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
November 30,1997
This report is not to be distributed unless preceded or accompanied by a
prospectus.
<PAGE>
STATE FARM INTERIM FUND, INC.
Dear Shareowner:
General movements of interest rates over the course of the Interim Fund's
fiscal year fell rather distinctly into two periods. Interest rates rose
during the first half of the year as the Federal Reserve nudged short-term
interest rates a little higher and investors worried that the rapid pace of
general U.S. economic growth might lead to higher inflation. The last half of
1997 produced declining interest rates while investors contemplated
developments in international markets and observed moderate levels of actual
inflation.
At the end of the year, yields on the U.S. Treasury securities held by
your Fund were slightly higher than they were one year ago. This rise in
yields helped cause the net asset value of the Fund to fall to $9.85 from
$9.98, a 1.3% decline. The Fund's total return, which considers the
reinvestment of dividends and the change in net asset value, for the year was
5.9%.
The following graph compares a $10,000 investment in the Interim Fund
over the last ten years to theoretical investments of the same amount in the
Lehman Brothers Intermediate Treasury Index and the Lehman Brothers Three-year
Treasury Index:
INTERIM LEHMAN LEHMAN
FUND INTERMEDIATE 3-YR TR
1987 10,000 10,000 10,000
1988 10,667 10,717 10,646
1989 11,925 12,052 11,837
1990 12,913 13,048 12,835
1991 14,383 14,728 14,447
1992 15,419 15,933 15,558
1993 16,615 17,397 16,761
1994 16,472 17,103 16,980
1995 18,429 19,435 19,109
1996 19,432 20,523 20,166
1997 20,573 21,804 21,406
* The Lehman Brothers Intermediate Treasury Index contains approximately
130 U.S. Treasury Securities with maturities ranging from one to ten
years.
** The Lehman Brothers Three-Year Index contains the U.S. Treasury issue with
approximately a three year maturity which has been issued most recently.
The Lehman Brothers indeces represent unmanaged groups of notes and bonds that
differ from the composition of the Interim Fund. Unlike an investment in the
Interim Fund, theoretical investments in the indeces do not reflect expenses.
2
<PAGE>
A major factor affecting money and capital markets since July has been
the currency turmoil in Asian countries. As the currencies of developing Asian
countries have plunged, stock markets in several of the countries have
plummeted 50-60% this year in U.S. dollar terms. Bond markets in these
countries have also suffered substantial declines while interest rates rose
and financial difficulties intensified. The turbulence in the world's
financial markets has caused an increased demand for U.S. Treasury securities
as investors seek safety.
The present situation suggests that our U.S. money and capital markets
are, and will continue to be, affected to a great extent by global financial
circumstances. The U.S. economy remains quite strong, and typically this
strength would be putting upward pressure on U.S. interest rates. However, the
Asian difficulties reduce somewhat the prospects for future domestic economic
growth and will have a dampening impact on future inflation. Consequently, the
Federal Reserve appears content to leave short-term interest rates at present
levels for awhile, and the consensus among investors seems to be that interest
rates on bonds can decline further. As you well know, expectations for markets
will change in unpredictable ways as new information is processed by
investors.
Leaders in many parts of the world are struggling as they attempt to
develop open market-based economies with a global orientation. Flexibility and
adaptability are the strengths of market-based systems, so the efforts should
be worthwhile. However, we caution against paying much attention to those who
proclaim to know how the Asian difficulties will play out and adjusting the
composition of investment portfolios in response to a specific scenario.
Ultimate effects of the Asian situation on financial markets, financial
institutions and general economic conditions are probably obvious only with
benefit of hindsight. In our opinion, the primary challenge for any investor
is development of a long-term investment program which makes one comfortable
regardless of what short-term direction markets might take.
The general composition of the Fund's portfolio changed very little over
the year with primary investments consisting of U.S. Treasury issues which
mature regularly over the next six years. The weighted average maturity of the
portfolio presently stands at three years, which is unchanged from a year ago.
The relatively short maturity structure of the portfolio tends to mitigate
fluctuations in the Fund's net asset value. The high quality investments
provide a dependable flow of dividend income.
