SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Securities Act of 1933 File #2-54998
Investment Company Act of 1940 File #811-2604
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.___
Post-Effective Amendment No.28
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 28
COMPOSITE INCOME FUND, INC.
(Exact name of Registrant as specified in Charter)
601 WEST MAIN AVENUE, SUITE 801, SPOKANE, WA 99201
(Address of principal executive offices)
Registrant's telephone number, including area code (509) 353-3401
JOHN T. WEST, CORPORATE SECRETARY
601 WEST MAIN AVENUE, SUITE 801, SPOKANE WA 99201
(Name and address of agent for service)
Approximate Date of Proposed Public Offering: MAY 1, 1995
-----------
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
---
xxx on May 1, 1995 pursuant to paragraph (b)
---
60 days after filing pursuant to paragraph (a)(i)
---
on (date) pursuant to paragraph (a)(i)
---
75 days after filing pursuant to paragraph (a)(ii)
---
on (date) pursuant to paragraph (a)(ii) of rule 485
---
this post-effective amendment designates a new effective date for a
--- previously filed post-effective amendment.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Indefinite amount has been registered pursuant to Rule 24f-2. The Rule 24f-2
Notice for the most recent fiscal year was filed on January 23, 1995.
<PAGE>
PART A
N-1A Item No. Location
Item 1. Cover Page . . . . . . . . . . . . . . Cover Page
Item 2. Synopsis . . . . . . . . . . . . . . . Fee Table
About This Prospectus
Item 3. Condensed Financial Information . . . . Financial Highlights
Performance Information
Item 4. General Description of the Registrant . Cover Page
The Funds' Objectives
and Risk Factors
Investment Practices
and Risk Factors
Investment Restrictions
Item 5. Management of the Fund . . . . . . . . Who We Are
The Cost of Good
Management
How to Buy Shares
Item 6. Capital Stock and Other Securities . . Who We Are
Distribution of
Income and
Capital Gains
Income Taxes on
Dividends and
Capital Gains
We're Here to Help
You
Item 7. Purchase of Securities Being Offered . . The Cost of Good
Management
The Value of a
Single Share
How to Buy Shares
Item 8. Redemption or Repurchase . . . . . . . . How to Sell Shares
Item 9. Pending Legal Proceedings . . . . . . . *
*Not applicable or negative answer
<PAGE>
PART B
Item 10. Cover Page . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . Table of Contents
Item 12. General Information and History . . Organization and
Authorized
Capital
Item 13. Investment Objectives & Policies . . See Prospectus
Page 7-11
Investment Practices
Brokerage
Allocations and
Portfolio Transactions
Item 14. Management of the Fund . . . . . . . The Funds and
Their Management
Item 15. Control Persons and Principal
Holders of Securities. . . . . . . . Directors &
Officers of the
Funds
Item 16. Investment Advisory and Other Services . The Investment
Adviser
Investment Mgmt.
Services
Distribution
Services
Custodian
Item 17. Brokerage Allocation & Other Practices . Brokerage
Allocations and
Portfolio
Transactions
Item 18. Capital Stock and Other Securities . . . Organization and
Authorized
Capital
Voting Privileges
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . How Shares are
Valued
How Shares Can Be
Purchased
Redemption of
Shares - See
Prospectus p.16-17
Exchange Privilege
Services Provided
by the Fund
Specimen Price
Make-up Sheet
<PAGE>
PART B
(CONTINUED)
Item 20. Tax Status . . . . . . . . . . . . . . Dividends, Capital
Gain
Distributions and
Taxes
Item 21. Underwriters . . . . . . . . . . . . . Distribution
Services
Item 22. Performance Information . . . . . . . . Performance
Information
Item 23. Financial Statements . . . . . . . . . Incorporated by
Reference -
Annual Report
to Shareholders
Dated 12/31/94
<PAGE>
COMPOSITE BOND FUNDS
Suite 801
601 W. Main Avenue
Spokane, Washington 99201-0613
Telephone (509) 353-3550 Toll Free (800)-543-8072
Three funds designed to produce income
The Composite Bond Funds are designed for investors who want to generate
income from debt securities and to protect their capital:
COMPOSITE U.S.GOVERNMENT SECURITIES, INC. - This Fund is intended to provide
a high level of current income, consistent with safety and liquidity.
Investments are made in obligations issued or guaranteed by the U.S. government.
The Fund also invests in repurchase agreements and collateralized mortgage
obligations that are secured by those types of obligations.
COMPOSITE INCOME FUND, INC. - The objective for this Fund is to provide a
high level of current income that is consistent with protection of shareholders'
capital. It does this through careful investment in a diversified pool of debt
securities.
COMPOSITE TAX-EXEMPT BOND FUND, INC. - This Fund is designed to provide a
high level of income that is exempt from federal taxes and, at the same time,
protect investors' capital. The Fund invests in a carefully selected portfolio
of bonds issued by states, counties, cities and other governmental bodies whose
bonds generate income exempt from federal income tax.
The "Financial highlights" tables in this Prospectus provide information on
the performance over several years for each of the three Funds. Information that
follows those tables explains the detailed investment criteria.
Each Fund offers two classes of shares: Class A shares include a sales charge
at the time of purchase. Class B shares do not have an initial sales charge.
However, they have a higher distribution fee for six years and also have a
contingent deferred sales charge if shares are redeemed within five years of
purchase.
Please read this Prospectus and retain it for future reference.
OTHER IMPORTANT INFORMATION
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SHARES INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A STATEMENT OF ADDITIONAL INFORMATION ABOUT THE FUNDS, DATED MAY 1, 1995, IS
ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION. IT IS INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. YOU MAY OBTAIN A FREE COPY BY CALLING OR WRITING
THE FUNDS AT THE LOCATION LISTED IN THE HEADING OF THIS INTRODUCTION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
CONTENTS
Fee table.....................................
Financial highlights..........................
About this Prospectus.........................
The Funds' objectives.........................
Investment practices and risk factors.........
Other investment practices ...................
Investment restrictions.......................
Who we are....................................
The cost of good management...................
The value of a single share...................
How to buy shares.............................
Distribution of income and capital gains......
Income taxes on dividends and
capital gains...............................
Exchanges for other Composite funds...........
How to sell shares............................
IRAs & other tax-sheltered
retirement plans............................
Performance information.......................
Reports to shareholders.......................
We're here to help you........................
<TABLE>
<CAPTION>
FEE TABLE
The fee table below shows the Funds' costs and expenses and how they affect share ownership. Operating expenses are projected
based on historical data.
For further information on costs and expenses, please see "The cost of good management" on Page 13.
Class A Class B
SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO ALL FUNDS): shares shares
------- -------
<S> <C> <C>
Maximum sales charge imposed on purchases
(as a percentage of the offering price) 4.00% None
Maximum contingent deferred sales charge (as a percentage of
purchase price or redemption proceeds, whichever is lower)* None 3.00%
Redemption fee** None None
Exchange fee None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES U.S. Government
(AS A PERCENTAGE OF AVERAGE NET ASSETS) Securities Income Tax-Exempt
---------------------- ---------------------- ----------------------
Class A Class B Class A Class B Class A Class B
shares shares shares shares shares shares
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management fees .63% .63% .63% .63% .50% .50%
12b-1 fees .20% 1.00% .20% 1.00% .20% 1.00%
Other expenses .16% .18% .21% .23% .10% .12%
--- ---- ---- ---- --- ----
Total Fund operating expenses .99% 1.81% 1.04% 1.86% .80% 1.62%
=== ==== ==== ==== === ====
<FN>
*Class B shares contingent deferred sales charges decrease to 2% in year 3; 1% in year 5; and 0% in year 6. After that, Class B
shares are converted into Class A shares without charge or tax impact.
**For a separate $10.00 charge, redemptions may be wired at your request. For redemption information, please see Page 20 of this
Prospectus.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXAMPLE
This example assumes you have made a $1,000 investment in one of the Funds and that you receive a 5% annual return. The table
shows the expenses you would pay over various time periods and for either class of shares.*
U.S. Government
Securities Income Tax-Exempt
----------------- ----------------- -----------------
Class A Class B Class A Class B Class A Class B
Assuming redemption at the end of shares shares shares shares shares shares
each period: ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1 Year $ 50 $ 48 $ 50 $ 49 $ 48 $ 46
3 Years $ 75 $ 77 $ 77 $ 78 $ 70 $ 70
5 Years $ 98 $109 $101 $111 $ 88 $ 99
10 Years** $161 $170 $167 $176 $140 $149
<CAPTION>
Assuming you keep your shares and
no redemptions are made:
<S> <C> <C> <C> <C> <C> <C>
1 Year $ 50 $ 18 $ 50 $ 19 $ 48 $ 16
3 Years $ 75 $ 57 $ 77 $ 58 $ 70 $ 51
5 Years $ 98 $ 99 $101 $101 $ 88 $ 89
10 Years** $161 $170 $167 $176 $140 $149
<FN>
* The 5% figure is a constant rate required for comparative purposes by the Securities and Exchange Commission. Also, the example
should not be considered a representation of past or future expenses or performance. Actual results will be greater or less than the
illustration.
** Class B shares automatically convert to Class A shares after six years. Because of that, years seven through ten reflect the
Class A operating expenses. Long-term shareholders could pay more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers. The Class B conversion feature is intended to reduce the likelihood
that this will occur.
</FN>
</TABLE>
For further information
o Management fees - See "The cost of good management,"
o 12b-1 fees - See "The cost of good management,"
o Sales charge on purchases - "How to buy shares,"
o Contingent deferred sales charge - See "How to buy shares,"
o Conversion of Class B shares to Class A - See "How to buy shares - Class B
conversion feature,"
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
U.S. GOVERNMENT SECURITIES
The supplemental financial information on this page has been audited by independent auditors whose reports thereon appear in the
Fund's annual report which is incorporated by reference into the Statement of Additional Information.
Class A
-------------------------------------------------------------------------------
Ten Months
Years Ended Ended
December 31, December Years Ended Last Day of February,
------------------- ------- -------------------------------------------
1994 1993 31, 1992 1992 1991 1990 1989
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $ 10.79 $ 10.63 $ 10.53 $ 10.17 $ 9.90 $ 9.63 $ 10.25
------- ------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income ...................... .63 .69 .62 .79 .84 .88 .91
Net Gains or Losses on Securities
(both realized and unrealized) ............ (1.15) .16 .10 .36 .27 .27 (.62)
------- ------- ------- ------- ------- ------- -------
Total from investment income ............. (.52) .85 .72 1.15 1.11 1.15 .29
------- ------- ------- ------- ------- ------- -------
Less Distributions
Dividends (from net investment income) ..... (.63) (.69) (.62) (.79) (.84) (.88) (.91)
Distributions (from capital gains) ......... - - - - - - -
------- ------- ------- ------- ------- ------- -------
Total distributions ...................... (.63) (.69) (.62) (.79) (.84) (.88) (.91)
------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of Period .............. $ 9.64 $ 10.79 $ 10.63 $ 10.53 $ 10.17 $ 9.90 $ 9.63
======= ======= ======= ======= ======= ======= =======
Total Return (1) ............................ -4.91% 8.12% 8.41% 11.72% 11.72% 12.31% 2.94%
Ratios/Supplemental Data
Net Assets, End of Period (in thousands) ...$188,068 $268,112 $207,501 $141,377 $92,293 $83,360 $79,920
Ratio of Expenses to Average Net Assets .... .97% .99% .99% 1.01% 1.03% .99% .88%
Ratio of Net Income to Average Net Assets .. 6.19% 6.29% 6.98% 7.63% 8.43% 8.86% 9.14%
Portfolio Turnover Rate(2).................. 34% 51% 11% 17% 66% 19% 41%
<CAPTION>
<PAGE>
Class A Class B
------------------------------- -------
Years Ended March 30,
Last Day of February, 1994 To
------------------------------- December
1988 1987 1986 31, 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $ 10.61 $ 10.71 $ 10.00 $ 10.24
------- ------- ------- -------
Income From Investment Operations
Net Investment Income ...................... .91 1.00 1.18 .41
Net Gains or Losses on Securities
(both realized and unrealized) ............ (.36) .01 .71 (.60)
------- ------- ------- -------
Total from investment income ............. .55 1.01 1.88 (.19)
------- ------- ------- -------
Less Distributions
Dividends (from net investment income) ..... (.91) (1.06) (1.18) (.41)
Distributions (from capital gains) ......... - (.05) - -
------- ------- ------- -------
Total distributions ...................... (.91) (1.11) (1.18) (.41)
------- ------- ------- -------
Net Asset Value, End of Period .............. $ 10.25) $ 10.61) $ 10.71) $ 99.64)
======= ======= ======= =======
Total Return (1) ............................ 6.63% 8.95% 20.35% -1.86%
Ratios/Supplemental Data
Net Assets, End of Period (in thousands) ... $89,385 $111,991 $63,660 $1,063
Ratio of Expenses to Average Net Assets .... .88% .88% .63% 1.76%
Ratio of Net Income to Average Net Assets .. 9.03% 9.33% 11.25% 5.43%
Portfolio Turnover Rate(2) ................. 43% 128% 86% 34%
<FN>
(1) Total return does not reflect sales charge. Returns of less than one year are not annualized.
(2) A portfolio turnover rate is the percentage computed by taking the lesser of purchases or sales of portfolio securities
(excluding securities with a maturity date of one year or less at the time of acquisition) for a period and dividing it by the
monthly average of the market value of such securities during the period.
(3) Change in fiscal year end.
(4) Annualized.
(5) The Adviser waived the management fee and paid all other Fund expenses for the period March 1, 1985 to May 17, 1985.
(6) From the commencement of operations of Class B shares.
</FN>
<PAGE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
INCOME
The supplemental financial information on this page has been audited by independent auditors whose reports thereon appear in the
Fund's annual report which is incorporated by reference into the Statement of Additional Information.
Class A
-------------------------------------------------------------------------------
Years Ended Three Months
December 31, Ended Years Ended September 30,
------------------- December -------------------------------------------
1994 1993 31, 1992(3) 1992 1991 1990 1989
------- ------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $ 9.33 $ 8.99 $ 9.17 $ 8.68 $ 8.12 $ 8.51 $ 8.87
------- ------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income ...................... .60 .61 .16 .65 .68 .74 .91
Net Gains or Losses on Securities
(both realized and unrealized) ............ (1.04) .34 (.18) .49 .56 (.39) (.36)
------- ------- ------- ------- ------- ------- -------
Total from investment income ............. (.44) .95 (.02) 1.14 1.24 .35 .55
------- ------- ------- ------- ------- ------- -------
Less Distributions
Dividends (from net investment income) ..... (.60) (.61) (.16) (.65) (.68) (.74) (.91)
------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of Period ............. $ 8.29 $ 9.33 $ 8.99 $ 9.17 $ 8.68 $ 8.12 $ 8.51
======= ======= ======= ======= ======= ======= =======
Total Return (1) ........................... -4.82% 10.82% -.92% 13.57% 15.93% 4.32% 6.58%
Ratios/Supplemental Data
Net Assets, End of Period (in thousands) ... $88,102 $104,876 $86,425 $84,995 $73,342 $66,648 $126,088
Ratio of Expenses to Average Net Assets .... 1.04% 1.08% .95%(4) 1.05% 1.04% 1.04% .96%
Ratio of Net Income to Average Net Assets .. 6.83% 6.58% 6.94%(4) 7.26% 8.16% 8.97% 10.53%
Portfolio Turnover Rate(2) ................ 26% 42% 87%(4) 47% 106% 64% 37%
<CAPTION>
<PAGE>
Class A Class B
------------------------------- -------
March 30,
Years Ended September 30, 1994 To
------------------------------- December
1988 1987 1986 31, 1994(5)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $ 9.04 $ 9.42 $ 9.51 $ 8.85
------- ------- ------- -------
Income From Investment Operations
Net Investment Income ...................... .95 .96 1.12 .40
Net Gains or Losses on Securities
(both realized and unrealized) ............ (.17) (.38) (.09) (.55)
------- ------- ------- -------
Total from investment income ............. .78 .58 1.03 (.15)
------- ------- ------- -------
Less Distributions
Dividends (from net investment income) ..... (.95) (.96) (1.12) (.40)
------- ------- ------- -------
Net Asset Value, End of Period ............. $ 8.87 $ 9.04 $ 9.42 $ 8.30
======= ======= ======= =======
Total Return (1) ........................... 9.02% 6.39% 11.70% -1.67%
Ratios/Supplemental Data
Net Assets, End of Period (in thousands) ...$162,956 $133,596 $60,924 $2,299
Ratio of Expenses to Average Net Assets .... 1.01% .99% .77% 1.80%(4)
Ratio of Net Income to Average Net Assets .. 10.56% 10.32% 11.86% 6.25%(4)
Portfolio Turnover Rate(2) ................ 47% 99% 100% 26%(4)
<FN>
(1) Total return does not reflect sales charge. Returns of less than one year are not annualized.
(2)A portfolio turnover rate is the percentage computed by taking the lesser of purchases or sales of portfolio securities
(excluding securities with a maturity date of one year or less at the time of acquisition) for a period and dividing it by the
monthly average of the market value of such securities during the period.
(3) Change in fiscal year end.
(4) Annualized.
(5) From the commencement of operations of Class B shares.
</FN>
<PAGE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
TAX-EXEMPT
The supplemental financial information on this page has been audited by independent auditors whose reports thereon appear in the
Fund's annual report which is incorporated by reference into the Statement of Additional Information.
Class A
-------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $ 8.04 $ 7.58 $ 7.42 $ 7.16 $ 7.17 $ 7.20 $ 7.02
------- ------- ------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income ...................... .39 .40 .42 .45 .47 .50 .52
Net Gains or Losses on Securities
(both realized and unrealized) ............ (.91) .54 .23 .34 (.01) .07 .20
------- ------- ------- ------- ------- ------- -------
Total from investment income ............. (.52) .94 .65 .79 .46 .57 .72
------- ------- ------- ------- ------- ------- -------
Less Distributions
Dividends (from net investment income) ..... (.39) (.40) (.42) (.45) (.47) (.50) (.52)
Distributions (from capital gains) ......... - (.08) (.07) (.08) - (.10) (.02)
Total distributions ...................... (.39) (.48) (.49) (.53) (.47) (.60) (.54)
------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of Period .............. $ 7.13 $ 8.04 $ 7.58 $ 7.42 $ 7.16 $ 7.17 $ 7.20
======= ======= ======= ======= ======= ======= =======
Total Return (1) ........................... -6.53% 12.54% 9.00% 11.36% 6.71% 8.08% 10.66%
Ratios/Supplemental Data
Net Assets, End of Period (in thousands) ...$215,438 $259,045 $186,861 $140,154 $111,462 $104,208 $94,156
Ratio of Expenses to Average Net Assets .... .79% .81% .78% .77% .77% .80% .80%
Ratio of Net Income to Average Net Assets .. 5.23% 4.97% 5.56% 6.16% 6.65% 6.85% 7.34%
Portfolio Turnover Rate(2) ................ 12% 18% 30% 83% 115% 104% 47%
<CAPTION>
<PAGE>
Class A Class B
------------------------------- -------
March 30,
Years Ended December 31, 1994 to
------------------------------- December
1987 1986 1985 31, 1994(3)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $ 7.56 $ 7.10 $ 6.40 $ 7.49
------- ------- ------- -------
Income From Investment Operations
Net Investment Income ...................... .54 .55 .58 .25
Net Gains or Losses on Securities
(both realized and unrealized) ............ (.45) .58 .70 (.36)
------- ------- ------- -------
Total from investment income ............. .09 1.13 1.28 (.11)
------- ------- ------- -------
Less Distributions
Dividends (from net investment income) ..... (.53) (.55) (.58) (.25)
Distributions (from capital gains) ......... (.10) (.12) - -
------- ------- ------- -------
Total distributions ...................... (.63) (.67) (.58) (.25)
------- ------- ------- -------
Net Asset Value, End of Period .............. $ 7.02 $ 7.56 $ 7.10 $ 7.13
======= ======= ======= =======
Total Return (1) ........................... 1.25% 16.51% 21.47% -1.46%
Ratios/Supplemental Data
Net Assets, End of Period (in thousands) ... $83,057 $82,821 $58,569 $1,258
Ratio of Expenses to Average Net Assets .... .85% .79% .78% 1.58%(4)
Ratio of Net Income to Average Net Assets .. 7.36% 7.41% 8.61% 4.53%(4)
Portfolio Turnover Rate(2) ................ 49% 37% 37% 12%(4)
<FN>
(1) Total return does not reflect sales charge. Returns of less than one year are not annualized.
(2) A portfolio turnover rate is the percentage computed by taking the lesser of purchases or sales of portfolio securities
(excluding securities with a maturity date of one year or less at the time of acquisition) for a period and dividing it by the
monthly average of the market value of such securities during the period.
(3) From the commencement of operations of Class B shares.
(4) Annualized.
</FN>
</TABLE>
<PAGE>
ABOUT THIS PROSPECTUS
In this publication, you will find basic and in-depth information about
the Composite Bond Funds. Included are such subjects as how to buy and sell
shares, as well as details about the Funds' objectives, investment practices and
restrictions, and other vital matters.
If you are not familiar with mutual funds, investment terminology, or the
Composite Group of Funds, you may find it useful to understand the following key
words and terms that appear frequently on these pages: Glossary of key words and
terms
ADVISER. Composite Research & Management Co., which is called the
"Adviser" in this Prospectus, is the manager of the Composite Bond Funds and
several other mutual funds.
CLASS A SHARES. All Composite Bond Funds are available in two classes.
Class A shares include a sales charge at the time of purchase and annual
operating expenses.
CLASS B SHARES. This is the second of the two classes of Composite Bond
Funds. Class B shares do not have an initial sales charge, but they do have
higher operating expenses for six years than Class A shares, and they have a
contingent deferred sales charge (see below).
CONTINGENT DEFERRED SALES CHARGE. If an investor redeems Class B shares
within five years of purchase, he or she normally must pay this charge.
DISTRIBUTOR. Murphey Favre, Inc. distributes the Composite Bond Funds and
other Composite mutual funds and is referred to as the "Distributor" in this
Prospectus.
EXCHANGE. This privilege allows shareholders to transfer their investment
from one fund to another as their needs or objectives change. There is no fee or
additional sales charge for an "exchange" within the Composite Group of Funds.
FUND. The term "Fund" identifies any one of the three mutual funds offered
through this prospectus. These "Funds" are identified as follows in this
document:
INCOME. This Fund's objective is to provide a high level of current
income, consistent with protection of shareholders' capital.
TAX-EXEMPT. This Fund's objective is to provide income that is exempt from
federal taxes, and, at the same time, to protect investors' capital.
U.S. GOVERNMENT SECURITIES. This Fund's objective is to provide a high
level of current income from U.S. government securities, consistent with
safety and liquidity.
NET ASSET VALUE (NAV). This is the term used in this publication and in
daily newspaper financial tables to report the value of a single share of a
mutual fund. It is determined by adding the value of a fund's securities and
other assets -- and then subtracting any liabilities. Next, the resulting figure
is divided by the number of shares outstanding. That provides the "net asset
value" per share, often referred to as "NAV."
REDEMPTION. This refers to the sale by an investor of shares of a mutual
fund he or she has owned. The investor is said to "redeem" the shares.
STATEMENT OF ADDITIONAL INFORMATION. This is a document that has more
detailed information about the Funds than what is in this Prospectus. It is on
file with the federal government's Securities and Exchange Commission and also
is available through the Funds.
THE FUNDS' OBJECTIVES
The investment objective and policies of each Fund are described on the
following page. Each Fund's investment objective is a fundamental policy that
cannot be changed without a majority vote of its outstanding shares.
Composite Research & Management Co., referred to as the "Adviser" in this
Prospectus, manages the Funds. The Adviser attempts to maintain Funds that are
responsive to changes in economic trends and developments, government actions
and regulations, and international monetary conditions. However, because risks
are involved, there cannot be any assurance that a Fund's objective will be
attained.
U.S. GOVERNMENT SECURITIES: This Fund has the objective of maintaining a
high level of current income, consistent with safety and liquidity. The Fund
invests in obligations issued or guaranteed by the full faith and credit of the
U.S. government or investments secured by these types of obligations.
INCOME: The objective for this Fund is to provide a high level of current
income that is consistent with protection of shareholders' capital. The Fund
carries out careful investment in a diversified pool of debt securities,
generally investing in higher grades of debt.
TAX-EXEMPT: This Fund has the objective of maintaining a high level of
federal tax-exempt income while protecting investors' capital. Investments are
made in a carefully selected portfolio of bonds issued by states, counties,
cities and other governmental bodies whose bonds generate income that is exempt
from federal income tax.
INVESTMENT PRACTICES AND RISK FACTORS
The Funds do not have any restrictions on the maturities of securities in
which they may invest. Each Fund seeks to invest in securities having maturities
that, in the Adviser's judgment, are consistent with that Fund's investment
objective.
As with all fixed-income investments, the Funds are subject to market and
credit risks.
Market risk relates to several factors. Among these are the price
fluctuation of a fixed-income security, overall interest-rate conditions, the
credit rating of the issuer, and the maturity length of the security.
Credit risk is a function of the ability of a security's issuer to
maintain timely interest and principal payments. Each Fund diversifies its
holdings to reduce the effect of credit risk.
U.S. GOVERNMENT SECURITIES
The intention of this Fund is to achieve its objective by investing in a
careful selection of obligations issued or guaranteed by the full faith and
credit of the U.S. government. The Fund may also invest in collateralized
mortgage obligations or repurchase agreements which are collateralized by these
types of securities. It is a fundamental policy of the Fund to invest only in
the following securities:
1) U.S. government obligations issued by the Treasury, including bills,
certificates of indebtedness, notes, and bonds.
2) Obligations secured by the full faith and credit of the U.S. government or
its instrumentalities.
3) Certificates of the Government National Mortgage Association ("GNMA"), which
are debt securities representing an undivided ownership interest in a pool of
mortgages. The mortgages backing these securities include conventional
30-year fixed-rate mortgages, 15-year fixed-rate mortgages, graduated payment
mortgages, and adjustable-rate mortgages. The U.S. government guarantees the
timely payment of interest and principal for these securities through the
GNMA, which is a wholly owned U.S. government corporation within the
Department of Housing and Urban Development. The GNMA is authorized to make
such a guarantee, with the full faith and credit of the U.S. government, on
securities issued by institutions and backed by pools of FHA-insured or
VA-insured mortgages. However, the guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with
fluctuations in interest rates, nor do the guarantees extend to the yield or
value of the Fund's shares.
4) Collateralized mortgage obligations which are fully collateralized by GNMA
certificates or by mortgages insured by GNMA.
5) Repurchase agreements which are secured by obligations identified in 1, 2,
and 3 above. See page 10 for a more complete discussion of GNMA certificates,
collateralized mortgage obligations and repurchase agreements.
INCOME
This Fund plans to achieve its objective by investing in debt issues and
obligations that offer high current yields and that are consistent with a low
degree of risk. In keeping with this, the Fund invests most of its assets in the
following:
1) Debt and convertible debt securities that enjoy the four highest ratings of
Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc.
("Moody's"). See the Statement of Additional Information for a detailed
description of these ratings.
2) Debts of the U.S. government and its agencies, including mortgage-backed
securities (see Page 10) issued by the GNMA, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation or similar government
agencies.
3) Obligations of U.S. banks that belong to the Federal Reserve System. (The
Fund may not invest more than 25% of its total assets in these issues.)
4) Preferred stocks and convertible preferred stocks that enjoy the four highest
ratings of S&P or Moody's.
5) The highest grade commercial paper as rated by S&P or Moody's.
6) Deposits in U.S. banks. (Unless these are liquid, they may not exceed 10% of
the Fund's total assets.)
In addition, the Fund may increase its yield by investing up to 20% of its
assets in debt obligations that are not rated in the four highest grades of S&P
or Moody's (see Page 10).
The Fund also may lend its securities to New York Stock Exchange member
firms, but it does not currently do so. This policy may involve a higher risk,
but the Adviser will use such practice only if it believes the income is
sufficient to justify such risk. For details, see the Statement of Additional
Information.
TAX-EXEMPT
This Fund is designed to achieve its objective by investing in a careful
selection of municipal bonds. The two principal classifications of municipal
bonds are "general obligation" and "revenue" bonds.
General obligation bonds are secured by the issuer's pledge of its full
faith and credit, with either limited or unlimited taxing power for the payment
of principal and interest.
Revenue bonds are not supported by the issuer's full taxing authority.
Generally, they are payable only from the revenues of a particular facility, a
class of facilities, or the proceeds of another specific revenue source.
In normal markets, the Fund will invest at least 80%, and possibly all, of
its portfolio in tax-exempt securities issued by or on behalf of the states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies or instrumentalities. The Fund
specifically limits these investments to:
1) Municipal bonds enjoying the four highest ratings of S&P or Moody's. See the
Statement of Additional Information for a detailed description of these
ratings.
2) Municipal notes backed by the federal government.
3) Notes from issuers who already have issued outstanding municipal bonds
enjoying the four highest ratings of S&P or Moody's.
