PORTFOLIO
COMPOSITION.........3
FUNDS'
INVESTMENT
HIGHLIGHTS..........4
FUNDS'
PORTFOLIOS..........7
FINANCIAL
INFORMATION
INDEPENDENT
PUBLIC
ACCOUNTANTS'
REPORT..........16
FINANCIAL
STATEMENTS......17
FINANCIAL
HIGHLIGHTS......20
NOTES TO
FINANCIAL
STATEMENTS......23
MORE ABOUT
THE COMPOSITE
GROUP...........26
FIVE KEY FORCES ARE EXPECTED TO
INFLUENCE THE MARKET FOR SOME TIME
[PHOTO: WILLIAM G. PAPESH, PRESIDENT]
The past year's economy began with expectations by some of a recession,
shifted to robust growth during mid-year, and concluded with almost perfect
conditions as the year ended. These shifts in trends kept our portfolio managers
especially attentive to the likely longer-term implications for the fixed-income
markets. It also reinforced the desirability of professional management.
Although the period ended December 31, 1996 was difficult, we're pleased with
our Funds' relative performance over time, as shown in the pages which follow.
MARKET FORCES ALLOW FOR FAVORABLE CONDITIONS
During the remainder of the 1990s, we expect that five important factors
will strongly influence the bond market. We feel these recurring themes will
allow the current, almost perfect, conditions of modest growth and low inflation
to persist. Additionally, we expect interest rates are likely to be centered
around current levels, with a tendency to move lower. The five important forces
we see include:
* First, the excessive buildup of debt of the U.S. government and U.S.
consumers has the effect of keeping economic growth slow. It does this by
placing a limit on the amount of new borrowing that our government and American
consumers can take on. In the case of the government, which accounts for 15% of
the overall economy, there is evidence of some reduced borrowing. If Congress
adopts a balanced budget, this reduction can be expected to continue.
* Second, foreign governments everywhere face a challenge similar to our own.
And, in most instances, those governments account for a larger share of their
economy than ours does.
* Third, the countries of the former Soviet Union, East Asia and Latin
America are opening up. This has helped curb inflation by allowing each country,
including ours, to provide the world market with the goods for which they are
the most efficient producer.
* Fourth, the Federal Reserve, which controls U.S. monetary policy, is well
aware that a desirable way to reach efficient, stable growth is to follow a path
of low inflation.
* Fifth, changing U.S. demographics are likely to have a positive impact on
financial markets. We can expect that aging baby boomers will begin to save more
for retirement and will borrow less to purchase goods.
It is our feeling that those five factors will be with us for the next
three to five years. Certainly, volatility will continue to be a potentially
powerful influence, just as it was in 1994 when interest rates rose, and in
1995, when rates fell. Nevertheless, we anticipate that today's interest rates
are likely to be typical of the average level of rates through the end of the
century.
MUTUAL FUNDS DESIRABLE FOR MOST INVESTORS
Those five factors represent what, a few years ago, was popularly called a
macro view. And that raises the question, "What is the micro view - the view
from the personal perspective?"
Unless you have a portfolio of several hundred thousand dollars that allows
you to diversify your holdings, the current and expected future market
conditions continue to favor the benefits of investing in mutual funds, each of
which consists of a large number of securities.
That is in contrast, of course, to owning a small selection of individual
securities. With that approach comes the loss of several positive attributes of
mutual funds: Extra risk is assumed because of the lack of diversification,
including credit or call risks for bonds if you buy just one or two.
Additionally, liquidity is reduced and professional investment management is
lost, as is simplified recordkeeping that comes from the umbrella provided by
owning a part of many securities within one mutual fund portfolio.
IMPORTANT CHANGES IN THE BOARD OF DIRECTORS
An on-going strength of the Composite Group of Funds has been the counsel
and leadership provided by members of our Board of Directors. After more than 21
years as a director and a source of valuable guidance, Edwin J. McWilliams
retired from our Board in December 1996. We are deeply appreciative for all he
has done for Composite.
Elected to succeed Mr. McWilliams was Daniel L. Pavelich, chairman and CEO
of BDO Seidman, the nation's seventh largest accounting firm. Mr. Pavelich has
national and international perspectives, as well as an intimate knowledge of our
Pacific Northwest region, having spent 27 years with Seidman in Spokane. He
moved recently to the firm's headquarters in Chicago. We are pleased to have Dan
join our Board.
YOUR CONFIDENCE IN COMPOSITE IS APPRECIATED
In closing, I would like to express our gratitude for those of you who
invest in our Composite funds. We encourage you to consider other funds in our
Composite Group to meet your varied investment objectives. We appreciate your
continued confidence and we will do our utmost to help support your financial
goals.
/s/
WILLIAM G. PAPESH
PRESIDENT
- --------------------------------------------------------------------------------
FOOTNOTE TO INVESTMENT PERFORMANCE CHARTS ON PAGES 4, 5 & 6
INVESTMENT RETURNS AND PRINCIPAL VALUES OF FUND SHARES WILL FLUCTUATE SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FUND SHARES ARE NOT GUARANTEED BY ANY AGENCY OF THE U.S.
GOVERNMENT.
COMPARISONS TO FUND PERFORMANCE ON THE FOLLOWING PAGES INCLUDE THE CONSUMER
PRICE INDEX (CPI), AS A MEASURE OF CHANGE IN CONSUMER PRICES, AND THE LEHMAN
BROTHERS GOVERNMENT (LBG), GOVERNMENT/CORPORATE (LGCB), AND MUNICIPAL BOND (LMB)
INDICES, WHICH ARE CONSIDERED REPRESENTATIVE OF THE U.S. GOVERNMENT, U.S.
GOVERNMENT AND CORPORATE, AND MUNICIPAL BOND MARKETS.
THESE INDICES ARE UNMANAGED AND DO NOT REFLECT ACTUAL INVESTMENT-RELATED
EXPENSES INCURRED BY THE FUNDS WITH WHICH THEY ARE COMPARED. FUND VALUES
PRESENTED IN THE GRAPHS ARE FOR CLASS A SHARES. CLASS B PERFORMANCE WOULD VARY
DUE TO DIFFERENT EXPENSES. AVERAGE ANNUAL TOTAL RETURNS AND GRAPH VALUES INCLUDE
CHANGES IN SHARE PRICE AND REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. UNLESS
OTHERWISE INDICATED, ALL FUND PERFORMANCE IS CALCULATED AFTER DEDUCTING THE
MAXIMUM 4% SALES CHARGE FOR CLASS A SHARES AND FOR CLASS B SHARES A CONTINGENT
DEFERRED SALES CHARGE OF 4% FOR ONE YEAR OR 2% SINCE 3/30/94. CLASS B YIELDS DO
NOT REFLECT CONTINGENT DEFERRED SALES CHARGES. THE YIELDS WOULD BE LOWER IF THEY
WERE REFLECTED. CLASS B INFORMATION IS PRESENTED SINCE 3/30/94, THE COMMENCEMENT
OF THEIR OFFERING.
<PAGE>
PORTFOLIO COMPOSITION
PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 1996
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
SOLE ISSUER
Invests exclusively in obligations issued
or guaranteed by the U.S. government and
investments secured by such obligations.
[PIE CHART]
ASSET ALLOCATION
Mortgage Pass Throughs 43%
Treasuries 25%
Collateralized Mortgage
Obligations 21%
Mortgage, Adjustable
Rate 9%
Cash and Other 2%
COMPOSITE INCOME FUND
TOP TEN ISSUERS
U.S. Treasury - 14%
Government National Mortgage Association-13%
Weyerhaeuser 1982 - C FHA Putable - 3%
United Mexican States, Series A and B - 3%
Time Warner, Inc. - 2%
Loral Corporation - 2%
Dart & Kraft Finance NV - 2%
Franchise Finance Corporation - 2%
Continental Corporation - 2%
Niagara Mohawk Power - 2%
[PIE CHART]
ASSET ALLOCATION
Corporate 48%
Mortgages 24%
Treasuries 14%
Cash and Other 10%
Foreign Obligations 4%
COMPOSITE TAX-EXEMPT BOND FUND
TOP TEN STATES
Washington - 21%
Illinois - 12%
California - 8%
Florida - 5%
Nebraska - 5%
New York - 4%
Arizona - 4%
Hawaii - 4%
Texas - 4%
Oregon - 4%
[PIE CHART]
ASSET ALLOCATION
Utility 24%
Industiral Development/
Pollution Control 15%
Local General
Obligation 15%
Prerefunded 15%
State General
Obligation 11%
Other Revenue 11%
Cash and Other 6%
Education 3%
<PAGE>
FUND HIGHLIGHTS
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
KEY IMPACTS ON 1996 PERFORMANCE
The economy grew at a faster pace than expected in 1996, which caused
interest rates to rise for most of the year and, therefore, limited returns to
investors in fixed-income securities. For the year, rates on
intermediate-maturity securities rose 0.85%. Although these returns were
relatively minor, it should be remembered that inflation remained low and,
because of that, the average fixed-income investor generally kept pace with cost
of living increases.
The Fund's portfolio consisted of a substantial amount of mortgage-backed
securities, which performed well in 1996. A favorable prepayment environment -
the result of relatively subdued interest rate volatility - was the primary
factor supporting this sector's strong relative performance.
WHAT'S AHEAD
We look for mortgage-backed securities to perform well again in 1997. As a
general rule, the best environment for mortgages is when prepayment expectations
are relatively stable. We believe this type of environment will exist because of
our view that 1997 interest rates will not be significantly higher nor lower
than last year.
