
Income taxes on dividends and capital gains . 20
Exchanges for other Composite funds ......... 21
How to sell shares .......................... 21
IRAs & other tax-sheltered retirement plans . 22
Performance information ..................... 22
Reports to shareholders ..................... 23
We're here to help you ...................... 23
<TABLE>
<CAPTION>
FEE TABLE
The fee 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 projected, based on historical data.
For further information on costs and expenses, please see "The cost of good
management" on Page 14.
SHAREHOLDER TRANSACTION EXPENSES FOR EACH FUND:
CLASS A CLASS B
SHARES SHARES
------- -------
<S> <C> <C>
Maximum sales charge imposed on purchases (as a percentage of
offering price) 4.00% None
Contingent deferred sales charge (as a percentage of
purchase price or redemption proceeds, whichever is lower) None 4.00%
Redemption fee None None
Exchange fee None None
<CAPTION>
ANNUAL FUND OPERATING U.S. GOVERNMENT
EXPENSES (AS A PERCENTAGE SECURITIES INCOME TAX-EXEMPT
OF AVERAGE NET ASSETS) ---------------- ------------- -------------
CLASS CLASS CLASS CLASS CLASS CLASS
A B A B A B
SHARES SHARES SHARES SHARES SHARES SHARES
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Advisory fees .63% .63% .63% .63% .50% .50%
12b-1 fees .20% 1.00% .20% 1.00% .20% 1.00%
Other expenses (after reimburse- .20% .21% .27% .28% .11% .12%
ment) ----- ----- ----- ----- ----- -----
Total Fund operating expenses 1.03% 1.84% 1.10% 1.91% .81% 1.62%
(after reimbursement) ===== ===== ===== ===== ===== =====
<FN>
Sales charge waivers are available for Class A and Class B shares, and
reduced sales charge purchase plans are available for Class A shares. Class A
purchases of $1 million or more are not subject to a sales charge at the time of
purchase, but a contingent deferred sales charge of 1% may apply on redemptions
made within 18 months of purchase. The 4% contingent deferred sales charge on
Class B shares declines 1% annually to 0% after four years. 12b-1 fees include
service fees not to exceed .25% of average net assets with the remainder being
distribution fees. 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.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXAMPLE
THIS EXAMPLE ASSUMES YOU HAVE MADE A $1,000 INVESTMENT IN ONE OF THE FUNDS
AND YOU RECEIVE A 5% ANNUAL RETURN. THE TABLE SHOWS THE EXPENSES YOU WOULD PAY
OVER VARIOUS TIME PERIODS AND FOR EITHER CLASS OF SHARES.
U.S. GOVERNMENT
SECURITIES INCOME TAX-EXEMPT
--------------- --------------- -----------------
CLASS CLASS CLASS CLASS CLASS CLASS
A B A B A B
SHARES SHARES SHARES SHARES SHARES SHARES
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
ASSUMING REDEMPTION AT
THE END OF EACH PERIOD:
1 Year $55 $59 $56 $59 $53 $56
3 Years $76 $78 $78 $80 $70 $71
5 Years $100 $100 $103 $104 $88 $89
10 Years $165 $174 $173 $182 $141 $150
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
ASSUMING YOU KEEP YOUR
SHARES AND NO REDEMPTIONS
ARE MADE:
1 Year $56 $19 $56 $19 $53 $16
3 Years $76 $58 $78 $60 $70 $51
5 Years $100 $100 $103 $104 $88 $89
10 Years $165 $174 $173 $182 $141 $150
<FN>
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.
Class B shares automatically convert to Class A shares after six years
without charge or tax impact. Because of that, years seven through ten reflect
Class A operating expenses. Long-term shareholders could pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers. The Class B conversion feature is
intended to reduce the likelihood this will occur. See "How to buy shares-Class
B conversion feature" on Page 19 for more information.
</FN>
</TABLE>
FOR FURTHER INFORMATION
* Advisory fees - See "The cost of good management" Page 14
* 12b-1 fees - See "The cost of good management" Page 14
* Sales charge on purchases - See "How to buy shares" Page 16
* Contingent deferred sales charge - See "How to buy shares" Page 16
* Conversion of Class B shares to Class A - See "How to buy shares - Class B
conversion feature" Page 19
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
U.S. GOVERNMENT SECURITIES - CLASS A SHARES (See Page 7 for Class B shares)
The supplemental financial information on this page has been audited by independent
auditors whose reports thereon appear in the Fund's annual report which is
incorporated by reference into the Statement of Additional Information.
YEARS ENDED TEN MONTHS
DECEMBER 31, ENDED YEARS ENDED LAST DAY OF FEBRUARY
----------------------- DECEMBER
1995 1994 1993 31,1992(3) 1992 1991 1990 1989 1988 1987
------- ------- ------ ----------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $9.64 $10.79 $10.63 $10.53 $10.17 $9.90 $9.63 $10.25 $10.61 $10.71
------- ------- ------ ----------- -------- -------- -------- -------- -------- ---------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income ........... 0.63 0.63 0.69 0.62 0.79 0.84 0.88 0.91 0.91 1.00
Net Gains or Losses
on Securities (both
realized and
unrealized) ...... 1.20 (1.15) 0.16 0.10 0.36 0.27 0.27 (0.62) (0.36) 0.01
------- -------- ------ ----------- --------- -------- -------- -------- -------- ---------
Total from
Investment
Operations ....... 1.83 (0.52) 0.85 0.72 1.15 1.11 1.15 0.29 0.55 1.01
------- -------- ------ ----------- --------- -------- -------- -------- -------- ---------
LESS DISTRIBUTIONS
Dividends (from net
investment income). (0.63) (0.63) (0.69) (0.62) (0.79) (0.84) (0.88) (0.91) (0.91) (1.06)
Distributions (from
capital gains) .... - - - - - - - - - (0.05)
------- -------- ------ ----------- --------- -------- --------- -------- -------- ---------
Total distributions (0.63) (0.63) (0.69) (0.62) (0.79) (0.84) (0.88) (0.91) (0.91) (1.11)
------- -------- ------ ----------- --------- -------- --------- -------- -------- ---------
NET ASSET VALUE,
END OF PERIOD ...... $10.84 $ 9.64 $10.79 $10.63 $10.53 $10.17 $ 9.90 $ 9.63 $10.25 $10.61
======= ======== ====== =========== ========= ======== ========= ======== ======== =========
TOTAL RETURN (1) ... 19.45% -4.91% 8.12% 7.03% 11.72% 11.72% 12.31% 2.94% 6.63% 8.95%
RATIOS/
SUPPLEMENTAL DATA
Net Assets, End of
Period (in
thousands) ...... $177,310 $188,068 $268,112 $207,501 $141,377 $92,293 $83,360 $79,920 $89,385 $111,991
Ratio of Expenses
to Average Net
Assets(5) ....... 1.01% 0.97% 0.99% 0.99%(4) 1.01% 1.03% 0.99% 0.88% 0.88% 0.88%
Ratio of Net Income
to Average Net
Assets .......... 6.08% 6.19% 6.29% 6.98%(4) 7.63% 8.43% 8.86% 9.14% 9.03% 9.33%
Portfolio Turnover
Rate (2) ........ 8% 34% 51% 11%(4) 17% 66% 19% 41% 43% 128%
<FN>
(1) Total return does not reflect sales charge. Returns of less than one year are not annualized.
(2) A portfolio turnover rate is the percentage computed by taking the lesser of purchases or sales of portfolio securities
(excluding securities with a maturity date of one year or less at the time of acquisition) for a period and dividing it by the
monthly average of the market value of such securities during the period.
(3) Change in Fund's fiscal year end. See note 1.
(4) Annualized.
(5) Ratios for 1995 are based upon total expenses in accordance with Securities & Exchange Commission Release No. FR 46 effective
September 1, 1995. Ratios for prior periods were calculated based on net expenses and have not been restated.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
INCOME - CLASS A SHARES (See Page 7 for Class B shares)
The supplemental financial information on this page has been audited by independent
auditors whose reports thereon appear in the Fund's annual report which is
incorporated by reference into the Statement of Additional Information.
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED YEARS ENDED SEPTEMBER 30,
------------------------ DECEMBER
1995 1994 1993 31,1992(3) 1992 1991 1990 1989 1988 1987
------- ------- ------ ----------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $8.29 $ 9.33 $ 8.99 $ 9.17 $ 8.68 $8.12 $8.51 $ 8.87 $ 9.04 $ 9.42
------- ------- ------ ----------- -------- -------- -------- -------- -------- ---------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income ........... 0.59 0.60 0.61 0.16 0.65 0.68 0.74 0.91 0.95 0.96
Net Gains or Losses
on Securities (both
realized and
unrealized) ...... 1.15 (1.04) 0.34 (0.18) 0.49 0.56 (0.39) (0.36) (0.17) (0.38)
------- -------- ------ ----------- --------- -------- -------- -------- -------- ---------
Total from
Investment
Operations ....... 1.74 (0.44) 0.95 (0.02) 1.14 1.24 0.35 0.55 0.78 0.58
------- -------- ------ ----------- --------- -------- -------- -------- -------- ---------
LESS DISTRIBUTIONS
Dividends (from net
investment income). (0.59) (0.60) (0.61) (0.16) (0.65) (0.68) (0.74) (0.91) (0.95) (0.96)
------- -------- ------ ----------- --------- -------- --------- -------- -------- ---------
NET ASSET VALUE,
END OF PERIOD ...... $ 9.44 $ 8.29 $ 9.33 $ 8.99 $ 9.17 $ 8.68 $ 8.12 $ 8.51 $ 8.87 $ 9.04
======= ======== ====== =========== ========= ======== ========= ======== ======== =========
TOTAL RETURN (1) ... 21.58% -4.82% 10.82% -0.23% 13.57% 15.93% 4.32% 6.58% 9.02% 6.39%
RATIOS/
SUPPLEMENTAL DATA
Net Assets, End of
Period (in
thousands) ...... $ 97,534 $ 88,102 $104,876 $ 86,425 $ 84,995 $73,342 $66,648 $126,088 $162,956 $133,596
Ratio of Expenses
to Average Net
Assets(4) ....... 1.08% 1.04% 1.08% 0.95%(5) 1.05% 1.04% 1.04% 0.96% 1.01% 0.99%
Ratio of Net Income
to Average Net
Assets .......... 6.59% 6.83% 6.58% 6.94%(5) 7.26% 8.16% 8.97% 10.53% 10.56% 10.32%
Portfolio Turnover
Rate (2) ........ 43% 26% 51% 87%(5) 47% 106% 64% 37% 47% 99%
<FN>
(1) Total return does not reflect sales charge. Returns of less than one year are not annualized.
(2) A portfolio turnover rate is the percentage computed by taking the lesser of purchases or sales of portfolio securities
(excluding securities with a maturity date of one year or less at the time of acquisition) for a period and dividing it by the
monthly average of the market value of such securities during the period.
(3) Change in Fund's fiscal year end. See note 1.
(4) Ratios for 1995 are based upon total expenses in accordance with Securities & Exchange Commission Release No. FR 46 effective
September 1, 1995. Ratios for prior periods were calculated based on net expenses and have not been restated.
(5) Annualized.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
TAX-EXEMPT - CLASS A SHARES (See Page 7 for Class B shares)
The supplemental financial information on this page has been audited by independent
auditors whose reports thereon appear in the Fund's annual report which is
incorporated by reference into the Statement of Additional Information.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------- ------- ------ ----------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $7.13 $ 8.04 $ 7.58 $ 7.42 $ 7.16 $7.17 $7.20 $ 7.02 $ 7.56 $ 7.10
------- ------- ------ ----------- -------- -------- -------- -------- -------- ---------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income ........... 0.38 0.39 0.40 0.42 0.45 0.47 0.50 0.52 0.54 0.55
Net Gains or Losses
on Securities (both
realized and
unrealized) ...... 0.89 (0.91) 0.54 0.23 0.34 (0.01) 0.07 0.20 (0.45) 0.58
------- -------- ------ ----------- --------- -------- -------- -------- -------- ---------
Total from
Investment
Operations ....... 1.27 (0.52) 0.94 0.65 0.79 0.46 0.57 0.72 0.09 1.13
------- -------- ------ ----------- --------- -------- -------- -------- -------- ---------
LESS DISTRIBUTIONS
Dividends (from net
investment income). (0.38) (0.39) (0.40) (0.42) (0.45) (0.47) (0.50) (0.52) (0.53) (0.55)
Distributions (from
capital gains) .... - - (0.08) (0.07) (0.08) - (0.10) (0.02) (0.10) (0.12)
------- -------- ------ ----------- --------- -------- --------- -------- -------- ---------
Total distributions (0.38) (0.39) (0.48) (0.49) (0.53) (0.47) (0.60) (0.54) (0.63) (0.67)
------- -------- ------ ----------- --------- -------- --------- -------- -------- ---------
NET ASSET VALUE,
END OF PERIOD ...... $ 8.02 $ 7.13 $ 8.04 $ 7.58 $ 7.42 $ 7.16 $ 7.17 $ 7.20 $ 7.02 $ 7.56
======= ======== ====== =========== ========= ======== ========= ======== ======== =========
TOTAL RETURN (1) ... 18.25% -6.53% 12.54% 9.00% 11.36% 6.71% 8.08% 10.66% 1.25% 16.51%
RATIOS/
SUPPLEMENTAL DATA
Net Assets, End of
Period (in
thousands) ...... $230,055 $215,438 $259,045 $186,861 $140,154 $111,462 $104,208 $94,156 $83,057 $82,821
Ratio of Expenses
to Average Net
Assets(3) ....... 0.81% 0.79% 0.81% 0.78% 0.77% 0.77% 0.80% 0.80% 0.85% 0.79%
Ratio of Net Income
to Average Net
Assets .......... 5.03% 5.23% 4.97% 5.56% 6.16% 6.65% 6.85% 7.34% 7.36% 7.41%
Portfolio Turnover
Rate (2) ........ 8% 12% 19% 30% 83% 115% 104% 47% 49% 37%
<FN>
(1) Total return does not reflect sales charge. Returns of less than one year are not annualized.