4) Securities of other tax-exempt mutual funds as temporary investments of cash
reserves.
In addition, the Fund may increase its yield by investing up to 25% of its
assets in tax-exempt obligations that are not rated in the four highest grades
of S&P or Moody's.
In adverse markets, the Fund may seek to protect its investment position
by investing up to 50% of its portfolio in short-term investments. Interest
income from these short-term investments, when it is distributed by the Fund,
may result in a tax liability to investors. These investments are limited to:
1) Obligations of the U.S. government and its agencies and instrumentalities.
These investments, limited to short maturities as temporary investments,
would not be made routinely nor made to any significant extent.
2) Commercial paper rated in the highest grade by either S&P or Moody's.
3) Obligations of U.S. banks belonging to the Federal Reserve System.
4) Time or demand deposits in U.S. banks.
5) Municipal bonds or any of the previously mentioned investments subject to
short-term repurchase agreements.
OTHER INVESTMENT PRACTICES
Several other policies and considerations are important to how the Funds'
assets are invested:
MORTGAGE-BACKED SECURITIES. The U.S. Government Securities and Income
Funds may invest in mortgage-backed securities. These may include "pass-through"
instruments or collateralized mortgage obligations. The holder of a pass-through
instrument receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. Collateralized
mortgage obligations differ from traditional pass-through instruments in that
they generally distribute principal and interest from their underlying pool of
mortgages sequentially rather than on a pro rata basis. Generally there are
multiple classes of ownership providing for successively longer expected
maturities.
Mortgage-backed securities, because of the pass-through of prepayments of
principal on the underlying mortgage obligations, almost always have an
effective maturity that is shorter than the stated maturity. The prepayment
characteristics of the underlying mortgages vary, so it is not possible to
accurately predict the life of a particular mortgage-backed security.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
interest rates rise, prepayments can be expected to slow.
When the mortgage obligations are prepaid, the Funds reinvest the prepaid
amounts in securities whose yields reflect interest rates prevailing at the
time. Therefore, the Funds' ability to maintain high-yielding mortgage-backed
securities in their portfolios will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. In addition, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
During periods of rising interest rates, slower prepayments limit the ability to
reinvest in higher yielding securities.
LOWER-RATED SECURITIES. To increase the Income and Tax-Exempt Funds'
yields, the Adviser may invest up to 20% of Income's and 25% of Tax-Exempt's
portfolios in below investment-grade securities, or in non-rated securities the
Adviser believes to be comparable. These securities have ratings below the top 4
assigned by Moody's or S&P and are commonly referred to as "junk bonds." The
Funds will not invest in securities rated lower than CCC by S&P or Caa by
Moody's.
The market price of lower-rated securities generally fluctuates more than
those of higher-rated securities, which may affect the value of the portfolios.
Although they are investment grade and are not subject to the above investment
limitations, securities rated BBB or Baa reflect speculative characteristics.
Securities that are rated lower than investment grades BBB or Baa should be
considered speculative. They involve greater risk of default or price
fluctuations because of changes in the issuer's creditworthiness.
Lower-rated and comparable non-rated securities tend to offer higher
yields and more limited liquidity than higher-rated securities with the same
maturities. This is because the creditworthiness of the issuers of lower-rated
securities is not as strong as that of other issuers. The market prices of these
securities may fluctuate more than higher-rated securities and may decline
significantly in periods of general economic difficulty. This may happen
following periods of rising interest rates.
MONEY MARKET INSTRUMENTS. The Funds are permitted to invest in money
market instruments for temporary or defensive purposes, subject to restrictions
noted in the previous section. The money market investments permitted include
obligations of the U.S. Government and its agencies and instrumentalities;
commercial paper, including bank obligations; other short-term corporate-debt
securities; certificates of deposit; and repurchase agreements.
The Tax-Exempt Fund will not normally invest in taxable money market
instruments, but it may purchase securities of other tax-exempt investment
companies.
REPURCHASE AGREEMENTS. The Funds may temporarily invest cash reserves in
repurchase agreements. In a repurchase agreement, a fund buys a fixed-income
security at one price and simultaneously agrees to sell it back at a higher
price. In the event the seller defaults on its agreement to repurchase the
security, the Fund may suffer a loss because of a decline in the value of the
underlying debt security. Repurchase agreements will be entered into only with
brokers, dealers or banks that meet credit guidelines adopted by each Fund's
board of directors. To limit risk, repurchase agreements maturing in more than
seven days will not exceed 10% of a Fund's total assets.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Fund may purchase
securities on what is called a "when-issued" or "delayed-delivery" basis. With
these transactions, instruments are bought under an agreement that payment and
delivery will take place in the future. This is done to obtain what is
considered to be an advantageous yield or price at the time of the transaction.
Delivery of and payment for these securities may take as long as a month or more
after the date of the purchase commitment. However, it must take place no more
than 120 days after the trade date. The payment obligation and interest rates to
be received are fixed at the time the Fund enters into the commitment, and no
interest will accrue to the Fund until settlement. Thus, it is possible that the
market value at the time of settlement could be higher or lower than the
purchase price, if the general level of interest rates has changed.
It is a current policy of each Fund not to enter into when-issued
commitments that, in total, exceed 20% of the market value of the Fund's total
assets minus all other liabilities besides, but not including, the obligations
created by these commitments.
FOREIGN SECURITIES. The Income Fund may invest up to 25% of its assets in
U.S. dollar-denominated securities of foreign issuers. Such investments may
involve somewhat different risks than in normal domestic investments, including
incomplete or inaccurate financial information, foreign taxes and restrictions,
illiquidity, and fluctuations in currency values.
FOR FURTHER INFORMATION. See the Statement of Additional Information for
further information regarding the investment practices summarized in this
section.
INVESTMENT RESTRICTIONS
Many decisions of the Adviser depend on flexibility. Nevertheless, there
are certain principles so fundamental to a Fund that they may not be changed
without a vote of a majority of the outstanding shares of that Fund.
In addition to other restrictions listed in the Statement of Additional
Information, each Fund is subject to the following restrictions. (All
percentages indicated are as of the time the investments are made):
1) Each Fund may not invest more than 5% of its total assets in any single
issuer (other than the U.S. government).
2) Each of the Funds may not acquire more than 10% of the voting securities of
any one company.
3) Each of the Funds may not invest more than 25% of its assets in any single
industry or foreign securities. (It is a policy of the Income Fund to
consider electric utilities, electric and gas utilities, gas utilities, and
telephone utilities to be separate industries. The Fund also considers
foreign issues to be a separate industry. It is a policy of the Tax-Exempt
Fund to apply this restriction only to its assets in non-municipal bond
holdings, pollution control, and industrial development revenue bonds. These
policies may result in increased risk.)
4) Each of the Funds may not borrow money for investment purposes. (However,
each Fund may borrow up to 5% of its total net assets for emergency,
non-investment purposes.)
WHO WE ARE
Composite U.S. Government Securities, Inc., Composite Income Fund, Inc.,
and Composite Tax-Exempt Bond Fund, Inc. are open-end, diversified, management
investment companies. They were incorporated under the laws of the state of
Washington on March 5, 1982, October 22, 1975, and September 16, 1976,
respectively. Each is a "series" company, which means it has the ability to add
portfolios, called "funds," subject to approval by its Board of Directors.
Currently, each consists of a single portfolio.
Adviser. The Funds are managed by Composite Research & Management Co. who
is referred to as the "Adviser" in this Prospectus. An investment management
agreement with the Adviser is renewable each year, subject to the approval of
each Fund's Board of Directors or the shareholders themselves.
The Adviser has been in the business of investment management since 1944.
It currently manages more than $1.7 billion for mutual funds and institutional
advisory accounts. These accounts include more than $1 billion within the
Composite Group of Funds, which is made up of the Funds described in this
Prospectus and five other mutual funds with differing objectives. The Adviser's
address is located on the back cover of this Prospectus.
The Adviser advises the Funds on investment policies and specific
investments. Subject to supervision by each Fund's Board of Directors, the
Adviser determines which securities are to be bought and sold. These decisions
are based on analyses of the economy, sectors of industry, and specific
institutions. They are compiled from extensive data provided by some of the
country's largest investment firms, in addition to the Adviser's own research.
A team of the Adviser's investment professionals manages each Fund under
supervision of the Adviser's investment committee. The investment team for the
Bond Funds consists of Craig S. Hobbs, CFA; Brian L. Placzek, CFA; and Gary J.
Pokrzywinski, CFA.
Mr. Hobbs is president of the Adviser, has been employed there since May
1983, and has 26 years of continuous experience in investment and financial
analysis. Mr. Placzek has been employed by the Adviser since July 1990 and has
10 years of continuous experience in investment and financial analysis. Mr.
Pokrzywinski has been employed by the Adviser since July 1992 and has 10 years
of continuous experience in fixed-income and financial market analysis.
Distributor. Murphey Favre, Inc. is the "Distributor" for these Funds. The
Distributor is not a bank, and securities offered by it are not backed by nor
guaranteed by a bank, nor are they insured by the FDIC. The value of investments
may fluctuate, return on investments is not guaranteed, and loss of principal is
possible. The firm's address is on the back page of this Prospectus.
Transfer Agent. Murphey Favre Securities Services, Inc., which serves as
the "Transfer Agent," acts as the Funds' shareholder servicing and dividend
disbursing agent. It is located at 601 W. Main Avenue, Suite 801, Spokane,
Washington 99201-0613.
The Adviser, Distributor, and Transfer Agent are subsidiaries of Washington
Mutual Bank. They are also affiliated with Washington Mutual, a Federal Savings
Bank, and Washington Mutual Federal Savings Bank, and are indirect subsidiaries
of Washington Mutual, Inc.
Other important information. Each Fund offers two classes of shares, as
described under "How to buy shares." U.S. Government has 1 billion authorized
shares of capital stock, including 600 million Class A and 400 million Class B.
Income has 50 million authorized shares, including 30 million Class A and 20
million Class B. Tax-Exempt has 500 million authorized shares of capital stock,
including 300 million Class A and 200 million Class B.
The shares do not have preemptive rights nor preference as to conversion,
exchange, dividends, retirement, liquidation, redemption, or any other feature,
except as described under "How to buy shares."
Shareholders have equal voting rights on corporate matters requiring
shareholder approval, except that each class may vote separately on its
distribution plan.
Normally, the Funds do not hold annual meetings of shareholders. When
meetings are held, shareholders have the right to vote cumulatively for any
election of directors. In other words, each voting shareholder may cast a number
of votes equal to the number of Fund shares he or she owns multiplied by the
number of directors to be elected. The shareholder may then allocate the total
votes among the director nominees in the amounts he or she chooses.
This Prospectus is consolidated to present information efficiently on each
Bond Fund in the Composite Group. There is a remote possibility that one Fund
might become liable for any misstatement in the Prospectus pertaining to another
Fund.
THE COST OF GOOD MANAGEMENT
Composite Research & Management Co. serves as Adviser under investment
management contracts with each Fund. The agreements are renewable every year,
subject to the approval of each Fund's Board of Directors or the shareholders
themselves.
Before reading this section, you may find it useful to turn back to Page 2 to
review the fee table's summary on "Annual Fund Operating Expenses." That
provides an overview of much of what is covered in detail here.
Management fees
Advisory fees are paid to the Adviser for its services. These include
investment management and administrative services and the Adviser's function as
an agent for the Funds when paying a portion of the fee to the Distributor and
Transfer Agent for their services.
Advisory fees are calculated daily and paid monthly.
For the U.S. Government and Income Funds, the fees are equal to an annual
rate of .625% the first $250 million of each Fund's respective average daily net
assets plus .50% on net assets in excess of $250 million.
Advisory fees for the Tax-Exempt Fund are equal to an annual rate of .50%
of the first $250 million of average daily net assets plus .40% onf the excess.
Distribution plans
Each Fund's Board of Directors has approved, and reviews at least
quarterly, a distribution plan that meets the provisions of Rule 12b-1 under the
Investment Company Act of 1940. The plans are intended to benefit shareholders
by stimulating interest in purchasing shares of the Funds and, thus, providing a
consistent flow of investment capital. This allows larger and more diversified
holdings, as well as economies of scale.
CLASS A SHARES. With respect to Class A shares, the plans authorize each
Fund to reimburse the Distributor for direct costs of marketing, selling and
distributing Class A shares of that Fund. These costs include sales literature
and prospectuses (other than those provided to current shareholders),
compensation to sales people, service fees, and other costs of sales and
marketing, including any state business and occupation tax. Excluded are general
and administrative expenses. Service fees are paid in consideration for personal
services and/or account maintenance services.
The distribution plans allow each Fund to reimburse actual Class A
distribution costs, subject to directors' approval. Reimbursements are not to
exceed annual limits of .25% of the Fund's average daily net assets attributable
to Class A shares.
CLASS B SHARES. For Class B shares, the plans authorize each Fund to pay
the Distributor a distribution fee at an annual rate of .75% of each Fund's
average daily net assets attributable to Class B shares and a service fee at an
annual rate of .25% of such assets. The distribution fee is designed to permit
investors to purchase Class B shares without the assessment of a front-end sales
charge. At the same time, this allows compensation to the Distributor in
connection with the sale of those shares. The service fee covers personal
services and/or account maintenance services.
Because the Distributor's distribution fee for Class B shares is not
directly tied to its expenses, the amount of compensation may be more or less
than its actual expenses. For this reason, the Class B distribution plan may be
characterized by the staff of the Securities and Exchange Commission as being a
"compensation" plan -- in contrast to the Class A "reimbursement" plan. The
Funds are not liable for any expenses incurred by the Distributor in excess of
the amount of compensation it receives.
Expenses incurred by the Distributor for Class B shares are likely to be
greater than distribution fees for the next several years. After that, such
expenses may be less than the distribution fees.
Other distribution information. With respect to either class of shares,
dealers with an effective dealer agreement will receive .25% annualized, of the
value of shares owned by investors for whom that dealer is dealer of record.
Unreimbursed expenses incurred by the Distributor in any fiscal year may not be
recovered in future periods.
Total expenses
Other operating expenses include fees of directors not affiliated with the
Adviser, custodial fees, auditing and legal expenses, taxes, costs of issuing
and redeeming shares, publishing of reports to shareholders, corporate meetings,
and other normal costs of running a business.
Each Fund pays the Transfer Agent for shareholder servicing and dividend
disbursing services, but not for special services such as producing and mailing
historical-account transcripts. You may be required to pay a fee if you need
these special services.
Total expenses, including advisory fees, distribution expenses, and other
operating expenses for the most recent fiscal year, can be found under "Ratio of
expenses to average net assets" in the "Financial highlights" section of this
Prospectus. The Adviser and Distributor have agreed to waive fees or reimburse
expenses if a Fund exceeds the most stringent, applicable limitation imposed by
any state.
THE VALUE OF A SINGLE SHARE
At the end of each business day of the New York Stock Exchange or at 1:00
p.m. Pacific time, whichever is earlier, the Fund calculates the value of each
class of shares. That figure is determined by adding the value of (1) the
securities in the Fund that are attributable to each class and (2) all other
assets -- and then subtracting any liabilities. Next, the resulting figure is
divided by the number of shares outstanding. That provides the "net asset value"
per share, which frequently is referred to as "NAV."
Security valuations are provided by independent pricing sources approved
by each Fund's Board of Directors. When such valuations are not available, the
Board of Directors will determine how they are to be priced at fair value.
HOW TO BUY SHARES
Shares are offered at the next NAV per share that is calculated, plus a
sales charge for Class A shares, as described in this section. The NAVs are
determined at the end of each business day of the New York Stock Exchange or at
1:00 p.m. Pacific time, whichever is earlier.
Distributor and securities dealers
You may buy shares of the Funds through Murphey Favre, the Distributor, or
through selected securities dealers that are registered in your state of
residence. With certain exceptions, the minimum initial purchase in a Composite
fund is $1,000. IRA accounts may make initial purchases of $500 in any Fund.
Subsequent investments
Subsequent investments should be at least $50.
Systematic investment program
For your convenience, you may arrange to have monthly purchases
automatically deducted from your checking account as part of a systematic
investment program. The minimum initial investment in this program is $50;
subsequent monthly investments should be at least $50.
Other information
The Funds and the Distributor reserve the right to refuse an order to buy
shares. Exceptions to the policies described in this Prospectus are detailed in
the Statement of Additional Information.
In the interest of economy and convenience, physical certificates
representing Fund shares will be issued only upon written request to the Fund or
by request from your broker.
A comparison of class a and class b shares
Each Fund offers two classes of shares:
1) Class A shares are sold to investors who pay a sales charge at the time of
purchase and who pay on-going distribution expenses.
2) Class B shares are sold to investors who do not pay a sales charge at the
time of purchase. Instead, they pay a higher ongoing distribution fee for six
years. They also may pay a "contingent deferred sales charge" if they redeem
their shares within five years of purchase.
The two classes of shares each represent an interest in the same portfolio
of investments. Each class has exclusive voting rights with respect to
provisions of the Rule 12b-1 distribution plan regarding which distribution
expenses are paid relative to a specific class. They have the same rights and
are identical in all respects except as noted in items 1) and 2) above and
except that Class B shares may be converted to Class A. (Class A may not be
converted to Class B.)
Class A shares and Class B shares may be exchanged only for shares of the
same class of other Composite funds. See "Exchanges for other funds" in this
Prospectus.
The net income attributable to Class B shares and the dividends payable to
Class B shares will be lower because of the higher expenses. Likewise, Class B
shares' NAV will be lower to the extent the Fund has undistributed net income.
Sales personnel of broker-dealers distributing the Funds' shares may
receive differing compensation for selling or servicing Class A or Class B
shares.
When purchasing shares, investors are encouraged to choose the class of
shares that will be best for them. Factors to consider include the purchase
amount, the length of time shares are expected to be held, and other individual
circumstances. Then, this question should be asked: "If I buy Class A or Class B
shares for a given length of time, which will give me with the lowest cost:
Class A's initial sales charge and accumulated distribution expenses, or Class
B's contingent deferred sales charges prior to conversion and its higher
accumulated distribution expenses?"
To assist investors in making that choice, the "Fee table" on Page 2
provides examples of the charges that apply to each class of shares. Normally,
Class A shares will be more beneficial to the investor who qualifies for a
reduced sales charge as described below. For this reason, the Distributor may
reject orders for Class B shares from certain investors.
Buying Class A shares
The offering price for Class A shares is the NAV per share, plus an
initial sales charge, as shown in the table below. Investors also may be
entitled to reduced sales charges for single or cumulative purchases of $25,000
or more, as discussed following the table and in the Statement of Additional
Information.
<TABLE>
<CAPTION>
Reallowed
Sales Charge to Dealers
----------------------- ----------
% of % of Net % of
Offering Amount Offering
Purchase of Class A shares Price Invested Price
--------- --------- ----------
<S> <C> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.50%
$25,000 to $100,000 3.50 3.59 3.00
$100,000 to $250,000 3.00 3.09 2.50
$250,000 to $500,000 2.00 2.04 1.75
$500,000 to $1,000,000 1.00 1.01 0.75
$1,000,000 to $2,500,000 0.50 0.50 0.40
$2,500,000 and above 0.00 0.00 0.00
</TABLE>
Example: AN INVESTOR CONSIDERS PUTTING $1,000 INTO A FUND'S CLASS A
SHARES. BASED ON THE FIRST COLUMN IN THE ABOVE TABLE, THE INVESTOR WOULD SEE
THAT 4% OF THE $1,000 WOULD PAY FOR A SALES CHARGE. THE CHARGE WOULD BE $40,
WHICH IS 4.17% OF THE $960 NET INVESTMENT. THE DEALER SELLING THE SHARES WOULD
BE PAID $35 OF THE $40 WHICH IS 3.50% OF $1,000 AS THE THIRD COLUMN SHOWS.
Here is a summary of information on reduced sales charges for which an
investor may be qualified. These refer to the data in the above table that cover
purchases of $25,000 or more.
CUMULATIVE DISCOUNT. This allows current purchases to qualify for the
above discounts by including the value of existing Composite Group investments,
other than those in Composite Cash Management Company. The discount will be
based on the amount of the new purchase plus the current offering price of
shares of those investments owned at the time of the purchase. The purchaser of
investments qualifying for a cumulative discount may be an individual, a
traditional family unit, or a trustee purchasing for a single fiduciary account.
LETTER OF INTENT. This discount is for purchases made over an extended
period. It provides for a cumulative discount on the same basis as explained in
the previous paragraph if the following conditions are met: Purchases of Class A
shares must be made within a 13-month period that begins on a date not earlier
than 90 days prior to the submission to the Funds of a letter of intent from the
investor. For more information about this discount, please contact the Funds'
offices or a registered representative.
REINVESTMENT. Redemption proceeds of Class A shares that were subject to a
sales charge when first purchased may be reinvested in Class A shares within 120
days without incurring another initial sales charge.
YOU MUST NOTIFY THE FUND WHENEVER A REDUCED SALES CHARGE IS APPLICABLE TO
YOUR PURCHASE TO ENSURE RECEIVING THAT REDUCTION.
Buying Class B shares
Class B shares are sold at their NAV per share without an initial sales
charge. The entire amount of the purchase is invested in the Fund selected.
However, Class B shares have a higher distribution fee than Class A shares for
six years. Also, if shares are redeemed within five years of purchase, a
contingent deferred sales charge must be paid.
Those charges and fees help make it possible for the Funds to sell Class B
shares without sales charges at the time of purchase.
The proceeds from any contingent deferred sales charges are paid to the
Distributor to defray expenses for providing distribution services to the Fund
in connection with the sale of Class B shares. Examples of such expenses include
compensation to sales people and selected dealers. The Distributor currently
expects to pay sales commissions from its own resources to selected dealers for
3.00% of the purchase price of shares sold by those dealers.
CONTINGENT DEFERRED SALES CHARGE. Class B shares redeemed within five
years of purchase are subject to a contingent deferred sales charge according to
the following schedule. Exceptions to this are shares purchased through
reinvestment of dividends or capital gain distributions.
<TABLE>
<CAPTION>
Year of Contingent
redemption deferred
after purchase sales charge
-------------- ------------
<S> <C>
First............................ 3%
Second........................... 3%
Third............................ 2%
Fourth........................... 2%
Fifth............................ 1%
Sixth............................ 0%
</TABLE>
The contingent deferred sales charge is calculated by applying the above
percentages to whichever of the following is less:
1) the NAV of the redeemed shares at the time of purchase, or
2) the NAV of the redeemed shares at the time of redemption.
This means that no contingent deferred sales charge will be charged on any
NAV increases above the initial purchase price. When it is determined which of
those alternatives apply, the one that is selected will be the one that will
result in the lowest possible charge. In view of that, when shares are redeemed
they will be taken in this order:
1) shares from reinvested dividends or capital gain distributions, and, then,
2) shares from the earliest purchase.
Here is an example:
AN INVESTOR PURCHASES 100 CLASS B SHARES AT $10 PER SHARE - FOR A TOTAL
COST OF $1,000. IN THE SECOND YEAR AFTER THE PURCHASE, THE NAV HAS RISEN TO $12
PER SHARE, AND THE INVESTOR HAS ACQUIRED 10 MORE SHARES THROUGH DIVIDEND
REINVESTMENT.
AT THAT TIME, THE INVESTOR DECIDES TO MAKE THE FIRST REDEMPTION. THE
TRANSACTION INCLUDES 50 SHARES AT $12 PER SHARE - FOR A TOTAL OF $600.
THE FIRST 10 SHARES TO BE REDEEMED WILL NOT BE SUBJECT TO ANY CHARGE
BECAUSE OF THE 10 SHARES RECEIVED FROM DIVIDEND REINVESTMENT. SEE ITEM 1) JUST
ABOVE THIS EXAMPLE.
AS FOR THE OTHER 40 SHARES, THE CHARGE WILL BE APPLIED ONLY TO THE
ORIGINAL COST OF $10 PER SHARE. THE NAV INCREASE OF $2 PER SHARE WILL NOT BE
CONSIDERED. AS A RESULT, $400 OF THE REDEMPTION PROCEEDS (40 X $10) WILL BE
CHARGED AT A RATE OF 3%, WHICH IS THE SECOND-YEAR RATE SHOWN IN THE TABLE ON THE
PRECEDING PAGE. THE RESULTING SALES CHARGE WILL BE 3% X $400, WHICH WILL BE $12.
The contingent deferred sales charge may be waived for redemptions of
Class B shares under these circumstances:
1) Following the death or disability of a shareholder, as defined in Section
72(m)(7) of the Internal Revenue Code.
2) In connection with certain distributions from an IRA or other retirement
plan, as described in the Statement of Additional Information.
3) According to the Fund's systematic withdrawal plan -- but limited to 12%
annually of the value of the Fund account at the time the plan is
established.
4) As a result of the right of the Fund to liquidate a shareholder's account as
described under "How to sell shares."
REINVESTMENT. You may reinvest in Class B shares within 120 days of
redemption and receive reimbursement credited to your account for any contingent
deferred sales charge you previously paid. The reinvested shares will be subject
to the original holding period of six years for Class B shares and to the
applicable contingent deferred sales charge.
To make sure you receive reimbursement for the contingent deferred sales
charge, you must notify the Fund whenever you reinvest Class B shares within 120
days.
CLASS B CONVERSION FEATURE. Class B shares of a Fund that remain
outstanding for six years will convert to Class A shares of that Fund. The basis
for this will be the relative NAVs of the two classes at the time of conversion.
Some investors buy shares at several different times and/or reinvest
dividends and capital gains over an extended period. Each time a conversion of
such shares takes place, a pro-rata portion of Class B shares acquired through
the reinvestment of dividends and capital gain distributions also will convert
to Class A shares.
The conversion of Class B shares to Class A shares is subject to the
continuing availability of a favorable ruling from the Internal Revenue Service
or an opinion of legal counsel that such conversion will not be subject to
federal income taxes. There cannot be any assurance that a ruling or opinion
will be available. If they should not be available, the conversion of Class B
shares to Class A shares would not occur and those shares would continue to be
subject to higher expenses than Class A shares for an indefinite period.
DISTRIBUTION OF INCOME AND CAPITAL GAINS
Each Fund pays dividends on income monthly. Dividends, if declared, begin
accruing on the day following payment for purchase. Any capital gains will
normally be paid in December.
You have three choices regarding what you want to do with income earned on
your investment. You can make your choice at the time of your initial purchase
or by contacting the Funds' offices or your registered representative. The
options include:
AUTOMATIC REINVESTMENT. Most shareholders elect this procedure. It is
automatically effective for all accounts unless you choose another option. All
income dividends and capital gain distributions are reinvested into additional
shares of the Fund. Automatic reinvestments generally provide the most capital
growth and are not subject to an initial or a contingent deferred sales charge.
CASH PAYMENT OF INCOME AND REINVESTMENT OF ANY CAPITAL GAINS. With this
option, income dividends are paid by check or deposited to your pre-authorized
bank account. Any capital gain distributions are reinvested in additional shares
of the Fund and are not subject to an initial or a contingent deferred sales
charge.
CASH PAYMENT OF ALL DISTRIBUTIONS. Income dividends and capital gain
distributions are paid by check or deposited to your pre-authorized bank
account. Reinvestments of income dividends are made at the closing NAV per share
on the last business day of each month. Reinvestments of capital gain
distributions are made at the closing NAV per share on the day distributions are
deducted.
INCOME TAXES ON DIVIDENDS AND CAPITAL GAINS
You are responsible for any federal income tax (and state income taxes, if
applicable) on dividends and capital gain distributions. This is true whether
they are paid in cash or reinvested in additional shares. At the end of the
year, you will be advised on the tax status of these dividends and
distributions.
Generally, dividends paid by the Funds from interest, dividends, or net
short-term capital gains will be taxed as ordinary income. Distributions of net
long-term capital gains are taxable as long-term capital gains, regardless of
the length of time you have held your shares. If your shares are in an IRA or
another qualified retirement plan, you will not have to pay tax on the
reinvested amount until funds are withdrawn.
Tax-exempt interest earned by Tax-Exempt Fund retains its tax-advantaged
status when it is distributed to investors. However, a portion of the interest
may be subject to federal alternative minimum tax and/or state and local taxes.
You should consult a tax preparer who is familiar with local law. Interest
income earned by Tax-Exempt from any investments that are not tax-exempt will be
taxable to shareholders, as will income from short-term and long-term capital
gains from those investments.
If your income is not subject to federal or state taxes, distributions
received from a Fund will not be taxable to you.
Each Fund complies with provisions of the Internal Revenue Code applicable
to regulated investment companies, and each distributes its taxable income.
Because of this, no provision is made for federal income and excise taxes on the
earnings it distributes to shareholders.
Because of tax law requirements, you must provide the Funds an accurate
and certified Social Security number or taxpayer identification number to avoid
the 31% "back-up" withholding tax.
EXCHANGES FOR OTHER COMPOSITE FUNDS
You may exchange shares of any Composite fund for the same class of shares
of any other Composite fund. In addition to the Funds described in this
Prospectus, there are Composite funds that invest in stocks, a balance between
stocks and bonds, and money market instruments.
