FUNDS' INVESTMENT HIGHLIGHTS...............2
FUNDS' PORTFOLIOS..........................7
FINANCIAL INFORMATION
INDEPENDENT PUBLIC ACCOUNTANTS' REPORT..16
FINANCIAL STATEMENTS....................17
FINANCIAL HIGHLIGHTS....................20
NOTES TO FINANCIAL STATEMENTS...........23
BOND MARKETS ENDED THE YEAR UP.
MODERATION FORECAST FOR 1998
The year ended December 31, 1997 provided strong investment results from each
of Composite Group's bond funds. In the pages which follow, you will find ex-
panded discussion concerning the investment strategies, portfolio composition
and performance of the Funds. I am pleased not only with the results of our
investments but with the ability of our portfolio managers to maintain their
focus on fund objectives - not an easy task in volatile markets.
[PHOTO - WILLIAM G. PAPESH, PRESIDENT OF THE COMPOSITE GROUP]
FOR THE PERIOD AHEAD: TAKE A BALANCED APPROACH WITH QUALITY INVESTMENTS
Optimism surrounding mutual fund investing has never been greater. After a
15-year bull market in both stocks and bonds, it is notable that households
(especially at the middle income level) are taking on more risk in their asset
holdings. While this attempt to participate in the growth of an expanding
equities market is commendable, it is especially important that a balanced
approach to investing not be ignored. By including a mix of long-term and
short-term fixed income investments in their portfolios, shareholders can reduce
risk and volatility. I would urge all investors to update their asset allocation
and keep in mind that Composite bond funds provide the benefits of diversified
and professionally managed portfolios offering compounded returns on a taxable
or tax-free basis.
WE'RE ADDING TO THE FAMILY TO GIVE YOU GREATER OPPORTUNITY
Finally, as you may know from proxy statements sent to you, Sierra Funds will
be combined with the Composite family shortly. This action will provide
shareholders with expanded investment opportunities as well as some efficiencies
associated with the management of our mutual find complex. We will be sending
you more information on this exciting opportunity as time progresses.
We wish you all the best in the new year ahead. Your continued confidence in
the Composite Group is appreciated and we will work hard to continue to deserve
your trust.
/s/ William G. Papesh
WILLIAM G. PAPESH
PRESIDENT
FOOTNOTE TO INVESTMENT PERFORMANCE CHARTS ON PAGES 3, 5 & 6
Investment returns and principal values of Fund shares will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. Fund shares are not guaranteed by any agency of the U.S.
government.
Comparisons to Fund performance on the following pages include the Consumer
Price Index (CPI), as a measure of change in consumer prices, and the Lehman
Brothers Government (LBG), Government/Corporate (LGCB), and Municipal Bond (LMB)
Indices, which are considered representative of the U.S. government, U.S.
government and corporate, and municipal bond markets.
These indices are unmanaged and do not reflect actual investment-related
expenses incurred by the Funds with which they are compared. Fund values
presented in the graphs are for Class A shares. Class B performance would vary
due to different expenses. Average Annual Total Returns and graph values include
changes in share price and reinvestment of dividends and capital gains. Unless
otherwise indicated, all Fund performance is calculated after deducting the
maximum 4% sales charge for Class A shares and for Class B shares a contingent
deferred sales charge of 3% for one year or 1% since 3/30/94. Class B yields do
not reflect contingent deferred sales charges; the yields would be lower if they
were reflected. Class B information is presented since 3/30/94, the commencement
of their offering.
<PAGE>
COMPOSITE U.S. GOVERNMENT SECURITIES, INC. HIGHLIGHTS
IMPACTS ON RECENT PERFORMANCE
Last year proved rewarding for investors in fixed income securities including
shareholders in Composite U.S. Government Securities, Inc. One year returns from
Class A shares for the period ended December 31, 1997 were 9.92% - well ahead of
a low 1.70% rate of inflation. Annualized returns for the past three and five
years also significantly outpaced inflation. This is important because inflation
erodes the purchasing power of investors and is the primary risk faced by most
fixed income investments. The ability to achieve returns in excess of inflation
over the last five years is impressive.
The Fund benefited last year by having a substantial portion of its portfolio
in mortgage-backed securities. The economic environment favorably influenced
these investments as interest rates were generally stable throughout the year
(intermediate interest rates declined about 1/2 of 1% during the year).
Relatively firm interest rates provided homeowners with little incentive to
refinance their loans; therefore, the mortgage-backed securities in the Fund
were able to earn high yields without the risk of being called away. As the risk
of refinancing was reduced, there was increasing demand for mortgage-backed
securities. Consequently, this helped increase the value of the securities held
in the Fund.
The Fund is weighted toward lower-coupon mortgage-backed securities that are
seasoned (issued at least three years ago). Historically, prepayments on these
securities have been more stable. Because of the limited volatility of interest
rates this year, the benefits of this strategy were not as significant.
Although interest rates moved down only slightly this year, the value of the
Fund was affected positively because of the intermediate-maturity profile of the
portfolio.
WHAT'S AHEAD?
The Fund will continue to hold a high portion of mortgage-backed securities
because of the belief that over a complete cycle of interest rate movements,
these securities provide good income and yield characteristics. Strategically,
we look for the best profile of yield versus prepayment risk in mortgages. While
a good portion of the time that will keep us away from the highest yielding
securities, it will also keep us away from the potential for significant
under-performance. Diversification in mortgage-backed securities also spreads
prepayment risk over a wide range of issues.
We continue to believe that by focusing on controlling prepayments,
mortgage-backed securities can be used to create a portfolio with attractive
yields and relatively stable income characteristics and above average total
returns.
With an outlook of low inflation, we feel fixed income investments offer very
good value. There can and will be periods when rates will rise but the long-term
trend, in our opinion, is for rates to edge downward. Because of our long-term
focus in managing the Funds, we have structured the portfolio to capture the
benefits of falling rates while controlling prepayments.
KEY INVESTMENT STRATEGIES
The Fund's objective is to provide a high level of current income that is
consistent with safety and liquidity. We seek to accomplish this by investing in
a combination of intermediate-maturity mortgage-backed and U.S. Treasury
securities. By taking advantage of changing fundamentals between different
segments of the mortgage market and by anticipating broad changes in interest
rates, we feel we can add additional income to the Fund while continuing to meet
the safety and liquidity objectives of the Fund.
<PAGE>
COMPOSITE U.S. GOVERNMENT SECURITIES, INC. HIGHLIGHTS (CONT.)
PORTFOLIO COMPOSITION
PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 1997
[PIE CHART]
Government National Mortgage Association (GNMA) - 48%
U.S. Treasury Bonds - 27%
GNMA-Collateralized Mortgage Obligations - 23%
Cash & Other Assets - 2%
INVESTMENT RESULTS
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------
WITHOUT WITH
Class A SALES SALES
Shares CHARGE CHARGE
------- ------- ------
One Year 9.92% 5.48%
Five Years 6.70% 5.84%
Ten Years 8.40% 7.96%
Class B
Shares
-------
One Year 9.03% 6.03%
Since
3/30/94 6.96% 6.74%
--------------------------------
30-Day Current Yields
Class A Shares 5.37%
Class B Shares 4.82%
--------------------------------
See footnote on page 1 for
additional information.
[PERFORMANCE CHART]
INVESTMENT PERFORMANCE - COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
- -------------------------------------------------------------------
Comparative Ending Values of $10,000 invested on 12/31/87
$25,000 [LEGEND]
Fund Class A Shares $21,524
20,000 LGB (Gov't. Bonds) $23,421
CPI (Inflation) $14,029
15,000
10,000
5,000
0
12/31/87 12/31/89 12/31/91 12/31/93 12/31/95 12/31/97
* Past performance cannot predict future results.
Investment Performance - Composite U.S. Government Securities, Inc.
Comparative Ending Values of $10,000 invested on 12/31/87
Composite
U.S. Government Securities LGB CPI
-------------------------- ------- -------
12/31/87 $10,000 $10,000 $10,000
3/31/88 $ 9,993 $10,330 $10,095
6/30/88 $10,131 $10,427 $10,225
9/30/88 $10,271 $10,603 $10,381
12/31/88 $10,307 $10,703 $10,422
3/31/89 $10,377 $10,817 $10,598
6/30/89 $11,170 $11,687 $10,754
9/31/89 $11,268 $11,783 $10,832
12/31/89 $11,677 $12,226 $10,927
3/31/90 $11,626 $12,074 $11,153
6/30/90 $11,978 $12,496 $11,256
9/30/90 $12,201 $12,599 $11,499
12/31/90 $12,781 $13,291 $11,594
3/31/91 $13,099 $13,580 $11,698
6/30/91 $13,308 $13,763 $11,785
9/30/91 $14,007 $14,548 $11,889
12/31/91 $14,662 $15,327 $11,950
3/31/92 $14,460 $15,059 $12,071
6/30/92 $15,018 $15,655 $12,149
9/30/92 $15,511 $16,428 $12,244
12/31/92 $15,559 $16,435 $12,296
3/31/93 $16,092 $17,177 $12,444
6/30/93 $16,504 $17,674 $12,513
9/30/93 $16,832 $18,248 $12,574
12/31/93 $16,823 $18,187 $12,634
3/31/94 $16,203 $17,639 $12,756
6/30/94 $15,941 $17,438 $12,825
9/30/94 $15,947 $17,512 $12,946
12/31/94 $15,996 $17,573 $12,972
3/31/95 $16,911 $18,400 $13,120
6/30/95 $18,006 $19,541 $13,215
9/30/95 $18,309 $19,887 $13,276
12/31/95 $19,107 $20,796 $13,302
3/31/96 $18,585 $20,326 $13,492
6/30/96 $18,649 $20,423 $13,579
9/30/96 $18,955 $20,766 $13,674
12/31/96 $19,581 $21,372 $13,795
3/31/97 $19,365 $21,198 $13,856
6/30/97 $20,143 $21,933 $13,891
9/30/97 $20,848 $22,669 $13,977
12/31/97 $21,524 $23,421 $14,029
<PAGE>
COMPOSITE INCOME FUND, INC. HIGHLIGHTS
IMPACTS ON RECENT PERFORMANCE
The income produced from the Fund's intermediate-maturity investments, strong
performance by mortgage-backed securities, and stable results from corporate
bond holdings, combined with a decline in interest rates, produced double digit
returns for 1997. Just as impressive as the one-year return is the annualized
return for the last three and five years. Returns during all periods have
provided shareholders with increased purchasing power by significantly outpacing
inflation.