(2) A portfolio turnover rate is the percentage computed by taking the lesser of purchases or sales of portfolio securities
(excluding securities with a maturity date of one year or less at the time of acquisition) for a period and dividing it by the
monthly average of the market value of such securities during the period.
(3) Ratios for 1995 are based upon total expenses in accordance with Securities & Exchange Commission Release No. FR 46 effective
September 1, 1995. Ratios for prior periods were calculated based on net expenses and have not been restated.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
CLASS B SHARES (See Pages 4-6 for Class A shares)
The supplemental financial information on this page has been audited by independent
auditors whose reports thereon appear in the Fund's annual report which is
incorporated by reference into the Statement of Additional Information.
U.S. GOVERNMENT
SECURITIES INCOME TAX-EXEMPT
------------------ -------------------- -------------------
YEAR MARCH 30, YEAR MARCH 30, YEAR MARCH 30,
ENDED 1994 TO ENDED 1994 TO ENDED 1994 TO
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1995 1994(3) 1995 1994(3) 1995 1994(3)
------- ------- ------ ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $9.64 $10.24 $ 8.30 $ 8.85 $ 7.13 $7.49
------- ------- ------ ----------- -------- --------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income ........... 0.54 0.41 0.51 0.40 0.32 0.25
Net Gains or Losses
on Securities (both
realized and
unrealized) ...... 1.20 (0.60) 1.16 (0.55) 0.89 (0.36)
------- -------- ------ ----------- --------- --------
Total from
Investment
Operations ....... 1.74 (0.19) 1.67 (0.15) 1.21 (0.11)
------- -------- ------ ----------- --------- --------
LESS DISTRIBUTIONS
Dividends (from net
investment income). (0.54) (0.41) (0.51) (0.40) (0.32) (0.25)
------- -------- ------ ----------- --------- --------
NET ASSET VALUE,
END OF PERIOD ...... $10.84 $ 9.64 $ 9.46 $ 8.30 $ 8.02 $ 7.13
======= ======== ====== =========== ========= ========
TOTAL RETURN (1) ... 18.48% -1.86% 20.70% -1.67% 17.30% -1.46%
RATIOS/
SUPPLEMENTAL DATA
Net Assets, End of
Period (in
thousands) ...... $2,206 $1,063 $4,452 $2,299 $2,682 $1,258
Ratio of Expenses
to Average Net
Assets(4) ....... 1.84% 1.76%(5) 1.91% 1.80%(5) 1.62% 1.58%(5)
Ratio of Net Income
to Average Net
Assets .......... 5.20% 5.43%(5) 5.73% 6.25%(5) 4.18% 4.53%(5)
Portfolio Turnover
Rate (2) ........ 8% 34% 43% 26% 8% 12%
<FN>
(1) Total return does not reflect sales charge. Returns of less than one year are not annualized.
(2) A portfolio turnover rate is the percentage computed by taking the lesser of purchases or sales of portfolio securities
(excluding securities with a maturity date of one year or less at the time of acquisition) for a period and dividing it by the
monthly average of the market value of such securities during the period.
(3) From the commencement of offering Class B shares.
(4) Ratios for 1995 are based upon total expenses in accordance with Securities & Exchange Commission Release No. FR 46 effective
September 1, 1995. Ratios for prior periods were calculated based on net expenses and have not been restated.
(5) Annualized.
</FN>
</TABLE>
ABOUT THIS PROSPECTUS
In this publication, you will find basic and in-depth information about the
Composite Bond Funds. Included are subjects such as how to buy and sell shares,
as well as details about the Funds' objectives, investment practices and
restrictions, and other vital 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 several other Composite
mutual funds.
CLASS A SHARES. All Composite Bond Funds are available in two classes.
Class A shares include a sales charge at the time of purchase and annual
operating expenses.
CLASS B SHARES. This is the second of the two classes of Composite Bond
Funds. Class B shares do not have an initial sales charge, but they do have
higher operating expenses for six years than Class A shares, and they have a
contingent deferred sales charge (see below).
CONTINGENT DEFERRED SALES CHARGE. If an investor redeems Class B shares
within four years of purchase, he or she normally must pay this charge.
DISTRIBUTOR. Murphey Favre, Inc. distributes the Composite Bond Funds and
other Composite mutual 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. There is no fee or additional sales charge for an
exchange within the Composite Group of 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.
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 publication and in
daily newspaper financial tables to report the value of a single share of a
mutual fund. It is determined by adding the value of a fund's securities and
other assets -- and then subtracting any liabilities. Next, the resulting figure
is divided 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 by of a 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 in this Prospectus. It is on
file with the federal government's Securities and Exchange Commission and also
is available through the Funds.
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 and policies of each Fund are described below. Each Fund's investment
objectives are a fundamental policy that cannot be changed without a majority
vote of its outstanding shares. Because risks are involved, there cannot be any
assurance that 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 carefully selected portfolio of bonds issued by states, counties,
cities and other governmental bodies whose bonds generate income that is exempt
from federal income tax.
INVESTMENT PRACTICES AND RISK FACTORS
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.
As with all fixed-income investments, the Funds 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.
U.S. GOVERNMENT SECURITIES
The intention of this Fund is to achieve its objective by investing in a
selection of obligations issued or guaranteed by the full faith and credit of
the U.S. government. The Fund may also invest in collateralized mortgage
obligations or repurchase agreements which are collateralized by these types of
securities. It is 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 11 for a more complete discussion of GNMA
certificates, collateralized mortgage obligations and repurchase
agreements.
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. In keeping with this, the Fund invests most of its assets in the
following:
1) Debt and convertible debt securities that enjoy the four highest ratings of
Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc.
("Moody's"). The Fund may invest up to 20% of its assets in lower-rated
securities (sometimes referred to as "junk bonds," see Page 11). See the
Statement of Additional Information for a detailed description of these
ratings.
2) Debts of the U.S. government and its agencies, including mortgage-backed
securities (see Page 11) 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 a careful
selection of 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
referred to as "junk bonds," see Page 11).See the Statement of Additional
Information for a detailed description of these 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 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:
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.
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 20% of Income's and 25% of Tax-Exempt's
assets in below investment-grade securities, or in non-rated securities the
Adviser believes to be comparable. 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 the Statement of Additional Information for a detailed description
of these ratings.)
The market price of lower-rated securities generally fluctuates 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 reflect speculative characteristics.
Securities that are rated lower than investment grades BBB or Baa should be
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 invest 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 because of
a decline in the value of the underlying debt security.
Repurchase agreements will be entered into only with brokers, dealers or
banks that meet credit guidelines adopted by each Fund's Board of Directors. 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. With
these transactions, securities are bought under an agreement that payment and
delivery will take place in the future. This is done to obtain what is
considered to be an advantageous yield or price at the time of the transaction.
Delivery of and payment for these securities may take as long as a month or
more after the date of the purchase commitment. However, it must take place no
more than 120 days after the trade date. 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 commitments that, in
total, exceed 20% of the market value of its total assets minus all other
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. 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.
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.
WHO WE ARE
Composite U.S. Government Securities, Inc., Composite Income Fund, Inc.,
and Composite Tax-Exempt Bond Fund, Inc. are open-end, diversified, management
investment companies. They were incorporated under the laws of the state of
Washington on March 5, 1982; October 22, 1975; and September 16, 1976,
respectively.
Each is a "series" company with the ability to add portfolios, called
"funds," subject to approval by its Board of Directors. Each currently consists
of a single fund.
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 $2.1 billion for mutual funds and institutional
advisory accounts. These accounts include more than $1.3 billion within the
Composite Group of Funds, which is made up of the Funds described in this
Prospectus and five other mutual funds with differing objectives.
The Adviser advises the Funds on investment policies and specific
investments. Subject to supervision by each Fund's Board of Directors, 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 Funds and of the Adviser. A team
of the Adviser's investment professionals manages each Fund, under supervision
of the Adviser's investment committee. The investment team for the Bond Funds
consists of Brian L. Placzek, Chartered Financial Analyst (CFA); Gary J.
Pokrzywinski, CFA; and Audrey S. Quaye.
Mr. Placzek has 11 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 has 11 years
of continuous experience in fixed-income and financial market analysis. Ms.
Quaye has been employed by the Adviser since February 1996 and has six years of
continuous experience in fixed-income investments and financial analysis. Mr.
Placzek is primarily responsible for the Tax-Exempt Bond Fund. Mr. Pokrzywinski
is primarily responsible for the U.S. Government Securities and Income Funds.
DISTRIBUTOR. Murphey Favre, 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.
OTHER IMPORTANT INFORMATION. Each Fund offers two classes of shares, as
described in "How to buy shares."
U.S. Government has 1 billion authorized shares of capital stock, including
600 million Class A and 400 million Class B.
Income has 50 million authorized shares, including 30 million Class A and
20 million Class B.
Tax-Exempt has 500 million authorized shares of capital stock, including
300 million Class A and 200 million Class B.
The shares do not have preemptive rights, and none has preference as to
conversion, exchange, dividends, retirement, liquidation, redemption, or any
other feature, except as described in "How to buy shares." Shares have equal
voting rights on corporate matters submitted for shareholder approval, except
that each class may vote separately on its distribution plan.
Normally, the Funds do not hold annual meetings of shareholders. When
meetings are held, shareholders have the right to vote cumulatively for any
election of directors. In other words, each voting shareholder may cast a number
of votes equal to the number of Fund shares he or she owns multiplied by the
number of directors to be elected. The shareholder may then allocate the total
votes among the director nominees in the amounts he or she chooses.
This Prospectus is consolidated to present information efficiently on each
of the Bond Funds in the Composite Group. There is a remote possibility that one
Fund might become liable for any misstatement in the Prospectus pertaining to
another Fund.
THE COST OF GOOD MANAGEMENT
Composite Research & Management Co. serves as Adviser under investment
management contracts with each Fund. The agreements are renewable every year,
subject to the approval of each Fund's Board of Directors or the shareholders
themselves.
BEFORE READING THIS SECTION, YOU MAY FIND IT USEFUL TO TURN BACK TO PAGE 2
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
Advisory fees are paid to the Adviser for its services. These include
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.
Advisory fees are calculated daily and paid monthly.
For U.S. Government and Income, advisory fees are equal to an annual rate
of .625% of the first $250 million of each Fund's respective average daily net
assets plus .50% on net assets in excess of $250 million.
Advisory fees for Tax-Exempt are equal to an annual rate of .50% of the
first $250 million of average daily net assets plus .40% on the excess.
DISTRIBUTION PLANS
Each Fund's Board of Directors has approved and monitors a distribution
plan that meets the provisions of Rule 12b-1 under the Investment Company Act of
1940. The plans are 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. The plans authorize each Fund to reimburse the Distributor
for direct costs of marketing, selling and distributing Class A shares of that
Fund. 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.
Such dealers receive fees of .25%, annualized, of the average daily value of
shares in the accounts of the dealer or its customers.
The distribution plans allow each Fund to reimburse actual Class A
distribution costs, subject to directors' approval. 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.
CLASS B SHARES. The plans authorize 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 sales of those
shares. The service fee covers account maintenance and other shareholder
services.
The Distributor pays authorized dealers service fees of .25%, annualized,
of the average daily value of shares in the accounts of the dealer or its
customers.
Because the Distributor's distribution fee for Class B shares is not
directly tied to its expenses, the amount of compensation may be more or less
than its 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 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 directors not employed by the
Adviser, 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.
Each Fund pays the Transfer Agent for shareholder servicing and dividend
disbursing services, but not for special services such as producing and mailing
historical account transcripts. You may be required to pay a fee if you need
these special services.
