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. 32 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 30 /X/
COMPOSITE INCOME FUND, INC.
- --------------------------------------------------------------------------
(Exact name of Registrant as specified in Charter)
601 W. Main Avenue, Suite 801, Spokane, WA 99201
- --------------------------------------------------------------------------
(Address of principal executive offices)
1-509-353-3486
- --------------------------------------------------------------------------
(Registrant's telephone number, including area code)
JOHN T. WEST, CORPORATE SECRETARY
Composite Group of Funds
601 West Main Avenue, Suite 801, Spokane, WA 99201
- ---------------------------------------------------
(Name and address of agent for service)
Approximate Date of Proposed Public Offering: April 30, 1997
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[xx] on April 30, 1997, pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(i) of Rule 485
[ ] on (date) pursuant to paragraph (a)(i) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(ii) of Rule 485
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
- -------------------------------------------------------------------------------
CALCULATION OF REGISTRATIAON FEE UNDER THE SECURITIES ACT OF 1933
Indefinite amount has been registered pursuant to Rule 24f-2. The Rule 24f-2
Notice for the most recent fiscal year was filed on February 24, 1997.
<PAGE>
PART A
TABLE OF CONTENTS
N-1A Item No. Location
Item 1. Cover Page ......................................... Cover Page
Item 2. Synopsis ........................................... Fee Table
About this
Prospectus
Item 3. Condensed Financial Information .................... Financial
Highlights
Performance
Information
Item 4. General Description of the Registrant .............. Cover Page
The Funds'
Objectives
Investment
Practices and
Risk Factors
Investment
Restrictions
Item 5. Management of the Fund ............................. Who We Are
The Cost of
Good
Management
How to Buy
Shares
Item 6. Capital Stock and Other Securities ................. Who We Are
Distribution
of Income and
Capital Gains
Income Taxes on
Dividends and
Capital Gains
We're Here
to Help
You
Item 7. Purchase of Securities Being Offered ............... The Cost of
Good
Management
The Value of a
Single Share
How to Buy
Shares
Item 8. Redemption or Repurchase ........................... How to Sell
Shares
Item 9. Pending Legal Proceedings .......................... *
*Not applicable or negative answer
<PAGE>
PART B
TABLE OF CONTENTS
Item 10. Cover Page ......................................... Cover Page
Item 11. Table of Contents .................................. Table of
Contents
Item 12. General Information and History .................... Organization
and
Authorized
Capital
Item 13. Investment Objectives & Policies ................... See Prospectus
page 8
Investment
Practices
Brokerage
Allocations
and
Portfolio
Transactions
Item 14. Management of the Fund ............................. The Funds and
Their
Management
Item 15. Control Persons and Principal Holders of Securities. Directors &
Officers of
the Funds
Item 16. Investment Advisory and Other Services ............. The Investment
Adviser
Investment
Management
Services
Distribution
Services
Custodian
Item 17. Brokerage Allocation & Other Practices ............. Brokerage
Allocations
and Portfolio
Transactions
Item 18. Capital Stock and Other Securities ................. Organization
and
Authorized
Capital
Voting
Privileges
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered ................................... How Shares are
Valued
How Shares Can
Be Purchased
How to Sell
Shares - See
Prospectus
page 21
Exchange
Privilege
Services
Provided
by the Funds
Specimen Price
Make-up
Sheet
Item 20. Tax Status ......................................... Dividends,
Capital
Gain
Distributions
and Taxes
Item 21. Underwriters ....................................... Distribution
Services
Item 22. Performance Information ............................ Performance
Information
Item 23. Financial Statements ............................... Financial
Statements
and Reports
<PAGE>
COMPOSITE BOND FUNDS
Suite 801
601 W. Main Avenue
Spokane, Washington 99201-0613
Telephone (509) 353-3550 Toll Free (800) 543-8072
A SELECTION OF THREE FUNDS WITH DIFFERENT INVESTMENT OBJECTIVES:
The Composite Bond Funds are designed for investors who want to generate
income from debt securities and protect their capital:
COMPOSITE U.S. GOVERNMENT SECURITIES, INC. - This Fund is intended to
provide a high level of current income, consistent with safety and liquidity.
Investments are made in obligations issued or guaranteed by the U.S. government.
The Fund also invests in repurchase agreements and collateralized mortgage
obligations that are secured by those types of obligations.
COMPOSITE INCOME FUND, INC. - The objective for this Fund is to provide a
high level of current income that is consistent with protection of shareholders'
capital. It pursues this objective through careful investment in a diversified
pool of debt securities.
COMPOSITE TAX-EXEMPT BOND FUND, INC. - This Fund is designed to provide a
high level of income that is exempt from federal taxes and to protect investors'
capital. The Fund invests in a carefully selected portfolio of bonds issued by
states, counties, cities and other governmental bodies whose bonds generate
income exempt from federal income tax.
Please read this Prospectus, dated April 30, 1997, and retain it for future
reference. It sets forth information about these Funds that a prospective
investor should know before investing.
OTHER IMPORTANT INFORMATION
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THESE SHARES INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A STATEMENT OF ADDITIONAL INFORMATION ABOUT THE FUNDS, DATED APRIL 30,
1997, IS ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION. IT IS INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS. YOU MAY OBTAIN A FREE COPY BY CALLING OR
WRITING THE FUNDS AT THE LOCATION LISTED 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.
CONTENTS Page
About this Prospectus......................... 2
Expense information........................... 3
Financial highlights.......................... 4
The Funds' objectives......................... 9
Investment practices and risk factors......... 9
Investment restrictions ...................... 12
Who we are.................................... 13
The cost of good management................... 14
The value of a single share................... 15
How to buy shares............................. 15
Distribution of income and capital gains...... 18
Income taxes on dividends and
capital gains............................... 19
Exchanges for other Composite funds........... 19
How to sell shares............................ 20
IRAs & other tax-sheltered
retirement plans............................ 21
Performance information....................... 21
Reports to shareholders....................... 22
We're here to help you........................ 22
ABOUT THIS PROSPECTUS
In this publication, you will find basic information about the Composite
Bond Funds. Included are such subjects as how to buy and sell shares, as well as
details about the Funds' objectives, investment practices and restrictions, and
other matters.
If you are not familiar with mutual funds, investment terminology, or the
Composite Group of Funds, you may find it useful to understand the following key
words and terms that appear frequently on these pages:
GLOSSARY OF KEY WORDS AND TERMS
ADVISER. Composite Research & Management Co., which is called the "Adviser"
in this Prospectus, is the manager of the Bond Funds and several other Composite
mutual funds.
CLASS A SHARES. All Composite Bond Funds are available in two classes.
Class A shares include a sales charge at the time of purchase and annual
operating expenses.
CLASS B SHARES. Class B shares do not have an initial sales charge, but
they do have higher operating expenses for six years than Class A shares, and
they have a contingent deferred sales charge (see below).
CONTINGENT DEFERRED SALES CHARGE. If an investor redeems Class B shares
within four years of purchase, he or she normally must pay this charge.
DISTRIBUTOR. Murphey Favre, Inc. distributes the Composite Bond Funds and
other Composite mutual funds and is referred to as the "Distributor" in this
Prospectus.
EXCHANGE. This privilege allows shareholders to exchange shares of any
other Composite fund for the same class of shares of any other Composite fund.
There is no fee or additional sales charge for an exchange.
FUND. The term "Fund" identifies any one of the three mutual funds offered
through this Prospectus. These "Funds" are identified as follows in this
document:
INCOME. This Fund's objective is to provide a high level of current income,
consistent with protection of shareholders' capital. It invests in a diversified
portfolio of debt securities.
TAX-EXEMPT. This Fund's objective is to provide income that is exempt from
federal taxes, and, at the same time, to protect investors' capital.
U.S. GOVERNMENT SECURITIES. This Fund's objective is to provide a high
level of current income from U.S. government securities, consistent with safety
and liquidity.
NET ASSET VALUE (NAV). This is the term used in this publication and in
daily newspaper financial tables to report the value of a single share of a
mutual fund.
REDEMPTION. This refers to the sale of mutual fund shares by an investor.
He or she is said to have "redeemed" the shares.
REPRESENTATIVE. This is the person who is authorized to purchase or sell
mutual fund shares on your behalf. Your representative may be an investment
representative of Washington Mutual Bank or a registered representative of
Murphey Favre, Inc., or a registered representative of another securities
dealer.
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 Securities and Exchange Commission and also is available through
the Funds.
EXPENSE INFORMATION
The table below shows the Funds' costs and expenses that an investor will
bear both directly or indirectly and how they affect share ownership. Operating
expenses are based on the Funds' expenses during the fiscal year ended December
31, 1996.
For further information on costs and expenses, please see "The cost of good
management" on Page 14.
CLASS A CLASS B
SHAREHOLDER TRANSACTION EXPENSES FOR EACH FUND: SHARES SHARES
Maximum sales charge imposed on purchases --------- ---------
(as a percentage of offering price) 4.00% None
Maximum contingent deferred sales charge (as a percentage of
purchase price or redemption proceeds, whichever is lower) None 4.00%
Redemption fee None None
Exchange fee None None
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS) U.S. GOVERNMENT
SECURITIES INCOME TAX-EXEMPT
--------------------- -------------------- ------------------
Class A Class B Class A Class B Class A Class B
shares shares shares shares shares shares
---------- ---------- --------- ---------- --------- --------
Advisory fees .63% .63% .63% .63% .50% .50%
12b-1 fees .20% 1.00% .20% 1.00% .20% 1.00%
Other expenses .20% .22% .25% .26% .10% .15%
Total Fund operating ------ --------- --------- ---------- --------- --------
expenses 1.03% 1.85% 1.08% 1.89% .80% 1.65%
====== ========= ========= ========== ========= ========
Sales charge waivers are available for Class A and Class B shares, and
reduced sales charge purchase plans are available for Class A shares. The 4%
contingent deferred sales charge on Class B shares declines 1% annually to 0%
after four years. 12b-1 fees include service fees not to exceed .25% of average
net assets with the remainder being reimbursed distribution expenses for Class A
shares and distribution fees for Class B shares. Please see "The cost of good
management" for further information. There is a $10 charge for redemptions paid
by Fed Funds wire but not for redemptions deposited to your pre-authorized bank
account or paid by check.
You would pay the following expenses on a $1,000 investment in one of the
Funds, assuming you receive a 5% annual return and that the Fund's expenses are
the same as those shown in the Annual fund operating expenses table on the
previous page. The 5% figure is a constant rate required for comparative
purposes by the Securities and Exchange Commission. The example should not be
considered a representation of past or future expenses or performance. Actual
results will be greater or less than the illustration.
U.S. GOVERNMENT
SECURITIES INCOME TAX-EXEMPT
Expenses assuming
redemption Class A Class B Class A Class B Class A Class B
at the end of each shares shares shares shares shares shares
period: -------- ------- -------- -------- -------- --------
1 Year $ 55 $ 49 $ 56 $ 49 $ 53 $ 47
3 Years $ 76 $ 68 $ 78 $ 69 $ 69 $ 62
5 Years $ 99 $101 $102 $103 $ 87 $ 90
10 Years $163 $174 $171 $180 $138 $151
Assuming you keep your shares
and no redemptions are made:
1 Year $ 55 $ 19 $ 56 $ 19 $ 53 $ 17
3 Years $ 76 $ 58 $ 78 $ 59 $ 69 $ 52
5 Years $ 99 $101 $102 $103 $ 87 $ 90
10 Years $163 $174 $171 $180 $138 $151
Class B shares automatically convert to Class A shares after six years
without charge or tax impact. Because of that, years seven through ten reflect
Class A operating expenses. Redemptions at the end of a full year result in the
imposition of the following year's contingent deferred sales charge. Class B
expenses assume contingent deferred sales charges as follows: one year, 3%;
three years, 1%; five and ten years, 0%. Long-term Class B shareholders could
pay more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers. The Class B
conversion feature is intended to reduce the likelihood this will occur.
FOR FURTHER INFORMATION
* Advisory fees - See "The cost of good management" Page 14
* 12b-1 fees - See "The cost of good management" Page 14
* Sales charge on purchases - See "Buying Class A shares" Page 16
* Contingent deferred sales charge - See "Buying Class B shares" Page 17
* Conversion of Class B shares to Class A - See "Class B conversion feature"
Page 18
FINANCIAL HIGHLIGHTS
The tables on the following pages present selected financial information
about the Funds, including per share data, expense ratios and other data based
on average net assets. This information has been audited by LeMaster & Daniels
pllc, the Funds' independent auditors, whose reports appear in the Funds' annual
report. The annual report is incorporated by reference into the Statement of
Additional Information.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES - CLASS A SHARES
TEN MONTHS
YEARS ENDED ENDED
DECEMBER 31, DECEMBER YEARS ENDED LAST DAY OF FEBRUARY,
1996 1995 1994 1993 31, 1992(3) 1992 1991 1990 1989 1988 1987
-------- ------- ------- ------ ----------- ------ ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD .. $10.84 $ 9.64 $10.79 $10.63 $10.53 $10.17 $ 9.90 $ 9.63 $10.25 $10.61 $10.71
INCOME FROM -------- ------- ------- ------ ----------- ------ ------- ------- ------- -------- -------
INVESTMENT
OPERATIONS
Net Investment Income 0.63 0.63 0.63 0.69 0.62 0.79 0.84 0.88 0.91 0.91 1.00
Net Gains or Losses on
Securities (both realized
and unrealized)..... (0.38) 1.20 (1.15) 0.16 0.10 0.36 0.27 0.27 (0.62) (0.36) 0.01
Total from -------- ------- ------- ------ ----------- ------- ------- ------- -------- -------- -------
Investment Operations 0.25 1.83 (0.52) 0.85 0.72 1.15 1.11 1.15 0.29 0.55 1.01
Less Distributions -------- ------- ------- ------ ----------- ------- ------- ------- -------- -------- -------
Dividends (from net
investment income) .. (0.63) (0.63) (0.63) (0.69) (0.62) (0.79) (0.84) (0.88) (0.91) (0.91) (1.06)
Distributions (from
capital gains)....... - - - - - - - - - - (0.05)
-------- ------- ------- ------ ----------- ------- ------- ------- -------- -------- -------
Total distributions. (0.63) (0.63) (0.63) (0.69) (0.62) (0.79) (0.84) (0.88) (0.91) (0.91) (1.11)
-------- ------- ------- ------ ----------- ------- ------- ------- -------- -------- -------
NET ASSET VALUE,
END OF PERIOD ......... $10.46 $10.84 $ 9.64 $10.79 $10.63 $10.53 $10.17 $ 9.90 $ 9.63 $10.25 $10.61
======== ======= ======= ====== =========== ======= ======= ======= ======== ======== =======
TOTAL RETURN (1) ...... 2.48% 19.45% -4.91% 8.12% 7.03% 11.72% 11.72% 12.31% 2.94% 6.63% 8.95%
RATIOS/
SUPPLEMENTAL DATA
Net Assets, End of
Period (in thousands). $138,159 $177,310 $188,068 $268,112 $207,501 $141,377 $92,293 $83,360 $79,920 $89,385 $111,991
Ratio of Expenses to
Average Net Assets(2). 0.97% 1.01% 0.97% 0.99% 0.99%(4) 1.01% 1.03% 0.99% 0.88% 0.88% 0.88%
Ratio of Net Income
to Average Net Assets. 6.01% 6.08% 6.19% 6.29% 6.98%(4) 7.63% 8.43% 8.86% 9.14% 9.03% 9.33%
Portfolio Turnover Rate. 16% 8% 34% 51% 11%(4) .17% .66% .19% .41% .43% .128%
(1) Total returns do not reflect a sales charge and are not annualized.
(2) Ratios of expenses to average net assets includes expenses paid indirectly
beginning in fiscal year 1995.
(3) Change in Fund's fiscal year end.
(4) Annualized.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
U.S. GOVERNMENT SECURITIES - CLASS B SHARES
March 30, March 30,
Years Ended 1994 to
Dec. 31, Dec. 31,
1996 1995 1994(2)
------- ------ -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.84 $ 9.64 $10.24
------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... 0.54 0.54 0.41
Net Gains or Losses on Securities
(both realized and unrealized). (0.38) 1.20 (0.60)
------- ------ -------
Total from Investment Operations 0.16 1.74 (0.19)
------- ------ -------
LESS DISTRIBUTIONS
Dividends (from net investment income)(0.54) (0.54) (0.41)
------- ------ -------
NET ASSET VALUE, END OF PERIOD .. $10.46 $10.84 $ 9.64
======= ====== =======
TOTAL RETURN (1) ................ 1.58% 18.48% -1.86%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in thousands) ................. $2,963 $2,206 $1,063
Ratio of Expenses to Average
Net Assets (3) ................. 1.85% 1.84% 1.76%(4)
Ratio of Net Income to
Average Net Assets ............. 5.14% 5.20% 5.43%(4)
Portfolio Turnover Rate ........ 16% 8% 34%
(1) Total returns do not reflect a sales charge and are not annualized.
(2) From the commencement of offering Class B shares.
(3) Ratio of expenses to average net assets includes expenses paid indirectly
beginning in fiscal year 1995.
(4) Annualized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
INCOME - CLASS A SHARES
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, DECEMBER YEARS ENDED SEPTEMBER 30,
1996 1995 1994 1993 31, 1992(3) 1992 1991 1990 1989 1988 1987
------- ------- ------- ------ ----------- ------ ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ...... $ 9.44 $ 8.29 $ 9.33 $ 8.99 $ 9.17 $ 8.68 $ 8.12 $ 8.51 $ 8.87 $ 9.04 $ 9.42
INCOME FROM ------- ------- ------- ------ ----------- ------- ------- ------- ------- ------- ------
INVESTMENT
OPERATIONS
Net Investment Income ... 0.59 0.59 0.60 0.61 0.16 0.65 0.68 0.74 0.91 0.95 0.96
Net Gains or Losses on
Securities (both realized
and unrealized)......... (0.29) 1.15 (1.04) 0.34 (0.18) 0.49 0.56 (0.39) (0.36) (0.17) (0.38)
Total from ------- ------- -------- ------ ---------- ------- ------- ------- ------- ------- ------
Investment Operations . 0.30 1.74 (0.44) 0.95 (0.02) 1.14 1.24 0.35 0.55 0.78 0.58
Less Distributions ------- ------- -------- ------ ---------- ------- ------- ------- ------- ------- ------
Dividends (from net
investment income) ..... (0.59) (0.59) (0.60) (0.61) (0.16) (0.65) (0.68) (0.74) (0.91) (0.95) (0.96)
NET ASSET VALUE, ------- ------- -------- ------ ---------- ------- ------- ------- ------- ------- ------
END OF PERIOD ............ $ 9.15 $ 9.44 $ 8.29 $ 9.33 $ 8.99 $ 9.17 $ 8.68 $ 8.12 $ 8.51 $ 8.87 $ 9.04
======= ======= ======== ====== ========== ======= ======= ======= ======= ======= ======
TOTAL RETURN (1) ......... 3.46% 21.58% -4.82% 10.82% -0.23% 13.57% 15.93% 4.32% 6.58% 9.02% 6.39%
RATIOS/
SUPPLEMENTAL DATA
Net Assets, End of
Period (in thousands) .. $86,657 $97,534 $88,102 $104,876 $86,425 $84,995 $73,342 $66,648$126,088$162,956 $133,596
Ratio of Expenses to
Average Net Assets (2) . 1.03% 1.08% 1.04% 1.08% 0.95%(4) 1.05% 1.04% 1.04% 0.96% 1.01% 0.99%
Ratio of Net Income
to Average Net Assets .. 6.52% 6.59% 6.83% 6.58% 6.94%(4) 7.26% 8.16% 8.97% 10.53% 10.56% 10.32%
Portfolio Turnover Rate . 42% 43% 26% 51% 87%(4) 47% 106% 64% 37% 47% 99%
(1) Total returns do not reflect a sales charge and are not annualized.
(2) Ratio of expenses to average net assets includes expenses paid indirectly
beginning in fiscal year 1995.
(3) Change in Fund's fiscal year end.
(4) Annualized.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
INCOME - CLASS B SHARES
<TABLE>
<CAPTION>
March 30,
Years Ended 1994 to
Dec. 31, Dec. 31,
1996 1995 1994(2)
------- ------ -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.46 $ 8.30 $ 8.85
------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... 0.52 0.51 0.40
Net Gains or Losses on Securities
(both realized and unrealized). (0.29) 1.16 (0.55)
------- ------ -------
Total from Investment Operations 0.23 1.67 (0.15)
------- ------ -------
LESS DISTRIBUTIONS
Dividends (from net investment income)(0.52) (0.51) (0.40)
------- ------ -------
NET ASSET VALUE, END OF PERIOD .. $ 9.17 $ 9.46 $ 8.30
======= ====== =======
TOTAL RETURN (1) ................ 2.59% 20.70% -1.67%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in thousands) ................. $7,122 $4,452 $2,299
Ratio of Expenses to Average
Net Assets (3) ................. 1.89% 1.91% 1.80%(4)
Ratio of Net Income to
Average Net Assets ............. 5.69% 5.73% 6.25%(4)
Portfolio Turnover Rate ........ 42% 43% 26%
(1) Total returns do not reflect a sales charge and are not annualized.
(2) From the commencement of offering Class B shares.
(3) Ratio of expenses to average net assets includes expenses paid indirectly
beginning in fiscal year 1995.
(4) Annualized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
TAX-EXEMPT - CLASS A SHARES
YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR ........ $ 8.02 $ 7.13 $ 8.04 $ 7.58 $ 7.42 $ 7.16 $ 7.17 $ 7.20 $ 7.02 $ 7.56
INCOME FROM ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INVESTMENT
OPERATIONS
Net Investment Income.... 0.38 0.38 0.39 0.40 0.42 0.45 0.47 0.50 0.52 0.54
Net Gains or Losses on
Securities (both realized
and unrealized)......... (0.19) 0.89 (0.91) 0.54 0.23 0.34 (0.01) 0.07 0.20 (0.45)
Total from ------- ------- -------- ------- ------- ------- ------- ------- ------- -------
Investment Operations.. 0.19 1.27 (0.52) 0.94 0.65 0.79 0.46 0.57 0.72 0.09
LESS DISTRIBUTIONS ------- ------- -------- ------- ------- ------- ------- ------- ------- -------
Dividends (from net
investment income)...... (0.38) (0.38) (0.39) (0.40) (0.42) (0.45) (0.47) (0.50) (0.52) (0.53)
Distributions (from
capital gains).......... - - - (0.08) (0.07) (0.08) - (0.10) (0.02) (0.10)
------- ------- -------- ------- ------- ------- ------- ------- ------- -------
Total distributions.... (0.38) (0.38) (0.39) (0.48) (0.49) (0.53) (0.47) (0.60) (0.54) (0.63)
------- ------- -------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE,
END OF YEAR .............. $ 7.83 $ 8.02 $ 7.13 $ 8.04 $ 7.58 $ 7.42 $ 7.16 $ 7.17 $ 7.20 $ 7.02
======= ======= ======== ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (1) ......... 2.52% 18.25% -6.53% 12.54% 9.00% 11.36% 6.71% 8.08% 10.66% 1.25%
RATIOS/
SUPPLEMENTAL DATA
Net Assets, End of
Year (in thousands)..... $203,606 $230,055 $215,438 $259,045 $186,861 $140,154 $111,462 $104,208 $94,156 $83,057
Ratio of Expenses to
Average Net Assets (2) . 0.75% 0.81% 0.79% 0.81% 0.78% 0.77% 0.77% 0.80% 0.80% 0.85%
Ratio of Net Income
to Average Net Assets... 4.90% 5.03% 5.23% 4.97% 5.56% 6.16% 6.65% 6.85% 7.34% 7.36%
Portfolio Turnover Rate . 22% 8% 12% 19% 30% 83% 115% 104% 47% 49%
(1) Total returns do not reflect a sales charge.
(2) Ratio of expenses to average net assets includes expenses paid indirectly
beginning in fiscal year 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
TAX-EXEMPT - CLASS A SHARES
March 30,
Years Ended 1994 to
Dec. 31, Dec. 31,
1996 1995 1994(2)
------- ------ -------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.02 $ 7.13 $ 7.49
------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........... 0.31 0.32 0.25
Net Gains or Losses on Securities
(both realized and unrealized). (0.19) 0.89 (0.36)
------- ------ -------
Total from Investment Operations 0.12 1.21 (0.11)
------- ------ -------
LESS DISTRIBUTIONS
Dividends (from net investment income)(0.31) (0.32) (0.25)
------- ------ -------
NET ASSET VALUE, END OF PERIOD .. $ 7.83 $ 8.02 $ 7.13
======= ====== =======
TOTAL RETURN (1) ................ 1.61% 17.30% -1.46%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(in thousands) ................. $5,266 $2,682 $1,258
Ratio of Expenses to Average
Net Assets (3) ................. 1.65% 1.62% 1.58%(4)
Ratio of Net Income to
Average Net Assets ............. 4.01% 4.18% 4.53%(4)
Portfolio Turnover Rate ........ 22% 8% 12%
(1) Total returns do not reflect a sales charge and are not annualized.
(2) From the commencement of offering Class B shares.
(3) Ratio of expenses to average net assets includes expenses paid indirectly
beginning in fiscal year 1995.
(4) Annualized.
</TABLE>
THE FUNDS' OBJECTIVES
Composite Research & Management Co., referred to as the "Adviser" in this
Prospectus, manages the Funds. The Adviser attempts to maintain Funds that are
responsive to changes in economic trends and developments, government actions
and regulations, and international monetary conditions.
The investment objectives of each Fund are described below. These
objectives are fundamental and, therefore, cannot be changed without a majority
vote of the Fund's outstanding shares. Because risks are involved, there cannot
be any assurance a Fund's objectives will be attained.
U.S. Government Securities: This Fund has the objective of maintaining a
high level of current income, consistent with safety and liquidity. The Fund
invests in obligations issued or guaranteed by the full faith and credit of the
U.S. government or investments secured by these types of obligations.
Income: The objective for this Fund is to provide a high level of current
income that is consistent with protection of shareholders' capital. The Fund
carries out investments in a diversified pool of debt securities, generally
investing in higher grades of debt.
