Registration Nos.
Securities Act - 2-58161
Investment Company Act - 811-2727
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 25
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23
State Farm Municipal Bond Fund, Inc.
____________________________________________________________________
(Exact Name of Registrant as Specified in Charter)
One State Farm Plaza, Bloomington, Illinois 61710
__________________________________________________ ____________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (309) 766-2029
Janet Olsen
Bell, Boyd & Lloyd
Roger Joslin 3 First National Plaza
One State Farm Plaza Suite 3300, 70 West Madison
Bloomington, Illinois 61710 Chicago, Illinois 60602
____________________________________________________________________
(Names and addresses of agents for service)
__________
X It is proposed that this filing will become effective on
April 1, 1997 pursuant to Rule 485 (b)
__________
Amending the revised prospectus, Statement of Additional Information and Part C
and filing Exhibits.
Registrant has elected to register an indefinite number of securities pursuant
to Rule 24f-2. On January 23, 1997, Registrant filed its Rule 24f-2 Notice for
the year ended November 30, 1996.
Total Number of Pages ________
(including attachments and exhibits)
Exhibit Index is on Page _______
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
------------------------------------
CROSS REFERENCE SHEET
Pursuant to Rule 404(a) of Regulation C
Item Number Location or Caption*
- ----------- --------------------
Part A (Prospectus)
-------------------
1 . . . . . . . . Front Cover
2 (a) . . . . . . Fee Table
2 (b), (c). . . . Not Applicable
3 (a) . . . . . . Financial Highlights
3 (b), (c). . . . Not Applicable
3 (d) . . . . . . Financial Highlights
4 (a) . . . . . . The Fund;
Investment Objective and Policies;
Organization and Capital Stock
4 (b) . . . . . . Investment Objective and Policies;
Investment Restrictions
4 (c) . . . . . . Investment Risks
5 (a) . . . . . . Management of the Fund
5 (b), (c). . . . Management of the Fund; Fee Table
5 (d) . . . . . . Management of the Fund
5 (e), (f). . . . Management of the Fund; Fee Table;
Financial Highlights
5 (g) . . . . . . Not Applicable
5A . . . . . . . The information called for is contained in
registrant's annual report to shareowners
6 (a) . . . . . . Organization and Capital Stock
6 (b), (c), (d) . Not Applicable
6 (e) . . . . . . Cover Page
6 (f), (g). . . . Dividends, Distributions and Taxes
6 (h) . . . . . . Not Applicable
7 . . . . . . . . Purchase of Fund Shares; Retirement Plans
7 (a) . . . . . . Management of the Fund
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
------------------------------------
CROSS REFERENCE SHEET
Pursuant to Rule 404(a) of Regulation C
(Continued)
Item Number Location or Caption*
- ----------- --------------------
7 (b) . . . . . . Determination of Net Asset Value;
Purchase of Fund Shares
7 (c) . . . . . . Not Applicable
7 (d) . . . . . . Purchase of Fund Shares
7 (e), (f). . . . Not Applicable
8 (a) . . . . . . Redemption of Fund Shares;
Signature Guarantee;
Systematic Withdrawal Program; Exchange of Fund
Shares
8 (b), (c). . . . Not Applicable
8 (d) . . . . . . Redemption of Fund Shares
9 . . . . . . . . Not Applicable
Part B (Statement of Additional Information)
--------------------------------------------
10 (a), (b). . . . Front Cover
11 . . . . . . . . Table of Contents
12 . . . . . . . . Not Applicable
13 (a) . . . . . . Investment Objective and Policies
13 (b), (c). . . . Investment Restrictions
13 (d) . . . . . . Not Applicable
14 (a), (b). . . . Directors and Officers
14 (c) . . . . . . Not Applicable
15 (a) . . . . . . Not Applicable
15 (b) . . . . . . General Information - Ownership of Shares
15 (c) . . . . . . Directors and Officers
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
------------------------------------
CROSS REFERENCE SHEET
Pursuant to Rule 404(a) of Regulation C
(Continued)
Item Number Location or Caption*
- ----------- --------------------
16 (a)(i). . . . . Investment Advisory and Other Services;
Part A - Management of the Fund
16 (a)(ii) . . . . Directors and Officers
16 (a)(iii), (b) . Management Services Agreement; Part A - Management
of the Fund
16 (c) . . . . . . Not Applicable
16 (d), (e). . . . Management Services Agreement; Service Agreement
16 (f), (g). . . . Not Applicable
16 (h) . . . . . . General Information - Custody of Assets;
General Information - Independent Auditors
16 (i) . . . . . . Transfer Agent Agreement
17 (a) . . . . . . Portfolio Transactions
17 (b) . . . . . . Not Applicable
17 (c), (d). . . . Portfolio Transactions
17 (e) . . . . . . Not Applicable
18 (a), (b). . . . Not Applicable
19 (a) . . . . . . Purchase and Redemption of Fund Shares
19 (b) . . . . . . Determination of Net Asset Value
19 (c) . . . . . . Not Applicable
20 . . . . . . . . Additional Tax Considerations
21 (a) . . . . . . Underwriting Agreement
21 (b), (c). . . . Not Applicable
22 (a) . . . . . . Not Applicable
22 (b) . . . . . . Performance Information
23 . . . . . . . . Financial Information
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
------------------------------------
CROSS REFERENCE SHEET
Pursuant to Rule 404(a) of Regulation C
(Continued)
Item Number Location or Caption*
- ----------- --------------------
Part C (Other Information)
--------------------------
24 . . . . . . . . Financial Statements and Exhibits
25 . . . . . . . . Persons Controlled by or Under Common Control with
Registrant
26 . . . . . . . . Number of Security Holders
27 . . . . . . . . Indemnification
28 . . . . . . . . Business and Other Connections of Investment
Adviser
29 . . . . . . . . Principal Underwriters
30 . . . . . . . . Location of Accounts and Records
31 . . . . . . . . Management Services
32 . . . . . . . . Undertakings
* References are to the captions in the part of the registration statement
indicated unless noted otherwise.
<PAGE>
PROSPECTUS -- APRIL 1, 1997
STATE FARM MUNICIPAL BOND FUND, INC.
ONE STATE FARM PLAZA, BLOOMINGTON, ILLINOIS 61710
For Account Information and Shareowner
Services: (309) 766-2029
(800) 447-0740
Offered to the Agents and Employees of
the State Farm Insurance Companies and their families
The investment objective of the Fund is to provide its shareowners with
as high a rate of income exempt from federal income taxes as is
consistent with prudent investment management. The Fund seeks to achieve
its investment objective through investment primarily in a diversified
portfolio of long-term Municipal Bonds, including industrial revenue
bonds.
Shares of the Fund are offered at their net asset value. There is no
sales charge.
----------------------------------------------
This prospectus contains information you should know before investing in
the Fund. Please read it and keep it for future reference. A Statement
of Additional Information dated April 1, 1997 containing further
information about the Fund, which is incorporated herein by reference,
has been filed with the Securities and Exchange Commission. You can
obtain a copy without charge by writing to State Farm Investment
Management Corp., One State Farm Plaza, Bloomington, Illinois 61710 or
by calling the shareowner services numbers stated above.
----------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
FEE TABLE
The Fund is 100% no-load; you pay no fees to purchase, exchange or redeem
shares, nor any ongoing marketing ("12b-1") expenses. Lower expenses
benefit you by increasing the Fund's investment return. Shown below are
all expenses the Fund incurred during its 1996 fiscal year. Expenses are
expressed as a percentage of fiscal 1996 average net assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES ANNUAL FUND OPERATING EXPENSES
Sales load "charge" on purchases NONE Management fee 0.12%
Sales load "charge" on reinvested dividends NONE Distribution ("12b-1") fees NONE
Redemption fees NONE Other expenses 0.04%
Exchange fees NONE -----
TOTAL FUND EXPENSES 0.16%
</TABLE>
Example
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 1 year 3 years 5 years 10 years
5% annual return and (2) redemption at the end of each ------ ------- ------- --------
time period .................................................................. $2 $5 $9 $20
</TABLE>
The purpose of this table is to help you understand the various costs
and expenses that an investor in the Fund will bear directly or
indirectly. (See "Management of the Fund").
THIS IS AN ILLUSTRATION ONLY. The figures in the example are not
necessarily representative of past or future expenses and actual
expenses and performance may be greater or less than that shown.
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES (for a share outstanding throughout
the period)
The following information has been audited by Ernst & Young LLP,
independent auditors, whose report thereon is unqualified. The audited
financial statements of the Fund, the auditor's report thereon and
additional performance information are contained in the Fund's annual
report dated November 30, 1996 which may be obtained from the Fund upon
request at no cost.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.50 7.88 8.59 8.34 8.15 7.98 7.96 7.76 7.58
Income from Investment Operations
- ---------------------------------
Net investment income .48 .48 .48 .50 .53 .54 .58 .58 .57
Net gain or loss on securities (both realized
and unrealized) (.06) .62 (.69) .25 .19 .17 .02 .20 .18
-------------------------------------------------------------------------
Total from investment operations .42 1.10 (.21) .75 .72 .71 .60 .78 .75
Less Distributions
- ------------------
Dividends (from net investment income) (.48) (.48) (.48) (.50) (.53) (.54) (.58) (.58) (.57)
Distributions (from capital gain) (b) -- -- (.02) -- -- -- -- -- --
-------------------------------------------------------------------------
Total distributions (.48) (.48) (.50) (.50) (.53) (.54) (.58) (.58) (.57)
Net asset value, end of period $ 8.44 8.50 7.88 8.59 8.34 8.15 7.98 7.96 7.76
=========================================================================
Total Return 5.21% 14.25% (2.55%) 9.17% 9.05% 9.17% 7.78% 10.44% 10.14%
- ------------
Ratios/Supplemental Data
- ------------------------
Net assets, end of period (millions) $321.1 307.4 269.9 276.4 211.3 167.2 132.8 110.0 85.2
Ratio of expenses to average net
assets .16% .17%(c) .16% .18% .19% .21% .23% .25% .29%
Ratio of net investment income to average net
assets 5.76% 5.80% 5.80% 5.84% 6.36% 6.75% 7.30% 7.42% 7.36%
Portfolio turnover rate 6% 7% 8% 5% 4% 2% 8% 7% 2%
Number of shares outstanding at end of period
(millions) 38.0 36.2 34.3 32.2 25.3 20.5 16.6 13.8 11.0
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
NOVEMBER 30, MAY 31,
1987 1987
<S> <C> <C>
Net asset value, beginning of period 7.55 7.53
Income from Investment Operations
- ---------------------------------
Net investment income .28 .57
Net gain or loss on securities (both
realized and unrealized) .03 .02
---------------------
Total from investment operations .31 .59
Less Distributions
- ------------------
Dividends (from net investment income) (.28) (.57)
Distributions (from capital gain) (b) -- --
---------------------
Total distributions (.28) (.57)
Net asset value, end of period 7.58 7.55
=====================
Total Return 4.19% 7.72%
- ------------
Ratios/Supplemental Data
- ------------------------
Net assets, end of period (millions) 70.7 66.4
Ratio of expenses to average net
assets .30%(a) .31
Ratio of net investment income to average
net assets 7.49%(a) 7.30%
Portfolio turnover rate 4%(a) 0%
Number of shares outstanding at end of
period (millions) 9.3 8.8
</TABLE>
Note: (a) Ratios and rate have been calculatedon an annualized basis.
(b) Distributions representing less than $.01 were distributed in 1996,
1993 and 1992.
(c) The ratio based on net custodian expenses would have been .16% in
1995.
-2-
<PAGE>
THE FUND
The Fund is a no-load, open-end, diversified, management investment
company (mutual fund). The Fund is a no-load fund, which means that it
imposes no sales charges or commissions. The Fund is "open-end" because
it continuously offers its shares for sale and redeems its shares upon
request of the shareowners.
The Fund makes available to investors a diversified portfolio of
long-term Municipal Bonds under the continuous supervision of
experienced investment management. By combining individual shareowner
investments into a pool of assets, the Fund is able to invest in
Municipal Bonds which are often offered only in relatively large dollar
denominations and, in some cases, are not available to individual
investors. Through ownership of shares of the Fund, as contrasted with
ownership of a number of individual securities, shareowners are relieved
of many details in the selection and management of their investments and
the safeguarding of securities, and their bookkeeping and income tax
records are greatly simplified. In addition, the Fund provides its
shareowners with liquidity, as shares can normally be redeemed at any
time at their net asset value. However, ownership of shares of the Fund
does not constitute a complete financial program. The Fund is intended
to serve as the longer term fixed-income portion of the investment
programs of investors with relatively high federal income tax brackets.
Anyone considering investing in the Fund should be confident that his
federal income tax bracket is high enough to make the lower tax-exempt
yield more attractive than taxable yields available from other forms of
fixed-income investments.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide its shareowners with
as high a rate of income exempt from federal income taxes as is
consistent with prudent investment management. It is a fundamental
policy of the Fund that during periods of normal market conditions,
either (1) the Fund's assets will be invested so that at least 80% of
its net investment income will be exempt from federal income tax, or (2)
at least 80% of the Fund's net assets will be invested in securities the
income of which is exempt from federal income tax.
The Fund intends to invest primarily in a diversified selection of
Municipal Bonds (as defined below) with maturities of one to fifteen
years, although issues with longer maturities may be purchased from time
to time. A majority of the Fund's investments will usually be in issues
with maturities longer than five years. There can be no assurance that
the current income will be sufficient to offset decreases in the net
asset value per share that will result if prevailing interest rates rise
in relation to the rates of interest on Municipal Bonds in the Fund's
portfolio. There can be no assurance that the objective of the Fund will
be achieved.
Assets not invested in Municipal Bonds will be held as cash or invested
in "Money Market Securities" and U.S. Treasury securities. Money Market
Securities include short-term obligations of the U.S. Government and its
agencies and instrumentalities and other money market instruments such
as domestic bank certificates of deposit, bankers' acceptances and
corporate commercial paper rated in the highest grade. From time to time
more than 20% of the Fund's assets may be invested in Money Market
securities or held as cash for defensive reasons in anticipation of a
decline in the market values of debt securities, or pending the
investment of proceeds from the sale of Fund shares or from the sale of
portfolio securities, or in order to have highly liquid securities
available to meet possible redemptions.
Under ordinary circumstances at least 70% of the Fund's total assets
will consist of Municipal Bonds rated A or better by Moody's Investors
Service, Inc. ("Moody's") or by Standard and Poor's Corporation ("S&P"),
Money Market Securities and cash (see "Appendix, Description of Moody's
and S&P Municipal Bond Ratings" in the Statement of Additional
Information). Consequently, up to 30% of assets may consist of Municipal
Bonds which are non-rated, or rated less than A by Moody's or by S&P.
See "Investment Risks." Subsequent to its purchase by the Fund, an issue
of Municipal Bonds or of Money Market Securities
-3-
<PAGE>
may no longer be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither occurrence will automatically
require the elimination of the security from the Fund's portfolio, but
the Fund's investment manager, State Farm Investment Management Corp.
("Manager") will consider the reasons for the change in determining
whether to retain the issue in the portfolio.
Although changes will be made from time to time in securities owned by
the Fund as deemed necessary to accomplish the Fund's objective, the
Manager does not expect to engage in a significant amount of short-term
trading. Most sales of securities will occur when the proportion of
securities owned with longer term maturities is reduced in anticipation
of a bond market decline (rise in interest rates), or increased in
anticipation of a bond market rise (decline in interest rates).
The Fund may purchase Municipal Bonds on a "when-issued" basis.
When-issued means that the Fund has committed to purchase at a specified
price certain securities to be issued in the future. Such commitments
are made in order to secure what is considered, in the opinion of the
Manager, to be an advantageous price and yield to the Fund at the time
of the commitment. Delivery and payment for these securities may be a
month or more after the purchase date, during which time the value of
such securities is subject to market fluctuation. It is possible that
the securities will never be issued and the commitment canceled.