Although we do not expect major shifts in interest rates, we do believe
that rates at today's levels represent good value.
KEY INVESTMENT STRATEGIES
The Fund's objective is to provide a high level of current income that is
consistent with safety and liquidity. We accomplish this by selecting
investments with an intermediate-maturity profile, by investing in a combination
of mortgage-backed and treasury securities which are obligations of, or have
collateral guaranteed by, the U.S. government. By taking advantage of changing
fundamentals between different segments of the mortgage market and by
anticipating broad changes in interest rates, we feel we can add additional
income to the Fund while clearly meeting the safety and liquidity objective.
INVESTMENT PERFORMANCE CHART:
INVESTMENT PERFORMANCE - COMPOSITE U.S. GOVERNMENT SECURITIES
- -------------------------------------------------------------
COMPARATIVE ENDING VALUES OF $10,000 INVESTED ON 12/31/86
KEY: FUND CLASS A SHARES $20,119
LGB (GOV'T. BONDS) $21,841
CPI (INFLATION) $14,353
PAST PERFORMANCE CANNOT PREDICT FUTURE RESULTS.
AVERAGE ANNUAL TOTAL RETURNS
WITH WITHOUT
CLASS A SALES SALES
SHARES CHARGE CHARGE
- --------- ------- --------
ONE YEAR -1.60% 2.48%
FIVE YEARS 5.09% 5.96%
TEN YEARS 7.24% 7.68%
CLASS B
SHARES
- ---------
ONE YEAR -2.28% 1.58%
SINCE
3/30/94 5.57% 6.22%
- ---------------------------------
30-DAY CURRENT YIELDS
Class A Shares 5.71%
Class B Shares 5.08%
- ---------------------------------
See footnote on page 2 for additional information.
COMPOSITE U.S. GOVERNMENT
SECURITIES LGB (GOV'T. BONDS) CPI (INFLATION)
- ------------------------- ------------------------ ---------------------
12/31/86 $9,600 $10,000 $10,000
3/31/87 $9,712 $10,117 $10,145
6/30/87 $9,534 $9,941 $10,271
9/30/87 $9,338 $9,673 $10,407
12/31/87 $9,867 $10,220 $10,443
3/31/88 $10,267 $10,557 $10,543
6/30/88 $10,409 $10,656 $10,679
9/30/88 $10,553 $10,836 $10,842
12/31/88 $10,589 $10,938 $10,905
3/31/89 $10,661 $11,054 $11,068
6/30/89 $11,477 $11,943 $11,231
9/31/89 $11,577 $12,042 $11,312
12/31/89 $11,997 $12,494 $11,412
3/31/90 $11,945 $12,339 $11,647
6/30/90 $12,307 $12,770 $11,756
9/30/90 $12,536 $12,876 $12,009
12/31/90 $13,132 $13,583 $12,109
3/31/91 $13,458 $13,878 $12,217
6/30/91 $13,673 $14,065 $12,308
9/30/91 $14,391 $14,867 $12,416
12/31/91 $15,065 $15,664 $12,480
3/31/92 $14,857 $15,390 $12,606
6/30/92 $15,431 $15,998 $12,688
9/30/92 $15,937 $16,788 $12,787
12/31/92 $15,987 $16,796 $12,842
3/31/93 $16,534 $17,554 $12,995
6/30/93 $16,957 $18,062 $13,068
9/30/93 $17,294 $18,649 $13,131
12/31/93 $17,285 $18,586 $13,195
3/31/94 $16,648 $18,027 $13,321
6/30/94 $16,379 $17,821 $13,394
9/30/94 $16,384 $17,896 $13,520
12/31/94 $16,435 $17,958 $13,548
3/31/95 $17,375 $18,804 $13,701
6/31/95 $18,501 $19,970 $13,801
9/30/95 $18,812 $20,324 $13,864
12/31/95 $19,632 $21,252 $13,891
3/31/96 $19,095 $20,772 $14,090
6/30/96 $19,161 $20,871 $14,181
9/30/96 $19,475 $21,222 $14,281
12/31/96 $20,119 $21,841 $14,353
<PAGE>
COMPOSITE INCOME FUND
KEY IMPACTS ON 1996 PERFORMANCE
Fixed-income returns, although modest in 1996, still outpaced inflation.
Despite interest rates generally being low by recent historical standards,
inflation remained even lower. This translated into positive returns for Fund
shareholders, over and above their cost of living.
As it became apparent that the economy was growing faster than expected,
interest rates rose for most of the year, limiting returns to investors in
fixed-income securities. For the year, rates on intermediate-maturity securities
rose 0.85%.
Performance in 1996 was enhanced by the Fund's investments in corporate
bonds, which make up more than 50% of the portfolio. A slow, steadily growing
economy and subdued inflation produced very favorable conditions for corporate
America. In the long run, the Fund benefited from the extra yield associated
with corporate securities AND from the companies' growing financial strength.
WHAT'S AHEAD
We feel that continued investments in corporate securities and
mortgage-backed securities should prove rewarding again in 1997.
As for corporate bonds, we believe investments should be concentrated in
the non-cyclical portions of the economy, such as defense, health care and
media. This is because those sectors produce stable credit measures, even if the
economy begins to slow.
We are not looking for substantially higher or lower interest rates in
1997. Because of that, mortgage-backed securities should not be burdened with a
changing prepayment pattern. Consequently, they should continue to provide
investors with extra yield throughout the year.
Interest rates are likely to be centered around today's levels, with a
tendency to drift down during the next few years. A more detailed discussion
about this is included in this report's opening message.
KEY INVESTMENT STRATEGIES
The Fund's objective is to provide a high level of current income that is
consistent with the protection of capital. We accomplish this by selecting
investments with an intermediate-maturity profile and by investing in a
combination of corporate, mortgage-backed and treasury securities.
INVESTMENT PERFORMANCE CHART:
INVESTMENT PERFORMANCE - COMPOSITE INCOME FUND
- -------------------------------------------------------------
COMPARATIVE ENDING VALUES OF $10,000 INVESTED ON 12/31/86
KEY: FUND CLASS A SHARES $21,036
LGCB (GOV'T./CORP. BONDS) $22,356
CPI (INFLATION) $14,353
PAST PERFORMANCE CANNOT PREDICT FUTURE RESULTS.
AVERAGE ANNUAL TOTAL RETURNS
WITH WITHOUT
CLASS A SALES SALES
SHARES CHARGE CHARGE
- --------- ------- --------
ONE YEAR -0.64% 3.46%
FIVE YEARS 6.47% 7.34%
TEN YEARS 7.72% 8.16%
CLASS B
SHARES
- ---------
ONE YEAR -1.28% 2.59%
SINCE
3/30/94 6.76% 7.40%
- ---------------------------------
30-DAY CURRENT YIELDS
Class A Shares 5.95%
Class B Shares 5.34%
- ---------------------------------
See footnote on page 2 for additional information.
COMPOSITE INCOME FUND LGB (GOV'T./CORP. BONDS) CPI (INFLATION)
- ------------------------- ------------------------ ---------------------
12/31/86 $ 9,600 $10,000 $10,000
3/31/87 $ 9,946 $10,148 $10,145
6/30/87 $ 9,939 $ 9,956 $10,271
9/30/87 $ 9,959 $ 9,665 $10,407
12/31/87 $10,180 $10,229 $10,443
3/31/88 $10,542 $10,595 $10,543
6/30/88 $10,704 $10,700 $10,679
9/30/88 $10,857 $10,900 $10,842
12/31/88 $10,898 $11,005 $10,905
3/31/89 $11,009 $11,126 $11,068
6/30/89 $11,405 $12,021 $11,231
9/31/89 $11,571 $12,133 $11,312
12/31/89 $11,634 $12,572 $11,412
3/31/90 $11,568 $12,427 $11,647
6/30/90 $11,986 $12,875 $11,756
9/30/90 $12,071 $12,953 $12,009
12/31/90 $12,589 $13,613 $12,109
3/31/91 $13,031 $13,980 $12,217
6/30/91 $13,272 $14,191 $12,308
9/30/91 $13,994 $15,007 $12,416
12/31/91 $14,766 $15,808 $12,480
3/31/92 $14,604 $15,571 $12,606
6/30/92 $15,210 $16,201 $12,688
9/30/92 $15,893 $16,993 $12,787
12/31/92 $15,856 $17,006 $12,842
3/31/93 $16,587 $17,797 $12,995
6/30/93 $17,011 $18,331 $13,068
9/30/93 $17,639 $18,938 $13,131
12/31/93 $17,572 $18,882 $13,195
3/31/94 $16,878 $18,291 $13,321
6/30/94 $16,638 $18,064 $13,394
9/30/94 $16,677 $18,153 $13,520
12/31/94 $16,724 $18,220 $13,548
3/31/95 $17,590 $19,128 $13,701
6/30/95 $19,004 $20,369 $13,801
9/30/95 $19,395 $20,759 $13,864
12/31/95 $20,332 $21,726 $13,891
3/31/96 $19,761 $21,217 $14,090
6/30/96 $19,841 $21,317 $14,181
9/30/96 $20,262 $21,693 $14,281
12/31/96 $21,036 $22,356 $14,353
<PAGE>
COMPOSITE TAX-EXEMPT BOND FUND
KEY IMPACTS ON 1996 PERFORMANCE
The year of 1996 did not match 1995's unusually high double-digit total
return but, after a roller coaster ride, municipal bond investors ended with a
positive return. Municipal bonds began the year weighted down by worries that
radical tax reform would eliminate some of the tax benefits enjoyed by municipal
bondholders. However, municipal yields dropped to a year's low of 5.34% in
February as fears of such far-reaching changes faded and as investors' demand
confronted a drop in the supply of municipal bonds. Then, yields took a hard
turn and rose to a high of 6.27% in June as it became evident that the economy
was growing faster than expected. Finally, municipal yields eased down and ended
the year at 5.64% as economic growth moderated and inflation appeared to be
under control.