Contact your registered representative or the Fund offices to request a
prospectus for the Composite funds that interest you.
There will not be a charge for an exchange, which will be made at the
prevailing NAV of the shares being exchanged. Shares initially purchased in
Composite Cash Management Company without a sales charge will be subject to the
acquired fund's sales charge. Any contingent deferred sales charge for Class B
shares redeemed within five years of their initial purchase will be based on the
schedule applicable to the initial purchase.
All exchanges are subject to the minimum investment requirements of the
Composite fund being acquired and its availability for sale in your state of
residence. The Funds reserve the right to refuse any order for the purchase of
shares, including those by exchange. In particular, a pattern of exchanges that
coincides with a "market timing" strategy may be disruptive to a Fund and,
consequently, may be disallowed.
HOW TO SELL SHARES
You may redeem shares at any time. The price paid per share will be the
next NAV per share that is calculated. The NAVs are determined at the end of
each business day of the New York Stock Exchange or at 1:00 p.m. Pacific time,
whichever is earlier.
Contingent deferred sales charges, if applicable, will be deducted upon
redemption of Class B shares. (See the table on Page 17 for the sales charge
schedule.)
TELEPHONE. You may authorize telephone transactions when you sign your
Fund account application. Or you may elect at that time not to have such
transactions.
You, or your registered representative at your request, may redeem shares
by telephoning 1-800-543-8072. Proceeds may be directed to a pre-authorized bank
or broker account or to the address of record for the account. Exchanges also
may be made by telephone. (See the previous section for more information.)
The Transfer Agent may require a Letter of Authorization, other documents,
or authorization from your broker to initiate telephone transactions over
$25,000.
It may be difficult to reach the Fund offices by telephone during periods
of considerable economic or market activity. Please be persistent if this
occurs. The Transfer Agent is committed to extending its availability beyond
regular 7 a.m. to 6 p.m. (Pacific time) customer service hours during such
periods. Calls requesting telephone redemption or exchanges that are received
after business hours will be recorded and returned in the order they were
received.
For protection, all telephone instructions are verified. This is done by
requesting personal shareholder information, providing written confirmations of
each telephone transaction, and recording telephone instructions. If reasonable
procedures are used, neither the Transfer Agent nor the Funds will be liable for
following telephone instructions which they reasonably believe to be genuine.
Shareholders assume the risk of any losses in such cases. However, the Transfer
Agent or the Funds may be liable for any losses because of unauthorized or
fraudulent telephone instructions if reasonable procedures are not followed.
WRITTEN REQUEST. Redemptions also may be requested by writing the Fund
offices. Written requests may require a signature guarantee, as discussed below,
and the return of any outstanding stock certificates. Changes in pre-authorized
redemption instructions or your account registration also require signature
guarantees. For your protection, the signature(s) must be guaranteed by an
officer of a U.S. bank belonging to the Federal Reserve System, a member of the
Stock Transfer Association Medallion Program, or a member of the National
Association of Securities Dealers, Inc.
PROMPT PAYMENT. Payment normally will be made on the next business day
after the transaction, but no later than seven days after. If you recently
purchased Fund shares by check, redemption proceeds may be delayed until the
Transfer Agent verifies collection of that check, generally within 14 days.
Redemption proceeds will be sent by check or Automated Clearing House transfer
without charge.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who invest $10,000 or more in a
Fund may elect to receive specific cash withdrawals on a monthly basis.
Shareholders who invest any amount in an IRA or other retirement plan account
for the purpose of taking normal distributions may also choose the systematic
withdrawal plan. Shares of the Fund will be redeemed to provide the monthly
payment requested. Class B shareholders may establish a systematic withdrawal
plan to redeem up to 12% annually of the value of the Fund account, at the time
the plan is established, without incurring a contingent deferred sales charge.
Naturally, withdrawals that continually exceed dividend income and capital gains
will eventually exhaust the account.
OTHER CONSIDERATIONS. Wire redemptions may be subject to a $10 fee. The
receiving bank also may charge a fee.
It is costly to maintain small accounts. Because of this, an account may
be closed after 90 days advance written notice if the total account value falls
below $700 when any transfer or redemption is made. Shares will be redeemed at
the share price calculated on the day the account is closed. To prevent an
account closure, investors may increase holdings to a minimum of $700 during the
90-day grace period.
IRAS AND OTHER TAX-SHELTERED RETIREMENT PLANS
Shares in the U.S. Government Securities and Income Funds are particularly
appropriate for many retirement plans, including IRAs. Although there are some
restrictions on the deductibility of contributions, earnings in these Funds
compound on a tax-deferred basis until withdrawn.
From time to time, Murphey Favre, the Distributor, may offer "bonus
income" on IRA rollovers and transfers to its IRA accounts. This bonus income is
paid totally by the Distributor and not by the applicable Fund. The products
purchased through these rollovers and transfers may include the Composite Group
of Funds.
Information about IRAs and other qualified retirement plans is available
from the Fund offices or your registered representative.
PERFORMANCE INFORMATION
While past results are not indicative of future performance, history
provides a basis for comparisons of mutual fund investment strategies and their
execution. Among the factors that influence the Bond Funds' performance are the
type and quality of investments, operating expenses, and the net amount of new
money coming into the Funds. Pertinent information follows:
YIELD. The Funds calculate their current "yields" by dividing annualized
net investment income per share for a stated 30-day period by the maximum
offering price on the last day of the period. The result then is shown as a
percentage of the total investment. (To determine the annualized income, the
amount of income generated by the investment during the 30-day period is assumed
to be repeated every 30 days over a 12-month period.)
Yields are calculated separately for each class of shares. Because yield
accounting methods differ from the methods used for other accounting purposes,
the Funds' yields may not equal the income paid to your account or the income
reported in the Funds' financial statements.
DISTRIBUTION RATE. The Funds' "distribution rates" are calculated by
dividing the actual ordinary income dividends per share (annualized) over a
one-month or 12-month period by the maximum offering price at the end of the
period.
TAXABLE-EQUIVALENT YIELD. Because the Tax-Exempt Fund is designed to
shelter shareholders' income from federal income taxes, it may be of interest to
know about "taxable-equivalent yield." This will show you the yield you would
need to receive from a taxable investment to reach the same earnings level as
this Fund. Here is how to do that: 1) Subtract your income tax rate from 1.0. 2)
Divide the Tax-Exempt Fund's stated yield by your answer to the first step.
For example: TO CALCULATE A TAXABLE-EQUIVALENT YIELD AT A 36% TAX RATE,
SUBTRACT .36 FROM 1.0, AND DIVIDE THE TAXABLE FUND'S YIELD BY THE RESULTING .64.
AVERAGE ANNUAL TOTAL RETURN. "Average annual total return" shows the
change in value of an investment in a Fund over a stated period as a steady
compound rate of return. The calculation assumes reinvestment of dividends and
capital gain distributions and payment of the maximum initial sales charge for
Class A shares or the applicable contingent deferred sales charge for Class B
shares.
NON-STANDARDIZED TOTAL RETURNS. These "non-standardized total returns"
differ from average annual total returns for the following reasons: First, they
relate to non-standard periods; second, they represent cumulative (rather than
average) total return over a period longer than a year; and/or third, sales
charges are not deducted.
OTHER INFORMATION. Each Fund will include performance data for both Class
A and B shares in any advertisement or promotional material presenting
performance data of that Fund.
Management has included a discussion of the Funds' performance during the
most recently completed fiscal year in its annual report, which is available
upon request and without charge by calling the Fund offices.
The Funds may quote performance results from recognized services and
publications that monitor the performance of mutual funds. Included, too, may be
comparisons of their performance with various published, historical indices.
Of course, the Funds' performance is not fixed nor is the principal
guaranteed. Asset values may fluctuate daily so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Annualization of
rates should not be interpreted as an indication of a Funds' actual performance
in the future.
REPORTS TO SHAREHOLDERS
Shareholders receive semiannual and annual reports. The financial
statements in the annual reports are audited by independent accountants.
Shareholders whose accounts are directly with the Funds also receive
statements at least quarterly. These reports show transactions in their
accounts, the total number of shares owned, and any dividends or distributions
paid. Shareholders also receive confirmation after each transaction except for
dividend reinvestments, systematic investment program purchases, and systematic
withdrawal plan redemptions.
WE'RE HERE TO HELP YOU
Any inquiries you may have about these Funds or your account should be
directed to the Fund at the address or telephone number on the front page and
back cover of this Prospectus. We will be glad to answer your questions.
<PAGE>
For further information, please
contact:
FUND OFFICES
601 W. Main Avenue, Suite 801
Spokane, WA 99201-0613
Phone: (509) 353-3550
Toll free: (800) 543-8072
ADVISER
Composite Research & Management Co.
1201 Third Avenue, Suite 1220
Seattle, WA 98101-3015
DISTRIBUTOR
Murphey Favre, Inc.
1201 Third Avenue, Suite 780
Seattle, WA 98101-3015
CUSTODIAN
Investors Fiduciary Trust Company
127 W. 10th Street
Kansas City, MO 64105-1716
INDEPENDENT PUBLIC ACCOUNTANTS
LeMaster & Daniels
601 W. Riverside Avenue, Suite 800
Spokane, WA 99201-0614
COUNSEL
Paine, Hamblen, Coffin, Brooke & Miller
717 W. Sprague Avenue, Suite 1200
Spokane, WA 99204-0464
BOARD OF DIRECTORS
Wayne L. Attwood, M.D.
Kristianne Blake
Anne V. Farrell
Edwin J. McWilliams
Michael K. Murphy
William G. Papesh
Jay Rockey
Leland J. Sahlin
Richard C. Yancey
<PAGE>
COMPOSITE GROUP
BOND
FUNDS
COMPOSITE
U.S. GOVERNMENT
SECURITIES, INC.
COMPOSITE
INCOME FUND, INC.
COMPOSITE
TAX-EXEMPT BOND
FUND, INC.
PROSPECTUS
MAY 1,
1995
<PAGE>
STATEMENT OF
ADDITIONAL
INFORMATION
MAY 1, 1995
COMPOSITE BOND FUNDS
601 W. Main Avenue
Suite 801
Spokane, WA 99201-0613
Telephone: 509-353-3550
Toll free: 800-543-8072
COMPOSITE U.S. GOVERNMENT SECURITIES, INC. ("U.S. Government Securities") is
designed to provide a high level of current income, consistent with safety and
liquidity. On behalf of this objective, the Fund invests in obligations issued
or guaranteed by the U.S. government. The Fund also invests in repurchase
agreements and collateralized mortgage obligations that are secured by these
types of obligations.
COMPOSITE INCOME FUND, INC. ("Income") is designed to provide current income
through careful investment in a diversified pool of debt securities. The Fund's
objective is to provide a high level of current income that is consistent with
protection of shareholders' capital.
COMPOSITE TAX-EXEMPT BOND FUND, INC. ("Tax-Exempt") is designed to provide a
high level of federal tax-exempt income while at the same time protecting
investors capital. On behalf of this objective, the Fund invests in a carefully
selected portfolio of bonds issued by states, counties, cities and other
governmental bodies whose bonds generate income that is exempt from federal
income tax.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE FUNDS' PROSPECTUS DATED MAY 1, 1995, WHICH CAN BE
OBTAINED WITHOUT CHARGE BY CONTACTING THE FUNDS AT THE ABOVE ADDRESS.
TABLE OF CONTENTS
The Funds and Their Management Investment Practices
Distribution Services Investment Restrictions
How Shares Are Valued Performance Information
How Shares Can Be Purchased Brokerage Allocations &
Redemption of Shares Portfolio Transactions
Exchange Privilege General Information
Services Provided by the Funds Financial Statements and
Tax-Sheltered Retirement Plans Reports
Dividends, Capital Gain Distributions Appendix A
and Taxes Appendix B
THE FUNDS AND THEIR MANAGEMENT
THE INVESTMENT ADVISER
As discussed under "Who We Are" in the prospectus, the Funds are managed and
investment decisions are made under the supervision of Composite Research &
Management Co. (the "Adviser"). Decisions to buy, sell, or hold a particular
security are made by an investment team of the Adviser, approved by an
investment committee of the Adviser, and subject to the control and final
direction of each Fund's Board of Directors.
Composite Research & Management Co. is Adviser for the eight investment
companies (currently 12 separate portfolios) in the "Composite Group," namely:
Composite Bond & Stock Fund, Inc.; Composite Equity Series, Inc.; Composite
Income Fund, Inc.; Composite Tax-Exempt Bond Fund, Inc.; Composite Cash
Management Company; Composite U.S. Government Securities, Inc.; Composite
Northwest 50 Fund, Inc.; and Composite Deferred Series, Inc. The Adviser also
provides investment advice to institutional clients.
INVESTMENT MANAGEMENT SERVICES
Management fees and services performed by the Adviser are discussed under "The
Cost of Good Management" in the prospectus. The present management agreements
(the "Agreements") with the Adviser to furnish suitable office space, research,
statistical and investment management services to each Fund were approved by
shareholders. These Agreements continue in effect from year-to-year provided
their continuation is specifically approved at least annually by each Fund's
Board of Directors (including a majority of the directors who are not parties to
the Agreements) by votes cast in person at a meeting called for the purpose of
such approval; or by vote of a majority of the outstanding shares of each Fund.
The Agreements can be terminated by either party on sixty (60) days' notice,
without penalty, and each provides for automatic termination upon its
assignment.
Under the provisions of the Investment Company Act of 1940 and as used elsewhere
in the prospectus, the phrase "vote of the majority of the outstanding shares of
the Fund" means the vote at any meeting of shareholders, of (a) 67% or more of
the shares present or represented by proxy at such meeting, if the shareholders
of more than 50% of the outstanding shares are present or represented by proxy,
or (b) more than 50% of the outstanding shares, whichever is less.
U.S. Government Securities and Income each pay a monthly fee to the Adviser for
its services equal to .625% per annum computed on the average daily net assets
of each Fund. For each of these two Funds, on average daily net assets in excess
of $250 million, the fee will decrease to .50%. For Tax-Exempt, the Adviser
receives a monthly fee for its services equal to .50% per annum computed on the
average daily net assets of the Fund; on average daily net assets in excess of
$250 million, the fee will decrease to .40%.
U.S. Government paid management fees of $1,417,336, and $1,516,074, and $916,453
for the years ended December 31, 1994, 1993, and 1992 (ten months due to change
in fiscal year), respectively.
Income paid management fees of $612,811, $594,487, and $133,616 during the years
ended December 31, 1994, 1993, and 1992 (three months due to change in fiscal
year), respectively.
Tax-Exempt paid management fees of $1,180,145, $1,106,973, and $784,571,
respectively during the years ended December 31, 1994, 1993, and 1992,
respectively.
The Adviser has agreed that should the expenses of U.S. Government Securities
(excluding taxes, interest and any portfolio brokerage but including the
management fee) exceed in any fiscal year 1.5% of the average net assets of the
Fund up to $30 million and 1% of average net assets over $30 million, it will
reimburse the Fund for such excess. There were no reimbursements by the Adviser
under the expense limitations of the Fund during 1994, 1993 or 1992.
The Adviser has agreed that should the expenses of Income or Tax-Exempt
(excluding taxes, interest and any portfolio brokerage but including the
management fee) exceed in any fiscal year 1.5% of the average net assets of the
Fund up to $30million; 1% of average net assets between $30 million and $130
million; and .75% of such net assets over $130 million; it will reimburse the
respective Fund for such excess. There were no reimbursements by the Adviser
under the expense limitations of either Fund during 1994, 1993 or 1992.
The Agreements provide that the management fees paid to the Adviser by each Fund
will be based solely on the individual assets of that Fund. Under the terms of
the Agreements, each Fund is required to pay custodian expenses; brokerage;
taxes; auditing and legal expenses; costs of issue, transfer, registration or
redemption of shares for sale; costs relating to disbursement of dividends,
corporate meetings, corporate reports, and the maintenance of its corporate
existence.
Investment decisions for each Fund are made independently of those for other
funds in the Composite Group. However, it may be determined that the same
security is suitable for more than one of the funds. If more than one of the
funds is simultaneously engaged in the purchase or sale of the same security,
the transactions are allocated as to price and amount in accordance with a
formula considered to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the funds are concerned. In other cases, however, it is
believed that the ability to participate in volume transactions may provide
better executions for each Fund. It is the opinion of each Fund's Board of
Directors that these advantages, when combined with the personnel and facilities
of the Adviser's organization, outweigh possible disadvantages which may exist
from exposure to simultaneous transactions.
The Funds have adopted a code of ethics which is intended to prevent access
persons from conducting personal securities transactions which interfere with
Fund portfolio transactions or otherwise take unfair advantage of their
relationship to the Funds. In general, the personal securities transactions of
individuals with access to information regarding Fund portfolio transactions
must be pre-cleared by the Adviser's Compliance Officer and must not occur when
similar transactions are contemplated by a Fund.
GLASS-STEAGALL
The Glass-Steagall Act, among other things, generally prohibits member banks of
the Federal Reserve system from engaging to any extent in the business of
issuing, underwriting, selling or distributing securities and generally
prohibits management interlocks and affiliations between member banks and
companies engaged in certain activities. In a Statement of Policy dated
September 1, 1982, the Federal Deposit Insurance Corporation concluded that the
investment restrictions of the Glass-Steagall Act do not apply to banks or their
affiliates if the banks are not members of the Federal Reserve System.
Washington Mutual Bank is not a member bank. The Adviser has advised the Funds
that, in its view, the Glass-Steagall Act does not prohibit the activities of
the Adviser and that it may perform the services for the Funds contemplated by
the Investment Management Agreements without violation of the Glass-Steagall Act
or other applicable banking laws or regulations.
DIRECTORS AND OFFICERS OF EACH FUND
Each Fund's Board of Directors is elected by its shareholders. Interim vacancies
may be filled by the current directors so long as at least two-thirds were
previously elected by shareholders. The Boards have responsibility for the
overall management of the Funds including general supervision and review of
their investment activities. The directors, in turn, elect the officers of the
Fund who are responsible for administering the day-to-day operations. All of the
Funds' directors and officers hold identical positions with each of the funds in
the Composite Group. Directors and officers of the Funds and their business
experience for the past five years are set forth below. Unless otherwise noted,
the address of each executive officer is 601 W. Main Avenue, Suite 801, Spokane,
Washington 99201-0613.
WAYNE L. ATTWOOD, MD
Director
3 E. 40th
Spokane, Washington 99203
Dr. Attwood is a retired doctor of internal medicine and gastroenterology in
Spokane, Washington.
KRISTIANNE BLAKE
Director
705 W. 7th, Suite D
Spokane, Washington 99204
Mrs. Blake is president of Kristianne Gates Blake, PS, an accouting services
firm specializing in personal financial planning and tax planning.
*ANNE V. FARRELL
Director
425 Pike Street, Suite 510
Seattle, Washington 98101
Mrs. Farrell is president & CEO of The Seattle Foundation (a charitable
foundation). In addition, she serves as a director of Washington Mutual, Inc.
EDWIN J. McWILLIAMS
Director
1717 S. Upper Terrace Road
Spokane, Washington 99203
Mr. McWilliams is former president of both Fidelity Service Corporation (a
mortgage servicing subsidiary of Sterling Savings Association) and Fidelity
Mutual Savings Bank, Spokane, Washington.
*MICHAEL K. MURPHY
Director
PO BOX 3366
Spokane, Washington 99220-3366
Mr. Murphy is chairman and CEO of CPM Development Corporation (a holding company
which includes Central Pre-Mix Concrete Company). In addition, he serves as a
director of Washington Mutual, Inc.
*WILLIAM G. PAPESH
President and Director
Mr. Papesh is president and a director of the Transfer Agent and is an executive
vice president and a director of the Adviser and Distributor.
JAY ROCKEY
Director
2121 - Fifth Avenue
Seattle, Washington 98121
Mr. Rockey is Chairman and CEO of The Rockey Company (a public relations firm).
He also serves as a director of RXL Pulitzer (a satellite education company),
and was recently chairman of the Washington State University Foundation.
*LELAND J. SAHLIN
Chairman and Director
Mr. Sahlin, an employee of the Adviser, formerly served as president of each of
the Funds from 1972 to 1989; of the Distributor from 1972 to 1987; and of the
Adviser from 1972 to 1988.
RICHARD C. YANCEY
Director
535 Madison Avenue
New York, NY 10022
Mr. Yancey is senior advisor to Dillon, Read & Co., Inc. (a registered
broker-dealer and investment banking firm), New York, New York.
*These directors are "interested persons" of the Funds as that term is defined
in the Investment Company Act of 1940 because they are affiliated persons of
the Fund, its Adviser, or Distributor.
GENE G. BRANSON
Vice President
Suite 780
1201 Third Avenue
Seattle, Washington 98101
Mr. Branson is a senior vice president and director of the Distributor and
Transfer Agent and a vice president and director of the Adviser.
MONTE D. CALVIN, CPA
Vice President and Treasurer
Mr. Calvin is executive vice president of the Transfer Agent.
CASSIE L. FOWLER, CPA
Assistant Secretary
Ms. Fowler is an employee of the Transfer Agent.
CRAIG S. HOBBS
Vice President
Suite 1220
1201 Third Avenue
Seattle, Washington 98101
Mr. Hobbs is president and a director of the Adviser, and a director of the
Distributor and Transfer Agent.
KERRY K. KILLINGER
Executive Vice President
Suite 1501
1201 Third Avenue
Seattle, Washington 98101
Mr. Killinger is president, chairman of the board, and chief executive officer
of Washington Mutual, Inc. and a director of the Adviser, Distributor, and
Transfer Agent.
JEFFREY L. LUNZER, CPA
Assistant Treasurer
Mr. Lunzer is an employee of the Transfer Agent.
CONNIE M. LYONS
Assistant Secretary
Ms. Lyons is an employee of the Transfer Agent. From July 1985 to February 1991,
she was employed by Dick Doty & Associates, Inc. (an insurance agency).
DOUGLAS D. SPRINGER
Vice President
Suite 780
1201 Third Avenue
Seattle, Washington 98101
Mr. Springer is president and a director of the Distributor and a director of
the Adviser and the Transfer Agent.
JOHN T. WEST, CPA
Secretary
Mr. West is an employee of the Transfer Agent.
The Funds paid no remuneration to any of its officers, including Mr. Papesh and
Mr. Sahlin, during the year ended December 31, 1994. The Funds and other Funds
within the Composite Group paid directors' fees and reimbursed expenses, during
the year ended December 31, 1994, in the amounts indicated below.
<TABLE>
<CAPTION>
U.S. GOVERNMENT TAX- TOTAL
DIRECTOR SECURITIES INCOME EXEMPT COMPLEX (1)
- -------- ---------- ------ ------ -----------
<S> <C> <C> <C> <C>
Wayne L. Attwood, MD .......... $1,029 $1,029 $1,029 $13,344
*Anne V. Farrell .............. $1,166 $1,166 $1,166 $13,994
Edwin J. McWilliams ........... $1,080 $1,080 $1,080 $12,956
Jay Rockey (2) ................ $ 344 $ 344 $ 344 $ 4,124
Richard C. Yancey ............. $1,383 $1,383 $1,383 $16,599
<FN>
(1) Directors serve in the same capacity for each of the 8 Funds (currently
12 portfolios) within the Composite Group of Funds.
(2) Mr. Rockey is Chairman and CEO of The Rockey Company, a public relations
firm which has received revenue from the Funds and Washington Mutual,
Inc., parent company of the Adviser and Distributor, during the 1994
fiscal year. The amounts received are not considered material to the
Funds or to Mr. Rockey.
</FN>
</TABLE>
As of March 1, 1995, officers, directors and their immediate families as a group
owned of record and beneficially less than 1% of the outstanding shares of each
Fund. On that date no individual person owned of record or beneficially more
than 5% of the outstanding voting securities in any of the three funds.
Wayne L. Attwood, MD, Kristianne Blake, *Anne V. Farrell, and *Michael K. Murphy
serve as members of the Boards' audit committee. The committee meets
periodically with each Fund's independent accountants and officers to review
accounting principles used by the Fund and the adequacy of the Fund's internal
controls.
The investment committee performs interim functions for the Board of Directors
of each Fund including dividend declaration and portfolio pricing matters.
Members are *Anne V. Farrell, *Michael K. Murphy, and Richard C. Yancey.
Responsibilities of the Boards' nominating committee include preparing for and
recommending replacements for any vacancies in directors' positions and initial
review of policy issues regarding the size, composition, and compensation of the
Boards. Members of the nominating committee are Kristianne Blake, Edwin J.
McWilliams and Jay Rockey.
The Board's distribution committee is responsible for reviewing distribution
activities and 12b-1 expenditures to determine that there is a reasonable
likelihood the 12b-1 plan will benefit each Fund and its shareholders. The
committee meets at least annually and is responsible for making recommendations
to the Boards regarding renewal or changes to the distribution plans. Committee
members are Wayne L. Attwood, M.D., Edwin J. McWilliams, Jay Rockey, and Richard
C. Yancey.
*These directors are "interested persons" of the Fund as that term is defined in
the Investment Company Act of 1940, because they are either affiliated persons
of the Funds, their Adviser, or Distributor.
DISTRIBUTION SERVICES
12B-1 PLAN
As discussed in the prospectus under "The Cost of Good Management," the
directors of each Fund have approved a plan for both classes of shares (the
"Plans") pursuant to Rule 12b-1 under the Investment Company Act of 1940 which
provides that investment companies may pay distribution expenses, directly or
indirectly, according to a plan adopted by each Fund's Board of Directors.
Under each Fund's Plan, the Fund may assume and pay all of its Class A
distribution expenses, including the cost of printing and distributing
prospectuses, statements of additional information and other promotional and
sales literature used by Murphey Favre, Inc. (the "Distributor"), all expenses
and fees incurred in connection with the public offering of shares of its
capital stock and registration of those shares with the appropriate regulatory
agencies, compensation to registered representatives for their services, and
reimbursement to the Distributor of the direct and indirect cost of furnishing
services of its personnel to assist in the entire distribution process but
excluding general and administrative expenses.
The maximum annual reimbursement allowed by the Plans and authorized by
directors for such Class A distribution expenses may not exceed .25% of the
average daily net assets attributable to Class A shares. Funds in the Composite
Group may benefit from expenditures made for distribution activities for another
Composite fund. U.S. Government Securities, Income, and Tax-Exempt reimbursed
the Distributor in the amounts of $399,592, $189,136, and $449,602,
respectively, for distribution expenses incurred on behalf of Class A shares
during the year ended December 31, 1994. Of this amount, $174,277, $76,942, and
$209,360 was paid on behalf of U.S. Government Securities, Income, and
Tax-Exempt, respectively, to selected dealers and registered representatives of
the Distributor for their shareholder servicing activities, and $203,621,
$117,982, and $219,808 was paid for other advertising and promotional expenses.
During the fiscal years ended December 31, 1993 and 1992, U.S. Government
Securities reimbursed the Distributor $408,941 and 219,946, respectively; Income
reimbursed the Distributor $177,417 and $30,580, respectively; and Tax-Exempt
reimbursed the Distributor $408,941 and $240,949 for distribution expenses
related to Class A shares.
Under the Plans, each Fund will compensate the Distributor with a distribution
fee at an annual rate of .75% of the Fund's average daily net assets
attributable to Class B shares and a service fee at an annual rate of .25% of
such assets. During the fiscal period from March 30, 1994 (commencement of
public offering), to December 31, 1994, U.S. Government, Income, and Tax-Exempt
compensated the Distributor in the amounts of $5,948, $10,698, and $6,727,
respectively, for the sale of Class B shares.
Dealers receive an amount equal to an annual rate of .25% of total net assets of
all accounts, of either class, serviced by their representatives.
Under the Plans, each Fund will report at least quarterly to its Board of
Directors the amounts and purposes of all distribution expense payments. During
the continuance of the Plan, as required by Rule 12b-1, the selection and
nomination of the disinterested directors of each Fund will be committed to the
discretion of the disinterested directors then in office.
Each Plan has been approved unanimously by the directors of each Fund including
a majority of the disinterested directors who have no direct or indirect
interest in the Plan and by the Distributor. Each Plan will remain in effect for
one year, may be terminated at any time by a vote of a majority of the
disinterested directors or by a vote of a majority of the outstanding voting
securities of the applicable Fund, and may be renewed from year to year
thereafter only if approved by a vote of the board of directors after
determining, in the exercise of their business judgment and in light of their
fiduciary duties as directors, that there is a reasonable likelihood that each
Plan will benefit its respective Fund and its shareholders. All material
amendments to either Plan must be approved by a vote of each Fund's Board of
Directors including disinterested directors and by shareholders.
DISTRIBUTOR
The Distributor purchases shares of each Fund's capital stock in a continuous
offering to fill orders placed with it by investors and investment dealers. It
pays net asset value and resells shares in accordance with terms of the
Distribution Contracts with each Fund. The Distributor acts in a similar
capacity for all other funds in the Composite Group.
