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. 26
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 24
State Farm Municipal Bond Fund, Inc.
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(Exact Name of Registrant as Specified in Charter)
One State Farm Plaza, Bloomington, Illinois 61710
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (800) 447-0740
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
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(Names and addresses of agents for service)
__________
X It is proposed that this filing will become effective on
April 1, 1998 pursuant to Rule 485 (b)
__________
Amending the revised prospectus, Statement of Additional Information and Part
C and Exhibits
Total Number of Pages ________
(including attachments and exhibits)
Exhibit Index is on Page _______
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
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CROSS REFERENCE SHEET
Pursuant to Rule 404(a) of Regulation C
Item Number Location or Caption*
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Part A (Prospectus)
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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), (g) .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)
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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), (c) .Directors and Officers
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, 1998
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, 1998 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.
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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 1997 fiscal
year. Expenses are expressed as a percentage of fiscal 1997 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 0.03%
Exchange fees NONE TOTAL FUND EXPENSES 0.15%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example
You would pay the following expenses on a $1,000 investment,
assuming(1) 5% annual return and (2) redemption at the end of each 1 year 3 years 5 years 10 years
time period $2 $5 $8 $19
</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, 1997, which may be obtained from the Fund upon request at no
cost.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.44 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 .47 .48 .48 .48 .50 .53 .54 .58 .58 .57
Net gain or loss on securities (both
realized and unrealized) (.01) (.06) .62 (.69) .25 .19 .17 .02 .20 .18
--------------------------------------------------------------------------------
Total from investment operations .46 .42 1.10 (.21) .75 .72 .71 .60 .78 .75
Less Distributions
------------------
Dividends (from net investment income) (.47) (.48) (.48) (.48) (.50) (.53) (.54) (.58) (.58) (.57)
Distributions (from capital gain) (a) - - - (.02) - - - - - -
--------------------------------------------------------------------------------
Total distributions (.47) (.48) (.48) (.50) (.50) (.53) (.54) (.58) (.58) (.57)
Net asset value, end of period $ 8.43 8.44 8.50 7.88 8.59 8.34 8.15 7.98 7.96 7.76
================================================================================
Total Return 5.68% 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) $336.4 321.1 307.4 269.9 276.4 211.3 167.2 132.8 110.0 85.2
Ratio of expenses to average net assets .15% .16% .17%(b) .16% .18% .19% .21% .23% .25% .29%
Ratio of net investment income to average net
assets 5.61% 5.76% 5.80% 5.80% 5.84% 6.36% 6.75% 7.30% 7.42% 7.36%
Portfolio turnover rate 6% 6% 7% 8% 5% 4% 2% 8% 7% 2%
Number of shares outstanding at end of
period (millions) 39.9 38.0 36.2 34.3 32.2 25.3 20.5 16.6 13.8 11.0
</TABLE>
Note: (a) Distributions representing less than $.01 were distributed in
1996, 1993 and 1992.
(b) The ratio based on net custodian expenses would have been .16% in
1995
--------------------------
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<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
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<PAGE>
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 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 cancelled.
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
-4-
<PAGE>
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.
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 proposal 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 re-evaluate its
investment objective and policies, submitting for shareowner approval any
significant changes that seem appropriate
-5-
<PAGE>
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 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
(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. The Fund will accept investments by letter
from a shareowner which provides clear instructions and indicates the account
registration and account number. 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 compensation deduction changes by letter or
facsimile 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
purchases 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.
-6-
<PAGE>
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; Martin Luther King, Jr. Day;
Presidents' 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 on December 24, 1998. 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 at amortized cost which
approximates market value. 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,
facsimile, 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
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<PAGE>
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 sent 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 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 or by
facsimile.
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 sent 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,
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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,
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 a redemption
is paid in kind, the redeeming shareowner may incur brokerage fees in selling
the securities received.
Payment for shares redeemed will be sent 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 sending 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 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 closings, (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.
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<PAGE>
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; (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); (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.
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 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 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.
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<PAGE>
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 or by facsimile.
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 responsibilities 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 in 1988.
Presently, Mr. Moser is a Director and a Senior 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 year: Investment 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
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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 advisers 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. 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>
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, 1998
- -----------------------------------------------------------------------------
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, 1998, 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.
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TABLE OF CONTENTS
PAGE
Financial Information 2
Investment Objective and Policies 2
Investment Restrictions 3
Purchase and Redemption of Fund Shares 4
Determination of Net Asset Value 4
Investment Advisory and Other Services 4
Management Services Agreement 4
Service Agreement 5
Underwriting Agreement 5
Transfer Agent Agreement 5
Performance Information 6
Portfolio Transactions 6
Additional Tax Considerations 7
Directors and Officers 8
General Information 9
Appendix 11
<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, 1997, 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 at no charge 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.