The largest sector of the Fund (55%) is debt issued by corporations. Solid
economic growth, rising productivity, and low inflation produced improving
credit quality for corporations. Although the Fund has some corporate bond
holdings that produced exceptional returns, a few were disappointing. Overall,
however, the corporate bond portfolio produced returns that were very similar to
the industry.
The mortgage-backed securities portion of the Fund (21%) had above-average
returns for 1997. Last year's economic environment provided a good opportunity
to invest in mortgage-backed securities since interest rates were relatively
stable (intermediate rates declined about 1/2 of 1% for the year). Stable rates
reduce the incentive for homeowners to refinance and, consequently, the
higher-yielding mortgage-backed securities tend to remain in the Fund.
The Fund's investments are of an intermediate maturity and will generally
rise in value when interest rates fall and decline in value when rates rise.
Because interest rates declined in 1997, albeit rather modestly, a positive
capital appreciation was generated for shareholders.
WHAT'S AHEAD?
We feel comfortable with the diversified mix of corporate, mortgage-backed,
and Treasury securities that make up the portfolio and will continue to target
an average quality of "A to BBB" as rated by Standard & Poor's.
As we enter 1998, the majority of our corporate bond investments will be
concentrated in non-cyclical industries such as health care, defense and
utilities. Additionally, we feel there are currently some situations worldwide
which offer a unique opportunity for solid returns for the long-term investor
and they should be included as a portion of the Fund's portfolio.
The mortgage-backed portfolio, as always, seeks to add extra yield to the
Fund while concentrating on controlling prepayments. Although rates have fallen
and are relatively low by recent historical standards, we believe that excess
worldwide capacity, fiscal austerity, and changing demographics will continue to
keep inflation under control and the long-term trend in rates moving downward.
Because of our long-term focus in managing the Funds, we have structured the
portfolio to capture this trend.
KEY INVESTMENT STRATEGIES
The Fund's objective is to provide a high level of current income that is
consistent with the protection of capital. We accomplish this by investing in
intermediate-maturity corporate, mortgage-backed and Treasury securities.
Although the Fund will use some lower-rated securities, it maintains an
investment grade average quality. By taking advantage of changing fundamentals
between market sectors and anticipating broad changes in interest rates, we feel
we can add additional income to the Fund while maintaining protection of
capital.
<PAGE>
COMPOSITE INCOME FUND, INC. HIGHLIGHTS (CONT.)
PORTFOLIO COMPOSITION
PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 1997
[PIE CHART]
Non-Convertible Corporate Bonds 42%
Mortgage-Backed Securities - 21%
U.S. Treasury Obligations - 19%
Convertible Corporate Bonds - 10%
U.S. Dollar Foreign Government Obligation - 3%
Preferred Stocks - 2%
Cash & Other Assets - 3%
INVESTMENT RESULTS
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------
WITHOUT WITH
Class A SALES SALES
Shares CHARGE CHARGE
------- ------- ------
One Year 10.51% 6.10%
Five Years 7.95% 7.09%
Ten Years 8.61% 8.16%
Class B
Shares
-------
One Year 9.51% 6.51%
Since
3/30/94 7.96% 7.74%
--------------------------------
30-Day Current Yields
Class A Shares 5.93%
Class B Shares 5.41%
--------------------------------
See footnote on page 1 for
additional information.
[PERFORMANCE CHART]
INVESTMENT PERFORMANCE - COMPOSITE INCOME FUND,
---------------------------------------------------------
Comparative Ending Values of $10,000 invested on 12/31/87
$25,000 [LEGEND]
Fund Class A Shares $21,912
20,000 LGCB (Gov't./Corp. Bonds) $23,988
CPI (Inflation) $14,029
15,000
10,000
5,000
0
12/31/87 12/31/89 12/31/91 12/31/93 12/31/95 12/31/97
* Past performance cannot predict future results.
Investment Performance - Composite Income Fund, Inc.
Comparative Ending Values of $10,000 invested on 12/31/87
Composite
Income Fund LGCB CPI
------------- ------- -------
12/31/87 $10,000 $10,000 $10,000
3/31/88 $ 9,937 $10,358 $10,095
6/30/88 $10,089 $10,460 $10,225
9/30/88 $10,233 $10,655 $10,381
12/31/88 $10,272 $10,758 $10,422
3/31/89 $10,376 $10,877 $10,598
6/30/89 $10,749 $11,751 $10,754
9/31/89 $10,907 $11,861 $10,832
12/31/89 $10,965 $12,290 $10,927
3/31/90 $10,903 $12,149 $11,153
6/30/90 $11,297 $12,586 $11,256
9/30/90 $11,378 $12,662 $11,499
12/31/90 $11,866 $13,307 $11,594
3/31/91 $12,282 $13,666 $11,698
6/30/91 $12,509 $13,873 $11,785
9/30/91 $13,190 $14,670 $11,889
12/31/91 $13,918 $15,453 $11,950
3/31/92 $13,765 $15,221 $12,071
6/30/92 $14,336 $15,838 $12,149
9/30/92 $14,980 $16,612 $12,244
12/31/92 $14,945 $16,625 $12,296
3/31/93 $15,634 $17,398 $12,444
6/30/93 $16,034 $17,920 $12,513
9/30/93 $16,626 $18,513 $12,574
12/31/93 $16,562 $18,459 $12,634
3/31/94 $15,908 $17,881 $12,756
6/30/94 $15,682 $17,658 $12,825
9/30/94 $15,719 $17,746 $12,946
12/31/94 $15,763 $17,811 $12,972
3/31/95 $16,579 $18,699 $13,120
6/30/95 $17,912 $19,912 $13,215
9/30/95 $18,281 $20,293 $13,276
12/31/95 $19,164 $21,238 $13,302
3/31/96 $18,626 $20,742 $13,492
6/30/96 $18,701 $20,839 $13,579
9/30/96 $19,098 $21,207 $13,674
12/31/96 $19,828 $21,855 $13,795
3/31/97 $19,665 $21,666 $13,856
6/30/97 $20,573 $22,455 $13,891
9/30/97 $21,405 $23,242 $13,977
12/31/97 $21,912 $23,988 $14,029
<PAGE>
COMPOSITE TAX-EXEMPT BOND FUND, INC. HIGHLIGHTS
IMPACTS ON RECENT PERFORMANCE
Municipal bonds enjoyed a good year in 1997. Long-term municipal bonds
finished 1997 with lower yields but attractive total returns.
During the year the prices of lower-rated municipal bonds rose relative to
higher-rated bonds as investors searched for yield. Consequently, the Fund's
above-average emphasis on quality led to a slightly negative impact on perfor-
mance.
During the year the percentage of non-callable bonds in the Fund increased
from 50% to 60%. As rates fell at year-end, and as call risk became a big
concern in the market, the Fund's large holdings of non-callable bonds boosted
performance.
WHAT'S AHEAD?
We continue to remain positive on bonds - especially municipals - given a
vigilant Federal Reserve, a possible pan-Asian recession, and a low domestic
inflation environment. If municipals return to their historical relationship
with Treasuries, then yields from municipals could decline and their prices
could rise significantly even if Treasuries remain unchanged. Our large position
in non-callable bonds should again boost performance in such an environment.
During 1997 we increased our holdings of California issuers from 8% to 17% of
the Fund - our second largest state representation. California bond yields have
been high compared to their pre-recession levels. In the coming year, as
California's economic turnaround continues, we expect bonds from the State to
appreciate better than other sectors of the municipal market and thus enhance
the performance of the Fund.
KEY INVESTMENT STRATEGIES
The Fund's objectives are to provide a high level of current income exempt
from federal taxes and to protect investors' capital. In pursuing these
objectives, we target a longer maturity range and a high average quality -
currently averaging 12.5 years in maturity and an Aa rating by Moody's Investors
Services. We seek to exploit opportunities in different market sectors and in
individual issues while minimizing risk.
INVESTMENT RESULTS
AVERAGE ANNUAL TOTAL RETURNS
--------------------------------
WITHOUT WITH
Class A SALES SALES
Shares CHARGE CHARGE
------- ------- ------
One Year 8.59% 4.20%
Five Years 6.73% 5.85%
Ten Years 7.93% 7.50%
Class B
Shares
-------
One Year 7.71% 4.71%
Since
3/30/94 6.45% 6.21%
--------------------------------
30-Day Current Yields
Class A Shares 3.94%
Class B Shares 3.34%
--------------------------------
See footnote on page 1 for
additional information.
[PERFORMANCE CHART]
INVESTMENT PERFORMANCE - TAX-EXEMPT BOND FUND, INC.
---------------------------------------------------------
Comparative Ending Values of $10,000 invested on 12/31/87
$25,000 [LEGEND]
Fund Class A Shares $20,601
20,000 LMB (Muni Bonds) $22,472
CPI (Inflation) $14,029
15,000
10,000
5,000
0
12/31/87 12/31/89 12/31/91 12/31/93 12/31/95 12/31/97
* Past performance cannot predict future results.
Investment Performance - Composite Tax-Exempt Bond Fund, Inc.
