<PAGE>
THE GNMA FUND INVESTMENT
ACCUMULATION PROGRAM, INC.
LOGO
ANNUAL REPORT
DECEMBER 31, 1996
<PAGE>
[A chart, captioned "Comparison of the Change in Value of a $10,000
Investment in the GNMA Fund Investment Accumulation Program and the
Salomon Brothers 30 Year GNMA Index," compares the cumulative
performance from 1986 to 1996 of the Salomon Brothers 30 Year GNMA
and the GIAP. A box in the lower right quadrant indicates the
components of the chart. The "x" axis reflects dollar amounts
in $5,000 increments; the "y" axis reflects years. The initial
value of each is $10,000; the ending values are $23,462.98 and
$21,627.03 for the Salomon Brothers 30 Year GNMA and the GIAP,
respectively.]
Average Annual Total Return for Periods Ending 12/31/96
1 year ended 4.39%
5 years ended 6.09%
10 years ended 8.01%
2
<PAGE>
To Our Shareholders:
We are pleased to present the shareholder report for The GNMA Fund
Investment Accumulation Program, Inc. for the year ended December 31, 1996.
During the year, the Program generated net investment income of 6.84% as a
percentage of average net assets and paid dividends of $1.39 per share.
During the year, interest rates on 30 year Treasury securities fluctuated
greatly from a low of nearly 6.00% in January to over 7.10% in June to end the
year at 6.58%. GNMA current coupons purchased for the Program fluctuated from a
low of 6.50% to a high of 8.00%. While principal pay downs of the GNMA pools
held in the Program averaged nearly $2.6 million per month during the first six
months of the year, pay downs slowed to $1.8 million per month during the second
six months of the year. Purchases of program shares averaged $3.0 million per
month and redemptions averaged $3.6 million per month.
Cash balances available and reserved for the purchase of GNMAs on their
corresponding settlement dates were invested in Short Term Treasury Bills. This
contributed $54,013 of income to the Program.
This Program should continue to provide a good means of compounding
distributions from your unit trust holdings through its monthly dividend, and
barring any dramatic change in interest rates should provide investors with
attractive returns in the future.
Thank you for including Defined Asset Funds and The GNMA Fund Investment
Accumulation Program, Inc. among your investment portfolio.
Officers and Directors Sincerely,
Michael J. Perini-President and Director
Leonard I. Shankman-Director
Robert A. Kavesh-Director
Philip G. Milot-Vice President
Teresa A. Koncick-Secretary
Gerard J. Fenerty-Treasurer Michael J. Perini
President
Custodian and Transfer Agent
The Bank of New York
P.O. Box 974 Wall Street Station
New York, N.Y. 10268-0974
3
<PAGE>
- --------------------------------------------------------------------------------
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE><CAPTION>
INTEREST VALUE (NOTE
SECURITY DESCRIPTION RATE RANGE OF MATURITIES FACE AMOUNT* COST* 1A)
- ------------------------------------------- ----------- ------------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 6.50% 05/15/23-03/15/26 $ 25,125,431 $ 25,320,258 $ 24,002,650
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 7.00 03/15/22-04/15/26 70,086,379 70,816,826 68,662,781
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 7.50 02/15/22-12/25/26 39,864,643 40,276,252 39,939,389
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 8.00 03/15/17-11/15/26 25,715,264 25,922,207 26,261,713
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 8.50 06/15/16-05/15/25 15,345,581 15,536,943 15,911,450
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 9.00 04/15/16-10/15/21 8,592,815 8,616,651 9,065,420
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 9.50 10/15/09-11/15/20 9,045,989 9,060,641 9,783,806
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 10.00 10/15/15-06/15/18 5,585,545 5,605,244 6,131,856
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 11.50 04/15/13-12/15/15 2,570,176 2,517,315 2,920,350
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 12.00 02/15/13-11/15/15 1,167,347 1,178,414 1,342,443
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 12.50 04/15/13 15,008 15,233 17,405
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 13.00 04/15/13 48,254 49,449 56,322
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 13.50 05/15/11 19,551 18,330 22,869
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 14.50 04/15/13 19,707 20,468 23,155
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 15.00 06/15/13 178,181 186,630 209,640
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 16.00 12/15/11-04/15/12 242,857 252,388 286,342
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 17.00 10/15/11-01/15/12 815,857 863,375 963,982
-------------- -------------- --------------
$ 204,438,585 $ 206,256,624**$ 205,601,573
Total Investments--99%.......................................................
