SEMI-ANNUAL REPORT
State Farm Interim Fund, Inc.
ONE STATE FARM PLAZA - BLOOMINGTON, ILLINOIS 61710
For Account Information and Shareowner
Services: (309) 766-2029
(800) 447-0740
May 31, 1998
This report is not to be distributed unless preceded or accompanied by a
prospectus.
<PAGE>
STATE FARM INTERIM FUND, INC.
Dear Shareowner:
U.S. capital markets have generally been pricing fixed-income securities
within a 25 basis point (a basis point is .01%) range in interest rates so far
this year. Yields have risen to the upper end of that range when investors
have displayed concerns about rapid economic growth and increasing
inflationary pressures which might lead the Federal Reserve Open Market
Committee to tighten monetary policy. Interest rates have fallen to the lower
level end of the range at times when investor sentiment leans towards
believing a significant slowdown in the economy is likely or U.S. securities
become favored investments as investors flee the turbulence of foreign
markets.
Presently interest rates are at the lower end of this trading range. At
May 31, yields on the U.S. Treasury securities which dominate the investments
of your Fund stood at levels about 25 basis points lower than those which
existed last November. The net asset value stands at $9.84 versus $9.85 when
the Fund's fiscal year ended in November. The Fund's total return, which
considers the reinvestment of dividends and the change in net asset value, was
7.8% for the past twelve months and 3.4% for the six months just ended.
Typically one would expect the net asset value to rise when yields decline.
However, that was not the case over the last six months because we chose to
manage the portfolio in a way which emphasizes the receipt of investment
income rather than capital appreciation. We believe that most shareowners own
the Interim Fund primarily to receive a dependable flow of dividend income and
are managing the assets of the Fund accordingly.
Our domestic economy continues to show persistent strength despite the
drag imposed on trade from Asia's crisis and the strong U.S. dollar. Investors
are vigilantly watching to determine if the strong economy will lead to a
resurgence in inflation. So far some inflationary pressures showing up in
wages have been more than offset by restrained pricing of goods and
productivity gains. Consequently, the investments of your Fund are presently
providing satisfactory levels of real investment income in a world where
domestic inflation seems to be increasing at an annual rate in the 2-3% range.
2
<PAGE>
As you know the Fund declares a dividend each day from its net
investment income which is payable on the last day of the calendar quarter.
All dividends are automatically invested in shares of the Fund unless you have
advised State Farm Investment Management Corp. otherwise in writing.
Sincerely,
/s/ Kurt G. Moser /s/ Donald E. Heltner
Kurt G. Moser Donald E. Heltner
Vice President Vice President
June 22, 1998
3
<PAGE>
STATE FARM INTERIM FUND, INC.
PORTFOLIO OF INVESTMENTS
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
LONG-TERM INVESTMENTS -- U.S. TREASURY
OBLIGATIONS (95.4%)
$ 750,000 5.125%, due June 30, 1998 $ 750,158
3,000,000 8.250%, due July 15, 1998 3,011,550
1,000,000 4.750%, due September 30, 1998 998,120
4,000,000 7.125%, due October 15, 1998 4,025,960
4,000,000 6.375%, due January 15, 1999 4,021,360
1,000,000 5.875%, due March 31, 1999 1,003,080
3,750,000 7.000%, due April 15, 1999 3,796,950
4,000,000 6.375%, due July 15, 1999 4,037,800
1,000,000 5.750%, due September 30, 1999 1,002,490
4,000,000 6.000%, due October 15, 1999 4,023,560
2,000,000 6.375%, due January 15, 2000 2,024,780
2,000,000 8.500%, due February 15, 2000 2,094,340
1,000,000 6.875%, due March 31, 2000 1,022,770
2,000,000 5.500%, due April 15, 2000 1,998,780
1,000,000 6.750%, due April 30, 2000 1,021,380
1,000,000 8.875%, due May 15, 2000 1,060,790
1,000,000 6.250%, due May 31, 2000 1,013,160
4,000,000 8.750%, due August 15, 2000 4,262,240
3,750,000 8.500%, due November 15, 2000 3,999,525
1,000,000 5.250%, due January 31, 2001 992,510
4,000,000 7.750%, due February 15, 2001 4,216,720
5,000,000 8.000%, due May 15, 2001 5,325,150
4,000,000 7.875%, due August 15, 2001 4,265,000
4,000,000 7.500%, due November 15, 2001 4,236,800
4,000,000 14.250%, due February 15, 2002 5,147,080
4,000,000 7.500%, due May 15, 2002 4,265,720
8,000,000 6.375%, due August 15, 2002 8,228,640
4,000,000 11.625%, due November 15, 2002 4,941,240
6,000,000 6.250%, due February 15, 2003 6,158,340
2,000,000 10.750%, due May 15, 2003 2,437,400
2,000,000 11.125%, due August 15, 2003 2,490,680
7,000,000 5.750%, due August 15, 2003 7,053,270
1,000,000 11.875%, due November 15, 2003 1,289,340
3,000,000 5.875%, due February 15, 2004 3,042,660
3,000,000 7.250%, due May 15, 2004 3,244,860
-------------
Total long-term investments (cost: $114,085,625) 112,504,203
See accompanying notes to financial statements.