WHAT'S AHEAD
In early 1997, there may be a seasonal contraction in the supply of
municipal bonds. This condition would result in better performance of municipal
bonds relative to treasuries. However, such a contraction is unlikely to be of
the magnitude experienced in early 1996.
KEY INVESTMENT STRATEGIES
The Fund's objectives are to provide a high level of current income exempt
from federal taxes and to protect investors' capital. In pursuing these
objectives, we target a longer maturity range and a high average quality -
currently averaging 12.5 years in maturity and an Aa rating by Moody's.
With the economy currently operating at its upper range, interest rates
have the potential at some time to move lower. To protect against having to
reinvest called bonds at lower interest rates, we currently have approximately
50% of the portfolio in noncallable bonds. We seek to exploit opportunities in
different market sectors and individual issues while avoiding their pitfalls.
INVESTMENT PERFORMANCE CHART:
INVESTMENT PERFORMANCE - COMPOSITE TAX-EXEMPT BOND FUND
- -------------------------------------------------------------
COMPARATIVE ENDING VALUES OF $10,000 INVESTED ON 12/31/86
KEY: FUND CLASS A SHARES $19,205
LMB (MUNI BONDS) $21,218
CPI (INFLATION) $14,353
PAST PERFORMANCE CANNOT PREDICT FUTURE RESULTS.
AVERAGE ANNUAL TOTAL RETURNS
WITH WITHOUT
CLASS A SALES SALES
SHARES CHARGE CHARGE
- --------- ------- --------
ONE YEAR -1.53% 2.52%
FIVE YEARS 5.94% 6.81%
TEN YEARS 6.74% 7.18%
CLASS B
SHARES
- ---------
ONE YEAR -2.29% 1.61%
SINCE
3/30/94 5.34% 6.00%
- ---------------------------------
30-DAY CURRENT YIELDS
Class A Shares 4.28%
Class B Shares 3.56%
- ---------------------------------
See footnote on page 2 for additional information.
COMPOSITE TAX-EXEMPT BOND FUND LMB (Muni-bonds) CPI (INFLATION)
- ------------------------------ ------------------------ ---------------------
12/31/86 $ 9,600 $10,000 $10,000
3/31/87 $ 9,897 $10,328 $10,145
6/30/87 $ 9,564 $10,075 $10,271
9/30/87 $ 9,342 $10,107 $10,407
12/31/87 $ 9,714 $10,316 $10,443
3/31/88 $10,080 $10,625 $10,543
6/30/88 $10,313 $10,767 $10,679
9/30/88 $10,534 $11,030 $10,842
12/31/88 $10,750 $11,120 $10,905
3/31/89 $10,834 $11,221 $11,068
6/30/89 $11,284 $11,802 $11,231
9/31/89 $11,288 $11,846 $11,312
12/31/89 $11,619 $12,307 $11,412
3/31/90 $11,616 $12,342 $11,647
6/30/90 $11,912 $12,644 $11,756
9/30/90 $11,890 $12,637 $12,009
12/31/90 $12,400 $13,210 $12,109
3/31/91 $12,643 $13,537 $12,217
6/30/91 $12,842 $13,810 $12,308
9/30/91 $13,368 $14,361 $12,416
12/31/91 $13,812 $14,809 $12,480
3/31/92 $13,803 $14,797 $12,606
6/30/92 $14,341 $15,374 $12,688
9/30/92 $14,673 $15,821 $12,787
12/31/92 $15,054 $16,131 $12,842
3/31/93 $15,653 $16,756 $12,995
6/30/93 $16,198 $17,309 $13,068
9/30/93 $16,790 $17,929 $13,131
12/31/93 $16,949 $18,190 $13,195
3/31/94 $15,877 $17,226 $13,321
6/30/94 $15,977 $17,479 $13,394
9/30/94 $16,014 $17,601 $13,520
12/31/94 $15,842 $17,322 $13,548
3/31/95 $16,996 $18,521 $13,701
6/31/95 $17,415 $19,012 $13,801
9/30/95 $17,815 $19,680 $13,864
12/31/95 $18,732 $20,296 $13,891
3/31/96 $18,344 $20,163 $14,090
6/30/96 $18,401 $20,227 $14,181
9/30/96 $18,796 $20,632 $14,281
12/31/96 $19,205 $21,218 $14,353
<PAGE>
<TABLE>
<CAPTION>
COMPOSITE
U.S.
GOVERNMENT
SECURITIES, INC.
PORTFOLIO OF
INVESTMENTS
IN SECURITIES
DECEMBER 31,
1996
COMPOSITE U.S. GOVERNMENT
SECURITIES PORTFOLIO
PRINCIPAL MARKET
AMOUNT VALUE
- ------------ ------------
<S> <C> <C>
U.S. TREASURY BONDS-25.30%
$ 6,500,000 U.S. Treasury Bond, 7.50%, due 11/15/2016.................. $ 7,036,257
15,000,000 U.S. Treasury Bond, 7.25%, due 05/15/2016.................. 15,843,765
7,250,000 U.S. Treasury Bond, 7.25%, due 08/15/2022.................. 7,671,414
5,500,000 U.S. Treasury Bond, 6.25%, due 08/15/2023.................. 5,156,255
------------
TOTAL U.S. TREASURY BONDS (cost $37,082,734)............... 35,707,691
------------
MORTGAGE-BACKED SECURITIES-73.23%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-51.82%
56,691 14.00%, due 06/15/2011..................................... 66,523
68,793 13.50%, due 09/15/2014 to 12/15/2014....................... 80,466
16,303 11.50%, due 07/15/2015..................................... 18,525
3,377,985 9.50%, due 07/15/2016 to 09/15/2020........................ 3,653,504
2,025,846 8.50%, due 05/15/2022...................................... 2,100,549
1,695,847 8.00%, due 04/15/2022...................................... 1,731,885
20,797,975 7.00%, due 07/15/2008 to 08/15/2023........................ 20,912,340
28,244,687 6.50%, due 08/15/2023 to 04/15/2026........................ 26,982,516
4,953,782 6.00%, due 04/20/2026...................................... 4,572,961
8,146,639 Adjustable Rate Mortgage, 7.125%, due 05/20/2022 to 09/20/2022 8,371,935
2,819,278 Adjustable Rate Mortgage, 7.00%, due 12/20/2022............ 2,412,467
2,191,840 Adjustable Rate Mortgage, 6.50%, due 03/20/2022............ 2,228,532
------------
73,132,203
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -
GNMA-BACKED-21.41%
545,471 Federal National Mortgage Association, 8.50%, due 02/25/2018 548,487
4,000,000 Federal National Mortgage Association, 8.25%, due 05/25/2020 4,091,952
6,408,000 Federal National Mortgage Association, 8.00%, due 06/25/2005 6,538,063
1,950,000 Federal National Mortgage Association, 7.50%, due 08/25/2001 1,991,742
2,230,000 Federal National Mortgage Association, 6.00%, due 08/25/2007 2,188,790
166,103 Federal National Mortgage Association, 5.75%, due 10/25/2010 165,740
8,500,000 Federal Home Loan Mortgage Corporation, 6.85%, due 07/25/2018 8,482,065
4,900,000 Merrill Lynch, 6.50%, due 08/27/2015....................... 4,761,075
131,659 Morgan Stanley, 8.975%, due 06/01/2001..................... 132,090
1,271,888 Mortgage Capital Trust, 9.25%, due 06/01/2017.............. 1,313,941
------------
30,213,945
------------
TOTAL MORTGAGE-BACKED SECURITIES (cost $102,892,992)....... 103,346,148
------------
SHORT-TERM INVESTMENT-0.90%
1,265,000 Repurchase agreement with Goldman Sachs, collateralized
by a U.S. Treasury Note, in a joint trading account at 6.15%,
dated 12/31/1996, due 01/02/1997 with a maturity value of
$1,265,432 (cost $1,265,000)............................... $ 1,265,000
------------
TOTAL INVESTMENTS (cost $141,240,726)...................... 140,318,839
Other assets ($1,320,356) less liabilities ($517,201)...... 803,155
------------
NET ASSETS................................................. $141,121,994
============
FEDERAL INCOME TAX INFORMATION:
Net unrealized depreciation of investments at December 31, 1996, of $921,887,
based on aggregate cost of $141,240,726, was composed of gross depreciation of
$3,037,198 for investments having an excess of cost over value and gross
appreciation of $2,115,311 for investments having an excess of value over cost.
As of December 31, 1996, the Fund had unused capital loss caryovers of
$6,834,842 for federal tax purposes which may be applied against gains realized
in future years. If not applied, the carryovers will expire by 2004.
OTHER INFORMATION:
Purchases and sales (including maturities and principal repayments) of
investment securities, other than short-term investments, all of which were U.S.
government securities, aggregated $24,901,952 and $55,906,619, respectively,
during the year ended December 31, 1996. Principal repayments of mortgage-backed
securities aggregated $12,688,887.
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
COMPOSITE
INCOME
FUND, INC.