The Fund's investment objective and fundamental investment policy as set
forth in the first paragraph of "Investment Objective and Policies" may
not be changed without the approval of the shareowners. However, all
other investment policies followed in seeking that investment objective
may be altered from time to time without shareowners' approval.
MUNICIPAL BONDS -- Municipal Bonds are debt obligations issued by or on
behalf of states, territories and possessions of the United States, the
District of Columbia and the Commonwealth of Puerto Rico and their
political subdivisions, agencies and instrumentalities, or by a
multistate governmental agency or authority, to obtain funds for various
purposes. The interest on these obligations is in general exempt from
federal income taxes in the opinion of bond counsel to the issuers.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" issues. The basic security of general
obligation bonds is the issuer's pledge of its faith, credit and taxing
power for the prompt payment of principal and interest. The sole or
principal security for a revenue bond is typically the net revenues
derived from operation of the facilities the bonds financed or, in some
cases, from the proceeds of a special excise or specific revenue source,
but not from the general taxing power.
Industrial development bonds, although issued by governmental entities
or public authorities, are usually not secured by the taxing power of
the issuer, but are secured by the revenues derived from payments by the
user. Industrial development bonds are issued to obtain funds for the
construction, repair or improvement of, or the equipment for, privately
operated housing facilities, sports facilities, convention or trade show
facilities, airport, mass transit, port or parking facilities, air or
water pollution control facilities, certain local facilities for water
supply, gas, electricity or sewage or solid waste disposal and other
industrial or commercial facilities. Such obligations are included
within the term Municipal Bonds if the interest paid thereon qualifies
as exempt from federal income taxes. The credit quality of an industrial
development bond is normally directly related to the credit standing of
the industrial user involved.
There are, in addition, a variety of hybrid and special types of
Municipal Bonds in which the Fund may invest, including variable rate
securities and municipal notes. Variable rate securities bear rates of
interest that are adjusted periodically according to formulae intended
to minimize fluctuation in values of the instruments. Municipal notes
include tax, revenue, and bond anticipation notes of short maturity,
generally less than three years, which are used to obtain temporary
funds for various public purposes.
For further information see "Investment Objective and Policies" in the
Statement of Additional Information.
-4-
<PAGE>
INVESTMENT RISKS
Risks are inherent in all security investments, including mutual funds.
The net asset value per share of the Fund may decrease if prevailing
interest rates rise in relation to rates of interest on Municipal Bonds
in the Fund's portfolio. The Fund is intended for investors who can
accept this fluctuation and other risks associated with investments in
long-term Municipal Bonds. Although the Fund invests in a diversified
selection of long-term Municipal Bonds in an attempt to reduce its
overall exposure to investment and market risks, such diversification
does not eliminate all risks. There can be no assurance that the
objective of the Fund will be achieved.
Inherent in the ownership of any Municipal Bond is the risk that the
issuer may lack the power or ability to make principal and interest
payments when due. Up to 30% of the Fund's total assets may be invested
in Municipal Bonds which are non-rated, or rated less than A by Moody's
or by S&P. Investment in medium or lower quality debt securities
involves greater investment risk, including the possibility of issuer
default or bankruptcy. An economic downturn could severely disrupt this
market and adversely affect the value of outstanding bonds and the
ability of issuers to repay principal and interest. During a period of
adverse economic changes, including a period of rising interest rates,
issuers of such bonds may experience difficulty in servicing their
principal and interest obligations.
Medium and lower quality debt securities tend to be less marketable than
higher quality debt securities because the market for them is less
broad. The market for unrated debt securities is even narrower. During
periods of thin trading in these markets, the spread between bid and
asked prices is likely to increase significantly, and the Fund may have
greater difficulty selling any medium and lower quality securities in
its portfolio.
The Fund may invest 25% or more of its assets in Municipal Bonds that
are related in such a way that an economic, business or political
development affecting one such security could also affect the other
securities. For example, Municipal Bonds, the interest on which is paid
from revenues of similar projects, such as hospitals, utilities or
housing, would be so related. The Fund may invest 25% or more of its
assets in industrial development bonds (subject to the concentration
restrictions described in this prospectus under "Investment
Restrictions" and in the Statement of Additional Information).
Also, pollution control revenue bonds that are guaranteed by a corporate
entity have a risk of being deemed taxable by the Internal Revenue
Service if the corporation failed to meet, or failed to continue to
meet, the established Environmental Protection Agency standards, or
otherwise failed to qualify for tax-exempt status. However, the Fund,
with two exceptions, has invested only in pollution control revenue
bonds that contain mandatory redemption provisions which provide that
should the corporation fail to qualify or continue to qualify for
exemption, the bonds would be redeemed at par value by the guarantor.
From time to time proposals have been introduced before Congress with
the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Bonds. Similar proposals may be
introduced in the future. If such a proposal were enacted, the Fund
would reevaluate its investment objective and policies, submitting for
shareowner approval any significant changes that seem appropriate.
INVESTMENT RESTRICTIONS
The Fund will not:
(1) Invest more than 5% of the value of the Fund's total assets in
securities of any one issuer except securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, which may be
purchased without limitation;
(2) Purchase more than 10% of any class of securities of any one issuer
except U.S. Government obligations;
(3) Invest more than 5% of the market value of the Fund's total assets
(at the time of the investment) in securities of companies with records
of less than three years' continuous operation, including that of
predecessors; or
-5-
<PAGE>
(4) Invest more than 25% of the value of the Fund's total assets in any
one industry (this restriction is not applicable to investments in
Municipal Bonds and securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
The policies described in the above paragraph, which cannot be changed
without the approval of a majority of the outstanding shares (as defined
in the Investment Company Act of 1940), are some of the important
restrictions upon investments of the Fund. All of the Fund's investment
restrictions are set forth in the Statement of Additional Information.
PURCHASE OF FUND SHARES
Shares of the Fund may be purchased by agents and employees of the State
Farm Insurance Companies and members of their families.
To open an account, eligible investors should complete and sign the
Application furnished with this prospectus and mail it to the Manager
together with a check (minimum: $1,000) made payable to State Farm
Investment Management Corp. Agents and employees may authorize a
compensation deduction (minimum: $100) through the State Farm Insurance
Companies by completing the Compensation Deduction Authorization section
of the Application.
Subsequent investments (minimum: $500) may be made at any time by
mailing to the Manager a check accompanied by the detachable purchase
form at the bottom of the confirmation. Similarly, agents and employees
may authorize, change or cancel a compensation deduction by completing
and signing the reverse side of the detachable purchase form and mailing
it to the Manager. The Fund will accept investments and compensation
deduction changes by letter from a shareowner which provides clear
instructions and indicates the account registration and account number.
The Fund will invest the entire dollar amount of each purchase in full
and fractional shares of the Fund at the net asset value next determined
after the order to purchase is received and accepted by the Manager.
Unless otherwise instructed, all income dividends and capital gain
distributions will be reinvested in full and fractional shares. However,
a shareowner may request that income dividends and capital gain
distributions be paid in cash. Stock certificates will not be issued
unless the shareowner requests a certificate in writing. Certificates
will be issued for full shares only.
A confirmation of each transaction, except purchases by compensation
deduction, will be mailed to the shareowner by the Manager. A
confirmation of purchase by compensation deduction will be mailed to
each shareowner promptly after the end of each calendar quarter.
The Fund reserves the right, in its sole discretion, to reject purchases
when, in the judgment of management, the purchase would not be in the
best interest of the Fund. No order to purchase shares is binding on the
Fund until it has been confirmed in writing and payment has been
received by the Fund.
SYSTEMATIC WITHDRAWAL
PROGRAM
A shareowner owning $5,000 or more of the Fund's shares at the current
net asset value may provide for the payment of a specified dollar amount
from the shareowner's account to the shareowner or a designated payee
monthly, quarterly or annually.
A shareowner who has a systematic withdrawal program is not permitted to
participate in the compensation deduction plan. The Fund reserves the
right to amend the systematic withdrawal program on 30 days' notice. The
program may be terminated at any time by the shareowner or the Fund.
Additional information may be obtained by contacting State Farm
Investment Management Corp., One State Farm Plaza, Bloomington, Illinois
61710.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined as of 1:00 p.m.
Bloomington, Illinois time on Monday through Friday exclusive of the
following federal holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value will not be calculated on the Friday
following Thanksgiving or
-6-
<PAGE>
on December 26, 1997. The Fund need not compute a net asset value on any
day when no purchase or redemption order has been received by the
Manager or the Fund. The net asset value per share is computed by
dividing the value of the Fund's portfolio securities plus any cash and
other assets of the Fund, less all liabilities of the Fund, by the
number of shares outstanding. Interest earned on portfolio securities
and expenses, including fees payable to the Manager, are accrued daily.
In determining the net asset value per share of the Fund, long-term debt
securities and U.S. Treasury bills are valued at a fair market value by
a pricing service approved by the Board of Directors. Short-term debt
securities, other than U.S. Treasury bills, are valued on an amortized
cost basis. Securities for which the Board of Directors believes the
value obtained by the above procedures does not reflect a fair value,
and all other assets, are valued at a fair value determined in good
faith by the Board of Directors.
REDEMPTION OF FUND SHARES
The Fund will redeem shares from a shareowner's account at the net asset
value next determined after receipt by the Fund of a proper request for
redemption.
Requests for redemption of shares in the Fund may be made in writing or
by telephone if the shareowner has so indicated on the application or
previously completed a Telephone Redemption Authorization Form. These
redemption methods are explained in detail below.
BY WRITTEN REQUEST -- Shareowners may redeem all or any portion of their
shares by sending a written request to: State Farm Investment Management
Corp., One State Farm Plaza, Bloomington, Illinois 61710. A redemption
request must clearly identify the exact name(s) in which the account is
registered, the account number and the number of shares or dollar amount
to be redeemed. Also, any stock certificates representing the shares to
be redeemed must be returned, in proper form for cancellation, along
with the redemption request. It is suggested that stock certificates
returned for cancellation be sent by certified mail, return receipt
requested. The request must be properly signed by each shareowner of
record, including each joint holder of a joint account. The Fund
reserves the right to require further documentation in order to verify
the validity of the redemption request.
On a redemption of $50,000 or more, the signature of the registered
shareowner must be guaranteed as described below in the section entitled
Signature Guarantee, unless the proceeds are to be electronically
transferred to a pre-designated bank account.
Proceeds of redemption by written request will normally be sent by check
to the registered shareowner's address of record. However, upon specific
instructions included in the redemption request, proceeds may be sent to
another payee or to an address other than the address of record.
BY TELEPHONE -- Shareowners can redeem by telephone at (309) 766-2029 or
(800) 447-0740 up to $50,000 of their uncertificated shares if proceeds
are to be mailed to the address of record, or they may redeem up to the
entire value of their uncertificated shares if the proceeds are to be
electronically transferred to a pre-designated bank account. Shareowners
cannot redeem shares by telephone if stock certificates are held for
those shares. Shareowners may not utilize this method of redemption
unless they have so elected on the application or until a completed
Authorization Form for Telephone Redemption and Exchange Privileges
("Authorization Form") has been filed. When this election is made by
submitting an Authorization Form, the signature of the shareowner must
be guaranteed (see "Signature Guarantee"). Further documentation may be
required from corporations, partnerships, trusts and other entities.
If elected by the shareowner, proceeds of telephone redemptions will be
electronically transferred to a bank as directed in the Telephone
Redemption election. A charge for receiving an electronic transfer may
be assessed by the shareowner's bank. In order to change the bank or
account designated to receive proceeds, a written request must be sent
to State Farm Investment Management Corp., One State Farm Plaza,
Bloomington, Illinois 61710. Such requests must
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<PAGE>
be signed by each shareowner, with each signature guaranteed as
described in the section entitled Signature Guarantee.
Telephone redemption proceeds of up to $50,000 by shareowners not
electing electronic transfer will be sent by check to the registered
shareowner at the address of record.
During periods of volatile economic and market conditions, a shareowner
may have difficulty making a redemption request by telephone, in which
case redemption requests would have to be made in writing.
By electing the Telephone Redemption Privilege, the shareowner
authorizes the Manager to act upon an instruction by telephone to redeem
shares from any account for which such services have been elected. The
Manager and the Fund will employ reasonable procedures, including tape
recording of telephone instructions and providing written confirmation
of each resulting transaction, to confirm that telephone instructions
are genuine. If the Manager and the Fund fail to employ such procedures,
they may be liable for any losses due to unauthorized or fraudulent
instructions. However, the Fund, the Manager and their respective
officers, directors, employees and agents will not be liable for acting
upon instructions given under the authorization when reasonably believed
to be genuine. In such case, the shareowner will bear the risk of loss
in the event of a fraudulent telephone redemption transaction. To reduce
that risk, proceeds of telephone redemptions will be sent only by check
payable to the shareowner of record to the shareowner's address of
record or electronically transferred to a pre-designated bank account.
Although the Authorization Form authorizes the Fund and the Manager to
tape-record all telephone instructions, the Fund may not honor telephone
instructions unless permission to record is confirmed by the caller.
Once the Telephone Redemption Privilege with a State Farm mutual fund
has been established by a shareowner, it may be established at the
request of the shareowner in any identically registered new account in
any other State Farm mutual fund offering the Telephone Redemption
Privilege by the exchange of shares of the first fund for those of the
second fund by use of the Exchange Privilege.
BY FACSIMILE. Shareowners can redeem by facsimile at (309) 766-2579 up
to $50,000 of their uncertificated shares if the proceeds are to be
mailed to the address of record, or they can redeem up to the entire
value of their uncertificated shares if the proceeds are to be
electronically transferred to a pre-designated bank account. A
redemption request sent by facsimile must clearly identify the exact
name(s) in which the account is registered, the account number and the
number of shares or dollar amount to be redeemed, and must show the
signature(s) of the registered shareowner(s). Shareowners cannot redeem
shares by facsimile if stock certificates are held for those shares.
Facsimile redemption proceeds up to $50,000 by shareowners not electing
electronic transfer will be sent by check to the registered shareowner
at the address of record. However, upon specific written instruction
(which may not be sent by facsimile) accompanied by a signature
guarantee received at least one day prior to the redemption, proceeds
may be sent to another payee or to another address other than the
address of record.
If elected by the shareowner, proceeds of facsimile redemptions will be
electronically transferred to a bank previously designated in writing in
a document on file with the Manager. A charge for receiving an
electronic transfer may be assessed by the shareowner's bank. In order
to change the bank or account designated to receive the proceeds, a
written request (not to include facsimile transmission), signed by each
shareowner with each signature guaranteed as described in this
prospectus under "Signature Guarantee" must be sent to State Farm
Investment Management Corp., One State Farm Plaza, D-3, Bloomington, IL
61710.
REDEMPTION GENERALLY -- The Fund will generally redeem shares in cash
(by check or electronic transfer). Redemptions of more than $500,000
during any 90-day period by one shareowner will normally be paid in cash,
but may be paid wholly or partly by a distribution in kind of
securities. If
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<PAGE>
a redemption is paid in kind, the redeeming shareowner may incur
brokerage fees in selling the securities received.
Payment for shares redeemed will be mailed or electronically transferred
within seven days after the Fund receives a redemption request, either
written or by telephone, in proper form (including stock certificates,
if any). However, if the Fund is requested to redeem shares within
several days after they have been purchased, the Fund may delay mailing
the redemption proceeds until it can verify that payment of the purchase
price for the shares has been, or will be, collected. If the shareowner
requests payment by electronic transfer, a charge for receiving the
transfer may be assessed by the shareowner's bank.
A redemption is treated as a sale for federal income tax purposes. A
shareowner's redemption proceeds may be more or less than the
shareowner's cost depending upon the net asset value at the time of the
redemption and, as a result, the shareowner may realize a capital gain
or loss. Gain or loss is computed on the difference between the fair
market value of the shares redeemed and their cost basis. If shares of
the Fund are purchased during the 30 days before or after a redemption,
the Internal Revenue Code wash sale rules might apply. Although it is
not anticipated that the Fund will impose a redemption fee, the Fund
reserves the right to charge a redemption fee not to exceed one percent
of the redemption price.