Total expenses, including advisory fees, distribution expenses, and other
operating expenses can be found under "Ratio of expenses to average net assets"
in the "Financial highlights" section of this Prospectus.
The Adviser or Distributor have agreed to waive fees or reimburse expenses
if a Fund exceeds the most stringent, applicable limitation imposed by any
state.
THE VALUE OF A SINGLE SHARE
At the end of each business day of the New York Stock Exchange or at 1:00
p.m. Pacific time, whichever is earlier, the Fund calculates the value of each
class of shares. That figure is determined by adding the value of (1) the
securities in the Fund that are attributable to each class and (2) all other
assets - and then subtracting any liabilities. Next, the resulting figure is
divided by the number of shares outstanding. That provides the "net asset value"
per share, which frequently is referred to as "NAV."
Security valuations are provided by independent pricing sources approved by
each Fund's Board of Directors. When such valuations are not available, the
Board of Directors will determine how securities are to be priced at fair value.
HOW TO BUY SHARES
Shares are offered at the next NAV per share that is calculated, plus a
sales charge for Class A shares. This section discusses various options you have
in purchasing shares of the Funds.
DISTRIBUTOR AND SECURITIES DEALERS
You may buy shares of the Funds through Murphey Favre, the Distributor, or
through selected securities dealers provided that the Fund and the Distributor
(or dealer) are registered for sale in your state of residence. With certain
exceptions, the minimum initial purchase in a Composite 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.
OTHER INFORMATION
The Funds and the Distributor reserve the right to refuse an order to buy
shares.
Exceptions to the policies described in this Prospectus are detailed in the
Statement of Additional Information.
In the interest of economy and convenience, physical certificates
representing Fund shares will be issued only upon written request to the Fund or
by request from your broker.
A COMPARISON OF CLASS A AND CLASS B SHARES
Each Fund offers two classes of shares:
1) Class A shares are sold to investors who pay a sales charge at the time of
purchase and who pay ongoing distribution expenses.
2) Class B shares are sold to investors who do not pay a sales charge at the
time of purchase. Instead, they pay a higher ongoing distribution fee for
six years. They also may pay a "contingent deferred sales charge" if they
redeem their shares within four years of purchase.
The two classes of shares each represent an interest in the same portfolio
of investments. Each class has exclusive voting rights with respect to
provisions of the Rule 12b-1 distribution plan regarding which distribution
expenses are paid relative to a specific class.
Class A shares and Class B shares may be exchanged only for shares of the
same class of other Composite funds. See "Exchanges for other Composite funds"
on Page 21 in this Prospectus.
The net income attributable to Class B shares and the dividends payable to
Class B shares will be lower because of the higher expenses. Likewise, NAVs of
the two classes may be different.
Sales personnel of broker-dealers distributing the Funds' shares may
receive differing compensation for selling or servicing Class A or Class B
shares.
When purchasing shares, investors are encouraged to choose the class of
shares that will be best for them. Factors to consider include the purchase
amount, the length of time shares are expected to be held, and other individual
circumstances.
Then, this question should be asked: "If I buy Class A or Class B shares
for a given length of time, which will give me the lowest cost: Class A's
initial sales charge and distribution expenses, or Class B's contingent deferred
sales charges and its higher distribution expenses?"
To assist investors in making that choice, the "Fee table" on Page 2
provides examples of the charges that apply to each class of shares. Normally,
Class A shares will be more beneficial to the investor who qualifies for a
reduced sales charge, as described below.
BUYING CLASS A SHARES
The offering price for Class A shares is the NAV per share, plus an initial
sales charge as shown in the table below. Investors also may be entitled to
reduced sales charges as discussed following the table and in the Statement of
Additional Information. (The final column in the table indicates what dealers
receive for selling Class A shares.)
Reallowed
Sales Charge to Dealers
- --------------------------------------------------------------------------------
% of % of net % of
offering amount offering
Purchase of Class A shares price invested price
- --------------------------------------------------------------------------------
Less than $50,000 4.00% 4.17% 3.50%
$50,000 to $100,000 3.50 3.59 3.00
$100,000 to $250,000 3.00 3.09 2.50
$250,000 to $500,000 2.00 2.04 1.75
$500,000 to $1,000,000 1.00 1.01 0.75
$1,000,000 and above None (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% OF
THE $1,000 WOULD PAY FOR A SALES CHARGE. THE CHARGE WOULD BE $40, WHICH IS 4.17%
OF THE NET INVESTMENT OF $960, AS THE NEXT COLUMN SHOWS. THE DEALER SELLING THE
SHARES WOULD BE PAID $35 OF THE $40 WHICH IS 3.50% 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 Group
investments that were purchased subject to an initial or contingent deferred
sales charge. The discount will be based on the amount of the new purchase plus
the current offering price of shares owned at the time of the purchase. Those
eligible for a cumulative discount include individuals, traditional family
units, 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 Fund offices 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, although a contingent deferred sales charge of
1% will be deducted if such shares are redeemed within 18 months of purchase.
The Distributor will pay authorized dealers commissions on such purchases.
Investors may qualify for this provision through a cumulative discount or by
letter of intent.
Class A shares may be purchased at net asset value, and in any amount, by
officers, directors and employees of the Adviser, its affiliates or companies
which have entered into selling agreements with the Distributor. The purchase
must be for investment purposes only and may not be resold other than through
redemption by the Funds. The Funds may also offer their shares at net asset
value to investors who use the sales proceeds from other mutual funds (excluding
money market funds), closed-end funds, or unit investment trusts; 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.
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 IS APPLICABLE TO
YOUR PURCHASE TO ENSURE RECEIVING THAT REDUCTION.
BUYING CLASS B SHARES
Class B shares are sold at their NAV per share without an initial sales
charge. The entire amount of the purchase is invested in the Fund selected.
However, Class B shares have a higher distribution fee than Class A shares for
six years. Also, if Class B shares are redeemed within four years of purchase, a
contingent deferred sales charge 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 expects to pay sales commissions
from its own resources to selected dealers for 4.00% of the purchase price of
shares sold by those dealers.
CONTINGENT DEFERRED SALES CHARGE. Class B shares redeemed within four years
of purchase are subject to a contingent deferred sales charge according to the
following schedule. Shares purchased through reinvestment of dividends or
capital gain distributions are not subject to a contingent deferred sales
charge.
Year of Contingent
Redemption deferred
After Purchase sales charge
- ---------------------------------------------------
First............................ 4%
Second........................... 3%
Third............................ 2%
Fourth........................... 1%
Fifth............................ 0%
Sixth............................ 0%
Class B shares purchased prior to March 15, 1996, are 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. In view of that, they
will be redeemed in this order:
1) Shares from reinvested dividends or capital gain distributions
2) Shares from the earliest purchase
Here is an example:
AN INVESTOR PURCHASES 100 CLASS B SHARES AT $10 PER SHARE - FOR A TOTAL
COST OF $1,000. IN THE SECOND YEAR AFTER THE PURCHASE, THE NAV HAS RISEN TO $12
PER SHARE, AND THE INVESTOR HAS ACQUIRED 10 MORE SHARES THROUGH DIVIDEND
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 AT A
RATE OF 3%, WHICH IS THE SECOND-YEAR RATE SHOWN IN THE TABLE ON THE PRECEDING
PAGE. THE RESULTING SALES CHARGE WILL BE 3% X $400, WHICH WILL BE $12.
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
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 REIMBURSEMENT FOR THE CONTINGENT DEFERRED SALES
CHARGE, YOU MUST NOTIFY THE FUND WITHIN 120 DAYS WHENEVER YOU REINVEST CLASS B
SHARES.
CLASS B CONVERSION FEATURE. Class B shares that remain outstanding for six
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 the
continuing availability of a favorable ruling from the Internal Revenue Service
or an opinion of legal counsel that such conversion will not be subject to
federal income taxes. There cannot be any assurance that a ruling or opinion
will be available. If they should not be available, the conversion of Class 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.
DISTRIBUTION OF INCOME AND CAPITAL GAINS
Each Bond Fund pays dividends on income monthly. 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 income earned on
your investment. 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 income 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.
These reinvestments are subject to the minimum investment requirements for
systematic investment plans of the Composite fund being acquired and to its
availability for sale in your state of residence.
CASH PAYMENT OF INCOME AND REINVESTMENT OF ANY CAPITAL GAINS. With this
option, income dividends are deposited to your pre-authorized bank account or
paid by check. Any capital gain distributions are reinvested in additional
shares of the Fund.
CASH PAYMENT OF ALL DISTRIBUTIONS. Income dividends and capital gain
distributions are deposited to your pre-authorized bank account or paid by
check.
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.
If you've 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 paid by the Funds from interest, dividends, or net
short-term capital gains will be taxed as ordinary income. Distributions of net
long-term capital gains are taxable as long-term capital gains, regardless of
how long you have held your shares. If your shares are in an IRA or another
qualified retirement plan, you will not have to pay tax on the reinvested amount
until funds are withdrawn.
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.
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.
If your income is not subject to federal or state taxes, distributions
received from a Fund will not be taxable to you.
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 and
certified Social Security number or taxpayer identification number 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: stocks, a balance between stocks and bonds, and money market
instruments.
Contact your investment representative or the Fund offices to request a
prospectus for the Composite funds that interest you.
The exchange will be made at the prevailing NAV of the shares being
exchanged. No additional sales charge will be incurred when exchanging shares
purchased with a sales charge. Any contingent deferred sales charge will be
based on the schedule applicable to the original purchase.
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 which are subject to
the minimum investments allowed for systematic investment plans of the acquired
fund. 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.
HOW TO SELL SHARES
You may redeem shares at any time. The price paid per share will be the
next NAV 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 Fund 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 Fund
offices. Written requests may require a signature guarantee, as discussed below,
and the return of any outstanding stock 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. However, if you
recently purchased Fund shares by check, redemption proceeds may be delayed
until the Transfer Agent verifies collection of that check. Generally this
occurs within 14 days. Redemption proceeds will be sent by check or Automatic
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 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. Because of
this, an account may be closed after 90 days advance, written notice if the
total account value falls below $700 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 increase holdings to a minimum of $700
during the 90-day grace period.
IRAS AND OTHER TAX-SHELTERED RETIREMENT PLANS
Shares in the U.S. Government Securities and Income Funds are particularly
appropriate for many retirement plans, including IRAs. Although there are some
restrictions on the deductibility of contributions, earnings compound on a
tax-deferred basis until withdrawn.
From time to time, Murphey Favre 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 Group of 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 Bond 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 shares.
NON-STANDARDIZED TOTAL RETURNS. These "non-standardized total returns"
differ from average annual total returns for the following reasons: First, they
relate to non-standard periods; second, they represent cumulative (rather than
average) total return over a period longer than a year; and/or third, sales
charges are not deducted.
OTHER INFORMATION. Each Fund will include performance data for both Class A
and B shares in any advertisement or promotional material presenting performance
data 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.
OF COURSE, THE FUNDS' PERFORMANCE IS NOT FIXED NOR IS THE PRINCIPAL
GUARANTEED. ASSET VALUES MAY FLUCTUATE DAILY SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANNUALIZATION OF
RATES SHOULD NOT BE INTERPRETED AS AN INDICATION OF A FUNDS' ACTUAL PERFORMANCE
IN THE FUTURE.
REPORTS TO SHAREHOLDERS
Shareholders receive semiannual and annual reports. The financial
statements in the annual reports are audited by independent accountants.
Shareholders whose accounts are directly with the Funds also receive
statements at least quarterly. These reports show transactions in their
accounts, the total number of shares owned, and any dividends or distributions
paid. Shareholders also receive confirmation after each transaction except for
dividend reinvestments, systematic investment program purchases, and systematic
withdrawal plan redemptions.
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.
- ----------------------------------------
FOR FURTHER INFORMATION, PLEASE CONTACT:
FUND OFFICES
601 W. Main Avenue, Suite 801
Spokane, WA 99201-0613
Phone: (509) 353-3550
Toll free:(800) 543-8072
- ----------------------------------------
ADVISER
Composite Research & Management Co.
1201 Third Avenue, Suite 1220
Seattle, WA 98101-3015
DISTRIBUTOR
Murphey Favre, Inc.
1201 Third Avenue, Suite 780
Seattle, WA 98101-3015
CUSTODIAN
Investors Fiduciary Trust Company
127 W. 10th Street
Kansas City, MO 64105-1716
INDEPENDENT PUBLIC ACCOUNTANTS
LeMaster & Daniels, PLLC
601 W. Riverside Avenue, Suite 800
Spokane, WA 99201-0614
COUNSEL
Paine, Hamblen, Coffin, Brooke & Miller LLP
717 W. Sprague Avenue, Suite 1200
Spokane, WA 99204-0464
BOARD OF DIRECTORS
Leland J. Sahlin, Chairman
Wayne L. Attwood, M.D.