During the 1994, 1993, and 1992 fiscal years, the Distributor received $336,055,
$2,546,166, and $2,649,826, respectively, for the sale of U.S. Government
Securities Class A shares; $340,052, $676,945, and $147,207, respectively, for
the sale of Income Class A shares; and $552,555, $1,986,918, and $1,717,496,
respectively, for the sale of Tax-Exempt Class A shares.
The Distributor has not received any earnings or profits from the redemption of
Class A shares. During the fiscal year ended December 31, 1994, the Distributor
receivedcontingent deferred sales charge payments of $2,812, $391, and $1,680
upon redemption of Class B shares. No brokerage fees were paid by the Funds to
the Distributor during the year, but it may act as a broker on portfolio
purchases and sales should it become a member of a securities exchange.
The Funds bear the cost of registering their shares with federal and state
securities commissions and printing copies of prospectuses and statements of
additional information used for its shareholders. The Distributor pays for
information to send to potential shareholders but may be reimbursed under the
Distribution Plan for such expenses.
TRANSFER AGENT
Murphey Favre Securities Services, Inc. (the "Transfer Agent") furnishes
necessary personnel and other transfer agent services required by each Fund. The
Shareholders Service Contracts for each Fund were originally approved by
shareholders.
During the fiscal years ended December 31, 1994, 1993, and 1992, U.S. Government
Securities paid $175,549, $183,339, and $124,416, respectively, for these
services; Income paid $104,897, $103,007, and $25,056, respectively; and
Tax-Exempt paid $102,778, $94,920, and $74,713, respectively.
At the date of this Statement of Additional Information, the monthly shareholder
servicing fee is $1.30 per Class A account and $1.40 per Class B account in each
Fund. All requests for transfer of shares should be directed to the Funds or to
the Transfer Agent.
HOW SHARES ARE VALUED
Investment securities are stated on the basis of valuations provided by an
independent pricing source, approved by each Fund's Board of Directors, which
use information with respect to last reported sales price for securities traded
on a national securities exchange (or reported on the National Association of
Securities Dealers (NASDAQ) national market system) 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
which cannot be priced by the approved pricing sources will be valued from
quotations from dealers who are market makers in those securities. Investment
securities with less than 60 days to maturity when purchased are valued at
amortized cost which approximates market value. Securities not currently quoted
as described above will be priced at fair value as determined in good faith in a
manner prescribed by the Boards of Directors.
HOW SHARES CAN BE PURCHASED
Information concerning the purchase of shares is discussed under "How to Buy
Shares" in the prospectus. Shares of each Fund are sold in a continuous offering
and may be purchased from the Distributor or a designated dealer at the public
offering price, which is the net asset value per share next determined after
receipt of a purchase order, plus, in the case of Class A shares, an initial
sales charge which is a percentage of the public offering price and varies as
shown in the prospectus. Class B shares are sold without an initial sales charge
but are subject to higher ongoing distribution expenses and may be subject to a
contingent deferred sales charge if redeemed within five years of purchase. Each
Fund receives the entire net asset value of all of its shares sold. The
Distributor or designated dealer retains the initial sales charge. The
Distributor pays sales commissions to dealers from its own resources for Class B
sales and retains contingent deferred sales charge payments. (See Appendix A for
a specimen price-make-up sheet.)
Shareholders who have redeemed Class A shares initially subject to a sales
charge may reinvest their redemption proceeds in Class A shares of any Composite
Group fund at net asset value provided that reinvestment is effected within 120
days of the redemption. Contingent Deferred Sales Charges assessed may be
reimbursed as they relate to the reinvestment of redemption proceeds in Class B
shares within 120 days. The shareholder is responsible for notifying the
Transfer Agent of such reinvestments. If a loss is realized on the redemption of
Fund shares, the reinvestment may be subject to the "wash sale" rule, resulting
in a disallowance of such loss for federal income tax purposes.
The minimum initial investment for each Fund is$1,000 ($500 in IRA accounts),
and additional investments should be at least $50 (unless the transaction is via
asystematic investment program wherethe minimum initial investments mustbe at
least $50 and additional monthly investments should be at least $50).
Investments made by an agent or fiduciary (such as a bank trust department,
investment advisor, broker, or employee benefit or retirement plan), pursuant to
a periodic investment plan may have the minimum purchase requirements on initial
and subsequent investments waived.
Class A shares may be sold at net asset value and in any amount to current and
retired directors, officers and employees of Washington Mutual, Inc., its
affiliates (including the Adviser, the Distributor, and the Transfer Agent, and
their children, grandchildren, and parents), as well as to any trust, pension,
profit-sharing or other benefit plan for such persons. The foregoing privilege
is also extended to directors, officers and employees (including their benefit
plans), of other companies which enter into arrangements with that Fund's
Adviser, Distributor or Transfer Agent for the purpose(s) of providing
investment advice, distribution, shareholder servicing or clearing functions.
Such shares are sold for investment purposes and on the condition that they will
not be resold except through redemption by the Fund.
Each Fund may issue shares at net asset value to employees of any securities
dealer having a sales agreement with the Fund. Each Fund may also issue Class A
shares at net asset value in connection with the acquisition of assets, merger
or consolidation with, another investment fund, or to shareholders in connection
with reinvestment of income dividends and capital gains distributions. Qualified
employee benefit plans which have more than 10 participants or which have more
than $25,000 invested in those Composite Group funds offered with an initial or
contingent deferred sales charge are also entitled to buy without a sales
charge. Individual retirement accounts such as IRAs or SEP IRAs are not eligible
for this privilege. In addition, shareholders of mutual funds outside the
Composite Group who have purchased shares subject to a sales charge may redeem
those shares and use their sale proceeds to purchase Class A shares of a
Composite fund at net asset value provided the proceeds are reinvested within 90
days of such sale and proof of the sale is provided.
PURCHASE PLANS
CUMULATIVE DISCOUNTS: The initial sales charges on Class A shares are applicable
to purchases made at one time by a "purchaser" who may be one of the following:
an individual; an individual, his spouse and children under age 21; a trustee or
other fiduciary of a single trust estate or single fiduciary account; an
organization exempt from federal income tax under Section 501(c)(3) or (13) of
the Internal Revenue Code; a pension, profit-sharing or other employee benefit
plan qualified or non-qualified under Section 401 of the Internal Revenue Code;
or other organized group of persons whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be identified as originating from a
qualifying "purchaser" and therefore entitled to a discount. Upon such
notification, the investor will receive the lowest applicable sales charge.
Discounts may be modified or terminated at anytime.
Each Fund's Class A shares may also be purchased at the reduced sales charge
based on shares currently owned by the investor (excluding Composite Cash
Management Company, unless exchanged from another fund). The sales charge
reduction is determined by adding the value of all Composite Group Class A
shares (at maximum offering price) and Class B shares (at net asset value) to
the amount of the Fund's shares being purchased.
LETTER OF INTENT: This Letter provides for a price adjustment depending upon the
actual amount purchased within a 13 month period. If total investments under the
Letter exceed the intended amount and thereby qualify for a lower initial sales
charge, a retroactive price adjustment is made and the difference is used to
purchase additional shares. A shareholder may include the value of all their
Class A shares (at maximum offering price) and Class B shares (at net asset
value) held in the Composite Group (excluding Composite Cash Management Company,
unless exchanged from another fund) that were held on the effective date of the
Letter of Intent as an "accumulation credit" toward completion of the Letter.
The Letter of Intent, which imposes no obligation to purchase or sell additional
shares, provides that 5% of the amount of the intended purchase will be held in
escrow (in the form of shares) pending completion of the Letter.
CERTIFICATES
Certificates for shares purchased will not be issued unless requested by the
investor. There is no charge for such issuance.
REDEMPTION OF SHARES
When the Fund or Transfer Agent receives: 1) a written request, in proper form,
for redemption of shares, and 2) the return of any issued certificates for
shares being redeemed, a check for payment of shares will normally be sent the
next business day, and no later than seven business days, except as indicated
below. If the account is pre-authorized for telephone transfer, payment may be
wired to a designated bank account or a check will be sent to the designated
bank account or broker, providing such accounts are identically registered.
Telephone redemptions may also be directed to the shareholder's address of
record. No wire fee will be charged for transfers to Washington Mutual Bank or
Seafirst Bank. There is a $10.00 transmittal wire fee (which is subject to
change) to wire all other banks. This fee will be subtracted from the account
balance prior to making the transfer. You should be aware that certain banks
also charge a receiving fee which is beyond the control of the Transfer Agent.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority must be submitted before the request will be
accepted.
Shares tendered for redemption will be redeemed at the net asset value next
determined less, in the case of Class B shares, the appropriate contingent
deferred sales charge as described in the prospectus under "How to Buy Shares."
However, if it appears that it may be necessary to liquidate assets of the Fund
in which shares are being redeemed to provide cash for the redemption of shares
tendered, the Fund reserves the right, in computing the redemption price of such
shares, to deduct a reasonable approximation for brokers' commissions, taxes and
other costs which might be incurred in liquidating assets of the Fund.
The amount received may be more or less than the cost of the shares, depending
on fluctuations in the market value of securities owned by the Fund. If the
shares have been purchased recently, this redemption payment may be delayed
until the Fund verifies that the instrument used in the purchase (e.g., a check)
has been collected, which may take up to 14 days.
The Class B contingent deferred sales charge may be waived under certain
circumstances, as discussed in the prospectus. In addition to the specific cases
outlined in the prospectus, the charge may be waived for any total or partial
redemption in connection with a lump-sum or other distribution from an
Individual Retirement Account ("IRA"), a custodial account maintained pursuant
to Internal Revenue Code of 1986, as amended ("IRC") section 403 (b) (7), or a
qualified pension or profit sharing plan ("Retirement Plans") following
retirement or, in the case of an IRA or Keogh Plan or custodial account pursuant
to IRC section 403 (b) (7), after attaining age 59 1/2. The charge also may be
waived on any redemption which results from a tax-free return of an excess
contribution pursuant to section 408 (d) (4) or (5) of the IRC, the return of
excess deferral amounts pursuant to IRC section 401 (k) (8) or 402 (g) (2), or
from the death or disability of the employee. In sum, the CDSC may be waived on
redemptions of Class B shares which constitute Retirement Plan distributions
which are permitted to be made without penalty pursuant to the IRC, other than
tax-free rollovers or transfers of assets.
EXCHANGE PRIVILEGE
Shareholders may exchange shares of each Fund for the same class of shares in
any other fund in the Composite Group. A brief discussion of such privileges is
in the prospectus under "Exchanges for other funds." Exchanges will be made at
the respective net asset values in effect on the date of such exchange (plus any
applicable sales charges). Shares previously subject to an initial sales charge
may be exchanged without incurring any additional sales charge. Any gain or loss
realized on an exchange is treated as a capital gain or loss for federal income
tax purposes. This privilege is not an option or right to purchase securities,
but is a revocable privilege permitted under the present policies of each of the
Funds. The privilege is not available in any state or other jurisdiction where
the shares of the Fund into which the transfer is to be made are not qualified
for sale, or when the value of the shares presented for exchange is less than
the minimum dollar purchase required by the appropriate prospectus. Each Fund
reserves the right to terminate or end the privilege of any shareholder who
attempts to use the privilege to take advantage of short-term swings in the
market.
An investor may exchange some or all of his shares in a Fund for the same class
of any other fund in the Composite Group of Funds, except Composite Deferred
Series, Inc.: These currently include:
COMPOSITE GROUP OF FUNDS
I. Composite Bond and Stock Fund: primary objective is continuity of income
and conservation of capital with long-term growth a secondary objective.
II. Composite Growth & Income Fund: primary objective is long-term growth of
principal with current income a secondary objective.
III. Composite Northwest 50 Fund: a unique correlation to the Northwest
50(R)Index which invests in a broadly diversified portfolio of 50 common
stocks from companies located or doing business in the Pacific Northwest.
IV. Composite U.S. Government Securities: primary objective is to provide a
high level of current income, consistent with safety and liquidity of
U.S. government-backed securities.
V. Composite Income Fund: primary objective is current income with
preservation of principal a secondary consideration.
VI. Composite Tax-Exempt Bond Fund: primary objective is as high a level of
current income exempt from federal income taxes as is consistent with
prudent investment risk and protection of capital. (Not allowed in IRAs)
VII. Composite Cash Management Company Money Market Portfolio: invests in high
grades of money market instruments maturing in less than one year for
maximum current income, while preserving capital and allowing liquidity.
The Tax-Exempt portfolio invests in high quality, short-term municipal
obligations for maximum current income exempt from federal income tax
while preserving capital and allowing liquidity.
VIII. Composite Cash Management Company Tax-Exempt Portfolio: invests in high
quality, short-term municipal obligations for maximum current income
exempt from federal income tax while preserving capital and allowing
liquidity.
SERVICES PROVIDED BY THE FUND
SYSTEMATIC WITHDRAWAL PLAN
As described in the prospectus, each Fund offers a Systematic Withdrawal Plan to
shareholders with $10,000 or more invested in a single Fund account or to
shareholders with an IRA or other qualified retirement plan account of any size
for the purpose of taking normal distributions. All dividends and distributions
on shares owned by shareholders participating in this plan are reinvested in
additional shares. Since withdrawal payments represent the proceeds from sales
of shares, the amount of a shareholder's investment in the Fund will be reduced:
1) to the extent that withdrawal payments represent the proceeds from sales of
shares; 2) to the extent that withdrawal payments exceed dividends and other
distributions paid and reinvested. Any gain or loss on such redemptions must be
reported for tax purposes. In each case, shares will be redeemed at the close of
business on or about the 25th day of each month preceding payment, and payments
will be mailed within five business days thereafter.
The Systematic Withdrawal Plan may involve the use of principal and is not a
guaranteed annuity. Payments under such a plan do not represent income or a
return on investment but instead are made from the redemption of Fund shares.
Naturally withdrawals that continually exceed dividend income and capital gains
will eventually exhaust the account.
Class B shareholders who establish a Systematic Withdrawal Plan may redeem up to
12% of the value of the account, measured at the time the plan is established,
without paying a contingent deferred sales charge.
A Systematic Withdrawal Plan may be terminated at any time by directing a
written request to the applicable Fund. Upon termination, all future dividends
and capital gain distributions will be reinvested in additional shares unless a
shareholder requests otherwise.
TAX-SHELTERED RETIREMENT PLANS (U.S. GOVERNMENT SECURITIES AND INCOME)
As described in the prospectus, shares of U.S. Government Securities and Income
may be purchased as an investment medium for various tax-sheltered retirement
plans. Each of these plans involves a long-term commitment of assets, and
participants may be subject to possible regulatory penalties for excess
contributions, premature distributions, excess distributions, or for
insufficient distributions after age 70 1/2.
QUALIFIED RETIREMENT PLANS
Self-employed individuals (as sole proprietors or partnerships) or corporations
may wish to purchase Fund shares in a retirement plan. The maximum contribution
limitations are the lesser of $30,000 or 15% of eligible compensation for a
profit sharing plan. The amount of eligible compensation is indexed for
inflation, for 1995 the maximum amount of eligible compensation is $150,000
which effectively limits profit sharing contributions to $22,500. The maximum
contribution limitation is $30,000 or 25% of compensation for a combination
profit sharing and money purchase pension plan or a money purchase pension plan
by itself.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
IRA contributions are invested when received. However, individuals establishing
a new IRA plan may rescind their plan within seven days. In the event of such
termination, their entire purchase price will be refunded by the Distributor
provided they notify the Distributor of their desire to rescind the purchase.
Termination during the seven-day period through regular redemption rather than
through rescission will result in adverse tax consequences. Internal Revenue
Service regulations prohibit revocation of rollover contributions. Any losses
derived through rescission will be absorbed by the Distributor.
Persons who request information regarding IRA plans will be provided with
application forms and information regarding eligibility and permissible
contributions.
IRA CUSTODY AGREEMENT, SERVICE CHARGES AND TAX ASPECTS
Unless participants elect otherwise, any capital gain distributions and income
dividends are reinvested on the ex-dividend date in full and fractional shares
of the applicable Fund at net asset value.
The IRA plan provides that the Distributor will furnish custodial services
either as agent for Washington Mutual Bank or as the named custodian. There are
set annual fees for IRA plans per participant unless made under an
employer-sponsored plan, in which case the custodial fee is negotiable. If
custodial fees are not paid annually by separate check, shares will
automatically be liquidated to cover such fees.
BONUS INCOME
Bonus income may periodically be credited to IRA accounts for contributions,
transfers and/or rollovers. This payment may be considered a reduction in the
sales charge on such purchases. Payments will be made at a uniform rate
determined by the Distributor and will be based on the value of the rollovers
and/or transfer. Bonus income is paid entirely by the Distributor and not by the
applicable Fund.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
Each Fund intends to continue to conduct its business and maintain the necessary
diversification of assets and source of income requirements to qualify as a
diversified management investment company under the Internal Revenue Code (the
"Code"). Each Fund so qualified during the 1994 fiscal year. As a result, under
Subchapter M of the Code, each Fund is accorded conduit or "pass through"
treatment for federal income tax purposes during each year in which it
distributes to its shareholders 90% or more of its gross income from dividends,
interest and gains from the sale or other disposition of securities, and in
which it derives less than 30% of its gross income from gains (without deduction
for losses) from the sale or other disposition of securities held for less than
three months. In addition, if each Fund distributes 98% of its ordinary income
and capital gain net income for each calendar year, it will not be subject to
excise tax on undistributed income. Each Fund intends to distribute such amounts
as necessary to avoid federal income and excise taxes.
Shareholders will usually pay federal income taxes on distributions designated
as net realized long-term capital gains, whether or not received in cash or
shares of the Fund, and regardless of how long the shares have been owned by the
shareholders. Advice as to the tax status of each year's dividends and
distributions will be mailed annually to each shareholder. Shareholders are
urged to consult their own tax advisors regarding specific questions about
federal, state and local taxes. Shareholders not subject to tax on their income
will not be required to pay tax on amounts distributed to them.
TAX-EXEMPT
Congressional legislation allows income received by the Fund which is excludable
from gross income under the Code to retain its status as exempt from federal
income tax when distributed to Fund shareholders as such. This allowance is
based on the Fund holding 50% of the value of its total assets in municipal
obligations at each quarter end of its fiscal year. Interest earned by the Fund
on municipal bonds is not includable by the holders of shares in their
respective gross incomes for federal income tax purposes. Net interest income
received by the Fund from other obligations (e.g., certificates of deposit,
commercial paper, and obligations of the United States government, its agencies
or instrumentalities) and net short-term capital gains realized by the Fund, if
any, will be taxable to holders of shares as ordinary income. Long-term capital
gain distributions will normally be taxed as long-term capital gains.
Section 265 of the Code in effect provides that interest on indebtedness (and
associated expenses) used to purchase or carry exempt interest obligations is
not deductible. In addition, interest on indebtedness incurred or continued to
purchase or carry shares of a fund which distributes exempt-interest dividends
is not deductible.
Interest on certain "private activity" bonds (referred to as "qualified bonds"
in the Code) is subject to the federal alternative minimum tax ("AMT"), although
the interest continues to be excludable from gross income for other purposes.
Interest from private activity municipal obligations is a tax preference item
for the purposes of determining whether a taxpayer is subject to AMT and the
amount of AMT tax to be paid, if any. Private activity obligations issued after
August 7, 1986, to benefit a private or industrial user or to finance a private
facility are affected by this rule. It is the current position of the staff of
the Securities and Exchange Commission that income from municipal obligations
that is a preference item for purposes of the AMT is not deemed to be
"tax-exempt". Under this position, at least 80% of the funds' income
distributions would have to be exempt from the AMT as well as exempt from
federal taxes.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal bonds. It can be expected that similar proposals may be
introduced in the future. If such a proposal were enacted, the availability of
municipal bonds for investment by the Fund and the value of the Fund's portfolio
would be affected. Additionally, the Fund would re-evaluate its investment
objective and policies and consider changes in the structure of the Fund.
STATE AND LOCAL TAX ASPECTS
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. The laws of the several state and local taxing
authorities vary with respect to the taxation of such interest income and each
holder of shares of the Fund is advised to consult his own tax advisor in that
regard. The Fund will report annually (on request) to shareholders with
addresses outside Washington state the percentage of interest income received by
the Fund during the preceding year on municipal bonds, indicating the source of
such income on a state-by-state basis.
U.S. GOVERNMENT SECURITIES AND INCOME
Under the Internal Revenue Code, dividends from net investment income (including
realized net short-term capital gains, if any) are taxable to Fund investors as
dividend income. Since the Funds' net investment income is normally derived from
interest income, the dividends are generally not eligible for the dividends
received deduction for corporate shareholders owning either of these Funds.
For federal tax purposes, carryovers of realized loss on investments of U.S.
Government Securities and Income may be applied against capital gains realized
in future years. If not applied, the carryover will expire in 2002 for U.S.
Government Securities and in 2002 for Income.
INVESTMENT PRACTICES
ALL FUNDS
In addition to these policies, each Fund is subject to investment restrictions
which cannot be changed without approval of a majority of outstanding shares.
These restrictions are discussed in under "Investment Restrictions." There are
no significant investment policies that can be changed without shareholder
approval.
In pursuit of the Funds' investment objectives, they may engage in repurchase
agreement transactions. Under the terms of a typical repurchase agreement, a
Fund would acquire an underlying debt obligation for a relatively short period
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. Under each repurchase agreement, the selling
institution will be required to maintain the value of the securities subject to
the repurchase agreement at not less than 102% of their repurchase price,
including accrued interest earned on the underlying securities. Repurchase
agreements could involve certain risks in the event of default or insolvency of
the other party, including possible delays or restrictions upon a Fund's ability
to dispose of the underlying securities. The Adviser, acting under the
supervision of the Board of Directors, reviews the creditworthiness of those
banks and dealers with which the Funds enter into repurchase agreements to
evaluate these risks, and monitors on an ongoing basis the value of the
securities subject to repurchase agreements to ensure that the collateral is
maintained at the required level. To limit risk, repurchase agreements maturing
in more than seven (7) days will not exceed 10 percent of the total assets of
the Fund.
The Funds' management aims to achieve these objectives through the use of a
flexible investment policy. Management attempts to anticipate market conditions
and places emphasis on economic changes. Portfolio investments are adjusted in
accordance with management's evaluation of changing market risks. Thus, the
relative proportion of various types of securities held may vary significantly.
U.S. GOVERNMENT SECURITIES
The investment objectives of the Fund are to seek as high a level of current
income as is considered consistent with safety and liquidity. It is a
fundamental policy of the Fund to invest in the following securities:
1. Obligations issued or guaranteed by the full faith and credit of the
United States government: U.S. government obligations are issued by the
Treasury and include bills, certificates of indebtedness, notes, bonds,
and obligations secured by the full faith and credit of the U.S.
government issued by the Small Business Administration, the Farmers Home
Administration, the Federal Deposit Insurance Corporation, the Federal
Savings & Loan Insurance Corporation, the D.C. Armory Board, the Export
Import Bank, the Federal Housing Authority, the General Services
Administration, the Washington Metropolitan Transit Authority, the
Department of Housing and Urban Development, and the Private Export
Funding Corporation.
2. Government National Mortgage Association ("GNMA") certificates of the
modified pass-through type: these GNMA certificates are debt securities
issued by a mortgage banker or other mortgagee and represent an interest
in one or a pool of mortgages insured by the Federal Housing
Administration or the Farmers Home Administration or guaranteed by the
Veterans Administration. GNMA guarantees the timely payment of monthly
installments of principal and interest on modified pass-through
certificates at the time such payments are due, whether or not such
amounts are collected by the issuer of these certificates on the
underlying mortgages. (The Fund does not propose to invest in GNMA
certificates of the straight pass-through type in which the payment of
principal and interest on a timely basis is not guaranteed.) The Fund may
purchase GNMAs on an immediate cash delivery basis or on a
when-issued/future delivery basis. GNMAs and forward commitments are
further discussed in the Fund's prospectus.
3. Collateralized Mortgage Obligations (CMOs) and Real Estate Mortgage
Investment Conduits (REMICs) owned by the Fund represent ownership in
underlying GNMA certificates. They differ from pass-through securities in
that principal and interest from the underlying mortgages is made
sequentially rather than pro-rata. Generally, there are multiple classes
of ownership providing for successively longer expected average
maturities. CMOs and REMICs may be used to manage prepayment risk.
The Fund will adjust its portfolio as considered advisable in view of prevailing
or anticipated market conditions and the Fund's investment objective.
Accordingly, the Fund may sell portfolio securities in anticipation of a rise in
interest rates and anticipation of a decline in interest rates (see Brokerage
Allocations and Portfolio Transactions). The portfolio maturity should
approximate 7 to 12 years under normal circumstances.
INCOME
As discussed in the prospectus, the Fund may invest in debt and convertible debt
securities (payable in U.S. funds) which have a rating within the four highest
grades as determined by Standard & Poor's Corporation (AAA, AA, A, or BBB) or
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa). Under present commercial
bank regulations, bonds rated in these categories generally are regarded as
eligible for bank investment. Securities rated BBB or Baa may have speculative
characteristics. Up to 20% of the Fund's total assets may be invested in debt,
convertible debt, preferred stocks, and convertible preferred stocks which are
not rated within the four highest grades by Standard & Poor's or Moody's. The
Fund may invest in issues rated CCC (Standard & Poor's) or Caa (Moody's) or
better, or non-rated obligations which the Adviser believes to be of comparable
quality. This practice may involve higher risks, but the Adviser will only use
such practices if it believes the income and yield is sufficient to justify such
risks. See Appendix B for a detailed description of these ratings.
Although no more than 20% of the Fund's total assets may be invested in "high
yield" securities (i.e., not rated among the four highest grades and sometimes
referred to as "junk" bonds), these securities, whether rated or unrated, may be
subject to greater market fluctuations and risks of loss of income and principal
than the lower yielding, higher-rated fixed-income securities which comprise
most of the Fund's portfolio. Risks of high-yield securities include: (i)
limited liquidity and secondary market support; (ii) substantial market price
volatility resulting from changes in prevailing interest rates; (iii)
subordination to the prior claims of banks and other senior lenders; (iv) the
operation of mandatory sinking fund or call/redemption provisions during periods
of declining interest rates whereby the Fund may reinvest premature redemption
proceeds in lower yielding portfolio securities; (v) the possibility that
earnings of the issuer may be insufficient to meet its debt service; and (vi)
the issuer's low creditworthiness and potential for insolvency during periods of
rising interest rates and economic downturn.
<TABLE>
<CAPTION>
The Fund's average portfolio quality during 1994 is presented below:
PERCENTAGE OF AVERAGE
MOODY'S / S&P RATING ......... TOTAL ASSETS
<S> <C>
Aaa / AAA (or US Treasury) ... 21 %
Aa / AA ...................... 4
A / A ........................ 19
Baa / BBB .................... 39
Ba / BB ...................... 11
Not Rated .................... 2
Other Assets ................. 4
---
Total Assets ................. 100 %
===
</TABLE>
The Fund will not directly purchase common stocks. However, it may retain up to
10% of the value of its total assets in common stocks acquired either by
conversion of fixed-income securities or by the exercise of warrants or rights
attached thereto. A percentage restriction on investment or utilization of
assets for the Fund is adhered to at the time the investment is made. A later
change in percentage resulting from changing values or a change in any rating of
a portfolio security will not be considered a violation.
The Fund considers electric utilities, electric and gas utilities, gas
utilities, and telephone utilities to be separate industries and may at times
invest more than 25% of its assets in utilities as a whole. In view of such
possible concentration in these industries, an investment in the Fund should be
made with an understanding of their characteristics and the risks which such an
investment may entail. General problems of the utility industries include the
difficulty in obtaining an adequate return on invested capital, in spite of
frequent increases in rates which have been granted by the public service
commissions having jurisdiction, the difficulty in financing large construction
programs during an inflationary period, the restrictions on operations and
considerations, the difficulty in obtaining fuel from electric generation at
reasonable prices, the difficulty in obtaining natural gas for resale and the
effects of energy conservation.
Federal, state and municipal governmental authorities may, from time to time,
review existing and impose additional regulations governing the licensing,
construction and operating of nuclear power plants. Any delays in the licensing,
construction and operation of nuclear power plants or the suspension of
operations of such plants which have been or are being financed by proceeds of
certain obligations held in the portfolio may affect the payment of interest on
or the repayment of principal amount of such obligations. The Fund is unable to
predict the ultimate form any such regulations may take or the impact such
regulations may have on the obligations of the portfolio.
The Adviser believes that in many instances foreign securities provide a higher
yield than securities of domestic issuers with similar maturities. Therefore,
such securities should enhance the Adviser's ability to fulfill the investment
objective of "providing a high level of current income." Foreign investments
generally, however, have risk elements which exceed those of comparable domestic
securities. Among these risk elements are potentially reduced domestic
marketability of such securities, the lower reserve requirements generally
mandated for overseas banking operations, the possible impact of interruptions
in the flow of international currency transactions, potential political and
social instability or expropriation, imposition of foreign taxes, less
government supervision of issuers, difficulty in enforcing contractual
obligations, and lack of uniform accounting standards. All trading activities
will be conducted on U.S. securities markets. The Fund will purchase foreign
securities only when the Adviser feels incremental returns from the same are
sufficient to justify assuming these increased risks. In all cases, foreign
investments will be payable in U.S. dollars.