Comparative Ending Values of $10,000 invested on 12/31/87
Composite
Tax-Exempt Bond Fund LMB CPI
-------------------- ------- -------
12/31/87 $10,000 $10,000 $10,000
3/31/88 $ 9,966 $10,299 $10,095
6/30/88 $10,196 $10,437 $10,225
9/30/88 $10,414 $10,692 $10,381
12/31/88 $10,627 $10,779 $10,422
3/31/89 $10,711 $10,877 $10,598
6/30/89 $11,155 $11,440 $10,754
9/31/89 $11,160 $11,483 $10,832
12/31/89 $11,487 $11,930 $10,927
3/31/90 $11,484 $11,963 $11,153
6/30/90 $11,776 $12,256 $11,256
9/30/90 $11,755 $12,250 $11,499
12/31/90 $12,258 $12,805 $11,594
3/31/91 $12,499 $13,122 $11,698
6/30/91 $12,696 $13,387 $11,785
9/30/91 $13,216 $13,921 $11,889
12/31/91 $13,651 $14,356 $11,950
3/31/92 $13,642 $14,343 $12,071
6/30/92 $14,174 $14,902 $12,149
9/30/92 $14,502 $15,336 $12,244
12/31/92 $14,878 $15,637 $12,296
3/31/93 $15,471 $16,242 $12,444
6/30/93 $16,009 $16,778 $12,513
9/30/93 $16,594 $17,380 $12,574
12/31/93 $16,743 $17,633 $12,634
3/31/94 $15,684 $16,698 $12,756
6/30/94 $15,783 $16,943 $12,825
9/30/94 $15,820 $17,061 $12,946
12/31/94 $15,649 $16,791 $12,972
3/31/95 $16,790 $17,953 $13,120
6/30/95 $17,203 $18,430 $13,215
9/30/95 $17,599 $19,076 $13,276
12/31/95 $18,505 $19,674 $13,302
3/31/96 $18,121 $19,545 $13,492
6/30/96 $18,177 $19,607 $13,579
9/30/96 $18,568 $19,999 $13,674
12/31/96 $18,972 $20,567 $13,795
3/31/97 $18,887 $20,562 $13,856
6/30/97 $19,469 $21,239 $13,891
9/30/97 $20,000 $21,905 $13,977
12/31/97 $20,601 $22,472 $14,029
<PAGE>
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
PORTFOLIO OF INVESTMENTS IN SECURITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMPOSITE U.S. GOVERNMENT
SECURITIES, INC. PORTFOLIO
PRINCIPAL MARKET
AMOUNT VALUE
- ------------ U.S. TREASURY BONDS - 27.33% ----------
<S> <C> <C>
$15,250,000 7.25%, due 05/15/2016, 08/15/2022.......................... $ 17,419,779
6,500,000 7.50%, due 11/15/2016...................................... 7,584,694
4,500,000 6.25%, due 08/15/2023...................................... 4,639,221
500,000 6.375%, due 08/15/2027..................................... 527,345
------------
TOTAL U.S. TREASURY BONDS (cost $29,131,797)............... 30,171,039
------------
MORTGAGE-BACKED SECURITIES-71.89%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-48.42%
4,802,289 6.00%, due 04/20/2026...................................... 4,610,198
14,642,433 6.50%, due 08/15/2023 to 03/15/2024........................ 14,500,592
2,366,711 6.875%, due 12/20/2022..................................... 2,435,102
23,372,030 7.00%, due 07/15/2008 to 08/15/2023........................ 23,744,119
1,681,531 7.37%, due 05/20/2022...................................... 1,737,895
1,501,621 8.00%, due 04/15/2022...................................... 1,558,871
1,693,455 8.50%, due 05/15/2022...................................... 1,780,775
2,766,278 9.50%, due 07/15/2016 to 09/15/2020........................ 2,996,226
15,884 11.50%, due 07/15/2015..................................... 17,905
41,263 13.50%, due 09/15/2014 to 12/15/2014....................... 47,918
26,471 14.00%, due 06/15/2011..................................... 30,806
------------
53,460,407
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -
GNMA-BACKED-23.47%
1,950,000 Federal National Mortgage Association, 7.50%,
due 08/25/2001........................................... 2,007,968
873,524 Federal National Mortgage Association - ACES,
6.783%, due 01/17/2003................................... 881,441
6,408,000 Federal National Mortgage Association, 8.00%,
due 06/25/2005........................................... 6,468,043
2,230,000 Federal National Mortgage Association, 6.00%,
due 08/25/2007........................................... 2,222,797
8,500,000 Federal Home Loan Mortgage Corporation, 6.85%,
due 07/25/2018........................................... 8,561,540
4,900,000 Merrill Lynch, 6.50%, due 08/25/2015....................... 4,907,909
842,516 Mortgage Capital Trust, 9.25%, due 06/01/2017.............. 859,781
------------
25,909,479
------------
TOTAL MORTGAGE-BACKED SECURITIES (cost $76,959,590)........ 79,369,886
------------
REPURCHASE AGREEMENT-0.33%
$ 365,000 Credit Suisse First Boston, collateralized by a U.S.
Treasury Note, in a joint trading account at 6.00%,
dated 12/31/1997, due 01/02/1998 with a maturity value of
$365,122 (cost $365,000)................................... $ 365,000
------------
TOTAL INVESTMENTS (cost $106,456,387)...................... 109,905,925
Other assets net of liabilities............................ 499,402
------------
NET ASSETS................................................. $110,405,327
============
</TABLE>
FEDERAL INCOME TAX INFORMATION:
Net unrealized appreciation of investments at December 31, 1997, of $3,449,538,
based on aggregate cost of $106,456,387, was composed of gross appreciation of
$3,646,715 for investments having an excess of value over cost and gross
depreciation of $197,177 for investments having an excess of cost over value.
OTHER INFORMATION:
Purchases and sales (including maturities and principal repayments) of
investment securities other than short-term investments, all of which were U.S.
government securities, aggregated $7,628,086 and $41,018,569, respectively,
during the year ended December 31, 1997. Principal repayments of mortgage-backed
securities aggregated $8,729,815.
See accompanying notes to financial statements.
<PAGE>
COMPOSITE INCOME FUND, INC.
PORTFOLIO OF INVESTMENTS IN SECURITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMPOSITE INCOME FUND, INC. PORTFOLIO
PRINCIPAL MARKET
AMOUNT VALUE
- ------------ U.S. TREASURY OBLIGATIONS-18.62% -----------
<S> <C> <C>
$ 5,225,000 U.S. Treasury Bond, 7.25%, due 08/15/2022.................. $ 6,036,510
6,325,000 U.S. Treasury Bond, 6.25%, due 08/15/2023.................. 6,520,683
1,200,000 U.S. Treasury Note, 5.875%, due 09/30/2002................. 1,207,501
1,500,000 U.S. Treasury Note, 6.375%, due 03/31/2001................. 1,528,595
1,000,000 U.S. Treasury Note, 9.00%, due 05/15/1998.................. 1,012,813
-----------
TOTAL U.S. TREASURY OBLIGATIONS (cost $14,899,833)......... 16,306,102
-----------
MORTGAGE-BACKED SECURITIES-21.16%
GOVERNMENT AGENCY-12.12%
206,024 Federal Home Loan Mortgage Corporation,
9.00%, due 12/01/2004.................................... 215,038
2,452,627 Government National Mortgage Association,
6.00%, due 02/15/2024.................................... 2,369,851
6,630,912 Government National Mortgage Association,
6.50%, due 08/15/2023 to 07/15/2024...................... 6,566,679
1,451,159 Government National Mortgage Association,
7.00%, due 07/15/2023.................................... 1,463,856
-----------
10,615,424
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS -
GOVERNMENT AGENCY BACKED-5.24%
522,167 Federal Home Loan Mortgage Corporation, 8.75%,
due 06/15/2005........................................... 531,454
1,000,000 Federal Home Loan Mortgage Corporation, 7.50%,
due 07/15/2020........................................... 1,015,944
2,893,943 Weyerhaeuser 1982-C FHA Putable, 7.43%, due 06/01/2022..... 3,036,605
-----------
4,584,003
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS-3.80%
1,750,000 Donaldson, Lufkin & Jenrette, 7.35%, due 12/18/2003........ 1,817,637
856,829 Resolution Trust Corporation - 1991-M2 - A-2,
7.375%, due 09/25/2020................................... 681,828
850,000 Ryland Mortgage Securities Corporation - 1992-12A,
6.50%, due 09/25/2023.................................... 829,949
-----------
3,329,414
-----------
TOTAL MORTGAGE-BACKED SECURITIES (cost $18,056,389)........ 18,528,841
-----------
CORPORATE BONDS-42.00%
$ 1,500,000 Aetna Services, Inc., 7.625%, due 08/15/2026............... $ 1,588,366
1,500,000 American Home Products Corporation, 7.25%, due 03/01/2023.. 1,592,832
1,000,000 AMR Corporation, 9.75%, due 03/15/2000..................... 1,073,017
1,000,000 Bank of New York, 7.875%, due 11/15/2002................... 1,066,394
1,500,000 Burlington Northern, 8.75%, due 02/25/2022................. 1,828,317
1,600,000 Burlington Resources, 9.125%, due 10/01/2021............... 2,042,914
750,000 Conagra, Inc., 9.75%, due 03/01/2021....................... 998,574
500,000 Conagra, Inc., 6.70%, due 08/01/2027....................... 516,641
2,000,000 Continental Corporation, 7.25%, due 03/01/2003............. 2,066,724
500,000 Crane Company, 8.50%, due 03/15/2004....................... 553,443
2,000,000 Dart & Kraft Finance NV, 7.75%, due 11/30/1998............. 2,028,290
500,000 Developers Diversified Realty, 6.58%, due 02/06/2001....... 503,889
2,000,000 FHP International Corp., 7.00%, due 09/15/2003............. 2,041,966
1,000,000 First Nationwide, 10.00%, due 10/01/2006................... 1,187,630
1,000,000 Fleming Companies, Inc., 5.77%, due 08/06/1998............. 976,494
900,000 Franchise Finance Corporation, 7.00%, due 11/30/2000....... 914,386
1,100,000 Franchise Finance Corporation, 7.875%, due 11/30/2005...... 1,175,279
850,000 Golden Books Publishing, 7.65%, due 09/15/2002............. 803,250
1,250,000 Kemper Corporation, 6.875%, due 09/15/2003................. 1,283,204
1,000,000 Loral Corporation, 8.375%, due 06/15/2024.................. 1,191,381
1,000,000 Loral Corporation, 7.625%, due 06/15/2025.................. 1,097,165
1,000,000 Manufacturers and Traders Trust Company, 8.125%,
due 12/01/2002........................................... 1,074,723
500,000 Mercantile Bank, 7.625%, due 10/15/2002.................... 526,340
1,000,000 Niagara Mohawk Power, 9.75%, due 11/01/2005................ 1,147,301
1,430,000 Niagara Mohawk Power, 8.77%, due 01/01/2018................ 1,523,385
1,000,000 Norwest Bancorp, 6.65%, due 10/15/2023..................... 975,469
750,000 Raytheon Company, 7.20%, due 08/15/2027.................... 777,604
1,400,000 Riviera Holdings Corporation, 11.00%, due 12/31/2002....... 1,491,000
500,000 Summit Bancorp, 8.625%, due 12/10/2002..................... 547,110
1,200,000 Texas Utilities Electric, 9.50%, due 08/01/1999............ 1,253,970
500,000 Time Warner, Inc., 9.15%, due 02/01/2023................... 616,325
300,000 U S West Capital Funding, Inc., 6.95%, due 01/15/2037...... 311,162
-----------
TOTAL NON-CONVERTIBLE CORPORATE BONDS (cost $34,639,563)... 36,774,545
-----------
CONVERTIBLE CORPORATE BONDS-9.71%
U.S. CORPORATIONS-7.16%
250,000 Battle Mountain Gold Company, 6.00%, due 01/04/2005........ 170,000
1,000,000 CII Financial, 7.50%, due 09/15/2001....................... 938,750
200,000 First State Bancorporation, 7.50%, due 04/30/2017.......... 259,750
1,400,000 Integrated Device Technology, Inc., 5.50%, due 06/01/2002.. 1,184,750
250,000 Jumbosports, Inc., 4.25%, due 11/01/2000................... 100,937
1,500,000 Medical Care Intl (Columbia), 6.75%, due 10/01/2006........ 1,395,000
2,075,000 Spectrum Holobyte, Inc., 6.50%, due 09/15/2002............. 1,330,594
1,200,000 Veterinary Centers of America, 5.25%, due 05/01/2006....... 889,500
-----------
6,269,281
-----------
CONVERTIBLE CORPORATE BONDS (continued)
U.S. DOLLAR FOREIGN CORPORATE OBLIGATIONS-2.55%
$ 2,000,000 MBI Metrobank Finance Ltd., due 12/18/2001................. $ 1,115,000
500,000 Peregrine Investment Finance, 4.50%, due 12/01/2000*....... 373,750
750,000 Ssangyong Oil, 3.75%, due 12/31/2008....................... 504,375
500,000 Total Access Communications, 2.00%, due 05/31/2006......... 235,000
-----------
2,228,125
-----------
TOTAL CONVERTIBLE CORPORATE BONDS (cost $9,315,673)........ 8,497,406
-----------
U.S. DOLLAR FOREIGN GOVERNMENT OBLIGATIONS-2.90%
1,000,000 Province of Alberta, 9.25%, due 04/01/2000................. 1,069,140
1,750,000 United Mexican States, Series B, 6.25%, due 12/31/2019..... 1,465,625
-----------
TOTAL FOREIGN OBLIGATIONS (cost $2,052,110)................ 2,534,765
-----------
SHARES
----------
PREFERRED STOCKS-2.04%
2,000 California Federal Bank, Series B.......................... 221,000
15,100 First Industrial Realty Trust, Series A.................... 398,263
13,000 Microsoft Corporation (Convertible)........................ 1,168,375
-----------
TOTAL PREFERRED STOCK (cost $1,656,700).................... 1,787,638
-----------
PRINCIPAL
AMOUNT
- ------------
REPURCHASE AGREEMENT-2.40%
$ 2,102,000 Credit Suisse First Boston, collateralized by a U.S.