Tax-Exempt: This Fund has the objective of maintaining a high level of
federal tax-exempt income while protecting investors' capital. Investments are
made in a 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' net asset values per share will fluctuate as the value of
securities they own change. As with all fixed-income investments, the Funds'
securities are subject to market and credit risks.
Market risk relates to several factors. Among these are the price
fluctuation of a fixed-income security, overall interest-rate conditions, the
credit rating of the issuer, and the maturity length of the security. Generally,
when interest rates increase, the prices of existing fixed-income securities
decrease.
Credit risk refers to the likelihood that a security's issuer can maintain
timely interest and principal payments. Each Fund diversifies its holdings to
reduce the effect of credit risk.
The Funds do not have any restrictions on the maturities of securities in
which they may invest. Each Fund seeks to invest in securities having maturities
that, in the Adviser's judgment, are consistent with that Fund's investment
objective.
U.S. GOVERNMENT SECURITIES
The intention of this Fund is to achieve its objective by investing in a
selection of obligations issued or guaranteed by the full faith and credit of
the U.S. government. The Fund may also invest in collateralized mortgage
obligations or repurchase agreements which are secured by those types of
obligations. It is a fundamental policy of the Fund to invest only in the
following securities:
1) U.S. government obligations issued by the Treasury, including bills,
certificates of indebtedness, notes, and bonds.
2) Obligations secured by the full faith and credit of the U.S.
government or its instrumentalities.
3) Certificates of the Government National Mortgage Association ("GNMA"),
which are debt securities representing an undivided ownership interest
in a pool of mortgages. The mortgages backing these securities include
conventional 30-year fixed-rate mortgages, 15-year fixed-rate
mortgages, graduated payment mortgages, and adjustable-rate mortgages.
The U.S. government guarantees the timely payment of interest and
principal for these securities through the GNMA, which is a wholly
owned U.S. government corporation within the Department of Housing and
Urban Development. The GNMA is authorized to make such a guarantee,
with the full faith and credit of the U.S. government, on securities
issued by institutions and backed by pools of FHA-insured or
VA-insured mortgages. However, the guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with
fluctuations in interest rates, nor do the guarantees extend to the
yield or value of the Fund's shares.
4) Collateralized mortgage obligations which are fully collateralized by
GNMA certificates or by mortgages insured by GNMA.
5) Repurchase agreements which are secured by obligations identified in
1, 2, and 3 above. See Page 11 for a more complete discussion of GNMA
certificates, collateralized mortgage obligations and repurchase
agreements.
INCOME
This Fund plans to achieve its objective by investing in debt issues and
obligations that offer high current yields and that are consistent with a low
degree of risk. In keeping with this, the Fund invests most of its assets in the
following:
1) Debt and convertible debt securities that enjoy the four highest
ratings of Standard & Poor's Corporation ("S&P") or Moody's Investors
Service, Inc. ("Moody's"). The Fund may invest up to 20% of its assets
in lower-rated securities (sometimes called junk bonds, see Page 13).
See the Statement of Additional Information for a detailed description
of ratings.
2) Debts of the U.S. government and its agencies, including
mortgage-backed securities (see Page 13) issued by the GNMA, Federal
National Mortgage Association, and Federal Home Loan Mortgage
Corporation or similar government agencies.
3) Obligations of U.S. banks that belong to the Federal Reserve System.
(The Fund may not invest more than 25% of its total assets in these
issues.)
4) Preferred stocks and convertible preferred stocks that enjoy the four
highest ratings of S&P or Moody's.
5) The highest grade commercial paper as rated by S&P or Moody's.
6) Deposits in U.S. banks. (Unless these are liquid, they may not exceed
10% of the Fund's total assets.)
TAX-EXEMPT
This Fund is designed to achieve its objective by investing in a careful
selection of municipal bonds. The two principal classifications of municipal
bonds are "general obligation" and "revenue" bonds.
General obligation bonds are secured by the issuer's pledge of its full
faith and credit, with either limited or unlimited taxing power for the payment
of principal and interest.
Revenue bonds are not supported by the issuer's full taxing authority.
Generally, they are payable only from the revenues of a particular facility, a
class of facilities, or the proceeds of another specific revenue source.
In normal markets, the Fund will invest at least 80%, and possibly all, of
its portfolio in tax- exempt securities issued by or on behalf of the states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies or instrumentalities. The Fund
specifically limits these investments to:
1) Municipal bonds enjoying the four highest ratings of S&P or Moody's.
The Fund may invest up to 25% of its assets in lower-rated securities
(sometimes called junk bonds, see Page 13). See the Statement of
Additional Information for a detailed description of ratings.
2) Municipal notes backed by the federal government.
3) Notes from issuers who already have issued outstanding municipal bonds
enjoying the four highest ratings of S&P or Moody's.
4) Securities of other tax-exempt mutual funds as temporary investments
of cash reserves.
In adverse markets, the Fund may seek to protect its investment position by
investing up to 50% of its portfolio in short-term investments. Interest income
from these short-term investments, when it is distributed by the Fund, may
result in a tax liability to investors. These investments are limited to:
1) Obligations of the U.S. government and its agencies and
instrumentalities. These investments, limited to short maturities as
temporary investments, would not be made routinely nor made to any
significant extent.
2) Commercial paper rated in the highest grade by either S&P or Moody's.
3) Obligations of U.S. banks belonging to the Federal Reserve System.
4) Time or demand deposits in U.S. banks.
5) Municipal bonds or any of the previously mentioned investments subject
to short-term repurchase agreements.
OTHER INVESTMENT PRACTICES
Several other policies and considerations are important to how the Funds'
assets are invested:
MORTGAGE-BACKED SECURITIES. The U.S. Government Securities and Income Funds
may invest in mortgage-backed securities. These may include "pass-through"
instruments or collateralized mortgage obligations. The holder of a pass-through
instrument receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. Collateralized
mortgage obligations differ from traditional pass-through instruments in that
they generally distribute principal and interest from their underlying pool of
mortgages sequentially rather than on a pro rata basis. Generally there are
multiple classes of ownership providing for successively longer expected
maturities.
Mortgage-backed securities, because of the pass-through of prepayments of
principal on the underlying mortgage obligations, almost always have an
effective maturity that is shorter than the stated maturity. The prepayment
characteristics of the underlying mortgages vary, so it is not possible to
accurately predict the life of a particular mortgage-backed security.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
interest rates rise, prepayments can be expected to slow.
When the mortgage obligations are prepaid, the Funds reinvest the prepaid
amounts in securities whose yields reflect interest rates prevailing at the
time. Therefore, the Funds' ability to maintain high-yielding mortgage-backed
securities in their portfolios will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. In addition, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
During periods of rising interest rates, slower prepayments limit the
ability to reinvest in higher yielding securities.
LOWER-RATED SECURITIES. To increase the Income and Tax-Exempt Bond Funds'
yields, the Adviser may invest up to 20% of Income's and 25% of Tax-Exempt's
assets in below investment-grade securities, or in non-rated securities the
Adviser believes to be comparable. These securities have ratings below the top
four assigned by Moody's or S&P and are commonly referred to as junk bonds. The
Funds will not invest in securities rated lower than CCC by S&P or Caa by
Moody's. (See the Statement of Additional Information for a detailed description
of these ratings.)
The market price of lower-rated securities generally fluctuates more than
those of higher-rated securities, which may affect the value of the portfolios.
Although they are investment grade and are not subject to the above investment
limitations, securities rated BBB or Baa reflect speculative characteristics.
Securities that are rated lower than investment grades BBB or Baa should be
considered speculative. They involve greater risk of default or price
fluctuations because of changes in the issuer's creditworthiness.
Lower-rated and comparable non-rated securities tend to offer higher yields
and more limited liquidity than higher-rated securities with the same
maturities. This is because the creditworthiness of the issuers of lower-rated
securities is not as strong as that of other issuers. The market prices of these
securities may fluctuate more than higher-rated securities and may decline
significantly in periods of general economic difficulty. This may happen
following periods of rising interest rates.
MONEY MARKET INSTRUMENTS. The Funds are permitted to invest in money market
instruments for temporary or defensive purposes. The money market investments
permitted include obligations of the U.S. government and its agencies and
instrumentalities; short-term corporate-debt securities; commercial paper,
including bank obligations; certificates of deposit; and repurchase agreements.
The Tax-Exempt Bond Fund will normally make its temporary investments in
tax-exempt money market instruments, but it may purchase taxable securities
during periods of adverse market conditions.
REPURCHASE AGREEMENTS. The Funds may temporarily invest cash reserves in
repurchase agreements. In a repurchase agreement, a fund buys a security at one
price and agrees to sell it back at a higher price. If the seller defaults on
its agreement to repurchase the security, the Fund may suffer a loss 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. This
is done to obtain what is considered to be an advantageous yield or price at the
time of the transaction. The Funds may purchase securities in these transactions
if payment and delivery are scheduled to take place no more than 120 days in the
future.
The payment obligation and interest rates to be received are fixed at the
time the Fund enters into the commitment. Thus, it is possible that the market
value at the time of settlement could be higher or lower than the purchase
price, if the general level of interest rates has changed. No interest will
accrue to the Fund until settlement.
Each Fund is prohibited from entering into when-issued or delayed-delivery
commitments that, in total, exceed 20% of the market value of its total assets
minus total liabilities (except for the obligations created by these
commitments).
FOREIGN SECURITIES. The Income Fund may invest up to 25% of its assets in
U.S. dollar-denominated securities of foreign issuers. Investments in foreign
securities may involve somewhat different risks, including incomplete or
inaccurate financial information, foreign taxes and restrictions, illiquidity,
and fluctuations in currency values.
FOR FURTHER INFORMATION. See the Statement of Additional Information for
further information regarding the investment practices summarized in this
section.
INVESTMENT RESTRICTIONS
Although many of the Adviser's decisions depend on flexibility, there are
certain principles so fundamental to a Fund that they may not be changed without
a vote of a majority of the outstanding shares of that Fund.
In addition to other restrictions listed in the Statement of Additional
Information, each Fund may not:
1) Invest more than 5%* of its total assets in securities of any single
issuer other than U.S. government securities, except that up to 25% of
a Fund's assets may be invested without regard to this 5% limitation.
2) Acquire more than 10%* of the voting securities of any one company.
3) Invest more than 25%* of its assets in any single industry.
4) Borrow money for investment purposes, although it may borrow up to 5%
of its total net assets for emergency, non-investment purposes.
*Percentage at the time the investment is made.
WHO WE ARE
Composite U.S. Government Securities, Inc., Composite Income Fund, Inc.,
and Composite Tax-Exempt Bond Fund, Inc. are open-end, diversified, management
investment companies. They were incorporated under the laws of the state of
Washington on March 5, 1982; October 22, 1975; and September 16, 1976,
respectively.
Each is a "series" company with the ability to add portfolios, called
"funds," subject to approval by its Board of Directors. Each currently consists
of a single fund.
ADVISER. The Funds are managed by Composite Research & Management Co.,
which is referred to as the "Adviser" in this Prospectus.
The Adviser has been in the business of investment management since 1944.
It currently manages more than $2.3 billion for mutual funds and institutional
advisory accounts, including more than $1.4 billion within the Composite Group
of Funds.
The Adviser advises the Funds on investment policies and specific
investments. Subject to supervision by each Fund's Board of Directors, the
Adviser determines which securities are to be bought and sold. These decisions
are based on analyses of the economy, sectors of industry, and specific
institutions. They are compiled from extensive data provided by some of the
country's largest investment firms, in addition to the Adviser's own research.
William G. Papesh is the president of the Funds and of the Adviser. A team
of the Adviser's investment professionals manages the Funds, under supervision
of the Adviser's investment committee. The primary portfolio managers are Brian
L. Placzek, CFA, for Tax-Exempt; and Gary J. Pokrzywinski, CFA, for Income and
U.S. Government.
Mr. Placzek has 12 years of continuous experience in investment and
financial analysis and has been employed by the Adviser since July 1990. Mr.
Pokrzywinski has been employed by the Adviser since July 1992 and also has 12
years of continuous experience in fixed-income and financial market analysis.
DISTRIBUTOR. Murphey Favre, Inc. is the "Distributor" for these Funds. The
Distributor is not a bank. Securities and annuities offered by it are not
deposits nor bank obligations, and they are not guaranteed by a bank nor insured
by the FDIC. The value of investments may fluctuate, return on investments is
not guaranteed, and loss of principal is possible.
TRANSFER AGENT. Murphey Favre Securities Services, Inc., which serves as
the "Transfer Agent," acts as the Funds' shareholder servicing and dividend
disbursing agent.
THE ADVISER, DISTRIBUTOR, AND TRANSFER AGENT, WHOSE ADDRESSES APPEAR ON THE
BACK COVER, ARE AFFILIATES OF WASHINGTON MUTUAL BANK AND WASHINGTON MUTUAL FSB.
THEY ARE ALSO SUBSIDIARIES OF WASHINGTON MUTUAL, INC.
OTHER IMPORTANT INFORMATION. Each Fund offers two classes of shares, as
described in "How to buy shares."
U.S. Government has 1 billion authorized shares of capital stock: 600
million Class A and 400 million Class B.
Income has 50 million authorized shares: 30 million Class A and 20 million
Class B.
Tax-Exempt has 500 million authorized shares of capital stock: 300 million
Class A and 200 million Class B.
The shares do not have preemptive rights, and none has preference as to
conversion, exchange, dividends, retirement, liquidation, redemption, or any
other feature, except as described in "How to buy shares." The Funds do not
normally hold annual shareholder meetings. They may hold shareholder meetings
from time to time on important matters. Shares have equal voting rights on
corporate matters submitted for shareholder approval, except that each class may
vote separately on its distribution plan.
This Prospectus is consolidated to efficiently present information about
the Funds. 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 agreements 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 3
to review the summary on "Annual fund operating expenses." That provides an
overview of much of what is covered in detail here.
ADVISORY FEES
A fee based on a percentage of average daily net assets is paid to the
Adviser for its services. This includes investment management and administrative
services and the Adviser's function as an agent for each Fund when paying a
portion of the fee to the Distributor and Transfer Agent for their services.
Advisory fees are calculated daily and paid monthly.
U.S. Government and Income, advisory fees equal to an annual rate of .625%
of the first $250 million of each Fund's respective average daily net assets
plus .50% on net assets in excess of $250 million. For Tax-Exempt, advisory fees
are equal to an annual rate of .50% of the first $250 million of average daily
net assets plus .40% on net assets in excess of $250 million. Distribution plans
Each Fund's Board of Directors has approved and monitors a distribution
plan that meets the provisions of Rule 12b-1 under the Investment Company Act of
1940. Each plan is intended to benefit shareholders by stimulating interest in
purchasing shares of the Funds and, thus, providing a consistent flow of
investment capital. This allows larger and more diversified holdings, as well as
economies of scale.
Class A shares. The plans authorize each Fund to reimburse the Distributor
for direct costs of marketing, selling and distributing Class A shares of that
Fund, subject to directors' approval. These costs include service fees, sales
literature and prospectuses (other than those provided to current shareholders),
compensation to sales people, and other costs of sales and marketing, including
state business and occupation tax assessed on the reimbursements. The
Distributor pays authorized dealers service fees in consideration for account
maintenance and other shareholder services. The fees are equal to an annual rate
of .25% of the average daily value of shares in the accounts of the dealer or
its customers.
Reimbursements are not to exceed annual limits of .25% of the Fund's
average daily net assets attributable to Class A shares. Unreimbursed expenses
which have not been accrued in the current fiscal year may not be recovered in
future periods.
Class B shares. The plans authorize each Fund to pay the Distributor a
distribution fee at an annual rate of .75% of each Fund's average daily net
assets attributable to Class B shares and a service fee at an annual rate of
.25% of such assets. The distribution fee is designed to permit investors to
purchase Class B shares without a front-end sales charge. At the same time, this
allows compensation to the Distributor in connection with the sale of Class B
shares. The service fee covers account maintenance and other shareholder
services.
The Distributor pays authorized dealers service fees at an annual rate of
.25% of the average daily value of Class B shares in the accounts of the dealer
or its customers.
Because the Distributor's distribution fee for Class B shares is not tied
directly to its expenses, the amount of compensation may be more or less than
its actual expenses. For this reason, the Class B distribution plan may be
characterized by the staff of the Securities and Exchange Commission as being a
"compensation" plan - in contrast to the Class A "reimbursement" plan. The Funds
are not liable for any expenses incurred by the Distributor in excess of the
amount of compensation it receives.
TOTAL EXPENSES
Other operating expenses include fees of directors not employed by the
Adviser, Transfer Agent fees, custodial fees, auditing and legal fees, taxes,
costs of issuing and redeeming shares, publishing of reports to shareholders,
corporate meetings, and other normal costs of running a business.
The Transfer Agent fees are for shareholder servicing and dividend
disbursing services. You may be required to pay a separate fee if you need
special services such as producing and mailing of historical account
transcripts.
THE VALUE OF A SINGLE SHARE
The Funds calculate the value of their shares at the end of each business
day of the New York Stock Exchange or at 1:00 p.m. Pacific time, whichever is
earlier. That figure is determined separately for each class by adding the value
of its securities and other assets - and then subtracting its liabilities. Next,
the resulting figure is divided by the number of shares of the class
outstanding. That provides the net asset value per share, which is commonly
referred to as "NAV."
Security valuations are provided by independent pricing sources approved by
each Fund's Board of Directors. When such valuations are not available, the
Board of Directors will determine how securities are to be priced at fair value.
HOW TO BUY SHARES
Shares are offered at the next NAV that is calculated, plus a sales charge
for Class A shares. This section discusses various options you have in
purchasing shares of the Funds.
You may buy shares of the Funds through Murphey Favre, Inc. (the
Distributor), or through selected securities dealers. The Funds' shares may not
be available in all states. With certain exceptions, the minimum initial
purchase in a Composite fund is $1,000. IRA accounts may make initial purchases
of $500 in any Fund. Subsequent investments should be at least $50. You can
arrange this at the time of application or you can do it later by talking to
your Representative or by calling the Funds.
SYSTEMATIC INVESTMENT PROGRAM
For your convenience, you may arrange to have monthly purchases
automatically deducted from your checking account as part of a systematic
investment program. The minimum initial and monthly investments in this program
are $50.
OTHER INFORMATION
The Funds and the Distributor reserve the right to refuse an order to buy
shares.
In the interest of economy and convenience, physical certificates
representing Fund shares will be issued only upon written request to the Fund or
by request from your Representative.
A COMPARISON OF CLASS A AND CLASS B SHARES
Each Fund offers two classes of shares which represent interests in the same
portfolio of investments:
1) Class A shares are sold to investors who pay a sales charge at the
time of purchase and who pay ongoing 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 higher ongoing distribution
expenses for six years. They also may pay a "contingent deferred sales
charge" if they redeem their shares within four years of purchase.
The net income attributable to Class B shares and the dividends payable to
Class B shares will be lower because of the higher expenses. Likewise, NAVs of
the two classes may be different.
Class A shares and Class B shares may be exchanged only for shares of the
same class of other Composite funds. See "Exchanges for other Composite funds"
on Page 19 in this Prospectus.
Representatives may receive differing compensation for selling or servicing
Class A or Class B shares.
When purchasing shares, investors are encouraged to choose the class of
shares that will be best for them. Factors to consider include the purchase
amount, the length of time shares are expected to be held, and other individual
circumstances.
Then, this question should be asked: "If I buy Class A or Class B shares
for a given length of time, which will give me the lowest cost: Class A's
initial sales charge and distribution expenses, or Class B's contingent deferred
sales charges and its higher distribution expenses?"
To assist investors in making that choice, the table on Page 3 provides
examples of charges that apply to each class of shares. Normally, Class A shares
will be more beneficial to investors who qualify for reduced sales charges, as
described below.
BUYING CLASS A SHARES
The offering price for Class A shares is the next calculated NAV, plus an
initial sales charge as shown in the table below. Investors may be entitled to
reduced or waived sales charges as discussed following the table. The final
column in the table indicates what dealers receive for selling Class A shares.
Reallowed
Sales Charge to Dealers
% of % of net % of
offering amount offering
Purchase of Class A shares price invested price
Less than $50,000 4.00% 4.17% 3.50%
$50,000 to $100,000 3.50 3.59 3.00
$100,000 to $250,000 3.00 3.09 2.50
$250,000 to $500,000 2.00 2.04 1.75
$500,000 to $1,000,000 1.00 1.01 0.75
$1,000,000 to $2,500,000 0.50 0.50 0.40
$2,500,000 and above None None None*
*See "Net Asset Value purchases"
EXAMPLE: An investor considers putting $1,000 into a Fund's Class A shares.
Based on the first column in the above table, the investor would see that 4% of
the $1,000 would pay for a sales charge. The charge would be $40, which is 4.17%
of the net investment of $960, as the next column shows. The dealer selling the
shares would be paid $35 of the $40 which is 3.50% of $1,000, as the last column
shows.
Here is a summary of information on reduced sales charges for which an
investor may be qualified. This summary refers to the data in the above table
that cover purchases of $50,000 or more.
CUMULATIVE DISCOUNT. This allows current purchases to qualify for the
foregoing discounts by including the value of existing Composite Group
investments that were purchased subject to an initial or contingent deferred
sales charge. The discount will be based on the amount of the new purchase plus
the current offering price of shares owned at the time of the purchase. Those
eligible for a cumulative discount include individuals, traditional family
units, or trustees purchasing for single fiduciary accounts.
LETTER OF INTENT. This discount is for purchases made over an extended
period. It provides for a cumulative discount on the same basis as explained in
the previous paragraph if the following conditions are met: Purchases of Class A
shares must be made within a 13-month period that begins no earlier than 90 days
before the submission of a letter of intent from the investor to the Funds. For
more information about this discount, please contact the Fund offices or a
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.
Class A shares may be purchased with no initial sales charge and in any
amount, by officers, directors and employees of the Adviser its affiliates, or
officers, directors, and employees of companies which have entered into selling
agreements with the Distributor. The purchase must be for investment purposes
only and may not be resold other than through redemption by the Funds.
The Funds may also offer their shares at net asset value to investors who
use the sales proceeds from open-end mutual funds outside the Composite Group of
Funds (excluding money market funds); to certain retirement plans; and to
brokers, dealers or registered investment advisers who have entered into
arrangements with the Distributor providing specifically for the shares to be
used in particular investment products made available to their clients for which
they may charge a separate fee.
There is no initial sales charge on Class A purchases of $2.5 million or
more.
The Distributor will pay authorized dealers commissions on certain net
asset value purchases as described in the Statement of Additional Information.
Consult a Representative or see the Statement of Additional Information if
you think you may qualify for any of these purchase plans.
You must notify the Fund whenever a reduced sales charge or net asset value
purchase applies to ensure receiving the sales charge reduction or waiver.
BUYING CLASS B SHARES
Class B shares are offered at the next calculated NAV without an initial
sales charge. The entire amount of the purchase is invested in the Fund
selected. However, Class B shares have higher distribution expenses than Class A
shares for six years. Also, if Class B shares are redeemed within four years of
purchase, a contingent deferred sales charge generally must be paid.
Those charges and fees help make it possible for the Funds to sell Class B
shares without sales charges at the time of purchase.
The proceeds from any contingent deferred sales charges are paid to the
Distributor to defray expenses for providing distribution services for Class B
shares. Examples of such expenses include compensation to sales people and
selected dealers. The Distributor currently pays authorized dealers commissions
of 4.00% of the price of shares sold by them.
CONTINGENT DEFERRED SALES CHARGE. Class B shares redeemed within four years
of purchase are subject to a contingent deferred sales charge according to the
following schedule. The period of ownership for this purpose begins on the first
day of the month in which the order for the investment is received. For example,
an investment made in March 1997 will be eligible for the second year's charge
if redeemed on or after March 1, 1998. Shares purchased through reinvestment of
dividends or capital gain distributions are not subject to a contingent deferred
sales charge.
Year of Contingent
Redemption deferred
After Purchase sales charge
First............................ 4%
Second........................... 3%
Third............................ 2%
Fourth........................... 1%
Fifth............................ 0%
Sixth............................ 0%
Class B shares purchased prior to March 15, 1996, are subject to a
different contingent deferred sales charge schedule which is shown in the
Statement of Additional Information.
The contingent deferred sales charge is calculated by applying the above
percentages to whichever of the following is less:
1) the NAV of the redeemed shares at the time they were purchased; or
2) the NAV of the redeemed shares at the time of redemption.
This means that no contingent deferred sales charge will be charged on any
NAV increases above the initial purchase price. Shares are redeemed in the order
that results in the lowest possible rate being charged. In view of that, they
will be redeemed in this order:
1) Shares from reinvested dividends or capital gain distributions
2) Shares from the earliest purchase
Here is an example:
An investor purchases 100 Class B shares at $10 per share - for a total
cost of $1,000. In the second year after the purchase, the NAV has risen to $12
per share, and the investor has acquired 10 more shares through dividend
reinvestment.
At that time, the investor decides to make the first redemption. The
transaction includes 50 shares at $12 per share - for a total of $600.
The first 10 shares to be redeemed will not be subject to any charge
because of the 10 shares received from dividend reinvestment. See item 1) just
above this example.
As for the other 40 shares, the charge will be applied only to the original
cost of $10 per share. The NAV increase of $2 per share will not be considered.
As a result, $400 of the redemption proceeds (40 x $10) will be charged at a
rate of 3%, which is the second-year rate shown in the table on the preceding
page. The resulting sales charge will be 3% x $400, which will be $12.
The contingent deferred sales charge may be waived for redemptions of Class B
shares under these circumstances:
1) Following the death or disability of a shareholder, as defined in
Section 72(m)(7) of the Internal Revenue Code
2) In connection with certain distributions from an IRA or other
retirement plan, as described in the Statement of Additional
Information
3) According to the Fund's systematic withdrawal plan - but limited to
12% annually of the value of the Fund account at the time the plan is
established
4) As a result of the right of the Fund to liquidate a shareholder's
account as described under "How to sell shares"
REINVESTMENT. You may reinvest in Class B shares within 120 days of
redemption and receive reimbursement credited to your account for any contingent
deferred sales charge you previously paid. The reinvested shares will be subject
to the holding period of the shares which were originally purchased. This
holding period determines any contingent deferred sales charges on subsequent
redemptions of the reinvested shares or their conversion to Class A shares as
described in the following section. Shares purchased in accounts that have
systematic investment programs or systematic withdrawal plans are not eligible
for this privilege.