Under present regulatory policies, including those of the board of governors of
the Federal Reserve System and the Securities and Exchange Commission, the Fund
may lend its portfolio securities to member firms of the New York Stock
Exchange. Any such loans would be required to be secured continuously by
collateral in cash or cash equivalents maintained on a current basis at an
amount at least equal to the market value of the securities loaned. The Fund
would have the right to call a loan and obtain the securities loaned at any time
on five days' notice. During the existence of a loan, the Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned and would also receive the interest on investment of the
collateral. The Fund would not have the right to vote the securities during the
existence of such a loan but would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or withholding
of consent on a material matter affecting the investment. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, any such loans would be made only to firms deemed by the Fund's
management to be of good standing, and only when, in its judgment, the
consideration which could be earned currently from such a loan would justify the
attendant risk.
No such loans are in existence at the present time. If in the future the
management of the fund determines to make securities loans, it is intended that
the value of portfolio securities loaned would not exceed 50% of total assets.
In addition, it is intended that the payments received on such loans, including
amounts received during the existence of such a loan on account of interest and
dividends on the securities loaned, would not exceed in aggregate 10% of the
Fund's annual gross income (without offset for realized capital losses) unless
counsel for the Fund determines that such amounts are qualifying income under
federal income tax provisions applicable to regulated investment companies.
TAX-EXEMPT
In seeking its objectives, the Fund will, under normal market conditions, invest
substantially all (at least 80%) of its portfolio in debt securities issued by
or on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("municipal bonds" or "tax-exempt securities"). As a defensive measure during
times of adverse market conditions, up to 50% of the Fund's portfolio may be
invested in short-term investments described in the prospectus.
The Fund may invest no more than 10% of its total assets in other investment
companies which invest in tax-exempt securities. No more than 5% of the Fund's
total assets may be invested in a single investment company nor may the Fund
purchase more than 3% of the total voting securities of a single investment
company. The Adviser will reduce its advisory fees on such investments to offset
management fees paid to the other investment company.
The foregoing restrictions and other limitations discussed herein will apply
only at the time of purchase of securities and will not be considered violated
unless an excess occurs or exists immediately after and as a result of an
acquisition of securities.
In the event the Fund acquires illiquid assets as a result of the exercise of a
security interest relating to municipal bonds, the assets will be disposed of as
promptly as possible.
MUNICIPAL BONDS
Municipal bonds include obligations issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, housing, hospitals, mass transportation, schools, streets
and water and sewer works. Other public purposes for which municipal bonds may
be issued include the refunding of outstanding obligations, obtaining funds for
general operating expenses and the obtaining of funds to loan to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide privately operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, port or parking
facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity for sewage or solid waste
disposal. Such obligations are included within the term municipal bonds if the
interest paid thereon qualifies as exempt from federal income tax. Other types
of industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute municipal bonds, although the current
federal tax laws place substantial limitations on the size of such issues.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source. Industrial development bonds
which are municipal bonds are in most cases revenue bonds and do not generally
constitute the pledge of the credit of the issuer of such bonds. There are, of
course, variations in the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors.
The yields on municipal bonds are dependent on a variety of factors, including
general money market conditions, general conditions of the municipal bond
market, size of a particular offering, the maturity of the obligation and rating
of the issue. The ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P") represent their opinions as the quality of the
municipal bonds which they undertake to rate. It should be emphasized, however,
that ratings are general and are not absolute standards of quality.
Consequently, municipal bonds with the same maturity, coupon and rating may have
different yields while bonds of the same maturity and coupon with different
ratings may have the same yield. See Appendix B for a detailed description of
these security ratings.
Only under exceptional circumstances would the Fund invest up to 25% of its
total assets in municipal obligations rated from Ba to Caa (Moody's) or BB to
CCC (Standard & Poor's). Obligations which carry these ratings are considered
speculative with respect to their capacity to pay interest and repay principal,
the danger of default may also be present. Such debt instruments may have some
quality and protective elements, but they are subject to major risk exposures
under adverse conditions. The Adviser currently has no intention to purchase
obligations of this nature.
The commercial paper ratings of A-1 by Standard & Poor's and P-1 Moody's are the
highest commercial paper ratings of the respective agencies. The issuer's
earnings, quality of long-term debt, management and industry position are among
the factors considered in assigning such ratings. See Appendix B for a detailed
description of these security ratings.
Subsequent to its purchase by the Fund, an issue of municipal bonds or other
investments may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event requires the elimination of
such obligations from the Fund's portfolio, but the Adviser will consider such
an event in its determination of whether the Fund should continue to hold such
obligation in its portfolio. To the extent that the ratings accorded by Standard
& Poor's or Moody's for municipal bonds or other investments may change as a
result of changes in such organizations, or changes in their rating systems, the
Fund will attempt to use comparable rating as standards for its investments in
accordance with the investment policies contained herein.
INVESTMENT RESTRICTIONS
While many decisions of the Adviser depend on flexibility, there are several
principles so fundamental to each Fund's philosophy that they may not be changed
without a vote of a majority of the outstanding shares of that Fund.
Each Fund may NOT:
o invest more than 5%* of its total assets in any single issuer (other than
U.S. government securities);
o acquire more than 10%* of the voting securities of any one company;
o invest in any company for the purpose of management or exercising control;
o invest in real estate or commodities;
o invest in oil, gas or other mineral leases;
o invest in securities restricted under federal securities laws;
o invest more than 20%* of its assets in forward commitments;
o invest more than 25%* of its assets in any single industry;
o invest more than 15%* of its net assets in illiquid securities;
o buy foreign securities not payable in U.S. dollars;
o buy securities on margin, mortgage or pledge its securities, or engage in
"short" sales;
o invest more than 5%* of its net assets in warrants including not more than
2%* of such net assets in warrants that are not listed on either the New
York Stock Exchange or American Stock Exchange; however, warrants acquired
in units or attached to securities may be deemed to be without value for
the purpose of this restriction;
o act as underwriter of securities issued by others;
o borrow money for investment purposes (it may borrow up to 5% of its total
assets for emergency, non-investment purposes);
o lend money (except for the execution of repurchase agreements);
o buy or sell put or call options;
o issue senior securities;
U.S. Government Securities may NOT:
o invest less than 80%* of its assets in obligations guaranteed by the U.S.
government or in repurchase agreements or collateralized mortgage
obligations secured by these obligations.
Tax-Exempt may NOT:
o buy or hold securities which directors or officers of the Fund or its
Adviser hold more than .50% of the outstanding securities.
U.S. Government Securities and Income may NOT:
o invest in other investment companies (except as part of a merger).
U.S. Government Securities and Tax-Exempt may NOT:
o buy common stocks or other equity securities except that Tax-Exempt may
invest in other investment companies.
* Percentage at the time the investment is made.
** It is a policy of Income to consider Electric Utilities, Electric and Gas
Utilities, Gas Utilities, and Telephone Utilities to be esparate
industries. The Fund also considers foreign issues to be a separate
industry. It is a policy of Tax-Exempt to apply this restriction only to
its assets in non-municipal bond holdings. These policies may result in
increased risk.
PERFORMANCE INFORMATION
YIELD
Each Fund's current yield used in advertising is calculated by dividing net
investment income per share (annualized) for a stated 30-day period by the
Fund's maximum offering price (including, in the case of Class A shares, the 4%
maximum sales charge) at the end of the period. Yields will generally be lower
for Class B shares than Class A shares because of the higher distribution
expenses incurred by Class B shares. Yields will be quoted for each class of
shares in any advertisement presenting the yield of either class. .
Interest income for yield purposes is calculated by computing interest income
based on standardized methods applicable to mutual funds. In general, interest
income is reduced on a daily basis with respect to bonds trading at a premium
over par value by a portion of that premium, or increased similarly with respect
to bonds trading at a discount.
Because yield accounting methods differ from the methods used for other
accounting purposes, a Fund's yield may not equal the income paid to your
account or the income reported in the financial statements.
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES
The Fund's yield for the 30 days ended December 31, 1994, was calculated based
on the following formula:
Class A Class B
<S> <C> <C>
Yield = 2{((a-b)/cd + 1)6 -1} 6.67% 6.09%
Where:
a = interest income earned during the period $ 1,227,730 $ 6,852
b = expenses accrued during the period $ 143,700 $ 1,540
c = daily average number of shares eligible to
receive dividends during the period $ 19,705,816 $ 109,993
d = maximum offering price at 12/31/94 $ 10.04 $ 9.64
<CAPTION>
INCOME
The Fund's yield for the 30 days ended December 31, 1994, was calculated based
on the following formula:
Class A Class B
<S> <C> <C>
Yield = 2{((a-b)/cd + 1)6 -1} 7.42% 6.92%
Where:
a = interest income earned during the period $ 633,449 $ 16,216
b = expenses accrued during the period $ 73,538 $ 3,376
c = daily average number of shares eligible to
receive dividends during the period $ 10,636,462 $ 271,930
d = maximum offering price at 12/31/94 $ 8.64 $ 8.30
<CAPTION>
TAX-EXEMPT
The Fund's yield for the 30 days ended December 31, 1994, was calculated based
on the following formula:
Class A Class B
<S> <C> <C>
Yield = 2{((a-b)/cd + 1)6 -1} 5.37% 4.79%
Where:
a = interest income earned during the period $ 1,133,809 $ 6,440
b = expenses accrued during the period $ 135,149 $ 1,585
c = daily average number of shares eligible to
receive dividends during the period $ 30,350,488 $ 172,336
d = maximum offering price at 12/31/94 $ 7.43 $ 7.13
</TABLE>
TAXABLE-EQUIVALENT YIELD
Taxable-equivalent yield is calculated by dividing the Fund's tax-exempt current
yield by the number one minus a particular income tax rate. For example, the
Class A current yield for the 30 days ended December 31, 1994, would result in a
8.89% taxable-equivalent yield at the 39.6% tax rate according to the following
calculation: 5.37% divided by (1.00 - .396) = 8.89%. The Class B
taxable-equivalent yield at the 39.6% tax rate for the 30 days ended December
31, 1994, was 7.93%.
From time to time, the Fund may present illustrations of the relationship
between various tax exempt yields and taxable yields for various tax brackets.
DISTRIBUTION RATE
Each Fund may quote a distribution rate in sales literature. The distribution
rate is calculated by dividing the actual ordinary income dividends per share
(annualized) over a one month or twelve month period by the maximum offering
price at the end of the period. The distribution rates for U.S. Government
Securities Class A and Class B shares for the month ended December 31, 1994,
were 6.19% and 5.60%, respectively. The distribution rates for Income Class A
and Class B shares for the month ended December 31, 1994, were 7.02% and 6.46%,
respectively. The distribution rates for Tax-Exempt Class A and Class B shares
for the month ended December 31, 1994, were5.35% and 4.77%, respectively.
Generally, a Fund's distribution rate reflects amounts of net investment income
actually paid to shareholders while yield reflects the earning power of the
Fund's portfolio (net of expenses).
TOTAL RETURNS
Total returns quoted in advertising include the effect of applicable sales
charges, reinvesting dividends and capital gain distributions (at net asset
value), and any change in net asset value per share over the period. Total
returns will be quoted for each class of shares in any advertisement presenting
the total return of either class. The following total returns reflect the
maximum 4.5% initial sales charge for Class A shares and the 3% maximum
contingent deferred sales charge appropriate to the period for Class B shares.
Average annual total returns are calculated by determining the change in value
of a hypothetical investment over a stated period of time and then calculating
the annual compounded rate of return that would have produced the same result
had the rate of growth or decline in value been constant over the entire period.
Cumulative total return is the simple change in value of a hypothetical
investment over a stated period of time. The cumulative total return may be
quoted as a percentage or a dollar amount and may be presented numerically or in
a table, graph, or similar illustration.
<TABLE>
<CAPTION>
PERIODS ENDED DECEMBER 31, 1994
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C> <C>
U.S. Government Securities, Class A ........ -8.72% 5.63% 7.91%
Income, Class A ............................ -8.64% 6.65% 7.88%
Tax-Exempt, Class A ........................ -10.33% 5.51% 8.40%
<CAPTION>
CUMULATIVE TOTAL RETURN
<S> <C> <C> <C>
U.S. Government Securities, Class A ........ -8.72% 31.51% 114.10%
Income, Class A ............................ -8.64% 37.98% 113.52%
Tax-Exempt, Class A ........................ -10.33% 30.79% 124.05%
</TABLE>
<TABLE>
<CAPTION>
Class B shares' cumulative total returns from the commencement of public
offering on March 30, 1994:
<S> <C>
U.S. Government Securities, Class B -4.68%
Income, Class B -4.48%
Tax-Exempt -4.32%
The total returns are calculated as follows:
Average annual total return: ERV = P(1+A)n
Cumulative total return (as a percentage): T = (ERV-P)/P
Where:
P = a hypothetical initial investment of $1,000
A = average annual total return
T = total return
n = number of years
ERV = ending redeemable value of a $1,000 hypothetical investment
</TABLE>
BROKERAGE ALLOCATIONS AND PORTFOLIO TRANSACTIONS
Under terms of the Investment Management Agreements, Composite Research &
Management Co. acts as agent for each Fund in entering orders with
broker-dealers to execute portfolio transactions and in negotiating commission
rates where applicable. Decisions as to eligible broker-dealers are approved by
the president of the Funds.
The primary consideration in all portfolio transactions is to seek the most
favorable price and execution and to deal directly with primary market makers in
over-the-counter transactions except when, in the Adviser's opinion, an equal or
better market exists elsewhere.
In executing portfolio transactions and selecting brokers or dealers, the
Adviser shall use its best efforts to seek, on behalf of each Fund, the best
overall terms available. In assessing the best overall terms available for any
transaction, the Adviser may consider all factors it deems relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. In evaluating the best overall terms available, and in
selecting the broker or dealer to execute a particular transaction, the Adviser
also may consider the brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934, as amended)
provided to the Fund and/or other accounts over which the Adviserexercises
investment discretion. The Adviser is authorized to pay to a broker or dealer
who provides such brokerage and research services a commission for executing a
portfolio transaction for the Fund which is in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction if the Adviser determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of that particular
transaction or in terms of the overall responsibilities of the Adviser to each
Fund.
The Adviser estimates that all portfolio transactions during the year were
executed by broker-dealers who provided research services to the Adviser.
Composite Research has advised that it is not possible to place a value on their
services. Research services received do not materially reduce the cost to the
Adviser of fulfilling its contract.
None of the brokers with whom the Funds deal have any interest in the Adviser or
the Distributor. The Distributor did not execute any portfolio orders for the
Funds during the fiscal year, nor did the Distributor or the Adviser receive any
direct or indirect compensation as a result of portfolio transactions of the
Funds. Shares may be sold by brokers who execute portfolio transactions for the
Fund; however, no brokerage fees will be allocated for such sales.
The Funds intend to actively manage the portfolio to take advantage of
anticipated movements in the general level of interest rates and temporary
disparities in the normal yield relationship between two securities. While such
portfolio management may result in the sale of securities held for a short
period of time, it is anticipated that the annual portfolio turnover rate will
not generally exceed 100% (excluding turnover of securities having a maturity of
one year or less). The rate of turnover, however, will not be a limiting factor
when the Fund deems it desirable to sell or purchase securities, and the
turnover rate in particular years may, therefore, exceed 100%. Market
volatility, which is unpredictable, remains the determining factor. For 1994 and
1993, the portfolio turnover rates were 34% and 51% for U.S. Government
Securities, 26% and 51% for Income, and 12% and 19% for Tax-Exempt.
The net asset value of the shares of an open-end investment fund investing
primarily in fixed-income securities changes as the general level of interest
rates fluctuate. When interest rates decline, the market value of a portfolio
invested in higher yields can be expected to rise. Conversely when interest
rates rise, the market value of a portfolio invested in higher yields can be
expected to decline.
GENERAL INFORMATION
ORGANIZATION AND AUTHORIZED CAPITAL
U.S. Government Securities was incorporated under the laws of the State of
Washington on March 5, 1982, under a Certificate of Incorporation granting
perpetual existence. The Fund has an authorized capitalization of 1 billion
shares of capital stock, $.0001 par value.
Income was incorporated under the laws of Washington on October 22, 1975, under
a certificate of incorporation granting perpetual existence. The Fund has an
authorized capitalization of 50,000,000 shares of capital stock, $0.01 par
value.
Tax-Exempt was incorporated under the laws of the state of Washington on
September 16, 1976, under a certificate of incorporation granting perpetual
existence. The Fund has an authorized capitalization of 500,000,000 shares of
capital stock, $.0001 par value.
Each Fund offers two classes of shares. Each class of shares represents
interests in the assets of the Fund. The shares do not have preemptive rights,
and none of the shares have any preference to conversion, exchange, dividends,
retirements, liquidation, redemption or any other feature. Class B shares
convert to Class A shares after six years. Shares have equal voting rights
except that each class has exclusive voting rights with respect to provisions of
each Fund's Distribution Plan that pertains to a particular class.
VOTING PRIVILEGES
The Funds are not required to hold annual meetings. When meetings are called, a
shareholder may exercise cumulative voting privileges under Washington state
law. Using this privilege, shareholders are entitled to one vote for each
director for each share of capital stock held by them. The total number of votes
for directors to which a shareholder is entitled may be accumulated and cast for
each candidate in such proportion that the shareholder may designate.
CUSTODIAN
The securities and cash owned by each Fund are held in safekeeping by Investors
Fiduciary Trust Company (IFTC), 127 West 10th, Kansas City, MO 64105. IFTC is a
wholly owned subsidiary of State Street Bank. The custodian's responsibilities
include collecting dividends, interest and principal payments on each Fund's
investments.
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of LeMaster & Daniels, Certified Public Accountants, has been selected
as the independent public accountants of each Fund. LeMaster & Daniels performs
audit services for each Fund including the examinations of the financial
statements included in annual reports to shareholders which are incorporated by
reference into this Statement of Additional Information.
REGISTRATION STATEMENT
This Statement of Additional Information and the prospectus do not contain all
of the information set forth in the registration statements each Fund has filed
with the Securities & Exchange Commission. Complete registration statements may
be obtained from the Securities & Exchange Commission upon payment of the fee
prescribed by the rules and regulations of the Commission.
FINANCIAL STATEMENTS AND REPORTS
The Funds' financial statements and schedules for the fiscal year 1994 appear in
their annual report to shareholders dated December 31, 1994, which may be
obtained without charge by contacting the Funds' offices.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX A
SPECIMEN PRICE MAKE-UP SHEET
At December 31, 1994
U.S. Government
Securities Income Tax-exempt
------------ ----------- ------------
<S> <C> <C> <C>
Assets ............................. $190,393,231 $90,958,315 $217,319,959
Liabilities ........................ 1,261,925 557,515 624,051
------------ ----------- ------------
Net Assets ......................... $189,131,306 $90,400,800 $216,695,908
============ =========== ============
Class A Shares
Net Assets ......................... $188,068,033 $88,101,843 $215,438,339
Shares Outstanding ................. 19,508,938 10,623,338 30,218,068
------------ ----------- ------------
Net Assets Per Share ............... $ 9.64 $ 8.29 $ 7.13
============ =========== ============
Maximum Offering Price
(Net Assets Per Share / 96/100) .... $ 10.04 $ 8.64 $ 7.43
============ =========== ============
CLASS B SHARES
Net Assets ......................... $ 1,063,273 $ 2,298,957 $ 1,257,569
Shares Outstanding ................. 110,309 276,838 176,371
------------ ----------- ------------
Net Assets and
Offering Price Per Share ........... $ 9.64 $ 8.30 $ 7.13
============ =========== ============
</TABLE>
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Corporate and Municipal Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack out- standing
investment characteristics and in fact have speculative characteristics
as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterize bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
STANDARD & POOR'S CORPORATION (S & P)
Corporate and Municipal Ratings
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only to a small
degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC, and C is regarded, on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default and
is dependent upon favorable business, financial, or economic conditions
to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy has been filed but
debt service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition of debt
service payments are jeopardized.
COMMERCIAL PAPER
A1 and Prime 1 commercial paper ratings issued by Moody's Investors Services,
Inc. (Moody's) and Standard & Poor's Corporation (S&P) are the highest ratings
these corporations issue.
Among factors considered by Moody's in assigning ratings are the following: (1)
evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
maybe inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparation to
meet such obligations.
Commercial paper rated A1 by S&P has the following characteristics: Liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated A
or better. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determine whether the issuer's commercial paper is rated A1, A2 or
A3.
ABSENCE OF RATING:
Where no rating has been assigned or where a rating has been suspended or
withdrawn, it may be for reasons unrelated to quality of the issue. Should no
rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published.
<PAGE>
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements. The annual report to shareholders dated December
31, 1994, was filed with the Securities and Exchange Commission on or about
February 22, 1995. The annual report is incorporated by reference in both Parts
B and C.
Filing Date
(b) Exhibits Incorporated With Filed
--------------- ----------------- ------
(1a) Articles of Incorporation Form N-8B-1 11-13-75
(1b) Amendment to Articles of Incorporation Form N-1A 3-31-94
(2) Bylaws Form N-SAR 2-22-95
(3) Voting Trust Agreement INAP
(4) Specimen Capital Stock Certificate Form N-8B-1 11-13-75
(5) Investment Advisory Contract Form N-1A 3-31-94
(6a) Distribution Contract Form N-1A 4-27-95
(6b) Specimen Selling Agreement Form N-1A 1-31-94
(7) Bonus, profit sharing, pension
or other similar contracts for
benefit of directors or officers of
the Registrant INAP
(8) Custodial Agreement Form N-1A 1-31-94
(9) Shareholder Services Contract Form N-1A 11-25-88
(10) Opinion & Consent of Counsel Form N-1A 4-27-95
(11) Accountants' Consent Form N-1A 4-27-95
(12) All financial statements omitted
from Item 23. Form N-1A 4-27-95
(13) Agreements or understandings made in
consideration for providing
initial capital. Form N-8B-1 11-13-75
(14) Retirement Plan and Forms Form N-1A for
Composite Fund
File #2-11380 1-22-85
(15) 12b-1 Plan Proxy Stmt. 11-21-83
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is operated under the supervision of Composite Research &
Management Co. Composite Research is affiliated with Murphey Favre, Inc. and
Murphey Favre Securities Services, Inc. through common ownership and management.
Murphey Favre serves as principal underwriter and distributor for the
Registrant. Murphey Favre Securities Services serves as transfer agent for the
Registrant. Composite Research, Murphey Favre, and Murphey Favre Securities
Services serve in their same capacities for the seven other investment companies
within the Composite Group of Funds, namely: Composite Northwest 50 Fund, Inc.;
Composite Tax-Exempt Bond Fund, Inc.; Composite Cash Management Company;
Composite Bond & Stock Fund, Inc.; Composite U.S. Government Securities, Inc.;
Composite Equity Series, Inc.; and Composite Deferred Series, Inc.
Composite Research & Management, Murphey Favre, and Murphey Favre Securities
Services are all wholly-owned subsidiaries of Washington Mutual, Inc.. All
companies named are incorporated in the State of Washington.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
As of March 31, 1995, there were 6,209 common stock shareholders.
Item 27. INDEMNIFICATION.
Registrant shall have the power to indemnify any director, officer or former
director or officer of the Corporation, or any person who may have served at the
Corporation's request as a director or officer of another corporation, against
expenses actually and reasonably incurred by such person in connection with the
defense of any action, suit or proceeding, civil or criminal, in which he
becomes a party by reason of being or having been such director or officer, to
the full extent permitted by the laws of the State of Washington, as such laws
at anytime may be in force and effect, provided however, that this
indemnification provision shall not protect, or purport to protect any director
or officer of the corporation against any liability to the corporation or to the
shareholders to which he otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of this office.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR.
Registrant's Investment Advisor is Composite Research & Management Co., a
wholly-owned subsidiary of Washington Mutual, Inc., which is a Washington
corporation, organized in 1889. The Advisor serves in that capacity for the
seven (7) other investment companies with the Composite Group of Funds
identified in Item 25.
Business and other connections of the Investment Advisor were most recently
filed on Form ADV, Securities and Exchange Commission File No. 801-4855, which
was mailed on February 23, 1995, and is incorporated herein by reference.
Item 29. PRINCIPAL UNDERWRITERS.
The principal underwriter for the Registrant is Murphey Favre which also serves
in the same capacity for seven (7) other investment companies identified in Item
25.
Business and other connections of the underwriter were most recently filed on
Form BD, CRD 599, with the National Association of Securities Dealers on
March 14, 1995, and are incorporated herein by reference.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules thereunder will be
maintained at the offices of the Registrant at 601 West Main Avenue, Suite 801,
Spokane, Washington 99201. The Registrant's custodian activities are performed
at Investors Fiduciary Trust Company (IFTC), 127 West 10th, Kansas City, MO
64105.
Item 31. MANAGEMENT SERVICES.
Registrant is not a party to any management related service contract, other than
as set forth in the Prospectus.
Item 32. UNDERTAKINGS.
The Fund is not required to hold annual shareholder meetings under Washington
state law. If requested by the holders of at least 10% of the Fund's outstanding
shares, a shareholder meeting will be called for the purpose of voting upon the
question of removal of a director and to assist in communications with other
shareholders as required by Section 16(c) of the Investment Company Act of 1940.
<PAGE>
SIGNATURES
FORM N-1A
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Spokane, and State of Washington on the 27th day of
April, 1995.
Composite Income Fund, Inc.
Registrant
[SEAL]
By: William G. Papesh
President
ATTEST:
John T. West, CPA
Secretary
Monte D. Calvin, CPA
Principal Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities on
the date indicated:
Wayne L. Attwood March 28, 1995 Kristianne Blake March 28, 1995
Director Director
Anne V. Farrell March 28, 1995 Edwin J. McWilliams March 28, 1995
Director Director
William G. Papesh March 28, 1995 Jay Rockey March 28, 1995
Director Director
Leland J. Sahlin March 28, 1995 Richard C. Yancey March 28, 1995
Director Director
DISTRIBUTION CONTRACT
THIS AGREEMENT, dated this 24th day of January 1995, is a continuation of
Agreements initially adopted in 1983 (with the exception of Composite Northwest
50 Fund, Inc. which adopted the Plan in 1987), by and between individual funds
within the Composite Group of Funds (corporations duly incorporated and existing
under the laws of the State of Washington), and MURPHEY FAVRE, INC., doing
business at Seattle, Washington, herein sometimes referred to as the
"DISTRIBUTOR." This Agreement is by and between the Composite Group of Funds and
the Distributor.
RECITALS
WHEREAS, the Composite Group of Funds ("Composite") is a family of funds
registered as open-end, management investment companies under the Investment
Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Composite Group of Funds and the Distributor desire to enter into
an agreement that sets forth standard terms and conditions for distribution
services for the individual funds, as noted on the signatory page, and in
accordance with the schedule of fees attached as Exhibit A;
WHEREAS, the payments contemplated herein intend to result in the sale of
Composite shares and the allocation of certain charges and expenses in paragraph
6 hereof relating to compensation of the Distributor and its registered
representatives and to the reimbursement of expenses for advertisement,
promotional material, sales literature and printing and mailing of prospectuses
to other than current Composite shareholders, incurred by the Distributor as
agent for the Composite, which may be considered the financing of activities
intended to result in the sale of Composite shares;
WHEREAS, this Agreement is intended to be a "written plan" of the reimbursement
type for Class A shares and of the compensation plan type for Class B shares as
contemplated by Rule 12b-1 promulgated pursuant to the provisions of the 1940
Act;
NOW, THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration the receipt whereof is hereby
acknowledged, the parties hereto agree as follows:
1. APPOINTMENT. Composite hereby appoints Murphey Favre as the Distributor
for the funds for the period and on terms set forth in this Agreement. The
Distributor accepts such appointment and agrees to render the services
herein set forth, for the compensation herein provided (including
reimbursement of expenses).
2. DELIVERY OF DOCUMENTS. Composite has furnished the Distributor with copies
of:
(a) Articles of Incorporation and all amendments thereto for each
fund;
(b) Bylaws and all amendments thereto for each fund;
(c) Each fund's most recent prospectus and recent registration
statement.
From time to time, each fund will furnish the Distributor properly certified or
authenticated copies of all amendments or supplements to the foregoing, if any,
and all documents, notices and reports filed with the Securities and Exchange
Commission (the "SEC").
3. DUTIES OF THE DISTRIBUTOR. The Distributor shall provide each fund with
the benefit of its best judgment, efforts and facilities in rendering its
services as Distributor. The Distributor will act as the exclusive
Distributor, subject to the supervision of each fund's board of directors
and the following understandings: (i) directors shall be responsible for
and control the conduct of each fund's affairs; (ii) in all matters
relating to the performance of this Agreement, the Distributor will act in
conformity with the Articles of Incorporation, Bylaws and Prospectus of
each fund and with the instructions and directions of each fund's board of
directors and will conform to and comply with the requirements of the 1940
Act and all other applicable federal or state laws and regulations. In
carrying out its obligations hereunder, the Distributor shall:
(a) provide to each fund's board of directors, at least quarterly, a
written report of the amounts expended in connection with all
distribution services rendered pursuant to this Agreement,
including an explanation of the purposes for which such
expenditures were made; and
(b) take, on behalf of each fund, all actions which appear to be
necessary to carry into effect the distribution of each fund's
shares as provided in paragraph 4.