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<PAGE>
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
procedures 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;
(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.
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<PAGE>
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.
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 including a majority of the directors who are not
interested persons of any party to such agreement 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.
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<PAGE>
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 0.20% of the first $50 million of average net assets, 0.15% of the
next $50 million of average net assets and 0.10% 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
0.40% of the average net assets of the Fund on an annual basis.
For the fiscal years ended November 30, 1997, 1996 and 1995, the Manager
earned $400,859, $385,258 and $366,394, 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
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, malls 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.
-5-
<PAGE>
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 period 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
For example, as of November 30, 1997 the Average Annual Total Return on a
$ 1,000 investment in the Fund for the following periods was:
Average Annual
Total Return
--------------
1 year 5.67%
5 years 6.20
10 years 7.74
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. Indexes are unmanaged and
do not include transaction costs.
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
-6-
<PAGE>
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 mutual 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 mutual 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 mutual funds and other State Farm Companies and with their
transactions.
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 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 Review 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.
-7-
<PAGE>
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. Age 47.
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. Age 61.
Albert H. Hoopes, Director
Attorney at Law. Address: 1001 North Main Street, Bloomington,
Illinois 61701. Age 83.
Thomas M. Mengler, Director
Dean, University of Illinois College of Law since August, 1993; Assistant
Dean prior to August, 1993. Address: 202 Law Building, 504 East
Pennsylvania Avenue, Champaign, Illinois 61820. Age 44.
Davis U. Merwin, Director
Investor. Address: P.O. Box 8, Bloomington, Illinois 61702. Age 69.
James A. Shirk, Director
Director and President, Beer Nuts, Inc. Address: 103 N. Robinson,
Bloomington, Illinois 61701. Age 54.
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. Age 55.
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 Senior
Vice President, State Farm Investment Management Corp. Age 53.
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.
Age 55.
Michael L. Tipsord, Assistant Secretary
Executive Assistant-Operations, State Farm Mutual Automobile Insurance
Company, since 1997; Assistant Controller from 1996-1997; Director of
Accounting from 1995-1996; Staff Associate in the Controllers' Department
from 1991-1995. Assistant Secretary, State Farm Investment Management
Corp. Age 38.
Jerel S. Chevalier, Assistant Secretary-Treasurer
Director-Mutual Funds, State Farm Mutual Automobile Insurance Company.
Assistant Treasurer, State Farm Investment Management Corp.; since 1994,
Assistant Secretary-Treasurer, State Farm Investment Management Corp. Age
59.
Patricia L. Dysart, Assistant Secretary
Assistant Tax Counsel, State Farm Mutual Automobile Insurance Company.
Since 1995, Assistant Secretary, State Farm Investment Management Corp.
Age 34.
*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 2.1 % of the Fund's
outstanding shares on February 28, 1998.
-8-
<PAGE>
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.
Directors or officers who are interested persons of the Fund do not receive
any compensation from the Fund for their services to the Fund. The Directors
who are not interested persons of the Fund received a fee of $200 for each
meeting of the Board of Directors attended during the first quarter of 1997,
and $300 for each meeting attended since the second quarter of 1997. Such fees
totaled $3,300 during the year ended November 30, 1997 for the board meetings
held during the year.
Directors and officers of the Fund do not receive any benefits from the Fund
upon retirement nor does the Fund accrue any expenses for pension or
retirement benefits.
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION THE FUND AND OTHER STATE
NAME OF PERSON FROM THE FUND FARM FUNDS*
<S> <C> <C>
- -----------------------------------------------------------------------------
Edward B. Rust, Jr. $ 0 $ 0
- -----------------------------------------------------------------------------
Albert H. Hoopes $ 1,100 $12,000
- -----------------------------------------------------------------------------
Roger S. Joslin $ 0 $ 0
- -----------------------------------------------------------------------------
Thomas M. Mengler** $ 0 $ 0
- -----------------------------------------------------------------------------
Davis U. Merwin $ 1,100 $12,000
- -----------------------------------------------------------------------------
James A. Shirk $ 1,100 $12,000
- -----------------------------------------------------------------------------
</TABLE>
* The State Farm Funds are the Fund, State Farm Growth Fund, Inc., State Farm
Balanced Fund, Inc., State Farm Interim Fund, Inc. and State Farm Variable
Product Trust.