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/ John S. Concklin
Kurt G. Moser John S. Concklin
Vice President Vice President
December 17, 1997
3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareowners
State Farm Interim Fund, Inc.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of State Farm Interim Fund, Inc., as
of November 30, 1997, the related statements of operations and changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the fiscal years since 1988. These financial statements
and financial highlights are the responsibility of the Fund's 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 confirmation of investments
owned as of November 30, 1997, 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 that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
State Farm Interim Fund, Inc. at November 30, 1997, the results of its
operations and changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the fiscal years
since 1988, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 12, 1997
4
<PAGE>
STATE FARM INTERIM FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1997
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS - U.S. TREASURY
OBLIGATIONS (97.8%):
$3,000,000 7.875%, due January 15, 1998 $ 3,009,720
1,000,000 8.125%, due February 15, 1998 1,005,240
4,000,000 7.875%, due April 15, 1998 4,034,840
750,000 5.125%, due June 30,1998 748,350
3,000,000 8.250%, due July 15, 1998 3,048,210
1,000,000 4.750%, due September 30, 1998 992,670
4,000,000 7.125%, due October 15, 1998 4,049,800
4,000,000 6.375%, due January 15,1999 4,029,080
1,000,000 5.875%, due March 31, 1999 1,001,980
3,750,000 7.000%, due April 15, 1999 3,812,025
4,000,000 6.375%, due July 15, 1999 4,038,120
1,000,000 5.750%, due September 30, 1999 999,890
4,000,000 6.000%, due October 15, 1999 4,020,640
2,000,000 6.375%, due January 15, 2000 2,024,680
2,000,000 8.500%, due February 15, 2000 2,111,520
1,000,000 6.875%, due March 31, 2000 1,023,610
2,000,000 5.500%, due April 15, 2000 1,988,200
1,000,000 6.750%, due April 30, 2000 1,021,490
1,000,000 8.875%, due May 15, 2000 1,070,960
1,000,000 6.250%, due May 31, 2000 1,010,830
4,000,000 8.750%, due August 15,2000 4,292,480
3,750,000 8.500%, due November 15, 2000 4,022,063
4,000,000 7.750%, due February 15, 2001 4,222,640
5,000,000 8.000%, due May 15, 2001 5,335,500
4,000,000 7.875%, due August 15, 2001 4,266,760
4,000,000 7.500%, due November 15, 2001 4,230,240
4,000,000 14.250%, due February 15, 2002 5,250,960
4,000,000 7.500%, due May 15, 2002 4,257,200
5,000,000 6.375%, due August 15, 2002 5,108,200
4,000,000 11.625%, due November 15, 2002 4,980,080
6,000,000 6.250%, due February 15, 2003 6,107,820
2,000,000 10.750%, due May 15, 2003 2,449,980
2,000,000 11.125%, due August 15,2003 2,502,420
7,000,000 5.750%, due August 15, 2003 6,965,070
1,000,000 11.875%, due November 15, 2003 1,297,360
---------------
110,330,628
Total long-term investments (cost: $112,293,672)
5
<PAGE>
STATE FARM INTERIM FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1997
PRINCIPAL
AMOUNT VALUE
$1,200,000 U.S. Treasury bills, 4.92% to 4.96%
effective yield, due December,
1997 to January, 1998 $ 1,193,880
1,000,000 General Motors Acceptance Corp.,
5.60%, due December, 1997 1,000,311
---------------
Total short-term investments
(cost: $2,194,148) 2,194,191
TOTAL INVESTMENTS (99.7%) (cost: $114,487,820) 112,524,819
CASH AND OTHER ASSETS, LESS LIABILITIES (0.3%) 321,389
---------------
NET ASSETS (100.00%) $ 112,846,208
===============
Note: At November 30, 1997, net unrealized depreciation of $1,963,001
consisted of gross unrealized appreciation of $485,752 and gross
unrealized depreciation of $2,448,753 based on cost of $1,114,487,820
for federal income tax purposes.
6
<PAGE>
STATE FARM INTERIM FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1997
ASSETS
Investments, at value (cost $114,487,820) $112,524,819
Cash 812,162
Receivable for:
Interest $ 1,596,511
Shares of the Fund sold 76,516
Sundry 3,544 1,676,571
-----------
Prepaid expenses 8,342
------------
Total assets 115,021,894
LIABILITIES AND NET ASSETS
Payable for:
Dividends to shareowners 1,196,972
Shares of the Fund redeemed 923,623
Other accounts payable (including $50,137
to Manager) 55,091
-----------
Total liabilities 2,175,686
------------
Net assets applicable to 11,454,154 shares outstanding
of $1 par value common stock (40,000,000
shares authorized) $112,846,208
============
Net assets value, offering price and redemption price
per share $ 9.85
============
ANALYSIS OF NET ASSETS
Excess of amounts received from sales of shares
over amounts paid on redemptions of shares
on account of capital $117,070,033
Accumulated net realized loss on sales of investments (2,260,824)
Net unrealized depreciation of investments (1,963,001)
------------
Net assets applicable to shares outstanding $112,846,208
============
See accompanying notes to financial statements.