The Fund may suspend the right of redemption or postpone a redemption
payment more than seven days during any period when (a) the New York
Stock Exchange is closed for other than customary weekend and holiday
closing, (b) trading on that exchange is restricted, (c) an emergency
exists making disposal of securities owned by the Fund or valuation of
its assets not reasonably practicable, or (d) the Securities and
Exchange Commission has by order permitted such suspension for the
protection of shareowners of the Fund; provided that applicable rules
and regulations of the Securities and Exchange Commission shall govern
as to whether any condition prescribed in (b) through (d) exists.
SIGNATURE GUARANTEE
A signature guarantee is a written representation, signed by an officer
or authorized employee of the guarantor, that the signature of the
shareowner is genuine. The guarantor must be an institution authorized
to guarantee signatures by applicable state law. Such institutions
include banks, broker-dealers, savings and loan associations and credit
unions.
The signature guarantee must appear, together with the signature of each
registered owner, either (1) on the written request for redemption,
which clearly identifies the exact name(s) in which the account is
registered, the account number and the number of shares or the dollar
amount to be redeemed; or (2) on a separate "stock power," an instrument
of assignment which should specify the total number of shares to be
redeemed (this stock power may be obtained from most banks and
stockbrokers); or (3) on the back of each stock certificate tendered for
redemption; or (4) on the Authorization Form for Telephone Redemption
and Exchange Privileges.
EXCHANGE OF FUND SHARES
GENERAL -- A shareowner may redeem part or all of the shares in the
shareowner's account and purchase shares of another State Farm mutual
fund without charge by meeting the established redemption procedures and
minimum subscription requirements of that fund. A written exchange
request must be accompanied by a properly completed application for the
fund being purchased if an account in the new fund has not previously
been established. A telephone exchange request can be transacted as
described under "Telephone Exchange Privilege".
An exchange transaction is a sale and purchase of shares for federal tax
purposes, and may result in capital gain or loss. Before making an
exchange, a shareowner should obtain the prospectus for the fund to be
purchased from the Manager at One State Farm Plaza, Bloomington,
Illinois 61710, and read it carefully.
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<PAGE>
TELEPHONE EXCHANGE PRIVILEGE -- Shareowners who wish to use the
Telephone Exchange Privilege, which permits them to exchange by
telephone shares of the Fund for those of another fund managed by State
Farm Investment Management Corp., must so elect on the application or
complete the Authorization Form, have their signatures guaranteed and
mail the form to the Fund.
Once the Telephone Exchange Privilege has been granted by the Fund, the
shareowner may telephone the Fund and request an exchange for any amount
meeting or exceeding the applicable minimum investment of the fund being
purchased. The shareowner must identify the existing account by
designating the Fund's name, registration of the account and account
number, and must specify the dollar amount or number of shares to be
exchanged and the fund to which the exchange should be made. The
registration of the account to which an exchange is made must be exactly
the same as that of the Fund account from which an exchange is made. If
the shareowner has not established an account in the fund to which the
exchange is to be made, a new account will be opened automatically and
will carry the same registration as the Fund account from which the
exchange is made; accordingly, the Telephone Exchange Privilege will
also apply to the fund being purchased. The Manager's records of such
instructions are binding.
The Manager and the Fund will employ reasonable procedures, including
tape recording of telephone instructions and providing written
confirmation of each resulting transaction, to confirm that telephone
instructions are genuine. If the Manager and the Fund fail to employ
such procedures, they may be liable for any losses due to unauthorized
or fraudulent instructions. However, the Fund, the Manager, and their
respective officers, directors, employees and agents will not be liable
for acting upon instructions given by any person under the Telephone
Exchange Privilege when reasonably believed to be genuine. In such case,
the shareowner will bear the risk of loss in the event of a fraudulent
telephone exchange transaction. To reduce the risk of loss, the
registration of the account into which the shares are exchanged must be
identical with the registration of the originating account.
The Telephone Exchange Privilege is not available for shares represented
by a certificate or if good payment for shares being redeemed has not
been received. (The other funds into which exchanges may be made have
adopted similar policies.)
During periods of volatile economic and market conditions, a shareowner
may have difficulty making an exchange request by telephone, in which
case exchange requests would have to be made in writing. The Fund
reserves the right at any time to suspend, limit, modify or terminate
the telephone exchange privilege, but will not do so without giving
shareowners at least 30 days' prior written notice.
MANAGEMENT OF THE FUND
The Board of Directors has overall management responsibility for the
Fund. However, the Fund has engaged State Farm Investment Management
Corp., One State Farm Plaza, Bloomington, Illinois 61710, as Manager to
provide professional investment management for the Fund.
The Fund's portfolio is managed by a team consisting of Kurt Moser and
Julian Bucher. Mr. Moser and Mr. Bucher have been members of the Fund's
portfolio management team since 1988.
Presently, Mr. Moser is a Director and a Vice President of the Manager.
In addition to his offices with the Manager, Mr. Moser has also held the
following positions during the past five years: Vice President of the
Fund and the other State Farm mutual funds; Director of State Farm Life
Insurance Company and State Farm Fire and Casualty Company; Vice
President of State Farm Life Insurance Company, and Vice President -
Investments of State Farm Mutual Automobile Insurance Company and State
Farm Fire and Casualty Company.
Presently, Mr. Bucher is an Investment Officer of the Manager. In
addition to his office with the Manager, Mr. Bucher has also held the
following positions during the past five years: Investment
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<PAGE>
Officer of State Farm Life Insurance Company, State Farm Mutual
Automobile Insurance Company and State Farm Fire and Casualty Company.
Since its inception in 1967, the Manager's sole business has been to act
as investment adviser, principal underwriter, transfer agent and
dividend disbursing agent for the State Farm mutual funds.
The Manager is wholly-owned by State Farm Mutual Automobile Insurance
Company.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund declares a dividend each day from its net investment income,
distributable at the end of each calendar quarter. Shares begin to earn
dividends on the day following the date of purchase. Net realized
capital gains, if any, are distributed annually. All distributions are
automatically reinvested in shares of the Fund on the reinvestment date,
except that any shareowner may elect to receive dividends and
distributions in cash, upon signed written request received by the
Manager. If the entire amount in a shareowner's account is redeemed,
dividends credited to that account through the day of redemption are
paid with the proceeds of redemption.
The Fund intends to continue to qualify as a "regulated investment
company" under the Internal Revenue Code so that it will not be liable
for federal income taxes on that portion of its net investment income
and capital gains distributed to shareowners. In addition, the Fund
intends to invest principally in tax-exempt obligations sufficient in
amount to qualify the Fund to designate and pay "exempt-interest
dividends" under the Internal Revenue Code.
Exempt-interest dividends paid to shareowners from interest earned by
the Fund from Municipal Bonds are not includable in the shareowner's
gross income for federal income tax purposes. Distributions from other
interest and from short-term capital gains, if any, are taxable to
shareowners as ordinary income, whether received in cash or additional
shares. Because the taxable portion of the Fund's dividends from
investment income will be derived from interest, none of its dividends
is expected to qualify for the dividends received deduction available to
corporations.
Shareowners are notified of such designations within 60 days following
the close of the Fund's November 30 fiscal year. The percentage of the
distribution which is tax-exempt varies from distribution to
distribution.
Distributions of long-term capital gains are taxable to shareowners as
long-term capital gains, whether received in cash or additional shares
and regardless of the period of time the shares have been held. If a
shareowner is not subject to tax on its income, it will not be required
to pay tax on amounts distributed to it.
The tax-exempt status of dividends derived from interest on Municipal
Bonds for federal income tax purposes does not necessarily result in
exemption from any state or local income taxes or other taxes.
In the case of a person receiving Social Security benefits,
tax-exempt interest, including exempt-interest dividends received from
the Fund, will be added to the person's adjusted gross income in
determining whether such benefits will be subject to federal income tax.
Shareowners must provide their social security or tax identification
number and furnish appropriate certification. Otherwise, IRS regulations
require the fund to withhold 31% from taxable distributions payable to
accounts whose owners have not complied.
Information concerning the tax status of dividends and distributions is
mailed to shareowners annually.
Because this section is not intended to be a full discussion,
shareowners may wish to consult their tax advisors regarding the tax
consequences of investments in the Fund.
ORGANIZATION AND CAPITAL STOCK
The Fund is a Maryland corporation organized on December 6, 1976 with
100,000,000 shares of authorized common stock, $1 par value.
Holders of shares are entitled to share pro rata in dividends and other
distributions on shares when and as declared by the Board of Directors,
to one vote per share in elections of directors and other matters
presented to shareowners, and to equal rights per share in the event of
liquidation.
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<PAGE>
The shares are nonassessable, have no pre-emptive, subscription or
conversion rights, and have no sinking fund provisions. The shares are
transferable and are redeemable upon request of the holder. Shares
redeemed by the Fund may be reissued.
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<PAGE>
PROSPECTUS
April 1, 1997
STATE
FARM
MUNICIPAL BOND
FUND, INC.
ONE STATE FARM PLAZA
BLOOMINGTON, ILLINOIS 61710
TELEPHONE (309) 766-2029
(800) 447-0740
G 4019c.20
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
ONE STATE FARM PLAZA, BLOOMINGTON, ILLINOIS 61710
Telephone: (309) 766-2029
(800) 447-0740
STATEMENT OF ADDITIONAL INFORMATION -- APRIL 1, 1997
- -----------------------------------------------------------------------
This Statement of Additional Information is not the Fund's prospectus
but contains information in addition to and more detailed than that set
forth in the prospectus. It should be read in conjunction with the
prospectus.
The Fund's prospectus dated April 1, 1997, which provides the basic
information you should know before investing in the Fund, may be
obtained without charge by contacting the Fund at the address or
telephone numbers shown above.
- -----------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
Financial Information .................................. 2
Investment Objective and Policies ...................... 2
Investment Restrictions ................................ 2
Purchase and Redemption of Fund Shares ................. 3
Determination of Net Asset Value ....................... 3
Investment Advisory and Other Services ................. 4
Management Services Agreement .......................... 4
Service Agreement ...................................... 5
Underwriting Agreement ................................. 5
Transfer Agent Agreement ............................... 5
Performance Information ................................ 5
Portfolio Transactions ................................. 6
Additional Tax Considerations .......................... 7
Directors and Officers ................................. 7
General Information .................................... 8
Appendix ............................................... 9
<PAGE>
FINANCIAL INFORMATION
Please refer to the financial statements (including Financial
Highlights), notes thereto and Report of Independent Auditors (all of
which are "Financial Information") contained in the Fund's annual report
for the fiscal year ended November 30, 1996, a copy of which accompanies
this Statement of Additional Information. This Financial Information
(but no other material from the annual report) is incorporated by
reference in this Statement of Additional Information. Additional copies
of the annual report may be obtained by writing or telephoning the Fund,
(309) 766-2029 or (800) 447-0740.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide its shareowners with
as high a rate of income exempt from federal income taxes as is
consistent with prudent investment management. It is a fundamental
policy of the Fund that during periods of normal market conditions,
either (1) the Fund's assets will be invested so that at least 80% of
its net investment income will be exempt from federal income tax, or (2)
at least 80% of the Fund's net assets will be invested in securities of
which the income is exempt from federal income tax. The Fund's
investment objective and the fundamental investment policy described in
this paragraph may not be changed without the approval of the
shareowners. Other investment policies followed in seeking to achieve
the Fund's investment objective may be altered from time to time without
shareowners' approval.
The Fund intends to invest primarily in a diversified selection of
Municipal Bonds (as defined in the prospectus) with maturities of one to
fifteen years, although issues with longer maturities may be purchased
from time to time. A majority of the Fund's investments will usually be
in issues with maturities longer than five years. There can be no
assurance that current income will be sufficient to offset decreases in
the net asset value per share that will result if prevailing interest
rates rise in relation to the rates of interest on Municipal Bonds in
the Fund's portfolio. There can be no assurance that the Fund's
investment objective will be achieved.
Assets not invested in Municipal Bonds will be held in cash or invested
in "Money Market Securities" and U.S. Treasury securities. Money Market
Securities include short-term obligations of the U.S. Government and its
agencies and instrumentalities and other money market instruments such
as domestic bank certificates of deposit, bankers' acceptances and
corporate commercial paper rated in the highest grade. From time to time
more than 20% of the Fund's assets may be invested in Money Market
securities or held as cash for defensive reasons in anticipation of a
decline in the market values of debt securities, or pending the
investment of proceeds from the sale of Fund shares or from the sale of
portfolio securities, or in order to have highly liquid securities
available to meet possible redemptions.
Although changes will be made from time to time in securities owned by
the Fund, as deemed necessary to accomplish the Fund's objective, the
Manager does not expect to engage in a significant amount of short-term
trading. Most sales of securities will occur when the proportion of
securities owned with longer term maturities is reduced in anticipation
of a bond market decline (rise in interest rates), or increased in
anticipation of a bond market rise (decline in interest rates). In
periods of relatively stable interest rate levels, the Fund does not
expect the annual portfolio turnover rate to exceed 50% for issues with
maturities longer than one year at the time of purchase. In years of
sharp fluctuations in interest rates, however, the annual portfolio
turnover rate may exceed 50%. The rate of portfolio turnover will not be
a limiting factor and, accordingly, will always be incidental to
transactions undertaken with the view of achieving the Fund's investment
objective. Historical portfolio turnover rate information is set forth
in the Fund's prospectus in the Financial Highlights table which is
incorporated herein by reference.
INVESTMENT RESTRICTIONS
The Fund is subject to certain restrictions upon its investments which
provide that the Fund may not:
(1) Invest more than 5% of the value of the Fund's total assets in
securities of any one issuer except securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, which may be
purchased without limitation;
(2) Borrow money, except from banks for temporary or emergency purposes
and not for investment purposes, and then only in an amount not
exceeding 5% of the value of the Fund's total assets at the time of
borrowing;
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<PAGE>
(3) Pledge, mortgage or hypothecate the Fund's assets, except that, to
secure borrowings permitted by subparagraph (2) above, the Fund may
pledge securities having a market value not exceeding 10% of the Fund's
net asset value;
(4) Underwrite any securities issued by other persons;
(5) Purchase or sell real estate, but the Fund may invest in Municipal
Bonds or Money Market Instruments secured by real estate or interests
therein;
(6) Purchase or sell commodities or commodities contracts, or interests
in oil, gas or other mineral exploration or development programs;
(7) Make loans to others (except to the extent that the purchase of
Municipal Bonds, Money Market Instruments or U.S. Treasury securities
may be deemed the making of a loan);
(8) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions, or purchase or sell any put or call options or
combinations thereof;
(9) Purchase or retain for the portfolio of the Fund the securities of
any issuer, if, to the Fund's knowledge, those directors and officers of
the Fund who individually own more than 1/2 of 1% of the outstanding
securities of such issuer together own more than 5% of such outstanding
securities;
(10) Purchase more than 10% of any class of securities of any one issuer
(for this purpose all indebtedness of an issuer shall be deemed a single
class) except U.S. Government obligations;
(11) Purchase securities subject to restrictions on disposition under
the Securities Act of 1933;
(12) Purchase securities of other investment companies or investment
trusts, except by purchases in the open market involving no commission
or profit (other than the customary broker's commission) to a sponsor or
dealer, and then only in an amount up to 5% of the value of the Fund's
total assets, or except as a part of a plan of merger or consolidation;
(13) Invest in the securities of a company for the purpose of exercising
management or control;
(14) Invest more than 5% of the market value of the Fund's total assets
(at the time of the investment) in securities of companies with records
of less than three years' continuous operation, including that of
predecessors;
(15) Invest more than 25% of the value of the Fund's total assets in any
one industry (this restriction is not applicable to investments in
Municipal Bonds and securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
For purposes of restrictions numbered 1, 9 and 10 above, the Fund will
classify the issuer or issuers of a security according to the entity or
entities which constitute the source of payment of interest and
principal on the security.
Other than for purposes of the restriction number 3 above, if a
percentage restriction is not violated at the time of investment or
borrowing, a change in the value of the Fund's net assets or in the
outstanding securities of an issuer will not result in a violation of
the restriction.