Kristianne Blake
Anne V. Farrell
Edwin J. McWilliams
Michael K. Murphy
William G. Papesh
Jay Rockey
Richard C. Yancey
<PAGE>
STATEMENT OF
ADDITIONAL
INFORMATION
MARCH 21, 1996
COMPOSITE BOND FUNDS
601 W. Main Avenue
Suite 801
Spokane, WA 99201-0613
Telephone: 509-353-3550
Toll free: 800-543-8072
COMPOSITE U.S. GOVERNMENT SECURITIES, INC. ("U.S. Government Securities") 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, INC. ("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, INC. ("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 carefully
selected portfolio of bonds issued by states, counties, cities and other
governmental bodies whose bonds generate income that is exempt from federal
income tax.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE FUNDS' PROSPECTUS DATED MARCH 21, 1996, WHICH CAN BE
OBTAINED WITHOUT CHARGE BY CONTACTING THE FUNDS AT THE ABOVE ADDRESS.
TABLE OF CONTENTS
Page Page
The Funds and Their Management 2-8 Investment Practices 18-23
Distribution Services 8-10 Investment Restrictions 23-24
How Shares Are Valued 10 Performance Information 25-28
How Shares Can Be Purchased 10-12 Brokerage Allocations &
Redemption of Shares 12-13 Portfolio Transactions 28-29
Exchange Privilege 13-14 General Information 29-30
Services Provided by the Funds 14-15 Financial Statements and
Tax-Sheltered Retirement Plans 15-16 Reports 30
Dividends, Capital Gain Distributions Appendix A 31
and Taxes 16-17 Appendix B 32-34
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 each Fund's Board of Directors.
Composite Research & Management Co. is Adviser for the eight investment
companies (currently 12 separate portfolios) in the "Composite Group," namely:
Composite Bond & Stock Fund, Inc.; Composite Equity Series, Inc.; Composite
Income Fund, Inc.; Composite Tax-Exempt Bond Fund, Inc.; Composite Cash
Management Company; Composite U.S. Government Securities, Inc.; Composite
Northwest Fund, Inc.; and Composite Deferred Series, Inc. 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") with 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 each Fund's
Board of Directors (including a majority of the directors who are not parties to
the Agreements) by votes cast in person at a meeting called for the purpose of
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, on average daily net assets in excess
of $250 million, the fee will decrease to .50%. For Tax-Exempt, the Adviser
receives a monthly fee for its services equal to .50% per annum computed on the
average daily net assets of the Fund; on average daily net assets in excess of
$250 million, the fee will decrease to .40%.
U.S. Government paid management fees of $1,156,052, $1,417,336, and $1,516,074,
for the years ended December 31, 1995, 1994, and 1993, respectively.
Income paid management fees of $598,377, $612,811, and $594,487, during the
years ended December 31, 1995, 1994, and 1993, respectively.
Tax-Exempt paid management fees of $1,120,096, $1,180,145, and $1,106,973,
during the years ended December 31, 1995, 1994, and 1993, 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
distribution fee) 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 1995, 1994, or 1993.
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; it will reimburse
the respective Fund for such excess. There were no reimbursements by the Adviser
under the expense limitations of either Fund during 1995, 1994, or 1993.
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 directors not employed by
the Adviser or its affiliates; custodian expenses; brokerage; taxes; auditing
and legal expenses; costs of issue, transfer, registration or redemption of
shares for sale; costs relating to disbursement of dividends, corporate
meetings, corporate reports, and the maintenance of its corporate existence.
Investment decisions for each Fund are made independently of those for other
funds in the Composite Group. 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 the Funds are 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 each Fund's Board of
Directors that these advantages, when combined with the personnel and facilities
of the Adviser's organization, outweigh possible disadvantages which may exist
from exposure to simultaneous transactions.
The Funds have adopted a code of ethics which is intended to prevent access
persons from conducting personal securities transactions which 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.
DIRECTORS AND OFFICERS OF EACH FUND
Each Fund's Board of Directors is elected by its shareholders. Interim vacancies
may be filled by the current directors so long as at least two-thirds were
previously elected by shareholders. The Boards have responsibility for the
overall management of the Funds, including general supervision and review of
their investment activities. The directors, in turn, elect the officers of the
Funds who are responsible for administering the day-to-day operations. All of
the Funds' directors and officers hold identical positions with each of the
funds in the Composite Group. Directors and officers of the Funds and their
business experience for the past five years are set forth below. Unless
otherwise noted, the address of each executive officer is 601 W. Main Avenue,
Suite 801, Spokane, Washington 99201-0613.
WAYNE L. ATTWOOD, MD
Director
3 E. 40th
Spokane, Washington 99203
Dr. Attwood is a retired doctor of internal medicine and gastroenterology in
Spokane, Washington.
KRISTIANNE BLAKE
Director
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
Director
425 Pike Street, Suite 510
Seattle, Washington 98101
Mrs. Farrell is president & CEO of The Seattle Foundation (a charitable
foundation). In addition, she serves as a director of Washington Mutual, Inc.
EDWIN J. McWILLIAMS
Director
1717 S. Upper Terrace Road
Spokane, Washington 99203
Mr. McWilliams is former president of both Fidelity Service Corporation (a
mortgage servicing subsidiary of Sterling Savings Association) and Fidelity
Mutual Savings Bank.
*MICHAEL K. MURPHY
Director
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 Director
Mr. Papesh is president and a director of the Adviser and Transfer Agent, , and
a director and executive vice president of the Distributor.
JAY ROCKEY
Director
2121 - Fifth Avenue
Seattle, Washington 98121
Mr. Rockey is Chairman and CEO of The Rockey Company (a regional public
relations firm).
*LELAND J. SAHLIN
Chairman and Director
Mr. Sahlin is a senior vice president of the Adviser, and served as president of
each of the Funds from 1972 to 1989; of the Distributor from 1972 to 1987; and
of the Adviser from 1972 to 1988.
RICHARD C. YANCEY
Director
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 directors 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
Fund, its Adviser, or 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
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.
CASSIE L. FOWLER, CPA
Assistant Secretary
Ms. Fowler is an employee of the Transfer Agent.
KERRY K. KILLINGER
Executive Vice President
Suite 1501
1201 Third Avenue
Seattle, Washington 98101
Mr. Killinger is president, chairman of the board, and chief executive officer
of Washington Mutual, Inc. and a director of the Adviser, Distributor, and
Transfer Agent.
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
Secretary
Mr. West is a vice president of the Transfer Agent.
The Funds paid no remuneration to any of its officers, including Mr. Papesh and
Mr. Sahlin, during the year ended December 31, 1995. The Funds and other Funds
within the Composite Group paid directors' fees, during the year ended December
31, 1995, in the amounts indicated below.
<TABLE>
<CAPTION>
U.S. GOVERNMENT TOTAL
DIRECTOR SECURITIES INCOME TAX-EXEMPT COMPLEX (1)
- --------- ---------- ------ ---------- -------------
<S> <C> <C> <C> <C>
Wayne L. Attwood, MD $1,250 $1,250 $1,250 $15,000
Kristianne Blake $ 775 $ 775 $ 775 $ 9,300
Edwin J. McWilliams $1,208 $1,208 $1,208 $14,500
Jay Rockey (2) $1,177 $1,177 $1,177 $14,125
Richard C. Yancey $1,208 $1,208 $1,208 $15,000
<FN>
(1) Each of the directors serve in the same capacity with each Fund within the
Composite Group (eight companies) comprising 12 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 and Distributor, during the 1995 fiscal year.
</FN>
</TABLE>
As of February 15, 1996, officers, directors and their immediate families as a
group owned of record and beneficially less than 1% of the outstanding shares of
each Fund. On that date no individual person owned of record or beneficially
more than 5% of the outstanding voting securities in any of the three funds.
Wayne L. Attwood, M.D., Kristianne Blake, *Anne V. Farrell and *Michael K.
Murphy serve as members of the Boards' 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 Directors
of each Fund including, but not limited to, dividend declaration and portfolio
pricing matters. Members are *Anne V. Farrell, *Michael K. Murphy, and Richard
C. Yancey.
Responsibilities of the Boards' nominating committee include preparing for and
recommending replacements for any vacancies in directors' positions and initial
review of policy issues regarding the size, composition, and compensation of the
Boards. Members of the nominating committee are Kristianne Blake, Edwin J.
McWilliams and Jay Rockey.
The Boards' 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, Edwin J. McWilliams, Jay Rockey, and Richard
C. Yancey.
*These directors are "interested persons" of the Fund as that term is defined in
the Investment Company Act of 1940, because they are either affiliated persons
of the Funds, their Adviser, or Distributor.
DISTRIBUTION SERVICES
12b-1 PLAN
As discussed in the prospectus under "The Cost of Good Management," the
directors of each Fund have approved a plan for both classes of shares (the
"Plans") 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 each Fund's Board of Directors and
approved by shareholders.
Under each Fund's Plan, the Fund may reimburse Murphey Favre, Inc. (the
"Distributor"), for Class A distribution expenses, including the cost of
printing and distributing prospectuses, statements of additional information and
other promotional and sales literature, compensation to registered
representatives 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 distribution process but excluding general and administrative
expenses.
The maximum annual reimbursement allowed by the Plans and authorized by
directors for such Class A distribution expenses may not exceed .25% of the
average daily net assets attributable to Class A shares. Funds in the Composite
Group may benefit from expenditures made for distribution activities for another
Composite fund. U.S. Government Securities, Income, and Tax-Exempt reimbursed
the Distributor in the amounts of $343,633, $168,531, and $432,854,
respectively, for distribution expenses incurred on behalf of Class A shares
during the year ended December 31, 1995. Of this amount, $173,521, $86,037, and
$222,838 was paid on behalf of U.S. Government Securities, Income, and
Tax-Exempt, respectively, to selected dealers and registered representatives of
the Distributor for their shareholder servicing activities, and $170,112,
$82,494, and $210,016, respectively, was paid for other distribution related
expenses.
During the fiscal years 1994 and 1993, U.S. Government Securities reimbursed the
Distributor $399,592 and $408,941, respectively; Income reimbursed the
Distributor $189,136 and $177,417, respectively; and Tax-Exempt reimbursed the
Distributor $449,602 and $408,941, respectively, for distribution expenses
related to Class A shares.
Under the Plans, 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 shares and a service fee at an annual rate of .25% of such assets.
During the fiscal year ended December 31, 1995, and the period from March 30,
1994 (commencement of public offering), to December 31, 1994, U.S. Government
compensated the Distributor in the amounts of $15,425 and $5,948, respectively;
Income compensated the Distributor in the amounts of $32,833 and $10,698,
respectively; and Tax-Exempt compensated the Distributor $18,879 and $6,727,
respectively, for the sale of Class B shares.
Dealers receive an amount equal to an annual rate of .25% of total net assets of
all accounts, of either class, serviced by their representatives.
Under the Plans, each Fund will report at least quarterly to its Board of
Directors 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 independent directors of each Fund will be committed to the
discretion of the independent directors then in office.
Each Plan has been approved unanimously by the directors of each Fund including
a majority of the independent directors who have no direct or indirect interest
in the Plan, and by the Distributor. Each Plan will remain in effect for one
year, may be terminated at any time by a vote of a majority of the disinterested
directors 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 independent directors. In approving the Plan and
submitting it to shareholders, directors of the Fund determined, in the exercise
of their business judgment and in light of their fiduciary duties as directors,
that there is a reasonable likelihood that each Plan will benefit its respective
Fund and its shareholders. All material amendments to each Plan must be approved
by a vote of each Fund's Board of Directors including independent directors and
by shareholders. The Plan will be renewed only if directors make a similar
determination for each subsequent year of the Plan.
DISTRIBUTOR
The Distributor purchases shares of each Fund's capital stock in a continuous
offering to fill orders placed with it by investors and investment dealers. It
purchases and resells shares at net asset value in accordance with terms of the
Distribution Contracts with each Fund. The Distributor acts in a similar
capacity for all other funds in the Composite Group.
During the 1995, 1994, and 1993 fiscal years, the Distributor received $150,970,
$336,055, and $2,546,166, respectively, for the sale of U.S. Government
Securities Class A shares; $209,703, $340,052, and $676,945, respectively, for
the sale of Income Class A shares; and $341,454, $552,555, and $1,986,918,
respectively, for the sale of Tax-Exempt Class A shares.
The Distributor has not received any earnings or profits from the redemption of
Class A shares. During the year ended December 31, 1995, the Distributor
received contingent deferred sales charge payments of $1,682, $5,047, and $1,893
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.
The Funds bear the cost of registering their shares with federal and state
securities commissions and printing copies of prospectuses and statements of
additional information used for its shareholders. The Distributor pays for
information to send to potential shareholders but may be reimbursed under the
Distribution Plan for such expenses applicable to Class A shares.