You are responsible for notifying the Fund whenever you are entitled to a
contingent deferred sales charge waiver or reimbursement.
CLASS B CONVERSION FEATURE. Class B shares that remain outstanding for six
years will convert to Class A shares of the same Fund. The basis for this will
be the relative NAVs of the two classes at the time of conversion.
Some investors buy shares at several different times and reinvest dividends
and capital gains over an extended period. Each time a conversion takes place, a
pro-rata portion of Class B shares acquired through the reinvestment of
dividends and capital gain distributions also will convert to Class A shares.
The conversion of Class B shares to Class A shares is subject to the
continuing availability of a favorable ruling from the Internal Revenue Service
or an opinion of legal counsel that such conversion will not be subject to
federal income taxes. There cannot be any assurance that a ruling or opinion
will be available. If they should not be available, the conversion of Class B
shares to Class A shares would not occur and those shares would continue to be
subject to higher expenses than Class A shares for an indefinite period.
DISTRIBUTION OF INCOME AND CAPITAL GAINS
The Funds distribute dividends from net investment income which is
essentially interest and dividends from securities held, minus expenses. They
also make capital gain distributions if realized gains from the sale of
securities exceed realized losses. Dividends are declared daily and paid
monthly, when available. Dividends, if declared, begin accruing on the day
following payment for purchase. Any capital gain distributions normally will be
paid in December.
You have four choices regarding what you want to do with dividends and
capital gain distributions. You can make your choice at the time of your initial
purchase or by contacting the Funds' offices or your Representative. The options
include:
AUTOMATIC REINVESTMENT. Most shareholders elect this procedure. It is
automatically effective unless you choose another option. All dividends and
capital gain distributions are reinvested into additional shares of the Fund.
Automatic reinvestments generally provide the most capital growth.
REINVEST DIVIDENDS IN ANOTHER COMPOSITE FUND. Income dividends may be
automatically invested in the same class of shares of another Composite fund
provided shares of that Fund are available in your state of residence.
CASH PAYMENT OF INCOME AND REINVESTMENT OF ANY CAPITAL GAINS. With this
option, dividends are deposited to your pre-authorized bank account or paid by
check. Any capital gain distributions are reinvested in additional shares of the
Fund.
CASH PAYMENT OF ALL DISTRIBUTIONS. Dividends and capital gain distributions
are deposited to your pre-authorized bank account or paid by check.
OTHER INFORMATION. Reinvestments of income dividends are made at the
closing NAV on the last business day of each month. Reinvestments of capital
gain distributions are made at the closing NAV on the day distributions are
deducted.
If you've chosen to receive dividends or capital gain distributions in cash
and the U.S. Postal Service cannot deliver your check, the Funds reserve the
right to reinvest your check at the then-current NAV and to automatically
reinvest subsequent dividends and capital gain distributions in your account.
The Funds may also automatically reinvest dividends or distributions of $10 or
less.
INCOME TAXES ON DIVIDENDS AND CAPITAL GAINS
You are responsible for any federal income tax (and state and local income
taxes, if applicable) on dividends and capital gain distributions. This is true
whether they are paid in cash or reinvested in additional shares. You will be
advised annually as to the tax status of these dividends and distributions.
Generally, dividends paid by the Funds from interest, dividends, or net
short-term capital gains will be taxed as ordinary income. Distributions of net
long-term capital gains are taxable as long-term capital gains, regardless of
how long you have held your shares. If your shares are in an IRA or another
qualified retirement plan, you will not have to pay tax on the reinvested amount
until funds are withdrawn.
Tax-exempt interest earned by the Tax-Exempt Bond Fund retains its
tax-advantaged status when it is distributed to investors. However, a portion of
the interest may be subject to federal alternative minimum tax and/or state and
local taxes. You should consult a tax preparer who is familiar with local law.
Interest income earned by Tax-Exempt from any investments that are not
tax-exempt will be taxable to shareholders, as will income from short-term and
long-term capital gains from those investments.
Each Fund complies with provisions of the Internal Revenue Code applicable
to regulated investment companies and distributes its taxable income
accordingly. Because of this, the Funds do not anticipate being subject to
federal income or excise taxes on the earnings they distribute to shareholders.
Because of tax law requirements, you must provide the Funds an accurate and
certified Social Security number or taxpayer identification number to avoid the
31% "back-up" withholding tax.
EXCHANGES FOR OTHER COMPOSITE FUNDS
You may exchange shares of any Composite fund for the same class of shares
of any other Composite fund. In addition to the Funds described in this
Prospectus, there are Composite funds that invest in other types of securities,
including: stocks, a balance between stocks and bonds, and money market
instruments.
Contact your Representative or the Fund offices to request a prospectus for
the Composite funds that interest you.
Exchanges are made at the prevailing NAV of the shares being exchanged. No
additional sales charge will be incurred when exchanging shares from a fund
which imposes an initial or contingent deferred sales charge. Any contingent
deferred sales charge on the subsequent sale of Class B shares acquired by
exchange will be based on the schedule applicable to the shares which were given
in exchange. Shares exchanged from Composite Cash Management Company will be
subject to the acquired fund's sales charge unless the shares given in exchange
were previously exchanged from a Composite fund that imposes an initial or
contingent deferred sales charge.
All exchanges are subject to the minimum investment requirements of the
Composite fund being acquired and to its availability for sale in your state of
residence. You may arrange for automatic monthly exchanges. The Funds reserve
the right to refuse any order for the purchase of shares, including those by
exchange. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to a Fund and, consequently, may be
disallowed.
HOW TO SELL SHARES
You may redeem shares at any time. The price paid per share will be the
next NAV that is calculated. The NAVs are determined at the end of each business
day of the New York Stock Exchange or at 1:00 p.m. Pacific time, whichever is
earlier. Contingent deferred sales charges, if applicable, will be deducted upon
redemption of Class B shares.
TELEPHONE. You may authorize telephone transactions on your Fund account
application or by contacting the Fund offices or your Representative.
Provided you have pre-authorized these transactions, you may redeem or
exchange shares by telephoning 1-800-543-8072. You may also request these
transactions through your Representative. Proceeds may be directed to a
pre-authorized bank or brokerage account or to the address of record for the
account.
It may be difficult to reach the Fund offices by telephone during periods
of unusual economic or market activity. Please be persistent if this occurs. The
Transfer Agent is committed to extending its availability beyond regular 7 a.m.
to 6 p.m. (Pacific time) customer service hours during such periods. Calls
requesting telephone redemption or exchanges during periods of unusual market
activity that are received after business hours will be recorded and returned in
the order they were received.
For protection, all telephone instructions are verified. This is done by
requesting personal shareholder information, providing written confirmations of
each telephone transaction, and recording telephone instructions. The Transfer
Agent may require a Letter of Authorization, other documents, or authorization
from your Representative to initiate telephone redemptions of $25,000 or more
that are not directed to your pre-authorized bank or brokerage account. If
reasonable procedures are used, neither the Transfer Agent nor the Funds will be
liable for following telephone instructions which they reasonably believe to be
genuine. Shareholders assume the risk of any losses in such cases. However, the
Transfer Agent or the Funds may be liable for any losses because of unauthorized
or fraudulent telephone instructions if reasonable procedures are not followed.
WRITTEN REQUEST. Redemptions also may be requested by writing the Fund
offices. Written requests may require a signature guarantee, as discussed below,
and the return of any outstanding stock certificates. Changes in pre-authorized
redemption instructions or your account registration also require signature
guarantees. For your protection, the signature(s) must be guaranteed by an
officer of a U.S. bank belonging to the Federal Reserve System, a member of the
Stock Transfer Association Medallion Program, or a member of the National
Association of Securities Dealers.
PROMPT PAYMENT. Payment normally will be made on the next business day
after the transaction, but no later than seven days after unless you recently
purchased Fund shares by check. In that case, redemption proceeds may be delayed
until the Transfer Agent is reasonably satisfied that the check has been
collected. Generally this occurs within 14 days. Redemption proceeds will be
sent by check or Automated Clearing House transfer to your bank account without
charge. Wire redemption proceeds may be subject to a $10 fee. The receiving bank
also may charge a fee.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders may choose to receive specific
cash withdrawals on a periodic basis. A $5,000 minimum balance is required to
establish a systematic withdrawal plan in a Fund account. Shares of the Fund
will be redeemed to provide the requested payment. Naturally, withdrawals that
continually exceed dividend income and capital gains will eventually exhaust the
account.
Class B shareholders may use a systematic withdrawal plan to redeem up to
12% annually of the value of the Fund account, measured at the time the plan is
established, without incurring a contingent deferred sales charge.
OTHER CONSIDERATIONS. It is costly to maintain small accounts. Because of
this, an account may be closed after 90 days advance, written notice if the
total account value falls below $700 ($500 in an IRA account) when any transfer
or redemption is made. Shares will be redeemed at the next calculated NAV on the
day the account is closed. To prevent an account closure, investors may 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. Retirement plan
contributions are tax deductible in some cases, and earnings compound on a
tax-deferred basis until withdrawn.
From time to time, Murphey Favre or its affiliates may offer "IRA bonuses"
on IRA rollovers and transfers to its IRA accounts maintained by them. The Funds
do not pay any portion of these bonuses. The products purchased through these
rollovers and transfers may include the Composite Group of Funds. This payment
may be considered a reduction in the Distributor's sales charge.
Information about IRAs and other qualified retirement plans is available
from the Fund offices or your Representative.
PERFORMANCE INFORMATION
While past results are not necessarily indicative of future performance,
history provides a basis for comparisons of mutual fund investment strategies
and their execution. Among the factors that influence the Bond Funds'
performance are the type and quality of investments, operating expenses, and the
net amount of new money coming into the Funds.
Pertinent information follows:
YIELD. The Funds calculate their current "yields" by dividing annualized
net investment income per share for a stated 30-day period by the maximum
offering price on the last day of the period. The result then is shown as a
percentage of the total investment.
Yields are calculated separately for each class of shares. Because yield
accounting methods differ from the methods used for other accounting purposes,
the Funds' yields may not equal the income paid to your account or the income
reported in the Funds' financial statements.
DISTRIBUTION RATE. The Funds' "distribution rates" are calculated by
dividing the actual ordinary income dividends per share (annualized) over a
one-month or 12-month period by the maximum offering price at the end of the
period.
TAXABLE-EQUIVALENT YIELD. Because the Tax-Exempt Bond Fund is designed to
shelter shareholders' income from federal income taxes, it may be of interest to
know about "taxable-equivalent yield." This will show you the yield you would
need to receive from a taxable investment to reach the same earnings level as
this Fund. Here is how to do that: 1) Subtract your income tax rate from 1.0; 2)
Divide the Tax-Exempt Fund's stated yield by your answer to the first step.
For example: To calculate a taxable-equivalent yield at a 36% tax rate,
subtract .36 from 1.0, and divide the taxable fund's yield by the resulting .64.
AVERAGE ANNUAL TOTAL RETURN. "Average annual total return" shows the change
in value of an investment in a Fund over a stated period as a steady compound
rate of return. The calculation assumes reinvestment of dividends and capital
gain distributions and payment of the maximum initial sales charge for Class A
shares or the applicable contingent deferred sales charge for Class B shares.
NON-STANDARDIZED TOTAL RETURNS. These "non-standardized total returns"
differ from average annual total returns for the following reasons: First, they
may relate to non-standard periods; second, they may represent cumulative
(rather than average) total return and sales charges may not be deducted.
OTHER INFORMATION. Each Fund will include performance data for both Class A
and B shares in any advertisement or promotional material presenting performance
data of that Fund.
Management has included a discussion of the Funds' performance in their
annual report, which is available upon request and without charge by calling the
Fund offices.
The Funds may quote performance results from recognized services and
publications that monitor the performance of mutual funds. Included, too, may be
comparisons of their performance with various published, historical indices.
THE FUNDS' PERFORMANCE IS NOT FIXED NOR IS THE PRINCIPAL GUARANTEED. ASSET
VALUES FLUCTUATE DAILY, THEREFORE 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 receive statements
at least quarterly. These statements show account transactions, the total number
of shares owned, and any dividends or distributions paid. Shareholders also
receive written confirmation soon after each transaction which is not a dividend
reinvestment, systematic investment program purchase, or systematic withdrawal
plan redemption.
WE'RE HERE TO HELP YOU
Any inquiries you may have about these Funds or your account should be
directed to the Funds at the address or telephone number on the front page and
back cover of this Prospectus. We will be glad to answer your questions.
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 1400
Seattle, WA 98101-3015
DISTRIBUTOR
Murphey Favre, Inc.
1201 Third Avenue, Suite 780
Seattle, WA 98101-3015
CUSTODIAN
Investors Fiduciary Trust Company
127 W. 10th Street
Kansas City, MO 64105-1716
INDEPENDENT PUBLIC ACCOUNTANTS
LeMaster & Daniels pllc
601 W. Riverside Avenue, Suite 800
Spokane, WA 99201-0614
COUNSEL
Paine, Hamblen, Coffin, Brooke & Miller LLP
717 W. Sprague Avenue, Suite 1200
Spokane, WA 99204-0464
BOARD OF DIRECTORS
Wayne L. Attwood, M.D.
Kristianne Blake
Anne V. Farrell
Michael K. Murphy
William G. Papesh
Daniel L Pavelich
Jay Rockey
Richard C. Yancey
COMPOSITE GROUP
BOND
FUNDS
COMPOSITE
U.S. GOVERNMENT
SECURITIES, INC.
COMPOSITE
INCOME FUND, INC.
COMPOSITE
TAX-EXEMPT BOND
FUND, INC.
PROSPECTUS
APRIL 30,
1997
<PAGE>
STATEMENT OF
ADDITIONAL
INFORMATION
April 30, 1997
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 APRIL 30, 1997, WHICH CAN BE
OBTAINED WITHOUT CHARGE BY CONTACTING THE FUNDS AT THE ABOVE ADDRESS.
TABLE OF CONTENTS
Page Page
The Funds and Their Management 2-8 Investment Practices 18-23
Distribution Services 8-10 Investment Restrictions 23-24
How Shares Are Valued 10 Performance Information 25-28
How Shares Can Be Purchased 10-12 Brokerage Allocations &
Redemption of Shares 12-13 Portfolio Transactions 28-30
Exchange Privilege 13-14 General Information 30-31
Services Provided by the Funds 14-15 Financial Statements and
Tax-Sheltered Retirement Plans 15-16 Reports 31
Dividends, Capital Gain Distributions Appendix A 32
and Taxes 16-17 Appendix B 33-35
THE FUNDS AND THEIR MANAGEMENT
THE INVESTMENT ADVISER
As discussed under "Who We Are" in the prospectus, the Funds are managed and
investment decisions are made under the supervision of Composite Research &
Management Co. (the "Adviser"). Decisions to buy, sell, or hold a particular
security are made by an investment team of the Adviser, approved by an
investment committee of the Adviser, subject to the control and final direction
of each Fund's Board of Directors.
Composite Research & Management Co. is Adviser for the eight investment
companies (currently 11 separate portfolios) in the "Composite Group," namely:
Composite Bond & Stock Fund, Inc.; Composite Equity Series, Inc.; Composite
Income Fund, Inc.; Composite Tax-Exempt Bond Fund, Inc.; Composite Cash
Management Company; Composite U.S. Government Securities, Inc.; Composite
Northwest Fund, Inc.; and Composite Deferred Series, Inc. The Adviser also
provides investment advice to institutional clients.
INVESTMENT MANAGEMENT SERVICES
Advisory fees and services performed by the Adviser are discussed under "The
Cost of Good Management" in the prospectus. The investment management agreements
(the "Agreements") between each Fund and the Adviser require the Adviser to
furnish suitable office space, research, statistical and investment management
services to each Fund. They were approved by shareholders and will continue in
effect provided each is 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
voting on such approval; or by vote of a majority of the outstanding shares of
each Fund. The Agreements can be terminated by either party on sixty (60) days'
notice, without penalty, and each provides for automatic termination upon its
assignment.
Under the provisions of the Investment Company Act of 1940 and as used elsewhere
in the prospectus and this statement of additional information, the phrase "vote
of the majority of the outstanding shares of the Fund" means the vote at any
meeting of shareholders of (a) 67% or more of the shares present at such
meeting, if the shareholders of more than 50% of the outstanding shares are
present or represented by proxy; or (b) more than 50% of the outstanding shares,
whichever is less.
U.S. Government Securities and Income each pay a monthly fee to the Adviser for
its services equal to .625% per annum computed on the average daily net assets
of each Fund. For each of these two Funds, the fee will decrease to .50% on
average daily net assets in excess of $250 million. For Tax-Exempt, the Adviser
receives a monthly fee for its services equal to .50% per annum computed on the
average daily net assets 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 $984,485, $1,156,052, and $1,417,336,
for the fiscal years ended December 31, 1996, 1995, and 1994, respectively.
Income paid management fees of $599,008, $598,377, and $612,811, for the fiscal
years ended December 31, 1996, 1995, and 1994, respectively.
Tax-Exempt paid management fees of $1,065,379, $1,120,096, and $1,180,145, for
the fiscal years ended December 31, 1996, 1995, and 1994, respectively.
The Adviser has agreed that should the expenses of U.S. Government Securities
(excluding taxes, interest and any portfolio brokerage and the .75% Class B
distribution fee) exceed in any fiscal year 1.5% of the average net assets of
the Fund up to $30 million and 1% of average net assets over $30 million, it
will reimburse the Fund for such excess. There were no reimbursements by the
Adviser under the expense limitations of the Fund during 1996, 1995, and 1994.
The Adviser has agreed that should the expenses of Income or Tax-Exempt
(excluding taxes, interest and any portfolio brokerage and the .75% Class B
distribution fee) exceed in any fiscal year 1.5% of the average net assets of
the Fund up to $30 million; 1% of average net assets between $30 million and
$130 million; and .75% of such net assets over $130 million, it will reimburse
the respective Fund for such excess. There were no reimbursements by the Adviser
under the expense limitations of either Fund during 1996, 1995, and 1994.
The Agreements provide that the advisory fees paid to the Adviser by each Fund
will be based solely on the individual assets of that Fund. Under the terms of
the Agreements, each Fund is required to pay fees of directors not employed by
the Adviser or its affiliates, custodial expenses, brokerage fees, taxes,
auditing and legal expenses, costs of issue, transfer, registration or
redemption of shares for sale, costs relating to disbursement of dividends,
corporate meetings, corporate reports, and the maintenance of each Fund's
corporate existence.
Investment decisions for each Fund are made independently of those for other
funds in the Composite Group. However, the Adviser may determine that the same
security is suitable for more than one of the funds. If more than one of the
funds is simultaneously engaged in the purchase or sale of the same security,
the transactions are allocated as to price and amount in accordance with a
formula considered to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Funds are concerned. In other cases, however, it is
believed that the ability to participate in volume transactions may provide
better executions for each Fund. It is the opinion of each Fund's Board of
Directors that these advantages, when combined with the personnel and facilities
of the Adviser's organization, outweigh possible disadvantages which may exist
from exposure to simultaneous transactions.
The Funds have adopted a code of ethics which is intended to prevent access
persons from conducting personal securities transactions which interfere with
Fund portfolio transactions or otherwise take unfair advantage of their
relationship to the Funds. In general, the personal securities transactions of
individuals with access to information regarding Fund portfolio transactions
must be pre-cleared by the Adviser's Compliance Officer and must not occur when
similar transactions are contemplated by a Fund.
GLASS-STEAGALL
The Glass-Steagall Act, among other things, generally prohibits member banks of
the Federal Reserve System from engaging to any extent in the business of
issuing, underwriting, selling or distributing securities and generally
prohibits management interlocks and affiliations between member banks and
companies engaged in certain activities. In a Statement of Policy dated
September 1, 1982, the Federal Deposit Insurance Corporation concluded that the
investment restrictions of the Glass-Steagall Act do not apply to banks or their
affiliates if the banks are not members of the Federal Reserve System.
Washington Mutual Bank is not a member bank. The Adviser has advised the Funds
that, in its view, the Glass-Steagall Act does not prohibit the activities of
the Adviser and that it may perform the services for the Funds contemplated by
the Investment Management Agreements without violation of the Glass-Steagall Act
or other applicable banking laws or regulations.
DIRECTORS AND OFFICERS OF EACH FUND
Each Fund's Board of Directors is elected by its shareholders. Interim vacancies
may be filled by the current directors so long as at least two-thirds were
previously elected by shareholders. The Boards have responsibility for the
overall management of the Funds, including general supervision and review of
their investment activities. The directors, in turn, elect the officers of the
Funds who are responsible for administering the day-to-day operations. 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
2931 S. Howard
Spokane, Washington 99203
Dr. Attwood is a retired doctor of internal medicine and gastroenterology in
Spokane, Washington.
KRISTIANNE BLAKE
Director
705 W. 7th, Suite D
Spokane, Washington 99204
Mrs. Blake is president of Kristianne Gates Blake, PS, an accounting services
firm specializing in personal financial planning and tax planning.
*ANNE V. FARRELL
Director
425 Pike Street, Suite 510
Seattle, Washington 98101
Mrs. Farrell is president and CEO of The Seattle Foundation (a charitable
foundation). In addition, she serves as a director of Washington Mutual, Inc.
*MICHAEL K. MURPHY
Director
PO Box 3366
Spokane, Washington 99220-3366
Mr. Murphy is Chairman and CEO of CPM Development Corporation (a holding company
which includes Central Pre-Mix Concrete Company). In addition, he serves as a
director of Washington Mutual, Inc.
*WILLIAM G. PAPESH
President and Director
Mr. Papesh is president and a director of the Adviser and Transfer Agent, and an
executive vice president and a director of the Distributor.
DANIEL L. PAVELICH
Director
Two Prudential Plaza
180 North Stetson Avenue, Suite 4300
Chicago, Illinois 60601
Mr. Pavelich is Chairman and CEO of BDO Seidman, a leading national accounting
and consulting firm.
JAY ROCKEY
Director
2121 - Fifth Avenue
Seattle, Washington 98121
Mr. Rockey is Chairman and CEO of The Rockey Company (a regional public
relations firm).
RICHARD C. YANCEY
Director
535 Madison Avenue
New York, New York 10022
Mr. Yancey is senior advisor to Dillon, Read & Co., Inc. (a registered
broker-dealer and investment banking firm), New York, New York.
*These directors are "interested persons" of the Funds as that term is defined
in the Investment Company Act of 1940 because they are affiliated persons of the
Funds, their Adviser, or Distributor.
GENE G. BRANSON
Vice President
Suite 780
1201 Third Avenue
Seattle, Washington 98101
Mr. Branson is a senior vice president and director of the Distributor and
Transfer Agent and a vice president and director of the Adviser.
MONTE D. CALVIN, CPA
Vice President and Treasurer
Mr. Calvin is an executive vice president of the Transfer Agent and serves as
the chief financial officer of the Funds.
KERRY K. KILLINGER
Executive Vice President
Suite 1501
1201 Third Avenue
Seattle, Washington 98101
Mr. Killinger is president, chairman of the board, and chief executive officer
of Washington Mutual, Inc. and a director of the Adviser, Distributor, and
Transfer Agent.
JEFFREY L. LUNZER, CPA
Assistant Treasurer
Mr. Lunzer is a vice president of the Transfer Agent.
CONNIE M. LYONS
Assistant Secretary
Ms. Lyons is an employee of the Transfer Agent.
DOUGLAS D. SPRINGER
Vice President
Suite 780
1201 Third Avenue
Seattle, Washington 98101
Mr. Springer is president and a director of the Distributor and a director of
the Adviser and the Transfer Agent.
JOHN T. WEST, CPA
Secretary
Mr. West is a vice president of the Transfer Agent.
The Funds paid no remuneration to any of its officers, including Mr. Papesh and
Mr. Sahlin, during the year ended December 31, 1996. The Funds and other Funds
within the Composite Group paid directors' fees, during the year ended December
31, 1996, in the amounts indicated below.
U.S. GOVERNMENT TOTAL
DIRECTOR SECURITIES INCOME TAX-EXEMPT COMPLEX (1)
- --------------------- --------------- -------- ---------- ------------
Wayne L. Attwood, MD $1,265 $1,265 $1,265 $15,000
Kristianne Blake $1,265 $1,265 $1,265 $15,000
Edwin J. McWilliams $1,265 $1,265 $1,265 $15,000
Jay Rockey (2) $1,265 $1,265 $1,265 $15,000
Richard C. Yancey $1,178 $1,178 $1,178 $14,000
(1) Each director serves in the same capacity with each Fund within the
Composite Group (eight companies) comprising 11 individual investment
portfolios.
(2) Mr. Rockey is Chairman and CEO of The Rockey Company, a public relations
firm which has received revenue from the Funds and Washington Mutual, Inc.,
parent company of the Adviser and Distributor, during the 1996 fiscal year.
As of March 31, 1997, officers, directors and their immediate families as a
group owned of record and beneficially less than 1% of the outstanding each
Fund.
Kristianne Blake, *Anne V. Farrell, *Michael K. Murphy, and Daniel L. Pavelich
serve as members of the Boards' audit committee. The committee meets
periodically with each Fund's independent accountants and officers to review
accounting principles used by each Fund and the adequacy of the Fund's internal
controls.
The investment committee performs interim functions for the Board of Directors
of each Fund including dividend declaration and portfolio pricing matters.
Members are *Anne V. Farrell, *Michael K. Murphy, and Richard C. Yancey.
The valuation committee is comprised of any two directors or officers of the
Funds and one or more portfolio managers, as designated by the Funds' chairman,
president, or vice president/treasurer of the Funds. The committee is called
upon to value any security held by the Funds whenever the security cannot
otherwise be valued under the Funds' guidelines for valuation.
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 Wayne L. Attwood, MD, Daniel L.
Pavelich, and Jay Rockey.