These investment restrictions may not be changed without the consent of
the shareowners holding a majority of the shares. A majority of the
shares, as used in this Statement of Additional Information and in the
Prospectus, means the vote of (i) 67% or more of the shares present and
entitled to vote at a meeting, if the owners of more than 50% of the
shares are present or represented by proxy, or (ii) more than 50% of the
shares, whichever is less.
PURCHASE AND REDEMPTION OF FUND SHARES
Purchases and redemptions of Fund shares are discussed in the Prospectus
under the headings "Purchase of Fund Shares", "Systematic Withdrawal
Program", "Redemption of Fund Shares" and "Exchange of Fund Shares" and
that information is incorporated herein by reference.
DETERMINATION OF NET ASSET VALUE
Determination of net asset value is set forth in the Prospectus under
the heading "Determination of Net Asset Value" and that information is
incorporated herein by reference.
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<PAGE>
INVESTMENT ADVISORY AND
OTHER SERVICES
The Fund has an Investment Advisory and Management Services Agreement, a
Transfer Agent Agreement and an Underwriting Agreement with State Farm
Investment Management Corp., One State Farm Plaza, Bloomington, Illinois
61710. There is a separate Service Agreement among the Fund, the Manager
and State Farm Mutual Automobile Insurance Company ("Auto Company").
Each of these four agreements may be continued beyond its current term
only so long as such continuance is specifically approved at least
annually by the Board of Directors of the Fund or by vote of a majority
of the outstanding shares of the Fund and, in either case, by vote of a
majority of the directors who are not interested persons of any party to
such agreement, except in their capacity as directors of the Fund, cast
in person at a meeting called for the purpose of voting on such
approval. Each agreement may be terminated upon 60 days' written notice
by any of the parties to the agreement, or by a majority vote of the
outstanding shares, and will terminate automatically upon its assignment
by any party.
The Manager is also the investment manager, transfer agent, dividend
disbursing agent and underwriter for State Farm Growth Fund, Inc., State
Farm Balanced Fund, Inc. and State Farm Interim Fund, Inc. There are
similar agreements among each of those funds, the Manager and the Auto
Company, except that the Investment Advisory and Management Services
Agreements with State Farm Growth Fund, Inc. and State Farm Balanced
Fund, Inc. provide for investment advisory fees at annual rates
different from those applicable to the Fund.
Since its inception in 1967, the Manager's sole business has been to act
as investment adviser, principal underwriter, transfer agent and
dividend disbursing agent for the State Farm mutual funds.
The Manager is wholly-owned by State Farm Mutual Automobile Insurance
Company, which is an Illinois mutual insurance company.
Messrs. Rust, Joslin, Grimes, Moser, Tipsord, Chevalier and Ms. Dysart
are directors and/or officers of the Fund, the Manager and the other
State Farm mutual funds (see "Directors and Officers").
MANAGEMENT SERVICES AGREEMENT
Pursuant to an Investment Advisory and Management Services Agreement,
the Manager: (1) acts as the Fund's investment adviser; (2) manages the
Fund's investments; (3) administers the Fund's business affairs; (4)
provides clerical personnel, suitable office space, necessary facilities
and equipment and administrative services; and (5) permits its officers
and employees to serve as directors, officers and agents of the Fund,
without compensation from the Fund, if duly elected or appointed.
The agreement requires the Fund to pay: (1) the fees and expenses of
independent auditors, legal counsel, the custodian, the transfer agent,
the registrar, the dividend disbursing agent and directors who are not
affiliated with the Manager; and (2) the cost of preparing and
distributing stock certificates, proxy materials, reports and notices to
shareowners, brokerage commissions, interest, taxes, federal securities
registration fees and membership dues in the Investment Company
Institute or any similar organization. The Manager is required to pay
all other Fund expenses.
As compensation for the services and facilities furnished, the Fund pays
a management fee (computed on a daily basis and paid quarterly) at the
annual rate 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. However, the management fee will
be reduced, or the Manager will reimburse the Fund, by any amount
necessary to prevent the Fund's total expenses (excluding taxes,
interest, extraordinary litigation expenses, brokerage commissions and
other portfolio transaction costs) from exceeding .40% of the average
net assets of the Fund on an annual basis.
For the fiscal years ended November 30, 1996, 1995 and 1994, the Manager
earned $385,258, $366,394 and $355,000, respectively, for its services
as investment adviser to the Fund. Neither the Manager nor any
affiliated company receives any brokerage commissions from the Fund as
such business is transacted with non-affiliated broker-dealers.
Some affiliated companies of the Manager (including Auto Company) and
the other State Farm funds managed by the Manager carry on extensive
investment programs. Securities considered as investments for the Fund
may also be appropriate for the accounts of one or more of such
companies. Although investment decisions for the Fund are made
independently from those for such other companies, securities of the
same issuer may be acquired, held or disposed of by the Fund and one or
more of such other companies at or about
-4-
<PAGE>
the same time, if consistent with the investment objectives and policies
of the respective parties. When both the Fund and one or more of such
other companies are concurrently engaged in the purchase or sale of the
same securities, the transactions are allocated as to amount and price
in a manner considered equitable to the Fund. In some cases this
procedure may affect the price or amount of the securities as far as
each party is concerned. It is the opinion of the Directors of the Fund,
however, that the benefits available to the Fund outweigh any possible
disadvantages that may arise from such concurrent transactions.
The obligation of performance under the Management Agreement between the
Manager and the Fund is solely that of the Manager, for which the Auto
Company assumes no responsibility.
SERVICE AGREEMENT
Under the Service Agreement, the Auto Company makes available to the
Manager the services, on a part-time basis, of employees of the Auto
Company engaged in its investment operations, and also certain other
personnel, services and facilities to enable the Manager to perform its
obligations to the Fund. The Manager reimburses the Auto Company for
such costs, direct and indirect, as are fairly attributable to the
services performed and the facilities provided by the Auto Company under
the Service Agreement. Accordingly, the Fund makes no payment to the
Auto Company under the Service Agreement.
UNDERWRITING AGREEMENT
Pursuant to the Underwriting Agreement, the Manager: (1) is the
underwriter of the Fund's shares; (2) acts as agent of the Fund in the
continuous sale of its shares; (3) prepares and distributes literature
relating to the Fund and its investment performance; (4) distributes and
pays for the printing of the Fund's prospectus; (5) circulates
advertising and public relations materials; and (6) pays the cost of
qualifying and maintaining the qualification of the Fund's shares for
sale under the securities laws of the various states.
The Manager receives no discount, commission or other compensation as
underwriter.
TRANSFER AGENT AGREEMENT
The Transfer Agent Agreement appoints the Manager as the Fund's transfer
agent and dividend disbursing agent. Under the terms of the agreement,
the Manager: (1) maintains all shareowner account records; (2) prepares
and mails transaction confirmations, annual records of investments and
tax information statements; (3) effects transfers of Fund shares; (4)
arranges for the issuance and cancellation of stock certificates; (5)
prepares annual shareowner meeting lists; (6) prepares, mails and
tabulates proxies; (7) mails shareowner reports; and (8) disburses
dividend and capital gains distributions. These services are performed
by the Manager at no charge to the Fund.
PERFORMANCE INFORMATION
The Fund provides information on its "Average Annual Total Return" in
its annual reports to shareowners and in advertising and sales
literature. "Average Annual Total Return" is the average annual
compounded rate of change in value represented by the percentage change
in value during a periods of an investment in shares of the Fund,
including the value of shares acquired through reinvestment of all
dividends and capital gains distributions for the period.
Average Annual Total Return is computed as follows:
ERV = P(1 + T)n
Where: P = the amount of an assumed initial investment in
shares of the Fund
T = average annual total return
n = number of years from initial investment to
the end of the period
ERV = ending redeemable value of shares held at the end
of the period
-5-
<PAGE>
For example, as of November 30, 1996 the Average Annual Total Return on
a $1,000 investment in the Fund for the following periods was:
Average Annual
Total Return
--------------
1 year ................................... 5.21%
5 years .................................. 6.85
10 years ................................. 7.25
The Fund imposes no sales charges and pays no distribution expenses.
Income taxes are not taken into account. Performance figures quoted by
the Fund are not necessarily indicative of future results. The Fund's
performance is a function of conditions in the securities markets,
portfolio management and operating expenses. Although information about
past performance is useful in reviewing the Fund's performance and in
providing some basis for comparison with other investment alternatives,
it should not be used for comparison with other investments using
different reinvestment assumptions or time periods.
The Fund's performance may be compared with movements of market indexes,
including the Lehman Brothers Municipal Bond Index.
PORTFOLIO TRANSACTIONS
To date, all purchases and sales of portfolio securities for the Fund
have been made on a net basis without brokerage commissions, in
transactions with securities dealers who buy and sell those securities
as market makers. Market makers earn the spread between the bid and
asked prices at which they buy and sell. New issues of securities
offered by underwriters are purchased at prices which are marked up from
the discounted prices at which the underwriters purchase for resale. For
the three most recent fiscal years, the Fund paid no brokerage
commissions.
Since the Fund will frequently wish to purchase newly issued securities,
the Manager appraises, as to each of its dealers, the past record and
future prospects in the allocation of new issues of securities by such
dealer for purchase by the Fund, and gives weight to such appraisals in
selecting dealers to execute market transactions for the Fund, and in
designating dealers to be credited with the dealer compensation for
purchases by the Fund of newly issued securities.
The Manager's primary consideration in selecting dealers or brokers to
execute transactions, and in designating dealers to be compensated for
Fund purchases in underwritings, is the best net price consistent with
competent execution. Among the factors considered in evaluating quality
of execution are: (1) skill, knowledge and effort required in executing
particular transactions; (2) trading and operational capability; (3)
financial condition and stability; (4) confidentiality; and (5)
reliability and integrity.
Informational services of a wide variety, which vary in value according
to their usefulness to the Manager in making investment decisions for
the Fund, are also provided by many dealers. The Fund may pay for useful
informational services provided by a dealer by placing brokerage
transactions through that dealer in an aggregate amount which, in the
opinion of the Manager, is commensurate with the value of the execution
services plus the value of any informational services provided by the
dealer over a period of time.
The Manager and the Auto Company perform extensive investment research,
which is used in making investment decisions for the Fund, for the other
State Farm funds and for the State Farm Companies. The availability of
additional information from a diversity of sources, some of which have
in-depth knowledge of specialized subjects, and have proven insight and
acumen in economic, financial, political and investment matters, may
tend to reduce the Manager's costs by some indeterminable amount, but
more importantly is believed to provide a quantity and range of
information greater than could be generated solely within a single
advisory organization, even for a larger advisory fee. Although the
other State Farm funds and other State Farm Companies benefit from
information obtained for the Fund with the Fund's transactions, the Fund
also benefits from information obtained for the other State Farm funds
and other State Farm Companies and with their transactions.
-6-
<PAGE>
ADDITIONAL TAX CONSIDERATIONS
The Fund intends to continue to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. A 4% excise
tax is imposed on the excess of the required distribution for a calendar
year over the distributed amount for such calendar year. Generally, the
required distribution is the sum of 98% of the Fund's net investment
income for the calendar year plus 98% of its capital gain net income for
the one year period ending November 30. The Fund intends to declare or
distribute dividends during the calendar year in an amount sufficient to
prevent imposition of the 4% excise tax.
Because capital gain distributions reduce net asset value, if you
purchase shares shortly before a record date for such a distribution you
will, in effect, receive a return of a portion of your investment
although the distribution will be taxable to you. This is true even if
the net asset value of your shares was reduced below your cost. However,
for federal income tax purposes your original cost would continue as
your tax basis. Any loss recognized on the disposition of Fund shares
acquired which have been held by the shareowner for six months or less
will be treated as long-term capital loss to the extent the shareowner
received a long-term capital gain distribution with respect to those
Fund shares.
Any loss realized by a shareholder on the disposition of Fund shares
held for six months or less is disallowed to the extent of any
exempt-interest dividends received by the shareholder with respect to
such shares.
Distributions of long-term capital gains are taxable to shareowners as
long-term capital gains, whether received in cash or additional shares
and regardless of the period of time the shares have been held.
Dividends subject to federal income tax and capital gains are taxed to
shareholders at the same rates. However, the distinction between
ordinary income or loss and capital gain or loss remains important for
certain tax purposes, such as a taxpayer's ability to offset losses
against income.
Under the provisions of the Internal Revenue Code, interest on
indebtedness incurred or continued to purchase or carry shares of the
Fund is not deductible for federal income tax purposes. Even though
borrowed funds are not directly traceable to the purchase of shares, the
Internal Revenue Service may determine, depending on circumstances, that
the indebtedness is incurred for such a purpose. Furthermore, persons
who are "substantial users" (or persons related thereto) of facilities
financed by industrial development bonds should consult their tax
advisers before purchasing Fund shares. Because of tax implications,
investment in the Fund may be unsuitable for such persons.
Pursuant to the Tax Reform Act of 1986, interest on certain municipal
obligations issued by "nonessential governmental issuers" are subject to
federal income taxation for those investors subject to the alternative
minimum tax. The Fund does not currently intend to purchase municipal
obligations whose interest is a tax preference item for purposes of the
alternative minimum tax.
DIRECTORS AND OFFICERS
The directors and officers of the Fund, their principal occupations for
the last five years and their affiliations, if any, with State Farm
Investment Management Corp., the Fund's investment adviser and principal
underwriter, are listed below. Unless otherwise noted, the address of
each is One State Farm Plaza, Bloomington, Illinois 61710.
Edward B. Rust, Jr., President and Director*
President and Chairman of the Board, State Farm Mutual Automobile
Insurance Company and Director of certain wholly owned insurance
subsidiaries and affiliates. President and Director, State Farm
Investment Management Corp.
Albert H. Hoopes, Director
Attorney at Law. Address: 102 S. East Street, Suite 350, Bloomington,
Illinois 61701.
Roger S. Joslin, Vice President, Treasurer and Director*
Senior Vice President and Treasurer, State Farm Mutual Automobile
Insurance Company and certain wholly owned insurance subsidiaries and
affiliates. Chairman of the Board, State Farm Fire and Casualty
Company. Vice President, Treasurer and Director, State Farm Investment
Management Corp.
Davis U. Merwin, Director
Investor. Address: P.O. Box 8, Bloomington, Illinois 61702.
James A. Shirk, Director
Director and President, Beer Nuts Inc., Address: 103 N. Robinson,
Bloomington, Illinois 61701.
-7-
<PAGE>
David R. Grimes, Assistant Vice President and Secretary
Assistant Vice President of Accounting, State Farm Mutual Automobile
Insurance Company. Secretary, State Farm Investment Management Corp.;
since 1994, Assistant Vice President and Secretary, State Farm
Investment Management Corp.
Kurt G. Moser, Vice President
Director of State Farm Life Insurance Company and State Farm Fire and
Casualty Company; Vice President of State Farm Life Insurance Company
and Vice President-Investments of State Farm Mutual Automobile
Insurance Company and State Farm Fire and Casualty Company. Director
and Vice President , State Farm Investment Management Corp.
Julian R. Bucher, Vice President
Investment Officer, State Farm Life Insurance Company, State Farm
Mutual Automobile Insurance Company and State Farm Fire and Casualty
Company. Since 1994, Investment Officer, State Farm Investment
Management Corp.
Michael L. Tipsord, Assistant Secretary
Assistant Controller, State Farm Mutual Automobile Insurance Company.
Assistant Secretary, State Farm Investment Management Corp.
Jerel S. Chevalier, Assistant Secretary-Treasurer
Director-Mutual Funds, State Farm Mutual Automobile Insurance Company.
Since 1992, Assistant Treasurer, State Farm Investment Management
Corp.; since 1994, Assistant Secretary-Treasurer, State Farm
Investment Management Corp.
Patricia L. Dysart, Assistant Secretary
Assistant Tax Counsel, State Farm Mutual Automobile Insurance Company.
Since 1995, Assistant Secretary, State Farm Investment Management
Corp.
* Director who is an "interested person" of the Fund or the Manager, as
defined in the Investment Company Act of 1940.