** Did not serve as a Director of the Fund or as a director of the other State
Farm Funds during 1997.
GENERAL INFORMATION
OWNERSHIP OF SHARES
As of February 28, 1998, 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, New York 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.
-9-
<PAGE>
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.
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.
OTHER INFORMATION
Like other mutual funds, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by the Manager and other service providers do not
properly process and calculate date-related information from and after January
1, 2000. The Manager is taking steps that it believes are reasonably designed
to address this problem in the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Fund's other major service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on
the Fund.
-10-
<PAGE>
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
credit-worthiness 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 my 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 risk appear somewhat greater than in Aaa securities.
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.
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.
-11-
<PAGE>
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.
RATINGS BY S&P
MUNICIPAL BONDS:
AAA. Bonds rated AAA have the highest rating. Capacity to pay interest
and repay principal is extremely strong.
-12-
<PAGE>
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 rate 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 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- I have very strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics are designated as SP-1+.
SP-2. Notes rated PS-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).
-13-
<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+.
-14-
<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 A of this amendment,
Financial Highlights
Financial statements included in Part B of this amendment:
Statement of assets and liabilities - November 30, 1997*
Statement of operations for each of the two years in the
period ended November 30, 1997*
Statement of changes in net assets for each of the two years
in the period ended November 30, 1997*
Portfolio of investments - November 30, 1997*
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,
1997.
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, 1997. 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, N-1 or
N-1A no. 2-58161.
1. Amended and restated articles of incorporation of
registrant*
2. By-laws of registrant (as amended and restated
March 13, 1998)
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 20, 1998
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, 1997
-------------- ------------------------
Common Stock, $1 par 4,249
Item 27. Indemnification
Section 2-418 of the Maryland General Corporation Law authorizes the
registrant to indemnify its directors and officers under specified
circumstances.
Article XVII of the by-laws of the registrant, as amended, provides
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 Moser, Director and Senior 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.
Paul N. Eckley, Senior Vice President *
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
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
Item 32. Undertakings
(a) Not applicable
(b) Not applicable
(c) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareowners, upon request and without charge.
<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
(800) 447-0740
November 30, 1997
This report is not to be distributed unless preceded or accompanied by a
prospectus
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
Dear Shareowner:
General movements of interest rates over the course of your Fund's
fiscal year fell rather distinctly into two periods. Interest rates rose
during the first half of the year as the Federal Reserve nudged short-term
interest rates a little higher and investors worried that the rapid pace of
general U.S economic growth might lead to higher inflation. The last half of
1997 produced declining interest rates while investors contemplated
developments in international markets and observed moderate levels of actual
inflation.
At the end of the year, yields on the municipal securities held by
your Fund were slightly lower than they were one year ago. The net asset value
of the Fund stands at $8.43 versus $8.44 when the 1996 fiscal year closed.
The Fund's total return, which considers the reinvestment of dividends and the
change in net asset value, for the year was 5.7%. Typically, one would expect
the net asset value to rise somewhat when yields decline. However, that was
not the case this year because we choose to manage the portfolio in a way
which emphasizes the receipt of tax-exempt investment income rather than
capital appreciation. We believe that most shareholders own the Municipal Bond
Fund primarily to receive the benefits of a dependable flow of tax-exempt
dividend income so have decided to manage the assets accordingly.
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:
Lehman Municipal
Municipal Bond Fund Bond Index*
1987 10,000 10,000
1988 11,011 11,063
1989 12,158 12,281
1990 13,104 13,227
1991 14,315 14,584
1992 15,603 16,046
1993 17,031 17,826
1994 16,593 16,890
1995 18,951 20,082
1996 19,940 21,263
1997 21,072 22,884
* 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 least $50 million; have an amount outstanding of 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.
2
<PAGE>
A major factor affecting money and capital markets since July has been
the currency turmoil in Asian countries. As the currencies of developing Asian
countries have plunged, stock markets in several of the countries have
plummeted 50-60% this year in U.S. dollar terms. Bond markets in these
countries have also suffered substantial declines while interest rates rose
and financial difficulties intensified. The turbulence in the world's
financial markets has caused an increased demand for U.S. Treasury securities
as investors seek safety.
Despite municipal securities trading only in U.S. markets, the
international situation has affected the municipal market indirectly.