Treasury Note, in a joint trading account at 6.00%,
dated 12/31/1997, due 01/02/1998, with a maturity value of
$2,102,700 (cost $2,102,000)............................... 2,102,000
-----------
TOTAL INVESTMENTS (cost $82,722,268)....................... 86,531,297
Other assets net of liabilities............................ 1,024,093
-----------
NET ASSETS................................................. $ 87,555,390
===========
</TABLE>
*Peregrine Investments Holdings, Ltd. filed for liquidation in January 1998.
Effective January 12, 1998, interest is not being accrued.
FEDERAL INCOME TAX INFORMATION:
Net unrealized appreciation of investments at December 31, 1997, of $3,809,029,
based on aggregate cost of $82,722,268, was composed of gross appreciation of
$5,050,231 for those investments having an excess of value over cost and gross
depreciation of $1,241,202 for investments having an excess of cost over value.
OTHER INFORMATION:
Purchases and sales (including maturities and principal repayments) of
investment securities, other than short-term investments, aggregated $23,398,176
and $29,312,624, respectively, during the year ended December 31, 1997,
including purchases and sales of U.S. government securities of $10,061,836 and
$13,482,561, respectively. Principal repayments of mortgage-backed securities
aggregated $1,696,886.
See accompanying notes to financial statements.
<PAGE>
COMPOSITE TAX-EXEMPT BOND FUND, INC.
PORTFOLIO OF INVESTMENTS IN SECURITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMPOSITE TAX-EXEMPT BOND FUND, INC. PORTFOLIO
PRINCIPAL MARKET
AMOUNT VALUE
- ------------ LONG-TERM MUNICIPAL OBLIGATIONS-97.79% --------
EDUCATION FACILITIES REVENUE-0.44%
<S> <C> <C>
$ 785,000 University of Washington, (MBIA), 7.00%, due 12/01/2021.... $ 871,499
GENERAL OBLIGATION-24.06%
2,000,000 Center Unified School District California,
Capital Appreciation - Series C, (MBIA),
zero coupon, due 09/01/2018.............................. 692,260
1,290,000 Crowley Texas Independent School District, (FGIC),
zero coupon, due 08/01/2016.............................. 494,225
5,000,000 California State General Obligation, (FGIC),
5.625%, due 10/01/2023................................... 5,222,400
5,000,000 Georgia State, Series B, 6.30%, due 03/01/2009............. 5,794,750
5,555,000 Hawaii State, Series BW, 6.40%, due 03/01/2009............. 6,465,076
2,000,000 Honolulu, Hawaii City & County, Series A, 6.00%,
due 01/01/2012........................................... 2,227,460
4,500,000 King County Washington School District #415 Kent,
Series C, 6.30%, due 12/01/2008.......................... 5,199,570
1,000,000 New York, NY, Series B, (FGIC), 6.00%, due 08/01/2007...... 1,115,190
6,230,000 Washington County, Oregon (Criminal Justice Facilities),
6.00%, due 12/01/2012.................................... 6,733,758
7,570,000 Washington State, Series B, 5.00%, due 05/01/2017.......... 7,477,116
4,900,000 Washington State, Series B & AT-7, 6.40%, due 06/01/2017... 5,749,170
-----------
47,170,975
-----------
HOSPITAL REVENUE-2.51%
1,750,000 Washington Health Care Facilities Authority, Fred
Hutchinson Cancer Center, LOC, 7.20%, due 01/01/2007.... 1,915,480
1,750,000 Washington Health Care Facilities Authority, Fred
Hutchinson Cancer Center, LOC, 7.375%, due 01/01/2018... 1,922,427
1,000,000 Wisconsin Health & Education Facility Authority,
Refunding Waukesha Memorial Hospital, Series A,
(AMBAC), 7.125%, due 08/15/2007.......................... 1,090,300
-----------
4,928,207
-----------
INDUSTRY DEVELOPMENT/
POLLUTION CONTROL REVENUE-13.84%
5,000,000 Mayor & City Council of Baltimore Port Facility (DuPont),
6.50%, due 10/01/2011.................................... 5,490,250
3,665,000 Chicago Gas Supply (Peoples Gas), 6.875%, due 03/01/2015... 4,033,809
1,500,000 Lordsburg Pollution Control (Phelps Dodge),
6.50%, due 04/01/2013.................................... 1,648,725
4,000,000 Lowndes County Solid Waste Disposal & Pollution Control
(Weyerhaeuser), 6.80%, due 04/01/2022.................... 4,904,480
4,370,000 Mercer County Pollution Control (Otter Tail Power),
6.90%, due 02/01/2019.................................... 4,721,085
6,000,000 San Diego Industrial Development (San Diego Gas &
Electric), Series A, (AMBAC), 5.90%, due 06/01/2018...... 6,347,700
-----------
27,146,049
-----------
LEASE RENTAL/MUNICIPAL LEASE-2.94%
$ 1,250,000 California State Public Works Board Lease, Department of
Corrections, State Prison, Series E, 5.50%,
due 06/01/2015........................................... $ 1,323,550
3,000,000 Orange County Recovery Certificate of Participation,
Series A, (MBIA), 6.00%, due 07/01/2026.................. 3,264,750
1,173,000 Sacramento, California Certificate of Participation,
5.55%, due 09/15/2004.................................... 1,181,305
-----------
5,769,605
-----------
PUBLIC FACILITIES REVENUE-5.48%
15,000,000 Anaheim, California Public Financing Authority Lease,
Capital Appreciation Subordinated Public Improvements
Project-C, zero coupon, (FSA), due 09/01/2034............ 2,227,200
4,000,000 Metropolitan Pier and Exposition Authority Dedicated State
Tax, zero coupon, (FGIC), due 06/15/2008................. 2,463,520
6,000,000 Metropolitan Pier and Exposition Authority Dedicated State
Tax, zero coupon, (FGIC), due 06/15/2009................. 3,488,640
1,500,000 Santa Fe County, New Mexico Correctional System, (FSA),
6.00%, due 02/01/2027.................................... 1,738,530
800,000 Simi Valley, California Unified School District Certificate of
Participation, Refunding & Capital Improvement Projects,
(AMBAC), 5.25%, due 08/01/2022........................... 830,856
-----------
10,748,746
-----------
PREREFUNDED-16.88%
4,000,000 Chicago Wastewater Transmission Revenue, 6.75%,
due 11/15/2020........................................... 4,363,760
2,225,000 Colorado Springs Utilities System Revenue, 6.75%,
due 11/15/2021........................................... 2,475,001
5,000,000 Illinois State Sales Tax Revenue, Series N, 7.00%,
due 06/15/2020........................................... 5,553,000
7,000,000 Omaha Public Power District Electric, Series B,
6.15%, due 02/01/2012.................................... 7,901,390
2,750,000 Snohomish County School District #2 -
Everett General Obligation, Series B, 7.20%,
due 12/01/2010........................................... 3,017,713
2,000,000 Spokane County Water District #3 Revenue, (BIG),
7.60%, due 01/01/2008.................................... 2,076,160
3,400,000 University of Washington Revenue Bond, (MBIA),
7.00%, due 12/01/2021.................................... 3,813,270
3,500,000 Washington Public Power Supply System Nuclear Project
#2 Revenue, Series C, 7.625%, due 07/01/2010............. 3,909,570
-----------
33,109,864
-----------
TRANSPORTATION FACILITIES REVENUE-8.51%
$ 2,000,000 Foothill/Eastern Corridor Agency, California Toll Road,
Sr. Lien - Series A, 5.00%, due 01/01/2035............... $ 1,884,640
5,000,000 Massachusetts State Turnpike Authority Metropolitan
Highway System, Series A, 5.00%, due 01/01/2037.......... 4,849,900
5,000,000 San Francisco, California City & County Airport Commission
International Airport, Second Series - Issue 12-B,
(FGIC), 5.625%, due 05/01/2021........................... 5,200,150
5,000,000 San Joaquin Hills, California Transportation Corridor
Agency Toll Road, 5.00%, due 01/01/2033.................. 4,754,700
-----------
16,689,390
-----------
UTILITY REVENUE-23.13%
1,235,000 Anchorage, Alaska Electric Utility, (MBIA), 6.50%,
due 12/01/2013........................................... 1,463,697
2,775,000 Colorado Springs Utilities System, Series C,
6.75%, due 11/15/2021.................................... 3,064,127
6,000,000 Georgia Municipal Electric Authority Power, Series Z, (MBIA),
5.50%, due 01/01/2020.................................... 6,447,720
6,000,000 Indiana Municipal Power Agency, Series A,
6.125%, (MBIA), due 01/01/2013........................... 6,829,320
5,000,000 Memphis Electric System, 5.625%, due 01/01/2002............ 5,280,550
5,000,000 North Carolina Eastern Municipal Power Agency,
Series B, 7.00%, due 01/01/2008.......................... 5,770,950
2,000,000 Omaha Public Power District Electric, Series C,
5.50%, due 02/01/2014**.................................. 2,141,620
5,000,000 Orlando Utilities Commission Water & Electric,
6.00%, due 10/01/2010.................................... 5,643,350
5,000,000 Salt River Project Agricultural Improvement & Power District
Electrical System, Series C, 6.25%, due 01/01/2019....... 5,391,200
3,000,000 Salt River Project Agriculture, Series A, 5.75%,