TRANSFER AGENT
Murphey Favre Securities Services, Inc. (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 1995, 1994, and 1993 fiscal years, U.S. Government Securities paid
$165,595, $175,549, and $183,339, respectively, for these services; Income paid
$114,938, $104,897, and $103,007, respectively, and Tax-Exempt paid $107,114,
$102,778, and $94,920, 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 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 stated on the basis of valuations provided by an
independent pricing service, approved by the Boards of Directors, which uses
information with respect to transactions, quotations from dealers, market
transactions in comparable securities, and various relationships between
securities in determining value. Investment securities with less than 60 days to
maturity when purchased are valued at amortized cost which approximates market
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 Boards of Directors.
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 continuously
offered 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 purchase order in Spokane, 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. Class B shares are sold without an
initial sales charge but are subject to higher ongoing distribution expenses and
may be subject to a contingent deferred sales charge if redeemed within four
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 contingent deferred sales charges 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% in year six.
Each Fund receives the entire net asset value of all of its shares sold. The
Distributor or designated dealer retains the appropriate portion of the initial
sales charge. The Distributor pays sales commissions to dealers from its own
resources for Class B sales and retains contingent deferred sales charge
payments. (See Appendix A for a specimen price-make-up sheet.)
There is no initial sales charge on Class A purchases of $1 million or more,
although a contingent deferred sales charge of up to 1% will be deducted if such
shares are redeemed within 18 months of purchase. The Distributor will pay
authorized dealers commissions of 1% on such purchases. The Class A contingent
deferred sales charge is calculated by applying 1% to the lesser of the NAV of
redeemed shares at the time of purchase or their NAV at the time of redemption.
Shares purchased through the reinvestment of dividends and capital gains are not
subject to a contingent deferred sales charge. Contingent Deferred Sales Charge
waivers are explained in the following section titled "Redemption of Shares."
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
Group fund at net asset value provided that reinvestment is effected within 120
days of the redemption. Contingent deferred sales charges assessed may be
reimbursed as they relate to the reinvestment of redemption proceeds 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.
The minimum initial investment for each Fund is $1,000 ($500 in IRA accounts),
and additional investments should be at least $50 (unless the transaction is via
systematic investment program where the initial investments and additional
monthly investments must be at least $50). Investments made by an agent or
fiduciary (such as a bank trust department, investment adviser, broker, or
employee benefit or retirement plan), pursuant to a periodic investment plan may
have the minimum purchase requirements on initial and subsequent investments
waived.
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, 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 fund,
or to shareholders in connection with reinvestment of income dividends and
capital gain distributions. Qualified employee benefit plans which have more
than 10 participants or which have more than $25,000 invested in those Composite
funds offered with an initial or contingent deferred sales charge are also
entitled to buy without a sales charge. Individual retirement accounts such as
IRAs or SEP IRAs are not eligible for this privilege. In addition, shareholders
of mutual funds (other than money market funds), closed-end funds or unit
investment trusts 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 or an individual, his spouse and 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 Composite Cash
Management Company Class A shares, unless exchanged from another fund). The
sales charge reduction is determined by adding the value of all Composite Group
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 their
Class A shares (at maximum offering price) and Class B shares (at net asset
value) held in the Composite Group (excluding Composite Cash Management Company,
unless exchanged from another fund) that were held on the effective date of the
Letter of Intent as an "accumulation credit" toward completion of the Letter.
The Letter of Intent, which imposes no obligation to purchase or sell additional
shares, provides that 5% of the amount of the intended purchase will be held in
escrow (in the form of shares) pending completion of the Letter.
CERTIFICATES
Ordinarily certificates for shares purchased will not be issued unless requested
by the investor. There is no charge for such issuance.
REDEMPTION OF SHARES
When the Fund or Transfer Agent receives: 1) a written request in proper form,
for redemption of shares, and 2) the return of any issued certificates for
shares being redeemed, a check for payment of shares will normally be sent the
next business day, and no later than seven business days, except as indicated
below. If the account is pre-authorized for telephone transfer, payment may be
made to a designated bank account or broker, providing such accounts are
identically registered. Telephone redemptions may also be directed to the
shareholder's address of record. No wire fee will be charged for transfers to
Washington Mutual Bank or Seafirst Bank. There is a $10.00 transmittal wire fee
(which is subject to change) to wire 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, and may take
up to 14 days.
As discussed in the prospectus, the Class B contingent deferred sales charge may
be waived under certain circumstances. The Class A contingent deferred sales
charge may be waived under the same conditions. 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 Internal Revenue Code of 1986, as amended ("IRC") section 403 (b) (7), 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 sum, 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 fund in the Composite Group. A brief discussion of such privileges is
in the prospectus under "Exchanges for Other 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 is treated as a capital gain or loss 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. The 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 qualified 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 fund in the Composite Group of Funds, except Composite Deferred
Series, Inc. These currently include:
Composite Group of Funds
I. Composite Bond and 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: primary objective is to provide a
high level of current income, consistent with safety and liquidity of 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 Cash Management Company, Money Market Portfolio: invests in high
grades of money market instruments for maximum current income, while
preserving capital and allowing liquidity.
VIII.Composite Cash Management Company, Tax-Exempt Portfolio: invests in
high-quality, short-term municipal obligations for maximum current income
exempt from federal income tax while preserving capital and allowing
liquidity.
SERVICES PROVIDED BY THE FUND
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 shareholders who establish a Systematic Withdrawal Plan may redeem 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 applicable Fund 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 regulatory penalties for
excess contributions, premature distributions, excess 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 Funds' offices.
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, SERVICE CHARGES AND TAX ASPECTS
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.
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.
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 (the
"Code"). Each Fund so qualified during the 1995 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
distributes to its shareholders 90% or more of its gross income from dividends,
interest and gains from the sale or other disposition of securities, and in
which it derives less than 30% of its gross income from gains (without deduction
for losses) from the sale or other disposition of securities held for less than
three months. In addition, if each Fund distributes 98% of its ordinary income
and capital gain net income for each calendar year, it will not be subject to
excise tax on undistributed income. 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. Shareholders will usually pay federal income taxes on
distributions designated as net realized capital gains, whether or not received
in cash or shares of the Fund, and regardless of how long the shares have been
owned by the shareholders.
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.
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 such. This allowance is
based on the Fund holding 50% of the value of its total assets in municipal
obligations at each quarter end of its fiscal year. Interest earned by the Fund
on municipal bonds is not includable by the holders of shares 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 United States government, its agencies
or instrumentalities) and net short-term capital gains realized by the Fund, if
any, will be taxable to holders of shares as ordinary income. Long-term capital
gain distributions will normally be taxed as long-term capital gains. 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. 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 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.
U.S. GOVERNMENT SECURITIES 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 Funds' net investment income is normally derived from
interest income, the dividends are generally not eligible for the dividends
received deduction for corporate shareholders owning either of these Funds.
For federal tax purposes, carryovers of realized loss on investments of U.S.
Government Securities 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. If not applied, the carryovers will
expire in 2003.
INVESTMENT PRACTICES
ALL FUNDS
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 percent of the total assets of
the Fund.
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.
U.S. GOVERNMENT SECURITIES
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.
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 Corporation (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.
The Fund's average portfolio quality during 1995 is presented below:
Percentage of Average
S&P Rating Total Assets
AAA (or US Treasury) 38%
AA 5
A 14
BBB 27
BB 13
Not Rated 3
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 operating 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.
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.
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.
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 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
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:
o 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;
o acquire more than 10%* of the voting securities of any one company;
o invest in any company for the purpose of management or exercising control;
o invest in real estate or commodities;
o invest in oil, gas or other mineral leases;
o invest in securities restricted under federal securities laws;
o invest more than 20%* of its assets in forward commitments;
o invest more than 25%* of its assets in any single industry;
o invest more than 15%* of its net assets in illiquid securities;
o buy foreign securities not payable in U.S. dollars;
o 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;
o act as underwriter of securities issued by others;
o borrow money for investment purposes (it may borrow up to 5% of its total
assets for emergency, non-investment purposes);
o lend money (except for the execution of repurchase agreements);
o buy or sell put or call options;
o issue senior securities.
U.S. Government Securities may NOT:
o 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:
o buy or hold securities which directors or officers of the Fund or its
Adviser hold more than .50% of the outstanding securities.
U.S. Government Securities and Income may NOT:
o invest in other investment companies (except as part of a merger).
U.S. Government Securities and Tax-Exempt may NOT:
o 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.
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%
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.
U.S. GOVERNMENT SECURITIES
The Fund's yield for the 30 days ended December 31, 1995, was calculated based
on the following formula:
Class A Class B
--------- ----------
Yield = 2{((a-b)/cd + 1)6 -1} 5.49% 4.87%
Where:
a = interest income earned during the period $979,118 $ 11,691
b = expenses accrued during the period $138,675 $ 3,119
c = daily average number of shares eligible to receive
dividends during the period 16,468,493 196,667
d = maximum offering price at 12/31/95 $ 11.29 $ 10.84
INCOME
The Fund's yield for the 30 days ended December 31, 1995, was calculated based
on the following formula:
Class A Class B
----------- ----------
Yield = 2{((a-b)/cd + 1)6 -1} 5.69% 5.08 %
Where:
a = interest income earned during the period $553,084 $24,880
b = expenses accrued during the period $ 77,805 $ 6,518
c = daily average number of shares eligible to receive
dividends during the period 10,318,339 463,546
d = maximum offering price at 12/31/95 $ 9.83 $ 9.46
TAX-EXEMPT
The Fund's yield for the 30 days ended December 31, 1995, was calculated based
on the following formula:
Class A Class B
----------- ----------
Yield = 2{((a-b)/cd + 1)6 -1} 4.15% 3.52 %
Where:
a = interest income earned during the period $966,096 $ 10,920
b = expenses accrued during the period $146,842 $ 3,362
c = daily average number of shares eligible to receive
dividends during the period 28,620,614 323,510
d = maximum offering price at 12/31/95 $ 8.35 $ 8.02
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, 1995, would result in a
6.87% taxable-equivalent yield at the 39.6% tax rate according to the following
calculation: 4.15% divided by (1.00 - .396) = 6.87%. The Class B
taxable-equivalent yield at the 39.6% tax rate for the 30 days ended December
31, 1995, was 5.83%.
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 U.S. Government
Securities Class A and Class B shares for the month ended December 31, 1995,
were 5.52% and 4.92%, respectively. The distribution rates for Income Class A
and Class B shares for the month ended December 31, 1995, were 6.02% and 5.41%,
respectively. The distribution rates for Tax-Exempt Class A and Class B shares
for the month ended December 31, 1995, were 4.58% and 3.98%, 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
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. Total
returns will be quoted for each class of shares in any advertisement presenting
the total return of either class. The following total returns reflect the
maximum 4% initial sales charge for Class A shares and the contingent deferred
sales charge appropriate to the period for Class B 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.
Periods Ended December 31, 1995
1 Year 5 Years 10 Years
Average Annual Total Return
U.S. Government Securities, Class A 14.69% 7.50% 7.97%
U.S. Government Securities, Class B 14.48% 7.36%*
Income, Class A 16.65% 9.16% 8.39%
Income, Class B 16.70% 8.65%*
Tax-Exempt, Class A 13.48% 7.70% 8.11%
Tax-Exempt, Class B 13.30% 6.98%*
Cumulative Total Return
U.S. Government Securities, Class A 14.69% 43.54% 115.20%
U.S. Government Securities, Class B 14.48% 13.28%*
Income, Class A 16.65% 54.97% 123.89%
Income, Class B 16.70% 15.69%*
Tax-Exempt, Class A 13.48% 44.92% 118.14%
Tax-Exempt, Class B 13.30% 12.58%
* 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
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 to 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 Funds.
In executing portfolio transactions and selecting brokers or 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 various 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, 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
Fund; 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 rate of turnover, however, will not be a limiting factor
when the Fund deems it desirable to sell or purchase securities, and the
turnover rate in particular years may, therefore, exceed 100%. Market
volatility, which is unpredictable, remains the determining factor. For 1995 and
1994, the portfolio turnover rates were 8% and 34% for U.S. Government
Securities, 43% and 26% for Income, and 8% and 12% for Tax-Exempt.
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
ORGANIZATION AND AUTHORIZED CAPITAL
Composite U.S. Government Securities, Inc., was incorporated under the laws of
the state of Washington on March 5, 1982, under a certificate of incorporation
granting perpetual existence. The Fund has an authorized capitalization of 1
billion shares of capital stock, $.0001 par value.
Composite Income Fund, Inc. was incorporated under the laws of Washington on
October 22, 1975, under a certificate of incorporation granting perpetual
existence. The Fund has an authorized capitalization of 50,000,000 shares of
capital stock, $0.01 par value.