Municipal bonds are regularly compared to U.S. Treasury securities to judge
their relative attractiveness as an investment. The demand for U.S. Treasury
securities has resulted in their yields recently declining more than those of
municipal bonds. Consequently, the yield of a high quality municipal bond
maturing in 20 years is now around 85% of that of a U.S. Treasury bond having
a comparable maturity. This ratio had been hovering around the 80% level for
most of 1996 and 1997. Over the last couple of years property and casualty
insurance companies had been the principal buyers of municipal bonds, but we
are now seeing an increase in demand from other investors. The higher relative
yield of municipal bonds available presently is surely a part of the reason
for the heightened demand.
The composition of your Fund's investments has not changed much since
last November. Municipal bonds purchased over the last year had maturities
ranging from 12-15 years. Good quality bonds dominate the portfolio. About 82%
of the long-term assets are rated AA or better, and another 6% are not rated
but are considered to be of equivalent quality since those issues are backed
by U.S. Treasury securities. The entire portfolio of the Fund falls into the
top three rating categories when the aforementioned issues are included at
appropriate equivalent ratings. The average weighted maturity of the Fund's
portfolio is approximately 7.25 years with all maturities spread out over the
next 15 years.
An intermediate maturity structure has been the orientation of the
Fund's portfolio for several years. Such a structure seems particularly
appropriate at the moment since bonds with an intermediate maturity provide
about 80-85% of the yield available from bonds with long maturities.
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 high quality
investments of the Fund should provide a dependable flow of dividend income
through all types of markets.
The Fund declares a dividend each day from its net investment income
which is payable on the last day of the calendar quarter. All dividends are
automatically invested in shares of the Fund unless you have advised State
Farm Investment Management Corp. otherwise in writing.
Sincerely,
/s/ Kurt G. Moser /s/ Julian R. Bucher
Kurt G. Moser Julian R. Bucher
Vice President Vice President
December 18, 1997
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, 1997, the related statements of operations and changes
in net assets for each of the two years in the period then ended, and the
financial highlights for each of the fiscal years since 1988. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of November 30, 1997, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
State Farm Municipal Bond Fund, Inc. at November 30, 1997, the results of its
operations and changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the fiscal years
since 1988, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 12, 1997
4
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
RATING
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
LONG-TERM MUNICIPAL BONDS (96.4%):
SECURED BY U.S. TREASURY OBLIGATIONS (17.4%):
<S> <C> <C> <C>
$ 45,000 San Antonio, Texas Water System Rev. Refunding Bonds, Ser. 1992, 5.80%,
5-15-1999 (Escrowed to maturity) Aaa $ 46,151
500,000 Orlando Utilities Commission, Florida Water and Electric Rev., Ser. 1983,
9.60%, 10-1-1999 (Escrowed to maturity) Aaa 548,975
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
@ 100) Aaa 2,077,860
1,000,000 State of Texas Public Finance Authority General Obligation Bonds, Ser.
1990A, 7.00%, 10-1-2000 (Prerefunded to 10-1-1999 @ 100) AA 1,051,380
2,840,000 Washington Suburban Sanitary District of Maryland, General Obligation
Bonds, 7.00%, 12-1-2001 (Prerefunded to 12-1-1998 @ 102) Aaa 2,982,880
2,250,000 Pima County, Arizona Unified School District No. 1, Tucson School