PORTFOLIO OF
INVESTMENTS
IN SECURITIES
DECEMBER 31,
1996
COMPOSITE INCOME FUND PORTFOLIO
PRINCIPAL MARKET
AMOUNT VALUE
- ------------ -------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS-14.38%
$ 4,225,000 U.S. Treasury Bond, 7.25%, due 08/15/2022.................. $ 4,470,582
6,325,000 U.S. Treasury Bond, 6.25%, due 08/15/2023.................. 5,929,694
1,000,000 U.S. Treasury Note, 9.00%, due 05/15/1998.................. 1,040,001
1,000,000 U.S. Treasury Note, 7.75%, due 01/31/2000.................. 1,046,876
1,000,000 U.S. Treasury Note, 6.25%, due 10/31/2001.................. 1,000,938
-------------
TOTAL U.S. TREASURY OBLIGATIONS (cost $13,200,857)......... 13,488,091
-------------
MORTGAGE-BACKED SECURITIES-23.84%
GOVERNMENT AGENCY-15.69%
270,583 Federal Home Loan Mortgage Corporation,
9.00%, due 12/01/2004.................................... 282,844
1,748,675 Federal National Mortgage Association, 8.00%, due 12/01/2026 1,782,556
1,561,098 Government National Mortgage Association,
7.00%, due 07/15/2023.................................... 1,529,389
9,128,807 Government National Mortgage Association,
6.50%, due 08/15/2023 to 04/15/2026...................... 8,730,843
2,565,974 Government National Mortgage Association,
6.00%, due 02/15/2024.................................... 2,384,752
-------------
14,710,384
-------------
COLLATERALIZED MORTGAGE OBLIGATIONS -
GOVERNMENT AGENCY BACKED-5.36%
882,260 Federal Home Loan Mortgage Corporation, 8.75%, due 06/15/2005 900,920
1,000,000 Federal Home Loan Mortgage Corporation, 7.50%, due 07/15/2020 1,015,020
3,026,223 Weyerhaeuser 1982-C FHA Putable, 7.43%, due 06/01/2022..... 3,110,207
-------------
5,026,147
-------------
COLLATERALIZED MORTGAGE OBLIGATIONS-2.79%
1,750,000 Donaldson, Lufkin & Jenrette, 7.35%, due 12/18/2003........ 1,733,506
27,063 Merrill Lynch Mortgage Investors, 9.70%, due 06/15/2008.... 27,229
1,178,453 Resolution Trust Corporation - 1991-M2 - A-2,
7.55%, due 09/25/2020.................................... 858,681
-------------
2,619,416
-------------
TOTAL MORTGAGE-BACKED SECURITIES (cost $22,477,170)........ 22,355,947
-------------
NON-CONVERTIBLE CORPORATE BONDS-43.57%
$ 1,000,000 Aetna Services, Inc., 7.625%, due 08/15/2026............... 1,011,652
850,000 American Home Products Corporation, 7.25%, due 03/01/2023.. 852,601
1,000,000 AMR Corporation, 9.75%, due 03/15/2000..................... 1,090,150
1,000,000 Bank of New York, 7.875%, due 11/15/2002................... 1,055,785
1,000,000 Boeing Company, 8.75%, due 08/15/2021...................... 1,179,313
1,500,000 Burlington Northern, 8.75%, due 02/25/2022................. 1,691,088
1,600,000 Burlington Resources, 9.125%, due 10/01/2021............... 1,879,762
1,000,000 Coastal Corporation, 10.75%, due 10/01/2010................ 1,280,729
750,000 Conagra, Inc., 9.75%, due 03/01/2021....................... 910,781
2,000,000 Continental Corporation, 7.25%, due 03/01/2003............. 2,023,698
500,000 Crane Company, 8.50%, due 03/15/2004....................... 543,989
2,000,000 Dart & Kraft Finance NV, 7.75%, due 11/30/1998............. 2,049,188
500,000 Developers Diversified Realty, 6.58%, due 02/06/2001....... 491,316
1,250,000 FHP International, 7.00%, due 09/15/2003................... 1,244,066
1,000,000 First Nationwide, 10.00%, due 10/01/2006................... 1,162,050
1,000,000 Fleming Companies, Inc., 5.77%, due 08/06/1998............. 908,494
1,100,000 Franchise Finance Corporation, 7.875%, due 11/30/2005...... 1,126,127
900,000 Franchise Finance Corporation, 7.00%, due 11/30/2000....... 901,007
1,000,000 General Motors Acceptance Corporation, 8.00%, due 04/10/1997 1,006,638
850,000 Goldenbooks Publishing, 7.65%, due 09/15/2002.............. 765,000
1,450,000 Integon Corporation, 8.00%, due 08/15/1999................. 1,467,803
1,250,000 Kemper Corporation, 6.875%, due 09/15/2003................. 1,251,646
1,000,000 Loral Corporation, 8.375%, due 06/15/2024.................. 1,111,000
1,000,000 Loral Corporation, 7.625%, due 06/15/2025.................. 1,026,178
1,000,000 Manufacturers and Traders Trust Company, 8.125%, due 12/01/2002 1,060,647
500,000 Mercantile Bank, 7.625%, due 10/15/2002.................... 517,882
1,000,000 Niagara Mohawk Power, 9.75%, due 11/01/2005................ 1,045,094
945,000 Niagara Mohawk Power, 8.77%, due 01/01/2018................ 924,632
1,000,000 Norwest Corporation, 6.65%, due 10/15/2023................. 910,843
1,000,000 Pacific Gas and Electric, 9.08%, due 12/15/1997............ 1,028,595
1,400,000 Riviera Holdings Corporation, 11.00%, due 12/31/2002....... 1,442,000
500,000 Summit Bancorp, 8.625%, due 12/10/2002..................... 541,446
1,200,000 Texas Utilities Electric, 9.50%, due 08/01/1999............ 1,280,363
2,000,000 Time Warner, Inc., 9.15%, due 02/01/2023................... 2,173,004
1,000,000 Westinghouse Corporation, 7.875%, due 09/01/2023........... 942,620
1,000,000 Weyerhaeuser Corporation, 7.125%, due 07/15/2023........... 962,684
-------------
TOTAL NON-CONVERTIBLE CORPORATE BONDS (cost $40,139,663)... 40,859,871
-------------
SHARES
- -------------
CONVERTIBLE CORPORATE BONDS-4.85%
398,000 Air Wisconsin, 7.75%, due 06/15/2010....................... 384,568
825,000 CII Financial, 7.50%, due 09/15/2001....................... 744,562
1,500,000 Costco Wholesale Corporation, 5.75%, due 05/15/2002........ 1,445,625
1,400,000 Integrated Device Technology, 5.50%, due 06/01/2002........ 1,242,500
350,000 Meditrust, 7.50%, due 03/01/2001........................... 386,313
500,000 Veterinary Centers of America, 5.25%, due 05/01/2006....... 342,500
-------------
TOTAL CONVERTIBLE CORPORATE BONDS (cost $4,306,155)........ 4,546,068
-------------
U.S. DOLLAR FOREIGN OBLIGATIONS-3.90%
1,000,000 Province of Alberta, 9.25%, due 04/01/2000................. 1,089,430
1,750,000 United Mexican States, Series A, 6.25%, due 12/31/2019..... 1,284,062
1,750,000 United Mexican States, Series B, 6.25%, due 12/31/2019..... 1,284,062
-------------
TOTAL FOREIGN OBLIGATIONS (cost $3,011,357)................ 3,657,554
-------------
SHARES
------------
PREFERRED STOCKS-2.33%
2,000 California Federal Bank.................................... 221,500
24,600 First Industrial Realty Trust.............................. 630,375
14,000 Integon Corporation (Convertible).......................... 752,500
6,000 Microsoft Corporation (Convertible)........................ 480,750
4,700 Wellsford Residential Property Trust (Convertible)......... 97,525
-------------
TOTAL PREFERRED STOCK (cost $2,065,857).................... 2,182,650
-------------
PRINCIPAL
AMOUNT
------------
REPURCHASE AGREEMENT-4.71%
$ 4,419,000 Repurchase agreement with Goldman Sachs, collateralized by
a U.S. Treasury Note, in a joint trading account at 6.15%,
dated 12/31/1996, due 01/02/1997, with a maturity value of
$4,420,510 (cost $4,419,000)............................... 4,419,000
-------------
TOTAL INVESTMENTS (cost $89,620,059)....................... 91,509,181
Other assets ($2,509,987), less liabilities ($239,890)..... 2,270,097
-------------
NET ASSETS................................................. $ 93,779,278
=============
FEDERAL INCOME TAX INFORMATION:
Net unrealized appreciation of investments at December 31, 1996, of $1,889,122,
based on aggregate cost of $89,620,059, was composed of gross appreciation of
$2,744,992 for those investments having an excess of value over cost and gross
depreciation of $855,870 for investments having an excess of cost over value. As
of December 31, 1996, the Fund had unused capital loss caryovers of $14,333,667
for federal tax purposes which may be applied against gains realized in future
years. If not applied, the carryovers will expire by 2003.
OTHER INFORMATION:
Purchases and sales (including maturities and principal repayments) of
investment securities, other than short-term investments, aggregated $37,693,348
and $44,000,352, respectively, during the year ended December 31, 1996,
including purchases and sales of U.S. government securities of $16,395,264 and
$18,299,050, respectively. Principal repayments of mortgage-backed securities
aggregated $3,218,992.
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
COMPOSITE
TAX-EXEMPT
BOND FUND,
INC.