The Boards' distribution committee is responsible for reviewing distribution
activities and 12b-1 expenditures to determine that there is a reasonable
likelihood the 12b-1 plan will benefit each Fund and its shareholders. The
committee meets at least annually and is responsible for making recommendations
to the Boards regarding renewal or changes to the distribution plans. Committee
members are Wayne L. Attwood, MD, Kristianne Blake, Jay Rockey, and Richard C.
Yancey.
*These directors are considered "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 reimburse Murphey Favre, Inc. (the
"Distributor"), for Class A distribution expenses, including the cost of
printing and distributing prospectuses (to other than current shareholders),
statements of additional information and other promotional and sales literature,
compensation to sales personnel for their services, and reimbursement to the
Distributor for the direct and indirect cost of furnishing services of its
personnel to assist in the entire distribution process but excluding general and
administrative expenses.
The 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 $218,510, $133,600, and $315,034, respectively, for distribution
expenses incurred on behalf of Class A shares during the year ended December 31,
1996. Of this amount, $156,811, $91,335, and $219,963 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 $61,699, $42,305, and $95,071, respectively, was paid
for other distribution related expenses.
During the fiscal years 1995 and 1994, U.S. Government Securities reimbursed the
Distributor $343,633 and $399,592, respectively; Income reimbursed the
Distributor $168,531 and $189,136, respectively; and Tax-Exempt reimbursed the
Distributor $432,854 and $449,602, respectively, for distribution expenses
related to Class A shares.
Under the Plans, each Fund compensates the Distributor with a distribution fee
at an annual rate of .75% of the Fund's average daily net assets attributable to
Class B shares and a service fee at an annual rate of .25% of such assets.
During the fiscal years ended December 31, 1996, and 1995, respectively, U.S.
Government compensated the Distributor in the amounts of $26,484 and $15,425,
respectively; Income compensated the Distributor in the amounts of $57,828 and
$32,833, respectively; and Tax-Exempt compensated the Distributor $40,939 and
$18,879, respectively, for the sale of Class B shares.
The Distributor pays dealers an amount equal to an annual rate of .25% of total
net assets of all accounts, of either class, serviced by their representatives.
Under the Plans, each Fund will report at least quarterly to its Board of
Directors the amounts and purposes of all distribution expense payments. During
the continuance of the Plan, as required by Rule 12b-1, the selection and
nomination of the independent directors of each Fund will be at the discretion
of the independent directors then in office.
Each Plan has been approved unanimously by the directors of each Fund including
a majority of the independent directors who have no direct or indirect interest
in the Plan, and by the Distributor. Each Plan will remain in effect for one
year, may be terminated at any time by a vote of a majority of the independent
directors or by a vote of a majority of the outstanding voting securities of the
applicable Fund, and may be renewed from year to year thereafter, only if
approved by a vote of independent directors. In approving the Plan and
submitting it to shareholders, directors of each Fund determined, in the
exercise of their business judgment and in light of their fiduciary duties as
directors, that there is a reasonable likelihood that each Plan will benefit its
respective Fund and its shareholders. All material amendments to each Plan must
be approved by a vote of each Fund's Board of Directors including independent
directors and by shareholders. The Plans will be renewed only if directors make
a similar determination for each subsequent year of the Plans.
DISTRIBUTOR
The Distributor purchases shares of each Fund's capital stock in a continuous
offering to fill orders placed with it by investors and investment dealers. It
purchases shares at net asset value and resells shares at the offering price in
accordance with terms of the Distribution Contracts with each Fund. The offering
price may include a sales charge as discussed in the Prospectus under "How to
buy shares." Each Fund receives the entire net asset value of all of its shares
sold. The Distributor or designated dealer retains their appropriate portion of
the initial sales charge. The Distributor pays sales commissions to dealers from
its own resources for Class B sales and retains contingent deferred sales charge
payments. The Distributor acts in a similar capacity for all other funds in the
Composite Group.
The Distributor may compensate its sales people or selected dealers for shares
sold without a sales charge according to various Class A "Net Asset Value
Purchase" provisions. The compensation is based on a percentage of the net asset
value of the shares sold.
During the 1996, 1995, and 1994 fiscal years, the Distributor received $89,694,
$150,970, and $336,055, respectively, for the sale of U.S. Government Securities
Class A shares; $156,410, $209,703, and $340,052, respectively, for the sale of
Income Class A shares; and $282,768, $341,454, and $552,555, respectively, for
the sale of Tax-Exempt Class A shares.
The Distributor has not received any earnings or profits from the redemption of
Class A shares. During the fiscal year ended December 31, 1996, the Distributor
received contingent deferred sales charge payments of $3,051, $7,284, and
$10,102 upon redemption of Class B shares of U.S. Government, Income, and
Tax-Exempt, respectively. No brokerage fees were paid by the Funds to the
Distributor during the year, but the Distributor may act as a broker on
portfolio purchases and sales should it become a member of a securities
exchange.
The Funds bear the cost of registering their shares with federal and state
securities commissions and printing prospectuses and statements of additional
information used for its shareholders. The Distributor pays for information
intended for potential shareholders but may be reimbursed by the Funds under the
Distribution Plan for such expenses applicable to Class A shares.
TRANSFER AGENT
Murphey Favre Securities Services, Inc. (the "Transfer Agent") furnishes
necessary personnel and other transfer agent services required by each Fund. The
Shareholders Service Contract for each Fund was originally approved by
shareholders.
During the 1996, 1995, and 1994 fiscal years, U.S. Government Securities paid
$146,145, $165,595, and $175,549, respectively, for these services; Income paid
$114,258, $114,938, and $104,897, respectively, and Tax-Exempt paid $102,716,
$107,114, and $102,778, respectively.
At the date of this Statement of Additional Information, the monthly shareholder
servicing fee is $1.35 per Class A account and $1.45 per Class B account in each
Fund. All requests for transfer of shares should be directed to the Funds or to
the Transfer Agent.
HOW SHARES ARE VALUED
Investment securities are stated on the basis of valuations provided by an
independent pricing service, approved by each Fund's Board of Directors, which
uses information with respect to valuations based upon transactions of a
security, quotations from dealers, market transactions in comparable securities,
and various relationships between securities in determining value. Investment
securities not currently quoted as described above will be priced at fair market
value as determined in good faith in a manner prescribed by the Boards of
Directors.
HOW SHARES CAN BE PURCHASED
Information concerning the purchase of shares is discussed under "How to Buy
Shares" in the prospectus. Shares of each class of each Fund are 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 in Spokane, plus, in the case of
Class A shares, an initial sales charge which is a percentage of the public
offering price and varies as shown in the prospectus. The Distributor or
designated dealer retains their appropriate portion of the initial sales charge.
Class B shares are sold without an initial sales charge but are subject to
higher ongoing distribution expenses and may be subject to a contingent deferred
sales charge of 3% if redeemed within four years of purchase. The current
contingent deferred sales charge schedule is shown in the prospectus. Class B
shares purchased prior to March 15, 1996, are subject to contingent deferred
sales charges of 3% if redeemed the first or second year after purchase, 2% in
the third or fourth year, 1% in the fifth year, and 0% in year six. (See
Appendix A for a specimen price make-up sheet.)
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
a systematic investment program where the initial and additional monthly
investments must be at least $50). Investments made by an agent or fiduciary
(such as a bank trust department, investment adviser, broker, or employee
benefit or retirement plan) pursuant to a periodic investment plan may have the
minimum purchase requirements on initial and subsequent investments waived.
Shareholders who have redeemed Class A shares initially subject to a sales
charge may reinvest their redemption proceeds in Class A shares of any Composite
Group fund at net asset value provided that reinvestment is effected within 120
days of the redemption. Contingent deferred sales charges assessed may be
reimbursed as they relate to the reinvestment of redemption proceeds within 120
days. The shareholder is responsible for notifying the Transfer Agent of such
reinvestments. If a loss is realized on the redemption of Fund shares, the
reinvestment may be subject to the "wash sale" rule, resulting in a disallowance
of such loss for federal income tax purposes.
Class A shares may be sold at net asset value and in any amount to current and
retired directors, officers and employees of Washington Mutual, Inc., its
affiliates (including the Adviser, the Distributor, and the Transfer Agent, and
their children, step-children, grandchildren, step-grandchildren and parents),
as well as to any trust, pension, profit-sharing or other benefit plan for such
persons. The foregoing privilege is also extended to directors, officers, and
employees of other companies which enter into selling arrangements with the
Distributor. Such shares are sold for investment purposes and on the condition
that they will not be resold except through redemption by the Fund.
Each Fund may also issue Class A shares at net asset value in connection with
the acquisition of assets, merger or consolidation with, another investment
company, or to shareholders in connection with reinvestment of income dividends
and capital gain distributions. Qualified employee benefit plans (including SEPs
and SIMPLEs) which have more than 10 participants or which have more than
$25,000 invested in those Composite funds offered with an initial or contingent
deferred sales charge are also entitled to buy Class A shares without a sales
charge. Individual retirement accounts that are not part of an employee benefit
plan are ineligible for this privilege. In addition, shareholders of mutual
funds (other than money market funds), may redeem those shares and use their
sale proceeds to purchase Class A shares of a Composite fund at net asset value
provided the proceeds are reinvested within 90 days of such sale and proof of
the sale is provided.
The Distributor may enter into arrangements with brokers, dealers or registered
investment advisers to sell Class A shares at net asset value for use in
particular investment products made available to their clients. The other
parties may charge their clients a fee for these products.
PURCHASE PLANS
CUMULATIVE DISCOUNTS: The initial sales charges on Class A shares are applicable
to purchases made at one time by a "purchaser" who may be one of the following:
an individual, and/or the individual's spouse, and/or children (including
step-children) under age 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account; an organization exempt from federal income
tax under Section 501(c)(3) or (13) of the Internal Revenue Code; a pension,
profit-sharing or other employee benefit plan qualified or non-qualified under
Section 401 of the Internal Revenue Code; or any other organized group of
persons whether incorporated or not, provided the organization has been in
existence for at least six months and has some purpose other than the purchase
of redeemable securities of a registered investment company at a discount. In
order to qualify for a lower sales charge, all orders from an organized group
will have to be identified as originating from a qualifying "purchaser." Upon
such notification, the investor will receive the lowest applicable sales charge.
Discounts may be modified or terminated at any time.
Each Fund's Class A shares may also be purchased at the reduced sales charge
based on shares currently owned by the investor (excluding Composite Cash
Management Company Class A shares, unless exchanged from another fund). The
sales charge reduction is determined by adding the value of all Composite Group
Class A shares (at maximum offering price) and Class B shares (at net asset
value) to the amount of the Fund's shares being purchased.
Letter of Intent: This Letter provides for a price adjustment depending upon the
actual amount purchased within a 13-month period. If total investments under the
Letter exceed the intended amount and thereby qualify for a lower initial sales
charge, a retroactive price adjustment is made and the difference is used to
purchase additional shares. A shareholder may include the value of all of their
Class A shares (at maximum offering price) and Class B shares (at net asset
value) held in the Composite Group (excluding Composite Cash Management Company,
unless exchanged from another fund) that were held on the effective date of the
Letter of Intent as an "accumulation credit" toward completion of the Letter.
The Letter of Intent, which imposes no obligation to purchase or sell additional
shares, provides that 5% of the amount of the intended purchase will be held in
escrow (in the form of shares) pending completion of the Letter.
CERTIFICATES
Ordinarily certificates for shares purchased will not be issued unless requested
by the investor. There is no charge for such issuance.
REDEMPTION OF SHARES
When the Fund or Transfer Agent receives: 1) a written request in proper form,
for redemption of shares, and 2) the return of any issued certificates for
shares being redeemed, a check for payment of shares will normally be sent the
next business day, and no later than seven business days, except as indicated
below. If the account is pre-authorized for telephone transfer, payment may be
made to a designated bank account or broker, providing such accounts are
identically registered. Telephone redemptions may also be directed to the
shareholder's address of record. No wire fee will be charged for transfers to
Washington Mutual Bank or Seafirst Bank. There is a $10.00 transmittal wire fee
(which is subject to change) to wire to all other banks. This fee will be
subtracted from the account balance prior to making the transfer. You should be
aware that certain banks also charge a receiving wire fee which is beyond the
control of the Transfer Agent.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority must be submitted before the request will be
accepted.
Shares tendered for redemption will be redeemed at the net asset value next
determined less any applicable contingent deferred sales charge as described in
the prospectus under "How to Buy Shares." The amount received may be more or
less than the cost of the shares, depending on fluctuations in the market value
of securities owned by the Fund. If the shares have been purchased recently,
this redemption payment may be delayed until the Transfer Agent is reasonably
satisfied that the instrument used in the purchase (e.g., a check) has been
collected, and may take up to 14 days.
As discussed in the prospectus, the Class B contingent deferred sales charge may
be waived under certain circumstances. 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 the 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 summary, the CDSC may be waived
on redemptions of shares which constitute Retirement Plan distributions which
are permitted to be made without penalty pursuant to the IRC, other than
tax-free rollovers or transfers of assets.
EXCHANGE PRIVILEGE
Shareholders may exchange shares of each Fund for the same class of shares in
any other fund in the Composite Group. A brief discussion of such privileges is
in the prospectus under "Exchanges for other Composite funds." Exchanges will be
made at the respective net asset values in effect on the date of such exchange.
Shares previously subject to a sales charge may be exchanged without incurring
any additional initial or contingent deferred sales charge. Any gains or losses
realized on an exchange should be recognized for federal income tax purposes, as
required. This privilege is not an option or right to purchase securities but is
a revocable privilege permitted under the present policies of each of the Funds.
This privilege is not available in any state or other jurisdiction where the
shares of the Fund into which the transfer is to be made are not available for
sale, or when the value of the shares presented for exchange is less than the
minimum dollar purchase required by the appropriate prospectus. Each Fund
reserves the right to terminate or end the privilege of any shareholder who
attempts to use the privilege to take advantage of short-term swings in the
market.
An investor may exchange some or all of his shares in a Fund for the same class
of any other fund in the Composite Group of Funds, except Composite Deferred
Series, Inc. These currently include:
COMPOSITE GROUP OF FUNDS
I. Composite Bond & Stock Fund: primary objective is continuity of income and
conservation of capital with long-term growth a secondary objective.
II. Composite Growth & Income Fund: primary objective is long-term growth of
principal with current income a secondary objective.
III. Composite Northwest Fund: designed to provide long-term growth of capital
by investing in a broadly diversified portfolio of common stocks selected
from companies located or doing business in the Northwest.
IV. Composite U.S. Government Securities: primary objective is to provide a
high level of current income, consistent with safety and liquidity, by
investing in U.S. government-backed securities.
V. Composite Income Fund: primary objective is current income with
preservation of principal a secondary consideration.
VI. Composite Tax-Exempt Bond Fund: primary objective is as high a level of
current income exempt from federal income taxes as is consistent with
prudent investment risk and protection of capital. (Not allowed in IRAs)
VII. Composite Cash Management Company, Money Market Portfolio: invests in high
grades of money market instruments for maximum current income, while
preserving capital and allowing liquidity.
VIII.Composite Cash Management Company, Tax-Exempt Portfolio: invests in
high-quality, short-term municipal obligations for maximum current income
exempt from federal income tax while preserving capital and allowing
liquidity. (Not allowed in IRAs)
SERVICES PROVIDED BY THE FUND
SYSTEMATIC WITHDRAWAL PLAN
As described in the prospectus, each Fund offers a Systematic Withdrawal Plan.
All dividends and distributions on shares owned by shareholders participating in
this plan are reinvested in additional shares. Since withdrawal payments
represent the proceeds from sales of shares, any gain or loss on such
redemptions must be reported for tax purposes. In each case, shares will be
redeemed at the close of business on or about the 25th day of each month
preceding payment, and payments will be mailed within three business days
thereafter.
The Systematic Withdrawal Plan may involve the use of principal and is not a
guaranteed annuity. Payments under such a plan do not represent income or a
return on investment but instead are made from the redemption of Fund shares.
Naturally, withdrawals that continually exceed reinvested dividend income and
capital gains will eventually exhaust the account.
Class B shareholders who establish a Systematic Withdrawal Plan may make annual
redemptions of up to 12% of the value of the account, measured at the time the
plan is established, without paying a contingent deferred sales charge.
A Systematic Withdrawal Plan may be terminated at any time by directing a
written request to the applicable Fund or the Transfer Agent. Upon termination,
all future dividends and capital gain distributions will continue to be
reinvested in additional shares unless a shareholder requests otherwise.
TAX-SHELTERED RETIREMENT PLANS (U.S. GOVERNMENT SECURITIES AND INCOME)
As described in the prospectus, shares of U.S. Government Securities and Income
may be purchased as an investment medium for various tax-sheltered retirement
plans. The amounts of contributions to such plans are generally limited by the
Internal Revenue Code. Each of these plans involves a long-term commitment of
assets, and participants may be subject to possible regulatory penalties for
excess contributions, premature distributions, excess distributions, or for
insufficient distributions after age 70 1/2.
QUALIFIED RETIREMENT PLANS
Self-employed individuals (as sole proprietors or partnerships) or corporations
may wish to purchase Fund shares in a retirement plan. Investors may obtain
information regarding these plans by contacting an investment representative or
the Funds' offices.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
IRA contributions are invested when received. However, individuals establishing
a new IRA plan may rescind their plan within seven days. In the event of such
termination, their entire purchase price will be refunded by the Distributor
provided they notify the Distributor of their desire to rescind the purchase.
Termination during the seven-day period through regular redemption rather than
through rescission will result in adverse tax consequences. Internal Revenue
Service regulations prohibit revocation of rollover contributions. Any losses
derived through rescission will be absorbed by the Distributor.
Persons who request information regarding IRA plans will be provided with
application forms and information regarding eligibility and permissible
contributions.
IRA CUSTODY AGREEMENT AND SERVICE CHARGES
The IRA plan provides that the Distributor will furnish custodial services
either as agent for Washington Mutual Bank or as the named custodian. There are
set annual fees for IRA plans per participant unless made under an
employer-sponsored plan, in which case the custodial fee is negotiable. If
custodial fees are not paid annually by separate check, shares will
automatically be liquidated to cover such fees.
Unless participants elect otherwise, any capital gain distributions and income
dividends are reinvested on the ex-dividend date in full and fractional shares
of the applicable Fund at net asset value.
IRA BONUSES
"IRA Bonuses" may periodically be credited to IRA accounts for contributions,
transfers and/or rollovers. Payments will be made at a uniform rate determined
by the Distributor or its affiliates and will be based on the value of the
rollovers and/or transfers. IRA Bonuses are not paid by the applicable Fund.
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES
Each Fund intends to continue to conduct its business and maintain the necessary
diversification of assets and source of income requirements to qualify as a
diversified management investment company under the Internal Revenue Code (the
"Code"). Each Fund so qualified during the 1996 fiscal year. As a result, under
Subchapter M of the Code, each Fund is accorded conduit or "pass through"
treatment for federal income tax purposes during each year in which it
distributes to its shareholders 90% or more of its gross income from dividends,
interest and gains from the sale or other disposition of securities, and in
which it derives less than 30% of its gross income from gains (without deduction
for losses) from the sale or other disposition of securities held for less than
three months. In addition, if each Fund distributes 98% of its ordinary income
and capital gain net income for each calendar year, it will not be subject to
excise tax on undistributed income. Each Fund intends to distribute such amounts
as necessary to avoid federal income and excise taxes.
Net realized capital gains represent the total profit from sales of securities
minus total losses from sales of securities, including losses carried forward
from prior years. Shareholders will usually pay federal income taxes on
distributions designated as net realized 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. Because long-term capital gain
distributions reduce the value of the shares, losses may occur upon subsequent
sale. Special holding period requirements may make the losses long-term rather
than short-term under the Internal Revenue Code.
Advice as to the tax status of each year's dividends and distributions will be
mailed annually to each shareholder. Shareholders are urged to consult their own
tax advisors regarding specific questions about federal, state and local taxes.
Shareholders not subject to tax on their income will not be required to pay tax
on amounts distributed to them.
Income dividends and capital gain distributions recorded and made shortly after
a purchase of shares by an investor will have the effect of reducing the net
asset value per share by the per share amount of the distribution. They are,
nevertheless, subject to income taxes despite the fact that this is, in effect,
a return of capital.
TAX-EXEMPT
Congressional legislation allows income received by the Fund which is excludable
from gross income under the Code to retain its status as exempt from federal
income tax when distributed to Fund shareholders as such. This allowance is
based on the Fund holding 50% of the value of its total assets in municipal
obligations at each quarter end of its fiscal year. Interest earned by the Fund
on municipal bonds is not includable by the holders of shares in their
respective gross incomes for federal income tax purposes. Net interest income
received by the Fund from other obligations (e.g., certificates of deposit,
commercial paper, and obligations of the United States government, its agencies
or instrumentalities) and net short-term capital gains realized by the Fund, if
any, will be taxable to holders of shares as ordinary income. Long-term capital
gain distributions will normally be taxed as long-term capital gains. Section
265 of the Code in effect provides that interest on indebtedness (and associated
expenses) used to purchase or carry exempt interest obligations is not
deductible. In addition, interest on indebtedness incurred or continued to
purchase or carry shares of a fund which distributes exempt-interest dividends
is not deductible.
Interest on certain "private activity" bonds (referred to as "qualified bonds"
in the Code) is subject to the federal alternative minimum tax ("AMT"), although
the interest continues to be excludable from gross income for other purposes.
Interest from private activity municipal obligations is a tax preference item
for the purposes of determining whether a taxpayer is subject to AMT and the
amount of AMT tax to be paid, if any. Private activity obligations issued after
August 7, 1986, to benefit a private or industrial user or to finance a private
facility are affected by this rule. It is the current position of the staff of
the Securities and Exchange Commission that income from municipal obligations
that is a preference item for purposes of the AMT is not deemed to be
"tax-exempt." Under this position, at least 80% of the funds' income
distributions would have to be exempt from the AMT as well as exempt from
federal taxes.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal bonds. It can be expected that similar proposals may be
introduced in the future. If such a proposal were enacted, the availability of
municipal bonds for investment by the Fund and the value of the Fund's portfolio
would be affected. Additionally, the Fund would re-evaluate its investment
objective and policies and consider changes in the structure of the Fund.
STATE AND LOCAL TAX ASPECTS
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. The laws of the several state and local taxing
authorities vary with respect to the taxation of such interest income and each
holder of shares of the Fund is advised to consult his own tax advisor in that
regard. Upon request, the Fund will report the state-by-state percentages of
federally tax-exempt interest received during the preceding year.
U.S. GOVERNMENT SECURITIES AND INCOME
Under the Internal Revenue Code, dividends from net investment income (including
realized net short-term capital gains, if any) are taxable to Fund investors as
dividend income. Since the Funds' net investment income is normally derived from
interest income, the dividends are generally not eligible for the dividends
received deduction for corporate shareholders owning either of these Funds.
For federal tax purposes, carryovers of realized loss on investments of U.S.
Government Securities and Income may be applied against capital gains realized
in future years. This has the effect of reducing capital gain distributions the
Funds may otherwise be required to make. If not applied, the carryovers will
expire in 2003.
INVESTMENT PRACTICES
ALL FUNDS
The Funds' management aims to achieve these objectives through the use of a
flexible investment policy. Management attempts to anticipate market conditions
and places emphasis on economic changes. Portfolio investments are adjusted in
accordance with management's evaluation of changing market risks. Thus, the
relative proportion of various types of securities held may vary significantly.
U.S. GOVERNMENT SECURITIES
The investment objectives of the Fund are to seek as high a level of current
income as is considered consistent with safety and liquidity. It is a
fundamental policy of the Fund to invest in the following securities:
1. Obligations issued or guaranteed by the full faith and credit of the United
States government: U.S. government obligations are issued by the Treasury
and include bills, certificates of indebtedness, notes, bonds, and
obligations secured by the full faith and credit of the U.S. government
issued by agencies including, but not limited to, the Small Business
Administration, the Farmers Home Administration, the Federal Deposit
Insurance Corporation, the D.C. Armory Board, the Export Import Bank, the
Federal Housing Authority, the General Services Administration, the
Washington Metropolitan Transit Authority, the Department of Housing and
Urban Development, and the Private Export Funding Corporation.
2. Government National Mortgage Association ("GNMA") certificates of the
modified pass-through type: these GNMA certificates are debt securities
issued by a mortgage banker or other mortgagee and represent an interest in
one or a pool of mortgages insured by the Federal Housing Administration or
the Farmers Home Administration or guaranteed by the Veterans
Administration. GNMA guarantees the timely payment of monthly installments
of principal and interest on modified pass-through certificates at the time
such payments are due, whether or not such amounts are collected by the
issuer of these certificates on the underlying mortgages. (The Fund does not
propose to invest in GNMA certificates of the straight pass-through type in
which the payment of principal and interest on a timely basis is not
guaranteed.) The Fund may purchase GNMAs on an immediate cash delivery basis
or on a when-issued/future delivery basis. GNMAs and forward commitments are
further discussed in the Fund's prospectus.
3. Collateralized Mortgage Obligations (CMOs) and Real Estate Mortgage
Investment Conduits (REMICs) owned by the Fund represent ownership in
underlying GNMA certificates. They differ from pass-through securities in
that principal and interest from the underlying mortgages is made
sequentially rather than pro-rata. Generally, there are multiple classes of
ownership providing for successively longer expected average maturities.
CMOs and REMICs may be used to manage prepayment risk.
The Fund will adjust its portfolio as considered advisable in view of prevailing
or anticipated market conditions and the Fund's investment objective.
Accordingly, the Fund may sell portfolio securities in anticipation of a rise in
interest rates and anticipation of a decline in interest rates (see Brokerage
Allocations and Portfolio Transactions). The portfolio maturity should
approximate 7 to 12 years under normal circumstances.