Improvement Bonds, Ser. 1990 B, 6.90%, 7-1-2002 (Prerefunded
to 7-1-2000 @ 101) A 2,422,688
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 @ 101) A+ 3,186,690
475,000 Johnson County Water District No. 1, Kansas Water Rev., Ser. 1982A,
10.25%, 8-1-2002 (Escrowed to maturity) Aaa 586,102
3,500,000 Milwaukee, Wisconsin Metropolitan Sewerage District General Obligation
Capital Purpose Bonds, Ser. 1990A, 6.70%, 10-1-2002 (Escrowed to
Maturity) NR 3,857,315
1,885,000 Federal Way School District No. 210, King County, Washington Unlimited
Tax General Obligation Refunding Bonds, Series 1987, 6.75%, 12-1-2002
(Prerefunded to 12-1-97 @ 100) A1 1,885,754
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 @ 100) Aaa 900,810
3,000,000 City of Lakeland, Florida Electric and Water Rev., Ser. 1989, 6.90%,
10-1-2003 (Prerefunded to 10-1-1999 @ 102) Aa 3,207,330
2,620,000 Cherry Creek School District No. 5, Arapahoe County,
Colorado General Obligation Improvement Bonds, Ser. 1990, 7.00%,
12-15-2003 (Prerefunded to 12-15-2000 @ 101) Aa2 2,857,424
2,000,000 Jefferson County, Colorado School District No. R-1 General Obligation Bonds,
Ser., 1992, 5.75%, 12-15-2003 (Prerefunded to 12-15-2002 @ 101) Aaa 2,148,420
2,000,000 Fargo, North Dakota Water Revenue of 1993, 5.00%, 1-1-2004
(Escrowed to Maturity) Aaa 2,065,640
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 @ 102) Aaa 2,047,300
2,000,000 Jackson, Mississippi General Obligation Bonds, Ser. 1988, 7.50%, 5-1-2004
(Prerefunded to 5-1-1998 @ 100) NR 2,030,680
3,500,000 City of Los Angeles, California Wastewater System Rev. Bonds, Ser. 1990 B,
6.90%, 6-1-2004 (Prerefunded to 6-1-2000 @ 102) Aaa 3,803,800
5
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
RATING
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
SECURED BY U.S. TREASURY OBLIGATIONS (Continued)
$ 3,000,000 Omaha Public Power District of Nebraska, Electric Systems Rev., Ser. A,
6.70%, 2-1-2005 (Prerefunded to 2-1-2000 @ 101.5) AA $ 3,200,790
2,500,000 King County, Washington, Health Care Capital Improvement Bonds
(Harborview Project), Ser. 1988 B, 7.30%, 12-1-2005 (Prerefunded to
12-1-1998 @ 100) NR 2,582,400
1,900,000 Fort Worth Independent School District, Texas School Building Unlimited
Tax Bonds, Ser. 1989, 6.75%, 2-15-2006 (Prerefunded to
2-15-1999 @ 100) AAA 1,963,745
2,600,000 Washington Public Power Supply System Nuclear Project No. 1,
Rev. Refunding Bonds, Ser. 1989A, 7.50%, 7-1-2007
(Prerefunded to 7-1-1999 @ 102) Aaa 2,784,756
2,000,000 State of Texas Public Financial Authority General Obligation Bonds, Ser.
1988A, 6.50%, 10-1-2007 (Prerefunded to 10-1-1998 @ 100) AA 2,043,260
1,500,000 Washington Public Power Supply System Nuclear Project No. 2, Rev.
Refunding Bonds, Ser. 1990 A, 7.625%, 7-1-2008 (Prerefunded to
7-1-2000 @ 102) Aaa 1,653,180
6,000,000 Omaha Public Power District, Nebraska Electric System Revenue Bonds,
1992, Series B, 6.15%, 2-1-2012 (Escrowed to Maturity) Aa2 6,686,640
--------------
58,621,970
GENERAL OBLIGATIONS (58.9%):
1,100,000 Stillwater, Minnesota Independent School District #834, General
Obligation School Building Bonds, Ser. 1991, 6.25%, 2-1-1998 Aaa 1,104,752
3,000,000 Scottsdale Unified School District No. 48 of Maricopa County, Arizona
Refunding Bonds, Ser. 1991, 6.75%, 7-1-1998 Aa2 3,051,750
1,350,000 Stillwater, Minnesota Independent School District #834, General
Obligation School Building Bonds, Ser. 1991, 6.25%, 2-1-1999 Aaa 1,386,234
400,000 State of California, Variable Purpose General Obligation Bonds, 9.00%,
4-1-1999 A1 426,104
150,000 Oregon Veterans' Welfare General Obligation Bonds, Ser. LXIV, 9.00%,
4-1-1999 Aa2 159,810
2,500,000 Austin Independent School District, Texas Unlimited Tax Refunding
Bonds, Ser. 1991, 6.20%, 8-1-1999 Aaa 2,590,000
1,000,000 State of Texas Public Finance Authority General Obligation Bonds, Ser.