due 01/01/2009........................................... 3,329,430
-----------
45,361,964
-----------
TOTAL LONG-TERM MUNICIPAL OBLIGATIONS (cost $172,602,505).. 191,796,299
-----------
SHORT-TERM MUNICIPAL OBLIGATIONS-1.07%
$ 500,000 Garfield County, Oklahoma Industrial Authority,
Pollution Control Revenue, Variable Rate Demand
Obligation, 3.75%*, due 01/01/2025....................... $ 500,000
100,000 Los Angeles, California Regional Airports,
Improvement Corporation Lease Revenue, Variable Rate
Demand Obligation, 5.00%*, due 12/01/2024................ 100,000
500,000 Wake County Industrial Facility & Pollution Control
Financing Authority, Variable Rate Demand Obligation,
3.70%*, due 05/01/2015................................... 500,000
1,000,000 Wilmington Hospital Revenue, Franciscan Health, Series A,
Variable Rate Demand Obligation, 5.00%*, due 07/01/2011.. 1,000,000
-----------
TOTAL SHORT-TERM MUNICIPAL OBLIGATIONS (cost $2,100,000)... 2,100,000
-----------
SHARES
--------
OTHER INVESTMENT-0.02%
31,763 Nuveen Tax Exempt Money Market Fund, 3.6573% (cost $31,763) 31,763
-----------
TOTAL INVESTMENTS (cost $174,739,268)...................... 193,928,062
Other assets net of liabilities............................ 2,202,403
-----------
NET ASSETS................................................. $196,130,465
===========
</TABLE>
*Variable Rate Demand Obligations are payable on demand and are secured by
letters of credit or other credit support. The interest rate, which is subject
to change periodically, is based on an index of market interest rates.
**A portion segregated as collateral pending settlement of Simi Valley
California Unified School District.
AMBAC = AMBAC Indemnity Corporation
BIG = Bond Investor Guaranty
FGIC = Financial Guaranty Insurance Company
FSA = Financial Security Assurance
LOC = Letter of Credit
MBIA = Municipal Bond Insurance Association
FEDERAL INCOME TAX INFORMATION:
Net unrealized appreciation of investments at December 31, 1997 of $19,188,794
based on aggregate cost of $174,739,268 was composed of gross appreciation of
$19,188,794 for investments having an excess of value over cost.
OTHER INFORMATION:
Purchases and sales of investment securities, other than short-term investments,
aggregated $40,029,834 and $53,133,298, respectively, during the year ended
December 31, 1997.
See accompanying notes to financial statements.
<PAGE>
FINANCIAL INFORMATION
DECEMBER 31, 1997
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, 1997, and the related statements of operations for the year then
ended and the statements of changes in net assets for the years ended December
31, 1997 and 1996 and the financial highlights for each of the five years in the
period ended December 31, 1997. 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, 1997, 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, 1997, and the
results of their operations, the changes in their net assets, and their
financial highlights for the above-stated periods in conformity with generally
accepted accounting principles.
LEMASTER & DANIELS PLLC
CERTIFIED PUBLIC ACCOUNTANTS
SPOKANE, WASHINGTON
JANUARY 20, 1998
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
COMPOSITE COMPOSITE COMPOSITE
U.S. GOVERNMENT INCOME TAX-EXEMPT
SECURITIES, INC. FUND, INC. BOND FUND, INC.
ASSETS ---------------- ---------- ---------------
<S> <C> <C> <C>
Investments at market (identified cost $106,456,387,
$82,722,268, and $174,739,268, respectively).................. $109,905,925 $ 86,531,297 $193,928,062
Cash............................................................ 12,429 - 11,127
Prepaid expense................................................. 11,133 11,278 10,602
Receivable for:
Interest...................................................... 855,296 1,330,090 3,128,417
Sale of Fund's shares......................................... 27,357 92,210 248,074
------------ ------------ ------------
Total assets.................................................... 110,812,140 87,964,875 197,326,282
------------ ------------ ------------
LIABILITIES
Payable for:
Investment securities purchased............................... - - 811,631
Repurchase of Fund's shares................................... 185,122 234,868 74,512
Dividends..................................................... 142,408 115,074 178,512
Accrued expenses and other payables........................... 79,283 59,543 131,162
------------ ------------ ------------
Total liabilities............................................... 406,813 409,485 1,195,817
------------ ------------ ------------
NET ASSETS...................................................... $110,405,327 $ 87,555,390 $196,130,465
============ ============ ============
COMPOSITION OF NET ASSETS
Capital stock, at par........................................... $ 1,019 $ 92,340 $ 2,426
Additional paid-in capital...................................... 114,283,468 97,191,734 176,939,245
Accumulated net realized loss................................... (7,328,698) (13,537,713) -
Net unrealized appreciation of investments...................... 3,449,538 3,809,029 19,188,794
------------ ------------ ------------
$110,405,327 $ 87,555,390 $196,130,465
============ ============ ============
SHARES OUTSTANDIING............................................. 10,186,796 9,234,028 24,256,248
============ ============ ============
Class A Shares:
Net asset value and redemption price per share (net assets of
$107,053,699, $77,864,314, and $188,020,645, respectively, for
9,877,528, 8,213,206, and 23,253,456 shares outstanding,
respectively)................................................ $10.84 $ 9.48 $ 8.09
====== ====== ======
Offering price per share (100/96 of net asset value per share).. $11.29 $ 9.88 $ 8.43
====== ====== ======
Class B Shares:
Net asset value, offering price and redemption price per share
(net assets of $3,351,628, $9,691,076, and $8,109,820,
respectively, for 309,268, 1,020,822, and 1,002,792 shares
outstanding, respectively)................................... $10.84 $ 9.49 $ 8.09
====== ====== ======
</TABLE>
On sales of $50,000 or more, the offering price of Class A is reduced.
A contingent deferred sales charge may be imposed on redemptions for Class B
shares.
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
COMPOSITE COMPOSITE COMPOSITE
U.S. GOVERNMENT INCOME TAX-EXEMPT
SECURITIES, INC. FUND, INC. BOND FUND, INC.
---------------- ---------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest income............................................... $ 8,575,819 $ 6,681,231 $11,310,385
----------- ----------- -----------
Expenses:
Management fees............................................... 769,591 553,562 987,356
Distribution expenses - Class A............................... 249,837 169,132 407,707
Distribution expenses - Class B............................... 29,872 78,016 66,282
Shareholder servicing - Class A............................... 102,702 85,007 80,006
servicing - Class B............................................. 2,742 8,515 4,541
Postage, printing and office expense.......................... 69,911 52,029 54,947
Registration and filing fees.................................. 22,077 22,666 18,037
Custodial fees................................................ 43,651 23,081 18,650
Auditing and legal fees....................................... 11,787 11,192 12,426
Directors' fees............................................... 8,499 8,499 8,499
Insurance..................................................... 3,927 3,195 6,047
----------- ----------- -----------
Total expenses.................................................. 1,314,596 1,014,894 1,664,498
Fees paid indirectly............................................ (2,671) (2,840) (3,033)
----------- ----------- -----------
Net expenses.................................................... 1,311,925 1,012,054 1,661,465
----------- ----------- -----------
Net investment income........................................... 7,263,894 5,669,177 9,648,920
----------- ----------- -----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Realized gain (loss) from investment transactions............... (493,856) 1,059,244 2,286,826
Unrealized appreciation of investments during the year.......... 4,371,425 1,919,907 4,270,931
----------- ----------- -----------
Net realized and unrealized gain on investments................. 3,877,569 2,979,151 6,557,757
----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ...................................... $11,141,463 $ 8,648,328 $16,206,677
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
COMPOSITE COMPOSITE COMPOSITE
U.S. GOVERNMENT INCOME TAX-EXEMPT BOND
SECURITIES, INC. FUND, INC. FUND, INC.