The directors and officers as a group owned 1.5% of the Fund's
outstanding shares on January 31, 1997.
The directors and officers of the Fund, excluding Julian R. Bucher, hold
identical positions with State Farm Growth Fund, Inc., State Farm
Balanced Fund, Inc. and State Farm Interim Fund, Inc. Messrs. Rust and
Joslin are members of the Executive Committee which has authority during
intervals between meetings of the board of directors to exercise the
powers of the board with certain exceptions.
GENERAL INFORMATION
OWNERSHIP OF SHARES
As of February 28, 1997, no shareowner owned more than five percent of
the Fund's outstanding shares.
CUSTODY OF ASSETS
The securities and cash of the Fund are held by The Bank of New York
("BONY"), One Wall Street, New York, NY 10286, as custodian. BONY
delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments and performs
other duties, all as directed by persons duly authorized by the Board of
Directors. Cash of the Fund is also held by Commerce Bank ("Commerce"),
120 S. Center Street, Bloomington, Illinois 61701, as custodian.
Commerce receives payments from the Manager for sale of the Fund's
shares and performs other duties, as directed by persons duly authorized
by the Board of Directors.
INDEPENDENT AUDITORS
The Fund's independent auditors are Ernst & Young LLP, 233 South Wacker
Drive, Chicago, Illinois 60606. The firm audits the Fund's annual
financial statements, reviews certain regulatory reports and the Fund's
income tax returns, and performs other professional accounting,
auditing, tax and advisory services when engaged to do so by the Fund.
-8-
<PAGE>
CODE OF ETHICS
The Manager intends that: all of its activities function exclusively for
the benefit of the owners or beneficiaries of the assets it manages;
assets under management or knowledge as to current or prospective
transactions in managed assets are not utilized for personal advantage
or for the advantage of anyone other than the owners or beneficiaries of
those assets; persons associated with the Manager and the Fund avoid
situations involving actual or potential conflicts of interest with the
owners or beneficiaries of managed assets; and, situations appearing to
involve actual or potential conflicts of interest or impairment of
objectivity are avoided whenever doing so does not run counter to the
interests of the owners or beneficiaries of the managed assets. The
Board of Directors of the Fund has adopted a Code of Ethics which
imposes certain prohibitions, restrictions, preclearance requirements
and reporting rules on the personal securities transactions of
subscribers to the Code, who include the Fund's officers and directors
and employees of the Manager. The Board of Directors believes that the
provisions of the Code are reasonably designed to prevent subscribers
from engaging in conduct that violates these principles.
APPENDIX -- RATINGS OF MUNICIPAL SECURITIES
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are
general and are not absolute standards of quality or guarantees as to
the creditworthiness of an issuer. Consequently, the Manager believes
that the quality of Municipal Securities should be continuously reviewed
and that individual analysts give different weightings to the various
factors involved in credit analysis. A rating is not a recommendation to
purchase, sell or hold a security, because it does not take into account
market value or suitability for a particular investor. When a security
has received a rating from more than one service, each rating should be
evaluated independently. Ratings are based on current information
furnished by the issuer or obtained by the rating services from other
sources that they consider reliable. Ratings may be changed, suspended
or withdrawn as a result of changes in or unavailability of such
information, or for other reasons. The Manager, through independent
analysis, attempts to discern variations in credit ratings of the
published services, and to anticipate changes in credit ratings. The
following is a description of the characteristics of certain ratings
used by Moody's Investors Service, Inc. ("Moody's") and Standard &
Poor's Corporation ("S&P").
RATINGS BY MOODY'S
MUNICIPAL BONDS:
Aaa. Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. Although the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa bonds or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long term risks appear somewhat greater
than in Aaa bonds.
A. Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the
future.
Baa. Bonds rated Baa are considered medium grade obligations; i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
-9-
<PAGE>
Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B. Bonds which are rated B generally lack the characteristics of
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be
in default or elements of danger may be present with respect to
principal or interest.
Ca. Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Conditional Ratings. The designation "Con." followed by a rating
indicates bonds for which the security depends upon the completion of
some act or the fulfillment of some condition. These are bonds secured
by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature
upon completion of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's
believes possess the strongest investment attributes are designated by
the symbols Aa 1, A 1, Baa 1, Ba 1, and B 1.
MUNICIPAL NOTES:
MIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
COMMERCIAL PAPER:
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated
issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, Moody's, in
assigning ratings to such issuers, evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance
companies, foreign governments, or other entities, but only as one
factor in the total rating assessment.
-10-
<PAGE>
RATINGS BY S&P
MUNICIPAL BONDS:
AAA. Bonds rated AAA have the highest rating. Capacity to pay interest
and repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only to a small
degree.
A. Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher-rated categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Although they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in
higher-rated categories.
BB. B. CCC. CC. Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
C. The rating C is reserved for income bonds on which no interest is
being paid.
In order to provide more detailed indications of credit quality, S&P's
bond letter ratings described above (except for the AAA category) may be
modified by the addition of a plus or a minus sign to show relative
standing within the rating category.
Provisional Ratings. The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, although addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise
his own judgment with respect to such likelihood and risk.
MUNICIPAL NOTES:
SP-1. Notes rated SP-1 have very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming
safety characteristics are designated as SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and
interest.
Notes due in three years or less normally receive a note rating. Notes
maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment:
- -- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue will be rated as a
note).
- -- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be rated as a note).
-11-
<PAGE>
COMMERCIAL PAPER:
A. Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designations 1, 2, and 3 to indicate the
relative degree to safety.
A-1. This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are designed
A-1+.
-12-
<PAGE>
ANNUAL REPORT
STATE FARM MUNICIPAL BOND FUND, INC.
ONE STATE FARM PLAZA - BLOOMINGTON, ILLINOIS 61710
For Account Information and Shareowner
Services:(309) 766-2029
For Price Information ONLY:
1-800/447-0740
November 30, 1996
This report is not to be distributed unless preceded or accompanied by a
prospectus.
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
Dear Shareowner:
Interest rates on municipal bonds fluctuated within a range of about 80
basis points (a basis point is .01%) over the course of the Fund's fiscal year.
However, after all was said and done, municipal yields now stand at about the
same levels which existed one year ago. Consequently, the net asset value of
your Fund has moved little, declining a mere 0.7%. The Fund's total return,
which considers the reinvestment of dividends and the change in net asset
value, for the past twelve months was 5.2%.
The following graph compares a $10,000 investment in the Municipal Bond
Fund over the past ten years to a theoretical investment of the same amount in
the Lehman Brothers Municipal Bond Index:
COMPARISON OF CHANGE IN VALUE OF
$10,000 INVESTMENT FOR THE YEARS
ENDED NOVEMBER 30
Fund's Avg Annual Total Return
1 YEAR 5 YEAR 10 YEAR
5.21% 6.85% 7.25%
MUNICIPAL LEHMAN
BOND MUNI
FUND BOND*
- ---------------------------------------------------
1986 $10,000 $10,000
1987 10,103 9,780
1988 11,123 10,820
1989 12,281 12,011
1990 13,237 12,936
1991 14,462 14,263
1992 15,763 15,693
1993 17,227 17,434
1994 16,762 16,519
1995 19,152 19,641
1996 20,139 20,795
Past performance is not predictive of future performance.
* The Lehman Brothers Municipal Bond Index includes approximately
21,000 municipal bonds which are selected to be representative of the
market. To be included in the Index, a municipal bond must meet the
following criteria: have a minimum credit rating of Baa; have been
issued as part of an issue of at least $50 million; have an amount
outstanding of at least $3 million; have been issued within the last
five years; and have a maturity of at least one year.
The Lehman Brothers Index represents unmanaged groups of bonds that
differ from the composition of the Municipal Bond Fund. Unlike an
investment in the Municipal Bond Fund, a theoretical investment in
the Index does not reflect expenses.
Valuations of municipal bonds fared better than their taxable
counterparts for most of the year. Their superior relative performance
can probably be attributed to investors becoming less concerned about
the prospects for significant federal tax reform. As you likely
2
<PAGE>
recall, a year ago politicians were openly discussing tax changes which
could have reduced the attractiveness of tax-exempt income from municipal
securities. Support for municipal bond prices was also generated from a
pickup in demand by property and casualty insurance companies.
The direction of municipal bond yields generally followed domestic
interest rate movements over the course of the year. After moving higher during
the first half of the year, yields have been trending lower over the last six
months.
Movements of interest rates on intermediate and long-term obligations
continue to be heavily influenced by how investors view the pace of general
domestic economic activity and the prospects for inflation. With the economy
seeming to slow from its speed of the second quarter to a more sustainable
pace, inflation in check, and monetary policy on hold, bond prices have been
rallying since the end of August. Results of the election, prospects for a plan
to balance the federal budget and heavy purchases of U.S. bonds by foreign
investors have added further help to bond prices over this period.
The prevailing mood in bond markets was obviously quite optimistic at the
end of the Fund's fiscal year. We again remind you that markets are very
anticipatory these days, and investor sentiment can change rapidly in
unpredictable ways. In fact, as this is being written, interest rates are
rising a bit based on some recently released strong economic data. Only time
will tell if a significant change in market fundamentals or investor
perceptions is now occurring.
The general composition of your Fund's investments has not changed much
since last November. Bonds purchased over the course of the year have
maturities ranging from 10 to 14 years. Good quality bonds dominate the Fund's
portfolio. About 84% of long-term assets are rated Aa or better and 99% fall in
the top three rating categories. The average maturity stands at approximately
7.5 years with maturities spread out over the next 16 years.
As always, we encourage you to view your investment in the Fund as a
genuinely long-term commitment and to accept market volatility as an inevitable
consequence of owning a municipal bond fund. The present intermediate maturity
structure of your Fund's portfolio is designed to be less affected by potential
interest rate changes than a portfolio of longer-term bonds. The high quality
investments of the Fund should 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,
Julian R. Bucher Kurt G. Moser
Vice President Vice President
December 17, 1996
3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareowners
State Farm Municipal Bond Fund, Inc.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of State Farm Municipal Bond
Fund, Inc. as of November 30, 1996, 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 periods since
1987. 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, 1996, by
correspondence with the custodian and brokers. 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 Municipal Bond Fund, Inc. at November
30, 1996, 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 periods since 1987, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 13, 1996
4
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
LONG-TERM MUNICIPAL BONDS (97.3%):
SECURED BY U.S. TREASURY OBLIGATIONS (12.9%):
<C> <S> <C> <C>
$ 90,000 Grand River Dam Authority, Oklahoma Rev., Ser. 1978, 7.20%,
6-1-1998 (Prerefunded to 6-1-1997 at 100) Aaa $ 92,261
500,000 Orlando Utilities Commission, Florida Water and Electric Rev., Ser. 1983,
9.60%, 10-1-1999 (Escrowed to maturity) Aaa 573,695
2,000,000 State of Washington Motor Vehicle Fuel Tax General Obligation Bonds (State
Route 90), Ser. CC-8, 7.10%, 3-1-2000 (Prerefunded to 3-1-1999 at 100) AA 2,130,720
1,000,000 State of Texas Public Finance Authority General Obligation Bonds, Ser. 1990A,
7.00%, 10-1-2000 (Prerefunded to 10-1-1999 at 100) AA 1,076,060
2,840,000 Washington Suburban Sanitary District of Maryland, General Obligation Bonds,
7.00%, 12-1-2001 (Prerefunded to 12-1-1998 at 102) Aaa 3,065,354
250,000 Georgia Municipal Electric Authority Power Rev., Ser. H., 12.50%,
1-1-2002 (Prerefunded to 1-1-1997 at 100) AAA 251,937
1,500,000 Gwinnett County, Georgia General Obligation Bonds, 7.25%, 1-1-2002
(Prerefunded to 1-1-1997 at 102) Aaa 1,534,740
300,000 North Carolina Eastern Municipal Power Agency Power System Revenue Bonds,
Ser. 1982A, 13.25%, 1-1-2002 (Prerefunded to 1-1-1997
at 100) AAA 302,541
2,250,000 Pima County, Arizona Unified School District No. 1, Tucson School
Improvement General Obligation Bonds, Ser. 1990B, 6.90%, 7-1-2002
(Prerefunded to 7-1-2000 at 101%) A 2,464,988