1990A, 7.00%, 10-1-1999 Aa2 1,053,390
3,000,000 Washington Suburban Sanitary District, Maryland Water Supply Refunding
Bonds of 1991, 6.00%, 11-1-1999 Aa1 3,113,130
200,000 Charleston, Illinois Water Works Improvement Bonds, 8.00%, 1-1-2000 A 214,718
3,000,000 State of California Various Purpose General Obligation Bonds, 5.90%, 2-1-2000 A1 3,114,510
2,500,000 DuPage Water Commission, Illinois General Obligation Water Refunding
Bonds, Ser. 1992, 5.85%, 3-1-2000 Aaa 2,592,400
1,000,000 State of Texas Veterans' Land Board General Obligation Bonds, Ser. 1984,
9.00%, 12-1-2000 Aa2 1,095,210
1,885,000 Anoka County, Minnesota General Obligation Capital Improvement
Refunding Bonds, Ser. 1992C, 5.20%, 2-1-2001 A1 1,941,022
6
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
RATING
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (Continued)
$ 1,200,000 Shelby County, Tennessee General Obligation Refunding Bonds, 1992
Ser. B, 5.20%, 3-1-2001 Aa2 $ 1,238,016
400,000 State of California General Obligation Veterans Bonds, Ser. AL, 9.60%,
4-1-2001 A1 467,056
2,200,000 City and County of Honolulu, Hawaii General Obligation Refunding
Bonds, 1992 Ser. 1, 5.60%, 6-1-2001 Aa2 2,296,712
2,000,000 School District of Leon County, Florida General Obligation Refunding
Bonds, Ser. 1991, 5.85%, 7-1-2001 A1 2,114,500
2,000,000 Howard County, Maryland Consolidated Public Improvement Refunding
Bonds, Ser. 1991B, 5.80%, 8-15-2001 Aaa 2,116,760
2,110,000 State of Nevada General Obligation (Limited Tax) Hoover Uprating
Refunding Bonds, Ser. 1992, 6.00%, 10-1-2001 Aa2 2,246,580
900,000 Monroe County Jail, Indiana, First Mortgage Refunding Bonds, Series
1993, 4.90%, 1-1-2002 A1 916,668
1,535,000 Columbus, Ohio Sewer Improvement No. 27 Refunding Bonds, Ser. 1991,
5.90%, 2-15-2002 Aaa 1,635,435
1,000,000 Williamson County, Tennessee Public Works Refunding Bonds, Ser. 1992,
5.65%, 3-1-2002 Aa1 1,054,400
1,500,000 City of Tulsa, Oklahoma General Obligation Refunding Bonds of 1993,
5.05%, 6-1-2002 Aa2 1,550,055
925,000 Monroe County Jail, Indiana First Mortgage Refunding Bonds, Series 1993,
4.90%, 7-1-2002 A1 944,018
2,100,000 Jackson Public School District, Mississippi General Obligation School
Bonds, Ser. 1992, 5.80%, 7-1-2002 A1 2,228,247
1,000,000 Pima County, Arizona General Obligation Refunding Bonds, Ser. 1992,
6.30%, 7-1-2002 Aa 1,086,050
1,500,000 County of Ramsey, Minnesota General Obligation Capital Improvement
Refunding Bonds, Ser. 1992C, 5.40%, 12-1-2002 Aaa 1,577,835
1,505,000 Anchorage, Alaska General Obligation General Purpose Refunding Bonds,
4.60%, 2-1-2003 Aaa 1,517,341
2,000,000 Lake County, Illinois Forest Preserve District General Obligation
Refunding Bonds, Ser. 1992B, 5.70%, 2-1-2003 Aa2 2,122,940
1,050,000 Oklahoma City, Oklahoma General Obligation Bonds, Series 1993, 5.15%,
5-1-2003 Aa2 1,091,234
2,000,000 Nashville and Davidson County, Tennessee General Obligation Refunding
Bonds of 1993, 5.00%, 5-15-2003 Aa2 2,062,640
2,000,000 State of Illinois General Obligation Refunding Bonds, Series of June 1993,
5.00%, 6-1-2003 Aa3 2,057,180
1,500,000 Municipality of Anchorage, Alaska 1993 General Obligation Refunding
School Bonds, Series B, 4.90%, 9-1-2003 Aaa 1,538,490
2,000,000 Texas Public Finance Authority, State of Texas General Obligation
Refunding Bonds, Ser. 1992A, 5.70%, 10-1-2003 Aa2 2,141,140
2,000,000 State of Wisconsin General Obligation Refunding Bonds of 1993, Series 1,
5.30%, 11-1-2003 Aa2 2,098,320
2,000,000 State of Wisconsin General Obligation Refunding Bonds of 1993, Series 3,
4.75%, 11-1-2003 Aa2 2,041,360
7
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
RATING
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (Continued)
$ 2,520,000 Federal Way School District No. 210, King County, Washington Unlimited