7
<PAGE>
STATE FARM INTERIM FUND, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 30,
1997 1996
INTEREST INCOME: $ 7,939,168 7,436,515
EXPENSES:
Investment advisory and management fees 184,551 177,555
Audit fees 17,405 16,242
Legal fees 588 1,106
Fidelity bond expense 2,912 3,103
Directors' fees 1,650 1,500
Reports to shareowners 2,207 3,471
Securities evaluation fees 2,094 2,288
Franchise taxes 9,391 7,235
Custodian fees 10,745 21,035
Other 6,752 6,205
--------------------------
Total expenses 238,295 239,740
Less: custodian fees paid indirectly - 17,978
--------------------------
Net expenses 238,295 221,762
--------------------------
Net investment income 7,700,873 7,214,753
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on sales of investments (922,190) (363,957)
Change in net unrealized depreciation (453,800) (1,331,541)
--------------------------
Net realized and unrealized loss on
investments (1,375,990) (1,695,498)
--------------------------
Net change in net assets resulting from
operations $ 6,324,883 5,519,255
==========================
See accompanying notes to financial statements.
8
<PAGE>
STATE FARM INTERIM FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED NOVEMBER 30,
1997 1996
From operations:
Net investment income $ 7,700,873 7,214,753
Net realized loss on sales of investments (922,190) (363,957)
Change in net unrealized depreciation (453,800) (1,331,541)
--------------------------
Net change in net assets resulting from operations 6,324,883 5,519,255
Dividends to shareowners from net investment
income (per share $.69 in 1997 and $.70 in 1996) (7,700,873) (7,214,753)
From Fund share transactions:
Proceeds from shares sold 57,531,569 36,298,430
Reinvestment of ordinary income dividends 7,150,343 6,439,866
--------------------------
64,681,912 42,738,296
Less payments for shares redeemed 58,104,026 38,097,084
--------------------------
Net increase in net assets from Fund share
transactions 6,577,886 4,641,212
--------------------------
Total increase in net assets 5,201,896 2,945,714
Net assets:
Beginning of year 107,644,312 104,698,598
--------------------------
End of year $112,846,208 107,644,312
==========================
See accompanying notes to financial statements.
9
<PAGE>
STATE FARM INTERIM FUND, INC.
NOTES TO FINANCIAL STATEMENTS
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 INVESTMENT 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. 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, 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.
A capital loss carryover of $55,654 expired in 1997 and was re-classified
from Accumulated net realized loss on sales of investments to Excess of
amounts received from sales of shares over amounts paid on redemptions of
shares on account of capital.
CUSTODIAN FEES - For the period ended November 30, 1997, the Fund no
longer receives fee reductions for balances maintained with the custodian, as
interest on cash balances ($15,052) is reflected as income rather than an
offset to custodian fees. Custodian fees for the year ended November 30, 1996
were reduced based on the Fund's cash balances maintained with the custodian.
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.
10
<PAGE>
STATE FARM INTERIM FUND, INC.
NOTES TO FINANCIAL STATEMENTS
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 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 franchise
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 $184,551,
for 1997 and $177,555 for 1996. The Fund does not pay any discount, commission
or other compensation for 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 two years ended November 30, 1997, except for directors'
fees of $1,650 for 1997 and $1,500 for 1996, paid to the Fund's independent
directors.
4. INVESTMENT TRANSACTIONS
Investment transactions (exclusive of short-term investments) for each of
the two years ended November 30 were as follows:
1997 1996
Purchases $25,775,703 19,122,109
Proceeds from maturities 15,750,000 15,750,000
5. 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:
YEAR ENDED NOVEMBER 30,
1997 1996
Shares sold 5,855,197 3,641,452
Shares issued in reinvestment of
ordinary income dividends 728,582 644,965
-----------------------
6,583,779 4,286,417
Less shares redeemed 5,913,858 3,815,161
-----------------------
Net increase in shares outstanding 669,921 471,256
=======================
11
<PAGE>
STATE FARM INTERIM FUND, INC.