Composite Tax-Exempt Bond Fund, Inc. was incorporated under the laws of the
state of Washington on September 16, 1976, under a certificate of incorporation
granting perpetual existence. The Fund has an authorized capitalization of
500,000,000 shares of capital stock, $.0001 par value.
Each Fund offers two classes of shares. Each class of shares represents
interests in the assets of the Fund. The shares do not have preemptive rights,
and none of the shares have any preference to conversion, exchange, dividends,
retirements, liquidation, redemption or any other feature. Class B shares
convert to Class A shares six years after purchase, exchanges are restricted to
shares of the same class, and each class bears different expenses related to
their distribution. Shares have equal voting rights except that each class has
exclusive voting rights with respect to provisions of each Fund's Distribution
Plan that pertains to a particular class.
VOTING PRIVILEGES
The Funds are not required to hold annual meetings. When meetings are called, a
shareholder may exercise cumulative voting privileges under Washington state
law. Using this privilege, shareholders are entitled to one vote per share for
each director candidate. The total number of votes for directors to which a
shareholder is entitled may be accumulated and cast for each candidate in such
proportion that the shareholder may designate.
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, 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.
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 Funds' annual report to shareholders
dated December 31, 1995, which is incorporated by reference into this statement
of additional information, may be obtained without charge by contacting the
Funds' offices.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX A
SPECIMEN PRICE MAKE-UP SHEET
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
COMPOSITE INCOME FUND, INC.
COMPOSITE TAX-EXEMPT BOND FUND, INC.
At December 31, 1995
U.S. GOVERNMENT
SECURITIES INCOME TAX-EXEMPT
--------------- ------------ ------------
<S> <C> <C> <C>
Assets $180,189,303 $102,352,339 $233,219,795
Liabilities 673,475 365,694 483,033
------------ ------------ ------------
Net Assets $179,515,828 $101,986,645 $232,736,762
============ ============ ============
Class A Shares
- --------------
Net Assets $177,309,898 $ 97,534,484 $230,055,028
Shares Outstanding 16,351,866 10,329,116 28,701,818
------------ ------------ ------------
Net Assets Per Share $10.84 $ 9.44 $ 8.02
====== ====== ======
Maximum Offering Price
(Net Assets Per Share ./. 96/100) $11.29 $ 9.83 $ 8.35
====== ====== ======
Class B Shares
- --------------
Net Assets $ 2,205,930 $ 4,452,161 $ 2,681,734
Shares Outstanding 203,455 470,873 334,540
------------ ------------ ------------
Net Assets and
Offering Price Per Share $10.84 $ 9.46 $ 8.02
====== ====== ======
</TABLE>
<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.
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 Corporation (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 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.
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.
<PAGE>
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements. The annual report to shareholders dated December
31, 1995, was filed with the Securities and Exchange Commission via EDGAR on
February 12, 1996. The annual report is incorporated by reference in both Parts
B and C.
Filing Date
(b) Exhibits Incorporated With Filed
---------------- ----------------- -----
(1a) Articles of Incorporation Form N-8B-1 10-28-76
(1b) Amendment to Articles of
Incorporation Form N-1A 3-31-94
(2) Bylaws Form N-1A 3-15-96
(3) Voting Trust Agreement INAP
(4) Specimen Capital Stock
Certificate Form N-8B-1 10-28-76
(5) Investment Advisory Contract Form N-1A 3-31-94
(6a) Distribution Contract Form N-1A 5-1-95
(6b) Specimen Selling Agreement Form N-1A 1-31-94
(7) Bonus, profit sharing, pension
or other similar contracts
for benefit of directors or
officers of the Registrant INAP
(8) Custodial Agreement Form N-1A 1-31-94
(9) Shareholders Service Contract Notice of Annual
Meeting of
Shareholders 1-23-85
(10) Opinion & Consent of Counsel Form N-1A 3-15-96
(11) Accountants' Consent Form N-1A 3-15-96
(12) All financial statements
omitted from Item 23. Annual Report 2-12-96
(13) Agreements or understandings
made in consideration
for providing initial
capital. Form N1 3-23-82
(14) Retirement Plan and Forms Form N-1A for
Composite Fund
File #2-11380 1-22-85
(15) 12b-1 Plan Notice of Annual 1-28-83
Meeting of
Shareholders
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 is affiliated with Murphey Favre, Inc. and
Murphey Favre Securities Services, Inc. through common ownership and management.
Murphey Favre serves as principal underwriter and distributor for the
Registrant. Murphey Favre Securities Services serves as transfer agent for the
Registrant. Composite Research, Murphey Favre, and Murphey Favre Securities
Services serve in their same capacities for the seven other investment companies
within the Composite Group of Funds, namely: Composite Income Fund, Inc.;
Composite U.S. Government Securities, Inc.; Composite Cash Management Company;
Composite Northwest Fund, Inc.; Composite Bond & Stock Fund, Inc.; Composite
Equity Series, Inc.; and Composite Deferred Series, Inc. Composite Research &
Management Company, Murphey Favre, and Murphey Favre Securities Services are all
wholly-owned subsidiaries of Washington Mutual, Inc. All companies' names are
incorporated in the State of Washington.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
As of February 29, 1996, there were 5,319 Class A shareholders and 142 Class B
shareholders.
Item 27. INDEMNIFICATION.
Registrant shall have the power to indemnify any director, officer or former
director or officer of the Corporation, or any person who may have served at the
Corporation's request as a director or officer of another corporation, against
expenses actually and reasonably incurred by such person in connection with the
defense of any action, suit or proceeding, civil or criminal, in which he
becomes a party by reason of being or having been such director or officer, to
the full extent permitted by the laws of the State of Washington, as such laws
at any time may be in force and effect, provided however, that this
indemnification provision shall not protect, or purport to protect, any director
or officer of the corporation against any liability to the corporation or to the
shareholders to which he otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of this office.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Registrant's Investment Adviser is Composite Research & Management Co., a
wholly-owned subsidiary of Washington Mutual, Inc., which is a Washington
corporation, organized in 1889. The Adviser serves in that capacity for seven
(7) other investment companies with the Composite Group of Funds identified in
Item 25.
Business and other connections of the Investment Adviser were most recently
filed on Form ADV, Securities and Exchange Commission File No. 801-4855, which
was mailed on February 23, 1996, and is incorporated herein by reference.
Item 29. PRINCIPAL UNDERWRITERS.
The principal underwriter for the Registrant is Murphey Favre which also serves
in the same capacity for seven (7) other investement companies identified in
Item 25.
Business and other connections of the underwriter were most recently filed on
Form BD, CRD 599, with the National Association of Securities Dealers on
February 20, 1996 and are incorporated herein by reference.
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 801,
Spokane, Washington 99201. The Registrant's custodian activities are performed
at Investors Fiduciary Trust Company (IFTC), 127 West 10th, Kansas City, MO
64105.
Item 31. MANAGEMENT SERVICES.
Registrant is not a party to any management related service contract, other than
as set forth in the Prospectus.
Item 32C. UNDERTAKINGS.
The management discussion of fund performance required by Item 5A is contained
in the 12/31/95 annual report to shareholders which will be provided to each
person to whom a prospectus is delivered, upon request and without charge.
<PAGE>
SIGNATURES
FORM N-1A
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Spokane, and State of Washington
on the 28 day of November, 1995.
COMPOSITE TAX-EXEMPT BOND FUND, INC.
------------------------------------
Registrant
[SEAL]
By:/s/ William G. Papesh
------------------------
ATTEST: William G. Papesh
/s/ John T. West President
- -----------------------------
John T. West, CPA /s/ Monte D. Calvin
Secretary ------------------------
Monte D. Calvin, CPA
Principal Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities on
the date indicated:
/s/ Wayne L. Attwood November 28, 1995
- -------------------------------------------
Wayne L. Attwood, Director (Date)
/s/ Kristianne Blake November 28, 1995
- -------------------------------------------
Kristianne Blake, Director (Date)
/s/ Anne V. Farrell November 28, 1995
- -------------------------------------------
Anne V. Farrell, Director (Date)
/s/ Edwin J. McWilliams November 28, 1995
- -------------------------------------------
Edwin J. McWilliams, Director (Date)
/s/ Michael K. Murphy November 28, 1995
- -------------------------------------------
Michael K. Murphy, Director (Date)
/s/ William G. Papesh Novewmber 28, 1995
- -------------------------------------------
William G. Papesh, Director (Date)
/s/ Jay Rockey November 28, 1995
- -------------------------------------------
Jay Rockey, Director (Date)
/s/ Leland J. Sahlin November 28, 1995
- -------------------------------------------
Leland J. Sahlin, Director (Date)
/s/ Richard C. Yancey November 28, 1995
- -------------------------------------------
Richard C. Yancey, Director (Date)
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT INDEX
- --------------------------------------------------------------------------------
EX-99.B2 BYLAWS
EX-99.B6 DISTRIBUTION CONTRACT
EX-99.B10 OPINION & CONSENT OF COUNSEL
EX-99.B11 ACCOUNTANT'S CONSENT
EX-27.CLASS A FINANCIAL DATA SCHEDULE - CLASS A
EX-27.CLASS B FINANCIAL DATA SCHEDULE - CLASS B
- --------------------------------------------------------------------------------
EXHIBIT 2
As Revised 1/23/96
BYLAWS
OF
COMPOSITE TAX-EXEMPT BOND FUND, INC.
ARTICLE I.
STOCKHOLDERS' MEETINGS
SECTION 1. ANNUAL MEETING: The corporation shall not be required to hold an
annual meeting of the shareholders unless an election of Directors is required
by the Investment Company Act of 1940. This provision shall not prohibit the
President or the Board of Directors from calling an annual meeting of
stockholders for any purpose. (Amended 3/22/94)
SECTION 2. SPECIAL MEETINGS: Special meetings of the shareholders may be
called at any time by the President or by the Board of Directors. At any time,
upon receipt of written request of shareholders holding in the aggregate
one-tenth (1/10) of the voting power of all shareholders, it shall be the duty
of the Secretary or other person duly authorized, to call a special meeting of
shareholders to be held at the registered office at such time as the Secretary
or other duly authorized person may fix; the notice of such meeting shall comply
with the requirements set forth in Section 4 of this Article and shall further
state the purpose or purposes for which the meeting is called. If the Secretary
or other duly authorized person shall neglect or refuse to issue such call, the
shareholders making the request may do so.
SECTION 3. PLACE OF MEETING: The annual meeting of shareholders or any
special meeting of shareholders shall be held at the principal office of the
corporation or at such other place either within or without the State of
Washington as determined by the Board of Directors.
SECTION 4. NOTICE OF MEETINGS: Except as otherwise required by statute,
notice of the time and place of each meeting of shareholders, whether annual or
special, shall be given to each shareholder of record entitled to vote at such
meeting not less than ten (10) nor more than sixty (60) days before the date of
such meeting, by delivering a written or printed notice thereof to him
personally, or by mailing such notice by certified mail, with return receipt
requested, in a postage-prepaid envelope addressed to him at his address as it
appears on the stock transfer books of the corporation.
SECTION 5. WAIVERS: Notice of any meeting of shareholders shall not be
required as to any shareholder who shall attend such meeting in person or by
proxy; and if any shareholder shall, in person or by attorney duly authorized,
waive notice of any meeting, whether before or after such meeting, notice
thereof shall not be required as to him.
SECTION 6. QUORUM: Unless otherwise provided in the Articles of
Incorporation, the presence in person or by proxy duly authorized, of the
holders of the majority of the shares entitled to vote shall constitute a quorum
for the transaction of business; if a quorum be present, the affirmative vote of
the majority of the shares represented at such meeting and entitled to vote on
the subject matter shall be the act of the shareholders, unless the vote of a
greater number is required by law or by the Articles of Incorporation, or other
sections of these Bylaws.
SECTION 7. VOTING: Unless otherwise provided in the Articles of
Incorporation, every shareholder of record shall be entitled to one vote per
share on each matter submitted to a vote at any meeting of shareholders. No
proxy shall be valid after eleven (11) months from the date of its execution,
unless such proxy provides for a longer period. The Board of Directors may fix
in advance a record date for the determination of shareholders entitled to vote
at such meeting, or for any other purpose. No share of stock shall be voted at
any meeting which shall have been transferred on the books of the corporation
subsequent to the record date fixed herein and prior to the date of the meeting.
When a determination of the shareholders entitled to vote at any meeting of
shareholders has been made, such determination shall apply to any adjournment
thereof.
ARTICLE II.
BOARD OF DIRECTORS
SECTION 1. NUMBER AND TERM OF OFFICE: The business of this corporation
shall be managed by a Board of Directors which shall be composed of not less
than three nor more than fifteen directors, the specific number to be set by
Resolution of the Board or the shareholders. The numbers of directors may be
changed from time to time by amendment of these Bylaws, but no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director. Unless a director dies, resigns, or is removed, his or her
term of office shall continue until his or her successor is elected and
qualified, or until there is a decrease in the authorized number of directors.