PORTFOLIO OF
INVESTMENTS
IN SECURITIES
DECEMBER 31,
1996
COMPOSITE TAX-EXEMPT BOND FUND PORTFOLIO
PRINCIPAL MARKET
AMOUNT VALUE
- ------------- --------------
LONG-TERM MUNICIPAL OBLIGATION-94.80%
EDUCATION FACILITIES REVENUE-2.53%
<S> <C> <C>
$ 785,000 University of Washington Housing and Dining,
7.00%, due 12/01/2021.................................... $ 875,707
4,500,000 Washington State Higher Education Facilities, Pacific Lutheran
University Project, (CONNIE LEE), 5.70%, due 11/01/2026.. 4,407,975
--------------
5,283,682
--------------
GENERAL OBLIGATION-26.59%
5,000,000 Cook County Illinois, (FGIC), 5.875%, due 11/15/2022....... 5,050,700
5,000,000 Georgia State, 6.30%, due 03/01/2009....................... 5,564,950
5,555,000 Hawaii State, 6.40%, due 03/01/2009........................ 6,195,158
2,000,000 Honolulu City & County, 6.00%, due 01/01/2012.............. 2,151,160
4,000,000 King County Washington Ref-Sewer Series C,
5.25%, due 01/01/2021.................................... 3,803,760
4,500,000 King County Washington School District #415 Kent,
Series C, 6.30%, due 12/01/2008.......................... 4,962,735
9,000,000 New York City, Series E, 6.00%, due 08/01/2026............. 8,774,640
6,230,000 Washington County, Oregon (Criminal Justice Facilities),
6.00%, due 12/01/2012.................................... 6,527,109
7,570,000 Washington State, Series B, 5.00%, due 05/01/2017.......... 7,070,077
4,900,000 Washington State, Series B, 6.40%, due 06/01/2017.......... 5,439,882
-------------
55,540,171
-------------
HOSPITAL REVENUE-2.31%
1,750,000 Washington Health Care Facilities Authority,
Fred Hutchinson Cancer Center, 7.375%, due 01/01/2018.... 1,887,025
1,750,000 Washington Health Care Facilities Authority,
Fred Hutchinson Cancer Center, 7.20%, due 01/01/2007..... 1,853,582
1,000,000 Wisconsin Health & Education Facility Authority, Waukesha
Memorial Hospital Series A, (AMBAC), 7.125%, due 08/15/2007 1,098,320
-------------
4,838,927
-------------
INDUSTRY DEVELOPMENT/
POLLUTION CONTROL REVENUE-15.01%
5,000,000 Mayor & City Council of Baltimore Port Facility (DuPont),
6.50%, due 10/01/2011.................................... 5,482,250
3,665,000 Chicago Gas Supply (Peoples Gas), 6.875%, due 03/01/2015... 3,953,802
1,500,000 Lordsburg Pollution Control (Phelps Dodge),
6.50%, due 04/01/2013.................................... 1,587,045
4,000,000 Lowndes County Solid Waste Disposal & Pollution Control
(Weyerhaeuser), 6.80%, due 04/01/2022.................... 4,596,520
4,370,000 Mercer County Pollution Control (Otter Tail Power),
6.90%, due 02/01/2019.................................... 4,686,869
6,000,000 San Diego Industrial Development (San Diego Gas &
Electric), Series A, (AMBAC), 5.90%, due 06/01/2018...... 6,113,100
5,000,000 Valdez Marine Term (Mobil Alaska Pipeline), 5.75%,
due 11/01/2028 .......................................... 4,941,950
-------------
31,361,536
-------------
LEASE RENTAL/MUNICIPAL LEASE-1.96%
3,000,000 Orange County Recovery Certificate of Participation,
Series A, (MBIA), 6.00%, due 07/01/2026.................. 3,091,770
1,000,000 Oregon State Department of Administrative Services, Certificate
of Participation, Series A, (MBIA), 5.50%, due 11/01/2020 992,700
-------------
4,084,470
-------------
PUBLIC FACILITIES REVENUE-6.95%
6,000,000 Metropolitan Pier and Exposition Authority Dedicated State Tax,
zero coupon, (FGIC), due 06/15/2009...................... 3,045,060
4,000,000 Metropolitan Pier and Exposition Authority Dedicated State Tax,
zero coupon, (FGIC), due 06/15/2008...................... 2,167,720
5,000,000 San Francisco California City & County Airport Commn
International Airport, 5.625% (FGIC), due 05/01/2021..... 4,993,000
4,500,000 Texas State Turnpike Authority, Dallas Northway
President George Bush Turnpike, (FGIC), 5.25%,
due 01/01/2023 .......................................... 4,312,350
-------------
14,518,130
-------------
PREREFUNDED-15.35%
4,000,000 Chicago Wastewater Transmission Revenue, 6.75%, due 11/15/2020 4,406,960
2,225,000 Colorado Springs Utilities System Revenue, 6.75%,
due 11/15/2021 ....................................... 2,483,234
3,000,000 Harris County Toll Road Revenue, 8.25%, due 08/15/2007..... 3,288,030
5,000,000 Illinois State Sales Tax Revenue Series N, 7.00%,
due 06/15/2020 ....................................... 5,595,450
3,000,000 Santa Barbara County Certificate of Participation,
7.40%, due 02/01/2007.................................... 3,309,060
2,750,000 Snohomish County School District #2 -
Everett General Obligation, 7.20%, due 12/01/2010........ 3,048,320
2,000,000 Spokane County Water District #3 Revenue,
7.60%, due 01/01/2008.................................... 2,136,840
215,000 University of Washington Housing and Dining Revenue Bond,
7.00%, due 12/01/2021.................................... 242,273
3,185,000 University of Washington Housing and Dining Revenue Bond,
7.00%, due 12/01/2021.................................... 3,595,037
3,500,000 Washington Public Power Supply System Nuclear Project
Number 2 Revenue, 7.625%, due 07/01/2010................. 3,954,230
-------------
32,059,434
-------------
UTILITY REVENUE-24.10%
1,235,000 Anchorage Electric Utility, (MBIA), 6.50%, due 12/01/2013.. 1,382,162
2,775,000 Colorado Springs Utilities System, 6.75%, due 11/15/2021... 3,043,204
6,000,000 Indiana Municipal Power Agency, Series A,
6.125%, (MBIA), due 01/01/2013........................... 6,465,480
5,000,000 Jacksonville Electric Authority, (St. Johns River
Power-2-Series 7), 5.75%, due 10/01/2012................. 5,107,350
5,000,000 Memphis Electric System, 5.625%, due 01/01/2002............ 5,252,800
5,000,000 North Carolina Eastern Municipal Power, 7.00%, due 01/01/2008 5,538,750
7,000,000 Omaha Public Power District Electric, Series B,
6.15%, due 02/01/2012.................................... 7,669,620
2,000,000 Omaha Public Power District Electric, Series C,
5.50%, due 02/01/2014.................................... 2,043,360
5,000,000 Orlando Utilities Commission Water & Electric,
6.00%, due 10/01/2010.................................... 5,412,050
5,000,000 Salt River Project Agricultural Improvement & Power District
Electrical System, Series C, 6.25%, due 01/01/2019....... 5,249,500
3,000,000 Salt River Project Improvement & Power District
Electrical System, Series A, 5.75%, due 01/01/2009....... 3,166,530
-------------
50,330,806
-------------
TOTAL LONG-TERM MUNICIPAL OBLIGATIONS (cost $183,099,293).. 198,017,156
=============
SHORT-TERM MUNICIPAL OBLIGATIONS-5.59%
700,000 Delaware State Economic Development, Variable
Rate Demand Obligation, 3.60%*........................... 700,000
500,000 Garfield County, Oklahoma Industrial Authority, Variable Rate
Demand Obligation, 3.45%*................................ 500,000
1,500,000 Huntington Beach, California Multifamily Housing Revenue,
Variable Rate Demand Obligation, 3.35%*.................. 1,500,000
400,000 L.A. California Regional Airports, Improvement Corporate
Lease Revenue, Variable Rate Demand Obligation, 3.65%*... 400,000
1,000,000 Michigan State Hospital Financial Authority Hospital Equipment
Loan Program Insured, Variable Rate Demand Obligation, 3.55%* 1,000,000
6,071,900 Nuveen Tax-Exempt Money Market Fund........................ 6,071,900
1,500,000 Wilmington Hospital Revenue, Franciscan Health, Series A,
Variable Rate Demand Obligation, 3.65%*.................. 1,500,000
-------------
TOTAL SHORT-TERM MUNICIPAL OBLIGATIONS (cost $11,671,900).. 11,671,900
-------------
TOTAL INVESTMENTS (cost $194,771,193)...................... 209,689,056
Other assets ($3,302,247) less liabilities ($4,119,520).... (817,273)
-------------
NET ASSETS................................................. $208,871,783
=============
*Variable Rate Demand Obligations are payable on demand and are secured by
letters of credit or other credit support. The interest rate, which is subject
to change periodically, is based on an index of market interest rates.
AMBAC = AMBAC Indemnity Corporation
CONNIE LEE = College Construction Loan Insurance Association
FGIC = Financial Guaranty Insurance Company
MBIA = Municipal Bond Insurance Association
FEDERAL INCOME TAX INFORMATION:
Net unrealized appreciation of investments at December 31, 1996, of $14,917,863
based on aggregate cost of $194,771,193 was composed of gross appreciation of
$14,922,434 for investments having an excess of value over cost and gross
depreciation of $4,571 for investments having an excess of cost over value. As
of December 31, 1996, the Fund had unused capital loss carryovers of $1,991,447
for federal tax purposes which may be applied against gains realized in future
years. If not applied, the carryovers will expire by 2004.
OTHER INFORMATION:
Purchases and sales of investment securities, other than short-term investments,
aggregated $42,644,538 and $59,159,046, respectively, during the year ended
December 31, 1996.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
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 related 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 for each of the five
fiscal 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.