------------------ ------------------ ------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income..............$ 7,263,894 $ 9,447,418 $5,669,177 $ 6,205,553 $ 9,648,920 $ 10,608,652
Realized gain (loss) from investment
transactions..................... (493,856) (386,962) 1,059,244 1,098,430 2,286,826 (1,336,656)
Unrealized appreciation (depreciation)
of investments during the year... 4,371,425 (6,198,006) 1,919,907 (4,354,365) 4,270,931 (4,335,561)
----------- ----------- ----------- ----------- ----------- ------------
Net increase in net assets
resulting from operations........ 11,141,463 2,862,450 8,648,328 2,949,618 16,206,677 4,936,435
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income:
Class A.......................... (7,110,859) (9,312,060) (5,227,656) (5,877,677) (9,381,180) (10,445,418)
Class B.......................... (153,035) (135,358) (441,521) (327,876) (267,740) (163,235)
Distributions from net capital gains
from investment transactions:
Class A.......................... - - - - (283,504) -
Class B.......................... - - - - (11,875) -
NET CAPITAL SHARE TRANSACTIONS
Class A.......................... (34,875,593) (32,648,901) (11,496,316) (7,741,496) (21,611,179) (20,829,678)
Class B.......................... 281,357 840,035 2,293,277 2,790,064 2,607,483 2,636,917
----------- ----------- ----------- ----------- ----------- ------------
Total decrease in net assets....... (30,716,667) (38,393,834) (6,223,888) (8,207,367) (12,741,318) (23,864,979)
NET ASSETS
Beginning of the year.............. 141,121,994 179,515,828 93,779,278 101,986,645 208,871,783 232,736,762
----------- ----------- ----------- ----------- ----------- ------------
End of the year................... $110,405,327 $141,121,994 $87,555,390 $ 93,779,278 $196,130,465 $208,871,783
=========== =========== =========== =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
YEAR ENDED DECEMBER 31,
----------------------------------------------
CLASS A 1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ........................ $10.46 $10.84 $ 9.64 $10.79 $10.63
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... 0.62 0.63 0.63 0.63 0.69
Net gains or losses on securities
(both realized and unrealized)........................... 0.38 (0.38) 1.20 (1.15) 0.16
------- ------- ------- ------- -------
Total from investment operations........................ 1.00 0.25 1.83 (0.52) 0.85
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net investment income).................... (0.62) (0.63) (0.63) (0.63) (0.69)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR .............................. $10.84 $10.46 $10.84 $ 9.64 $10.79
======= ======= ======= ======= =======
TOTAL RETURN (1) .......................................... 9.92% 2.48% 19.45% -4.91% 8.12%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($1,000's)....................... $107,054 $138,159 $177,310 $188,068 $268,112
Ratio of expenses to average net assets(2) ............... 1.05% 0.97% 1.01% 0.97% 0.99%
Ratio of net income to average net assets................. 5.92% 6.01% 6.08% 6.19% 6.29%
Portfolio turnover rate .................................. 6% 16% 8% 34% 51%
MARCH 30
YEAR ENDED DECEMBER 31, TO
CLASS B -------------------------- DEC. 31,
1997 1996 1995 1994(3)
------ ------ ------ -------
NET ASSET VALUE, BEGINNING OF PERIOD ...................... $10.46 $10.84 $ 9.64 $10.24
INCOME FROM INVESTMENT OPERATIONS ------ ------ ------ -------
Net investment income..................................... 0.54 0.54 0.54 0.41
Net gains or losses on securities
(both realized and unrealized)........................... 0.38 (0.38) 1.20 (0.60)
------ ------ ------ -------
Total from investment operations........................ 0.92 0.16 1.74 (0.19)
LESS DISTRIBUTIONS ------ ------ ------ -------
Dividends (from net investment income).................... (0.54) (0.54) (0.54) (0.41)
------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD ............................ $10.84 $10.46 $10.84 $ 9.64
====== ====== ====== =======
TOTAL RETURN (1) .......................................... 9.03% 1.58% 18.48% -1.86%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($1,000's)...................... $3,352 $2,963 $2,206 $1,063
Ratio of expenses to average net assets(2) ............... 1.84% 1.85% 1.84% 1.76%(4)
Ratio of net income to average net assets................. 5.08% 5.14% 5.20% 5.43%(4)
Portfolio turnover rate .................................. 6% 16% 8% 34%
</TABLE>
(1) Total returns do not reflect a sales charge and are not annualized.
(2) Ratio of expenses to average net assets includes expenses paid indirectly
beginning in fiscal year 1995.
(3) From the commencement of offering Class B shares.
(4) Annualized.
<PAGE>
<TABLE>
<CAPTION>
COMPOSITE INCOME FUND, INC.
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
CLASS A ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ........................ $ 9.15 $ 9.44 $ 8.29 $ 9.33 $ 8.99
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... 0.60 0.59 0.59 0.60 0.61
Net gains or losses on securities
(both realized and unrealized)........................... 0.33 (0.29) 1.15 (1.04) 0.34
------ ------ ------ ------ ------
Total from investment operations........................ 0.93 0.30 1.74 (0.44) 0.95
LESS DISTRIBUTIONS ------ ------ ------ ------ ------
Dividends (from net investment income).................... (0.60) (0.59) (0.59) (0.60) (0.61)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR .............................. $ 9.48 $ 9.15 $ 9.44 $ 8.29 $ 9.33
====== ====== ====== ====== ======
TOTAL RETURN (1) .......................................... 10.51% 3.46% 21.58% -4.82% 10.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($1,000's)....................... $77,864 $86,657 $97,534 $88,102 $104,876
Ratio of expenses to average net assets(2) ............... 1.08% 1.03% 1.08% 1.04% 1.08%
Ratio of net income to average net assets................. 6.47% 6.52% 6.59% 6.83% 6.58%
Portfolio turnover rate .................................. 27% 42% 43% 26% 51%
MARCH 30
YEAR ENDED DECEMBER 31, TO
CLASS B -------------------------- DEC. 31,
1997 1996 1995 1994(3)
------ ------ ------ -------
NET ASSET VALUE, BEGINNING OF PERIOD ...................... $ 9.17 $ 9.46 $ 8.30 $ 8.85
INCOME FROM INVESTMENT OPERATIONS ------ ------ ------ -------
Net investment income..................................... 0.53 0.52 0.51 0.40
Net gains or losses on securities
(both realized and unrealized)........................... 0.32 (0.29) 1.16 (0.55)
------ ------ ------ -------
Total from investment operations........................ 0.85 0.23 1.67 (0.15)
LESS DISTRIBUTIONS ------ ------ ------ -------
Dividends (from net investment income).................... (0.53) (0.52) (0.51) (0.40)
------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD ............................ $ 9.49 $ 9.17 $ 9.46 $ 8.30
====== ====== ====== =======
TOTAL RETURN (1) .......................................... 9.51% 2.59% 20.70% -1.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($1,000's)...................... $9,691 $7,122 $4,452 $2,299
Ratio of expenses to average net assets(2) ............... 1.86% 1.89% 1.91% 1.80%(4)
Ratio of net income to average net assets................. 5.65% 5.69% 5.73% 6.25%(4)
Portfolio turnover rate .................................. 27% 42% 43% 26%
</TABLE>
(1) Total returns do not reflect a sales charge and are not annualized.
(2) Ratio of expenses to average net assets includes expenses paid indirectly
beginning in fiscal year 1995.
(3) From the commencement of offering Class B shares.
(4) Annualized.
<PAGE>
<TABLE>
<CAPTION>
COMPOSITE TAX-EXEMPT BOND FUND, INC.
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
CLASS A ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ........................ $ 7.83 $ 8.02 $ 7.13 $ 8.04 $ 7.58
INCOME FROM INVESTMENT OPERATIONS ------ ------ ------ ------ ------
Net investment income..................................... 0.38 0.38 0.38 0.39 0.40
Net gains or losses on securities
(both realized and unrealized)........................... 0.27 (0.19) 0.89 (0.91) 0.54
------ ------ ------ ------ ------
Total from investment operations........................ 0.65 0.19 1.27 (0.52) 0.94
LESS DISTRIBUTIONS ------ ------ ------ ------ ------
Dividends (from net investment income).................... (0.38) (0.38) (0.38) (0.39) (0.40)
Distributions (from net capital gains).................... (0.01) - - - (0.08)
(0.39) (0.38) (0.38) (0.39) (0.48)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR .............................. $ 8.09 $ 7.83 $ 8.02 $ 7.13 $ 8.04
====== ====== ====== ====== ======
TOTAL RETURN (1) .......................................... 8.59% 2.52% 18.25% -6.53% 12.54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($1,000's)....................... $188,021 $203,606 $230,055 $215,438 $259,045
Ratio of expenses to average net assets(2) ............... 0.80% 0.75% 0.81% 0.79% 0.81%
Ratio of net income to average net assets................. 4.84% 4.90% 5.03% 5.23% 4.97%
Portfolio turnover rate .................................. 21% 22% 8% 12% 19%
MARCH 30
YEAR ENDED DECEMBER 31, TO
------------------------- DEC.31,
1997 1996 1995 1994(3)
CLASS B ------ ------ ------ -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ...................... $7.83 $ 8.02 $ 7.13 $ 7.49
INCOME FROM INVESTMENT OPERATIONS ------ ------ ------ -------
Net investment income..................................... 0.32 0.31 0.32 0.25
Net gains or losses on securities
(both realized and unrealized)........................... 0.27 (0.19) 0.89 (0.36)
------ ------ ------ -------
Total from investment operations........................ 0.59 0.12 1.21 (0.11)
LESS DISTRIBUTIONS ------ ------ ------ -------
Dividends (from net investment income).................... (0.32) (0.31) (0.32) (0.25)
Distributions (from net capital gains).................... (0.01) - - -
------ ------ ------ -------
(0.33) (0.31) (0.32) (0.25)
------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD ............................ $ 8.09 $ 7.83 $ 8.02 $ 7.13
====== ====== ====== =======
TOTAL RETURN (1) .......................................... 7.71% 1.61% 17.30% -1.46%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period ($1,000's)...................... $8,110 $5,266 $2,682 $1,258
Ratio of expenses to average net assets(2) ............... 1.62% 1.65% 1.62% 1.58%(4)
Ratio of net income to average net assets................. 4.00% 4.01% 4.18% 4.53%(4)
Portfolio turnover rate .................................. 21% 22% 8% 12%
</TABLE>
(1) Total returns do not reflect a sales charge and are not annualized.
(2) Ratio of expenses to average net assets includes expenses paid indirectly
beginning in fiscal year 1995.
(3) From the commencement of offering Class B shares.
(4) Annualized.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Composite U.S. Government Securities, Inc., Composite Income Fund, Inc., and
Composite Tax-Exempt Bond Fund, Inc. (together the "Funds") are registered under
the Investment Company Act of 1940, as amended, as open-end diversified
management investment companies.
Each Fund offers both Class A and Class B shares. The two classes of shares
differ in their respective sales charges, shareholder servicing fees, and
distribution and service fees.