--------------
-------------- --------------
--------------
2,167,257
Other Assets in Excess of Liabilities--1%....................................................................
--------------
Net Assets--Equivalent to $20.59 net asset value per share on 10,090,171 shares of capital stock
$ 207,768,830
outstanding--100%............................................................................................
--------------
--------------
</TABLE>
* Original face amounts and related costs are reduced by principal payment
pass-throughs.
** Aggregate cost for Federal tax purposes was $206,256,624.
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at Value (Identified Cost $206,256,624) (Note 1a)... $ 205,601,573
Interest Receivable............................................. 1,311,291
Cash............................................................ 1,230,639
Other........................................................... 3,533
-----------------
Total Assets................................................. 208,147,036
-----------------
LIABILITIES:
Accounts Payable and Accrued Expenses........................... 198,198
Payable for Capital Stock Reacquired............................ 77,460
Payable to Administrators (Note 2).............................. 69,835
Payable for Securities Purchased................................ 32,713
-----------------
Total Liabilities............................................ 378,206
-----------------
NET ASSETS (Equivalent to $20.59 net asset value per share on
10,090,171 shares of capital stock outstanding) (Note 4)..... $ 207,768,830
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
NET INVESTMENT INCOME:
INCOME:
Interest Income and Premium Amortization (Note 1c).......................... $ 15,627,978
EXPENSES:
Custodian, Transfer and Dividend Disbursing Agent Fees...................... $ 534,887
Administration Fee (Note 2)................................................. 421,585
Printing and Mailing........................................................ 162,708
Professional Fees........................................................... 62,953
Other....................................................................... 14,300
Directors' Fees & Expenses.................................................. 11,000 1,207,433
--------------- ----------------
Net Investment Income.................................................... 14,420,545
UNREALIZED LOSS ON INVESTMENTS:
Unrealized Appreciation (Depreciation) of Investments:
Beginning of Year........................................................ 4,910,082
End of Year.............................................................. (655,051)
---------------
Increase in Unrealized Depreciation......................................... (5,565,133)
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......................... $ 8,855,412
----------------
----------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------------ --------------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net Investment Income.................................................. $ 14,420,545 $ 14,789,514
Net Equalization (Debits) included in the Price of Capital Stock Sold
and Reacquired (Note 1d)............................................... (138,164) (128,760)
Increase in Unrealized Appreciation/(Depreciation) of Investments...... (5,565,133) 19,663,568
------------------ --------------------
Net Increase/(Decrease) in Net Assets Derived from Operations.......... 8,717,248 34,324,322
------------------ --------------------
Dividends to Shareholders (Note 5)..................................... (14,110,317) (14,708,106)
------------------ --------------------
Capital Share Transactions (Exclusive of Net Equalization Debits
Allocated to Undistributed Net Investment Income) (Note 4):
Net Proceeds from Sale of Capital Stock................................ 23,102,353 27,435,407
Net Asset Value of Shares Issued to Shareholders in Reinvestment of
Dividends............................................................ 13,043,853 13,695,215
------------------ --------------------
36,146,206 41,130,622
Cost of Capital Stock Reacquired....................................... (43,181,951) (44,581,192)
------------------ --------------------
Decrease in Net Assets from Capital Stock Transactions................. (7,035,745) (3,450,570)
------------------ --------------------
Total Increase/(Decrease) in Net Assets................................ (12,428,814) 16,165,646
NET ASSETS:
Beginning of Year...................................................... 220,197,644 204,031,998
------------------ --------------------
End of Year (including undistributed net investment income of