LeMASTER & DANIELS pllc
CERTIFIED PUBLIC ACCOUNTANTS
SPOKANE, WASHINGTON
JANUARY 24, 1997
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
COMPOSITE COMPOSITE COMPOSITE
U.S. GOVERNMENT INCOME TAX-EXEMPT
SECURITIES, INC. FUND, INC. BOND FUND, INC.
---------------- ------------ ---------------
<S> <C> <C> <C>
ASSETS
Investments at market (identified cost
$141,240,726, $89,620,059, and
$194,771,193, respectively).................. $140,318,839 $ 91,509,181 $209,689,056
Cash........................................... 10,273 - 11,724
Prepaid expenses............................... 17,305 14,228 19,453
Receivable for:
Investment securities sold................... - 1,040,177 -
Interest..................................... 1,160,997 1,399,985 3,261,274
Sale of Fund's shares........................ 131,781 55,597 9,796
------------- ------------- -------------
Total assets................................... 141,639,195 94,019,168 212,991,303
------------- ------------- -------------
LIABILITIES
Payable for:
Investment securities purchased.............. - - 3,795,200
Repurchase of Fund's shares.................. 279,400 72,320 73,672
Dividends.................................... 187,140 129,255 199,893
Accrued expenses and other payables.......... 50,661 38,315 50,755
------------- ------------- -------------
Total liabilities.............................. 517,201 239,890 4,119,520
------------- ------------- -------------
NET ASSETS .................................... $141,121,994 $ 93,779,278 $208,871,783
============= ============= =============
COMPOSITION OF NET ASSETS
Capital stock, at par.......................... $ 1,349 $ 102,442 $ 2,667
Additional paid-in capital..................... 148,877,374 106,384,672 195,942,700
Accumulated net realized loss.................. (6,834,842) (14,596,958) (1,991,447)
Net unrealized appreciation
(depreciation) of investments................ (921,887) 1,889,122 14,917,863
------------- ------------- -------------
$141,121,994 $ 93,779,278 $208,871,783
============= ============= =============
SHARES OUTSTANDING ............................ 13,487,368 10,244,233 26,674,785
============= ============= =============
CLASS A SHARES:
Net asset value and redemption price per share
(net assets of $138,159,478, $86,657,040, and
$203,606,240, respectively, for 13,204,217,
9,467,260, and 26,002,410 shares outstanding,
respectively)............................... $10.46 $ 9.15 $ 7.83
============= ============= =============
Offering price per share (100/96 of net asset
value per share)............................. $10.90 $ 9.53 $ 8.16
============= ============= =============
CLASS B SHARES:
Net asset value, offering price and redemption price
per share (net assets of $2,962,516, $7,122,238, and
$5,265,543, respectively, for 283,151, 776,973, and
672,375 shares outstanding, respectively)... $10.46 $ 9.17 $ 7.83
============= ============= =============
On sales of $25,000 or more, the offering price of Class A is reduced.
A contingent deferred sales charge may be imposed on redemptions for
Class B shares.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
COMPOSITE COMPOSITE COMPOSITE
U.S. GOVERNMENT INCOME TAX-EXEMPT
SECURITIES, INC. FUND, INC. BOND FUND, INC.
---------------- ------------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest income............................................... $10,992,841 $ 7,234,241 $12,265,409
---------------- ------------- ---------------
Expenses:
Management fees............................................... 984,485 599,008 1,065,379
Distribution expenses - Class A............................... 218,510 133,640 315,034
Distribution expenses - Class B............................... 26,484 57,828 40,939
Shareholder servicing - Class A............................... 143,139 107,315 98,854
Shareholder servicing - Class B............................... 3,006 6,943 3,862
Postage, printing and office expense.......................... 100,393 66,392 68,690
Registration and filing fees.................................. 24,099 25,197 17,971
Custodial fees................................................ 26,899 20,258 23,963
Auditing and legal fees....................................... 9,542 9,162 11,067
Directors' fees............................................... 7,390 7,390 7,474
Insurance..................................................... 4,658 3,393 6,961
---------------- ------------- --------------
Total expenses.................................................. 1,548,605 1,036,526 1,660,194
Fees paid indirectly............................................ (3,182) (7,838) (3,437)
---------------- ------------- --------------
Net expenses.................................................... 1,545,423 1,028,688 1,656,757
---------------- ------------- --------------
Net investment income........................................... 9,447,418 6,205,553 10,608,652
---------------- ------------- --------------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Realized gain (loss) from investment transactions............... (386,962) 1,098,430 (1,336,656)
Unrealized depreciation of investments during the year.......... (6,198,006) (4,354,365) (4,335,561)
---------------- ------------- --------------
Net realized and unrealized loss on investments................. (6,584,968) (3,255,935) (5,672,217)
---------------- ------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ...................................... $ 2,862,450 $ 2,949,618 $ 4,936,435
================ ============= ==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
COMPOSITE COMPOSITE COMPOSITE
U.S. GOVERNMENT INCOME TAX-EXEMPT BOND
SECURITIES, INC. FUND, INC. FUND, INC.
------------------------ ------------------------ --------------------------
FOR THE YEARS ENDED FOR THE YEARS ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995 1996 1995
------------ ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net Investment Income................... $ 9,447,418 $ 11,232,651 $ 6,205,553 $ 6,281,269 $ 10,608,652 $ 11,380,408
Realized gain (loss) from investment
transactions.......................... (386,962) (248,406) 1,098,430 (964,092) (1,336,656) 709,951
Unrealized appreciation (depreciation)
of investments during the year........ (6,198,006) 22,057,802 (4,354,365) 13,282,886 (4,335,561) 25,628,133
------------ ----------- ------------ ------------ ------------- ------------
Net increase in net assets
resulting from operations............. 2,862,450 33,042,047 2,949,618 18,600,063 4,936,435 37,718,492
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income:
Class A............................... (9,312,060 )(11,152,866) (5,877,677) (6,093,671) (10,445,418) (11,301,739)
Class B............................... (135,358) (79,785) (327,876) (187,598) (163,235) (78,669)
NET CAPITAL SHARE TRANSACTIONS
Class A............................... (32,648,901) (32,402,457) (7,741,496) (2,476,599) (20,829,678) (11,515,781)
Class B............................... 840,035 977,583 2,790,064 1,743,650 2,636,917 1,218,551
------------ ----------- ----------- ------------ ------------- ------------
Total increase (decrease) in net assets (38,393,834) (9,615,478) (8,207,367) 11,585,845 (23,864,979) 16,040,854
NET ASSETS
Beginning of the year................... 179,515,828 189,131,306 101,986,645 90,400,800 232,736,762 216,695,908
------------ ----------- ----------- ------------ ------------- ------------
End of the year..................... $141,121,994 $179,515,828 $ 93,779,278 $101,986,645 $208,871,783 $232,736,762
============ =========== =========== ============ ============= ============
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
CLASS A
TEN MONTHS
YEARS ENDED DECEMBER 31, ENDED
----------------------------------------- DEC. 31,
1996 1995 1994 1993 1992(3)
------------ --------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ...................... $10.84 $ 9.64 $10.79 $10.63 $10.53
------------ --------- --------- -------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income..................................... 0.63 0.63 0.63 0.69 0.62
Net Gains or Losses on Securities
(both realized and unrealized)........................... (0.38) 1.20 (1.15) 0.16 0.10
------------ --------- --------- -------- ------------
Total From Investment Operations........................ 0.25 1.83 (0.52) 0.85 0.72
------------ --------- --------- -------- ------------
LESS DISTRIBUTIONS
Dividends (from net investment income).................... (0.63) (0.63) (0.63) (0.69) (0.62)
------------ --------- --------- -------- ------------
NET ASSET VALUE, END OF PERIOD ............................ $10.46 $10.84 $ 9.64 $10.79 $10.63
============ ========= ========= ======== ============
TOTAL RETURN (1) .......................................... 2.48% 19.45% -4.91% 8.12% 7.03%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($1,000's)...................... $138,159 $177,310 $188,068 $268,112 $207,501
Ratio of Expenses to Average Net Assets(2) ............... 0.97% 1.01% 0.97% 0.99% 0.99%(5)
Ratio of Net Income to Average Net Assets................. 6.01% 6.08% 6.19% 6.29% 6.98%(5)
Portfolio Turnover Rate .................................. 16% 8% 34% 51% 11%(5)
</TABLE>
<TABLE>
<CAPTION>
MARCH 30
YEARS ENDED DECEMBER 31, TO
CLASS B ------------------------ DEC. 31,
1996 1995 1994(4)
--------- --------- ----------
<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 ($1,000's)...................... $2,963 $2,206 $1,063
Ratio of Expenses to Average Net Assets(2) ............... 1.85% 1.84% 1.76%(5)
Ratio of Net Income to Average Net Assets................. 5.14% 5.20% 5.43%(5)
Portfolio Turnover Rate .................................. 16% 8% 34%
(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) From the commencement of offering Class B shares.
(5) Annualized.
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
COMPOSITE INCOME FUND, INC.