INCOME
As discussed in the prospectus, the Fund may invest in debt and convertible debt
securities (payable in U.S. funds) which have a rating within the four highest
grades as determined by Standard & Poor's Corporation (AAA, AA, A, or BBB) or
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa). Under present commercial
bank regulations, bonds rated in these categories generally are regarded as
eligible for bank investment. Securities rated BBB or Baa may have speculative
characteristics. Up to 20% of the Fund's total assets may be invested in debt
securities, convertible debt securities, preferred stocks, and convertible
preferred stocks which are not rated within the four highest grades by Standard
& Poor's or Moody's. The Fund may invest in issues rated CCC (Standard & Poor's)
or Caa (Moody's) or better, or non-rated obligations which the Adviser believes
to be of comparable quality. This practice may involve higher risks, but the
Adviser will only use such practices if it believes the income and yield is
sufficient to justify such risks. See Appendix B for a detailed description of
these ratings.
Although no more than 20% of the Fund's total assets may be invested in
"high-yield" securities (i.e., not rated among the four highest grades and
sometimes referred to as "junk" bonds), these securities, whether rated or
unrated, may be subject to greater market fluctuations and risks of loss of
income and principal than the lower yielding, higher-rated, fixed-income
securities which comprise most of the Fund's portfolio. Risks of high-yield
securities include: (i) limited liquidity and secondary market support; (ii)
substantial market price volatility resulting from changes in prevailing
interest rates; (iii) subordination to the prior claims of banks and other
senior lenders; (iv) the operation of mandatory sinking fund or call/redemption
provisions during periods of declining interest rates whereby the Fund may
reinvest premature redemption proceeds in lower yielding portfolio securities;
(v) the possibility that earnings of the issuer may be insufficient to meet its
debt service; and (vi) the issuer's low creditworthiness and potential for
insolvency during periods of rising interest rates and economic downturn.
The Fund's average portfolio quality during 1996 is presented below:
PERCENTAGE OF AVERAGE
S&P RATING TOTAL ASSETS
---------------------- --------------------
AAA (or US Treasury) 41%
AA 3
A 13
BBB 24
BB 12
B 3
Not Rated 4
The Fund will not directly purchase common stocks. However, it may retain up to
10% of the value of its total assets in common stocks acquired either by
conversion of fixed-income securities or by the exercise of warrants or rights
attached thereto. A percentage restriction on investment or utilization of
assets for the Fund is adhered to at the time the investment is made. A later
change in percentage resulting from changing values or a change in any rating of
a portfolio security will not be considered a violation.
The Fund considers electric utilities, electric and gas utilities, gas
utilities, and telephone utilities to be separate industries and may at times
invest more than 25% of its assets in utilities as a whole. In view of such
possible concentration in these industries, an investment in the Fund should be
made with an understanding of their characteristics and the risks which such an
investment may entail. General problems of the utility industries include the
difficulty in obtaining an adequate return on invested capital, in spite of
frequent increases in rates which have been granted by the public service
commissions having jurisdiction, the difficulty in financing large construction
programs during an inflationary period, the restrictions on operations and
considerations, the difficulty in obtaining fuel from electric generation at
reasonable prices, the difficulty in obtaining natural gas for resale and the
effects of energy conservation.
Federal, state and municipal governmental authorities may, from time to time,
review existing and impose additional regulations governing the licensing,
construction and operation of nuclear power plants. Any delays in the licensing,
construction and operation of nuclear power plants or the suspension of
operations of such plants which have been or are being financed by proceeds of
certain obligations held in the portfolio may affect the payment of interest on
or the repayment of principal amount of such obligations. The Fund is unable to
predict the ultimate form any such regulations may take or the impact such
regulations may have on the obligations of the portfolio.
The Adviser believes that in many instances foreign securities provide a higher
yield than securities of domestic issuers with similar maturities. Therefore,
such securities should enhance the Adviser's ability to fulfill the investment
objective of "providing a high level of current income." Foreign investments
generally, however, have risk elements which exceed those of comparable domestic
securities. Among these risk elements are potentially reduced domestic
marketability of such securities, the lower reserve requirements generally
mandated for overseas banking operations, the possible impact of interruptions
in the flow of international currency transactions, potential political and
social instability or expropriation, imposition of foreign taxes, less
government supervision of issuers, difficulty in enforcing contractual
obligations, and lack of uniform accounting standards. All trading activities
will be conducted on U.S. securities markets. The Fund will purchase foreign
securities only when the Adviser feels incremental returns from the same are
sufficient to justify assuming these increased risks. In all cases, foreign
investments will be payable in U.S. dollars.
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.
In addition to these policies, each Fund is subject to investment restrictions
which cannot be changed without approval of a majority of outstanding shares.
These restrictions are discussed under "Investment Restrictions." There are no
significant investment policies that can be changed without shareholder
approval.
In pursuit of the Funds' investment objectives, they may engage in repurchase
agreement transactions. Under the terms of a typical repurchase agreement, a
Fund would acquire an underlying debt obligation for a relatively short period,
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. Under each repurchase agreement, the selling
institution will be required to maintain the value of the securities subject to
the repurchase agreement at not less than 102% of their repurchase price,
including accrued interest earned on the underlying securities. Repurchase
agreements could involve certain risks in the event of default or insolvency of
the other party, including possible delays or restrictions upon a Fund's ability
to dispose of the underlying securities. The Adviser, acting under the
supervision of the Boards of Directors, reviews the creditworthiness of those
banks and dealers with which the Funds enter into repurchase agreements to
evaluate these risks, and monitors on an ongoing basis the value of the
securities subject to repurchase agreements to ensure that the collateral is
maintained at the required level. To limit risk, repurchase agreements maturing
in more than seven (7) days will not exceed 10% of the total assets of the Fund.
MUNICIPAL BONDS
Municipal bonds include obligations issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, housing, hospitals, mass transportation, schools, streets
and water and sewer works. Other public purposes for which municipal bonds may
be issued include the refunding of outstanding obligations, obtaining funds for
general operating expenses and the obtaining of funds to loan to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide privately operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, port or parking
facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity for sewage or solid waste
disposal. Such obligations are included within the term municipal bonds if the
interest paid thereon qualifies as exempt from federal income tax. Other types
of industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute municipal bonds, although the current
federal tax laws place substantial limitations on the size of such issues.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source. Industrial development bonds
which are municipal bonds are in most cases revenue bonds and do not generally
constitute the pledge of the credit of the issuer of such bonds. There are, of
course, variations in the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors.
The yields on municipal bonds are dependent on a variety of factors, including
general money market conditions, general conditions of the municipal bond
market, size of a particular offering, the maturity of the obligation and rating
of the issue. The ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P") represent their opinions as the quality of the
municipal bonds which they undertake to rate. It should be emphasized, however,
that ratings are general and are not absolute standards of quality.
Consequently, municipal bonds with the same maturity, coupon and rating may have
different yields while bonds of the same maturity and coupon with different
ratings may have the same yield. See Appendix B for a detailed description of
these security ratings.
Only under exceptional circumstances would the Fund invest up to 25% of its
total assets in municipal obligations rated from Ba to Caa (Moody's) or BB to
CCC (Standard & Poor's). Obligations which carry these ratings are considered
speculative with respect to their capacity to pay interest and repay principal,
the danger of default may also be present. Such debt instruments may have some
quality and protective elements, but they are subject to major risk exposures
under adverse conditions. The Adviser currently has no intention to purchase
obligations of this nature.
The commercial paper ratings of A-1 by Standard & Poor's and P-1 Moody's are the
highest commercial paper ratings of the respective agencies. The issuer's
earnings, quality of long-term debt, management and industry position are among
the factors considered in assigning such ratings. See Appendix B for a detailed
description of these security ratings.
Subsequent to its purchase by the Fund, an issue of municipal bonds or other
investments may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event requires the elimination of
such obligations from the Fund's portfolio, but the Adviser will consider such
an event in its determination of whether the Fund should continue to hold such
obligation in its portfolio. To the extent that the ratings accorded by Standard
& Poor's or Moody's for municipal bonds or other investments may change as a
result of changes in such organizations, or changes in their rating systems, the
Fund will attempt to use comparable rating as standards for its investments in
accordance with the investment policies contained herein.
INVESTMENT RESTRICTIONS
While many decisions of the Adviser depend on flexibility, there are several
principles so fundamental to each Fund's philosophy that neither they, nor the
investment objective, may be changed without a vote of a majority of the
outstanding shares of that Fund.
Each Fund may NOT:
invest more than 5%* of its total assets in any single issuer other than U.S.
government securities, except that up to 25% of a Fund's assets may be invested
without regard to this 5% limitation;
acquire more than 10%* of the voting securities of any one company;
invest in any company for the purpose of management or exercising control;
invest in real estate or commodities;
invest in oil, gas or other mineral leases;
invest in securities restricted under federal securities laws;
invest more than 20%* of its assets in forward commitments;
invest more than 25%* of its assets in any single industry;**
invest more than 15%* of its net assets in illiquid securities;
buy foreign securities not payable in U.S. dollars;
buy securities on margin, mortgage or pledge its securities, or engage in
"short" sales;
invest more than 5%* of its net assets in warrants including not more than 2%*
of such net assets in warrants that are not listed on either the New York Stock
Exchange or American Stock Exchange; however, warrants acquired in units or
attached to securities may be deemed to be without value for the purpose of this
restriction;
act as underwriter of securities issued by others;
borrow money for investment purposes (it may borrow up to 5% of its total assets
for emergency, non-investment purposes);
lend money (except for the execution of repurchase agreements);
buy or sell put or call options;
issue senior securities.
U.S. Government Securities may NOT:
invest less than 80%* of its assets in obligations guaranteed by the U.S.
government or in repurchase agreements or collateralized mortgage obligations
secured by these obligations.
Tax-Exempt may NOT:
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:
invest in other investment companies (except as part of a merger).
U.S. Government Securities and Tax-Exempt may not:
buy common stocks or other equity securities except that Tax-Exempt may invest
in other investment companies.
* Percentage at the time the investment is made.
** It is a policy of Income to consider Electric Utilities, Electric and Gas
Utilities, Gas Utilities, and Telephone Utilities to be separate industries. The
Fund also considers foreign issues to be a separate industry. It is a policy of
Tax-Exempt to apply this restriction only to its assets in non-municipal bond
holdings, pollution control revenue bonds and industrial development revenue
bonds. These policies may result in increased risk.
PERFORMANCE INFORMATION
YIELD
Each Fund's current yield used in advertising is calculated by dividing net
investment income per share (annualized) for a stated 30-day period by the
Fund's maximum offering price (including, in the case of Class A shares, the 4%
maximum sales charge) at the end of the period. Yields will generally be lower
for Class B shares than Class A shares because of the higher distribution
expenses incurred by Class B shares. Yields will be quoted for each class of
shares in any advertisement presenting the yield of either class.
Interest income for yield purposes is calculated by computing interest income
based on standardized methods applicable to mutual funds. In general, interest
income is reduced on a daily basis with respect to bonds trading at a premium
over par value by a portion of that premium, or increased similarly with respect
to bonds trading at a discount.
Because yield accounting methods differ from the methods used for other
accounting purposes, a Fund's yield may not equal the income paid to your
account or the income reported in the financial statements.
U.S. GOVERNMENT SECURITIES
The Fund's yield for the 30 days ended December 31, 1996, was calculated based
on the following formula:
CLASS A CLASS B
------------ -------------
Yield = 2{((a-b)/cd + 1)6 -1} 5.71% 5.08%
Where:
a = interest income earned during the period $ 792,121 $ 16,588
b = expenses accrued during the period $ 110,584 $ 4,403
c = daily average number of shares eligible
to receive dividends during the period 13,287,624 278,242
d = maximum offering price at 12/31/96 $ 10.90 $ 10.46
INCOME
The Fund's yield for the 30 days ended December 31, 1996, was calculated based
on the following formula:
CLASS A CLASS B
------------ ----------
Yield = 2{((a-b)/cd + 1)6 -1} 5.95% 5.34%
Where:
a = interest income earned during the period $ 514,275 $ 41,626
b = expenses accrued during the period $ 73,041 $ 10,813
c = daily average number of shares
eligible to receive dividends during
the period 9,453,739 764,076
d = maximum offering price at 12/31/96 $ 9.53 $ 9.17
TAX-EXEMPT
The Fund's yield for the 30 days ended December 31, 1996, was calculated based
on the following formula:
CLASS A CLASS B
---------- ----------
Yield = 2{((a-b)/cd + 1)6 -1} 4.28% 3.56%
Where:
a = interest income earned during the
period $ 873,985 $ 21,818
b = expenses accrued during the period $ 122,541 $ 6,821
c = daily average number of shares
eligible to receive dividends
during the period 26,029,100 649,655
d = maximum offering price at 12/31/96 $ 8.16 $ 7.83
TAXABLE-EQUIVALENT YIELD
Taxable-equivalent yield is calculated by dividing the Fund's tax-exempt current
yield by the number one minus a particular income tax rate. For example, the
Class A current yield for the 30 days ended December 31, 1996, would result in a
7.09% taxable-equivalent yield at the 39.6% tax rate according to the following
calculation: 4.28% divided by (1.00 - .396) = 7.09%. The Class B
taxable-equivalent yield at the 39.6% tax rate for the 30 days ended December
31, 1995, was 5.89%.
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, 1996,
were 5.83% and 5.06%, respectively. The distribution rates for Income Class A
and Class B shares for the month ended December 31, 1996, were 6.28% and 5.56%,
respectively. The distribution rates for Tax-Exempt Class A and Class B shares
for the month ended December 31, 1996, were 4.91% and 4.07%, respectively.
Generally, a Fund's distribution rate reflects amounts of net investment income
actually paid to shareholders while yield reflects the earning power of the
fund's portfolio (net of expenses).
TOTAL RETURNS
Total returns quoted in advertising include the effect of applicable sales
charges, reinvesting dividends and capital gain distributions (at net asset
value), and any change in net asset value per share over the period. Total
returns will be quoted for each class of shares in any advertisement presenting
the total return of either class. The following total returns reflect the
maximum 4% initial sales charge for Class A shares and the contingent deferred
sales charge appropriate to the period for Class B shares. Class B shares
redeemed at the end of a full year are assessed the following year's contingent
deferred sales charge. Class B returns assume contingent deferred sales charges
of 3% for one year and 1% since March 1994.
Average annual total returns are calculated by determining the change in value
of a hypothetical investment over a stated period of time and then calculating
the annual compounded rate of return that would have produced the same result
had the rate of growth or decline in value been constant over the entire period.
Cumulative total return is the simple change in value of a hypothetical
investment over a stated period of time. The cumulative total return may be
quoted as a percentage or a dollar amount and may be presented numerically or in
a table, graph, or similar illustration.
PERIODS ENDED DECEMBER 31, 1996
1 YEAR 5 YEARS 10 YEARS
AVERAGE ANNUAL TOTAL RETURN
U.S. Government Securities, Class A (1.60)% 5.09% 7.24%
U.S. Government Securities, Class B (1.31)% 5.57%*
Income, Class A (0.64)% 6.47% 7.72%
Income, Class B (0.31)% 6.76%*
Tax-Exempt, Class A (1.53)% 5.94% 6.74%
Tax-Exempt, Class B (1.32)% 5.34%*
CUMULATIVE TOTAL RETURN
U.S. Government Securities, Class A (1.60)% 28.18% 101.11%
U.S. Government Securities, Class B (1.31)% 16.12%*
Income, Class A (0.64)% 36.83% 110.36%
Income, Class B (0.31)% 19.77%*
Tax-Exempt, Class A (1.53)% 33.43% 91.93%
Tax-Exempt, Class B (1.32)% 15.45%
* CLASS B SHARES' TOTAL RETURNS FROM THE COMMENCEMENT OF PUBLIC OFFERING ON
MARCH 30, 1994
The total returns are calculated as follows:
Average annual total return: ERV = P(1+A)n
Cumulative total return (as a percentage): T = (ERV-P)/P
Where:
P = a hypothetical initial investment of $1,000
A = average annual total return
T = total return
n = number of years
ERV = ending redeemable value of a $1,000 hypothetical investment
COMPARATIVE PERFORMANCE DATA
Fund literature may occasionally refer to information about the Fund which is
published by mutual funds rating services. Comparisons to fund performance may
be made to various market, economic or other indices. Industry publications may
also be referred to from time to time.
BROKERAGE ALLOCATIONS AND PORTFOLIO TRANSACTIONS
Under terms of the Investment Management Agreements, Composite Research &
Management Co. acts as agent for each Fund in entering orders with
broker-dealers to execute portfolio transactions and in negotiating commission
rates where applicable. Decisions as to eligible broker-dealers are approved by
the president of the Funds.
In executing portfolio transactions and selecting broker-dealers, the Adviser
shall use its best efforts to seek, on behalf of each Fund, the best overall
terms available. In assessing the best overall terms available for any
transaction, the Adviser may consider all factors it deems relevant, including
the breadth of the market in the security, the price of the security, the size
of the transaction, the timing of the transaction, the reputation, financial
condition, experience and execution capability of a broker-dealer, and the
amount of the commission and the value of any brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934, as amended) provided by a broker-dealer.
The Adviser is authorized to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Fund. This commission may be in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction if the Adviser determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of that particular
transaction or in terms of the overall responsibilities of the Adviser to the
Funds and/or other accounts over which the Adviser exercises investment
discretion. The Adviser may commit to pay commission dollars to brokers or
financial institutions for specific research materials or products that it
considers useful in advising the Funds and/or its other clients. Research
services furnished to the Adviser include, for example, written and electronic
reports analyzing economic and financial characteristics, telephone
conversations between brokerage securities analysts and members of the Adviser's
staff, and personal visits by such analysts, brokerage strategists and
economists to the Adviser's office.
Some of these services are of value to the Adviser in advising clients, although
not all of these services are necessarily useful and of value in managing the
Funds. The management fee paid to the Adviser is not reduced because it receives
those services, even though it might otherwise be required to purchase these
services for cash.
The staff of the Securities and Exchange Commission has expressed the view that
the best price and execution of over-the-counter transactions in portfolio
securities may be secured by dealing directly with principal market makers,
thereby avoiding the payment of compensation to another broker. In certain
situations, the Adviser believes that the facilities, expert personnel and
technological systems of a broker often enable the Funds to secure a net price
by dealing with a broker that is as good as or better than the price the Funds
could have received from a principal market maker, even after payment of the
compensation to the broker. The Adviser places its over-the-counter transactions
with principal market makers, but may also deal on a brokerage basis when
utilizing electronic trading networks or as circumstances warrant.
None of the brokers with whom the Funds deal have any interest in the Adviser or
the Distributor. The Distributor did not execute any portfolio orders for the
Funds during the fiscal year, nor did the Distributor or the Adviser receive any
direct or indirect compensation as a result of portfolio transactions of the
Funds. Shares may be sold by brokers who execute portfolio transactions for the
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 1996 and
1995, the portfolio turnover rates were 16% and 8%, respectively, for U.S.
Government Securities, 42% and 43%, respectively for Income, and 22% and 8%,
respectively, for Tax-Exempt.
The net asset value of the shares of an open-end investment fund investing
primarily in fixed-income securities changes as the general level of interest
rates fluctuate. When interest rates decline, the market value of a portfolio
invested in higher yields can be expected to rise. Conversely when interest
rates rise, the market value of a portfolio invested in higher yields can be
expected to decline.
GENERAL INFORMATION
ORGANIZATION AND AUTHORIZED CAPITAL
Composite U.S. Government Securities, Inc., was incorporated under the laws of
the state of Washington on March 5, 1982, under a certificate of incorporation
granting perpetual existence. The Fund has an authorized capitalization of 1
billion shares of capital stock, $.0001 par value.
Composite Income Fund, Inc. was incorporated under the laws of the state of
Washington on October 22, 1975, under a certificate of incorporation granting
perpetual existence. The Fund has an authorized capitalization of 50 million
shares of capital stock, $0.01 par value.
Composite Tax-Exempt Bond Fund, Inc. was incorporated under the laws of the
state of Washington on September 16, 1976, under a certificate of incorporation
granting perpetual existence. The Fund has an authorized capitalization of 500
million shares of capital stock, $.0001 par value.
Each Fund offers two classes of shares. Each class of shares represents
interests in the assets of the Fund. The shares do not have preemptive rights,
and none of the shares have any preference to conversion, exchange, dividends,
retirements, liquidation, redemption or any other feature. Class B shares
convert to Class A shares six years after purchase, exchanges are restricted to
shares of the same class, and each class bears different expenses related to
their distribution. Shares have equal voting rights except that each class has
exclusive voting rights with respect to provisions of each Fund's Distribution
Plan that pertains to a particular class.
VOTING PRIVILEGES
The Funds are not required to hold annual meetings. When meetings are called to
elect directors, a shareholder may exercise cumulative voting privileges under
Washington state law in the election of directors. Using this privilege,
shareholders are entitled to one vote per share for each director candidate. The
total number of votes for directors to which a shareholder is entitled may be
accumulated and cast for each candidate in such proportion that the shareholder
may designate.
CUSTODIAN
The securities and cash owned by each Fund are held in safekeeping by Investors
Fiduciary Trust Company (IFTC), 127 West 10th, Kansas City, MO 64105. IFTC is a
wholly owned subsidiary of State Street Bank. The custodian's responsibilities
include collecting dividends, interest and principal payments on each Fund's
investments.
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of LeMaster & Daniels PLLC, Certified Public Accountants, has been
selected as the independent public accountants of each Fund. LeMaster & Daniels
performs audit services for each Fund including the examinations of the
financial statements included in annual reports to shareholders, which are
incorporated by reference into this statement of additional information.
REGISTRATION STATEMENT
This statement of additional information and the prospectus do not contain all
of the information set forth in the registration statements each Fund has filed
with the Securities & Exchange Commission. Complete registration statements may
be obtained from the Securities & Exchange Commission upon payment of the fee
prescribed by the rules and regulations of the Commission.
FINANCIAL STATEMENTS AND REPORTS
Semiannual and annual reports are issued to shareholders. The annual reports
include audited financial statements. The Funds' annual report to shareholders
dated December 31, 1996, which is incorporated by reference into this statement
of additional information, may be obtained without charge by contacting the
Funds' offices.
APPENDIX A
SPECIMEN PRICE MAKE-UP SHEET
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
COMPOSITE INCOME FUND, INC.
COMPOSITE TAX-EXEMPT BOND FUND, INC.
At December 31, 1996
U.S. GOVERNMENT
SECURITIES INCOME TAX-EXEMPT
Assets $141,639,195 $ 94,019,168 $212,991,303
Liabilities 517,201 239,890 4,119,520
------------- ------------- ------------
Net Assets $141,121,994 $ 93,779,278 $208,871,783
============= ============= ============
CLASS A SHARES
Net Assets $138,159,478 $ 86,657,040 $203,606,240
Shares Outstanding 13,204,217 9,467,260 26,002,410
------------- ------------- ------------
Net Assets Per Share $10.46 $ 9.15 $ 7.83
============= ============= ============
Maximum Offering Price
(Net Assets Per Share ./. 96/100) $10.90 $ 9.53 $ 8.16
============= ============= ============
CLASS B SHARES
Net Assets $2,962,516 $7,122,238 $5,265,543
Shares Outstanding 283,151 776,973 672,375
------------- ------------- ------------
Net Assets and
Offering Price Per Share $10.46 $ 9.17 $ 7.83
============= ============= ============
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, 1996, was filed with the Securities and Exchange Commission via EDGAR on
February 19, 1997. 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-1A 4-24-97
(1b) Amendment to Articles of
Incorporation Form N-1A 4-24-97
(2) Bylaws Form N-1A 3-15-96
(3) Voting Trust Agreement INAP
(4) Specimen Capital Stock
Certificate Form N-1A 4-24-97
(5) Investment Advisory Contract Form N-1A 4-24-97
(6a) Distribution Contract Form N-1A 3-15-96
(6b) Specimen Selling Agreement Form N-1A 4-24-97
(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 4-24-97
(9) Shareholders Service Contract Form N-1A 4-24-97
(10) Opinion & Consent of Counsel Form N-1A 4-24-97
(11) Accountants' Consent Form N-1A 4-24-97
(12) All financial statements
omitted from Item 23. Annual Report 2-19-97
(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 See 6(a) above 3-15-96
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 U.S. Government
Securities, Inc.; Composite Tax- Exempt Bond Fund, Inc.; Composite Cash
Management Company; Composite Northwest Fund, Inc.; Composite Bond & Stock Fund,
Inc.; Composite Equity Series, Inc.; and Composite Deferred Series, Inc.
Composite Research & Management Company, Murphey Favre, and Murphey Favre
Securities Services are all wholly-owned subsidiaries of Washington Mutual, Inc.
All companies' names are incorporated in the State of Washington.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
As of ____________, 1997, there were _____ Class A shareholders and ____ Class B
shareholders.
Item 27. INDEMNIFICATION.
Registrant shall have the power to indemnify any director, officer or former
director or officer of the Corporation, or any person who may have served at the
Corporation's request as a director or officer of another corporation, against
expenses actually and reasonably incurred by such person in connection with the
defense of any action, suit or proceeding, civil or criminal, in which he
becomes a party by reason of being or having been such director or officer, to
the full extent permitted by the laws of the State of Washington, as such laws
at any time may be in force and effect, provided however, that this
indemnification provision shall not protect, or purport to protect, any director
or officer of the corporation against any liability to the corporation or to the
shareholders to which he otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of this office.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Registrant's Investment Adviser is Composite Research & Management Co., a
wholly-owned subsidiary of Washington Mutual, Inc., which is a Washington
corporation, organized in 1889. The Adviser serves in that capacity for seven
(7) other investment companies with the Composite Group of Funds identified in
Item 25.
Business and other connections of the Investment Adviser were most recently
filed on Form ADV, Securities and Exchange Commission File No. 801-4855, which
was mailed on March 11, 1997, and is incorporated herein by reference.
Item 29. PRINCIPAL UNDERWRITERS.
The principal underwriter for the Registrant is Murphey Favre which also serves
in the same capacity for seven (7) other investement companies identified in
Item 25.
Business and other connections of the underwriter were most recently filed on
Form BD, CRD 599, with the National Association of Securities Dealers on
February 7, 1997, and are incorporated herein by reference.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules thereunder will be
maintained at the offices of the Registrant at 601 West Main Avenue, Suite 801,
Spokane, Washington 99201. The Registrant's custodian activities are performed
at Investors Fiduciary Trust Company (IFTC), 127 West 10th, Kansas City, MO
64105.