4. DISTRIBUTION OF SHARES. It is mutually understood and agreed that the
Distributor does not undertake to sell all or any specific portion of the
shares of common stock of any of the funds. A fund shall not sell any
shares of its common stock except through the Distributor. Notwithstanding
the provisions of the foregoing sentence:
(a) A fund may issue its Shares at their net asset value to any
shareholder of the fund purchasing such shares with dividends or
other cash distributions received from the fund pursuant to any
special or continuing offer made to shareholders;
(b) the Distributor may, and when requested by a fund, shall, suspend
its efforts to effectuate sales of the shares of common stock of
a fund at any time when in the opinion of the Distributor or of
the fund no sales should be made because of market or other
economic considerations or abnormal circumstances of any kind and
may in its sole discretion reject orders for the purchase of a
fund's shares;
(c) a fund may withdraw the offering of its common stock (i) at any
time with the consent of the Distributor or (ii) without such
consent when so required by the provisions of any statute or of
any order, rule or regulation of any governmental body having
jurisdiction; and
(d) the price at which the shares may be sold (the "offering price")
shall be the net asset value per share, plus a sales charge which
shall be determined in the manner established from time to time
by a fund's Distributor and set forth in a fund's then current
prospectus.
5. COMPENSATION FOR SERVICING SHAREHOLDER ACCOUNTS. Composite acknowledges
that the Distributor may compensate its investment representatives for
opening accounts, processing investors' purchase and redemption orders,
responding to inquiries from fund shareholders concerning the status of
their accounts and the operations of a fund, and communicating with a fund
and its transfer agent on behalf of fund shareholders in such manner and
amount as the Distributor may deem appropriate.
6. EXPENSES. The expenses connected with distribution shall be allocable
between the funds and the Distributor as follows:
(a) the Distributor shall furnish the services of personnel to the
extent that such services are required to carry out its
obligations under this Agreement.
(b) Composite agrees that each fund assumes and shall pay or cause to
be paid the following expenses incurred on its behalf:
registration of common stock (except the initial registration)
including the expense of printing and distributing prospectuses; expenses
incurred for corporate services; taxes and expenses related to portfolio
transactions; charges and expenses of any registrar, custodian or depository for
portfolio securities and other property, and any stock transfer, dividend or
account agent or agents; brokers' commissions chargeable in connection with
portfolio securities transactions; all taxes, including securities issuance and
transfer taxes, and corporate fees payable to federal, state or other
governmental agencies; the costs and expenses of engraving or printing of stock
certificates representing shares of a fund; costs and expenses in connection
with the registration and maintenance of registration of a fund and its shares
with the SEC and various states and other jurisdictions (including filing fees,
legal fees and disbursements of counsel); expenses of shareholders' and
directors' meetings and of preparing, printing, and mailing of proxy statements
and reports to shareholders; fees and travel expenses of "disinterested"
directors; expenses incident to the payment of any dividend, distribution,
withdrawal or redemption, whether in shares or in cash; charges and expenses of
any outside service used for pricing of a fund's shares; fees and expenses of
legal counsel and of independent accountants; membership dues of industry
associations; postage (excluding postage for promotional and sales literature);
insurance premiums on property of personnel (including, but not limited to legal
claims and liabilities and litigation costs and any indemnification related
thereto); and all other charges and costs of a fund's operation unless otherwise
explicitly provided herein.
(c) With respect to Class A shares, the Distributor shall request
reimbursement for distribution expenses not otherwise described
above, including, without limitation, the direct cost of
advertising, marketing, selling, and distributing shares of
common stock of each fund; printing and mailing prospectuses to
other than current shareholders; the cost of preparation,
printing, and mailing of promotional and sales literature; and
compensation paid to registered representatives of the
Distributor, affiliates of the Manager or other dealers.
Reimbursement for these distribution expenses will be subject to
the provisions of Rule 12b-1 and will not exceed an annual rate
of a fund's average daily net assets attributable to Class A
shares as set forth in Exhibit A. Such expenditures will be
reviewed at least quarterly by the board of directors. In
addition, the Distributor and its affiliates or the Manager and
its affiliates may pay additional expenses of any type or nature
which are reported to and deemed by the directors to be
appropriate for reimbursement within the provisions of this
paragraph.
(d) With respect to Class B shares, the Distributor shall be
compensated with a distribution fee equal to an annual rate of
.75 of 1% of a fund's average net assets attributable to Class B
shares and a service fee at an annual rate of .25 of 1% of such
assets. Proceeds from any contingent deferred sales charges are
paid to the Distributor.
(e) The distributor will furnish the board of directors statements of
distribution revenues and expenditures at least quarterly with
respect to each class of shares. Only distribution expenses
properly attributable to Class A shares will be used to support
the reimbursement charged to Class A shareholders.
(f) Each fund will record all payments made under the Plan as
expenses in the calculation of its net investment income. The
amount of distribution expenses incurred by the Distributor that
may be paid pursuant to the Plan in future periods will not be
incurred as a liability, unless the standards for accrual of a
liability under generally accepted accounting principles have
been satisfied. Such distribution expenses will be recorded as an
expense in future periods as they are paid by a fund.
(g) For purposes of Section 6 of this Distribution Contract, the
Distributor shall not be responsible for the payment of
distribution expenses that are subject to reimbursement, as the
Distributor has acted solely as the agent of Composite or of a
specific fund in connection therewith.
7. EXPENSE LIMITATION. In the event the operating expenses of any fund, for
any fiscal year exceed the expense limitations imposed by the securities
laws or regulations thereunder of any state in which that fund's shares
are qualified for sale, as such limitations may be raised or lowered from
time to time, the Distributor will reimburse that fund for annual
operating expenses in excess of any expense limitation that may be
applicable; provided, however, there shall be excluded from such expenses
the amount of all distribution costs as well as any interest, taxes,
brokerage commissions, and extraordinary expenses (including but not
limited to legal claims and liabilities and litigation costs and any
indemnification related thereto) paid or payable by the Fund.
8. NON-EXCLUSIVITY. The services of the Distributor are not exclusive and the
Distributor shall be free to render distribution or other services to
others (including other investment companies) and to engage in other
activities. It is understood and agreed that officers of the Distributor
may serve as officers or directors of Composite, and that officers or
directors of Composite may serve as officers of the Distributor to the
extent permitted by law; and that officers of the Distributor are not
prohibited from engaging in anoy other business activity or from rendering
services to any other person, or from serving as partners, officers or
directors of any other firm or corporation, including other investment
companies.
9. TERM AND APPROVAL. This Agreement shall become effective upon execution
and shall continue in force and effect from year to year, provided that
such continuance is specifically approved at least annually:
(a) by Composite's board of directors or (ii) by the vote of a
majority of the outstanding voting securities of any fund (as
defined in Section 2{1}{42} of the 1940 Act), and
(b) the affirmative vote of a majority of the directors who are not
parties to this Agreement or interested persons of any such party
or have no direct or indirect financial interest in the operation
of this Agreement or any agreement related to this Agreement, by
votes cast in person at a meeting specifically called for the
purpose of voting on such approval.
10. TERMINATION. This Agreement may be terminated at any time, without the
payment of any penalty, by vote of Composite's board of directors, by a
vote of a majority of the members of the board of directors of Composite
who are not interested persons of any fund and have no direct or indirect
financial interest in the operation of this Agreement or in agreement
related to this Agreement, or by a vote of a majority of any fund's
outstanding voting securities (as defined in Section 2{a}{42} of the 1940
Act), or by the Distributor on sixty (60) days' written notice to the
other party. The notice provided for herein may be waived by either party.
This Agreement shall automatically terminate in the event of its
assignment, the term "assignment" for this purpose having the meaning
defined in Section {a}{4} of the 1940 Act.
11. AMENDMENTS.
(a) This Agreement may be amended by the parties hereto only if such
amendment is specifically approved (i) by the board of directors
of Composite or by the vote of majority of outstanding voting
securities of any fund, and (ii) by a majority of those directors
who are not parties to this Agreement or disinterested persons of
any such party, which vote must be cast in person at a meeting
called for the purpose of voting on such approval; provided,
however, that if any such amendment is "material" as such word is
used in Rule 12b-1 under the 1940 Act, such amendment shall be
approved in the manner prescribed in paragraph 10 for the annual
approval of the continuation of the Agreement.
(b) In the event that this Agreement is proposed to be amended to
increase materially the amount to be spent for distribution, such
amendment will not be effected without shareholder approval.
12. LIABILITY OF THE DISTRIBUTOR. In the performance of its duties hereunder,
the Distributor shall be obligated to exercise care and diligence and to
act in good faith and to use its best efforts within reasonable limits to
insure the accuracy of all services performed under this Agreement, but
the Distributor shall not be liable for any act or omission which does not
constitute willful misfeasance, bad faith or gross negligence on the part
of the Distributor or reckless disregard by the Distributor of its duties
under this Agreement provided that the Distributor shall be responsible
for its own negligent failure to perform its duties under this Agreement.
13. NOTICES. Any notices under this Agreement shall be in writing, addressed
and delivered or mailed postage paid to the other party at such address as
such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of
Composite shall be 601 West Main Avenue, Spokane, WA 99201, and the
address of the Distributor shall be 1201 Third Avenue, Seattle, WA 98101.
14. QUESTIONS OF INTERPRETATION. This Agreement shall be implemented and
continued in a manner consistent with the provisions of the 1940 Act and
to interpretations thereof, if any, of the United States Courts or, in the
absence of any controlling decision of any such court, by rules,
regulations or orders of the SEC issued pursuant to said 1940 Act. In
addition, where the effect of a requirement of the 1940 Act reflected in
any provision of this Agreement is revised by rule, regulation or order of
the SEC, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the day and year first above
written.
FUNDS BOUND BY THIS AGREEMENT COMPOSITE GROUP OF FUNDS
Composite Bond & Stock Fund, Inc. By: William G. Papesh
Composite Growth Fund, Inc. President
Composite Northwest 50 Fund, Inc.
Composite U.S. Government Securities, Inc.
Composite Income Fund, Inc.
Composite Tax-Exempt Bond Fund, Inc.
Composite Cash Management Company
ATTEST: John T. West
Secretary
MURPHEY FAVRE, INC.
By: Douglas D. Springer
President
ATTEST: Suzanne M. Krahling
Secretary
February 14, 1995
Composite Income Fund, Inc.
Third Floor
601 W. Main Avenue
Spokane, WA 99201-0613
Gentlemen:
We hereby consent to the use of our written opinion dated February 14, 1995,
upon the validity of the organization of Composite Income Fund, Inc., and upon
the designation of authorized capital stock of said company in the Articles of
Incorporation as an exhibit to the amendments to the Registration Statement now
being filed with the Securities and Exchange Commission and any Prospectus
relating to the proposed offer and sale of the capital stock of the corporation.
Very truly yours,
PAINE, HAMBLEN, COFFIN,
BROOKE & MILLER
Lawrence R. Small
<PAGE>
February 14, 1995
Composite Income Fund, Inc.
Third Floor
601 W. Main Avenue
Spokane, WA 99201-0613
Gentlemen:
In connection with an amendment to the Registration Statement now being filed by
your company with the Securities and Exchange Commission relating to an offering
of shares of common stock having a par value of $.01 per share, we certify that,
as attorneys for this corporation, we have examined the corporate proceedings
relating to its incorporation and all amendments to the Articles of
Incorporation, Bylaws, Distributor and Management Contracts, and all other
matters hereinafter referred to, and it is our opinion:
(a) That said Composite Income Fund, Inc., is a corporation duly incorporated
and existing under the laws of the State of Washington, with an authorized
capital stock in the aggregate amount of $500,000 consisting of 50,000,000
shares of common stock with 30,000,000 shares denominated as Class A and
20,000,000 shares denominated as Class B. The par value is $.01 per share with
all shares having equal voting rights.
(b) That all of the 50 million shares have been validly and legally authorized
to be issued by proper corporate action and in conformity with the laws of the
State of Washington applicable thereto. Such authorized shares, upon their
issuance, will be for proceeds to the company of not less than the net asset
value of such shares at the time of sale after adjusting to the nearer full
cent, and will be fully paid and nonassessable.
Very truly yours,
PAINE, HAMBLEN, COFFIN,
BROOKE & MILLER
Lawrence R. Small
<PAGE>
April 24, 1995
Composite Group of Funds
601 West Main Ave., Suite 801
Spokane, WA 99201-0613
Attn: John T. West
Gentlemen:
You have asked our firm to review the post-effective amendment to be filed
with the Securities and Exchange Commission (the "SEC") for the Composite Bond
Funds. The purpose of our review is to determine whether the post-effective
amendment meets the requirements of Rule 485(b) promulgated pursuant to the
provisions of the Securities Act of 1933.
We have reviewed the proposed post-effective amendment as it relates to
each of the three bond funds that comprise the Composite Bond Funds group.
Because the Funds are striving to make the prospectus more readable and
understandable for current and prospective investors, parts of the prospectus
for each Fund (included in the post-effective amendment) have been rewritten
substantially. It is our opinion, however, that the rewritten sections of the
proposed post-effective amendment do not include any changes or revisions that
would be considered material. Therefore, the post-effective amendment may be
filed pursuant to the provisions of Rule 485(b) and the Bond Funds may request
immediate effectiveness.
You are authorized to furnish this opinion to the Securities and Exchange
Commission at the time that the post-effective amendment is filed. The signature
page of the post-effective amendment must also certify that the amendment meets
all of the requirements for effectiveness set forth by Rule 485(b).
Very truly yours,
PAINE, HAMBLEN, COFFIN,
BROOKE & MILLER
Lawrence R. Small
INDEPENDENT ACCOUNTANTS' CONSENT TO USE OF
CERTIFICATE AND FINANCIAL STATEMENTS
Composite Income Fund, Inc.
Spokane, Washington
We, LeMaster & Daniels, Certified Public Accountants of Spokane, Washington, who
have signed the certificate dated January 20, 1995, to the statement of assets
and liabilities, including the portfolio of investments in securities, as of
December 31, 1994, and the related statements of operations for the year then
ended and the changes in net assets for the two years then ended, and the
financial highlights for each of the five fiscal years in the period ended
December 31, 1994, hereby consent to the use of said certificate and financial
statements in the prospectus forming a part of the amendment to registration
statement No. 2-54998 effective January 22, 1976, relating to the offering and
sale of capital stock of your Corporation to be filed with the Securities and
Exchange Commission.
LeMaster & Daniels
Certified Public Accountants
PRESIDENT'S MESSAGE
[PHOTO, WILLIAM PAPESH, PRESIDENT, COMPOSITE FUNDS]
A variety of circumstances combined to produce an unprecedented one-year
decline in bond prices in the year just ended. This brought to a halt a 12-year
record of price improvement from nearly all sectors as well as in our own bond
funds which posted similar gains.
Although yields were up at December 31 year end, total returns for each of
our funds were negative. While admittedly disappointing, those losses could have
been more severe had it not been for our risk-adjusted approach to investing.
History has demonstrated time and again that an aggressive pursuit of profit
carries with it a heightened potential for loss. In the market cycle we have
just experienced, such a strategy could have been devastating. We much prefer a
more balanced risk/reward relationship for precisely that reason.
I think it is important that you more fully understand the impacts of 1994
and some likely scenarios for the years ahead. With this in mind, I urge you to
read the Manager's ex-panded comments on the pages which follow.
In recent months, public attention has been focused on certain investment
management practices by a small segment of the mutual fund industry and a few
institutional investors. These practices include investing in highly volatile
derivative securities and using extensive leverage in portfolios, such as was
the case in Orange County, California. These strategies seem driven more by
greed than sound judgment: while they may reap unusual rewards and fame when
times are good, capital can be quickly dissipated when the market heads south.
Our position with respect to these matters is clear. Although we maintain
positions in collateralized mortgage obligations, which are technically
considered derivatives, we do not invest in exotic derivative securities such as
interest-only or principal-only securities, or inverse floaters. Their track
record is short and hence, involves a degree of risk with which we are most
uncomfortable. Moreover, since timely valuation of them is often difficult, bids
frequently evaporate during turbulent market environments. For equally sound
reasons, we do not leverage our bond portfolios. Buying securities on margin,
pledging portfolio securities, or engaging in short sales are specifically
prohibited by Composite Group policy.
Investing is not a science that lends itself to making perfect decisions 100%
of the time. If it was, you and I would be rich beyond all measure. Prudent
investing must always contemplate the inevitability of market cycles. We urge
that you continue to take a long-term view and make investment decisions
accordingly. Indeed, many experienced investors often seize the opportunity
presented by market declines to acquire additional shares at cheaper prices.
Whether this could be an appropriate step for you will depend on your
circumstances and investment objectives. By all means, look to your registered
representative for helpful counseling.
Finally, I want to note the resignation of Janet H. Skadan from the
Composite Group board in mid-December. Mrs. Skadan made a valuable contribution
to your board for nearly a decade and we are most appreciative of her
stewardship.
Your business as well as your trust is important to us and we will continue
in our quest to provide longer term investment benefits, consistent with the
objectives of the funds.
WILLIAM G. PAPESH
PRESIDENT
MANAGER'S INTERVIEW
[PHOTO OF CRAIG HOBBS, PRESIDENT, COMPOSITE RESEARCH & MANAGEMENT CO.]
The action in the bond market this past year was as pronounced a
correction as seen in over two decades. What really happened and why, are
issues of concern to every investor. In this interview, Craig Hobbs,
president of Composite Research & Management Co., discusses those questions,
addresses the problems of derivative securities which have received major
attention in the press, and, of principal interest to shareholders, gives his
candid appraisal of what's ahead.
Q. What happened to the bond market in 1994?
A. Economic growth persisted into the second half of 1994, with almost all
sectors of the economy participating. This stronger-than-expected growth
prompted the Federal Reserve to continue on its credit tightening course, aimed
at reducing U.S. economic growth to 2% - 2.5%. Inflation fears (commodity prices
in particular) contributed to the sharp increases in yields in longer-term
bonds.
Q. Just how bad was it?
A. The bond market suffered its worst decline in over 20 years. As shown in
the yield graph on the next page, yields on short-term maturities (1-3 years)
increased 3.25%-3.50%. For the one-year Treasury bill, yields doubled from 3.58%
to 7.16%. Yields from longer-term maturities increased much less. Q. What caused
such a substantial and rapid decline in bond prices?
A. Bond prices move in the opposite direction of any interest rate change.
Shorter-term maturities generally have less price risk than longer-term
maturities. The magnitude of the yield change in 1994 was large and so was the
price change. For example, the 10-year U.S. Treasury note yield increased by
over 2%, resulting in a price decline of 13% for the year.
Q. What is your forecast for the fixed income markets in 1995 and 1996?
A. As discussed in the Economic and Interest Rate Outlook, we believe
interest rates will likely trend significantly lower over the next two years.
Given the direction Congress seems headed, along with a slowdown in U.S.
economic growth and constrained inflation, we believe the 30-year U.S. Treasury
bond has the potential to hit 6% in 1996 (versus 7.9% at year-end 1994).
Q. Still, inflation appears to be a concern to bond investors. Do you think
this is warranted?
A. No. I believe inflation fears are blown way out of proportion with
reality. A modest, cyclical inflation uptick is anticipated in 1995 with the CPI
increasing to around 3.5%. The Federal Reserve's resolve to slow economic growth
gives us confidence in this opinion.
Q. How do you expect the change of leadership in the Congress to impact fixed
income markets?
A. In a very positive way. One of the early items of business in 1995 will be
a balanced budget amendment to the Constitution. Prospects appear to be good for
passage and ultimate ratification by the states. Deficit reduction and the
agenda of a smaller, less intrusive federal government should eventually lead to
an enthusiastic response from bond investors in 1995.
Q. Do you expect further tightening by the Federal Reserve in 1995?
A. Yes. As measured in the U.S. Treasury bill market, bond investors are
currently anticipating another 2% increase in short-term rates. My own view is
that further Federal Reserve tightening of about 1% in early 1995 should be
sufficient to bring about slower U.S. economic growth -- implying 2 or 3
additional tightening moves by the Federal Reserve during the first half of the
year.
Q. How will this affect the fixed income markets?
A. As I've mentioned, further tightening by the Federal Reserve is widely
anticipated by investors. As a result, I believe that further increases in
short-term rates will have only a modest (if any) effect on longer-term
maturities of seven years or more.
Q. What are these derivatives I hear so much about in the news today?
A. Derivatives are securities that are "derived from" some other underlying
security. Derivative products were used by Wall Street to create securities with
unique risk characteristics and/or hidden leverage.
Q. What effect have they had on the fixed income markets?
A. The unwinding of various derivative portfolios contributed to the bond
market decline in 1994. As interest rates began moving up, many derivative
portfolios suffered dramatic price declines -- due to hidden leverage or unusual
yield structures. Although its my opinion that most of the irresponsible use of
derivatives is behind us, the Orange County bankruptcy provides an excellent
example of the problem. The County used various high-risk derivatives in its
short-term portfolio including "inverse-floaters" as well as "step-up callable
notes." These investments produced catastrophic results.
[GRAPH]
<TABLE>
<CAPTION>
U.S. TREASURY YIELDS BY MATURITIES
12/31/94 COMPARED TO 12/31/93
12/31/93 12/31/94
-------- --------
<S> <C> <C>
3 MONTH 3.075% 5.682%
6 MONTH 3.287% 6.495%
1 YEAR 3.578% 7.162%
2 YEAR 4.234% 7.690%
3 YEAR 4.514% 7.778%
5 YEAR 5.197% 7.827%
10 YEAR 5.792% 7.827%
30 YEAR 6.346% 7.876%
</TABLE>
Q. How do they affect my investments in the fixed income funds managed by
Composite Research?
A. First of all, we're a conservative group at Composite Research. We limit
the use of derivative securities to collateralized mortgage obligations (CMOs),
which are selected for their risk-reduction characteristics -- not as a way to
add risk. As a consequence, we avoided the pitfalls experienced by many
investors who held various volatile, high-risk derivatives in their portfolios.
Q. Bonds seem attractive right now, but I'm afraid they might decline further
in price. What should I do?
A. I'd argue that bonds now provide an outstanding opportunity for the
long-term investor. Yields are up substantially from a year ago and prices are
down. Certainly, bond prices might decline further, and that is one reason to
consider a dollar-averaging investment program into one of our bond funds. It is
an extremely rare and lucky investor who buys at the bottom of the market.
Although periodic investing plans don't assure a profit or protect against loss
in a declining market, they are a commonly employed strategy that eliminates the
need for market timing. What is important for long-term investors now, in my
opinion, is to take advantage of today's cheaper prices. I think there are
excellent values in today's bond markets.
ECONOMIC AND INTEREST RATE OUTLOOK
THE ECONOMY CONTINUES TO EVIDENCE favorable growth characteristics, although
recent interest rate changes are beginning to have an impact. Interest rates
moved up sharply during 1994, with the yield on the benchmark 10-year U.S.
Treasury note having increased from 5.2% to 7.8% at year end. This dramatic
reversal in interest rates came about as the Federal Reserve tightened money
supply to reduce economic growth and combat emerging inflation pressures.
We continue to expect further increases in short-term interest rates in early
1995, as the Federal Reserve is resolved to slow U.S. economic growth to less
than 2.5%. The U.S. economy is now operating at near full capacity utilization
(85% historically), and most economists believe that the non-inflationary growth
potential of the U.S. economy is 2% - 2.5%. Very simply, the slower growth
policy being implemented by the Federal Reserve should result in constrained
inflation in 1995, as higher interest rates take hold of economic activity.
As discussed in the mid-year report to shareholders, we believe the secular
case for low inflation remains intact. Structural unemployment, demographics,
productivity enhancements and worldwide competition are all contributors to this
long-term outlook for low inflation. Significantly, NAFTA and GATT should lead
to increased world trade and result in lower U.S. prices over the long term.
Lastly, the Federal Reserve's bold move with money supply and interest rates
during 1994 should bring about the desired economic slowdown in 1995, reducing
inflation pressures that emerged during 1994.
On the political front, things will be different in the U.S. Congress in 1995
- -- with Republicans having gained control of both the House and Senate for the
first time in over 40 years. Any legislative actions which result in deficit
reduction should provide welcome news to the U.S. financial markets and the U.S.
dollar.
As 1995 unfolds, look for a combination of factors to turn investor sentiment
toward bonds: slower growth, constrained inflation, deficit reduction, a strong
U.S. dollar, and a peak in short-term interest rates in the first half of 1995.
Given the Federal Reserve's early, bold move on inflation nearly a year ago, we
believe bond investors will be well rewarded in the years ahead. Real interest
rates (yield minus inflation) are very high at this time, providing investors
with favorable total return potential over the next 2-3 years.
COMPOSITE RESEARCH & MANAGEMENT CO.
INVESTMENT TEAM
FOOTNOTES TO INVESTMENT PERFORMANCE CHARTS
ON PAGES 5, 6, & 7.
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
Indices (LMB), 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. 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 maximum 3% contingent deferred sales charge for Class B shares. Fund values
presented in the graphs are for Class A shares. Class B performance would vary
due to different expenses. Class B information is presented since 3/30/94, the
commencement of their offering.
INVESTMENT HIGHLIGHTS
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
THE SUBSTANTIAL RISE IN INTEREST RATES OVER the past year overwhelmed what
was an otherwise generally good performance from mortgage-backed securities and
produced negative returns for Composite U.S. Government Securities, Inc. Despite
this disappointment, longer-term returns of the Fund remained attractive as
depicted in the chart below.
The Fund currently invests 74% of its assets in mortgage-backed securities:
45% in fixed-rate Government National Mortgage Association (Ginnie Mae)
securities, 11% in adjustable-rate Ginnie Maes, and 18% in collateralized
mortgage obligations which are backed by Ginnie Maes. The benefits associated
with these securities include extremely high credit quality and income generally
above comparable U.S. Treasury notes. We believe that these benefits, over time,
clearly outweigh the prepayment or call risk of these securities.
As the rise in interest rates this year reduced the incentive for homeowners
to refinance their mortgages, the Fund benefited since fewer of the higher
income-producing Ginnie Maes were prepaid. Ginnie Mae adjustable-rate mortgages
offer the advantage of increasing income as short-term interest rates rise.
The Fund carefully avoided the extremely volatile mortgage derivative
securities that were written about extensively in the press and caused
significant losses for a number of mutual funds.
The Fund's average maturity of 11 years was at the long end of its
intermediate range for most of the year. While this diminished short-term
performance, it should allow the Fund to take full advantage of the positive
long-term environment we envision. Additionally, the Fund is well-positioned for
the anticipated interest rate environment with the majority of Ginnie Maes
having low coupon (6.5%-7.5%) mortgages which are less subject to refinancing.
The long-term holder of this Fund will experience periods when interest rates
rise and principal is eroded and periods when interest rates fall and principal
gains are realized. The Fund's investment objectives remain the same, however:
to provide a high level of current income, consistent with safety and liquidity.
We believe the best way this can be accomplished is to invest in a combination
of U.S. Treasury and mortgage-backed securities which are either direct
obligations of or guaranteed by the U.S. government, or collateralized by such
securities.
[GRAPH]
<TABLE>
<CAPTION>
INVESTMENT PERFORMANCE o COMPOSITE U.S. GOVERNMENT SECURITIES
COMPARATIVE ENDING VALUES OF $10,000 INVESTED ON 12/31/84
Composite Lehman Brothers Consumer
U.S. Government Government Bond Price
Securities Index Index
--------------- --------------- -------
<S> <C> <C> <C>
DECEMBER 31, 1984 $ 9,600 $10,000 $10,000
DECEMBER 31, 1985 $11,410 $12,043 $10,380
DECEMBER 31, 1986 $12,512 $13,887 $10,494
DECEMBER 31, 1987 $12,856 $14,192 $10,959
DECEMBER 31, 1988 $13,797 $15,190 $11,443
DECEMBER 31, 1989 $15,632 $17,351 $11,975
DECEMBER 31, 1990 $17,109 $18,863 $12,707
DECEMBER 31, 1991 $19,628 $21,752 $13,096
DECEMBER 31, 1992 $20,829 $23,324 $13,476
DECEMBER 31, 1993 $22,520 $25,810 $13,846
DECEMBER 31, 1994 $21,414 $24,939 $14,217
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
CLASS A SHARES
- --------------
WITH SALES WITHOUT
CHARGE SALES CHARGE
---------- ------------
ONE YEAR -8.72% -4.91%
FIVE YEARS 5.63% 6.50%
TEN YEARS 7.91% 8.35%
CLASS B SHARES
- --------------
SINCE 3/94 -4.68% -1.86%
CLASS A 30 DAY CURRENT YIELD 6.67%
CLASS B 30 DAY CURRENT YIELD 6.09%
SEE FOOTNOTE ON PAGE 4 FOR ADDITIONAL INFORMATION
</TABLE>
INVESTMENT HIGHLIGHTS (CONTINUED)
COMPOSITE INCOME FUND
SIGNIFICANTLY RISING INTEREST RATES produced negative returns not only from
Composite Income Fund, but across the vast majority of fixed income securities
in the year just ended. However, 1994's negative returns should be kept in
context with what was a prosperous last 5 and 10 years for the fixed income
markets.