3,000,000 Tempe, Union High School District No. 213, Maricopa County, Arizona School
Improvement General Obligation Bonds, Project of 1989, Ser. 1992B, 5.875%,
7-1-2002 (Prerefunded to 7-1-2001 at 101) A+ 3,216,840
550,000 Johnson County Water District No. 1, Kansas Water Rev., Ser. 1982A, 10.25%,
8-1-2002 (Escrowed to maturity) Aaa 692,186
900,000 Metropolitan Government of Nashville and Davidson County, Tennessee Water
and Sewer Rev., Ser. 1982, 10.50%, 12-1-2002 (Prerefunded to
12-1-1997 at 100) Aaa 959,742
3,000,000 City of Lakeland, Florida Electric and Water Rev., Ser. 1989, 6.90%, 10-1-2003
(Prerefunded to 10-1-1999 at 102) Aa 3,277,890
2,000,000 City of Grand Rapids, Michigan Water Supply System Improvement Rev. Bonds,
Ser. 1988, 7.70%, 1-1-2004 (Prerefunded to 1-1-1998 at 102) AAA 2,121,120
2,000,000 Jackson, Mississippi General Obligation Bonds, Ser. 1988, 7.50%, 5-1-2004
(Prerefunded to 5-1-1998 at 100) NR 2,098,960
3,500,000 City of Los Angeles, California Wastewater System Rev. Bonds, Ser. 1990B,
6.90%, 6-1-2004 (Prerefunded to 6-1-2000 at 102) Aaa 3,881,325
3,000,000 Omaha Public Power District of Nebraska, Electric Systems Rev., Ser. A, 6.70%,
2-1-2005 (Prerefunded to 2-1-2000 at 101.5) AA 3,259,050
2,000,000 State of Wisconsin General Obligation Bonds, 1988 Series B, 7.40%, 5-1-2005
(Prerefunded to 5-1-1997 at 101) Aaa 2,051,740
2,500,000 King County, Washington, Unlimited Tax General Obligation Bonds, Ser. 1988B,
7.30%, 12-1-2005 (Prerefunded to 12-1-1998 at 100) NR 2,658,925
1,900,000 Fort Worth Independent School District, Texas School Building Unlimited Tax
General Obligation Bonds, Ser. 1989, 6.75%, 2-15-2006 (Prerefunded to
2-15-1999 at 100) AAA 2,009,041
2,000,000 State of Texas Public Financial Authority General Obligation Bonds, Ser. 1988A,
6.50%, 10-1-2007 (Prerefunded to 10-1-1998 at 100) AA 2,089,440
1,500,000 Washington Public Power Supply System Nuclear Project No. 2, Rev. Refunding
Bonds, Ser. A, 7.625%, 7-1-2008 (Prerefunded to 7-1-2000 at 102) Aaa 1,689,900
------------
41,498,455
</TABLE>
5
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (60.5%):
<C> <S> <C> <C>
$1,455,000 State of Louisiana General Obligation Bonds, Ser. 1986A, 7.375%, 5-1-1997 Baa1 $ 1,477,232
3,000,000 North Slope Borough, Alaska General Obligation School Construction Bonds,
Ser. Y, 7.10%, 7-1-1997 AAA 3,061,320
300,000 Maryland State & Local Facility Loan of 1982 General Obligation Bonds, 1st
Ser., 11.20%, 7-1-1997 AAA 313,326
1,100,000 Stillwater, Minnesota Independent School District #834, General Obligation
School Building Bonds, Ser. 1991, 6.25%, 2-1-1998 AAA 1,131,053
3,000,000 Scottsdale Unified School District No. 48 of Maricopa County, Arizona
Refunding Bonds, Ser. 1991, 6.75%, 7-1-1998 AA 3,135,060
1,350,000 Stillwater, Minnesota Independent School District #834, General Obligation
School Building Bonds, Ser. 1991, 6.25%, 2-1-1999 AAA 1,410,494
400,000 State of California, Variable Purpose General Obligation Bonds, 9.00%, 4-1-1999 A+ 443,252
150,000 Oregon Veterans' Welfare General Obligation Bonds, Ser. LXIV, 9.00%, 4-1-1999 AA 166,539
2,500,000 Austin Independent School District, Texas Unlimited Tax Refunding District
Obligation Bonds, Ser. 1991, 6.20%, 8-1-1999 Aaa 2,629,100
1,000,000 State of Texas Public Finance Authority General Obligation Bonds, Ser. 1990A,
7.00%, 10-1-1999 AA 1,077,180
3,000,000 Washington Suburban Sanitary District, Maryland Water Supply Refunding
Bonds of 1991, 6.00%, 11-1-1999 Aa1 3,160,440
200,000 City of Charleston, Illinois Water Works Improvement General Obligation
Bonds, 8.00%, 1-1-2000 A 220,208
3,000,000 State of California Various Purpose General Obligation Bonds, 5.90%, 2-1-2000 A+ 3,149,790
2,500,000 Dupage Water Commission, Illinois General Obligation Water Refunding Bonds,
Ser. 1992, 5.85%, 3-1-2000 AA+ 2,620,225
1,000,000 State of Texas Veterans Land Board General Obligation Bonds, Ser. 1984, 9.00%,
12-1-2000 AA 1,131,790
1,885,000 Anoka County, Minnesota General Obligation Capital Improvement Refunding
Bonds, Ser. 1992C, 5.20%, 2-1-2001 A1 1,945,414
1,200,000 Shelby County, Tennessee General Obligation Refunding Bonds, 1992 Ser. B,
5.20%, 3-1-2001 Aa 1,244,340
400,000 State of California General Obligation Veterans Bonds, Ser. AL, 9.60%, 4-1-2001 A+ 481,760
2,200,000 City and County of Honolulu, Hawaii General Obligation Refunding Bonds,
1992 Ser. 1, 5.60%, 6-1-2001 AA 2,316,930
2,000,000 School District of Leon County, Florida General Obligation Refunding Bonds,
Ser. 1991, 5.85%, 7-1-2001 A1 2,126,060
2,000,000 Howard County, Maryland Consolidated Public Improvement Refunding
General Obligation Bonds, Ser. 1991B, 5.80%, 8-15-2001 Aaa 2,136,220
2,110,000 State of Nevada General Obligation (Limited Tax) Hoover Uprating Refunding
Bonds, Ser. 1992, 6.00%, 10-1-2001 AA 2,261,245
900,000 Monroe County Jail, Indiana, First Mortgage Refunding Bonds, Series 1993,
4.90%, 1-1-2002 A1 912,906
1,535,000 City of Columbus, Ohio Sewer Improvement No. 27 Refunding Bonds,
Unlimited Tax General Obligation Bonds, Ser. 1991, 5.90%, 2-15-2002 Aaa 1,647,638
1,000,000 Williamson County, Tennessee Public Works Refunding Bonds, Ser. 1992, 5.65%,
3-1-2002 Aa 1,059,360
1,500,000 City of Tulsa, Oklahoma General Obligation Refunding Bonds of 1993, 5.05%,
6-1-2002 Aa 1,549,140
2,100,000 Jackson Public School District, Jackson, Mississippi General Obligation School
Bonds, Ser. 1992, 5.80%, 7-1-2002 A1 2,235,093
925,000 Monroe County Jail, Indiana, First Mortgage Refunding Bonds, Series 1993,
4.90%, 7-1-2002 A1 939,190
1,000,000 Pima County Arizona General Obligation Refunding Bonds, Ser. 1992, 6.30%,
7-1-2002 Aa 1,092,410
</TABLE>
6
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (Continued)
<C> <S> <C> <C>
$3,500,000 Milwaukee, Wisconsin Metropolitan Sewerage District General Obligation
Capital Purpose Bonds, Ser. 1990A, 6.70%, 10-1-2002 AA $ 3,901,135
1,885,000 Federal Way School District No. 210, King County, Washington Unlimited Tax
General Obligation Refunding Bonds, 1987, 6.75%, 12-1-2002 A1 1,913,614
1,500,000 County of Ramsey, Minnesota General Obligation Capital Improvement
Refunding Bonds, Ser. 1992C, 5.40%, 12-1-2002 Aaa 1,583,340
1,505,000 Anchorage, Alaska General Obligation General Purpose Refunding Bonds,
4.60%, 2-1-2003 Aaa 1,507,318
2,000,000 Lake County, Illinois Forest Preserve District General Obligation Refunding
Bonds, Ser. 1992B, 5.70%, 2-1-2003 Aa 2,126,840
2,000,000 Oregon General Obligation Veterans' Welfare Bonds, Ser. 74A, 7.75%, 3-1-2003 Aa 2,060,100
1,050,000 Oklahoma City, Oklahoma General Obligation Bonds, Series 1993, 5.15%,
5-1-2003 Aa 1,090,037
2,000,000 Nashville and Davidson County, Tennessee General Obligation Refunding
Bonds of 1993, 5.00%, 5-15-2003 Aa 2,063,400
2,000,000 State of Illinois General Obligation Refunding Bonds, Series of June 1993,
5.00%, 6-1-2003 A1 2,042,280
1,500,000 Municipality of Anchorage, Alaska 1993 General Obligation Refunding School
Bonds, Series B, 4.90%, 9-1-2003 Aaa 1,532,760
1,750,000 State of Louisiana General Obligation Bonds, Series 1987A, 7.00%, 8-1-2003 Aaa 1,823,535
2,000,000 Texas Public Finance Authority, State of Texas General Obligation Refunding
Bonds, Ser. 1992A, 5.70%, 10-1-2003 Aa 2,145,880
2,000,000 State of Wisconsin General Obligation Refunding Bonds of 1993, Series 1,
5.30%, 11-1-2003 Aa 2,099,040
2,000,000 State of Wisconsin General Obligation Refunding Bonds of 1993, Series 3,
4.75%, 11-1-2003 Aa 2,034,140
2,520,000 Federal Way School District No. 210, King County, Washington Unlimited Tax
General Obligation and Refunding Bonds, 1993, 5.25%, 12-1-2003 Aaa 2,629,418
2,620,000 Cherry Creek School District No. 5, Arapahoe County, Colorado General
Obligation Improvement Bonds, Ser. 1990, 7.00%, 12-15-2003 AA 2,892,794
2,000,000 Jefferson County Colorado School District No. R-1 General Obligation Bonds,
Ser. 1992, 5.75%, 12-15-2003 Aaa 2,150,660
2,025,000 County of DuPage, Illinois General Obligation Refunding Bonds (Alternate Rev.
Source - Stormwater Project), 5.10%, 1-1-2004 Aaa 2,084,332
2,000,000 Indianapolis, Indiana Local Public Improvement Bond Bank, Limited
Obligation Bonds, Series 1993A Bonds, 5.25%, 1-10-2004 Aaa 2,074,320
2,100,000 Cherokee County School Systems Georgia, General Obligation School Series
1993, 4.90%, 2-1-2004 A1 2,136,708
2,300,000 Osseo Area Schools, Minnesota, General Obligation Refunding Bonds, Series
1993, 4.60%, 2-1-2004 A1 2,300,690
2,300,000 Indianapolis, Indiana Local Public Improvement Bond Bank Refunding Bonds,
Limited Obligation Bonds, Ser. 1993B, 4.70%, 2-15-2004 Aaa 2,296,780
1,600,000 County of Buncombe, North Carolina Refunding General Obligation Bonds,
Series 1993, 5.10%, 3-1-2004 Aa 1,661,760
1,050,000 Oklahoma City, Oklahoma General Obligation Bonds, Series 1993, 5.25%,
5-1-2004 Aa 1,090,498
2,000,000 Davis County School District, Davis County, Utah, General Obligation
Refunding Bonds, Series 1993A, 4.50%, 6-1-2004 Aaa 1,978,680
2,000,000 Alachua County School District, Alachua County, Florida General Obligation
Refunding Bonds, Ser. 1994, 4.50%, 7-1-2004 Aaa 1,984,700
2,000,000 Deer Valley Unified School District No. 97 of Maricopa County, Arizona School
Improvement General Obligation Bonds, Project of 1992, Series A (1993),
5.125%, 7-1-2004 Aaa 2,076,920
</TABLE>
7
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (Continued)
<C> <S> <C> <C>
$1,205,000 DeKalb County School District, Georgia General Obligation Refunding Bonds,
Series 1993, 5.10%, 7-1-2004 Aa $ 1,248,645
1,000,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement General Obligation Bonds, Ser. 1990A, 7.10%, 7-1-2004 A1 1,148,220
1,540,000 Joint School District No. 2, Ada and Canyon Counties, Idaho, General
Obligation School Bonds, Ser. 1994, 5.0%, 7-30-2004 Aa 1,594,439
3,215,000 State of Minnesota General Obligation State Refunding Bonds, 5.125%, 8-1-2004 Aaa 3,335,145
2,000,000 Harris County, Texas Road and Refunding Bonds, Ser. 1993, 4.70%, 10-1-2004 Aa 2,011,880
2,000,000 City of Seattle, Washington Unlimited Tax General Obligation Refunding Bonds,
1993, 4.80%, 12-1-2004 Aa1 2,020,780
1,000,000 Bismarck, North Dakota Public School District #1, Burleigh County General
Obligation Building Bonds of 1986, 7.00%, 4-1-2005 A1 1,010,050
1,800,000 Nashville and Davidson County, Tennessee General Obligation Refunding
Bonds of 1993, 5.00%, 5-15-2005 Aa 1,847,412
1,625,000 Charleston County, South Carolina General Obligation Refunding Bonds of 1994
(ULT), 5.40%, 6-1-2005 Aa 1,714,489
1,100,000 Municipality of Anchorage, Alaska 1994 General Obligation School Bonds,
5.40%, 7-1-2005 Aaa 1,149,896
2,000,000 Oklahoma City, Oklahoma General Obligation Refunding Bonds, Series 1993,
5.30%, 8-1-2005 Aa 2,093,220
2,500,000 State of Illinois General Obligation Refunding Bonds, Ser. 1987, 6.80%, 4-1-2006 A1 2,571,925
1,600,000 Natrona County, Wyoming School District No. 1 General Obligation Bonds, Ser.
1994, 5.45%, 7-1-2006 Aaa 1,665,424
2,340,000 City of Phoenix, Arizona General Obligation Refunding Bonds, Ser. 1993A,
5.30%, 7-1-2006 Aa1 2,450,963
2,125,000 Southwest Allen, Indiana High School Building Corp., 1st Mortgage Refunding
Bonds, Series 1996B, 4.85%, 7-15-2006 Aaa 2,123,916
2,000,000 State of California Various Purpose General Obligation Bonds, 6.00%, 10-1-2006 A1 2,196,180
3,215,000 Forsyth County School District, Georgia, General Obligation Bonds, Series 1995,
5.05%, 7-1-2007 Aaa 3,249,015
2,000,000 Arapahoe County School District #6, Colorado, Littleton Public Schools General
Obligation Improvement Bonds, Series 1995A 5.00%, 12-1-2007 Aa 2,033,880
2,780,000 Salt Lake County, Utah General Obligation Jail Bonds, Series 1995, 5.00%,
12-15-2007 Aaa 2,822,367
2,355,000 Carrollton-Farmers Branch Independent School District (Dallas and Denton
Counties, Texas) School Building Unlimited Tax Bonds, Series 1996, 5.20%,
2-15-2008 Aaa 2,382,318
2,000,000 State of Wisconsin General Obligation Bonds of 1995, Series A, 6.00%, 5-1-2008 Aa 2,150,240
2,000,000 State of Florida, State Board of Education, Public Education Capital Outlay
Refunding Bonds, 1995 Series C, 5.125%, 6-1-2008 Aa 2,021,740
1,000,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1994A, 7.10%, 7-1-2008 A1 1,185,590
1,700,000 State of South Carolina General Obligation State Highway Bonds, Series 1995,
5.10%, 8-1-2008 Aaa 1,734,969
3,000,000 State of Texas Public Finance Authority General Obligation Refunding Bonds,
Series 1996B, 5.40%, 10-1-2008 Aa 3,096,870
1,200,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1994A, 7.00%, 7-1-2009 A1 1,413,516
3,590,000 State of Georgia General Obligation Bonds, Series 1996C, 6.25%, 8-1-2009 Aaa 4,032,360
1,700,000 State of South Carolina General Obligation State Highway Bonds, Series 1995,
5.25%, 8-1-2009 Aaa 1,737,519
4,000,000 City and County of Honolulu, Hawaii General Obligation Bonds, Series 1996A,
5.40%, 9-1-2009 Aaa 4,097,680
</TABLE>
8
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (Continued)
<C> <S> <C> <C>
$4,000,000 State of Illinois General Obligation Bonds, Series of September 1996, 5.45%,
9-1-2009 Aaa $ 4,081,840
2,500,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1994A, 7.00%, 7-1-2010 A1 2,958,700
2,500,000 State of Wisconsin General Obligation Refunding Bonds of 1993, Ser. 2, 5.125%,
11-1-2010 Aa 2,493,500
2,540,000 (c) Mesa County, Colorado Valley School District #51, General Obligation Bonds,
Series 1996, 5.30%, 12-1-2010 Aaa 2,563,622
3,000,000 State of Hawaii, General Obligation Refunding Bonds of 1992, Series BW,
6.375%, 3-1-2011 Aa 3,364,410
2,000,000 Washington and Clackamas Counties School District #23J (Tigard-Tualatin),
Oregon, General Obligation Bonds, Series 1995, 5.55%, 6-1-2011 A1 2,030,980
2,000,000 State of Georgia, General Obligation Bonds, Series 1995C, 5.70%, 7-1-2011 Aaa 2,113,440
1,125,000 State of Delaware, General Obligation Bonds, Series 1994B, 6.00%, 12-1-2011 Aa1 1,190,115
3,000,000 State of Georgia, General Obligation Bonds, Series 1995B, 5.75%, 3-1-2012 Aaa 3,175,290
4,500,000 State of Washington General Obligation Bonds, Series 1993A, 5.75%, 10-1-2012 Aa 4,754,520
1,125,000 State of Delaware, General Obligation Bonds, Series 1994B, 6.00%, 12-1-2012 Aa1 1,186,335
------------
194,409,794
MUNICIPAL REVENUE (20.8%):
2,000,000 City of St. Petersburg, Florida Public Utility Refunding Rev. Bonds, Ser. 1991,
6.10%, 10-1-1998 Aa 2,076,940
3,000,000 City of Colorado Springs, Colorado Utilities System Refunding Rev., Ser. 1991A,
6.10%, 11-15-1998 AA 3,123,510
1,490,000 City of San Antonio, Texas Water System Revenue Refunding Special Obligation
Bonds, Ser. 1992, 5.80%, 5-15-1999 AAA 1,549,406
1,250,000 Washington Public Power Supply System Nuclear Project No. 3, Refunding Rev.
Bonds, Ser. 1991A, 6.25%, 7-1-2000 Aa1 1,320,837
1,250,000 State of New York Power Authority General Purpose Bonds, Ser. Z, 6.00%,
1-1-2001 Aa 1,329,812
1,400,000 San Diego County Water Authority Water Rev. Certificates of Participation, Ser.