Item 31. MANAGEMENT SERVICES.
Registrant is not a party to any management related service contract, other than
as set forth in the Prospectus.
Item 32C. UNDERTAKINGS.
The management discussion of fund performance required by Item 5A is contained
in the 12/31/96 annual report to shareholders which will be provided to each
person to whom a prospectus is delivered, upon request and without charge.
<PAGE>
SIGNATURES
FORM N-1A
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Spokane, and State of Washington
on the 24 day of April, 1997.
COMPOSITE INCOME FUND, INC.
--------------------------------
Registrant
[SEAL]
By:/s/ William G. Papesh
------------------------
ATTEST: William G. Papesh
/s/ John T. West President
- -----------------------------
John T. West, CPA /s/ Monte D. Calvin
Secretary ------------------------
Monte D. Calvin, CPA
Principal Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities on
the date indicated:
/s/ Wayne L. Attwood March 25, 1997
- -------------------------------------------
Wayne L. Attwood, Director (Date)
/s/ Kristianne Blake March 25, 1997
- -------------------------------------------
Kristianne Blake, Director (Date)
/s/ Anne V. Farrell March 25, 1997
- -------------------------------------------
Anne V. Farrell, Director (Date)
/s/ Michael K. Murphy March 25, 1997
- -------------------------------------------
Michael K. Murphy, Director (Date)
/s/ William G. Papesh March 25, 1997
- -------------------------------------------
William G. Papesh, Director (Date)
/s/ Daniel L. Pavelich March 25, 1997
- -------------------------------------------
Daniel L. Pavelich (Date)
/s/ Jay Rockey March 25, 1997
- -------------------------------------------
Jay Rockey, Director (Date)
/s/ Richard C. Yancey March 25, 1997
- -------------------------------------------
Richard C. Yancey, Director (Date)
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT INDEX
- --------------------------------------------------------------------------------
EX-99.B1 CHARTER
EX-99.B4 HOLDERS RTS
EX-99.B5 ADVSR CONTR
EX-99.B6 6(b) SPECIMEN SELLING AGREEMENT
EX-99.B8 CUST CONTR
EX-99.B9 OTH CONTRCT
EX-99.B10 OPINION & CONSENT OF COUNSEL
EX-99.B11 ACCOUNTANT'S CONSENT
EX-27.CLASS A FINANCIAL DATA SCHEDULE - CLASS A
EX-27.CLASS B FINANCIAL DATA SCHEDULE - CLASS B
- --------------------------------------------------------------------------------
EXHIBIT 1
ARTICLES OF INCORPORATION
OF
COMPOSITE INCOME FUND, INC.
KNOW ALL MEN BY THESE PRESENTS: That the undersigned, being of legal age
and a citizen of the United States of America and the State of Washington, does
this day form a corporation under the general laws of the State of Washington,
and does hereby make, certify, execute, acknowledge and deliver the following
Articles of Incorporation:
ARTICLE I
NAME
The name of this corporation shall be:
COMPOSITE INCOME FUND, INC.
ARTICLE II
PURPOSES
The general nature of the business of this corporation and the objects and
purposes proposed to be transacted, promoted and carried on by the corporation
are as follows:
A. To conduct and carry on the business of an investment company, and
exercise all powers necessary and appropriate to the conduct of such
operations.
B. To invest and reinvest the property and assets of the corporation in
securities of different types and classes, including, without in any
way limiting the generality thereof, stocks, bonds, notes, debentures,
and certificates of interest or participation, and in other personal
property without limitation or restriction except for such specific
restrictions as are hereinafter set forth and as may be adopted from
time to time by the Board of Directors.
C. To act as financial or fiscal agent for any person, firm, or
corporation and as such to manage, control, and deal with, in any and
every way whatsoever, the property, holdings, investments, and
business interests thereof.
D. To endorse, guarantee, or undertake the performance of any obligation,
contract, or engagement of any other corporation, or other party, if
the corporation is interested in such obligation, contract, or
engagement.
E. To purchase, retire, redeem, hold, sell, reissue, transfer, and
otherwise deal in, shares of its own capital stock; and to apply to
such purchase, retirement, or redemption, any funds or property of the
corporation, whether capital, capital surplus, earned surplus, or
otherwise, as may be permitted by law.
F. To engage in any lawful act or activity for which corporations may be
organized under the general corporation laws of the State of
Washington and to conduct and carry on business in any other states,
territories or foreign countries.
G. To do any and all of the acts herein set forth or implied and such
other acts as are incidental or conducive to the attainment of the
objects and purposes of the corporation; and to do any and all such
acts either as principal or in the capacity of agent, broker,
representative, or otherwise.
ARTICLE III
REGULATION OF THE INTERNAL AFFAIRS OF
THE CORPORATION
A. Preemptive Rights.
No shareholder of the corporation shall have any prior, preemptive or
other preferential right to subscribe to, purchase, or otherwise
acquire any share(s) of stock of the corporation, whether now or
hereafter authorized, and whenever issued, and the Board of Directors
may issue capital stock of the corporation for cash or other lawful
consideration without offering the same either in whole or in part to
shareholders.
B. Net Asset Value of Sales.
The Board of Directors from time to time may issue and sell the
authorized shares of the corporation in accordance with the then
applicable provisions of the Investment Company Act of 1940 and the
rules promulgated thereunder. Upon all sales of stock or fractional
shares of the corporation, whether upon original issue or from
treasury stock, the corporation shall receive not less than the net
asset value thereof, as that term may be defined by the provisions of
the Investment Company Act of 1940 and the rules promulgated
thereunder, in effect at the time of sale.
C. Purchase or Redemption at Net Asset Value.
Any owner of stock of the corporation desiring to dispose of all or
any part thereof may present the same to the corporation by depositing
with the corporation the certificate or certificates thereof or a
delivery undertaking satisfactory to the corporation or as to any
unissued but fully paid for shares or fractional shares, other
evidence of assignment and transfer of the ownership of stock in the
corporation satisfactory to the corporation, and the corporation, to
the full extent to which the corporation at the time of purchase may
legally do so under the laws of the State of Washington, shall
purchase the stock so presented at the net asset value thereof.
D. Determination of Net Asset Value.
The Board of Directors shall have the power and duty to determine from
time to time the net asset value per share of the outstanding shares
of the corporation. Such power may be delegated to one or more
directors and officers of the corporation, to the custodian or
depository of the corporation assets, or to another agent appointed
for such purpose. Any determination by the directors or their delegate
shall be binding on all parties concerned.
The time and manner of such determination shall be prescribed by the
directors by resolution and the directors also shall have the right to
declare a suspension of such determination for good cause at any time.
E. Compliance with Investment Company Act of 1940
Notwithstanding any of the foregoing provisions of these Articles, the
Board of Directors may prescribe, in its absolute discretion, such
bases and times for determining the per share net asset value of the
corporation's shares as it shall deem necessary or desirable to enable
the corporation to comply with any provision of the Investment Company
Act of 1940, or any rule or regulation thereunder, including any rule
or regulation adopted pursuant to Section 22 of the Investment Company
Act of 1940 by the Securities and Exchange Commission or any
securities association registered under the Securities Act of 1934,
all as in effect now or as hereafter amended or added.
F. Stock Transfer Books.
The stock transfer books of the corporation shall be deemed to include
the corporation's record of unissued shares and fractional shares
which have been fully paid for but have not been issued.
G. Voting List.
A voting list of the shareholders entitled to vote at a meeting of the
shareholders or any adjournment thereof need not be made available as
required by Revised Code of Washington, Section 23A.08.280, unless a
shareholder shall make written request therefor.
ARTICLE IV
AUTHORIZED SHARES
The aggregate number of shares which the corporation shall have
authority to issue is Five Million (5,000,000) shares of capital
stock, and the par value of each of such shares shall be One Cent (1
cent) per share.
ARTICLE V
COMMENCEMENT OF BUSINESS
The corporation shall not commence business until it shall have
received consideration having a value of at least Five Hundred Dollars
($500.00) for the issuance of its shares.
ARTICLE VI
DESIGNATION OF REGISTERED AGENT
AND REGISTERED OFFICE
The registered office of the corporation shall be:
402 Spokane and Eastern Building
Spokane, Washington 99201
and the registered agent of this corporation shall be Wm. G. Papesh, his
address being the same as that of the registered office of this corporation.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS
The corporation shall have the power to indemnify any directors, officers
or former directors or officers of the corporation, or any person who may have
served at the corporation's request as a director or officer of another
corporation, against expenses actually and reasonably incurred by such person in
connection with the defense of any action, suit or proceeding, civil or
criminal, in which he becomes a party by reason of being or having been such
director or officer, to the full extent permitted by the laws of the State of
Washington, as such laws at any time may be in force and effect, provided
however, that this indemnification provision shall not protect or purport to
protect any director or officer of the corporation against any liability to the
corporation or to the shareholders to which he otherwise would be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
ARTICLE VIII
DESIGNATION OF INVESTMENT ADVISOR
AND DISTRIBUTOR
The Board of Directors, at any time and from time to time, may contract for
management services with Composite Research & Management Co., a Washington
corporation, or with such other association, corporation or firm as the Board of
Directors may deem desirable, every such contract to comply with such
requirements and restrictions as may be set forth in the Bylaws of this
corporation as from time to time amended; and any such contract may contain such
other terms interpretative of or in addition to said requirements and
restrictions as the Board of Directors may determine. The Board of Directors
also, at any and from time to time, may contract with Murphey Favre, Inc. or
with any other corporation, firm or association, appointing it distributor for
the capital stock of this corporation, every such contract to comply with such
requirements and restrictions as may be set forth in the Bylaws of the
corporation as from time to time amended; and any such contract may contain such
other terms interpretative of or in addition to said requirements and
restrictions as the Board of Directors may determine. The fact that any or all
of the directors and officers of this corporation are also shareholders,
directors or officers of Composite Research & Management Co., or Murphey Favre,
Inc., or may be shareholders, trustees, directors or officers of some other
corporation, firm or association with which such a management contract or
distributor's contract may hereafter be made, shall not affect the validity of
any such contract or disqualify any officer or director of this corporation from
voting upon or executing the same or create any liability or accountability
based on adverse interest in connection with any such contract, provided that
any such interest be disclosed to the directors prior to their action thereon,
and provided further that a majority of the Board of Directors voting in favor
of the action shall have no such interest, and provided further that the
approval shall be in conformance with the requirements of the Investment Company
Act of 1940 as amended, or similar act, and the rules and regulations
promulgated in connection therewith.
ARTICLE IX
DIRECTORS
The management of this corporation shall be vested in a Board of Directors,
which Board shall not be less than three in number and the qualifications,
compensation, terms of office, manner of election, time and place of meeting,
powers and duties of the directors shall be such as are prescribed by the Bylaws
of this corporation. The authority to make Bylaws for the corporation is
expressly vested in the Board of Directors of this corporation, and said Board
may adopt, alter, amend or repeal such Bylaws of the State of Washington and
these Articles of Incorporation.
The names and post office addresses of the directors who shall first manage
the affairs of this corporation are as follows:
Name Address
Leland J. Sahlin Fourth Floor
Spokane and Eastern Building
Spokane WA 99201
Leonard H. Aspinwall Fourth Floor
Spokane and Eastern Building
Spokane WA 99201
Noel E. Thompson Paulsen Building
Spokane WA 99201
Each of said directors shall hold office until the first annual meeting of
shareholders of the corporation or until his successor has been elected and
qualified in the manner prescribed by law.
ARTICLE X
RESERVATION OF AMENDMENT POWERS
The corporation reserves the right to amend, alter, change or repeal any
provisions contained in these Articles of Incorporation in the manner now or
hereafter prescribed by statute, and all rights conferred on the stockholders
herein are granted subject to this reservation.
ARTICLE XI
TERM OF EXISTENCE
The corporation shall have perpetual existence.
ARTICLE XII
INCORPORATOR
WM. G. PAPESH shall be the incorporator of this corporation.
IN WITNESS WHEREOF, the incorporator has hereunto set his hand this 9th day
of October, 1975.
------------------------
WM. G. PAPESH
Fourth Floor
Spokane and Eastern Building
Spokane WA 99201
STATE OF WASHINGTON )
: ss.
County of Spokane )
I, the undersigned, a Notary Public in and for the above named County and
State, do hereby certify that on the 9th day of October, 1975, personally
appeared before me WM. G. PAPESH, to me known to be the individual and
incorporator described in and who executed the foregoing instrument, and
acknowledged that he signed and sealed the same as his free and voluntary act
and deed for the uses and purposes therein mentioned.
GIVEN under my hand and official seal the day and year last above written.
/s/------------------------------
Lawrence R. Small
Notary Public in and for the State
of Washington, residing at Spokane
<PAGE>
ARTICLES OF AMENDMENT
OF
COMPOSITE INCOME FUND, INC.
Articles of Amendment of the Articles of Incorporation of COMPOSITE INCOME
FUND, INC. (the "Corporation") are herein executed by the Corporation pursuant
to the provisions of RCW 23B.10.060 as follows:
1. The name of the Corporation is COMPOSITE INCOME FUND, INC.
2. The amendment to the Articles of Incorporation of the Corporation is as
follows:
Article IV of the Articles of Incorporation hereby is amended in its entirety to
read as set forth below:
ARTICLE IV
AUTHORIZED SHARES
The total number of shares which the Corporation shall have the authority
to issue is fifty million (50,000,000) shares having a par value of $.01 per
share. The shares shall be classified initially into two classes, consisting of
thirty million (30,000,000) shares of Class A Common Stock and twenty million
(20,000,000) shares of Class B Common Stock. The shares of the Corporation's
capital stock issued and outstanding at the effective date of the amendment
adding this provision are hereby reclassified as "Class A Common Stock."
The Board of Directors is authorized to classify or to reclassify, from
time to time, any unissued shares of any class of the Corporation, including
classes established in separate portfolios, by setting, changing, eliminating or
designating specific distinctions and preferences, conversion or other rights,
powers, restrictions, limitations as to dividends, and qualifications or terms
and conditions of or rights to require redemption of such shares.
Each holder of record of a share of capital stock of the Corporation shall
be entitled to one vote for each share registered in such holder's name,
irrespective of the class thereof, and all shares of all classes shall vote
together as a single class; provided, however, that (I) as to any matter with
respect to which a separate vote of any class or of any classes voting together
as a single class is required by law pursuant to any applicable order, rule or
interpretation issued by the Securities and Exchange Commission, or otherwise,
such requirement as to a separate vote by that class or those classes voting
together as a single class, as the case may be, shall apply in lieu of a general
vote of all classes as described above, (ii) in the event that the separate vote
requirements referred to in (i) above apply with respect to one or more classes,
voting separately or as a single class, then subject to paragraph (iii) below,
the shares of all other classes not entitled to a vote of a separate class or of
separate classes voting together as a single class vote as a single class, and
(iii) as to any matter which does not affect the interest of a particular class,
such class shall not be entitled to any vote and only holders of shares of the
one or more affected classes shall be entitled to vote.
Shares of each class of stock shall be entitled to such dividends or
distributions, in stock or in cash or both, as may be declared from time to time
by the Board of Directors with respect to such class. Dividends and
distributions of income and capital gains with respect to the Class A Common
Stock or the Class B Common Stock, and any other class hereafter created may
vary among the classes to reflect differing allocations of expenses of the
Corporation among the holders of the various classes and any resultant
differences among the net asset value of the various classes of Common Stock to
such extent and for such purposes as the Board of Directors may deem necessary
or appropriate.
3. The date of the adoption of the amendment by the Corporation is December
21, 1993.
4. The amendment was adopted by (check one of the following statements):
( ) The incorporators. Shareholder action was not required.
( ) The board of directors. Shareholder action was not required.
(X ) Duly approved shareholder action in accordance with the provisions of
RCW 23B.10.030 and RCW 23B.10.040.
5. These Articles of Amendment shall be effective upon filing.
DATE: February 7, 1994.
COMPOSITE INCOME FUND, INC.
By /s/----------------------
William G. Papesh, President
STATE OF WASHINGTON )
) ss.
County of Spokane )
I certify that I know or have satisfactory evidence that William G. Papesh
is the person who appeared before me, and said person acknowledged that he
signed this instrument, on oath stated that he was authorized to execute the
instrument and acknowledged it as the President of COMPOSITE INCOME FUND, INC.
to be the free and voluntary act of such party for the uses and purposes
mentioned in the instrument.
Dated: February 7, 1994
/s/------------------------------------------------
Name: Lawrence R. Small
Notary Public in and for the State of Washington,
residing at Spokane
My commission expires: 9/26/95
EXHIBIT 4
SPECIMEN CAPITAL STOCK CERTIFICATE
Certificate No. Date Shares Account No.
COMPOSITE GROUP OF FUNDS
THIS IS TO CERTIFY THAT
See Reverse for
Certain Definitions
is the registered holder of
fully paid and non-assessable shares, of the par value of each of the
CAPITAL STOCK of the
incorporated under the laws of the state of Washington, transferable on the
books of the Corporation by said owner in person or by duly authorized attorney,
upon surrender of this certificate properly endorsed. This certificate is not
valid until countersigned by the Fund.
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
Affixed: At Spokane, Washington
----------------------- --------------------------
Signature Signature
----------------------- --------------------------
Title Title
Composite Group of Funds
AUTHORIZED SIGNATURES
EXHIBIT 5
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT, dated July 23, 1996, between Composite Income Fund, Inc., a
Washington corporation (the "Fund") and Composite Research & Management Co., a
Washington corporation (the "Manager").
W I T N E S S E T H
WHEREAS, the Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Fund desires to retain the Manager to render investment
management services to the Fund, and the Manager is willing to render such
services;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto agree as follows:
1. Appointment. The Fund hereby appoints the Manager to act as investment
manager to the Fund for the period and on the terms set forth in this
Agreement. The Manager accepts such appointment and agrees to render
the services herein described, for the compensation herein provided.
2. Management. Subject to the supervision of the Board of Directors of
the Fund, the Manager shall manage the investment operations of the
Fund and the composition of the Fund's portfolio, including the
purchase, retention and disposition of securities therefor, in
accordance with the Fund's investment objectives, policies and
restrictions as stated in the Prospectus and Statement of Additional
Information (as such terms are hereinafter defined) and resolutions of
the Fund's Board of Directors and subject to the following
understandings:
(a) The Manager shall provide supervision of the Fund's investments,
furnish a continuous investment program for the Fund's portfolio
and determine from time to time what securities will be
purchased, retained, or sold by the Fund, and what portion of the
assets will be invested or held as cash.
(b) The Manager shall use reasonable care and judgment in the
management of the Fund's portfolio.
(c) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Articles
of Incorporation (as hereinafter defined) of the Fund and by the
investment policies of the Fund as determined by the Board of
Directors of the Fund and set forth in the Prospectus and
Statement of Additional Information. All acts of the Manager
shall conform to and comply with the requirements of the 1940 Act
and all other applicable federal and state laws and regulations.
(d) The Manager shall determine the securities to be purchased or
sold by the Fund and at the Fund's expense, and shall place
orders for the purchase and sale of portfolio securities pursuant
to its determinations with brokers or dealers selected by the
Manager. In executing portfolio transactions and selecting
brokers or dealers, the Manager shall use its best efforts to
seek on behalf of the Fund the best overall terms available. In
assessing the best overall terms available for any transaction,
the Manager may consider all factors it deems relevant, including
the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the
broker or dealer, and the reasonableness of the commission, if
any, both for the specific transaction and on a continuing basis.
In evaluating the best overall terms available, and in selecting
the broker or dealer to execute a particular transaction, the
Manager also may consider the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934, as amended) provided to the Fund and/or
other accounts over which the Manager exercises investment
discretion. The Manager is authorized to pay to a broker or
dealer who provides such brokerage and research services a
commission for executing a portfolio transaction for the Fund
which is in excess of the amount of commission another broker or
dealer would have charged for effecting the transaction if the
Manager determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of
that particular transaction or in terms of the overall
responsibilities of the Manager to the Fund and/or other accounts
over which the Manager exercises investment discretion.
(e) On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Fund as well as other
fiduciary accounts for which it has investment responsibility,
the Manager, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be so sold or
purchased in order to obtain the best execution, most favorable
net price or lower brokerage commissions. In such event,
allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, shall be made by the
Manager in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Fund and to such
other fiduciary accounts.
(f) On each business day the Manager shall provide a list of all
transactions concerning the Fund's assets.
(g) When the Manager makes investment recommendations for the Fund,
its personnel shall not inquire or take into consideration
whether the issuer of the securities proposed for purchase or
sale for the Fund's account is a customer of any affiliate of the
Manager. In dealing with commercial customers, the Manager's
affiliates shall not inquire or take into consideration whether
securities of those customers are held by the Fund.
3. Services Not Exclusive. The investment management services rendered by
the Manager hereunder to the Fund are not to be deemed exclusive, and
the Manager shall have the right to render similar services to others,
including, without limitation, other investment companies.
4. Expenses. During the term of this Agreement, the Manager shall pay all
expenses incurred by it in connection with its activities under this
Agreement including the salaries and expenses of any of its officers
or employees who act as officers, directors or employees of the Fund
but excluding the cost of securities purchased for the Fund and the
amount of any brokerage fees and commissions incurred in executing
portfolio transactions for the Fund, and provide the Fund with
suitable office space. Other expenses to be incurred in the operation
of the Fund (other than those borne by any third party), including
taxes, interest, brokerage fees and commissions, if any, fees of
directors who are not officers, directors, employees or holders of 5%
or more of the outstanding voting securities of the Manager or the
Fund's administrator or any of their affiliates, Securities and
Exchange Commission fees and state Blue Sky qualification fees,
advisory and administration fees, charges of custodians, transfer and
dividend disbursing agents' fees, certain insurance premiums, industry
association fees, outside auditing and legal expenses, costs of
maintaining corporate existence, costs of independent pricing
services, costs attributable to investor services (including, without
limitation, telephone and personnel expenses), costs of preparing,
printing and distributing prospectuses, costs of stockholders' reports
and corporate meetings, costs of implementing and operating the Fund's
service plan, and any extraordinary expenses will be borne by the
Fund. If, in any fiscal year, the sum of the Fund's expenses
(excluding taxes, interest and brokerage fees but including the
management fee) exceeds 1.5% of the average net assets of the Company
up to $30 million, 1% of such net assets between $30 million and $130
million, and .75% of such net assets over $130 million, or
alternatively (as defined under the securities regulations of any
state having jurisdiction over the Fund) the expense limitations of
any such state, it will reimburse the Fund for such excess.
5. Compensation. For the services provided pursuant to this Agreement,
the Fund shall pay to the Manager as full compensation therefor a
monthly fee computed on the average daily net assets of the Fund equal
to .625% per annum up to the first $250 million; on assets in excess
of $250 million, the fee decreases to .50%. The Fund acknowledges that
the Manager, as agent for the Fund, will allocate a portion of the fee
equal to .15% of such assets to Murphey Favre Securities Services,
Inc. for administrative services, portfolio accounting and regulatory
compliance systems and a portion of the fee equal to .125% of such
assets to Murphey Favre, Inc. for shareholder servicing activities.
6. Limitation of Liability. The Manager shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates, except a
loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in
Section 36(b) of the 1940 Act) or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement.
7. Delivery of Documents. The Fund has heretofore delivered to the
Manager true and complete copies of each of the following documents
and shall promptly deliver to it all future amendments and supplements
thereto, if any:
(a) Articles of Incorporation of the Fund (such Articles as presently
in effect and as amended from time to time, the "Articles of
Incorporation");
(b) Bylaws of the Fund;
(c) Resolutions of the Board of Directors of the Fund authorizing the
appointment of the Manager and approving the form of this
Agreement;
(d) Registration Statement under the Securities Act of 1933 and under
the 1940 Act of the Fund on Form N-1A, and all amendments
thereto, as filed with the Securities and Exchange Commission
(the "Registration Statement") relating to the Fund and the
shares of the Fund's common stock;
(e) Notification of Registration of the Fund under the 1940 Act on
Form N-8A;
(f) Prospectus of the Fund (such prospectus as presently in effect
and/or as amended or supplemented from time to time, the
"Prospectus"); and
(g) Statement of Additional Information of the Fund (such statement
as presently in effect and/or as amended or supplemented from
time to time, the "Statement of Additional Information").
8. Duration and Termination. This Agreement is a continuation of the
agreement dated July 29, 1982. Unless terminated herein, this
Agreement shall continue in effect provided such continuance is
specifically approved at least annually (a) by the vote of a majority
of those members of the Fund's Board of Directors who are not parties
to the Contract or "interested persons" to any such party, cast in
person at a meeting called for that purpose, or by vote of a majority
of the outstanding voting securities of the Fund. Notwithstanding the
foregoing, (a) this Agreement may be terminated at any time, without
the payment of any penalty, by either the Fund (by vote of the Fund's
Board of Directors or by vote of a majority of the outstanding voting
securities of the Fund) or the Manager, on sixty (60) days prior
written notice to the other and (b) shall automatically terminate in
the event of its assignment. As used in this Agreement, the terms
"majority of the outstanding voting securities", "interested persons"
and "assignment" shall have the meanings assigned to such terms in the
1940 Act.
9. Amendments. No provision of this Agreement may be amended, modified,
waived or supplemented except by a written instrument signed by the
party against which enforcement is sought. No amendment of this
Agreement shall be effective until approved in accordance with the
provisions of the 1940 Act.
10. Use of Manager's Name and Logo. The Fund agrees that it shall furnish
to the Manager, prior to any use or distribution thereof, copies of
all prospectuses, statements of additional information, proxy
statements, reports to stockholders, sales literature, advertisements,
and other material prepared for distribution to stockholders of the
Fund or to the public, which in any way refer to or describe the
Manager or which include any trade names, trademarks or logos of the
Manager or of any affiliate of the Manager. The Fund further agrees
that it shall not use or distribute any such material if the Manager
reasonably objects in writing to such use or distribution within five
(5) business days after the date such material is furnished to the
Manager. The provisions of this section shall survive termination of
this Agreement.
11. Notices. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or
mailed by registered mail, postage prepaid, if to the Fund: 601 W.