While the Fund was not spared from negative returns, we took a number of
actions to help bolster returns and produce solid income. The Fund was
overweighted throughout the year in the Industrial sector of corporate bonds,
which strongly outperformed other sectors. The growing economy here and abroad,
as well as continued domestic productivity gains, have helped propel this
sector. Additionally, the Fund continued to hold a good portion of
mortgage-backed securities which performed relatively well in 1994 as rising
rates provided less incentive for homeowners to refinance.
The Fund generally uses an intermediate-maturity profile (presently 12.2
years), which allows us to capture favorable yields for the benefit of our
shareholders who have intermediate to long-term time horizons. The Fund's
present maturity is at the upper end of the intermediate range. Although
near-term this has modestly decreased Fund performance, we believe that longer
term these maturities could potentially provide healthy returns over the rate of
inflation.
In anticipation of the favorable rate environment cited in the Economic and
Interest Rate Outlook, the Fund is currently comprised of 77% non-callable bonds
and 10% low-coupon mortgages which are less susceptible to refinancing. Credit
quality remains an important part of our overall strategy. We review industry
groups and companies to find securities which we feel have attractive yields
relative to the underlying risks. Presently, our average quality is A2/A as
rated by Moody's and Standard & Poor's, respectively.
The intermediate maturity of the Fund, portfolio diversification, credit
quality, and the evaluation of relative value within the fixed income markets
are controlling factors we believe will continue to allow Composite Income Fund
to meet its long-term investment objectives.
[GRAPH]
<TABLE>
<CAPTION>
INVESTMENT PERFORMANCE o COMPOSITE INCOME FUND
COMPARATIVE ENDING VALUES OF $10,000 INVESTED ON 12/31/84
Composite Lehman Brothers Consumer
Income Government Corp. Price
Fund Bond Index Index
--------------- --------------- -------
<S> <C> <C> <C>
DECEMBER 31, 1984 $ 9,600 $10,000 $10,000
DECEMBER 31, 1985 $11,129 $12,130 $10,380
DECEMBER 31, 1986 $12,259 $14,025 $10,494
DECEMBER 31, 1987 $12,997 $14,346 $10,959
DECEMBER 31, 1988 $13,913 $15,434 $11,443
DECEMBER 31, 1989 $14,853 $17,631 $11,975
DECEMBER 31, 1990 $16,072 $19,091 $12,707
DECEMBER 31, 1991 $18,852 $22,170 $13,096
DECEMBER 31, 1992 $20,244 $23,851 $13,476
DECEMBER 31, 1993 $22,434 $26,482 $13,846
DECEMBER 31, 1994 $21,352 $25,553 $14,217
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
CLASS A SHARES
- --------------
WITH SALES WITHOUT
CHARGE SALES CHARGE
---------- ------------
<S> <C> <C>
ONE YEAR -8.64% -4.82%
FIVE YEARS 6.65% 7.53%
TEN YEARS 7.88% 8.32%
CLASS B SHARES
- --------------
SINCE 3/94 -4.48% -1.67%
<S> <C>
CLASS A 30 DAY CURRENT YIELD 7.42%
CLASS B 30 DAY CURRENT YIELD 6.92%
SEE FOOTNOTE ON PAGE 4 FOR ADDITIONAL INFORMATION
</TABLE>
INVESTMENT HIGHLIGHTS (C0NTINUED)
COMPOSITE TAX-EXEMPT BOND FUND
AFTER A SUSTAINED PERIOD OF YEARS OF strong performance, 1994 ended with
negative returns from the bond market. As indicated in the chart below,
Composite Tax-Exempt Bond Fund suffered as well, although longer-term returns
were favorable and 30-day current yields were relatively high.
As reported by Lipper Analytical Services, general municipal debt funds were
especially hard hit since, as a group, they have longer average maturities than
most bond funds and thus are more sensitive to an overall rise in interest
rates. The 10-year AAA municipal bond yield increased 1.6% to yield 5.9%, while
the yield of the 30-year AAA municipal bond increased about 1.4% to end the year
at 6.6%.
The negative returns of 1994 have overshadowed a positive supply story. Last
year, new issuance of municipal bonds declined 45% from the $292 billion issued
in 1993. The combination of diminished issuance, maturing issues, and already
scheduled bond calls should actually reduce the availability of municipal bonds
in 1995. We believe this could well translate into superior performance of
municipals relative to Treasuries in 1995.
We began the year with an average maturity of 13.4 years and with 51.7% of
the Fund invested in non-callable bonds. During the year we extended the average
maturity to 15.8 years and further increased non-callable bonds to 62.7% of the
Fund. We maintain high credit quality at Aa2/AA, as measured by Moody's and
Standard & Poor's, respectively.
The high percentage of non-callable bonds defends the Fund against
reinvestment risk, i.e., the risk that, if rates should decline, high-coupon
bonds will be called and reinvestment would be available only in lower yielding
issues. The high credit quality of the Fund's portfolio provides some protection
against the consequences of a recession, a risk that some in the industry
believe has become more tangible. We believe the Fund, as currently positioned,
offers the potential for attractive returns to long-term investors, especially
in light of the Federal Reserve's determination to slow down the economy.
[GRAPH]
<TABLE>
<CAPTION>
INVESTMENT PERFORMANCE o COMPOSITE TAX-EXEMPT BOND
COMPARATIVE ENDING VALUES OF $10,000 INVESTED ON 12/31/84
Composite Lehman Brothers Consumer
Tax-Exempt Municipal Bond Price
Bond Fund Index Index
--------------- --------------- -------
<S> <C> <C> <C>
DECEMBER 31, 1984 $ 9,600 $10,000 $10,000
DECEMBER 31, 1985 $11,653 $11,877 $10,380
DECEMBER 31, 1986 $13,579 $14,136 $10,494
DECEMBER 31, 1987 $13,749 $14,583 $10,959
DECEMBER 31, 1988 $15,215 $15,719 $11,443
DECEMBER 31, 1989 $16,446 $17,396 $11,975
DECEMBER 31, 1990 $17,550 $18,674 $12,707
DECEMBER 31, 1991 $19,544 $20,934 $13,096
DECEMBER 31, 1992 $21,302 $22,802 $13,476
DECEMBER 31, 1993 $23,973 $25,713 $13,846
DECEMBER 31, 1994 $22,406 $24,486 $14,217
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
CLASS A SHARES
- --------------
WITH SALES WITHOUT
CHARGE SALES CHARGE
---------- ------------
ONE YEAR -10.33% -6.53%
FIVE YEARS 5.51% 6.38%
TEN YEARS 8.40% 8.85%
CLASS B SHARES
- --------------
SINCE 3/94 -4.32% -1.46%
CLASS A 30 DAY CURRENT YIELD 5.37%
CLASS B 30 DAY CURRENT YIELD 7.93%
SEE FOOTNOTE ON PAGE 4 FOR ADDITIONAL INFORMATION
</TABLE>
<TABLE>
<CAPTION>
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
PORTFOLIO OF INVESTMENTS IN SECURITIES
DECEMBER 31, 1994
PRINCIPAL MARKET
AMOUNT U.S. TREASURY NOTES-24.05% VALUE
- ----------- -----------
<C> <C> <C>
$ 2,500,000 7.875%, due 02/15/2021..................................... $ 2,467,188
10,000,000 7.50%, due 11/15/2016...................................... 9,484,370
7,000,000 7.50%, due 01/31/1996...................................... 7,010,934
15,000,000 7.25%, due 05/15/2016...................................... 13,860,930
5,000,000 7.25%, due 08/15/2022...................................... 4,614,060
6,500,000 5.625%, due 08/31/1997..................................... 6,166,875
4,000,000 Zero coupon, due 08/15/2004 ............................... 1,873,220
-----------
TOTAL U.S. TREASURY OBLIGATIONS (COST $51,276,817) ........ 45,477,577
-----------
MORTGAGE-BACKED SECURITIES-74.54%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-56.72%
82,786 14.00%, due 06/15/2011 to 03/15/2012....................... 93,549
135,338 13.50%, due 08/15/2014 to 12/15/2014....................... 152,467
42,070 11.50%, due 07/15/2015..................................... 46,212
4,859,609 9.50%, due 07/15/2016 to 09/15/2020........................ 5,022,105
3,094,980 8.50%, due 05/15/2022...................................... 3,042,753
10,328,606 8.00%, due 01/15/2022 to 02/15/2023........................ 9,883,186
22,478,689 7.50%, due 12/15/2022 to 06/15/2024........................ 20,870,069
25,359,048 7.00%, due 08/15/2008 to 08/15/2023........................ 22,906,211
27,028,922 6.50%, due 08/15/2023 to 03/15/2024........................ 23,439,158
2,923,305 6.00%, due 05/20/2022...................................... 2,773,545
4,579,518 5.875%, due 09/20/2022..................................... 4,294,925
4,390,973 5.50%, due 03/20/2022 to 11/20/2023........................ 4,051,110
7,802,448 5.125%, due 12/20/2021 to 12/20/2022....................... 7,284,132
3,647,040 4.875%, due 09/20/2022..................................... 3,420,393
-----------
107,279,815
-----------
GNMA COLLATERALIZED MORTGAGE OBLIGATIONS-17.82%
8,500,000 Federal Home Loan Mortgage Corporation, 6.85%, due 07/25/2018 7,695,560
2,730,347 Federal National Mortgage Association, 8.50%, due 02/25/2018 2,733,214
4,000,000 Federal National Mortgage Association, 8.25%, due 05/25/2020 3,847,720
6,408,000 Federal National Mortgage Association, 8.00%, due 06/25/2005 6,225,821
1,950,000 Federal National Mortgage Association, 7.50%, due 08/25/2001 1,857,804
2,230,000 Federal National Mortgage Association, 6.00%, due 08/25/2007 1,943,044
1,100,000 Federal National Mortgage Association, 5.75%, due 10/25/2010 1,044,450
4,900,000 Merrill Lynch, 6.50%, due 08/27/2015....................... 4,139,961
1,633,577 Morgan Stanley, 8.975%, due 06/01/2001..................... 1,650,076
2,000,000 Mortgage Capital Trust, 9.25%, due 06/01/2017.............. 2,019,660
540,711 Residential Resources Inc., 9.50%, due 03/01/2015.......... 538,949 33,696,259
-----------
33,696,259
-----------
TOTAL MORTGAGE-BACKED SECURITIES (cost $151,958,517)....... 140,976,074
-----------
$ 1,831,000 Repurchase agreement with Merrill Lynch, collateralized
by a U.S. Treasury Note, in a joint trading account at 5.00%,
dated 12/30/1994, due 01/03/1995 with a maturity value of
$1,832,017 (cost $1,831,000)............................... 1,831,000
-----------
TOTAL INVESTMENTS (cost $205,066,334)...................... 188,284,651
Other assets ($2,108,580) less liabilities ($1,261,925).... 846,655
-----------
NET ASSETS................................................. $189,131,306
============
<FN>
FEDERAL INCOME TAX INFORMATION:
Net unrealized depreciation of investments at December 31, 1994, of $16,781,683,
based on aggregate cost of $205,066,334, was composed of gross depreciation of
$16,976,124 for investments having an excess of cost over value and gross
appreciation of $194,441 for investments having an excess of value over cost. As
of December 31, 1994, the Fund had unused capital loss carryovers of $6,072,305
for federal tax purposes which may be applied against capital gains realized in
future years. If not applied, the carryovers will expire in 2002.
OTHER INFORMATION:
Purchases and sales (including maturities and principal repayments) of
investment securities, all of which were U.S. government securities, other than
short-term investments, aggregated $77,611,701 and $136,934,855, respectively,
during the year ended December 31, 1994. Principal repayments of mortgage-backed
securities aggregated $32,371,497.
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
COMPOSITE INCOME FUND, INC.
PORTFOLIO OF INVESTMENTS IN SECURITIES
DECEMBER 31, 1994
PRINCIPAL MARKET
AMOUNT U.S. TREASURY NOTES-5.12% VALUE
- ----------- -----------
<C> <C> <C>
$ 1,000,000 U.S. Treasury Note, 8.125%, due 08/15/2021................. $ 1,015,937
2,000,000 U.S. Treasury Note, 7.250%, due 08/15/2022................. 1,845,624
1,000,000 U.S. Treasury Note, 6.250%, due 08/15/2023................. 812,500
1,000,000 U.S. Treasury Note, 7.500%, due 11/15/2024................. 956,250
-----------
TOTAL U.S. TREASURY OBLIGATION (cost $5,200,794)........... 4,630,311
-----------
MORTGAGE-BACKED SECURITIES-18.62%
U.S. GOVERNMENT PASS-THROUGH CERTIFICATES-11.96%
470,871 Federal Home Loan Mortgage Corporation, 9.00%, due 12/01/2004 473,962
2,696,108 Government National Mortgage Association, 7.00%,due 08/15/2008 2,525,075
1,840,706 Government National Mortgage Association, 7.00%,due 07/15/2023 1,653,185
2,394,936 Government National Mortgage Association, 6.50%,due 12/15/2023 2,076,861
946,490 Government National Mortgage Association, 6.50%,due 08/15/2023 820,785
2,464,345 Government National Mortgage Association, 6.50%,due 03/15/2024 2,137,051
1,204,959 Government National Mortgage Association, 5.125%,due 12/20/2021 1,124,914
-----------
10,811,833
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS-6.66%
1,750,000 Donaldson, Lufkin & Jenrette, 7.35%, due 12/18/2003........ 1,567,377
1,000,000 Federal Home Loan Mortgage Corporation, 8.75%, due 06/15/2005 1,013,930
1,000,000 Federal Home Loan Mortgage Corporation, 7.50%, due 07/15/2020 942,760
200,019 Merrill Lynch Mortgage Investors, 9.70%, due 06/15/2008.... 204,362
1,775,461 Morgan Stanley Mortgage Trust, 9.30%, due 07/01/2017....... 1,799,361
487,059 Shearson Lehman, 8.75%, due 08/27/2017..................... 489,855
-----------
6,017,645
-----------
TOTAL MORTGAGE-BACKED SECURITIES (cost $18,169,983)........ 16,829,478
-----------
CORPORATE BONDS-66.93%
NON-CONVERTIBLE CORPORATE BONDS-62.35%
AIRCRAFT & AEROSPACE-2.24%
2,000,000 Boeing Aerospace Corporation, 8.75%, due 08/15/2021........ 2,027,582
-----------
BANKING-10.10%
2,000,000 Bank of New York, 7.875%, due 11/15/2002................... 1,906,934
1,350,000 Liberty National Bank and Trust Company, 6.75%, due 06/01/2003 1,207,857
2,000,000 Manufacturers and Traders Trust Company, 8.125%, due 12/01/2002 1,910,494
500,000 Mercantile Bank, 7.625%, due 10/15/2002.................... 467,261
1,000,000 Norwest Corporation, 6.65%, due 10/15/2023................. 794,258
1,000,000 Summit Bank, 6.75%, due 06/15/2003......................... 889,022
2,000,000 Wells Fargo, 8.375%, due 05/15/2002........................ 1,953,902
-----------
9,129,728
-----------
CONSUMER PRODUCTS & SERVICES-5.24%
750,000 Conagra, Inc., 9.75%, due 03/01/2021....................... 795,557
2,000,000 Dart & Kraft Finance NV, 7.75%, due 11/30/1998............. 1,944,492
1,000,000 Fleming Companies, Inc., 5.77%, due 08/06/1998............. 889,911
1,250,000 Marriott Corporation, 6.75%, due 12/15/2003................ 1,109,796
-----------
4,739,756
-----------
ELECTICAL EQUIPMENT-3.08%
1,000,000 Westinghouse Corporation, 7.875%, due 09/01/2023........... 810,600
2,000,000 Westinghouse Corporation, 9.13%, due 06/20/2001............ 1,970,260
-----------
2,780,860
-----------
FINANCE-5.38%
1,000,000 GATX Medium Term Note, 9.90%, due 03/22/1999............... 1,044,230
1,000,000 General Motors Acceptance Corp., 8.95%, due 01/10/1996..... 1,009,860
1,000,000 General Motors Acceptance Corp., 8.00%, due 04/10/1997..... 992,092
2,000,000 Green Tree Finance, 7.62%, due 04/07/2003.................. 1,818,450
-----------
4,864,632
-----------
FINANCIAL SERVICES-2.07%
1,000,000 Morgan Stanley, 8.25%, due 12/20/2001...................... 989,030
1,000,000 Morgan Stanley, 6.75%, due 03/04/2003...................... 886,448
-----------
1,875,478
-----------
INDUSTRIAL EQUIPMENT-0.88%
790,000 FMC Corporation, 8.75%, due 04/01/1999..................... 794,657
-----------
INSURANCE-3.47%
2,000,000 Continental Corporation, 7.25%, due 03/01/2003............. 1,761,538
1,450,000 Integon Corporation, 8.00%, due 08/15/1999................. 1,371,910
-----------
3,133,448
-----------
MEDIA-5.40%
750,000 Telecommunications, Inc., 9.25%, due 01/15/2023............ 712,462
2,000,000 Time Warner, Inc., 9.15%, due 02/01/2023................... 1,799,784
2,800,000 Western Publishing Group, 7.65%, due 09/15/2002............ 2,373,000
-----------
4,885,246
-----------
OIL & GAS RELATED-6.30%
1,600,000 Burlington Resources, 9.125%, due 10/01/2021............... 1,666,923
2,000,000 Coastal Corporation, 10.75%, due 10/01/2010................ 2,241,724
2,000,000 Phillips Petroleum, 7.92%, due 04/15/2023.................. 1,782,458
-----------
5,691,105
-----------
PAPER & FOREST PRODUCTS-2.46%
500,000 Georgia Pacific, 9.50%, due 12/01/2011..................... 521,851
2,000,000 Weyerhaeuser Corporation, 7.125%, due 07/15/2023........... 1,703,658
-----------
2,225,509
-----------
TRANSPORTATION-7.62%
1,000,000 AMR Corporation, 9.75%, due 03/15/2000..................... 1,009,924
1,500,000 AMR Corporation, 10.00%, due 02/01/2001.................... 1,512,075
1,350,000 Burlington Northern, 8.75%, due 02/25/2022................. 1,360,410
2,000,000 CSX Corporation, 8.625%, due 05/15/2022.................... 1,974,796
1,100,000 CSX Corporation, 8.10%, due 09/15/2022..................... 1,027,849
-----------
6,885,054
-----------
UTILITIES/ELECTRIC-8.11%
3,000,000 Commonwealth Edison, 9.375%, due 02/15/2000................ 3,053,361
1,000,000 Pacific Gas and Electric, 9.08%, due 12/15/1997............ 1,020,320
2,000,000 Public Service Company of New Hampshire, 9.17%, due 05/15/1998 2,010,936
1,200,000 Texas Utilities Electric, 9.50%, due 08/01/1999............ 1,250,272
-----------
7,334,889
-----------
TOTAL NON-CONVERTIBLE CORPORATE BONDS (cost $61,085,212)... 56,367,944
-----------
CONVERTIBLE CORPORATE BONDS-4.58%
FINANCIAL SERVICES-1.13%
1,100,000 Legg Mason Inc., 5.25%, due 05/01/2003..................... 1,017,500
-----------
INDUSTRIAL PRODUCTS/SERVICES-0.71%
700,000 Horace Mann Educators, 6.50%, due 12/01/1999............... 640,500
-----------
RETAIL-2.24%
2,500,000 Price/Costco, Inc., 5.75%, due 05/15/2002.................. 2,025,000
-----------
TRANSPORTATION & EQUIPMENT-0.50%
500,000 Airborne Freight, 6.750%, due 08/15/2001................... 456,250
-----------
TOTAL CONVERTIBLE CORPORATE BONDS (cost $4,462,477)........ 4,139,250
-----------
TOTAL CORPORATE BONDS (cost $65,547,689).................. 60,507,194
-----------
CANADIAN OBLIGATIONS-4.59%
2,000,000 Province of Alberta, 9.25%, due 04/01/2000................. 2,095,480
2,000,000 Province of Quebec, 9.125%, due 03/01/2000................. 2,053,000
-----------
TOTAL CANADIAN OBLIGATIONS (cost $4,231,020)............... 4,148,480
-----------
SHARES PREFERRED STOCK-1.06%
- ----------- PAPER & FOREST PRODUCTS-1.06%
43,000 Bowater, Series C (cost $967,500).......................... 962,125
-----------
PRINCIPAL
AMOUNT
- ----------- SHORT-TERM INVESTMENT-2.26%
$ 2,046,000 Repurchase agreement with Merrill Lynch, collateralized by
a U.S. Treasury Note, in a joint trading account at 5.00%,
dated 12/31/1994, due 01/03/1995, with a maturity value of
$2,047,137 (cost $2,046,000)............................... 2,046,000
-----------
TOTAL INVESTMENTS (cost $96,162,986)....................... 89,123,588
Other assets ($1,834,727), less liabilities ($557,515)..... 1,277,212
-----------
NET ASSETS................................................. $ 90,400,800
============
<FN>
FEDERAL INCOME TAX INFORMATION:
Net unrealized depreciation of investments at December 31, 1994, of $7,039,398,
based on aggregate cost of $96,162,986, was composed of gross depreciation of
$7,179,673 for those investments having an excess of cost over value and gross
appreciation of $140,275 for investments having an excess of value over cost. As
of December 31, 1994, the Fund had unused capital loss carryovers of $14,708,996
for federal tax purposes which may be applied against capital gains realized in
future years. If not applied, the carryovers will expire in 2002.
OTHER INFORMATION:
Purchases and sales (including maturities and principal repayments) of
investment securities, other than short-term investments, aggregated $24,598,536
and $27,683,328, respectively, during the year ended December 31, 1994,
including purchases and sales of U.S. government securities of $9,229,255 and
$7,336,229, respectively.
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
COMPOSITE TAX-EXEMPT BOND FUND, INC.
PORTFOLIO OF INVESTMENTS IN SECURITIES
DECEMBER 31, 1994
PRINCIPAL MARKET
AMOUNT STATE AND MUNICIPAL SECURITIES-96.84% VALUE
- ----------- ------------
ALASKA-1.93
<S> <C>
$ 5,000,000 City of Valdez (Mobile-Alaska Pipeline), 5.75%,
due 11/01/2028 ............................................ $ 4,188,050
------------
ARIZONA-6.47%
7,000,000 Phoenix Arizona General Obligation, 5.55%, due 07/01/2009.. 6,399,890
5,000,000 Salt River Project Agricultural Improvement, 6.25%,
due 01/01/2019. ........................................... 4,773,250
3,000,000 Salt River Electrical System Revenue, 5.75%, due 01/01/2009 2,842,620
------------
14,015,760
------------
CALIFORNIA-3.93%
6,000,000 San Diego Industrial Development Authority
(San Diego Gas & Electric), 5.90%, due 06/01/2018.......... 5,263,620
3,000,000 Santa Barbara County Certificiate of Participation,
7.40%, due 02/01/2007...................................... 3,250,290
------------
8,513,910
------------
COLORADO-2.39%
5,000,000 Colorado Springs Utilities System Revenue, 6.75%,
due 11/15/2021 ............................................ 5,180,261
------------
DISTRICT OF COLUMBIA-0.81%
1,645,000 District of Columbia Series B, 7.75%, due 06/01/2007....... 1,754,705
------------
FLORIDA-4.35%
5,000,000 Jacksonville Electric Authority, 5.75%, due 10/01/2012..... 4,607,800
5,000,000 Orlando Utilities Commission Revenue, 6.00%, due 10/01/2010 4,821,900
------------
9,429,700
------------
GEORGIA-5.48%
5,000,000 Georgia State General Obligation, 6.30%, due 03/01/2009.... 5,064,950
8,000,000 Municipal Electric Authority of Georgia Series C,
5.70%, due 01/01/2019...................................... 6,815,520
------------
11,880,470
------------
HAWAII-0.88%
2,000,000 Honolulu City & County General Obligation,
6.00%, due 01/01/2012...................................... 1,903,900
------------
ILLINOIS-7.81%
3,665,000 Chicago Illinois Gas Supply Revenue (Peoples Gas),
6.875%, due 03/01/2015..................................... 3,642,790
4,000,000 Chicago Waste Water Revenue, 6.75%, due 11/15/2020......... 4,278,840
3,400,000 Illinois Education Facilities Authority Revenue,
7.10%, due 12/01/2020...................................... 3,584,994
5,000,000 Illinois Sales Tax Revenue Series N, 7.00%, due 06/15/2020. 5,416,450
------------
16,923,074
------------
INDIANA-2.63%
6,000,000 Indiana Municipal Power Revenue, 6.125%, due 01/01/2013.... 5,696,220
------------
MARYLAND-4.29%
5,000,000 Maryland State General Obligation, 4.30%, due 07/15/2003... 4,350,000
5,000,000 Mayor & City Council of Baltimore Port Facility Revenue
(DuPont), 6.50%, due 10/01/2011............................ 4,954,100
------------
9,304,100
MISSISSIPPI-1.81% ------------
4,000,000 Lowndes County Pollution Control Revenue (Weyerhaeuser),
6.80%, due 04/01/2022...................................... 3,916,920
------------
NEBRASKA-7.82%
10,000,000 Lincoln Nebraska Electric Revenue, Series A,
5.25%, due 09/01/2015...................................... 8,458,100
7,000,000 Omaha Public Power District Revenue, Series B,
6.15%, due 02/01/2012...................................... 6,741,910
2,000,000 Omaha Public Power District Revenue, Series B,
5.50%, due 02/01/2014...................................... 1,758,140
------------
16,958,150
------------
NEW MEXICO-0.67%
1,500,000 City of Lordsburg Pollution Control Revenue (Phelps Dodge),
6.50%, due 04/01/2013...................................... 1,453,140
------------
NORTH CAROLINA-2.33%
5,000,000 North Carolina Eastern Municipal Power Agency,
7.00%, due 01/01/2008...................................... 5,053,100
------------
NORTH DAKOTA-2.00%
4,370,000 Mercer County Pollution Control Revenue (Otter Tail Power),
6.90%, due 02/01/2019...................................... 4,344,217
------------
OREGON-2.72%
6,230,000 Washington County, Oregon, 6.00%, due 12/01/2012........... 5,890,091
------------
SOUTH CAROLINA-0.62%
1,310,000 South Carolina Power Supply Agency Electric System Revenue,
7.875%, due 07/01/2021..................................... 1,351,527
------------
TENNESSEE-2.29%
5,000,000 Memphis Electric System Revenue, 5.625%, due 01/01/2002.... 4,967,200
------------
TEXAS-8.77%
6,300,000 Austin Utility System Revenue, Zero Coupon, due 05/15/2017. 1,411,263
5,000,000 Austin Utility System Revenue, Zero Coupon, due 05/15/2018. 1,042,900
5,000,000 Forth Worth Water & Sewer, Series B, 6.10%, due 02/15/2002. 5,056,750
3,000,000 Harris County Toll Road, 8.25%, due 08/15/2007............. 3,343,530
5,000,000 San Antonio Electric & Gas Revenue, 6.00%, due 02/01/2014.. 4,663,900
4,250,000 San Antonio Electric & Gas Revenue, 5.00%, due 02/01/2012.. 3,491,077
------------
19,009,420
------------
UTAH-3.37%
6,000,000 Intermountain Power Agency, 5.25%, due 07/01/2014.......... 5,003,520
3,000,000 Intermountain Power Agency, 5.00%, due 07/01/2023.......... 2,308,560
------------
7,312,080
------------
WASHINGTON-17.65%
4,500,000 Kent School District #415, General Obligation,
6.30%, due 12/01/2008...................................... 4,503,825
2,750,000 Snohomish County School District #2 - Everett,
7.20%, due 12/01/2010...................................... 2,970,522
2,000,000 Spokane County Water District #3 Revenue,
7.60%, due 01/01/2008...................................... 2,149,060
4,000,000 University of Washington Housing and Dining Facilities,
7.00%, due 12/01/2021...................................... 4,076,600
7,000,000 Vancouver Water & Sewer Revenue, 5.50%, due 06/01/2013..... 6,151,810
1,750,000 Washington Health Care Facilities Authority, Hutchinson,
7.375%, due 01/01/2018..................................... 1,804,793
1,750,000 Washington Health Care Facilities Authority, Hutchinson,
7.20%, due 01/01/2007...................................... 1,823,273
3,500,000 Washington Public Power Supply System, 7.625%, due 07/01/2010 3,884,615
4,900,000 Washington State General Obligation, 6.40%, due 06/01/2017. 4,771,816
7,570,000 Washington State General Obligation, 5.00%, due 05/01/2017. 6,111,715
------------
38,248,029
------------
WISCONSIN-3.89%
1,000,000 Wisconsin Health & Education, 7.125%, due 08/15/2007....... 1,057,910
3,750,000 Wisconsin State Refunding, Series 3, 5.30%, due 11/01/2011. 3,282,713
5,000,000 Wisconsin State Transportation Revenue, Series A,
4.90%, due 07/01/2010...................................... 4,090,050
------------
8,430,673
------------
WYOMING-1.91%
4,000,000 Sweetwater County Pollution Control Revenue (Idaho Power),
7.625%, due 12/01/2014..................................... 4,132,000
------------
TOTAL STATE AND MUNICIPAL SECURITIES (cost $216,231,405)... 209,856,697
------------
SHORT-TERM INVESTMENT-1.32%
2,850,000 Nuveen Tax-Exempt Money Market Fund (cost $2,850,000)...... 2,850,000
------------
TOTAL INVESTMENTS (cost $219,081,405)...................... 212,706,697
Other assets ($4,613,262) less liabilities ($624,051)...... 3,989,211
------------
NET ASSETS................................................. $216,695,908
============
<FN>
FEDERAL INCOME TAX INFORMATION:
Net unrealized depreciation of investments at December 31, 1994, of $6,374,708,
based on aggregate cost of $219,081,405, was composed of gross depreciation of
$10,453,489 for investments having an excess of cost over value and gross
appreciation of $4,078,781 for investments having an excess of value over cost.