Directors need not be stockholders of the corporation or residents of the State
of Washington and need not meet any other qualifications. (Amended 3/22/94)
SECTION 2. PLACE OF MEETING: Meetings of the Board of Directors may be held
either within or without the State of Washington.
SECTION 3. STATED MEETINGS: The Board of Directors may, by resolution
adopted by the affirmative vote of a majority of the whole board, from time to
time, appoint the time and place for holding stated meetings of the Board if it
be deemed advisable and such stated meetings shall thereupon be held at the time
and place so appointed, without the giving of any special notice with regard
thereto. In case the day appointed for a stated meeting shall fall upon a legal
holiday, such meeting shall be held on the next following day not a legal
holiday, at the regularly appointed hour. Except as otherwise provided in the
Bylaws, any type of business may be transacted at any stated meeting.
SECTION 4. SPECIAL MEETINGS: Special meetings of the Board of Directors
shall be held whenever called by the President, or by a majority of the
directors. Notice of any such meeting or any adjournment thereof shall be mailed
to each director, addressed to him at his residence or usual place of business,
not later than five (5) days before the day on which the meeting is to be held,
or shall be sent to him at such place by telegraph, or delivered personally or
by telephone, not later than the day before such day of meeting. Notice of any
meeting of the Board need not, however, be given to any director if waived by
him in writing or if he shall be present at the meeting; and any meeting of the
Board of Directors shall be a legal meeting without any notice thereof having
been given if all the members shall be present thereat except as otherwise
provided in the Bylaws or as may be indicated in the notice thereof, and any and
all business may be transacted at any special meeting.
SECTION 5. QUORUM AND MANNER OF ACTING: A majority of the number of
directors fixed by resolution of the directors shall constitute a quorum for the
transaction of business. The act of the majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors.
In the absence of a quorum, a majority of the Directors present may adjourn any
meeting, from time to time, until a quorum is present.
SECTION 6. RESIGNATIONS: Any director of the corporation may resign at any
time either by oral tender of resignation at any meeting of the Board or by
giving written notice thereof to the Secretary. Such resignation shall take
effect at the time specified therefor; and unless otherwise specified with
respect thereto, the acceptance of such resignation shall not be necessary to
make it effective.
SECTION 7. FILING OF VACANCIES: In the case of any vacancy or vacancies in
the Board of Directors, such vacancy or vacancies shall be filled by the
remaining directors.
SECTION 8. SALARIES AND BONUSES: The Board of Directors shall have power to
fix salaries of officers, and the Board shall further have power to determine
and authorize payment of bonuses from time to time as may be best determined by
the financial condition of the corporation.
SECTION 9. MEETINGS: Meetings of the Board of Directors or of any
committees thereof may be held by conference telephone or similar communication
equipment so long as all participants can hear each other and participate in
discussion without restriction.
SECTION 10. COMMITTEE DESIGNATION: In addition to the committees designated
in this section, the Board of Directors, by resolution adopted by a majority of
the members, may designate from among its members one or more other committees,
each of which, to the extent provided in such resolution, shall have and may
exercise all the authority of the Board of Directors to the extent permitted by
applicable law. Designated Board of Directors' committees and responsibilities
are:
1) AUDIT COMMITTEE - consisting of three (or more) disinterested Directors:
This committee is responsible for overseeing the financial reporting
process and assuring the objectivity of the independent audit. The
committee will hold periodic meetings with the independent auditors and
make recommendations to the Directors about the adequacy and accuracy of
systems, acceptance of audits and suggestions on internal control
improvements.
2) NOMINATING COMMITTEE - consisting of three (or more) Directors: This
committee will nominate or recommend a slate of Directors each year and
make preparations and recommendations for replacements. Responsibilities
will also include the initial review of policy issues regarding Board
compensation, size of the Board, and composition of the Board.
3) INVESTMENT COMMITTEE - consisting of three (or more) Directors: This
committee will perform interim functions for the Board including, but not
limited to, dividend declaration, investment policy preparation and
recommendations, and portfolio pricing matters. The committee will have the
authority to act on behalf of the Board with any policy recommendations
subsequently reported to the Board for ratification.
4) VALUATION COMMITTEE:
a. Membership. The Board of Directors may annually appoint a Valuation
Committee comprised of two or more individuals. The names of persons
serving on the Committee will be named in the Committee guidelines.
b. Responsibilities and Duties. The purpose of the Valuation Committee shall
be to value any security held by a Fund or any Series which cannot
otherwise be valued under the Fund's guidelines for valuation of portfolio
securities.
c. Rules of Procedures. In determining the fair value of a security, the
Valuation Committee shall consider such factors and follow such procedures
as may be established under guidelines approved by the Board of Directors.
The guidelines shall be reviewed and approved by the Board as frequently as
the Board shall deem appropriate, but in no event less than annually. A
record of each meeting shall be kept. At the next regularly scheduled Board
of Directors meeting following the Valuation Committee's determination of a
fair value for a security, the Board of Directors shall consider ratifying
the Valuation Committee's action.
d. Vote Required. The members of the Valuation Committee must unanimously
approve a fair value for the security.
e. Action Without Meeting. Any action that may be or is required to be taken
at a meeting of the Valuation Committee may be conducted by telephone or
may be taken without a meeting, if a consent in writing setting forth the
action so taken shall be signed by all members of the Valuation Committee.
Such consent shall have the same effect as a unanimous vote.
f. Compensation of Committee Members. Each committee member who is not an
interested person of the Fund may receive such compensation from the Fund
for his or her services and reimbursement for his or her expenses as may be
fixed from time to time by the Directors.
ARTICLE III.
OFFICERS
(Amended 5/31/89) The officers of the Company shall be the Chairman of the
Board of Directors, a President, a Treasurer, and a Secretary. Persons elected
to those offices by the Board of Directors shall serve at the will of the Board
of Directors and continue in office until such time as their successors are
elected and qualified. Any two of the foregoing officers may be united in one
person. A Vice President or Vice Presidents may be added from time to time as
determined by the Board of Directors who may also appoint one or more Assistant
Secretaries and one or more Assistant Treasurers.
The Chairman of the Board of Directors shall preside at all meetings of the
stockholders and of the Board of Directors and shall have further duties and
responsibilities as the Board of Directors may determine. The President, subject
to the general supervision and control of the Board of Directors, shall be
responsible for the affairs of the company and shall perform such other duties
as may be assigned to him from time to time by the Board of Directors.
The Secretary shall issue notices for all meetings, shall have charge of
the seal and the corporate books, shall sign with the President such instruments
as require such signature and shall perform such other duties as are incident to
his office or are particularly required of him by the Board of Directors.
The Treasurer shall have the custody of monies and securities of the
Company. He shall sign and issue checks, notes and other obligations of the
Company not under seal, and shall perform all duties incident to his office or
that are particularly required of him by the Board of Directors.
The Vice Presidents, Assistant Secretaries and Assistant Treasurers shall
perform the duties of the President, Secretary or Treasurer in his or their
offices or during their inability to act; such officer shall have such other and
further powers and perform such other and further duties as may be assigned to
him or them, respectively, by the Board of Directors.
ARTICLE IV.
AUDITS
The accounts and transactions of the Corporation shall be submitted for
audit at least once a year to reputable certified public accountants to be
chosen by the Board of Directors. These audits are to be directed to a
verification as of the date selected of the assets and liabilities and principal
and income accounts and are to include a detailed check of the sales price and
liquidation value make-up sheets for at least one day in each calendar month.
ARTICLE V.
COMMON STOCK
SECTION 1. STOCK CERTIFICATES: Certificates shall not be issued until the
shares represented thereby shall have been fully paid for. Certificates will not
be issued unless requested by the stockholder.
SECTION 2. TRANSFERS: Shares may be transferred by assignment and delivery,
but no such transfer shall be binding upon the Corporation until same shall have
been entered upon the share register as provided in Section 3 of this Article.
SECTION 3. SHARE REGISTER: The Secretary shall keep a stock book and a
record of the shares issued in accordance with procedures established by the
distributor and/or as may be required by the Investment Company Act of 1940 and
rules promulgated thereunder.
ARTICLE VI.
CORPORATE SEAL
The Corporate Seal of this Corporation shall consist of an impression on
paper or wax circular in form, bearing the words:
COMPOSITE TAX-EXEMPT BOND FUND, INC.
CORPORATE SEAL
Spokane, Washington
as indicated by the impression on the margin hereof. The seal shall be prepared
only if requested by an officer and upon a showing of legal necessity.
ARTICLE VII.
BOOKS AND RECORDS
The Corporate Minute Book, Record of Shareholders, Share Register and other
corporate records, shall be kept at the registered office of the Corporation in
Spokane, Washington, and the location of such registered office may be changed
at any time by resolution of the Board of Directors regularly adopted, and by
filing a proper notice of such change in such public office as the law may
require.
ARTICLE VIII.
AMENDMENTS
These Bylaws may be amended or repealed, or new Bylaws may be adopted, by
the Board of Directors at any meeting thereof, provided, however, that notice of
such meeting shall have been given as provided in these Bylaws, which notice
shall mention that amendment or repeal of the Bylaws, or the adoption of new
Bylaws, is one of the purposes of such meeting. Any such Bylaws adopted by the
Board may be amended or repealed, or new Bylaws may be adopted, by vote of the
stockholders of the Corporation, at any annual or special meeting thereof;
provided, however, that the notice of such meeting shall have been given as
provided in these Bylaws, which notice shall mention that amendment or repeal of
these Bylaws, or the adoption of new Bylaws, is one of the purposes of such
meeting.
EXHIBIT 6
DISTRIBUTION CONTRACT
THIS AGREEMENT, dated this 24th day of January 1996, is a continuation of
Agreements initially adopted in 1983 (with the exception of Composite Northwest
Fund, Inc. which adopted the Plan in 1987), by and between individual funds
within the Composite Group of Funds (corporations duly incorporated and existing
under the laws of the State of Washington), and MURPHEY FAVRE, INC., doing
business at Seattle, Washington, herein sometimes referred to as the
"DISTRIBUTOR." This Agreement is by and between the Composite Group of Funds and
the Distributor.
RECITALS
WHEREAS, the Composite Group of Funds ("Composite") is a family of funds
registered as open-end, management investment companies under the Investment
Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Composite Group of Funds and the Distributor desire to enter
into an agreement that sets forth standard terms and conditions for distribution
services for the individual funds, as noted on the signatory page, and in
accordance with the schedule of fees attached as Exhibit A;
WHEREAS, the payments contemplated herein intend to result in the sale of
Composite shares of common stock with the allocation of certain charges and
expenses in paragraph 6 hereof and the reimbursement of expenses incurred by the
Distributor as agent for Composite for advertisement, promotional material,
sales literature and printing and mailing of prospectuses to other than current
Composite shareholders;
WHEREAS, such payments may be considered the financing of activities
intended to result in the sale of Composite shares;
WHEREAS, this Agreement is intended to be a "written plan" of the
reimbursement type for Class A shares and of the compensation type for Class B
shares 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 whereof is hereby
acknowledged, the parties hereto agree as follows:
1. APPOINTMENT. Composite hereby appoints Murphey Favre as the Distributor for
the funds for the period 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. Composite has furnished the Distributor with copies
of:
(a) Articles of Incorporation and all amendments thereto for each fund;
(b) Bylaws and all amendments thereto for each fund;
(c) Each fund's most recent prospectus and recent registration statement.
From time to time, each fund will furnish the Distributor properly
certified or authenticated 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").
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, subject to the supervision of each fund's board of directors
and the following understandings: (i) directors 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 Articles of Incorporation, Bylaws and Prospectus of
each fund and with the instructions and directions of each fund's board of
directors and will conform to and comply with the requirements of the 1940
Act and all other applicable federal or state laws and regulations. In
carrying out its obligations hereunder, the Distributor shall:
(a) provide to each fund's board of directors, 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
shares of common stock of any of the funds. A fund shall not sell any
shares of its common stock except through the Distributor. Notwithstanding
the provisions of the foregoing sentence:
(a) A fund may issue its 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 shares of common stock of a fund at any
time when in the opinion of the Distributor or of the fund no sales should
be made because of market or other economic considerations or abnormal
circumstances of any kind and may in its sole discretion reject orders for
the purchase of a fund's shares;
(c) a fund may withdraw the offering of its shares of common stock (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; and
(d) the price at which the shares may be sold (the "offering price") shall be
the net asset value per share, plus a sales charge which shall be
determined in the manner established from time to time by a fund's
Distributor and set forth in a fund's then current prospectus.