Main Ave., Suite 801, Spokane, Washington 99201; or if to the Manager:
1201 Third Avenue, Suite 1220, Seattle, Washington 98101; or to either
party at such other address as such party shall designate to the other
by a notice given in accordance with the provisions of this section.
12. Miscellaneous.
(a) Except as otherwise expressly provided herein or authorized by
the Board of Directors of the Fund from time to time, the Manager
for all purposes herein shall be deemed to be an independent
contractor and shall have no authority to act for or represent
the Fund in any way or otherwise be deemed an agent of the Fund.
(b) The Fund shall furnish or otherwise make available to the Manager
such information relating to the business affairs of the Fund as
the Manager at any time or from time to time reasonably requests
in order to discharge its obligations hereunder.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the State of Washington and shall inure to the
benefit of the parties hereto and their respective successors.
(d) If any provision of this Agreement shall be held or made invalid
or by any court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the date first above-written.
COMPOSITE INCOME FUND, INC.
/s/WILLIAM G. PAPESH Date-------------------------------
President
COMPOSITE RESEARCH & MANAGEMENT CO.
/s/WILLIAM G. PAPESH Date-------------------------------
President
EXHIBIT 6(b)
SELECTED DEALER AGREEMENT
Dear Sirs:
As the principal underwriter of shares in regulated investment companies
managed by Composite Research and Management co. which are distributed by us at
their respective net asset values plus any sales charges pursuant to each Fund's
prospectus, we invite you to participate as principal in the distribution of
shares of any and all of the Funds upon the following terms and conditions:
1. You are to offer and sell such shares only at the public offering
prices which shall be currently in effect, in accordance with the
terms of the then current prospectus of the Funds. You agree to act
only as principal in such transactions and shall not have authority to
act as agent for the Funds, for us, or for any other dealer in any
respect. All orders are subject to acceptance by us and become
effective upon confirmation by us.
2. On each purchase of shares by you from us, the total sales charges and
discount to selected dealers shall be as stated in each Fund's then
current prospectus.
Such sales charges and discount to selected dealers are subject to
reductions under a variety of circumstances as described in each Fund's then
current prospectus. To obtain these reductions, we must be notified when the
sale, which qualifies for the reduced charge, takes place.
There is no sales charge applied on the reinvestment of dividends.
3. As a selected dealer, you are hereby authorized to place orders
directly with the Funds for their shares to be resold by us to you
subject to the applicable terms and conditions governing the placement
of orders by us set forth in the Distribution Contract between each
Fund and us and subject to the applicable compensation provisions set
forth in each Fund's then current prospectus. You may tender shares
directly to the Funds or their transfer agent, Murphey Favre
Securities Services, Inc., for redemption.
4. Redemption and repurchases of shares will be made at the net asset
value of such shares in accordance with the then current prospectus of
the Funds.
5. You represent that you are a member in good standing of the National
Association of Securities Dealers, Inc., subject to the Rules of Fair
Practice of such Association.
6. This Agreement is in all respects subject to Rule 26 of the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
which shall control any provisions to the contrary in this Agreement.
7. You agree:
(a) To purchase shares from us only for the purpose of covering
purchase orders already received or for your own bond fide
investment.
(b) That you will not purchase any shares from your customers at
prices lower than the redemption or repurchase prices then quoted
by the Funds. You shall, however, be permitted to sell shares for
the account of their record owners to the Funds at the repurchase
prices currently established for such shares and may charge the
owner a fair commission for handling the transaction.
(c) That you will not withhold placing customers' orders for shares
solely for the purpose of increasing your profit as a result of
such withholding.
(d) That if any shares confirmed to you hereunder are redeemed or
repurchased by any of the Funds within seven business days after
such confirmation of your original order, you shall forthwith
refund to us the full discount reallowed to you on such sales. We
shall forthwith pay to the appropriate Fund our share of the
"charge" on the original sale, and shall also pay to such Fund
the refund from you as herein provided. We shall notify you of
such redemption or repurchase within ten days from the date of
delivery of the certificate or certificates to us or such Fund.
Termination or cancellation of this Agreement shall not relieve
you or us from the requirements of this subparagraph.
8. We shall not accept from you any conditional orders for shares.
Delivery of certificates for shares purchased shall be made by the
Funds only against receipt of the purchase price, subject to deduction
for the discount reallowed to you and our portion of the sales charge
on such sale. If payment for the shares purchased is not received
within the time customary for such payments, the sale may be cancelled
without any responsibility or liability on our part or on the part of
the Funds (in which case you will be responsible for any loss,
including loss of profit, suffered by the Funds resulting from your
failure to make payment as aforesaid), or, at our option, we may sell
the shares ordered back to the Funds (in which case we may hold you
responsible for any loss, including loss of profit suffered by us
resulting from your failure to make payment as aforesaid).
9. You will not offer or sell any of the shares except under
circumstances that will result in compliance with the applicable
Federal and State securities laws and in connection with sales and
offers to sell shares you will furnish to each person to whom any such
sale or offer is made a copy of the applicable then current
prospectus. We shall be under no liability to you except for
obligations expressly assumed by us herein. Nothing herein contained
however, shall be deemed to be a condition, stipulation or provision
binding any persons acquiring any security to waive compliance with
any provision of the Securities Act of 1933, or of the Rules and
Regulations of the Securities and Exchange Commission, or to relieve
the parties hereto from any liability arising under the Securities Act
of 1933.
10. No person is authorized to make any representations concerning shares
of the Funds except those contained in the current prospectus and
printed information issued by each Fund or by us as information
supplemental to each prospectus. We shall supply prospectuses,
reasonable quantities of supplemental sales literature, and additional
information as issued. You agree not to use other advertising or sales
material relating to the Funds unless approved in writing by us in
advance of such use. Any printed information furnished by us other
than the then current prospectus for each Fund, periodic reports and
proxy solicitation materials are our sole responsibility and not the
responsibility of the Funds, and you agree that the Funds shall have
no liability or responsibility to you in these respects unless
expressly assumed in connection therewith.
11. Either party to this Agreement may cancel this Agreement by giving
written notice to the other. Such notice shall be deemed to have been
given on the date on which it was either delivered personally to the
other party or any officer or member thereof, or was mailed postpaid
or delivered to a telegraph office for transmission to the other party
at his or its address as shown below. This Agreement may be amended by
us at any time and your placing of an order after the effective date
of any such amendment shall constitute your acceptance thereof.
12. This Agreement shall be construed in accordance with the laws of the
State of Washington and shall be binding upon both parties hereto when
signed by us and accepted by you in the space provided below.
Very truly yours,
MURPHEY FAVRE, INC.
By--------------------------------
(Authorized Signature)
Firm Name---------------------------------------------------------
Address-----------------------------------------------------------
City-------------------------------State------------Zip Code------
ACCEPTED BY (signature)-------------------------------------------
Name (print)------------------------------------------------------
Date--------------------------------19---
Please return two signed copies of this Agreement (one of which will be signed
by us and thereafter returned to you).
Murphey Favre, Inc.
601 West Main Avenue
Suite 801
Spokane, Washington 99201
EXHIBIT 8
CUSTODY AGREEMENT
THIS AGREEMENT made the 1st day of September, 1992 by and between INVESTORS
FIDUCIARY TRUST COMPANY, a trust company chartered under the laws of the state
of Missouri, having its trust office located at 127 West 10th Street, Kansas
City, Missouri 64105 ("Custodian"), and COMPOSITE INCOME FUND, INC., a
Washington corporation, having its principal office and place of business at 601
West Riverside Avenue, Spokane Washington 99201 ("Fund").
WITNESSETH:
WHEREAS, Fund desires to appoint Investors Fiduciary Trust Company as
Custodian of the securities and monies of Fund's investment portfolio; and
WHEREAS, Investors Fiduciary Trust Company is willing to accept such
appointment;
NOW THEREFORE, for and in consideration of the mutual promises contained
herein, the parties hereto, intending to be legally bound, mutual covenant and
agree as follows:
1. APPOINTMENT OF CUSTODIAN. Fund hereby constitutes and appoints
Custodian as custodian of the securities and monies at any time owned
by the Fund.
2. DELIVERY OF CORPORATE DOCUMENTS. Fund has delivered or will deliver to
Custodian prior to the effective date of this Agreement, copies of the
following documents and all amendments or supplements thereto,
properly certified or authenticated:
A. Resolutions of the Board of Directors of the Fund appointing
Custodian as custodian hereunder and approving the form of this
Agreement; and
B. Resolutions of the Board of Directors of the Fund designating
certain persons to give instructions on behalf of the Fund to
Custodian and authorizing Custodian to rely upon written
instructions over their signatures.
3. DUTIES AND RESPONSIBILITIES OF CUSTODIAN.
A. Delivery of Assets. Fund will deliver or cause to be delivered to
Custodian on the effective date of this Agreement, or as soon
thereafter as practicable, and from time to time thereafter, all
portfolio securities acquired by it and monies then owned by it
except as permitted by the Investment Company Act of 1940 or from
time to time coming into its possession during the time this
Agreement shall continue in effect. Custodian shall have no
responsibility or liability whatsoever for or on account of
securities or monies not so delivered. All securities so
delivered to Custodian (other than bearer securities) shall be
registered in the name of Fund or its nominee, or of a nominee of
Custodian, or shall be properly endorsed and in form for transfer
satisfactory to Custodian.
B. Delivery of Accounts and Records. Fund shall turn over to
Custodian all of the Fund's relevant custody accounts and records
previously maintained by it or a prior custodian in order to
perform its duties hereunder. Custodian shall be entitled to rely
conclusively on the completeness and correctness of the accounts
and records turned over to it by Fund, and Fund shall indemnify
and hold Custodian harmless of and from any and all expenses,
damages and losses whatsoever arising out of or in connection
with any error, omission, inaccuracy or other deficiency of such
accounts and records or in the failure of Fund to provide any
portion of such or to provide any information needed by the
Custodian knowledgeably to perform its function hereunder.
C. Delivery of Assets to Third Parties. Custodian will receive
delivery of and keep safely the assets of Fund delivered to it
from time to time and the assets of each Portfolio segregated in
a separate account. Custodian will not deliver, assign, pledge or
hypothecate any such assets to any person except as permitted by
the provisions of this Agreement or any agreement executed by it
according to the terms of Section 3.S. of this Agreement. Upon
delivery of any such assets to a subcustodian pursuant to Section
3.S. of this Agreement, Custodian will create and maintain
records identifying those assets which have been delivered to the
subcustodian as belonging to the applicable Portfolio of the
Fund. The Custodian is responsible for the safekeeping of the
securities and monies of Fund only until they have been
transmitted to and received by other persons as permitted under
the terms of this Agreement, except for securities and monies
transmitted to United Missouri Bank of Kansas City, N.A. (UMBKC),
United Missouri Trust Company of New York (UMBTC), and First
National Bank of Chicago (FNBC) for which Custodian remains
responsible. Custodian shall be responsible for the monies and
securities of Fund(s) held by eligible foreign subcustodians to
the extent the domestic subcustodian with which the Custodian
contracts is responsible to Custodian. Custodian may participate
directly or indirectly through a subcustodian in the Depository
Trust Company, Treasury/Federal Reserve Book Entry System,
Participant Trust Company, Treasury/Federal Reserve Book Entry
System, Participant Trust Company or other depository approved by
the Fund (as such entities are defined at 17 CFR Section
270.17f(b)).
D. Registration of Securities. Custodian will hold stocks and other
registerable portfolio securities of Fund registered in the name
of the Fund or in the name of any nominee of Custodian for whose
fidelity and liability Custodian will be fully responsible, or in
street certificate form, so-called, with or without any
indication of fiduciary capacity. Unless otherwise instructed,
Custodian will register all such portfolio securities in the name
of its authorized nominee. All securities, and the ownership
thereof by Fund, which are held by Custodian hereunder, however,
shall at all times be identifiable on the records of the
Custodian. The Fund agrees to hold Custodian and its nominee
harmless for any liability as a record holder of securities held
in custody.
E. Exchange of Securities. Upon receipt of instructions as defined
herein in Section 4.A, Custodian will exchange, or cause to be
exchanged, portfolio securities held by it for the account of
Fund for other securities or cash issued or paid in connection
with any reorganization, recapitalization, merger, consolidation,
split-up of shares, change of par value, conversion or otherwise,
and will deposit any such securities in accordance with the terms
of any reorganization or protective plan. Without instructions,
Custodian is authorized to exchange securities held by it in
temporary form for securities in definitive form, to effect an
exchange of shares when the par value of the stock is changed,
and upon receiving payment therefor, to surrender bonds or other
securities held by it at maturity or when advised of earlier call
for redemption, except that Custodian shall receive instructions
prior to surrendering any convertible security.
F. Purchases of Investments of the Fund. Fund will, on each business
day on which a purchase of securities shall be made by it,
deliver to Custodian instructions which shall specify with
respect to each such purchase:
1. The name of the Portfolio making such purchase;
2. The name of the issuer and description of the
security;
3. The number of shares or the principal amount
purchased, and accrued interest, if any;
4. The trade date;
5. The settlement date;
6. The purchase price per unit and the brokerage
commission, taxes and other expenses payable in
connection with the purchase;
7. The total amount payable upon such purchase; and
8. The name of the person from whom or the broker or
dealer through whom the purchase was made.
In accordance with such instructions, Custodian will pay for
out of monies held for the account of Fund, but only insofar
as monies are available therein for such purpose, and
receive the portfolio securities so purchased by or for the
account of Fund except that Custodian may in its sole
discretion advance funds to the Fund which may result in an
overdraft because the monies held by the Custodian on behalf
of the Fund are insufficient to pay the total amount payable
upon such purchase. Such payment will be made only upon
receipt by Custodian of the securities so purchased in form
for transfer satisfactory to Custodian.
G. Sales and Deliveries of Investments of the Fund - Other than
Options and Futures Fund will, on each business day on which a
sale of investment securities of Fund has been made, deliver to
Custodian instructions specifying with respect to each such sale:
1. The name of the Portfolio making such sale;
2. The name of the issuer and description of the securities;
3. The number of shares or principal amount sold, and accrued
interest, if any;
4. The date on which the securities sold were purchased or
other information identifying the securities sold and to be
delivered;
5. The trade date;
6. The settlement date;
7. The sale price per unit and the brokerage commission, taxes
or other expenses payable in connection with such sale;
8. The total amount to be received by Fund upon such sale; and
9. The name and address of the broker or dealer through whom or
person to whom the sale was made.
In accordance with such instructions, Custodian will deliver
or cause to be delivered the securities thus designated as
sold for the account of Fund to the broker or other person
specified in the instructions relating to such sale, such
delivery to be made only upon receipt of payment therefor in
such form as is satisfactory to Custodian, with the
understanding that Custodian may deliver or cause to be
delivered securities for payment in accordance with the
customs prevailing among dealers in securities.
H. Purchases or Sales of Security Options, Options on Indices and
Security Index Futures Contracts Fund will, on each business day
on which a purchase or sale of the following options and/or
futures shall be made by it, deliver to Custodian instructions
which shall specify with respect to each such purchase or sale:
1. The name of the Portfolio making such purchase or sale;
2. Security Options
a. The underlying security;
b. The price at which purchased or sold;
c. The expiration date;
d. The number of contracts;
e. The exercise price;
f. Whether the transaction is an opening, exercising,
expiring or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased;
i. Market on which option traded;
j. Name and address of the broker or dealer through whom
the sale or purchase was made.
3. Options on Indices
a. The index;
b. The price at which purchased or sold;
c. The exercise price;
d. The premium;
e. The multiple;
f. The expiration date;
g. Whether the transaction is an opening, exercising,
expiring or closing transaction;
h. Whether the transaction involves a put or call;
i. Whether the option is written or purchased;
j. The name and address of the broker or dealer through
whom the sale or purchase was made, or other applicable
settlement instructions.
4. Security Index Futures Contracts
a. The last trading date specified in the contract and,
when available, the closing level, thereof;
b. The index level on the date the contract is entered
into;
c. The multiple;
d. Any margin requirements;
e. The need for a segregated margin account (in addition
to instructions, and if not already in the possession
of Custodian, Fund shall deliver a substantially
complete and executed custodial safekeeping account and
procedural agreement which shall be incorporated by
reference into this Custody Agreement); and
f. The name and address of the futures commission merchant
through whom the sale or purchase was made, or other
applicable settlement instructions.
5. Option on Index Future Contracts
a. The underlying index futures contract;
b. The premium;
c. The expiration date;
d. The number of options;
e. The exercise price;
f. Whether the transaction involves an opening,
exercising, expiring or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased; and
i. The market on which the option is traded.
I. Securities Pledged or Loaned
If specifically allowed for in the prospectus of Fund:
1. Upon receipt of instructions, Custodian will release or
cause to be released securities held in custody to the
pledgee designated in such instructions by way of pledge or
hypothecation to secure any loan incurred by Fund; provided,
however, that the securities shall be released only upon
payment to Custodian of the monies borrowed, except that in
cases where additional collateral is required to secure a
borrowing already made, further securities may be released
or caused to be released for that purpose upon receipt of
instructions. Upon receipt of instructions, Custodian will
pay, but only from funds available for such purpose, any
such loan upon redelivery to it of the securities pledged or
hypothecated therefor and upon surrender of the note or
notes evidencing such loan.
2. Upon receipt of instructions, Custodian will release
securities held in custody to the borrower designated in
such instructions; provided, however, that the securities
will be released only upon deposit with Custodian of full
cash collateral as specified in such instructions, and that
Fund will retain the right to any dividends, interest or
distribution on such loaned securities. Upon receipt of
instructions and the loaned securities, Custodian will
release the cash collateral to the borrower.
J. Routine Matters. Custodian will, in general, attend to all
routine and mechanical matters in connection with the sale,
exchange, substitution, purchase, transfer, or other dealings
with securities or other property of Fund except as may be
otherwise provided in this Agreement or directed from time to
time by the Board of Directors of Fund.
K. Deposit Account. Custodian will open and maintain a special
purpose deposit accounts in the name of Custodian ("Account"),
subject only to draft or order by Custodian upon receipt of
instructions. All monies received by Custodian from or for the
account of a portfolio shall be deposited in said Account,
barring events not in the control of the Custodian such as
strikes, lockouts or labor disputes, riots, war or equipment or
transmission failure or damage, fire, flood, earthquake or other
natural disaster, action or inaction of governmental authority or
other causes beyond its control, at 9:00 a.m., Kansas City time,
on the second business day after deposit of any check into Fund's
Account, Custodian agrees to make Fed Funds available to the Fund
in the amount of the check. Deposits made by Federal Reserve wire
will be available to the Fund immediately and ACH wires will be
available to the Fund on the next business day. Income earned on
the portfolio securities will be credited to the applicable
portfolio of the Fund based on the schedule attached as Exhibit
A. The Custodian will be entitled to reverse any credited amounts
where credits have been made and monies are not finally
collected. If monies are collected after such reversal, the
Custodian will credit the applicable portfolio in that amount.
Custodian may open and maintain an Account in such other banks or
trust companies as may be designated by it or by properly
authorized resolution of the Board of Directors of Fund, such
Account, however, to be in the name of custodian and subject only
to its draft or order.
L. Income and other Payments to Fund.
Custodian will:
1. Collect, claim and receive and deposit for the Account of
Fund all income and other payments which become due and
payable on or after the effective date of this Agreement
with respect to the securities deposited under this
Agreemenet, and credit the account of Fund in accordance
with the schedule attached hereto as Exhibit A. If for any
reason, the Fund is credited with income that is not
subsequently collected, Custodian may reverse that credited
amount;
2. Execute ownership and other certificates and affidavits for
all federal, state and local tax purposes in connection with
the collection of bond and note coupons; and
3. Take such other action as may be necessary or proper in
connection with:
a. The collection, receipt and deposit of such income and
other payments, including but not limited to the
presentation for payment of:
1. all coupons and other income items requiring
presentation; and
2. all other securities which may mature or be
called, redeemed, retired or otherwise become
payable and regarding which the Custodian has
actual knowledge, or notice of which is contained
in publications of the type to which it normally
subscribes for such purpose; and
b. the endorsement for collection, in the name of the
Fund, of all checks, drafts or other negotiable
instruments.
Custodian, however, will not be required to institute suit
or take other extraordinary action to enforce collection
except upon receipt of instructions and upon being
indemnified to its satisfaction against the costs and
expenses of such suit or other actions. Custodian will
receive, claim and collect all stock dividends, rights or
other similar items and will deal with the same pursuant to
instructions. Unless prior instructions have been received
to the contrary, Custodian will, without further
instructions, sell any rights held for the account of Fund
on the last trade date prior to the date of expiration of
such rights.
M. Payment of Dividends and other Distributions. On the declaration
of any dividend or other distribution on the shares of Capital
Stock of Fund ("Fund Shares") by the Board of Directors of Fund,
Fund shall deliver to Custodian instructions with respect
thereto, including a copy of the Resolution of said Board of
Directors certified by the Secretary or Assistant Secretary of
Fund wherein there shall be set forth the record date as of which
shareholders entitled to receive such dividend or other
distribution shall be determined, the date of payment of such
dividend or distribution, and the amount payable per share on
such dividend or distribution. Except if the ex-dividend date and
the reinvestment date of any dividend are the same, in which case
funds shall remain in the Custody Account, on the date specified
in such Resolution for the payment of such dividend or other
distribution, Custodian will pay out of the monies held for the
account of Fund, insofar as the same shall be available for such
purposes, and credit to the account of the Dividend Disbursing
Agent for Fund, such amount as may be necessary to pay the amount
per share payable in cash on Fund Shares issued and outstanding
on the record date established by such Resolution.
N. Shares of Fund Purchased by Fund. Whenever any Fund Shares are
repurchased or redeemed by Fund, Fund or its agent shall advise
Custodian of the aggregate dollar amount to be paid for such
shares and shall confirm such advice in writing. Upon receipt of
such advice, Custodian shall charge such aggregate dollar amount
to the Account of Fund and either deposit the same in the account
maintained for the purpose of paying for the repurchase or
redemption of Fund Shares or deliver the same in accordance with
such advice. Custodian shall not have any duty or responsibility
to determine that Fund Shares have been removed from the proper
shareholder account or accounts or that the proper number of such
shares have been cancelled and removed from the shareholder
records.
O. Shares of Fund Purchased from Fund. Whenever Fund Shares are
purchased from Fund, Fund will deposit or cause to be deposited
with Custodian the amount received for such shares. Custodian
shall not have any duty or responsibility to determine that Fund
Shares purchased from Fund have been added to the proper
shareholder account or accounts or that the proper number of such
shares have been added to the shareholder records.
P. Proxies and Notice. Custodian will promptly deliver or mail or
have delivered or mailed to Fund all proxies properly signed, all
notices of meetings, all proxy statements and other notices,
requests or announcements affecting or relating to securities
held by Custodian for Fund and will, upon receipt of
instructions, execute and deliver or cause its nominee to execute
and deliver or mail or have delivered or maield such proxies or
other authorizations as may be required. Except as provided by
this Agreement or pursuant to instructions hereafter received by
Custodian, neither it nor its nominee will exercise any power
inherent in any such securities, including any power to vote the
same, or execute any proxy, power of attorney, or other similar
instrument voting any of such securities, or give any consent,
approval or waiver with respect thereto, or take any other
similar action.
Q. Disbursements. Custodian will pay or cause to be paid insofar as
funds are available for the purpose, bills, statements and other
obligations of Fund (including but not limited to obligations in
connection with the conversion, exchange or surrender of
securities owned by Fund, interest charges, dividend
disbursements, taxes, management fees, custodian fees, legal
fees, auditors' fees, transfer agents' fees, brokerage
commissions, compensation to personnel, and other operating
expenses of Fund) pursuant to instructions of Fund setting forth
the name of the person to whom payment is to be made, the amount
of the payment, and the purpose of the payment.
R. Daily Statement of Accounts. Custodian will, within a reasonable
time, render to Fund as of the close of business on each day, a
detailed statement of the amounts received or paid and of
securities received or delivered for the account of Fund during
said day. Custodian will, from time to time, upon request by
Fund, render a detailed statement of the securities and monies
held for Fund under this Agreement, and Custodian will maintain
such books and records as are necessary to enable it to do so and
will permit such persons as are authorized by Fund including
Fund's independent public accountants, access to such records or
confirmation of the contents of such records; and if demanded,
will permit federal or state regulatory agencies to examine the
securities, books and records. Upon the written instructions of
Fund or as demanded by federal or state regulatory agencies,
Custodian will instruct any subcustodian to give such persons as
are authorized by Fund including Fund's independent public
accountants, access to such records or confirmation of the
contents of such records; and if demanded, to permit federal and
state regulatory agencies to examine the books, records and
securities held by subcustodian which relate to Fund.
S. Appointment of Subcustodians.
1. Notwithstanding any other provisions of this Agreement, all
or any of the monies or securities if Fund may be held in
Custodian's own custody or in the custody of one or more
other banks or trust companies selected by Custodian. Any
such subcustodian selected by the Custodian must have the
qualifications required for custodian under the Investment
Company Act of 1940, as amended. The Custodian may
participate directly or indirectly in the Depository Trust
Company, Treasury/Federal Reserve Book Entry System,
Participant Trust Company (as such entities are defined at
17 CFR Sec. 270.17f-4(b)), or other depository approved by
the Fund and with which Custodian has a satisfactory direct
or indirect contractual relationship. Custodian will appoint
UMBKC and UMBNY as subcustodians and Custodian shall be
responsible for UMBKC and UMBNY to the same extent it is
responsible to the Fund under Section 5 of this Agreement.
Custodian is not responsible for DTC, the Treasury/Federal
Reserve Book Entry System, and PTC except to the extent such
entities are responsible to Custodian. Upon instruction of
the Fund, Custodian shall be willing to contract with such
entities as Bank of New York (BONY), Morgan Guaranty and
Trust Company (MGTC), Chemical Bank (CB), and Bankers Trust
Company (BT) for variable rate securities and Custodian will
be responsible to the Fund to the same extent those entities
are responsible to Custodian. The Fund shall be entitled to
review Custodian's contracts with BONY, MGTC, CB, and BT.