FINANCIAL HIGHLIGHTS
Per Share Income and Capital Changes (For a share outstanding throughout each
period)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $9.98 10.15 9.72 10.52 10.46 10.50 10.16 10.17 9.86 9.99
Income from Investment
----------------------
Operations
----------
Net investment Income .69 .70 .70 .71 .74 .78 .78 .82 .81 .78
Net gain or loss on
securities (both realized
and unrealized) (.13) (.17) .43 (.80) .06 (.04) .34 (.01) .31 (.13)
---------------------------------------------------------------------------------------
Total from investment
operations .56 .53 1.13 (.09) .80 .74 1.12 .81 1.12 .65
Less Distributions
------------------
Net investment income (.69) (.70) (.70) (.71) (.74) (.78) (.78) (.82) (.81) (.78)
Capital gain - - - - - - - - - -
---------------------------------------------------------------------------------------
Total distributions (.69) (.70) (.70) (.71) (.74) (.78) (.78) (.82) (.81) (.78)
Net asset value, end of year $9.85 9.98 10.15 9.72 10.52 10.46 10.50 10.16 10.17 9.86
=======================================================================================
Total Return 5.87% 5.44% 11.91% (.85%) 7.82% 7.19% 11.41% 8.27% 11.82% 6.67%
- ------------
Ratios/Supplemental Data
- ------------------------
Net assets, end of period
(millions) $112.8 107.6 104.7 94.3 103.7 85.9 66.8 52.7 42.2 32.9
Ratio of expenses to
average net assets .22% .23%(a) .25%(a) .22% .25% .27% .28% .30% .31% .36%
Ratio of net investment
income to average
net assets 7.03% 7.03% 7.00% 7.00% 7.00% 7.30% 7.65% 8.12% 8.16% 7.85%
Portfolio turnover rate 15% 17% 17% 15% 15% 15% 14% 14% 17% 15%
Number of shares
outstanding at end
of period (millions) 11.5 10.8 10.3 9.7 9.9 8.2 6.4 5.2 4.2 3.3
</TABLE>
Note: (a) The ratio based on net custodian expenses would have been .22%
in 1996 and .24% in 1995
----------------
STATE FARM INTERIM FUND, INC.
TAX INFORMATION
The Fund paid ordinary income dividends in March, June, September and
December. The dividends paid to you will be included on the Form 1099-DIV
to be sent in January 1998.
Since the Fund's investment income was derived from interest, none of the
Fund's distributions are eligible for the dividend received deduction for
corporations.
NOTE: Dividends paid to you must be included in your federal income tax return
and must be reported by the Fund to the Internal Revenue Service in
accordance with provisions of the Internal Revenue Code.
12
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<CIK> 0000205925
<NAME> STATE FARM INTERIM FUND, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 114487820
<INVESTMENTS-AT-VALUE> 112524819
<RECEIVABLES> 1676571
<ASSETS-OTHER> 820504
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 115021894
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2175686
<TOTAL-LIABILITIES> 2175686
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 117070033
<SHARES-COMMON-STOCK> 11454154
<SHARES-COMMON-PRIOR> 10784233
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2260824)
<OVERDISTRIBUTION-GAINS> 0
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<INTEREST-INCOME> 7939168
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<EXPENSES-NET> 238295
<NET-INVESTMENT-INCOME> 7700873
<REALIZED-GAINS-CURRENT> (922190)
<APPREC-INCREASE-CURRENT> (453800)
<NET-CHANGE-FROM-OPS> 6324883
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7700873)<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5855197
<NUMBER-OF-SHARES-REDEEMED> 5913858
<SHARES-REINVESTED> 728582
<NET-CHANGE-IN-ASSETS> 5201896
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 184551
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 238295
<AVERAGE-NET-ASSETS> 109560407
<PER-SHARE-NAV-BEGIN> 9.98
<PER-SHARE-NII> .69
<PER-SHARE-GAIN-APPREC> (.13)
<PER-SHARE-DIVIDEND> (.69)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
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<EXPENSE-RATIO> .22
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<AVG-DEBT-PER-SHARE> 0
<FN>
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</FN>
</TABLE>