Tax General Obligation and Refunding Bonds, Series 1993, 5.25%, 12-1-2003 Aaa $ 2,633,450
2,025,000 County of DuPage, Illinois General Obligation Refunding Bonds (Alternate
Rev. Source - Stormwater Project), 5.10%, 1-1-2004 Aaa 2,095,612
2,000,000 Indianapolis, Indiana Local Public Improvement Bond Bank, Series 1993A
Bonds, 5.25%, 1-10-2004 Aaa 2,082,640
2,100,000 Cherokee County School Systems, Georgia General Obligation School
Series 1993, 4.90%, 2-1-2004 A1 2,153,865
2,300,000 Osseo Area Schools, Minnesota, General Obligation Refunding Bonds,
Series 1993, 4.60%, 2-1-2004 A1 2,324,518
2,300,000 Indianapolis, Indiana Local Public Improvement Bond Bank Refunding
Bonds, Series 1993 B, 4.70%, 2-15-2004 Aaa 2,322,080
1,600,000 County of Buncombe, North Carolina Refunding Bonds, Series 1993,
5.10%, 3-1-2004 Aa2 1,663,296
1,050,000 Oklahoma City, Oklahoma General Obligation Bonds, Series 1993, 5.25%,
5-1-2004 Aa2 1,093,176
2,000,000 Davis County School District, Davis County, Utah General Obligation
Refunding Bonds, Series 1993A, 4.50%, 6-1-2004 Aaa 2,007,840
2,000,000 Alachua County School District, Alachua County, Florida General
Obligation Refunding Bonds, Series 1994, 4.50%, 7-1-2004 Aaa 2,015,820
2,000,000 Deer Valley Unified School District No. 97 of Maricopa County, Arizona
School Improvement Bonds, Project of 1992, Series A (1993), 5.125%,
7-1-2004 Aaa 2,085,660
1,205,000 DeKalb County School District, Georgia General Obligation Refunding
Bonds, Series 1993, 5.10%, 7-1-2004 Aa 1,252,091
1,000,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1990A, 7.10%, 7-1-2004 A1 1,150,320
1,540,000 Joint School District No. 2, Ada and Canyon Counties, Idaho, General
Obligation School Bonds, Series 1994, 5.00%, 7-30-2004 Aa 1,597,381
3,215,000 State of Minnesota General Obligation State Refunding Bonds, 5.125%,
8-1-2004 Aaa 3,332,476
2,000,000 Harris County, Texas Road and Refunding Bonds, Series 1993, 4.70%,
10-1-2004 Aa2 2,035,040
2,000,000 City of Seattle, Washington Unlimited Tax General Obligation Refunding
Bonds, 1993, 4.80%, 12-1-2004 Aa1 2,034,740
1,800,000 Nashville and Davidson County, Tennessee General Obligation Refunding
Bonds of 1993, 5.00%, 5-15-2005 Aa2 1,858,842
1,625,000 Charleston County, South Carolina General Obligation Bonds of 1994
(ULT), 5.40%, 6-1-2005 Aa3 1,721,606
1,100,000 Municipality of Anchorage, Alaska 1994 General Obligation School Bonds,
5.40%, 7-1-2005 Aaa 1,159,444
2,000,000 Oklahoma City, Oklahoma General Obligation Refunding Bonds, Series
1993, 5.30%, 8-1-2005 Aa2 2,108,120
1,600,000 Natrona County, Wyoming School District No. 1 General Obligation
Bonds, Ser. 1994, 5.45%, 7-1-2006 Aaa 1,677,488
2,340,000 City of Phoenix, Arizona General Obligation Refunding Bonds, Ser. 1993 A,
5.30%, 7-1-2006 Aa1 2,472,140
2,125,000 Southwest Allen, Indiana High School Building Corp., 1st Mortgage
Refunding Bonds, Series 1996B, 4.85%, 7-15-2006 Aaa 2,154,835
2,000,000 State of California Various Purpose General Obligation Bonds, 6.00%,
10-1-2006 A1 2,218,360
8
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
RATING
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
GENERAL OBLIGATIONS (Continued)
$ 3,215,000 Forsyth County School District, Georgia, General Obligation Bonds, Series
1995, 5.05%, 7-1-2007 Aaa $ 3,323,571
2,000,000 Arapahoe County School District #6, Colorado, Littleton Public Schools
General Obligation Improvement Bonds, Series 1995A, 5.00%, 12-1-2007 Aa 2,066,860
2,780,000 Salt Lake County, Utah General Obligation Jail Bonds, Series 1995, 5.00%,
12-15-2007 Aaa 2,865,374
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 2,423,978
2,000,000 State of Wisconsin General Obligation Bonds of 1995, Series A, 6.00%,
5-1-2008 Aa2 2,154,900