Following is a summary of significant accounting policies, in conformity with
generally accepted accounting principles, which are consistently followed by
each Fund in the preparation of their financial statements.
a. 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 last reported sales price for securities traded
on a national securities exchange or securities traded over-the-counter, or
valuations based upon transactions of a security, quotations from dealers,
market transactions in comparable securities, and various relationships
between securities, in determining value. Investment securities 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.
b. Each Fund requires the custodian to take possession, to have legally
segregated in the Federal Reserve Book Entry System or to have segregated
within the custodian's vault, all securities held as collateral for repur-
chase agreements. The market value of the underlying securities is required
to be at least 102% of the resale price at the time of purchase. If the
seller of the agreement defaults and the value of collateral declines, or if
the seller enters an insolvency proceeding, realization of the value of the
collateral by the Fund may be delayed or limited.
c. Income and expenses (other than expenses attributable to a specific class)
are allocated daily to each class based on the value of settled shares
outstanding. Gains and losses are allocated daily to each class based on
value of shares outstanding. Dividends are declared separately for each
class. Neither class has preferential dividend rights; differences in per
share dividend rates are generally due to differences in separate class ex-
penses, including distribution and service fees.
d. Interest income is earned from the settlement date on securities purchased
and is recorded on the accrual basis.
e. Dividends to shareholders are recorded on a daily basis and distributed
monthly.
f. Security transactions are accounted for on the trade date (execution date of
the order to buy or sell). The cost of investments sold is determined by use
of the specific identification method for both financial reporting and
federal income tax purposes.
g. Each Fund complies with requirements of the Internal Revenue Code applicable
to regulated investment companies and distributes taxable income so that no
provision for federal income or excise tax is required. Income dividends and
capital gain distributions are determined in accordance with income tax regu-
lations which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments for expiring capital
loss carry forwards, deferral of wash sales, and post-October losses.
Expiring capital loss carry forwards are charged to additional paid-in
capital.
h. Custodial fees have been increased by $2,671, $2,840, and $3,033 for U.S.
Government Securities, Income Fund, and Tax-Exempt Bond Fund, respectively,
as a result of "expense offset arrangements." The Funds could have otherwise
employed the assets to produce income if they had not entered into such
arrangements. In accordance with regulations, such amounts are added to net
custodial fees and then reflected as a deduction, "fees paid indirectly" to
derive net expenses. There were no "expense offset arrangements" other than
custodial fees.
i. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
<PAGE>
NOTE 2 - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
The amounts of fees and expenses described below are shown on each Fund's
statement of operations. Composite Research & Management Co. (the "Adviser")
manages each Fund and Murphey Favre Securities Services, Inc. (the "Transfer
Agent") is the transfer and shareholder servicing agent. On July 14, 1997, Com-
posite Funds Distributor, Inc. (the "Distributor"), began operations as the
principal underwriter. Prior to July 14, 1997, Murphey Favre, Inc., was the
principal underwriter. All are affiliates of Washington Mutual Bank and Wash-
ington Mutual fsb and subsidiaries of Washington Mutual, Inc.
Management fees were paid by each Fund to the Adviser. For the U.S.
Government Securities and Income Fund, the fees are based on an annual rate of
0.625% of average daily net assets and is reduced to 0.50% of average daily net
assets in excess of $250 million. For the Tax-Exempt Bond Fund, the fee is based
on an annual rate of 0.50% of average daily net assets and is reduced to 0.40%
of average daily net assets in excess of $250 million. Under terms of each
Fund's management contract, the Adviser has agreed to reimburse a Fund for fund
expenses in excess of 1.50% of average daily net assets up to $30 million, and
1% of such assets over $30 million. The Income Fund and Tax-Exempt Bond Fund
will be further reimbursed for expenses exceeding .75% of average daily net
assets exceeding $130 million. No such reimbursement was required during the
year ended December 31, 1997.
Directors' fees and expenses were paid directly by each Fund to directors
having no affiliation with the Funds other than in their capacity as directors.
Other officers and directors received no compensation from the Funds.
Shareholder servicing fees were paid to the Transfer Agent for services
incidental to issuance and transfer of shares, maintaining shareholder lists,
and issuing and mailing distributions and reports. Under terms of the
shareholder servicing agreement, the authorized monthly shareholder servicing
fees are $1.45 and $1.55 ($1.60 and $1.70 prior to April 1, 1997) per Class A
and Class B share accounts, respectively.
Distribution expenses were paid to the Distributor in accordance with
separate distribution plans for Class A and Class B shares. Each Fund's Board of
Directors adopted the Plans pursuant to Rule 12b-1 of the Investment Company Act
of 1940. The Class A distribution plan provides that each Fund will reimburse
the Distributor up to 0.25% of the average daily net assets attributable to
Class A shares annually for a portion of its expenses incurred in distributing
each Fund's Class A shares, including payments to brokers. The Class B
distribution Plan provides that the Funds will pay the Distributor a
distribution fee, equal to 0.75% annually, and a service fee of 0.25%, of the
Funds' average daily net assets attributable to Class B shares.
For the year ended December 31, 1997, commissions (sales charges paid by
investors) on the purchases of Class A shares totaled $55,967, $102,701, and
$195,489, of which $46,091, $76,816, and $158,451 was retained by the
Distributor and its predecessor, Murphey Favre, Inc., in the U.S. Government
Securities, Income Fund, and Tax-Exempt Bond Fund, respectively. For the year
ended December 31, 1997, the Distributor and its predecessor, Murphey Favre,
Inc., received contingent deferred sales charges of $8,623, $20,754, and
$11,543, for the U.S. Government Securities, Income Fund, and Tax-Exempt Bond
Fund, respectively, upon redemption of Class B shares as reimbursement for sales
commissions advanced by the Distributor at the time of such sales.
NOTE 3 - CAPITAL STOCK
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
Capital stock authorized.............1,000,000,000
Designated as:
Class A............................ 600,000,000
Class B............................ 400,000,000
Par value per share.................. $0.0001
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------- ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SHARES
Sold................................................. 424,259 749,623 81,465 113,842
Issued for reinvestment of dividends................. 489,525 655,835 11,762 10,765
----------- ----------- ---------- ----------
913,784 1,405,458 93,227 124,607
Reacquired........................................... (4,240,473) (4,553,107) (67,110) (44,911)
----------- ----------- ---------- ----------
Net increase (decrease).............................. (3,326,689) (3,147,649) 26,117 79,696
=========== =========== ========== ==========
AMOUNT
Sold................................................. $4,447,940 $ 7,854,380 $ 864,913 $1,194,334
Issued for reinvestment of dividends................. 5,145,658 6,819,272 123,880 111,800
----------- ----------- ---------- ----------
9,593,598 14,673,652 988,793 1,306,134
Reacquired........................................... (44,469,191) (47,322,553) (707,436) (466,099)
----------- ----------- ---------- ----------
Net increase (decrease).............................. $(34,875,593) $(32,648,901) $ 281,357 $ 840,035
=========== =========== ========== ==========
</TABLE>
<PAGE>
NOTE 3 - CAPITAL STOCK (continued)
COMPOSITE INCOME FUND, INC.
Capital stock authorized............. 50,000,000
Designated as:
Class A............................ 30,000,000
Class B............................ 20,000,000
Par value per share.................. $0.01
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------ ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SHARES
Sold................................................. 1,212,967 1,208,364 467,109 383,465
Issued for reinvestment of dividends................. 413,335 477,619 40,332 30,990
---------- ---------- ---------- ----------
1,626,302 1,685,983 507,441 414,455
Reacquired........................................... (2,880,356) (2,547,839) (263,592) (108,355)
---------- ---------- ---------- ----------
Net increase (decrease).............................. (1,254,054) (861,856) 243,849 306,100
========== ========== ========== ==========
AMOUNT
Sold................................................. $ 11,286,277 $10,996,951 $4,354,889 $3,492,257
Issued for reinvestment of dividends................. 3,823,083 4,323,174 374,440 280,728
---------- ---------- ---------- ----------
15,109,360 15,320,125 4,729,329 3,772,985
Reacquired........................................... (26,605,676) (23,061,621) (2,436,052) (982,921)
---------- ---------- ---------- ----------
Net increase (decrease).............................. $(11,496,316) $(7,741,496) $2,293,277 $2,790,064
========== ========== ========== ==========
</TABLE>
COMPOSITE TAX-EXEMPT BOND FUND, INC.
Capital stock authorized............. 500,000,000
Designated as:
Class A............................ 300,000,000
Class B............................ 200,000,000
Par value per share.................. $0.0001
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------ ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SHARES
Sold................................................. 1,161,023 1,460,406 398,272 390,317
Issued for reinvestment of dividends................. 951,410 1,037,464 27,480 26,578
---------- ---------- ---------- ----------
2,112,433 2,497,870 425,752 416,895
Reacquired........................................... (4,861,387) (5,197,278) (95,335) (79,060)
---------- ---------- ---------- ----------
Net increase (decrease).............................. (2,748,954) (2,699,408) 330,417 337,835
========== ========== ========== ==========
AMOUNT
Sold................................................. $ 9,139,630 $ 11,398,132 $3,133,343 $3,119,779
Issued for einvestment of dividends.................. 7,486,759 8,078,800 218,328 128,510
---------- ---------- ---------- ----------
16,626,389 19,476,932 3,351,671 3,248,289
Reacquired........................................... (38,237,568) (40,306,611) (744,188) (611,372)
---------- ---------- ---------- ----------
Net increase (decrease).............................. $(21,611,179) $(20,829,679) $2,607,483 $2,636,917
========== ========== ========== ==========
</TABLE>
<PAGE>
NOTE 4 - SHAREHOLDER MEETING RESULTS
A special meeting of the Funds' shareholders was held on December 23, 1997.