THREE
CLASS A MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------------------- DEC. 31,
1996 1995 1994 1993 1992(3)
--------- --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD...................... $ 9.44 $ 8.29 $ 9.33 $ 8.99 $ 9.17
--------- --------- -------- ----------- ----------
Income From Investment Operations
Net Investment Income..................................... 0.59 0.59 0.60 0.61 0.16
Net Gains or Losses on Securities
(both realized and unrealized)........................... (0.29) 1.15 (1.04) 0.34 (0.18)
--------- --------- -------- ----------- ----------
Total From Investment Operations........................ 0.30 1.74 (0.44) 0.95 (0.02)
--------- --------- -------- ----------- ----------
LESS DISTRIBUTIONS
Dividends (from net investment income).................... (0.59) (0.59) (0.60) (0.61) (0.16)
--------- --------- -------- ----------- ----------
NET ASSET VALUE, END OF PERIOD............................ $ 9.15 $ 9.44 $ 8.29 $ 9.33 $ 8.99
========= ========= ======== =========== ==========
TOTAL RETURN (1) .......................................... 3.46% 21.58% -4.82% 10.82% -0.23%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($1,000's)...................... $86,657 $97,534 $88,102 $104,876 $86,425
Ratio of Expenses to Average Net Assets(2) ............... 1.03% 1.08% 1.04% 1.08% 0.95%(5)
Ratio of Net Income to Average Net Assets................. 6.52% 6.59% 6.83% 6.58% 6.94%(5)
Portfolio Turnover Rate .................................. 42% 43% 26% 51% 87%(5)
</TABLE>
<TABLE>
<CAPTION>
MARCH 30
CLASS B YEARS ENDED DECEMBER 31, TO
------------------------- DEC. 31,
1996 1995 1994(4)
------------ ----------- ----------
<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 ($1,000's)...................... $7,122 $4,452 $2,299
Ratio of Expenses to Average Net Assets(2) ............... 1.89% 1.91% 1.80%(5)
Ratio of Net Income to Average Net Assets................. 5.69% 5.73% 6.25%(5)
Portfolio Turnover Rate .................................. 42% 43% 26%
(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) From the commencement of offering Class B shares.
(5) Annualized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
COMPOSITE TAX-EXEMPT BOND FUND, INC.
CLASS A
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
----------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ........................ $ 8.02 $ 7.13 $ 8.04 $ 7.58 $ 7.42
INCOME FROM INVESTMENT OPERATIONS ----------- -------- --------- --------- --------
Net Investment Income..................................... 0.38 0.38 0.39 0.40 0.42
Net Gains or Losses on Securities
(both realized and unrealized)........................... (0.19) 0.89 (0.91) 0.54 0.23
----------- -------- --------- --------- --------
Total From Investment Operations........................ 0.19 1.27 (0.52) 0.94 0.65
----------- -------- --------- --------- --------
LESS DISTRIBUTIONS
Dividends (from net investment income).................... (0.38) (0.38) (0.39) (0.40) (0.42)
Distributions (from net capital gains).................... - - - (0.08) (0.07)
----------- -------- --------- --------- --------
NET ASSET VALUE, END OF YEAR .............................. $ 7.83 $ 8.02 $ 7.13 $ 8.04 $ 7.58
=========== ======== ========= ========= ========
TOTAL RETURN (1) .......................................... 2.52% 18.25% -6.53% 12.54% 9.00%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year ($1,000's)........................ $203,606 $230,055 $215,438 $259,045 $186,861
Ratio of Expenses to Average Net Assets(2) ............... 0.75% 0.81% 0.79% 0.81% 0.78%
Ratio of Net Income to Average Net Assets................. 4.90% 5.03% 5.23% 4.97% 5.56%
Portfolio Turnover Rate .................................. 22% 8% 12% 19% 30%
</TABLE>
<TABLE>
<CAPTION>
MARCH 30
YEARS ENDED DECEMBER 31, TO
CLASS B -------------------------- DEC. 31,
1996 1995 1994(3)
---------- ----------- ----------
<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 ($1,000's)...................... $5,266 $2,682 $1,258
Ratio of Expenses to Average Net Assets(2) ............... 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) Ratio of expenses to average net assets includes expenses paid indirectly
beginning in fiscal year 1995.
(3) From the commencement of offering Class B shares.
(4) Annualized.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Composite U.S. Government Securities, Inc., Composite Income Fund, Inc.,
and Composite Tax-Exempt Bond Fund, Inc. (together the "Funds") are registered
under the Investment Company Act of 1940, as amended, as open-end diversified
management investment companies.
The Funds offer both Class A and Class B shares. The two classes of shares
differ in their respective sales charges, shareholder servicing fees, and
distribution and service fees. All shareholders bear the common expenses of the
Fund pro rata, based on value of settled shares outstanding, without distinction
between share class. Dividends are declared separately for each class. Neither
class has preferential dividend rights; differences in per-share dividend rates
are generally due to differences in separate class expenses, including
distribution and service fees.
Following is a summary of significant accounting policies, in conformity
with generally accepted accounting principles, which are consistently followed
by the Funds in the preparation of their financial statements.
a. Investment securities are stated on the basis of valuations provided
by an independent pricing service, approved by the Boards of
Directors, which uses information with respect to transactions,
quotations from dealers, market transactions in comparable securities,
and various relationships between securities in determining value.
Investment securities with less than 60 days to maturity when
purchased are valued at amortized cost which approximates market
value. Investment securities not currently quoted as described above
will be priced at fair market value as determined in good faith in a
manner prescribed by the Boards of Directors.
b. For U.S. Government Securities and Income Fund, each Fund requires the
custodian to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian's vault, all securities held as collateral for repurchase
agreements. The market Value of the underlying securities is required
to be at least 102% of the resale price at the time of purchase. If
the seller of the agreement defaults and the value of the collateral
declines, or if the seller enters an insolvency proceeding,
realization of the value of the collateral by the Fund may be delayed
or limited.
c. Interest income is earned from the settlement date on securities
purchased and is recorded on the accrual basis.
d. Dividends to shareholders are recorded on a daily basis and
distributed monthly.
e. Security transactions are accounted for on the trade date (execution
date of the order to buy or sell). Realized gains or losses from
security transactions are determined on the basis of identified cost.
f. Each Fund complies with requirements of the Internal Revenue Code
applicable to regulated investment companies and distributes taxable
income so that no provision for federal income or excise tax is
required. Income dividends and capital gain distributions are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are
primarily due to differing treatments for expiring capital loss carry
forwards, deferral of wash sales, and post-October losses. Expiring
capital loss carry forwards are charged to additional paid-in capital.
For the year ended December 31, 1996, the Tax-Exempt Bond Fund did not
distribute income subject to the alternative minimum tax.
g. Custodial fees have been increased by $3,182, $7,838, and $3,437 for
U.S. Government Securities, Income Fund, and Tax-Exempt Bond Fund,
respectively, as a result of "expense offset arrangements." The Funds
could have otherwise employed the assets to produce income if they had
not entered into such arrangements. In accordance with regulations,
such amounts are added to net custodial fees and then reflected as a
deduction, "fees paid indirectly" to derive net expenses. There were
no "expense offset arrangements" other than custodial fees.
h. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 2 - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
The amounts of fees and expenses described below are shown on each Fund's
statement of operations. Composite Research & Management Co. (the "Adviser")
manages each Fund, Murphey Favre, Inc. (the "Distributor"), is the principal
underwriter and Murphey Favre Securities Services, Inc. (the "Transfer Agent"),
is the transfer and shareholder servicing agent. All are affiliates of
Washington Mutual Bank and Washington Mutual fsb and are subsidiaries of
Washington Mutual, Inc.
Management fees were paid by each Fund to the Adviser. For U.S. Government
Securities, and Income Fund, the fees are based on an annual rate of 0.625% of
average daily net assets and is reduced to 0.50% on average daily net assets in
excess of $250 million. For the Tax-Exempt Bond Fund, the fee is based on an
annual rate of 0.50% of average daily net assets and is reduced to 0.40% on
average daily net assets in excess of $250 million. Under terms of each Fund's
management contract, the Adviser has agreed to reimburse a Fund for fund
expenses in excess of 1.50% of average daily net assets up to $30 million, and
1% of such assets over $30 million. The Income Fund and Tax-Exempt Bond Fund
will be further reimbursed for expenses exceeding .75% of average daily net
assets exceeding $130 million. No such reimbursement was required during the
year ended December 31, 1996.
Directors' fees and expenses were paid directly by each Fund to directors
having no affiliation with the Funds other than in their capacity as directors.
Other officers and directors received no compensation from the Funds.
Shareholder servicing fees were paid to the Transfer Agent for services
incidental to issuance and transfer of shares, maintaining shareholder lists,
and issuing and mailing distributions and reports. Under terms of the
shareholder servicing agreement, the authorized monthly shareholder servicing
fees are $1.60 and $1.70 per Class A and Class B share accounts, respectively.
Distribution expenses were paid to the Distributor in accordance with
separate distribution plans for Class A and Class B shares. Each Funds' Boards
of Directors adopted the Plans pursuant to Rule 12b-1 of the Investment Company
Act of 1940. The Class A distribution plan provides that each Fund will
reimburse the Distributor up to 0.25% of the average daily net assets
attributable to Class A shares annually for a portion of its expenses incurred
in distributing each Fund's Class A shares, including payments to brokers. The
Class B distribution Plan provides that the Funds will pay the Distributor a
distribution fee, equal to 0.75% annually, and a service fee of 0.25%, of the
Funds' average daily net assets attributable to Class B shares.
For the year ended December 31, 1996, commissions (sales charges paid by
investors) on the purchases of Class A shares totaled $89,694, $156,410, and
$282,768, of which $87,069, $147,789, and $269,623 was retained by the
Distributor, in U.S. Government Securities, Income Fund, and Tax-Exempt Bond
Fund, respectively. For the year ended December 31, 1996, the Distributor
received contingent deferred sales charges of $3,051, $7,284, and $10,102, for
U.S. Government Securities, Income Fund, and Tax-Exempt Bond Fund, respectively,
upon redemption of Class B shares as reimbursement for sales commissions
advanced by the Distributor at the time of such sales.