1991A, 6.00%, 5-1-2001 Aa 1,491,392
1,250,000 Municipal Subdistrict, Northern Colorado Water Conservancy District Water
Rev., Ser. D, 7.60%, 12-1-2001 A1 1,275,275
2,000,000 Nashville and Davidson County, Tennessee Electric System Rev. Bonds, 1992
Series B, 5.50%, 5-15-2002 Aa 2,109,300
1,000,000 Washington Public Power Supply System Nuclear Project No. 1, Rev. Refunding
Bonds, Ser. 1990C, 7.70%, 7-1-2002 Aa1 1,142,730
1,080,000 Charleston, South Carolina Waterworks and Sewer Systems Rev. Refunding
Bonds, Ser. 1986A, 6.90%, 1-1-2003 A1 1,104,700
2,000,000 City of Des Moines, Iowa Sewer Rev. Bonds, Ser. 1992D, 6.00%, 6-1-2003 Aaa 2,142,840
2,500,000 City of Albuquerque, New Mexico Joint Water and Sewer Refunding Rev. Bonds,
Ser. 1990B, 7.00%, 7-1-2003 Aa 2,752,750
2,000,000 Washington Public Power Supply System, Nuclear Project No. 3 Refunding
Revenue Bonds, Series 1993C, 4.80%, 7-1-2003 Aa1 1,998,800
2,000,000 City of Lincoln, Nebraska, Water Revenue and Refunding Bonds, Series 1993,
4.90%, 8-15-2003 Aa 2,050,420
2,850,000 City of Lincoln, Nebraska, Electric System Revenue Refunding Bonds, 1993
Series A, 4.70%, 9-1-2003 Aa 2,887,677
2,000,000 Fargo, North Dakota, Water Revenue of 1993, 5.00%, 1-1-2004 Aaa 2,040,560
1,500,000 Municipal Electric Authority of Georgia General Power Rev. Bonds, 1993A
Series, 5.00%, 1-1-2004 A 1,514,190
1,500,000 Nashville and Davidson County, Tennessee, Water and Sewer Revenue
Refunding Bonds, Series 1993, 4.90%, 1-1-2004 Aaa 1,531,455
1,710,000 Southern Minnesota Municipal Power Agency, Power Supply System Revenue
Bonds, Series 1993 B, 4.60%, 1-1-2004 A 1,689,993
</TABLE>
9
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1996
<TABLE>
<CAPTION>
RATING(B)
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
MUNICIPAL REVENUE (Continued)
<C> <S> <C> <C>
$2,000,000 City of Dallas, Texas Waterworks and Sewer System Rev. Refunding Bonds,
Series 1993, 4.90%, 4-1-2004 Aa $ 2,031,440
2,045,000 City of Iowa City, Johnson County, Iowa Sewer Rev. Bonds, 5.875%, 7-1-2004 Aaa 2,171,095
2,000,000 City of Jackson, Mississippi Water and Sewer System Rev. Refunding Bonds,
Series 1993-A, 4.85%, 9-1-2004 Aaa 2,030,860
1,685,000 Hampton Roads Sanitation District, Virginia, Wastewater Refunding and
Capital Improvement Revenue Bonds, Series 1993, 4.70%, 10-1-2004 Aa 1,700,519
3,000,000 City of Los Angeles Department of Water and Power, Electric Plant Refunding
Revenue Bonds, Second Issue of 1993, 4.80%, 11-15-2004 Aa 3,049,560
2,200,000 The Water Works and Sewer Board, Birmingham, Alabama Water and Sewer
Revenue Bonds, Series 1994, 4.75%, 1-1-2005 Aa 2,211,660
1,500,000 Omaha, Nebraska Public Power District Electric System Rev. Bonds, 1993,
Series B, 5.10%, 2-1-2005 Aa 1,543,305
1,325,000 Winston-Salem, North Carolina Water & Sewer System Revenue Bonds, Series
1995B, 5.00%, 6-1-2007 Aa 1,344,478
2,600,000 Washington Public Power Supply System Nuclear Project No. 1, Rev. Refunding
Bonds, Ser. 1989A, 7.50%, 7-1-2007 Aa1 2,856,230
2,830,000 Sacramento County, California Sanitary District Financing Authority Revenue
Bonds, 1995, 5.00%, 12-1-2007 Aa 2,868,262
4,500,000 Nashville and Davidson County, Tennessee Water & Sewer Revenue Refunding
Bonds, Series 1996, 5.25%, 1-1-2008 Aaa 4,621,680
1,665,000 Winston-Salem, North Carolina Water & Sewer System Revenue Bonds, Series
1995B, 5.10%, 6-1-2008 Aa 1,685,679
1,500,000 Sacramento County, California Sanitary District Financing Authority Revenue
Bonds, 1995, 5.00%, 12-1-2008 Aa 1,506,300
1,840,000 City of Dallas, Texas Waterworks and Sewer System Revenue Bonds, Series
1994A, 6.375%, 10-1-2012 Aa 1,956,067
------------
66,709,722
INDUSTRIAL REVENUE - UTILITIES (3.1%):
3,000,000 Becker, Minnesota Pollution Control Rev. Refunding Bonds, Ser. 1989A, 6.80%,
4-1-2007, (Northern States Power Co. - Sherburne Cnty. Gen. Sta. Units 1 & 2
Proj.) A2 3,188,130
6,000,000 Omaha, Nebraska Public Power District Electric System Revenue Bonds, Ser.
1992B, 6.15%, 2-1-2012 Aa 6,652,680
------------
9,840,810
Total long-term municipal bonds (cost: $295,897,155) 312,458,781
SHORT-TERM INVESTMENTS (2.7%):
6,000,000 U.S. Treasury bills, 5.005% to 5.155% effective yield, due 12-1996 to 2-1997 5,964,660
2,460,000 Ford Motor Credit Company, 5.30%, 12-3-1996 2,461,449
275,000 Ford Motor Credit Company, 5.40%, 12-3-1996 275,124
------------
Total short-term investments (cost: $8,699,005) 8,701,233
------------
TOTAL INVESTMENTS (100.0%) (cost: $304,596,160) 321,160,014
LIABILITIES, LESS CASH AND OTHER ASSETS (0%) (10,393)
------------
NET ASSETS (100.0%) $321,149,621
============
</TABLE>
Notes: (a) At November 30, 1996, net unrealized appreciation of $16,563,854
consisted of gross unrealized appreciation of $16,601,552 and gross
unrealized depreciation of $37,698 based on cost of $304,596,160
for federal income tax purposes.
(b) Ratings not covered by the report of independent auditors. NR
denotes no rating available.
(c) Purchased on a `when-issued' basis.
10
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments, at value (cost $304,596,160) $321,160,014
Cash 304,236
Receivable for:
Interest $5,708,064
Shares of the Fund sold 200
Sundry 5,316 5,713,580
----------
Prepaid expenses 17,761
------------
Total assets 327,195,591
LIABILITIES AND NET ASSETS
Payable for:
Dividends to shareowners 3,197,502
Securities purchased 2,546,731
Shares of the Fund redeemed 174,483
Other accounts payable (including $117,874 to Manager) 127,254
----------
Total liabilities 6,045,970
------------
Net assets applicable to 38,035,010 shares outstanding of
$1 par value common stock (100,000,000 shares authorized) $321,149,621
============
Net asset value, offering price and redemption price per
share $ 8.44
============
ANALYSIS OF NET ASSETS
Excess of amounts received from sales of shares over
amounts paid on redemptions of shares on account of
capital $304,463,942
Accumulated net realized gain on
sales of investments 121,825
Net unrealized appreciation of investments 16,563,854
------------
Net assets applicable to shares outstanding $321,149,621
============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1996 1995
<S> <C> <C>
INVESTMENT INCOME:
Tax-exempt interest $17,621,142 16,931,069
Taxable interest 735,320 446,122
---------------------------
Total investment income 18,356,462 17,377,191
EXPENSES:
Investment advisory and management fees 385,258 366,394
Audit fees 21,106 21,113
Legal fees 3,006 4,264
Fidelity bond expense 4,433 5,077
Directors' fees 3,000 2,200
Reports to shareowners 5,141 9,024
Securities evaluation fees 19,874 19,822
Franchise taxes 16,602 16,598
Custodian fees 24,936 29,930
Other 18,775 21,799
---------------------------
Total expenses 502,131 496,221
Less: Custodian fees paid indirectly 18,709 25,465
---------------------------
Net expenses 483,422 470,756
---------------------------
Net investment income 17,873,040 16,906,435
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on sales of investments 121,825 264,519
Change in net unrealized appreciation (1,805,995) 21,451,782
---------------------------
Net realized and unrealized gain (loss) on investments (1,684,170) 21,716,301
---------------------------
Net change in net assets resulting from operations $16,188,870 38,622,736
===========================
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1996 1995
<S> <C> <C>
From operations:
Net investment income $ 17,873,040 16,906,435
Net realized gain on sales of investments 121,825 264,519
Change in net unrealized appreciation (1,805,995) 21,451,782
-----------------------------
Net change in net assets resulting
from operations 16,188,870 38,622,736
Dividends to shareowners from:
Net investment income (per share $.48 in 1996
and $.48 in 1995) (17,873,040) (16,906,435)
Net realized gain (per share $.006 in 1996) (214,926) --
----------------------------
Total distributions to shareowners (18,087,966) (16,906,435)
From Fund share transactions:
Proceeds from shares sold 27,900,088 25,292,645
Reinvestment of ordinary income dividends
and capital gain distributions 13,618,482 12,894,959
----------------------------
41,518,570 38,187,604
Less payments for shares redeemed 25,886,170 22,392,823
----------------------------
Net increase in net assets from Fund share
transactions 15,632,400 15,794,781
----------------------------
Total increase in net assets 13,733,304 37,511,082
Net assets:
Beginning of year 307,416,317 269,905,235
----------------------------
End of year $321,149,621 307,416,317
============================
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
SECURITIES 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 on an amortized
cost basis. 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; premiums and original issue discounts on tax-exempt
securities are amortized. Realized gains and losses from security
transactions are reported on an identified cost basis.
SECURITIES PURCHASED ON A `WHEN-ISSUED' BASIS --
The Fund may purchase municipal bonds on a `when-issued' basis.
Delivery and payment for these securities may be a month or more after
the purchase date, during which time such securities are subject to
market fluctuations. It is possible that the securities will never be
issued and the commitment cancelled. At November 30, 1996, there were
commitments of $2,546,731 for such securities.
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 1:00 p.m.
Bloomington, Illinois time on each business day other than customary
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. Net
realized gain on sales of investments, if any, are distributed annually
after the close of the Fund's fiscal year. Distributions of net realized
gains payable to its shareowners are recorded by the Fund on the
ex-dividend date.
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 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.
14
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
2. 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 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 $385,258
for 1996 and $366,394 for 1995. The Fund pays no fees for transfer agent
services provided by the Manager. 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, 1996,
except for directors' fees of $3,000 for 1996 and $2,200 for 1995 paid
to the Fund's independent directors.
3. INVESTMENT TRANSACTIONS
Investment transactions (exclusive of short-term investments) for each
of the two years ended November 30 were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Purchases $30,463,407 34,619,287
Proceeds from sales 17,540,000 18,616,250
==========================
</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>
YEAR ENDED NOVEMBER 30,
1996 1995
<S> <C> <C>
Shares sold 3,324,581 3,052,147
Shares issued in reinvestment of
ordinary income dividends and
capital gain distributions 1,626,301 1,565,349
--------------------------
4,950,882 4,617,496
Less shares redeemed 3,088,643 2,709,601
--------------------------
Net increase in shares outstanding 1,862,239 1,907,895
==========================
</TABLE>
15
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES (For a share outstanding throughout each
period)
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
YEAR ENDED NOVEMBER 30, NOVEMBER 30, MAY 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 8.50 7.88 8.59 8.34 8.15 7.98 7.96 7.76 7.58 7.55 7.53
Income from
Investment
Operations
Net investment
income .48 .48 .48 .50 .53 .54 .58 .58 .57 .28 .57
Net gain or loss
on securities (both
realized and
unrealized) (.06) .62 (.69) .25 .19 .17 .02 .20 .18 .03 .02
------------------------------------------------------------------------------------------------------------
Total from
investment
operations .42 1.10 (.21) .75 .72 .71 .60 .78 .75 .31 .59
Less Distributions
Net investment
income (.48) (.48) (.48) (.50) (.53) (.54) (.58) (.58) (.57) (.28) (.57)
Capital gain (b) -- -- (.02) -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------
Total distributions (.48) (.48) (.50) (.50) (.53) (.54) (.58) (.58) (.57) (.28) (.57)
Net asset value, end
of period $ 8.44 8.50 7.88 8.59 8.34 8.15 7.98 7.96 7.76 7.58 7.55
============================================================================================================
Total Return 5.21% 14.25% (2.55%) 9.17% 9.05% 9.17% 7.78% 10.44% 10.14% 4.19% 7.72%
Ratios/Supplemental
Data
Net assets, end of
period (millions) $ 321.1 307.4 269.9 276.4 211.3 167.2 132.8 110.0 85.2 70.7 66.4
Ratio of expenses to
average net assets .16% .17%(c) .16% .18% .19% .21% .23% .25% .29% .30%(a) .31%
Ratio of net
investment income
to average net
assets 5.76% 5.80% 5.80% 5.84% 6.36% 6.75% 7.30% 7.42% 7.36% 7.49%(a) 7.30%
Portfolio turnover
rate 6% 7% 8% 5% 4% 2% 8% 7% 2% 4%(a) 0%
Number of shares
outstanding at end
of period
(millions) 38.0 36.2 34.3 32.2 25.3 20.5 16.6 13.8 11.0 9.3 8.8
</TABLE>
Notes: (a) Ratios and rates have been calculated on an annualized basis.
(b) Distributions representing less than $.01 were made in 1996, 1993
and 1992.
(c) The ratio based on net custodian expenses would have been .16% in
1995.
16
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
TAX INFORMATION
The Fund paid ordinary income dividends in March, June, September and
December 1996. Of those dividends, 98% in March, 97% in June, 97% in
September and 98% in December are designated as exempt-interest
dividends. The taxable portion of the dividends paid to you will be
included on the Form 1099-DIV to be sent in January 1997.
Since the Fund's investment income was derived from interest, none of
the taxable portion of the Fund's distributions are eligible for the
dividend received deduction for corporations.
In December, 1996, the Fund made a capital gain distribution of $.003
per share, 100% of which was paid from long-term capital gain and is
designated as a capital gain dividend.
NOTE: The taxable portion of the dividends and the capital gain
distribution 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. The
tax-exempt status of dividends derived from interest on municipal
bonds for federal income tax purposes does not necessarily result
in exemption from any state or local income taxes or other taxes.
17
<PAGE>
(This page intentionally left blank.)
18
<PAGE>
(This page intentionally left blank.)
19
<PAGE>
ANNUAL
REPORT
November 30, 1996
STATE
FARM
MUNICIPAL BOND
FUND, INC.
ONE STATE FARM PLAZA
BLOOMINGTON, ILLINOIS 61710
TELEPHONE (309) 766-2029
G 4100.38
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PART C OF THE REGISTRATION STATEMENT
------------------------------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Financial statements included in Part B of this amendment:
Statement of assets and liabilities - November 30, 1996*
Statement of operations for each of the two years in the
period ended November 30, 1996*
Statement of changes in net assets for each of the two years
in the period ended November 30, 1996*
Portfolio of investments - November 30, 1996*
Notes to financial statements*
Report of independent auditors*
Schedule I has been omitted as the required information is
presented in the portfolio of investments at November 30, 1996.
Schedules II, III, IV and V are omitted as the required
information is not present.
*Incorporated by reference to the Annual Report of registrant for
the fiscal year ended November 30, 1996. A copy of that Annual
Report is attached hereto, but, except for those portions
incorporated by reference, the Annual Report is furnished for
the information of the Commission and is not deemed to be filed
as part of this amendment.
(b) Exhibits
Note: As used herein the term "Registration Statement" refers to
registration statement of registrant on Form S-5 or N-1 no.
2-58161.
1. Amended and restated articles of incorporation of
registrant*
2. By-laws of registrant (as amended and restated March
12, 1993)*
3. None
4(a). Form of stock certificate*
5(a). Investment advisory and management services agreement
between registrant and State Farm Investment
Management Corp. dated October 1, 1978*
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
5(b). Service agreement among registrant, State Farm
Investment Management Corp. and State Farm Mutual
Automobile Insurance Company, as amended, dated
September 9, 1977*
6. Underwriting agreement between registrant and State
Farm Investment Management Corp., as amended, dated
September 9, 1977*
7. None
8(a). Custodian agreement between registrant and Morgan
Guaranty Trust Company of New York dated November 1,
1990*
8(b). Custodian agreement between registrant and The
Peoples Bank dated October 1, 1991*
9. Transfer agent agreement between registrant and State
Farm Investment Management Corp. dated April 1, 1992*
10. Opinion of Bell, Boyd & Lloyd, dated March 8, 1996*
11. Consent of Independent Auditors dated March 14, 1997
12. None
13. None
14. None
15. None
16. Schedule for Computation of Performance Quotations
27. Financial Data Schedule
* Incorporated by reference to post-effective
amendment no. 24.