Each matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, and abstained, are set forth below:
1. The shareholders of each Fund were asked to approve the reorganization of the
Fund as a Massachusetts Business Trust. Sufficient votes were not received at
the time of the meeting so a shareholder meeting has been rescheduled for
February 20, 1998:
<TABLE>
<CAPTION>
SHARES SHARES
VOTED VOTED
"FOR" "AGAINST" ABSTAINED
--------- --------- ---------
<S> <C> <C> <C>
U.S. Government Securities.................. 5,956,060 230,779 556,153
Income Fund................................. 5,636,314 159,419 416,368
Tax-Exempt Bond Fund........................ 16,107,675 658,938 1,057,048
</TABLE>
2. The shareholders of each Fund elected the following thirteen directors:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES INCOME FUND TAX-EXEMPT BOND FUND
-------------------------- --------------------- ------------------------
SHARES SHARES SHARES
SHARES WITHHOLDING SHARES WITHHOLDING SHARES WITHHOLDING
VOTED AUTHORITY VOTED AUTHORITY VOTED AUTHORITY
"FOR" TO VOTE "FOR" TO VOTE "FOR" TO VOTE
--------- ------------- ------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
David E. Anderson............... 6,429,873 341,382 6,104,481 221,658 17,218,113 642,775
Wayne L. Attwood, M.D........... 6,431,347 339,908 6,105,631 220,509 17,242,129 618,758
Arthur H. Bernstein............. 6,429,873 341,382 6,106,876 219,264 17,212,234 648,653
Kristianne Blake................ 6,431,347 339,908 6,110,832 215,308 17,252,011 608,877
Edmond R. Davis................. 6,428,748 342,507 6,106,655 219,485 17,217,312 643,576
John W. English................. 6,429,873 341,382 6,106,655 219,485 17,222,637 638,250
Anne V. Farrell................. 6,431,347 339,908 6,110,832 215,308 17,246,654 614,233
Michael K. Murphy............... 6,431,347 339,908 6,111,871 214,269 17,252,812 608,076
Alfred E. Osborne, Jr. ......... 6,430,192 341,063 6,104,237 221,903 17,221,836 639,051
William G. Papesh............... 6,431,347 339,908 6,111,871 214,269 17,246,654 614,233
Daniel Pavelich................. 6,431,347 339,908 6,110,832 215,308 17,237,941 622,946
Jay Rockey...................... 6,430,729 340,526 6,110,807 215,333 17,242,129 618,758
Richard C. Yancey............... 6,431,347 339,908 6,107,813 218,326 17,239,481 621,406
</TABLE>
3. The shareholders of each Fund approved an amended Investment Manager
Agreement:
<TABLE>
<CAPTION>
SHARES SHARES
VOTED VOTED
"FOR" "AGAINST" ABSTAINED
--------- ----------- -----------
<S> <C> <C> <C>
U.S. Government Securities.................. 5,914,823 235,825 620,607
Income Fund................................. 5,684,940 154,070 487,130
Tax-Exempt Bond Fund........................ 15,878,245 664,128 1,318,515
</TABLE>
4. The shareholders of each Fund approved an amended Distribution Plan of the
Fund for its Class A shares:
<TABLE>
<CAPTION>
SHARES SHARES
VOTED VOTED
"FOR" "AGAINST" ABSTAINED
---------- --------- ---------
<S> <C> <C> <C>
U.S. Government - Class A................... 5,631,527 284,561 663,332
U.S. Government - Class B................... 147,611 10,977 4,982
Income Fund - Class A....................... 5,091,958 149,315 480,830
Income Fund - Class B....................... 414,271 23,737 48,986
Tax-Exempt Bond - Class A................... 15,180,941 648,176 1,439,694
Tax-Exempt Bond - Class B................... 469,782 30,513 54,553
</TABLE>
<PAGE>
NOTE 4 - SHAREHOLDER MEETING RESULTS (continued)
5. The shareholders of each Fund approved certain amendments to existing
investment restrictions allowing each Fund to invest in the following types
of securities:
<TABLE>
<CAPTION>
SHARES SHARES
VOTED VOTED
"FOR" "AGAINST" ABSTAINED
U.S. GOVERNMENT SECURITIES --------- --------- ---------
<S> <C> <C> <C>
Rule 144A Securities........................ 5,709,823 330,472 702,696
U.S. Government Agency Securities........... 5,722,625 352,894 667,472
Dollar Rolls................................ 5,805,566 246,639 690,786
SHARES SHARES
VOTED VOTED
INCOME FUND "FOR" "AGAINST" ABSTAINED
--------- --------- ---------
Rule 144A Securities........................ 5,429,023 211,985 568,091
Foreign Currency............................ 5,452,798 185,996 570,305
Dollar Rolls................................ 5,477,216 178,096 553,788
REITs....................................... 5,459,334 194,290 555,473
Interest Rate Futures....................... 5,473,825 159,031 576,243
SHARES SHARES
VOTED VOTED
TAX-EXEMPT BOND FUND "FOR" "AGAINST" ABSTAINED
--------- --------- ---------
Rule 144A Securities........................ 15,585,347 694,051 1,544,263
Interest Rate Futures....................... 15,667,661 635,543 1,520,457
</TABLE>
NOTE 5 - SUBSEQUENT EVENTS
On September 23, 1997, the Funds' Board of Directors authorized the
reorganization of each of the Funds into a series of a Massachusetts business
trust. The reorganization will not result in the dilution of the interests of
the Funds' shareholders and the shareholders will not bear any portion of the
expense incurred relating to the reorganization. The effective date of the
reorganization is expected to be March 20, 1998.
Also on September 23, 1997, the Board of Directors of Composite U.S.
Government Securities, Inc., Composite Income Fund, Inc., and Composite
Tax-Exempt Bond Fund, Inc., approved the acquisition of the net assets of the
Sierra U.S. Government Fund, Sierra Corporate Income Fund, and Sierra National
Municipal Fund, respectively, each a series of the Sierra Trust Funds. On
October 28, 1997, the Trustees of the Sierra Funds approved the acquisitions
which were contingent upon a vote of shareholders. Subsequent to December 31,
1997, Sierra Fund's shareholders approved the acquisitions. The transactions are
expected to occur in March 1998. The transactions will not result in the
dilution of the interests of either Composite or Sierra shareholders and they
will not bear any portion of the expense relating to these transactions.
<PAGE>
========================================
----------------------------------------
For further information, please contact:
FUND OFFICES
Composite Group of Funds
601 W. Main Avenue, Suite 300
Spokane, WA 99201-0613
Phone: (509) 353-3550
Toll free: (800) 543-8072
----------------------------------------
========================================
ADVISER
Composite Research & Management Co.
1201 Third Avenue, Suite 1400 Seattle, WA 98101-3015
DISTRIBUTOR
Composite Funds Distributor, Inc.
601 W. Main Avenue, Suite 300 Spokane, WA 99201-0613
CUSTODIAN
Investors Fiduciary Trust Company
801 Pennsylvania Avenue Kansas City, MO 64105
INDEPENDENT PUBLIC ACCOUNTANTS
LeMaster & Daniels PLLC
601 W. Riverside Avenue, Suite 700 Spokane, WA 99201-0614
COUNSEL
Paine, Hamblen, Coffin, Brooke & Miller LLP
717 W. Sprague Avenue, Suite 1200 Spokane, WA 99204-0464
OFFICERS BOARD OF DIRECTORS
President Members
William G. Papesh David E. Anderson
Senior Vice President Wayne L. Attwood, M.D.
Monte D. Calvin Arthur H. Bernstein
Senior Vice President Kristianne Blake
Sandra A. Cavanaugh Edmond R. Davis
Vice President & Secretary John W. English
John T. West Anne V. Farrell
Vice President & Treasurer Michael K. Murphy
Jeffrey L. Lunzer Alfred E. Osborne
Vice President William G. Papesh
Gene G. Branson Daniel L. Pavelich
Jay Rockey
Richard C. Yancey
This report is submitted for the general information of
shareholders of the Funds. For more detailed information
about the Funds, their officers and directors, fees, expenses
and other pertinent information, please see the prospectus
of the Funds. This report is not authorized for distribution
to prospective investors in the Funds unless preceded or
accompanied by an effective prospectus.
[RECYCLE LOGO]
CBFAR (2/98) 42K
COMPOSITE GROUP
BOND
FUNDS
ANNUAL
REPORT
DECEMBER 31,
1997
COMPOSITE
U.S. GOVERNMENT
SECURITIES, INC.
COMPOSITE
INCOME FUND, INC.
COMPOSITE
TAX-EXEMPT BOND
FUND, INC.
[COMPOSITE GROUP OF FUNDS LOGO]
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 174,739,268
<INVESTMENTS-AT-VALUE> 193,928,062
<RECEIVABLES> 3,376,491
<ASSETS-OTHER> 21,729
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 197,326,282
<PAYABLE-FOR-SECURITIES> 811,631
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 384,186
<TOTAL-LIABILITIES> 1,195,817
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 176,941,671
<SHARES-COMMON-STOCK> 23,253,456
<SHARES-COMMON-PRIOR> 26,002,410
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19,188,794
<NET-ASSETS> 196,130,465
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,310,385
<OTHER-INCOME> 0
<EXPENSES-NET> (1,661,465)
<NET-INVESTMENT-INCOME> 9,648,920
<REALIZED-GAINS-CURRENT> 2,286,826
<APPREC-INCREASE-CURRENT> 4,270,931
<NET-CHANGE-FROM-OPS> 16,206,677
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,381,180)
<DISTRIBUTIONS-OF-GAINS> (283,504)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,161,023
<NUMBER-OF-SHARES-REDEEMED> (4,861,387)
<SHARES-REINVESTED> 951,410
<NET-CHANGE-IN-ASSETS> (12,741,318)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,991,447)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 987,356
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,661,465
<AVERAGE-NET-ASSETS> 200,871,278
<PER-SHARE-NAV-BEGIN> 7.83
<PER-SHARE-NII> 0.38
<PER-SHARE-GAIN-APPREC> 0.27
<PER-SHARE-DIVIDEND> (0.38)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.09
<EXPENSE-RATIO> 0.80
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 174,739,268
<INVESTMENTS-AT-VALUE> 193,928,062
<RECEIVABLES> 3,376,491
<ASSETS-OTHER> 21,729
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 197,326,282
<PAYABLE-FOR-SECURITIES> 811,631
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 384,186
<TOTAL-LIABILITIES> 1,195,817
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 176,941,671
<SHARES-COMMON-STOCK> 1,002,792
<SHARES-COMMON-PRIOR> 672,375
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19,188,794
<NET-ASSETS> 196,130,465
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,310,385
<OTHER-INCOME> 0
<EXPENSES-NET> (1,661,465)
<NET-INVESTMENT-INCOME> 9,648,920
<REALIZED-GAINS-CURRENT> 2,286,826
<APPREC-INCREASE-CURRENT> 4,270,931
<NET-CHANGE-FROM-OPS> 16,206,677
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (267,740)
<DISTRIBUTIONS-OF-GAINS> (11,875)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 398,272
<NUMBER-OF-SHARES-REDEEMED> (95,335)
<SHARES-REINVESTED> 27,480
<NET-CHANGE-IN-ASSETS> (12,741,318)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,991,447)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 987,356
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,661,465
<AVERAGE-NET-ASSETS> 200,871,278
<PER-SHARE-NAV-BEGIN> 7.83
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> 0.27
<PER-SHARE-DIVIDEND> (0.32)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.09
<EXPENSE-RATIO> 1.62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