NOTE 3 - CAPITAL STOCK
COMPOSITE U.S. GOVERNMENT SECURITIES, INC.
Capital stock authorized 1,000,000,000
Designated as:
Class A............................ 600,000,000
Class B............................ 400,000,000
Par value per share.................. $0.0001
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------- --------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
1996 1995 1996 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
SHARES
Sold................................................. 749,623 810,845 113,842 106,878
Issued for reinvestment of dividends................. 655,835 784,736 10,765 6,046
------------ ------------ ------------- ------------
1,405,458 1,595,581 124,607 112,924
Reacquired........................................... (4,553,107) (4,752,653) (44,911) (19,778)
------------ ------------ ------------- ------------
Net increase (decrease).............................. (3,147,649) (3,157,072) 79,696 93,146
============ ============ ============= ============
AMOUNT
Sold................................................. $ 7,854,380 $ 8,364,834 $1,194,334 $1,115,018
Issued for reinvestment of dividends................. 6,819,272 8,133,434 111,800 63,184
------------ ------------ ------------- ------------
14,673,652 16,498,268 1,306,134 1,178,202
Reacquired........................................... (47,322,553) (48,900,725) (466,099) (200,619)
------------ ------------ ------------- ------------
Net increase (decrease).............................. $(32,648,901) $(32,402,457) $ 840,035 $ 977,583
============ ============ ============= ============
</TABLE>
COMPOSITE INCOME FUND, INC.
Capital stock authorized ............ 50,000,000
Designated as:
Class A............................ 30,000,000
Class B............................ 20,000,000
Par value per share.................. $0.01
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------- -------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SHARES
Sold................................................. 1,208,364 1,400,247 383,465 219,399
Issued for reinvestment of dividends................. 477,619 499,570 30,990 16,941
------------ ------------ ------------ ------------
1,685,983 1,899,817 414,455 236,340
Reacquired........................................... (2,547,839) (2,194,039) (108,355) (42,305)
------------ ------------ ------------ ------------
Net increase (decrease).............................. (861,856) (294,222) 306,100 194,035
============ ============ ============ ============
AMOUNT
Sold................................................. $ 10,996,951 $ 12,466,219 $3,492,257 $1,972,074
Issued for reinvestment of dividends................. 4,323,174 4,473,957 280,728 152,542
------------ ------------ ------------ ------------
15,320,125 16,940,176 3,772,985 2,124,616
Reacquired........................................... (23,061,621) (19,416,775) (982,921) (380,966)
------------ ------------ ------------ ------------
Net increase (decrease).............................. $ (7,741,496) $ (2,476,599) $2,790,064 $1,743,650
============ ============ ============ ============
</TABLE>
COMPOSITE TAX-EXEMPT BOND FUND, INC.
Capital stock authorized ............ 500,000,000
Designated as:
Class A............................ 300,000,000
Class B............................ 200,000,000
Par value per share.................. $0.0001
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------- -------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
1996 1995 1996 1995
-------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
SHARES
Sold................................................. 1,460,406 2,542,933 390,317 161,616
Issued for reinvestment of dividends................. 1,037,464 1,034,551 26,578 7,241
-------------- ------------ ------------- ----------
2,497,870 3,577,484 416,895 168,857
Reacquired........................................... (5,197,278) (5,093,734) (79,060) (10,688)
-------------- ------------ ------------- ----------
Net increase (decrease).............................. (2,699,408) (1,516,250) 337,835 158,169
============== ============ ============= ==========
AMOUNT
Sold................................................. $ 11,398,132 $ 18,646,519 $3,119,779 $1,240,802
Issued for reinvestment of dividends................. 8,078,800 8,716,895 128,510 60,160
-------------- ------------ ------------- ----------
19,476,932 27,363,414 3,248,289 1,300,962
Reacquired........................................... (40,306,611) (38,879,195) (611,372) (82,411)
-------------- ------------ ------------- ----------
Net increase (decrease).............................. $(20,829,679) $(11,515,781) $2,636,917 $1,218,551
============== ============ ============= ==========
</TABLE>
<PAGE>
A FAMILY OF
FUNDS TO MEET
MOST ANY NEED
MORE ABOUT THE
COMPOSITE GROUP
A RANGE OF INVESTING
OPPORTUNITIES FOR YOU
The Composite Group offers you six additional portfolios, with such varied
groupings as value-oriented common stocks, income-producing government and
corporate bonds and tax-exempt municipal obligations. An investment in one or
more of these funds makes it possible for you to match your objectives with
sensible investment opportunities.
COMPOSITE BOND & STOCK FUND
This Fund is managed to provide the potential for steady income,
conservation of principal, and long-term growth of income and principal.
Investments are made in bonds, preferred and common stocks, and convertible
bonds.
COMPOSITE GROWTH & INCOME FUND
Long-term capital growth is the focus for this Fund. Current income is a
secondary consideration. The Fund invests principally in high-quality common
stocks which, in our opinion, are undervalued.
COMPOSITE NORTHWEST FUND
The Northwest Fund seeks long-term growth of capital by investing in common
stocks of companies located or doing business in Washington, Oregon, Idaho,
Montana and Alaska.
COMPOSITE U.S. GOVERNMENT SECURITIES
Securities for this Fund are selected for their ability 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 secured
by those types of obligations. Individual fund shares are not guaranteed by the
U.S. government, and share values will fluctuate.
COMPOSITE INCOME FUND
The objective of this Fund is to provide a high level of current income
that is consistent with protection of shareholders' capital. It does this
through careful investment in a diversified pool of debt securities.
COMPOSITE TAX-EXEMPT BOND FUND
Current income, free from federal income tax, is targeted for this Fund.
Investments are made in high-quality municipal bonds that have received one of
the four highest ratings from Standard & Poor's Corporation or Moody's Investor
Service, Inc. In some tax situations, the alternative minimum tax and/or state
and local taxes may apply.
TWO COMPOSITE MONEY MARKET FUNDS
Composite Cash Management Co. seeks to provide current money market rates
of return, liquidity, and preservation of capital through its two portfolios.
1) The MONEY MARKET portfolio invests in high-quality, short-term money
market obligations of banks, businesses and the U.S. government. 2) The
TAX-EXEMPT portfolio invests in high-quality, short-term municipal bonds that
are exempt from federal income tax.
Both portfolios are intended to satisfy the need for available future cash,
and both offer draft-writing privileges. Neither has a sales charge for
purchases of shares.
Please note that investments in these shares are not insured nor guaranteed
by the U.S. government. Also, there cannot be any assurance that a stable net
asset value (NAV) of $1.00 per share can be maintained.
HELPFUL FEATURES OFFERED
BY THE COMPOSITE GROUP
* Distinct portfolios to fit your objectives
* Diversification within portfolios
* Highly experienced professional management
* Ease of exchange from one fund to another
* Most funds appropriate for IRAs
* Automatic reinvestment of earnings
* Systematic investment programs
* Convenient monthly payments of principal and interest (CONTINUED WITHDRAWALS
IN EXCESS OF INCOME, OF COURSE, WILL EVENTUALLY EXHAUST PRINCIPAL.)
WE'RE HERE TO HELP
We encourage you to visit with your investment representative when you have
questions about your investments or a new goal you have in mind.
But you also may call Composite Customer Service toll-free at
1-800-543-8072, Monday through Friday, 7:00 a.m. - 6:00 p.m., Pacific time.
Or, if you prefer, you can have virtual 24-hour access to account
information by calling the Composite INFO-LINE at 1-800-662-3533 on your
touch-tone telephone. Readily available information includes such data as
account balances, fund prices, and last-transaction details. When calling,
please be sure to have your account number and personal identification number
(the last four digits of your Social Security or tax ID number) handy. Both are
listed on your statement.
When calling INFO-LINE, please respond to the recorded prompt messages by
pressing the appropriate numbers on your touch-tone phone.
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FOR MORE INFORMATION ON ANY OF THE COMPOSITE GROUP FUNDS, INCLUDING CHARGES
AND EXPENSES, WRITE OR CALL FOR A FREE PROSPECTUS. PLEASE READ IT CAREFULLY
BEFORE YOU INVEST OR SEND MONEY.
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<PAGE>
FOR FURTHER INFORMATION, PLEASE CONTACT:
FUND OFFICES
COMPOSITE GROUP OF FUNDS
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
OFFICERS
PRESIDENT
William G. Papesh
Executive Vice President
Kerry K. Killinger
VICE PRESIDENTS
Gene G. Branson
Douglas D. Springer
VICE PRESIDENT & TREASURER
Monte D. Calvin
SECRETARY
John T. West
BOARD OF DIRECTORS
MEMBERS
Wayne L. Attwood, M.D.
Kristianne Blake
Anne V. Farrell
Michael K. Murphy
William G. Papesh
Daniel L. Pavelich
Jay Rockey
Leland J. Sahlin
Richard C. Yancey
This report is submitted for the general information of
shareholders of the Funds. For more detailed information
about the Funds, their officers and directors, fees, expenses
and other pertinent information, please see the prospectus
of the Funds. This report is not authorized for distribution
to prospective investors in the Funds unless preceded or
accompanied by an effective prospectus.
COMPOSITE GROUP
BOND
FUNDS
ANNUAL
REPORT
DECEMBER 31,
1996
COMPOSITE
U.S. GOVERNMENT
SECURITIES, INC.
COMPOSITE
INCOME FUND, INC.
COMPOSITE
TAX-EXEMPT BOND
FUND, INC.