5. COMPENSATION FOR SERVICING SHAREHOLDER ACCOUNTS. Composite acknowledges
that the Distributor may compensate its 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) Composite agrees that each fund assumes and shall pay or cause to be paid
the following expenses incurred on its behalf:
registration of common stock (except the initial registration) including
the expense of printing and distributing prospectuses; 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 representing shares
of a fund; 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 of 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) With respect to Class A shares, the Distributor shall request reimbursement
for distribution expenses not otherwise described above, including, without
limitation, the direct cost of advertising, marketing, selling, and
distributing shares of common stock of each fund; printing and mailing
prospectuses to other than current shareholders; the cost of preparation,
printing, and mailing of promotional and sales literature; and compensation
paid to registered representatives of the Distributor, affiliates of the
Manager or other dealers. Reimbursement for these distribution expenses
will be subject to the provisions of Rule 12b-1 and will not exceed an
annual rate of a fund's average daily net assets attributable to Class A
shares as set forth in Exhibit A. Such expenditures will be reviewed at
least quarterly by the board of directors. In addition, the Distributor and
its affiliates or the Manager and its affiliates may pay additional
expenses of any type or nature which are reported to and deemed by the
directors to be appropriate for reimbursement within the provisions of this
paragraph.
(d) With respect to Class B shares, the Distributor shall be compensated with a
distribution fee equal to an annual rate of .75 of 1% of a fund's average
net assets attributable to Class B shares and a service fee at an annual
rate of .25 of 1% of such assets. Proceeds from any contingent deferred
sales charges are paid to the Distributor.
(e) The distributor will furnish the board of directors statements of
distribution revenues and expenditures at least quarterly with respect to
each class of shares. Only distribution expenses properly attributable to
Class A shares will be used to support the reimbursement charged to Class A
shareholders.
(f) Each fund will record all payments made under the 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. EXPENSE LIMITATION. In the event the operating expenses of any fund, for
any fiscal year exceed the expense limitations imposed by the securities
laws or regulations thereunder of any state in which that fund's shares are
qualified for sale, as such limitations may be raised or lowered from time
to time, the Distributor will reimburse that fund for annual operating
expenses in excess of any expense limitation that may be applicable;
provided, however, there shall be excluded from such expenses the amount of
all distribution costs as well as any interest, taxes, brokerage
commissions, and extraordinary expenses (including but not limited to legal
claims and liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Fund.
8. 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 directors of Composite, and that officers or
directors of Composite 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.
9. TERM AND APPROVAL. This Agreement shall become effective upon execution and
shall continue in force and effect from year to year, provided that such
continuance is specifically approved at least annually:
(a) by Composite's board of directors or (ii) by the vote of a majority of the
outstanding voting securities of any fund (as defined in Section 2{1}{42}
of the 1940 Act), and
(b) the affirmative vote of a majority of the directors who are not parties to
this Agreement or interested persons of any such party or have no direct or
indirect financial interest in the operation of this Agreement or any
agreement related to this Agreement, by votes cast in person at a meeting
specifically called for the purpose of voting on such approval.
10. TERMINATION. This Agreement may be terminated at any time, without the
payment of any penalty, by vote of Composite's board of directors, by a
vote of a majority of the members of the board of directors of Composite
who are not interested persons of any fund and have no direct or indirect
financial interest in the operation of this Agreement or in agreement
related to this Agreement, or by a vote of a majority of any fund's
outstanding voting securities (as defined in Section 2{a}{42} of the 1940
Act), or by the Distributor on sixty (60) days' written notice to the other
party. 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.
11. AMENDMENTS.
(a) This Agreement may be amended by the parties hereto only if such amendment
is specifically approved (i) by the board of directors of Composite or by
the vote of majority of outstanding voting securities of any fund, and (ii)
by a majority of those directors who are not parties to this Agreement or
disinterested 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 if any such amendment is "material" as such word is used in
Rule 12b-1 under the 1940 Act, such amendment shall be approved in the
manner prescribed in paragraph 10 for the annual approval of the
continuation of the Agreement.
(b) In the event that this Agreement is proposed to be amended to increase
materially the amount to be spent for distribution, such amendment will not
be effected without shareholder approval.
12. 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 provided that the Distributor shall be responsible for
its own negligent failure to perform its duties under this Agreement.
13. 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
Composite shall be 601 West Main Avenue, Spokane, WA 99201, and the address
of the Distributor shall be 1201 Third Avenue, Seattle, WA 98101.
14. QUESTIONS OF INTERPRETATION. This Agreement shall be implemented and
continued in a manner consistent with the provisions of the 1940 Act and to
interpretations thereof, if any, of the United States Courts or, in the
absence of any controlling decision of any such court, by rules,
regulations or orders of the SEC issued pursuant to said 1940 Act. In
addition, where the effect of a requirement of the 1940 Act reflected in
any provision of this Agreement is revised by rule, regulation or order of
the SEC, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
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.
FUNDS BOUND BY THIS AGREEMENT COMPOSITE GROUP OF FUNDS
Composite Bond & Stock Fund, Inc. By /s/ William G. Papesh
Composite Equity Series, Inc. -------------------------
Composite Northwest Fund, Inc. William G. Papesh
Composite U.S. Government Securities, Inc. President
Composite Income Fund, Inc.
Composite Tax-Exempt Bond Fund, Inc.
Composite Cash Management Company
ATTEST:/s/ John T. West
---------------------
John T. West
Secretary MURPHEY FAVRE, INC.
By /s/ Douglas D. Springer
---------------------------
Douglas D. Springer
President
ATTEST: /s/Suzanne M. Krahling
-----------------------
Suzanne M. Krahling
Secretary
EXHIBIT 10
February 26, 1996
COMPOSITE TAX-EXEMPT BOND FUND, INC.
601 W MAIN AVE STE 801
SPOKANE WA 99201-0694
Gentlemen:
We hereby consent to the use of our written opinion dated February 26, 1996 upon
the validity of the organization of Composite Tax-Exempt Bond Fund, Inc., and
upon the designation of the authorized capital stock of said company in the
Articles of Incorporation as an exhibit to the amendments to the Registration
Statement now being filed with the Securities and Exchange Commission and any
Prospectus relating to the proposed offer and sale of the capital stock of the
corporation.
Very truly yours,
PAINE, HAMBLEN, COFFIN,
BROOKE & MILLER LLP
/s/ Lawrence R. Small
Lawrence R. Small
<PAGE>
EXHIBIT 10
February 26, 1996
Composite Tax-Exempt Bond Fund, Inc.
Third Floor
Washington Mutual Building
601 W. Main Avenue
Spokane, WA 99201
Gentlemen:
In connection with an amendment to the Registration Statement now being filed by
your company with the Securities and Exchange Commission relating to an offering
of shares of common stock having a par value of $.0001 per share, we certify
that, as attorneys for this corporation, we have examined the corporate
proceedings relating to its incorporation, Bylaws,Distributor and Management
Contracts, and such other matters hereinafter referred to, and it is our
opinion:
(a) That said Composite Tax-Exempt Bond Fund, Inc. is a corporation duly
incorporated and existing under the laws of the State of Washington, with
an authorized capital stock in the aggregate amount of $50,000 consisting
of 500,000,000 shares of common stock with 300,000,000 shares denominated
as Class A and 200,000,000 shares denominated as Class B. The par value is
$.0001 per share with all shares having equal voting rights.
(b) That all of the 500 million shares have been validly and legally authorized
to be issued by proper corporate action and in conformity with the laws of
the State of Washington applicable thereto. Such authorized shares, upon
their issuance, will be for proceeds to the company of not less than the
net asset value of such shares at the time of sale after adjusting to the
nearer full cent, and will be fully paid and nonassessable.
Very truly yours,
PAINE, HAMBLEN, COFFIN,
BROOKE & MILLER
/s/ Lawrence R. Small
Lawrence R. Small
EXHIBIT 11
ACCOUNTANTS' CONSENT TO USE OF CERTIFICATE
AND FINANCIAL STATEMENTS
We hereby consent to the incorporation by reference into the Prospectus and
Statement of Additional Information in Post-Effective Amendment No. 28 to the
Registration Statement on Form N-1A of Composite Tax-Exempt Bond Fund, Inc., of
our report dated January 19, 1996, on the financial statements and financial
highlights included in the December 31, 1995 Annual Report to Shareholders of
Composite Tax-Exempt Bond Fund, Inc. We further consent to the reference to our
Firm under the headings "Financial Highlights" in the Prospectus and
"Independent Public Accountants" in the Statement of Additional Information.
/s/ LeMaster & Daniels, PLLC
LeMaster & Daniels, PLLC
Spokane, Washington
January 19, 1996
<PAGE>
EXHIBIT 11
INDEPENDENT PUBLIC ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of:
Composite U.S. Government Securities, Inc.
Composite Income Fund, Inc.
Composite Tax-Exempt Bond Fund, Inc.
We have audited the accompanying statements of assets and liabilities of
Composite U.S. Government Securities, Inc., Composite Income Fund, Inc., and
Composite Tax-Exempt Bond Fund, Inc., including the investment portfolios, as of
December 31, 1995, the related statements of operations for the year then ended,
and the related statements of changes in net assets for the years ended October
31, 1995 and 1994. For Composite Tax-Exempt Bond Fund, Inc., we have audited the
financial highlights for each of the five years in the period ended December 31,
1995. For Composite U.S. Government Securities, Inc., and Composite Income Fund,
Inc., we have audited the financial highlights of each of the five years in the
period ended December 31, 1995. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirming securities owned as of December
31, 1995, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of
Composite U.S. Government Securities, Inc., Composite Income Fund, Inc., and
Composite Tax-Exempt Bond Fund, Inc., as of December 31, 1995, and the results
of their operations, the changes in their net assets, and the financial
highlights for the above-stated periods in conformity with generally accepted
accounting principles.
/s/ LeMaster & Daniels, PLLC
Certified Public Accountants
Spokane, Washington
January 19, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S ANNUAL 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>
<CIK> 0000201507
<NAME> Composite Tax-Exempt Bond Fund, Inc.
<SERIES>
<NUMBER> 001
<NAME> Class A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 210,095,612
<INVESTMENTS-AT-VALUE> 229,349,037
<RECEIVABLES> 3,850,343
<ASSETS-OTHER> 20,415
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 233,219,795
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 483,033
<TOTAL-LIABILITIES> 483,033
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 214,138,128
<SHARES-COMMON-STOCK> 28,701,818
<SHARES-COMMON-PRIOR> 29,531,581
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (654,791)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19,253,425
<NET-ASSETS> 232,736,762
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,215,754
<OTHER-INCOME> 0
<EXPENSES-NET> (1,835,346)
<NET-INVESTMENT-INCOME> 11,380,408
<REALIZED-GAINS-CURRENT> 709,951
<APPREC-INCREASE-CURRENT> 25,628,133
<NET-CHANGE-FROM-OPS> 37,718,492
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 11,301,739
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,542,933
<NUMBER-OF-SHARES-REDEEMED> (5,093,734)
<SHARES-REINVESTED> 1,034,551
<NET-CHANGE-IN-ASSETS> 16,040,854
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,364,723)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,120,096
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,835,346
<AVERAGE-NET-ASSETS> 226,505,138
<PER-SHARE-NAV-BEGIN> 7.13
<PER-SHARE-NII> 0.38
<PER-SHARE-GAIN-APPREC> 0.89
<PER-SHARE-DIVIDEND> (0.38)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.02
<EXPENSE-RATIO> 0.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S ANNUAL 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>
<CIK> 0000201507
<NAME> Composite Tax-Exempt Bond Fund, Inc.
<SERIES>
<NUMBER> 002
<NAME> Class B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 210,095,612
<INVESTMENTS-AT-VALUE> 229,349,037
<RECEIVABLES> 3,850,343
<ASSETS-OTHER> 20,415
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 233,219,795
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 483,033
<TOTAL-LIABILITIES> 483,033
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 214,138,128
<SHARES-COMMON-STOCK> 334,540
<SHARES-COMMON-PRIOR> 253,920
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (654,791)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19,253,425
<NET-ASSETS> 232,736,762
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,215,754
<OTHER-INCOME> 0
<EXPENSES-NET> (1,835,346)
<NET-INVESTMENT-INCOME> 11,380,408
<REALIZED-GAINS-CURRENT> 709,951
<APPREC-INCREASE-CURRENT> 25,628,133
<NET-CHANGE-FROM-OPS> 37,718,492
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (78,699)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 161,616
<NUMBER-OF-SHARES-REDEEMED> (10,688)
<SHARES-REINVESTED> 7,241
<NET-CHANGE-IN-ASSETS> 16,040,854
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,364,723)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,120,096
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,835,346
<AVERAGE-NET-ASSETS> 226,505,138
<PER-SHARE-NAV-BEGIN> 7.13
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> 0.89
<PER-SHARE-DIVIDEND> (0.32)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.02
<EXPENSE-RATIO> 1.62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