T. Accounts and Records Property of Fund. Custodian acknowledges
that all of the accounts and records maintained by Custodian
pursuant to this Agreement are the property of Fund, and will be
made available to Fund for inspection or reproduction within a
reasonable period of time, upon demand. Custodian will assist
Fund's independent auditors, or upon approval of Fund, or upon
demand, any regulatory body having jurisdiction over the Fund or
Custodian, in any requested review of Fund's accounts and records
but shall be reimbursed for all expenses and employee time
invested in any such review outside of routine and normal
periodic reviews.
U. Adoption of Procedures. Custodian and Fund may from time to time
adopt procedures as they agree upon, and Custodian may
conclusively assume that no procedure approved by Fund, or
directed by Fund, conflicts with or violates any requirements of
its prospectus, "Articles of Incorporation," Bylaws, or any rule
or regulation of any regulatory body or governmental agency. Fund
will be responsible to notify Custodian of any changes in
statutes, regulations, rules or policies which might necessitate
changes in Custodian's responsibilities or procedures.
V. Overdrafts. If Custodian shall in its sole discretion advance
funds to the account of the Fund which results in an overdraft
because the monies held by Custodian on behalf of the Fund are
insufficient to pay the total amount payable upon a purchase of
securities as specified in a Fund's instructions or for some
other reason, the amount of the overdraft shall be payable by the
Fund to Custodian upon demand and shall bear an interest rate
determined by Custodian from the date advanced until the date of
payment. Custodian shall have a lien on the assets of Fund in the
amount of any outstanding overdraft.
4. INSTRUCTIONS.
A. The term "instructions," as used herein, means written or oral
instructions to Custodian from a designated representative of
Fund. Certified copies of resolutions of the Board of Directors
of Fund naming one or more designated representatives to give
instructions in the name and on behalf of Fund, may be received
and accepted from time to time by Custodian as conclusive
evidence of the authority of any designated representative to act
for Fund and may be considered to be in full force and effect
(and Custodian will be fully protected in acting in reliance
thereon) until receipt by Custodian of notice to the contrary.
Unless the resolution delegating authority to any person to give
instructions specifically requires that the approval of anyone
else will first have been obtained, Custodian will be under no
obligation to inquire into the right of the person giving such
instructions to do so. Notwithstanding any of the foregoing
provisions of this Section 4. no authorizations or instructions
received by Custodian from Fund, will be deemed to authorize or
permit any director, trustee, officer, employee, or agent of Fund
to withdraw any of the securities or similar investments of Fund
upon the mere receipt of such authorization or instructions from
such director, trustee, officer, employee or agent.
B. No later than the next business day immediately following each
oral instruction, Fund will send Custodian written confirmation
of such oral instruction. At Custodian's sole discretion,
Custodian may record on tape, or otherwise, any oral instruction
whether given in person or via telephone, each such recording
identifying the parties, the date and the time of the beginning
and ending of such oral instruction.
5. LIMITATION OF LIABILITY OF CUSTODIAN.
A. Custodian shall hold harmless and indemnify Fund from and against
any loss or liability arising out of Custodian's negligence or
bad faith. Custodian shall not be liable for consequential
damages, special, or punitive damages. Custodian may request and
obtain the advice and opinion of counsel for Fund, or of its own
counsel with respect to questions or matters of law, and it shall
be without liability to Fund for any action taken or omitted by
it in good faith, in conformity with such advice or opinion. If
Custodian reasonably believes that it could not prudently act
according to the instructions of the Fund or the Fund's counsel,
it may in its discretion, with notice to the Fund, not act
according to such instructions.
B. Custodian may rely upon the advice of Fund and upon statements of
Fund's accountants and other persons believed by, it in good
faith, to be expert in matters upon which they are consulted, and
Custodian shall not be liable for any actions taken, in good
faith, upon such statements.
C. If Fund requires Custodian in any capacity to take, with respect
to any securities, any action which involves the payment of money
by it, or which in Custodian's opinion might make it or its
nominee liable for payment of monies or in any other way,
Custodian, upon notice to Fund given prior to such actions, shall
be and be kept indemnified by Fund in an amount and form
satisfactory to Custodian against any liability on account of
such action.
D. Custodian shall be entitled to receive, and Fund agrees to pay
Custodian, on demand, reimbursement for such cash disbursements,
costs and expenses as may be agreed upon from time to time by
Custodian and Fund.
E. Custodian shall be protected in acting as custodian hereunder
upon any instructions, advice, notice, request, consent,
certificate or other instrument or paper reasonably appearing to
it to be genuine and to have been properly executed and shall,
unless otherwise specifically provided herein, be entitled to
receive as conclusive proof of any fact or matter required to be
ascertained from Fund hereunder, a certificate signed by the
Fund's President, or other officer specifically authorized for
such purpose.
F. Without limiting the generality of the foregoing, Custodian shall
be under no duty or obligation to inquire into, and shall not be
liable for:
1. The validity of the issue of any securities purchased by or
for Fund, the legality of the purchase thereof or evidence
of ownership required by Fund to be received by Custodian,
or the propriety of the decision to purchase or amount paid
therefor;
2. The legality of the sale of any securities by or for Fund,
or the propriety of the amount for which the same are sold;
3. The legality of the issue or sale of any shares of the
Capital Stock of Fund, or the sufficiency of the amount to
be received therefor;
4. The legality of the repurchase or redemption of any Fund
Shares, or the propriety of the amount to be paid therefor;
or
5. The legality of the declaration of any dividend by Fund, or
the legality of the issue of any Fund Shares in payment of
any stock dividend.
G. Custodian shall not be liable for, or considered to be Custodian
of, any money represented by any check, draft, wire transfer,
clearing house funds, uncollected funds, or instrument for the
payment of money received by it on behalf of the Fund, until
Custodian actually receives such money, provided only that it
shall advise Fund promptly if it fails to receive any such money
in the ordinary course of business, and use its best efforts and
cooperate with Fund toward the end that such money shall be
received.
H. Custodian shall not be responsible for loss occasioned by the
acts, neglects, defaults or insolvency of any broker, bank, trust
company, or any other person with whom Custodian may deal in the
absence of negligence, or bad faith on the part of the Custodian.
I. Notwithstanding anything herein to the contrary, Custodian may,
and with respect to any foreign subcustodian appointed under
Section 3.S.2. must, provide the Fund for its approval,
agreements with banks or trust companies which will act as
subcustodians for Fund pursuant to Section 3.S of this Agreement.
6. COMPENSATION. Fund will pay Custodian such compensation as is stated
in the Fee Schedule attached hereto as Exhibit B which may be changed
from time to time as agreed to in writing by Custodian and Fund.
Custodian may charge such compensation against monies held by it for
the account of Fund. Custodian will also be entitled, notwithstanding
the provisions of Sections 5.C. or 5.D. hereof, to charge against any
monies held by it for the account of Fund the amount of any loss,
damage, liability, advance, or expense for which it shall be entitled
to reimbursement under the provisions of this Agreement including fees
or expenses due to Custodian for other services provided to the Fund
by the Custodian.
7. TERMINATION. Either party to this Agreement may terminate the same by
notice in writing, delivered or mailed, postage prepaid, to the other
party hereto and received not less than ninety (90) days prior to the
date upon which such termination will take effect. Upon termination of
this Agreement, Fund will pay to Custodian such compensation for its
reimbursable disbursements, costs and expenses paid or incurred to
such date and Fund will use its best efforts to obtain a successor
custodian. Unless the holders of a majority of the outstanding shares
of "Capital Stock" of Fund vote to have the securities, funds and
other properties held under this Agreement delivered and paid over to
some other person, firm or corporation specified in the vote, having
not less than Two Million Dollars ($2,000,000) aggregate capital,
surplus and undivided profits, as shown by its last published report,
and meeting such other qualifications for custodian as set forth in
the Bylaws of Fund, the Board of Directors of Fund will, forthwith
upon giving or receiving notice of termination of this Agreement,
appoint as successor custodian a bank or trust company having such
qualifications. Custodian will, upon termination of this Agreement,
deliver to the successor custodian so specified or appointed, at
Custodian's office, all securities then held by Custodian hereunder,
duly endorsed and in form for transfer, all funds and other properties
of Fund deposited with or held by Custodian hereunder, or will
cooperate in effecting changes in book-entries at the Depository Trust
Company or in the Treasury/Federal Reserve Book-Entry System pursuant
to 31 CFR Sec. 306.118. In the event no such vote has been adopted by
the stockholders of Fund and no written order designating a successor
custodian has been delivered to Custodian on or before the date when
such termination becomes effective, then Custodian will deliver the
securities, funds and properties of Fund to a bank or trust company at
the selection of Custodian and meeting the qualifications for
custodian, if any, set forth in the Bylaws of Fund and having not less
than Two Million Dollars ($2,000,000) aggregate capital, surplus and
undivided profits, as shown by its last published report. Upon either
such delivery to a successor custodian, Custodian will have no further
obligations or liabilities under this Agreement. Thereafter such bank
or trust company will be the successor custodian under this Agreement
and will be entitled to reasonable compensation for its services. In
the event that no such successor custodian can be found, Fund will
submit to its shareholders, before permitting delivery of the cash and
securities owned by Fund to anyone other than a successor custodian,
the question of whether Fund will be liequidated or function without a
custodian. Notwithstanding the foregoing requirement as to delivery
upon termination of this Agreement, Custodian may make any other
delivery of the securities, funds and property of Fund which is
permitted by the Investment Company Act of 1940, Fund's Certificate of
Incorporation and Bylaws then in effect or apply to a court of
competent jurisdiction for the appointment of a successor custodian.
8. NOTICES. Notices, requests, instructions and other writings received
by Fund at 601 West Riverside Avenue, Suite 900, Spokane, Washington,
99201 or at such other address as Fund may have designated to
Custodian in writing, will be deemed to have been properly given to
Fund hereunder; and notices, requests, instructions and other writings
received by Custodian at its offices at 127 West 10th Street, Kansas
City, Missouri 64105, or to such other address as it may have
designated to Fund in writing, will be deemed to have been properly
given to Custodian hereunder.
9. MISCELLANEOUS.
A. This Agreement is executed and delivered in the State of Missouri
and shall be governed by the laws of said state.
B. All the terms and provisions of this Agreement shall be binding
upon, inure to the benefit of, and be enforceable by the
respective successor and assigns of the parties hereto.
C. No provisions of the Agreement may be amended or modified, in any
manner except by a written agreement properly authorized and
executed by both parties hereto.
D. The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or
effect.
E. This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original but all of
which together will constitute one and the same instrument.
F. If any part, term or provision of this Agreement is by the courts
held to be illegal, in conflict with any law or otherwise
invalid, the remaining portion or portions shall be considered
severable and not be affected, and the rights and obligations of
the parties shall be construed and enforced as if the Agreement
did not contain the particular part, term or provision held to be
illegal or invalid.
G. Custodian will not release the identity of Fund to an issuer
which requests such information pursuant to the Shareholder
Communications Act of 1985 for the specific purpose of direct
communications between such issuer and Fund unless the Fund
directs the Custodian otherwise.
H. This Agreement may not be assigned by either party without prior
written consent of the other party.
I. If any provision of the Agreement, either in its present form or
as amended from time to time, limits, qualifies, or conflicts
with the Investment Company Act of 1940, as amended, and the
rules and regulations promulgated thereunder, such statutes,
rules and regulations shall be deemed to control and supercede
such provision without nullifying or terminating the remainder of
the provisions of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly respective authorized officers.
INVESTORS FIDUCIARY TRUST
COMPANY
By: /s/ Allen Strain
Title: Senior V.P.
COMPOSITE INCOME FUND, INC.
By: /s/ William G. Papesh
Title: President
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
TRANSACTION DTC PHYSICAL FED
TYPE CR DATE FDS TYPE CR DATE FDS TYPE CR DATE FDS TYPE
Calls Puts As Received C of F* As Received C or F*
Maturities As Received C or F* Mat. Date C or F* Mat. Date F
Tender Reorgs. As Received C or F* As Received C N/A
Dividends Paydate C Paydate C N/A
Floating Rate Paydate C Paydate C N/A
Int.
Floating Rate N/A As Rate C N/A
Int. (No Rate) Received
Mtg. Backed P&I Paydate C Paydate + 1 C Paydate F
Bus. Day
Fixed Rate Int. Paydate C Paydate C Paydate F
Euroclear N/A C Paydate C
Legend
C = Clearinghouse Funds
F = Fed Funds
N/A = Not Applicable
* Availability based on how received.
</TABLE>
EXHIBIT 9
SHAREHOLDERS SERVICE CONTRACT
AGREEMENT, dated March 25, 1997, between COMPOSITE INCOME FUND, INC. (the
"Fund"), a Washington corporation with offices at 601 West Main Avenue, Suite
801, Spokane, Washington 99201, and MURPHEY FAVRE SECURITIES SERVICES, INC. (the
"Transfer Agent"), a Washington corporation with offices located at 601 West
Main Avenue, Suite 801, Spokane, Washington 99201:
W I T N E S S E T H
WHEREAS, the Fund is an investment company registered under the Investment
Company Act of 1940, whose shares will be registered under the Securities Act of
1933; and
WHEREAS, the Transfer Agent engages in the business of rendering computer
and related services and acting as transfer agent and shareholder servicing
agent for investment companies;
WHEREAS, the Fund desires the Transfer Agent to perform the services set
forth in Schedule A attached hereto and incorporated herein by reference, and
the Transfer Agent is willing to perform such services;
NOW THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the Fund and the Transfer Agent agree as follows:
1. The Transfer Agent shall perform for the Fund the services set forth
in Schedule A for a monthly fee as detailed in Schedule C (see
attached addenda).
2. The Fund agrees to reimburse the Transfer Agent for postage, the
procurement and/or printing of share certificates, statements,
envelopes, checks, reports, tax forms, proxies, or other forms of
printed material required in the performance of its services to the
Fund under this agreement.
3. The Fund agrees to reimburse the Transfer Agent for all freight and
other delivery charges and insurance or bonding charges incurred by
the Transfer Agent in delivering materials to and from the Fund and
for certificates delivered to shareholders.
4. The Fund agrees to reimburse the Transfer Agent for all direct
telephone expenses incurred by the Fund in calling shareholders
regarding their Fund transactions, accounts, and for any other Fund
business.
5. The Transfer Agent at the end of each month during the term of this
agreement will render an itemized statement to the Fund for its
charges under this agreement. Payment by the Fund is due 10 (ten) days
from the date such statement is received.
6. The Fund agrees that all computer programs and procedures developed to
perform services required under this agreement are the property of the
Transfer Agent and the Transfer Agent agrees that all records and
other data, except computer programs and procedures, are the property
of the Fund. The Transfer Agent agrees that it will furnish all
records and other data as may be requested to the Fund immediately
upon termination of this agreement for any reason whatsoever.
7. The Transfer Agent agrees to treat all records and other information
relative to the Fund with utmost confidence and further agrees that
all records maintained by the Transfer Agent for the Fund shall be
open to inspection and audit at reasonable times by the officers,
agents or auditors employed by the Fund and that such records shall be
preserved and retained by the Transfer Agent so long as this agreement
shall remain in effect.
8. The Transfer Agent shall not be liable for any damage, loss of data,
delay or any other loss caused by any such power failure or machine
breakdown, except that the Transfer Agent shall be liable for actual
out-of-pocket costs caused by any such power failure or machine
breakdown, and the Transfer Agent shall recover the data in process
that is assumed lost during any power failure or machine breakdown.
9. The Transfer Agent will maintain in force through the duration of this
agreement at least $1,000,000 or more fidelity bond written by a
reputable bonding company, covering theft, embezzlement, forgery and
other acts of malfeasance by the Transfer Agent, its employees, or
agents in connection with services performed for the Fund.
10. This agreement is a continuation of the agreement dated March 26,
1991. This agreement may be terminated without the payment of any
penalty by either party upon (180)days' written notice thereof given
by the Fund to the Transfer Agent and upon one hundred eighty (180)
days' written notice thereof given by the Transfer Agent to the Fund.
11. Any notice shall be officially given when sent by registered or
certified mail by either party to the foregoing addresses, provided
that either party may notary the other of any changed address to which
such notices should be mailed thereunder.
12. This agreement constitutes the entire agreement between the parties
and shall be governed by, and its provision shall be construed in
accordance with, the laws of the state of Washington.
13. This contract will be subject to review annually.
IN WITNESS WHEREOF, the parties hereto cause this agreement to be executed
by their officers designated below as of the date first above-written.
COMPOSITE INCOME FUND, INC.
By:/s/ WILLIAM G. PAPESH
President
MURPHEY FAVRE SECURITIES SERVICES, INC.
By:/s/ MONTE D. CALVIN
Executive Vice President
<PAGE>
SCHEDULE A
I. Shareholder Services
A. Maintain all shareholder records on electronic data processing
equipment, including:
1. Share balances
2. Account transaction history
3. Names and addresses
4. Certificate records
5. Distribution records
6. Transfer records
7. Over-all control records
B. New Accounts
1. Deposit all monies received into a Fund custoday account
maintained by the Custodian
2. Set up account according to shareholders'instructions as to:
a. Amount of shares purchased
b. Retain shares or deliver to shareholder
3. Issue and mail shareholder confirmations
C. Additional Purchases
1. Deposit monies received into a Fund custody account
maintained by the Custodian
2. Issue shareholder confirmations
D. Liquidations - Full and Partial
1. Liquidate shares upon shareholder request
2. Issue checks for amount of liquidation
3. Issue and mail shareholder confirmation
E. Transfer shares as requested which includes obtaining necessary
papers and documents to satisfy transfer requirements. On
irregular transfers requiring special legal opinions, such
special legal fees, if any, are to be paid for by the Fund.
F. Prepare and mail certificates as requested by shareholders
G. Process changes, corrections of addresses and registrations
H. Maintain service with shareholders as follows:
1. Activity required to receive, process and reply to
shareholders' correspondence regarding account matters
2. Refer correspondence regarding investment matters to the
Fund with sufficient account data to answer
3. Contact shareholders directly to settle problems and
answer questions
I. Compute distributions, dividends and capital gains
1. Reinvest in additional shares
2. Advise each shareholder of amount of dividends received and
tax status annually
J. Replace lost certificates
K. Produce transcripts of shareholder account history as required
L. Maintain the controls associated with the computer programs and
manual systems to arrive at the Company's total shares
outstanding
M. Receive mail and perform other administrative functions relating
to transfer agent work.
II. Reports and Schedules
A. Daily
1. Name and address changes
2. Name and address additions and deletions
3. Transaction Register
a. Purchases
b. Sales
c. Adjustments
4. Cash reconciliation - cash received for day
5. Check reconciliation - checks issued for day
6. Transaction reconciliation
a. Amount received
b. Total shares purchased
c. Number of purchase transactions
d. Amount liquidated
e. Total shares liquidated
f. Number of liquidations
g. Checks issued for liquidations
B. Monthly
1. Purchases, sales and adjustments
2. Certificates issued
3. Certificate, redemptions and transfers
4. Certificate reconciliation by certificate number
5. Sales by states for month
C. Periodically
1. Alphabetical account listing
III. Other Services
*A. Mailing labels or other mailing services to shareholders
*B. Services in connection with any stock splits
*C. Develop special reports for Fund officers regarding statistical
and accounting data pertaining to the Fund. Fund shall pay for
out-of-pocket expenses charged by vendors to develop such
reports or portions thereof.
* Extra charge services, per Schedule B.
SCHEDULE B
TIME AND MATERIAL SERVICES
Computer..............................................$50/hour
Keypunch..............................................$10/hour
Clerical..............................................$10/hour
Programming and Direct Technical Management $25/hour
Travel and per diem expenses (chargeable only
when authorized by Company).........................At Cost
Mailing Services......................................At Cost
Any of the above services when performed outside regular working hours of
Murphey may be billed at 150 percent of the above.
<PAGE>
SCHEDULE C: SHAREHOLDER SERVICING FEES
March 25, 1997
Fee Per Account Per Month
Class A Class B
Composite Bond & Stock Fund $1.25 $1.35
Composite Growth & Income Fund $1.25 $1.35
Composite Northwest Fund $1.25 $1.35
Composite Income Fund $1.45 $1.55
Composite Tax-Exempt Bond Fund $1.45 $1.55
Composite U.S. Government Securities $1.45 $1.55
Composite Cash Management Company
Money Market Portfolio
First 25,000 accounts $1.85 $1.95
Each additional account $1.55 $1.65
Composite Cash Management Company
Tax-Exempt Portfolio
First 25,000 accounts $1.85 $1.95
Each additional account $1.55 $1.65
EXHIBIT 10
April 22, 1997
COMPOSITE INCOME FUND, INC.
601 W MAIN AVE STE 801
SPOKANE WA 99201-0694
Gentlemen:
We hereby consent to the use of our written opinion dated April 22, 199,
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 Post-Effective Amendment No. 32 to the
Registration Statement now being filed with the Securities and Exchange
Commission and any Prospectus relating to the proposed offer and sale of the
capital stock of the corporation.
Very truly yours,
PAINE, HAMBLEN, COFFIN,
BROOKE & MILLER LLP
/s/ Lawrence R. Small
Lawrence R. Small
<PAGE>
EXHIBIT 10
April 22, 1997
Composite Income Fund, Inc.
Third Floor
Washington Mutual Building
601 W. Main Avenue
Spokane, WA 99201
Gentlemen:
In connection with Post-Effective Amendment No. 32 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
/s/ Lawrence R. Small
Lawrence R. Small
EXHIBIT 11
ACCOUNTANTS' CONSENT TO USE OF CERTIFICATE
AND FINANCIAL STATEMENTS
We hereby consent to the incorporation by reference into the Prospectus and
Statement of Additional Information in Post-Effective Amendment No. 32 to the
Registration Statement on Form N-1A of Composite Income Fund, Inc., of our
report dated January 24, 1997, on the financial statements and financial
highlights included in the December 31, 19965 Annual Report to Shareholders of
Composite Income Fund, Inc. We further consent to the reference to our Firm
under the headings "Financial Highlights" in the Prospectus and "Independent
Public Accountants" in the Statement of Additional Information.
/s/ LeMaster & Daniels, PLLC
LeMaster & Daniels, PLLC
Spokane, Washington
April 21, 1997
<PAGE>
EXHIBIT 11
INDEPENDENT PUBLIC ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of:
Composite U.S. Government Securities, Inc.
Composite Income Fund, Inc.
Composite Tax-Exempt Bond Fund, Inc.
We have audited the accompanying statements of assets and liabilities of
Composite U.S. Government Securities, Inc., Composite Income Fund, Inc., and
Composite Tax-Exempt Bond Fund, Inc., including the investment portfolios, as of
December 31, 1996, and the related statements of operations for the year then
ended and the statements of changes in net assets for the years ended December
31, 1996 and 1995. 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,
1996. For Composite U.S. Government Securities, Inc., and Composite Income Fund,
Inc., we have audited the financial highlights of each of the five years in the
period ended December 31, 1996. 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, 1996, 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, 1996, 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.
/s/ LeMaster & Daniels, PLLC
Certified Public Accountants
Spokane, Washington
January 24, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S ANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH DOCUMENTS.
</LEGEND>
<CIK> 0000022865
<NAME> Composite Income Fund, Inc.
<SERIES>
<NUMBER> 001
<NAME> Class A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 89,620,059
<INVESTMENTS-AT-VALUE> 91,509,181
<RECEIVABLES> 2,495,759
<ASSETS-OTHER> 14,228
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 94,019,168
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 239,890
<TOTAL-LIABILITIES> 239,890
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 106,487,114
<SHARES-COMMON-STOCK> 9,467,260
<SHARES-COMMON-PRIOR> 10,329,116
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,569,958)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,889,122
<NET-ASSETS> 86,657,040
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,234,241
<OTHER-INCOME> 0
<EXPENSES-NET> (1,028,688)
<NET-INVESTMENT-INCOME> 6,205,553
<REALIZED-GAINS-CURRENT> 1,098,430
<APPREC-INCREASE-CURRENT> (4,354,365)
<NET-CHANGE-FROM-OPS> 2,949,618
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,877,677)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,208,364
<NUMBER-OF-SHARES-REDEEMED> (2,547,839)
<SHARES-REINVESTED> 477,619
<NET-CHANGE-IN-ASSETS> (8,207,367)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (15,695,388)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 599,008
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,028,688
<AVERAGE-NET-ASSETS> 96,099,713
<PER-SHARE-NAV-BEGIN> 9.44
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> (0.29)
<PER-SHARE-DIVIDEND> (0.59)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.15
<EXPENSE-RATIO> 1.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S ANNUAL REPORT AND FORM N-SAR WHICH ARE ON FILE WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH DOCUMENTS.
</LEGEND>
<CIK> 0000022865
<NAME> Composite Income Fund, Inc.
<SERIES>
<NUMBER> 002
<NAME> Class B
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 89,620,059
<INVESTMENTS-AT-VALUE> 91,509,181
<RECEIVABLES> 2,495,759
<ASSETS-OTHER> 14,228
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 94,019,168
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 239,890
<TOTAL-LIABILITIES> 239,890
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 106,487,114
<SHARES-COMMON-STOCK> 776,973
<SHARES-COMMON-PRIOR> 470,873
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,569,958)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,889,122
<NET-ASSETS> 7,122,238
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,234,241
<OTHER-INCOME> 0
<EXPENSES-NET> (1,028,688)
<NET-INVESTMENT-INCOME> 6,205,553
<REALIZED-GAINS-CURRENT> 1,098,430
<APPREC-INCREASE-CURRENT> (4,354,365)
<NET-CHANGE-FROM-OPS> 2,949,618
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (327,876)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 383,465
<NUMBER-OF-SHARES-REDEEMED> (108,355)
<SHARES-REINVESTED> 30,990
<NET-CHANGE-IN-ASSETS> (8,207,367)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (15,695,388)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 599,008
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,028,688
<AVERAGE-NET-ASSETS> 96,099,713
<PER-SHARE-NAV-BEGIN> 9.46
<PER-SHARE-NII> 0.52
<PER-SHARE-GAIN-APPREC> (0.29)
<PER-SHARE-DIVIDEND> (0.52)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.17
<EXPENSE-RATIO> 1.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