Item 25. Persons controlled by or under Common Control with Registrant
The registrant does not consider that there are any persons directly
or indirectly controlling, controlled by, or under common control
with, the registrant within the meaning of this item. The information
in the Statement of Additional Information under the caption
"Directors and Officers" and "General Information - Ownership of
Shares" and in the first two paragraphs under the caption "Investment
Advisory and Other Services" is incorporated herein by reference.
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
Item 26. Number of Security Holders
Number of Record Holders
Title of Class at December 31, 1996
-------------- --------------------
Common Stock, $1 par 4,337
Item 27. Indemnification
Section 2-418 of the Maryland General Corporation Law authorizes the
registrant to indemnify its directors and officers under specified
circumstances.
Paragraph 5 of Article Seventh of the Articles of Incorporation of the
registrant and Section 6 of Article VI of the by-laws of the
registrant provide that the registrant shall indemnify its directors
and officers under specified circumstances.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
The information in the prospectus under the caption "Management of the
Fund" is incorporated herein by reference. Neither State Farm
Investment Management Corp., nor any of its directors or officers, has
at any time during the past two years engaged in any other business,
profession, vocation or employment of a substantial nature either for
its own account or in the capacity of director, officer, employee,
partner or trustee.
Directors and Officers of Investment Adviser -
Edward B. Rust, Jr., Director and President *
Roger Joslin, Director, Vice President and Treasurer *
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
Kurt G. Moser, Director and Vice President *
John J. Killian, Director - Vice President and Controller, State Farm
Mutual Automobile Insurance Company and holds a similar position
with certain subsidiaries and affiliates.
Vincent J. Trosino, Director - Executive Vice President, State Farm
Mutual Automobile Insurance Company.
David R. Grimes, Assistant Vice President and Secretary *
Michael L. Tipsord, Assistant Secretary *
Jerel S. Chevalier, Assistant Secretary-Treasurer *
Patricia L. Dysart, Assistant Secretary *
* Information in the Statement of Additional Information under the
caption "Directors and Officers" is incorporated herein by
reference.
Item 29. Principal Underwriters
(a) Information under the caption "Investment Advisory and Other
Services" in the Statement of Additional Information is
incorporated herein by reference.
(b) Registrant's principal underwriter is also registrant's
investment adviser. Accordingly, the information in Item 28
hereof is incorporated herein by reference.
(c) Not applicable.
Item 30. Location of Accounts and Records
Jerel S. Chevalier, State Farm Investment Management Corp., One State
Farm Plaza, Bloomington, Illinois 61710 maintains physical possession
of each account, book, or other document required to be maintained by
Section 31(a) of the 1940 Act and the Rules promulgated thereunder.
Item 31. Management Services
None
Item 32. Undertakings
(a) Not applicable
(b) Not applicable
(c) Registrant undertakes to furnish each person to whom
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
a prospectus is delivered with a copy of the Registrant's latest
annual report to shareowners, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Bloomington, and State of Illinois on
the 14th day of March, 1997.
STATE FARM MUNICIPAL BOND FUND, INC.
By: ______________________________
Edward B. Rust, Jr., President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
___________________________________ Director
Edward B. Rust, Jr. and President
(Principal Executive
Officer)
___________________________________ Director, Vice President,
Roger Joslin and Treasurer
(Principal financial
and accounting officer)
___________________________________ Director March 14, 1997
Albert H. Hoopes --------------
___________________________________ Director
Davis U. Merwin
___________________________________ Director
James A. Shirk
<PAGE>
INDEX FOR EXHIBITS
FILED WITH THIS AMENDMENT
-------------------------
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
11 Consent of Independent Auditors
dated March 14, 1997
16 Schedule for computation of performance
quotations
27 Financial Data Schedule
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Financial Information" and to the use of our report dated
December 13, 1996 in the Registration Statement (Form N-1A) and its
incorporation by reference in the related Prospectus and Statement of Additional
Information of State Farm Municipal Bond Fund, Inc., filed with the Securities
and Exchange Commission in this Post-Effective Amendment No. 25 to the
Registration Statement under the Securities Act of 1933 (File No. 2-58161) and
in this Amendment No. 23 to the Registration Statement under the Investment
Company Act of 1940 (File No. 811-2727).
ERNST & YOUNG LLP
Chicago, Illinois
March 14, 1997
3 MONTH(S) ACCRUED DIVIDEND
NET ASSET VALUES FOR VALUATION: AT VALUATION DATE
30-Nov-96 $8.44 0.081825981
30-Nov-95 8.50
30-Nov-91 8.15
30-Nov-86 8.07
STATE FARM MUNICIPAL BOND FUND
INVESTMENT RECORD - ALL DIVIDENDS AND CAPITAL GAINS REINVESTED
1, 5, AND 10 YEAR AVERAGE RETURNS
30-Nov-96
<TABLE>
<CAPTION>
QUARTER C.G. DIV REINV. INVESTMENT C.G. DIV SHARES SHARES
ENDED ACTION RATE RATE PRICE AMOUNT AMOUNT AMOUNT ACQUIRED OWNED
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30-Nov-86 INITIAL INVEST. N/A N/A $8.07 $1,000.00 N/A N/A 123.916 123.916
28-Feb-87 DIVIDEND * N/A 0.142651049 8.22 0.00 17.68 2.151 126.067
31-May-87 DIVIDEND N/A 0.142417894 7.58 0.00 17.95 2.368 128.435
31-Aug-87 DIVIDEND N/A 0.140882340 7.66 0.00 18.09 2.362 130.797
30-Sep-87 DIVIDEND N/A 0.046585827 7.36 0.00 6.09 0.827 131.624
31-Dec-87 DIVIDEND N/A 0.143893976 7.65 0.00 18.94 2.476 134.100
31-Mar-88 DIVIDEND N/A 0.141565727 7.73 0.00 18.98 2.455 136.555
30-Jun-88 DIVIDEND N/A 0.142026783 7.74 0.00 19.39 2.505 139.060
30-Sep-88 DIVIDEND N/A 0.142903983 7.79 0.00 19.87 2.551 141.611
30-Dec-88 DIVIDEND N/A 0.141590983 7.80 0.00 20.05 2.571 144.182
31-Mar-89 DIVIDEND N/A 0.148226412 7.69 0.00 21.37 2.779 146.960
30-Jun-89 DIVIDEND N/A 0.147648911 7.98 0.00 21.70 2.719 149.680
30-Sep-89 DIVIDEND N/A 0.144366158 7.83 0.00 21.61 2.760 152.440
31-Dec-89 DIVIDEND N/A 0.144590859 7.99 0.00 22.04 2.758 155.198
31-Mar-90 DIVIDEND N/A 0.145176732 7.86 0.00 22.53 2.866 158.065
30-Jun-90 DIVIDEND N/A 0.144727268 7.90 0.00 22.88 2.896 160.961
30-Sep-90 DIVIDEND N/A 0.141127468 7.78 0.00 22.72 2.920 163.881
31-Dec-90 DIVIDEND N/A 0.145942309 7.96 0.00 23.92 3.005 166.886
31-Mar-91 DIVIDEND N/A 0.133622584 8.00 0.00 22.30 2.788 169.674
30-Jun-91 DIVIDEND N/A 0.137463357 8.01 0.00 23.32 2.911 172.585
30-Sep-91 DIVIDEND N/A 0.137647359 8.15 0.00 23.76 2.915 175.500
31-Dec-91 DIVIDEND 0.002017998 0.133875048 8.27 0.35 23.50 2.884 178.384
31-Mar-92 DIVIDEND N/A 0.131308849 8.14 0.00 23.42 2.877 181.261
30-Jun-92 DIVIDEND N/A 0.130954700 8.29 0.00 23.74 2.864 184.125
30-Sep-92 DIVIDEND N/A 0.133795116 8.37 0.00 24.64 2.944 187.069
31-Dec-92 DIVIDEND 0.001436310 0.128232845 8.37 0.27 23.99 2.898 189.967
31-Mar-93 DIVIDEND N/A 0.126744151 8.48 0.00 24.08 2.840 192.807
30-Jun-93 DIVIDEND N/A 0.124495686 8.59 0.00 24.00 2.794 195.601
30-Sep-93 DIVIDEND N/A 0.124919772 8.70 0.00 24.43 2.808 198.409
31-Dec-93 DIVIDEND 0.017087489 0.121357031 8.66 3.39 24.08 3.172 201.581
31-Mar-94 DIVIDEND N/A 0.120600170 8.26 0.00 24.31 2.943 204.524
30-Jun-94 DIVIDEND N/A 0.120336660 8.21 0.00 24.61 2.998 207.522
30-Sep-94 DIVIDEND N/A 0.120312413 8.15 0.00 24.97 3.064 210.585
31-Dec-94 DIVIDEND N/A 0.119308000 7.96 0.00 25.12 3.156 213.741
31-Mar-95 DIVIDEND N/A 0.122390227 8.25 0.00 26.16 3.171 216.912
30-Jun-95 DIVIDEND N/A 0.120734368 8.34 0.00 26.19 3.140 220.052
30-Sep-95 DIVIDEND N/A 0.118543113 8.41 0.00 26.09 3.102 223.155
31-Dec-95 DIVIDEND 0.005938192 0.117657831 8.52 1.33 26.26 3.238 226.393
31-Mar-96 DIVIDEND N/A 0.117525511 8.37 0.00 26.61 3.179 229.572
30-Jun-96 DIVIDEND N/A 0.122507665 8.29 0.00 28.12 3.392 232.964
30-Sep-96 DIVIDEND N/A 0.119843786 8.32 0.00 27.92 3.356 236.320
</TABLE>
ACCRUED DIVIDEND / PER SHARE 0.081825981
SHARES OWNED 236.320
NAV 30-Nov-96 $8.44
ACCOUNT VALUE - 10 YEAR INVESTMENT $2,013.88
ONE YEAR AVERAGE RETURN 5.21%
FIVE YEAR AVERAGE RETURN 6.85%
TEN YEAR AVERAGE RETURN 7.25%
<PAGE>
STATE FARM MUNICIPAL BOND FUND
1 MONTH(S)
<TABLE>
<CAPTION>
3 YEAR
QUARTER CALCULATION C.G. DIVIDEND C.G. DIVIDEND REIN. SHARES SHARES
ENDED ORIGINAL INV. RATE RATE AMOUNT AMOUNT PRICE ACQUIRED OWNED
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30-Nov-91 INITIAL INVEST. $1,000.00 $8.15 122.699 122.699
31-Dec-91 DIVIDEND * 0.002017998 0.133875048 0.25 5.48 $8.27 0.693 123.392
31-Mar-92 DIVIDEND N/A 0.131308849 0.00 16.20 8.14 1.990 125.382
30-Jun-92 DIVIDEND N/A 0.130954700 0.00 16.42 8.29 1.981 127.363
30-Sep-92 DIVIDEND N/A 0.133795116 0.00 17.04 8.37 2.036 129.399
31-Dec-92 DIVIDEND 0.001436310 0.128232845 0.19 16.59 8.37 2.005 131.404
31-Mar-93 DIVIDEND N/A 0.126744151 0.00 16.65 8.48 1.963 133.367
30-Jun-93 DIVIDEND N/A 0.124495686 0.00 16.60 8.59 1.932 135.300
30-Sep-93 DIVIDEND N/A 0.124919772 0.00 16.90 8.70 1.943 137.242
31-Dec-93 DIVIDEND 0.017087489 0.121357031 2.35 16.66 8.66 2.195 139.437
31-Mar-93 DIVIDEND N/A 0.120600170 0.00 16.82 8.26 2.036 141.474
30-Jun-94 DIVIDEND N/A 0.120336660 0.00 17.02 8.21 2.073 143.547
30-Sep-94 DIVIDEND N/A 0.120312413 0.00 17.27 8.15 2.119 145.666
31-Dec-94 DIVIDEND N/A 0.119308000 0.00 17.38 7.96 2.183 147.849
31-Mar-95 DIVIDEND N/A 0.122390227 0.00 18.10 8.25 2.194 150.043
30-Jun-95 DIVIDEND N/A 0.120734368 0.00 18.12 8.34 2.173 152.216
30-Sep-95 DIVIDEND N/A 0.118543113 0.00 18.04 8.41 2.145 154.361
31-Dec-95 DIVIDEND 0.005938192 0.117657831 0.92 18.16 8.52 2.239 156.600
31-Mar-96 DIVIDEND N/A 0.117525511 0.00 18.40 8.37 2.198 158.799
30-Jun-96 DIVIDEND N/A 0.122507665 0.00 19.45 8.29 2.346 161.145
30-Sep-96 DIVIDEND N/A 0.119843786 0.00 19.31 8.32 2.321 163.466
</TABLE>
SHARES OWNED 163.466
NAV 30-Nov-96 $8.44
ACCRUED DIVIDEND 0.081825981
ACCOUNT VALUE - 5 YEAR INVESTMENT $1,393.03
<TABLE>
<CAPTION>
1 YEAR
QUARTER CALCULATION C.G. DIVIDEND C.G. DIVIDEND REIN. SHARES SHARES
ENDED ORIGINAL INV. RATE RATE AMOUNT AMOUNT PRICE ACQUIRED OWNED
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30-Nov-95 INITIAL INVEST. $1,000.00 8.50 117.647 117.647
31-Dec-95 DIVIDEND * 0.005938192 0.117657831 0.70 4.61 8.52 0.623 118.270
31-Mar-96 DIVIDEND N/A 0.117525511 0.00 13.90 8.37 1.661 119.931
30-Jun-96 DIVIDEND N/A 0.122507665 0.00 14.69 8.29 1.772 121.703
30-Sep-96 DIVIDEND N/A 0.119843786 0.00 14.59 8.32 1.754 123.457
</TABLE>
SHARES OWNED 123.457
NAV 30-Nov-96 $8.44
ACCRUED DIVIDEND 0.081825981
ACCOUNT VALUE - 1 YEAR INVESTMENT $1,052.08
* Dividend amount = rate * # of months/3, representing the number of months
the amount was invested for the quarter
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000205926
<NAME> STATE FARM MUNICIPAL BOND FUND, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> NOV-30-1996
<INVESTMENTS-AT-COST> 304,596,160
<INVESTMENTS-AT-VALUE> 321,160,014
<RECEIVABLES> 5,713,580
<ASSETS-OTHER> 321,997
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 327,195,591
<PAYABLE-FOR-SECURITIES> 2,546,731
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,499,239
<TOTAL-LIABILITIES> 6,045,970
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 304,463,942
<SHARES-COMMON-STOCK> 38,035,010
<SHARES-COMMON-PRIOR> 36,172,771
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 121,825
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,563,854
<NET-ASSETS> 321,149,621
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18,356,462
<OTHER-INCOME> 0
<EXPENSES-NET> 483,422
<NET-INVESTMENT-INCOME> 17,873,040
<REALIZED-GAINS-CURRENT> 121,825
<APPREC-INCREASE-CURRENT> (1,805,995)
<NET-CHANGE-FROM-OPS> 16,188,870
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 17,873,040<F1>
<DISTRIBUTIONS-OF-GAINS> 214,926<F2>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,324,581
<NUMBER-OF-SHARES-REDEEMED> 3,088,643
<SHARES-REINVESTED> 1,626,301
<NET-CHANGE-IN-ASSETS> 13,733,304
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 214,926
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 385,258
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 502,131
<AVERAGE-NET-ASSETS> 311,118,632
<PER-SHARE-NAV-BEGIN> 8.50
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> (.06)
<PER-SHARE-DIVIDEND> .48
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.44
<EXPENSE-RATIO> .16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>$.48 PER SHARE IN 1996
<F2>$.006 PER SHARE IN 1996
</FN>
</TABLE>