4
<PAGE>
STATE FARM INTERIM FUND, INC.
PORTFOLIO OF INVESTMENTS
MAY 31, 1998
(UNAUDITED)
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (3.6%):
$ 300,000 U.S. Treasury bills, 5.030% effective yield, due June 1998 $ 299,889
3,990,000 General Motors Acceptance Corp., 5.520% to 5.540%,
due June 1998 3,993,101
-------------
Total short-term investments (cost: $4,292,889) 4,292,990
-------------
TOTAL INVESTMENTS (99.0%) (cost: $118,378,514) 116,797,193
CASH AND OTHER ASSETS, LESS LIABILITIES (1.0%) 1,128,243
-------------
NET ASSETS (100.0%) $ 117,925,436
=============
</TABLE>
Note: At May 31, 1998 net unrealized depreciation of $1,581,321 consisted of
gross unrealized appreciation of $672,521 and gross unrealized
depreciation of $2,253,842 based on cost of $118,378,514 for federal
income tax purposes.
See accompanying notes to financial statements.
5
<PAGE>
STATE FARM INTERIM FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments, at value (cost $118,378,514) $ 116,797,193
Cash 852,147
Receivable for:
Interest $ 1,624,220
Shares of the Fund sold 176,814
Sundry 3,544 1,804,578
-----------
Prepaid expenses 18,758
-------------
Total assets 119,472,676
LIABILITIES AND NET ASSETS
Payable for:
Dividends to shareowners 1,265,247
Shares of the Fund redeemed 229,992
Other accounts payable (including $48,498 to Manager) 52,001
-----------
Total liabilities 1,547,240
-------------
Net assets applicable to 11,988,081 shares outstanding of
$1 par value common stock (40,000,000 shares
authorized) $ 117,925,436
=============
Net asset value, offering price and redemption price per
share $ 9.84
=============
ANALYSIS OF NET ASSETS
Excess of amounts received from sales of shares over
amounts paid on redemptions of shares on account of
capital $ 122,318,753
Accumulated net realized loss on sales of investments (2,811,996)
Net unrealized depreciation of investments (1,581,321)
-------------
Net assets applicable to shares outstanding $ 117,925,436
=============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
STATE FARM INTERIM FUND, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED NOVEMBER 30,
MAY 31, 1998 1997
(UNAUDITED)
<S> <C> <C>
INTEREST INCOME: $ 4,091,628 7,939,168
EXPENSES:
Investment advisory and management fees 94,296 184,551
Audit fees 9,092 17,405
Legal fees 899 588
Fidelity bond expense 1,419 2,912
Directors' fees 1,360 1,650
Reports to shareowners 1,378 2,207
ICI dues 1,639 4,053
Registration fees 770 2,577
Proxy and mailing expenses 1,200 --
Securities evaluation fees 1,015 2,094
Franchise taxes 4,405 9,391
Custodian fees 3,048 10,745
Other 100 122
------------ ----------
Total Expenses 120,621 238,295
------------ ----------
Net investment income 3,971,007 7,700,873
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on sales
of investments (551,172) (922,190)
Change in net unrealized appreciation (depreciation) 381,680 (453,800)
------------ ----------
Net realized and unrealized loss on
investments (169,492) (1,375,990)
------------ ----------
Net change in net assets
resulting from operations $ 3,801,515 6,324,883
============ ==========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
STATE FARM INTERIM FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 1998 1997 1996
(UNAUDITED)
<S> <C> <C> <C>
From operations:
Net investment income $ 3,971,007 7,700,873 7,214,753
Net realized loss on sales
of investments (551,172) (922,190) (363,957)
Change in net unrealized
appreciation (depreciation) 381,680 (453,800) (1,331,541)
------------- ----------- -----------
Net change in net assets resulting
from operations 3,801,515 6,324,883 5,519,255
Distributions to shareowners from
net investment income (per share
$.34 in 1998, $.69 in 1997
and $.70 in 1996) (3,971,007) (7,700,873) (7,214,753)
From Fund share transactions:
Proceeds from shares sold 26,086,935 57,531,569 36,298,430
Reinvestment of ordinary income dividends 3,591,290 7,150,343 6,439,866
------------- ----------- -----------
29,678,225 64,681,912 42,738,296
Less payments for shares redeemed 24,429,505 58,104,026 38,097,084
------------- ----------- -----------
Net increase in net assets from Fund
share transactions 5,248,720 6,577,886 4,641,212
------------- ----------- -----------