As of December 31, 1994, the Fund had unused capital loss carryovers of
$1,364,723 for federal tax purposes which may be applied against capital gains
realized in future years. If not applied, the carryovers will expire in 2002.
OTHER INFORMATION:
Purchases and sales of investment securities, other than short-term investments,
aggregated $26,924,623 and $40,445,960, respectively, during the year ended
December 31, 1994.
See accompanying notes to financial statements.
</FN>
</TABLE>
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, 1994, the related statements of operations for the year then ended
and the related statements of changes in net assets for the years ended December
31, 1994 and 1993. For Composite Tax-Exempt Bond Fund, Inc., we have audited the
financial highlights for each of the five years in the period ended December 31,
1994. For Composite U.S. Government Securities, Inc., and Composite Income Fund,
Inc., we have audited the financial highlights for each of the five fiscal years
in the period ended December 31, 1994. 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, 1994, 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, 1994, 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
CERTIFIED PUBLIC ACCOUNTANTS
SPOKANE, WASHINGTON
JANUARY 20, 1995
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
Composite Composite Composite
U.S. Government Income Tax-Exempt
Securities, Inc. Fund., Inc. Bond, Inc.
---------------- ------------- -------------
ASSETS
<S> <C> <C> <C>
Investments at market (identified cost
$205,066,334, $96,162,986, and
$219,081,405, respectively) - note 1a .......................... $ 188,284,651 $ 89,123,588 $ 212,706,697
Cash ............................................................. 885 862 251,795
Prepaid expenses ................................................. 31,080 19,341 29,730
Receivable for:
Interest ....................................................... 1,715,788 1,683,560 4,210,795
Sale of Fund's shares .......................................... 360,827 130,964 120,942
------------- ------------- -------------
Total assets ..................................................... 190,393,231 90,958,315 217,319,959
------------- ------------- -------------
LIABILITIES
Payable for:
Repurchase of Fund's shares .................................... 922,214 379,372 337,101
Dividends ...................................................... 271,742 150,441 230,935
Accrued expenses and other payables ............................ 67,969 27,702 56,015
------------- ------------- -------------
Total liabilities ................................................ 1,261,925 557,515 624,051
------------- ------------- -------------
NET ASSETS $ 189,131,306 $ 90,400,800 $ 216,695,908
============= ============= =============
COMPOSITION OF NET ASSETS
Capital stock, at par ............................................ $ 1,962 $ 109,002 $ 3,039
Additional paid-in capital ....................................... 212,110,501 112,302,889 224,432,300
Accumulated net realized loss .................................... (6,199,474) (14,971,693) (1,364,723)
Net unrealized depreciation of investments ....................... (16,781,683) (7,039,398) (6,374,708)
------------- ------------- -------------
$ 189,131,306 $ 90,400,800 $ 216,695,908
============= ============= =============
SHARES OF BENEFICIAL
INTEREST OUTSTANDING ............................................. 19,619,247 10,900,176 30,394,439
============= ============= =============
Class A Shares:
Net asset value and redemption price per share
(net assets of $188,068,033, $88,101,843, and
$215,438,339, for 19,508,938, 10,623,338, and
30,218,068 shares, respectively, of beneficial
interest outstanding) ............................................ $ 9.64 $ 8.29 $ 7.13
Offering price per share (100/96 of net asset
value per share) ............................................... $ 10.04 $ 8.64 $ 7.43
Class B Shares:
Net asset value, offering price and redemption
price per share (net assets of $1,063,273,
$2,298,957, and $1,257,569, for 110,309, 276,838,
and 176,371 shares, respectively, of beneficial
interest outstanding) ........................................... $ 9.64 $ 8.30 $ 7.13
<FN>
On sales of $25,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class B
shares.
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
Composite Composite Composite
U.S. Government Income Tax-Exempt
Securities, Inc. Fund., Inc. Bond, Inc.
---------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest income ................................................... $ 16,268,106 $ 7,729,403 $ 14,324,955
------------ ------------ ------------
Expenses:
Management fees - note 2 .......................................... 1,417,336 612,811 1,180,145
Distribution expenses - Class A - note 2 .......................... 399,592 189,136 449,602
Distribution expenses - Class B - note 2 .......................... 5,948 10,698 6,727
Shareholder servicing - note 2 .................................... 175,549 104,897 102,778
Postage, printing and office expense .............................. 120,713 58,686 67,818
Registration and filing fees ...................................... 23,639 21,797 19,972
Custodial fees .................................................... 32,722 14,472 21,559
Auditing and legal fees ........................................... 16,182 9,718 16,063
Directors' fees - note 2 .......................................... 6,342 6,342 6,342
Insurance ......................................................... 5,364 2,007 5,341
------------ ------------ ------------
Total expenses ...................................................... 2,203,387 1,030,564 1,876,347
------------ ------------ ------------
Net investment income ............................................... 14,064,719 6,698,839 12,448,608
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS
Realized loss from investment transactions .......................... (4,397,627) (225,532) (1,364,723)
Unrealized depreciation of investments during the year .............. (22,453,803) (11,673,357) (28,088,153)
Net realized and unrealized loss on investments ..................... (26,851,430) (11,898,889) (29,452,876)
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........................................... $(12,786,711) $ (5,200,050) $(17,004,268)
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
COMPOSITE COMPOSITE COMPOSITE
U.S. GOVERNMENT INCOME TAX-EXEMPT BOND
SECURITIES, INC FUND, INC. FUND, INC.
------------------------- ------------------------- --------------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1994 1993 1994 1993
------------ ------------ ----------- ----------- ------------ ------------
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net investment income.....................$ 14,064,719 $ 15,343,719 $ 6,698,839 $ 6,255,445 $ 12,448,608 $ 11,194,078
Realized gain (loss) from investment
transactions............................ (4,397,627) 3,634,470 (225,532) 1,530,317 (1,364,723) 2,415,648
Unrealized appreciation (depreciation)
of investments during the year.......... (22,453,803) (773,492) (11,673,357) 1,708,146 (28,088,153) 12,292,022
------------ ------------ ----------- ----------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations............... (12,786,711) 18,204,697 (5,200,050) 9,493,908 (17,004,268) 25,901,748
DIVIDENDS TO SHAREHOLDERS
From net investment income:
Class A................................. (14,032,268) (15,343,719) (6,629,826) (6,255,445) (12,418,016) (11,200,626)
Class B................................. (32,451) - (69,013) - (30,572) -
From net capital gains from
investment transactions:
Class A................................. - - - - - (2,415,648)
Class B................................. - - - - - -
NET CAPITAL SHARE
TRANSACTIONS - note 3..................... (52,129,577) 57,750,690 (2,575,865) 15,211,821 (12,896,541) 59,898,784
------------ ------------ ----------- ----------- ------------ ------------
Total increase (decrease) in net assets... (78,981,007) 60,611,668 (14,474,754) 18,450,284 (42,349,397) 72,184,258
NET ASSETS
Beginning of the year..................... 268,112,313 207,500,645 104,875,554 86,425,270 259,045,305 186,861,047
------------ ------------ ----------- ----------- ------------ ------------
End of the year...........................$189,131,306 $268,112,313 $ 90,400,800 $104,875,554 $216,695,908 $259,045,305
============ ============ ============ ============ ============ ============
UNDISTRIBUTED
NET INVESTMENT INCOME
AT END OF YEAR............................ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
============ ============ ============ ============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CLASS A CLASS B
------------------------------------------------- -------
TEN MONTHS MARCH 30,
YEARS ENDED ENDED YEARS ENDED 1994 TO
DECEMBER 31, DECEMBER 31, LAST DAY OF FEBRUARY, DEC 31,
-------------- -------- -------------------- ------
1994 1993 1992(3) 1992 1991 1994(4)
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........................ $10.79 $10.63 $10.53 $10.17 $ 9.90 $10.24
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................................... 0.63 0.69 0.62 0.79 0.84 0.41
Net Gains or Losses on Securities (both
realized and unrealized)................................... (1.15) 0.16 0.10 0.36 0.27 (0.60)
----- ---- ---- ---- ---- -----
Total From Investment Operations.......................... (0.52) 0.85 0.72 1.15 1.11 (0.19)
----- ---- ---- ---- ---- -----
LESS DISTRIBUTIONS
Dividends (from net investment income)...................... (0.63) (0.69) (0.62) (0.79) (0.84) (0.41)
Distributions (from capital gains).......................... 0.00 0.00 0.00 0.00 0.00 0.00
---- ---- ---- ---- ---- ----
Total Distributions....................................... (0.63) (0.69) (0.62) (0.79) (0.84) (0.41)
----- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD .............................. $ 9.64 $10.79 $10.63 $10.53 $10.17 $ 9.64
====== ====== ====== ====== ====== ======
TOTAL RETURN (1) ............................................ -4.91% 8.12% 7.03% 11.72% 11.72% -1.86%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($1,000's)........................ $188,068 $268,112 $207,501 $141,377 $ 92,293 $1,063
Ratio of Expenses to Average Net Assets..................... 0.97% 0.99% 0.99% 1.01% 1.03% 1.76%
Ratio of Net Income to Average Net Assets................... 6.19% 6.29% 6.98% 7.63% 8.43% 5.43%
Portfolio Turnover Rate(2) ................................. 34% 51% 11% 17% 66% 34%
<FN>
(1) total return does not reflect sales charge. Returns of less than one year are aggregate returns and not annualized.
(2) A portfolio turnover rate is the percentage computed by taking the lesser of purchases or sales of portfolio securities
(excluding securities with a maturity date of one year or less at the time of acquisition) for a period and dividing it by the
monthly average of the market value of such securities during the period.
(3) Change in Fund's fiscal year-end. See note 1.
(4) From the commencement of operations of Class B shares.
(5) Annualized.
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
COMPOSITE INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CLASS A CLASS B
------------------------------------------------- -------
THREE MONTHS MARCH 30,
YEARS ENDED ENDED YEARS ENDED 1994 TO
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DEC 31,(4)
-------------- -------- -------------------- ------
1994 1993 1992(3) 1992 1991 1994(4)
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........................ $ 9.33 $ 8.99 $ 9.17 $ 8.68 $ 8.12 $ 8.85
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................................... 0.60 0.61 0.16 0.65 0.68 0.40
Net Gains or Losses on Securities (both
realized and unrealized)................................... (1.04) 0.34 (0.18) 0.49 0.56 (0.55)
----- ---- ----- ---- ---- -----
Total From Investment Operations.......................... (0.44) 0.95 (0.02) 1.14 1.24 (0.15)
LESS DISTRIBUTIONS
Dividends (from net investment income)...................... (0.60) (0.61) (0.16) (0.65) (0.68) (0.40)
Distributions (from capital gains).......................... 0.00 0.00 0.00 0.00 0.00 0.00
---- ---- ---- ---- ---- ----
Total Distributions....................................... (0.60) (0.61) (0.16) (0.65) (0.68) (0.40)
----- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD .............................. $ 8.29 $ 9.33 $ 8.99 $ 9.17 $ 8.68 $ 8.30
====== ====== ====== ====== ====== ======
TOTAL RETURN (1) ............................................ -4.82% 10.82% -.23% 13.57% 15.93% -1.67%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($1,000's)........................ $ 88,102 $104,876 $ 86,425 $ 84,995 $ 73,342 $2,299
Ratio of Expenses to Average Net Assets..................... 1.04% 1.08% 0.95% 1.05% 1.04% 1.80%
Ratio of Net Income to Average Net Assets................... 6.83% 6.58% 6.94% 7.26% 8.16% 6.25%
Portfolio Turnover Rate(2) ................................. 26% 51% 87% 47% 106% 26%
<FN>
(1) Total return does not reflect sales charge. Returns of less than one year are aggregate returns and not annualized.
(2) A portfolio turnover rate is the percentage computed by taking the lesser of purchases or sales of portfolio securities
(excluding securities with a maturity date of one year or less at the time of acquisition) for a period and dividing it by the
monthly average of the market value of such securities during the period.
(3) Change in Fund's fiscal year-end. See note 1.
(4) From the commencement of operations of Class B shares.
(5) Annualized.
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
COMPOSITE TAX-EXEMPT BOND FUND, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CLASS A CLASS B
------------------------------------------------- -------
MARCH 30,
1994 TO
YEARS ENDED DECEMBER 31, DEC 31,(4)
-------------------------------------------------- ------
1994 1993 1992 1991 1990 1994(4)
---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........................ $ 8.04 $ 7.58 $ 7.42 $ 7.16 $ 7.17 $ 7.49
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income....................................... 0.39 0.40 0.42 0.45 0.47 0.25
Net Gains or Losses on Securities (both
realized and unrealized)................................... (0.91) 0.54 0.23 0.34 (0.01) (0.36)
----- ---- ---- ---- ----- -----
Total From Investment Operations.......................... (0.52) 0.94 0.65 0.79 0.46 (0.11)
----- ---- ---- ---- ---- -----
LESS DISTRIBUTIONS
Dividends (from net investment income)...................... (0.39) (0.40) (0.42) (0.45) (0.47) (0.25)
Distributions (from capital gains).......................... 0.00 (0.08) (0.07) (0.08) 0.00 0.00
---- ----- ----- ----- ---- ----
Total Distributions....................................... (0.39) (0.48) (0.49) (0.53) (0.47) (0.25)
----- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD .............................. $ 7.13 $ 8.04 $ 7.58 $ 7.42 $ 7.16 $ 7.13
====== ====== ====== ====== ====== ======
TOTAL RETURN (1) ............................................ -6.53% 12.54% 9.00% 11.36% 6.71% -1.46%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($1,000's)........................ $215,438 $259,045 $186,861 $140,154 $111,462 $1,258
Ratio of Expenses to Average Net Assets..................... 0.79% 0.81% 0.78% 0.77% 0.77% 1.58%
Ratio of Net Income to Average Net Assets................... 5.23% 4.97% 5.56% 6.16% 6.65% 4.53%
Portfolio Turnover Rate(2) ................................. 12% 19% 30% 83% 115% 12%
<FN>
(1) Total return does not reflect sales charge. Returns of less than one year are aggregate returns and not annualized.
(2) A portfolio turnover rate is the percentage computed by taking the lesser of purchases or sales of portfolio securities
(excluding securities with a maturity date of one year or less at the time of acquisition) for a period and dividing it by the
monthly average of the market value of such securities during the period.
(3) From the commencement of operations of Class B shares.
(4) Annualized.
See accompanying notes to financial statements.
</FN>
</TABLE>
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.
On January 28, 1992, the Composite U.S. Government Securities, Inc. and the
Composite Income Fund, Inc. Board of Directors approved a change in their fiscal
year ends to December 31. Accordingly, information for the fiscal year ended
December 31, 1992, is presented for the ten-month period from March 1, 1992, for
Composite U.S. Government Securities, Inc. and the three-month period from
October 1, 1992, for Composite Income Fund, Inc.
The Funds offer both Class A and Class B shares. Operations of Class B shares
commenced on March 30, 1994. The two classes of shares differ in their
respective sales charges, shareholder servicing agent fees, and distribution and
service fees. All shareholders bear the common expenses of the Fund pro rata,
based on value of settled shares outstanding, without distinction between share
class. 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 expenses, including 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 its 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 transactions, quotations from dealers, market
transactions in comparable securities, and various relationships between
securities in determining value. Investment securities with less than 60 days
to maturity when purchased are valued at amortized cost which approximates
market value. Investment securities not currently quoted as described above
will be priced at fair market value as determined in good faith in a manner
prescribed by the Boards of Directors.
b. Interest income is earned from the settlement date on securities purchased
and is recorded on the accrual basis. Dividend income is recorded on the
ex-dividend date.
c. The Funds record dividends to shareholders on a daily basis and distribute
such dividends monthly. The Funds distribute substantially all of their
income monthly.
d. Security transactions are accounted for on the trade date (execution date of
the order to buy or sell). Realized gain or loss from security transactions
and the change in unrealized appreciation or depreciation are determined on
the basis of identified cost.
e. 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.
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.
Management fees were paid by each Fund to Composite Research & Management
Co., the investment manager. The fees are based on an annual rate of .625% of
average daily net assets for Composite U.S. Government Securities and Composite
Income Fund and on an annual rate of .50% for Composite Tax-Exempt Bond Fund. An
individual Fund's management fees will be reduced if that Fund's net assets
exceed $250 million. Under terms of each Fund's management contract, Composite
Research & Management Co. has agreed to reimburse a Fund for its expenses in
excess of 1.50% of average daily net assets up to $30 million, and 1% of such
assets over $30 million. Composite Income Fund and Composite Tax-Exempt Bond
Fund will be further reimbursed for expenses exceeding .75% of average net
assets exceeding $130 million. No such reimbursement was required during the
year ended December 31, 1994.
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 Murphey Favre Securities Services,
Inc., (MFSSI) the transfer and shareholder servicing agent, for services
incidental to issuance and transfer of shares, maintaining shareholder lists,
and issuing and mailing distributions and reports.
Distribution expenses were paid to Murphey Favre, Inc. (MFI), the principal
underwriter and distributor, in accordance with separate Distribution Plans for
Class A and Class B. The 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 the Fund will reimburse MFI 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 Funds' Class A shares, including payments to
brokers. The Class B Distribution Plan provides that the Funds will pay MFI 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, 1994, commissions (sales charges paid by
investors) on the purchases of Class A shares totaled $336,210, $340,052, and
$552,555, of which $336,055, $339,829, and $550,756 was retained by MFI, in
Composite U.S. Government Securities, Composite Income Fund, and Composite
Tax-Exempt Bond Fund, respectively. For the period ended December 31, 1994, MFI
received contingent deferred sales charges of $2,812, $391, and $1,680, for
Composite U.S. Government Securities, Composite Income Fund, and Composite
Tax-Exempt Bond Fund, respectively, upon redemption of Class B shares as
reimbursement for sales commissions advanced by MFI at the time of sale of such
sales.
Under terms of the distribution contracts, MFI will reimburse the Funds if
its expenses exceed the most stringent applicable state blue sky limitation. No
such reimbursement was required during the year ended December 31, 1994.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The amounts of fees and expenses described below are shown on each Fund's
statement of operations.
Management fees were paid by each Fund to Composite Research & Management
Co., the investment manager. The fees are based on an annual rate of .625% of
average daily net assets for Composite U.S. Government Securities and Composite
Income Fund and on an annual rate of .50% for Composite Tax-Exempt Bond Fund. An
individual Fund's management fees will be reduced if that Fund's net assets
exceed $250 million. Under terms of each Fund's management contract, Composite
Research & Management Co. has agreed to reimburse a Fund for its expenses in
excess of 1.50% of average daily net assets up to $30 million, and 1% of such
assets over $30 million. Composite Income Fund and Composite Tax-Exempt Bond
Fund will be further reimbursed for expenses exceeding .75% of average net
assets exceeding $130 million. No such reimbursement was required during the
year ended December 31, 1994.
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 Murphey Favre Securities Services,
Inc., (MFSSI) the transfer and shareholder servicing agent, for services
incidental to issuance and transfer of shares, maintaining shareholder lists,
and issuing and mailing distributions and reports.
Distribution expenses were paid to Murphey Favre, Inc. (MFI), the principal
underwriter and distributor, in accordance with separate Distribution Plans for
Class A and Class B. The 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 the Fund will reimburse MFI 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 Funds' Class A shares, including payments to
brokers. The Class B Distribution Plan provides that the Funds will pay MFI 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, 1994, commissions (sales charges paid by
investors) on the purchases of Class A shares totaled $336,210, $340,052, and
$552,555, of which $336,055, $339,829, and $550,756 was retained by MFI, in
Composite U.S. Government Securities, Composite Income Fund, and Composite
Tax-Exempt Bond Fund, respectively. For the period ended December 31, 1994, MFI
received contingent deferred sales charges of $2,812, $391, and $1,680, for
Composite U.S. Government Securities, Composite Income Fund, and Composite
Tax-Exempt Bond Fund, respectively, upon redemption of Class B shares as
reimbursement for sales commissions advanced by MFI at the time of sale of such
sales.
Under terms of the distribution contracts, MFI will reimburse the Funds if
its expenses exceed the most stringent applicable state blue sky limitation. No
such reimbursement was required during the year ended December 31, 1994.
<TABLE>
<CAPTION>
NOTE 3 - CAPITAL STOCK
COMPOSITE U.S. GOVERNMENT COMPOSITE INCOME COMPOSITE TAX-EXEMPT BOND
SECURITIES, INC. FUND, INC. FUND, INC.
------------------------- ------------------------------------ ---------------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
--------------- --------- ----------------------- --------- ---------------------- ---------
MARCH 30, MARCH 30, MARCH 30,
YEAR ENDED 1994 TO YEAR ENDED 1994 TO YEAR ENDED 1994 TO
DECEMBER 31, DEC.31, DECEMBER 31, DEC.31, DECEMBER 31, DEC.31,
---------------- -------- ----------------------- -------- ----------------------- --------
1994 1993 1994(1) 1994 1993 1994(1) 1994 1993 1994(1)
---- ---- ------ ---- ---- ------ ---- ---- ------
Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sold............. 1,450,548 7,677,325 120,824 1,783,466 2,698,043 290,683 3,556,878 8,983,473 181,155
Issued for reinvest-
ment of dividends
and capital gains 954,531 1,068,825 2,342 565,488 502,988 6,610 1,310,239 1,396,049 3,539
----------- ----------- -------- ----------- ----------- -------- ----------- ----------- -------
2,405,079 8,746,150 123,166 2,348,954 3,201,031 297,293 4,867,117 10,379,522 184,694
Reacquired....... (7,733,340) (3,429,749) (12,857) (2,963,495) (1,579,690) (20,455) (6,888,578) (2,807,814) (8,323)
----------- ----------- -------- ----------- ----------- -------- ----------- ----------- -------
Total increase
(decrease)...... (5,328,261) 5,316,401 110,309 (614,541) 1,621,341 276,838 (2,021,461) 7,571,708 176,371
============ ===================== ============ =========== ========== ============ =========== ==========
Amount
Sold.............$ 14,056,664 $83,175,412 $1,201,752 $15,792,705 $25,236,339 $2,494,055 $ 25,964,330 $71,054,251 $1,340,880
Issued for reinvest-
ment of dividends
and capital gains 10,395,143 11,607,882 26,998 4,889,312 4,695,087 55,679 9,728,020 11,098,343 25,691
----------- ----------- -------- ----------- ----------- -------- ----------- ----------- -------
24,451,807 94,783,294 1,228,750 20,682,017 29,931,426 2,549,734 35,692,350 82,152,594 1,366,571
Reacquired....... (77,684,980)(37,032,604) (125,154) (25,636,115)(14,719,605) (171,501) (49,893,740)(22,253,810) (61,722)
----------- ----------- -------- ----------- ----------- -------- ----------- ----------- -------
Total increase
(decrease)......$(53,233,173)$57,750,690$1,103,596 $ (4,954,098)$15,211,821 $2,378,233 $(14,201,390) $59,898,784 $1,304,849
============ ===================== ============ =========== ========== ============ =========== ==========
December 31, 1994:
Capital stock authorized... 1,000,000,000 50,000,000 500,000,000
Designated as:
Class A.................. 600,000,000 30,000,000 300,000,000
Class B.................. 400,000,000 20,000,000 200,000,000
Par value per share........ $0.0001 $0.01 $0.0001
<FN>
(1) From the commencement of offering Class B shares.
</FN>
</TABLE>
MORE ABOUT THE COMPOSITE GROUP
FUND OFFICES
601 W. Main Avenue, Suite 801
Spokane, WA 99201-0613
Phone: (509) 353-3550
MANAGER
Composite Research & Management Co.
1201 Third Avenue, Suite 1220 Seattle, WA 98101-3015
DISTRIBUTOR
Murphey Favre, Inc.
1201 Third Avenue, Suite 780 Seattle, WA 98101-3015
CUSTODIAN
Investors Fiduciary Trust Company
127 W. 10th Street Kansas City, MO 64105-1716
INDEPENDENT PUBLIC ACCOUNTANTS
LeMaster & Daniels
601 W. Riverside Avenue, Suite 800 Spokane, WA 99201-0614
COUNSEL
Paine, Hamblen, Coffin, Brooke & Miller
717 W. Sprague Avenue, Suite 1200 Spokane, WA 99204-0464
OFFICERS
PRESIDENT
William G. Papesh
EXECUTIVE VICE PRESIDENT
Kerry K. Killinger
VICE PRESIDENTS
Gene G. Branson
Craig S. Hobbs
Douglas D. Springer
VICE PRESIDENT & TREASURER
Monte D. Calvin
SECRETARY
John T. West
BOARD OF DIRECTORS
CHAIRMAN
Leland J. Sahlin
MEMBERS
Wayne L. Attwood, M.D.
Anne V. Farrell
Edwin J. McWilliams
Michael K. Murphy
William G. Papesh
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.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS AND FORM N-SAR WHICH ARE ON FILE WITH
THE SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000022865
<NAME> COMPOSITE INCOME FUND, INC CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 96,162,986
<INVESTMENTS-AT-VALUE> 89,123,588
<RECEIVABLES> 1,814,524
<ASSETS-OTHER> 20,203
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 90,958,315
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 557,515
<TOTAL-LIABILITIES> 557,515
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 112,411,891
<SHARES-COMMON-STOCK> 10,623,338
<SHARES-COMMON-PRIOR> 11,237,879
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,971,693)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7,039,398)
<NET-ASSETS> 88,101,843
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,729,403
<OTHER-INCOME> 0
<EXPENSES-NET> 1,030,564
<NET-INVESTMENT-INCOME> 6,698,839
<REALIZED-GAINS-CURRENT> (225,532)
<APPREC-INCREASE-CURRENT> (11,673,357)
<NET-CHANGE-FROM-OPS> (5,200,050)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,629,826
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,783,466
<NUMBER-OF-SHARES-REDEEMED> 2,963,495
<SHARES-REINVESTED> 565,488
<NET-CHANGE-IN-ASSETS> (14,474,754)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (14,746,161)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 612,811
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,030,564
<AVERAGE-NET-ASSETS> 97,178,814
<PER-SHARE-NAV-BEGIN> 9.33
<PER-SHARE-NII> .60
<PER-SHARE-GAIN-APPREC> (1.04)
<PER-SHARE-DIVIDEND> .60
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.29
<EXPENSE-RATIO> 1.04
<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 TO SHAREHOLDERS AND FORM N-SAR WHICH ARE ON FILE WITH
THE SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000022865
<NAME> COMPOSITE INCOME FUND, INC. CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 96,162,986
<INVESTMENTS-AT-VALUE> 89,123,588
<RECEIVABLES> 1,814,524
<ASSETS-OTHER> 20,203
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 90,958,315
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 557,515
<TOTAL-LIABILITIES> 557,515
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 112,411,891
<SHARES-COMMON-STOCK> 276,838
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,971,693)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7,039,398)
<NET-ASSETS> 2,298,957
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,729,403
<OTHER-INCOME> 0
<EXPENSES-NET> 1,030,564
<NET-INVESTMENT-INCOME> 6,698,839
<REALIZED-GAINS-CURRENT> (225,532)
<APPREC-INCREASE-CURRENT> (11,673,357)
<NET-CHANGE-FROM-OPS> (5,200,050)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 69,013
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 290,683
<NUMBER-OF-SHARES-REDEEMED> 20,455
<SHARES-REINVESTED> 6,610
<NET-CHANGE-IN-ASSETS> (14,474,754)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (14,746,161)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 612,811
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,030,564
<AVERAGE-NET-ASSETS> 1,401,450
<PER-SHARE-NAV-BEGIN> 8.85
<PER-SHARE-NII> .40
<PER-SHARE-GAIN-APPREC> (.55)
<PER-SHARE-DIVIDEND> .40
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.30
<EXPENSE-RATIO> 1.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