$1,007,557 in 1996 and $835,494 in 1995 and accumulated realized
capital losses of $87,817 in 1996 and 1995).......................... $ 207,768,830 $ 220,197,644
------------------ --------------------
------------------ --------------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE><CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SELECTED DATA FOR A SHARE OF CAPITAL STOCK
OUTSTANDING THROUGHOUT EACH YEAR:
Net Asset Value, Beginning of Year.................. $ 21.10 $ 19.24 $ 21.39 $ 21.66 $ 22.00
------------ ------------ ------------ ------------ ------------
Income From Investment Operations
Net Investment Income............................... 1.41 1.41 1.43 1.53 1.72
Net Realized and Unrealized Gain (Loss) on
Investments....................................... (0.53) 1.87 (2.14) (0.20) (0.34)
------------ ------------ ------------ ------------ ------------
Total From Investment Operations.................. 0.88 3.28 (0.71) 1.33 1.38
------------ ------------ ------------ ------------ ------------
Dividend Distributions from Net Investment Income... (1.39) (1.42) (1.44) (1.60) (1.72)
------------ ------------ ------------ ------------ ------------
Net Asset Value, End of Year........................ $ 20.59 $ 21.10 $ 19.24 $ 21.39 $ 21.66
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
TOTAL INVESTMENT RETURN............................. 4.39% 17.54% (3.36%) 6.32% 6.58%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
SIGNIFICANT RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (in thousands).............. $ 207,769 $ 220,198 $ 204,032 $ 222,493 $ 174,838
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Operating Expenses to Average Net Assets............ 0.57% 0.58% 0.59% 0.62% 0.67%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net Investment Income to Average Net Assets......... 6.84% 6.92% 7.12% 7.00% 7.90%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Portfolio Turnover Rate............................. 0% 0% 0% 0% 0%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The GNMA Fund Investment Accumulation Program, Inc. (the 'Program') was
incorporated under Maryland law on November 17, 1977 and commenced operations on
April 24, 1978. The Program is registered under the Investment Company Act of
1940 as an open-end management company.
The following is a summary of significant accounting policies consistently
followed by the Program.
(a) Investments are valued by the Program's pricing
agent, Interactive Data Services, Inc. These
values are not necessarily bids or actual last
sale prices but are estimates of the prices at
which the pricing agent believes the Program
could sell such investment securities.
(b) It is the Program's policy to comply with the
requirements of the Internal Revenue Code
applicable to regulated investment companies and
to distribute all of its income to its
shareholders. Therefore, no Federal income tax
provision is required.
(c) Security transactions are recorded on the date
the securities are purchased or sold (the trade
date). Interest income including amortization of
discount less premium amortization is recorded as
earned. Dividend distributions to shareholders
are recorded on the ex-dividend date.
(d) The Program follows the accounting practice known
as 'Equalization' by which a portion of the
proceeds from sales and costs of reacquiring
capital shares, equivalent on a per share basis
to the amount of distributable net investment
income on the date of the transaction, is
credited or charged to undistributed net
investment income. As a result, undistributed net
investment income per share is unaffected by
sales or reacquisitions of capital stock.
(e) Prepaid registration fees are charged to expense
as the related shares are issued or over the
period of registration, whichever is applicable.
2. ADMINISTRATION AGREEMENT
The Program has entered into an Administration Agreement with Merrill Lynch,
Pierce, Fenner & Smith, Incorporated ('MLPF&S'), Prudential Securities Inc.,
Dean Witter Reynolds, Inc. and Smith Barney Inc. (the 'Administrators'), whereby
the Administrators perform certain administrative duties for the Program. For
these services, the Administrators receive a monthly fee from the Program equal
to 0.2% on an annual basis of the Program's average daily net assets and have
agreed to reimburse the Program to the extent the Program's expenses (excluding
interest, taxes, brokerage fees and extraordinary items such as litigation
costs) exceed the lesser of (i) 1 1/2% of the first $30 million of the average
daily net assets of the Program and 1% of the average daily net assets in excess
thereof, or (ii) 25% of the Program's investment income.