Total increase in net assets 5,079,227 5,201,896 2,945,714
Net assets:
Beginning of period 112,846,208 107,644,312 104,698,598
------------- ----------- -----------
End of period $ 117,925,436 112,846,208 107,644,312
============= =========== ===========
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
STATE FARM INTERIM FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. OBJECTIVE
The investment objective of the State Farm Interim Fund, Inc. (the Fund)
is the realization over a period of years of the highest yield consistent with
relative price stability (relatively low volatility). The Fund seeks to
achieve its investment objective through investment in high quality debt
securities with primarily short-term (less than five years) and
intermediate-term (five to fifteen years) maturities.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION -- Long-term debt securities and U.S. Treasury bills
are valued using quotations provided by an independent pricing service.
Short-term debt securities, other than U.S. Treasury bills, are valued at
amortized cost which approximates market value. Any securities not valued as
described above are valued at fair value as determined in good faith by the
Board of Directors or its delegate.
SECURITY TRANSACTIONS AND INTEREST INCOME -- Security transactions are
accounted for on the trade date (date the order to buy or sell is executed).
Interest income is recorded on the accrual basis. Realized gains and losses
from security transactions are reported on an identified cost basis.
FUND SHARE VALUATION, DIVIDENDS AND DISTRIBUTIONS TO SHAREOWNERS -- Fund
shares are sold and redeemed on a continuous basis at net asset value. The net
asset value per share is determined as of 3:00 p.m. Bloomington, Illinois time
on each business day other than weekend and holiday closings, except that the
Fund need not compute a net asset value on any day when no purchase or
redemption order has been received by the Fund. The net asset value per share
is computed by dividing the value of the Fund's investments and other assets,
less liabilities, by the number of Fund shares outstanding. The Fund declares
a daily dividend equal to its net investment income, and distributions of such
amounts are made at the end of each calendar quarter.
FEDERAL INCOME TAXES -- It is the Fund's policy to comply with the
special provisions of the Internal Revenue Code available to investment
companies and, in the manner provided therein, to distribute all of its
taxable income, as well as any net realized gain on sales of investments
reportable for federal income tax purposes. The Fund has complied with this
policy and, accordingly, no provision for federal income taxes is required.
The accumulated net realized loss on sales of investments at November 30,
1997 (the Fund's most recent fiscal year end), amounting to $2,260,824 is
available to offset future taxable gains. If not applied, the capital loss
carryover expires as follows: $40,572 in 1998, $92,150 in 1999, $22,669 in
2000, $162,716 in 2001, $335,277 in 2002, $321,293 in 2003, $363,957 in 2004,
and $922,190 in 2005.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
9
<PAGE>
STATE FARM INTERIM FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
3. TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory and management services agreement
with State Farm Investment Management Corp. (Manager) pursuant to which the
Fund pays the Manager an annual fee (computed on a daily basis and paid
quarterly) of .20% of the first $50 million of average net assets, .15% of the
next $50 million of average net assets and .10% of the average net assets in
excess of $100 million. The Manager guarantees that all operating expenses of
the Fund, including the compensation of the Manager but excluding taxes,
interest, extraordinary litigation expenses, brokerage commissions and other
portfolio transaction costs, shall not exceed .40% of average net assets
annually.
Under the terms of this agreement, the Fund incurred fees of $94,296, for
the six months ended May 31, 1998 and $184,551 for the year ended November 30,
1997. The Fund does not pay any discount, commission or other compensation for
transfer agent or underwriting services provided by the Manager.
Certain officers and/or directors of the Fund are also officers and/or
directors of the Manager. The Fund made no payments to its officers or
directors during the six months ended May 31, 1998 and the year ended November
30, 1997, except for directors' fees of $1,360 and $1,650, respectively, paid
to the Fund's independent directors.
4. INVESTMENT TRANSACTIONS
Investment transactions (exclusive of short-term instruments) are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED NOVEMBER 30,
MAY 31, 1998 1997
(UNAUDITED)
<S> <C> <C>
Purchases $ 10,349,531 25,775,703
Proceeds from sales 7,982,188 15,750,000
============ ==========
</TABLE>
4. FUND SHARE TRANSACTIONS
Proceeds and payments on Fund shares as shown in the statement of changes
in net assets are in respect of the following number of shares:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 1998 1997 1996
(UNAUDITED)
<S> <C> <C> <C>
Shares sold 2,645,672 5,855,197 3,641,452
Shares issued in reinvestment of
ordinary income dividends 364,406 728,582 644,965
--------- --------- ---------
3,010,078 6,583,779 4,286,417
Less shares redeemed 2,476,151 5,913,858 3,815,161
--------- --------- ---------
Net increase in shares
outstanding 533,927 669,921 471,256
========= ========= =========
</TABLE>
10
<PAGE>
STATE FARM INTERIM FUND, INC.
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES (For a share outstanding throughout the
period)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 1998 1997 1996 1995 1994 1993
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 9.85 9.98 10.15 9.72 10.52 10.46
Income from Investment
- ----------------------
Operations
----------
Net Investment Income 0.34 .69 .70 .70 .71 .74
Net Gains or Losses
on Securities (both realized
and unrealized) (0.01) (.13) (.17) .43 (.80) .06
-------------------------------------------------------------------
Total from Investment
Operations 0.33 .56 .53 1.13 (.09) .80
Less Distributions
- ------------------
Net investment income (0.34) (.69) (.70) (.70) (.71) (.74)
Net Asset Value, End of Period $ 9.84 9.85 9.98 10.15 9.72 10.52
===================================================================
Total Return 3.44% 5.87% 5.44% 11.91% (.85%) 7.82%
- ------------
Ratios/Supplemental Data
- ------------------------
Net assets, end of period
(millions) $ 117.9 112.8 107.6 104.7 94.3 103.7
Ratio of expenses to average
net assets .21%(a) .22% .23%(b) .25%(b) .22% .25%
Ratio of net investment income
to average net assets 7.05%(a) 7.03% 7.03% 7.00% 7.00% 7.00%
Portfolio turnover rate 15%(a) 15% 17% 17% 15% 15%
Number of shares outstanding
at end of period
(millions) 12.0 11.5 10.8 10.3 9.7 9.9
</TABLE>
Notes: (a) Determined on an annualized basis.
(b) The ratio based on net custodian expenses would have been .22% in
1996 and .24% in 1995.
11
<PAGE>
VOTING RESULTS OF SPECIAL MEETING OF SHAREOWNERS
At a Special Meeting of Shareowners of the Fund held on March 13, 1998, the
following actions were taken:
A. The shareowners of the Fund elected the following individuals to serve on
the Board of Directors until the next meeting of shareowners called for
this purpose and until their successors shall be elected and qualified:
------------------------------------------------------------------------
Name of Director Number of Votes For Number of Votes Withheld
------------------------------------------------------------------------
Edward B. Rust, Jr. 7,921,664 651
Roger S. Joslin 8,054,986 651
Albert H. Hoopes 7,987,506 932
Davis U. Merwin 8,027,534 932
James A. Shirk 8,031,947 932
Thomas M. Mengler 7,980,702 932
------------------------------------------------------------------------
B. The shareowners of the Fund approved the proposed bylaw amendment that
would permit the board of directors to adopt further amendments without
shareowner approval:
------------------------------------------------------------------------
Number of Votes For Number of Votes Against Number of Votes Withheld
------------------------------------------------------------------------
7,010,241 883,231 231,412
------------------------------------------------------------------------
12
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000205925
<NAME> STATE FARM INTERIM FUND, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 118378514
<INVESTMENTS-AT-VALUE> 116797193
<RECEIVABLES> 1804578
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<SHARES-REINVESTED> 364406
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</TABLE>