Certain officers and/or directors of the Program are officers and/or directors
of MLPF&S.
3. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 1996 purchases, excluding short-term
securities, totalled $22,159,000. There were no sales of securities.
9
<PAGE>
- --------------------------------------------------------------------------------
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
4. CAPITAL SHARES
The Articles of Incorporation authorize the Program to issue 25,000,000 shares
of a single class. At December 31, 1996, paid-in capital amounted to
$207,504,142. Transactions in shares were as follows:
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
Shares sold...................... 1,132,204 1,353,002
Shares issued to shareholders
in reinvestment of dividends.. 639,093 675,903
-------------- --------------
Total............................ 1,771,297 2,028,905
Shares reacquired................ (2,116,456) (2,198,182)
-------------- --------------
Net decrease..................... (345,159) (169,277)
-------------- --------------
-------------- --------------
5. DIVIDENDS AND DISTRIBUTIONS
The Program distributes, monthly, substantially all of its net investment
income. Net realized capital gains, if any, are distributed annually. At
December 31, 1996, the Program had a capital loss carryforward of approximately
$88,000 ($4,000 expiring in 1997, $19,000 in 1998, $9,000 in 1999 and $56,000 in
2000), which will be available to offset a like amount of future taxable gains.
6. CASH OVERDRAFT
Under the terms of an agreement between the Program Agent ('Agent') and the
Program, overdrafts by the Program are deemed to be loans by the Agent payable
on demand and bearing interest at the GNMA Repurchase Agreement Rate. Such
overdrafts are secured by a lien on the Program's property in the Agent's
possession or control.
The Program did not have any overdrafts during the year ended December 31, 1996.
10
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of The GNMA Fund Investment Accumulation
Program, Inc. as of December 31, 1996, the related statements of operations for
the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Program's management. Our
responsibility is to express an opinion on these financial statements and the
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 the 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 confirmation of securities owned at December
31, 1996 by correspondence with the custodian and broker. 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 that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The GNMA Fund
Investment Accumulation Program, Inc. as of December 31, 1996, the results of
its operations, the changes in its net assets, and the financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 25, 1997
11
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 206,256,624
<INVESTMENTS-AT-VALUE> 205,601,573
<RECEIVABLES> 1,311,291
<ASSETS-OTHER> 3,533
<OTHER-ITEMS-ASSETS> 1,230,639
<TOTAL-ASSETS> 208,147,036
<PAYABLE-FOR-SECURITIES> 32,713
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 345,493
<TOTAL-LIABILITIES> 378,206
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 207,504,142
<SHARES-COMMON-STOCK> 10,090,171
<SHARES-COMMON-PRIOR> 10,435,330
<ACCUMULATED-NII-CURRENT> 1,007,557
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (87,817)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (655,051)
<NET-ASSETS> 207,768,830
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,627,978
<OTHER-INCOME> 0
<EXPENSES-NET> 1,207,433
<NET-INVESTMENT-INCOME> 14,420,545
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (5,565,133)
<NET-CHANGE-FROM-OPS> 8,855,412
<EQUALIZATION> (138,164)
<DISTRIBUTIONS-OF-INCOME> (14,110,317)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,132,204
<NUMBER-OF-SHARES-REDEEMED> (2,116,456)
<SHARES-REINVESTED> 639,093
<NET-CHANGE-IN-ASSETS> (12,428,814)
<ACCUMULATED-NII-PRIOR> 835,494
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,207,433
<AVERAGE-NET-ASSETS> 210,810,168
<PER-SHARE-NAV-BEGIN> 21.10
<PER-SHARE-NII> 1.41
<PER-SHARE-GAIN-APPREC> (.53)
<PER-SHARE-DIVIDEND> (1.39)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 20.59
<EXPENSE-RATIO> 0.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