2,000,000 State of Florida, State Board of Education, Public Education Capital Outlay
Refunding Bonds, 1995 Series C, 5.125%, 6-1-2008 Aa2 2,059,060
1,000,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1994A, 7.10%, 7-1-2008 A1 1,196,610
1,700,000 State of South Carolina General Obligation State Highway Bonds, Series
1995, 5.10%, 8-1-2008 Aaa 1,760,316
3,000,000 State of Texas Public Finance Authority General Obligation Refunding
Bonds, Series 1996B, 5.40%, 10-1-2008 Aa2 3,145,950
4,000,000 County of Wake, North Carolina, General Obligation School Bonds,
Series 1997, 4.90%, 3-1-2009 Aaa 4,049,480
1,200,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1994A, 7.00%, 7-1-2009 A1 1,431,444
3,590,000 State of Georgia, General Obligation Bonds, 1996 C, 6.25%, 8-1-2009 Aaa 4,075,117
1,700,000 State of South Carolina General Obligation State Highway Bonds, Series
1995, 5.25%, 8-1-2009 Aaa 1,766,572
4,000,000 City and County of Honolulu, Hawaii, General Obligation Bonds,
Series 1996A, 5.40%, 9-1-2009 Aaa 4,168,840
4,000,000 State of Illinois, General Obligation Bonds, Series September 1996,
5.45%, 9-1-2009 Aaa 4,185,400
4,250,000 Mesa Unified School District No. 4 of Maricopa County, Arizona,
School Improvement Bonds, Project of 1995, Series D (1997),
4.75%, 7-1-2010 Aaa 4,190,415
2,500,000 Maricopa County, Arizona Unified School District No. 69, Paradise Valley
School Improvement Bonds, Ser. 1994A, 7.00%, 7-1-2010 A1 2,989,000
2,500,000 State of Wisconsin General Obligation Refunding Bonds of 1993, Ser. 2,
5.125%, 11-1-2010 Aa2 2,565,375
2,540,000 Mesa County Valley School District No. 51, County of Mesa, State of Colorado,
General Obligation Bonds, Series 1996, 5.30%, 12-1-2010 Aaa 2,620,035
3,000,000 State of Hawaii General Obligation Bonds of 1992, Series BW, 6.375%, 3-1-2011 Aa3 3,421,290
5,000,000 State of Louisiana, General Obligation Bonds, Series 1997A, 5.375%, 4-15-2011 Aaa 5,156,600
3,800,000 Northville Public Schools, Michigan, 1997 Sch. Bldg. & Site & Ref., 5.10%,
5-1-2011 Aaa 3,810,564
2,000,000 Washington and Clackamas Counties School District #23J (Tigard-Tualatin),
Oregon, General Obligation Bonds, Series 1995, 5.55%, 6-1-2011 A1 2,065,700
2,000,000 State of Georgia, General Obligation Bonds, Series 1995C, 5.70%, 7-1-2011 Aaa 2,161,500
1,125,000 The State of Delaware General Obligation Bonds, Series 1994B, 6.00%,12-1-2011 Aa1 1,199,756
3,000,000 State of Georgia General Obligation Bonds, Series 1995B, 5.75%, 3-1-2012 Aaa 3,249,600
3,000,000 State of Georgia, General Obligation Bonds, 1997A, 6.25%, 4-1-2012 Aaa 3,403,620
5,000,000 State of Ohio, Full Faith & Credit General Obligation Infrastructure
Improvement Bonds, Series 1997, 5.35%, 8-1-2012 Aa1 5,153,100
4,500,000 State of Washington General Obligation Bonds, Series 1993A, 5.75%, 10-1-2012 Aa1 4,865,175
1,125,000 The State of Delaware General Obligation Bonds, Series 1994B, 6.00%, 12-1-2012 Aa1 1,205,280
--------------
9 197,967,329
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
RATING
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
MUNICIPAL REVENUE (19.2%):
$ 2,000,000 City of St. Petersburg, Florida Public Utility Refunding
Rev. Bonds, Ser. 1991, 6.10%, 10-1-1998 Aa $ 2,037,380
3,000,000 City of Colorado Springs, Colorado Utilities System Refunding Rev., Ser
1991A, 6.10%, 11-15-1998 Aa2 3,063,870
1,445,000 San Antonio, Texas Water System Rev. Refunding Bonds, Ser. 1992, 5.80%,
5-15-1999 Aaa 1,481,747
1,250,000 Washington Public Power Supply System Nuclear Project No.3, Refunding
Rev. Bonds, Ser. 1991A, 6.25%, 7-1-2000 Aa1 1,310,800
1,250,000 State of New York Power Authority General Purpose Bonds, Ser. Z, 6.00%,
1-1-2001 Aa2 1,316,875
1,400,000 San Diego County Water Authority Water Rev. Certificates of Participation,
Ser. 1991A, 6.00%, 5-1-2001 Aa 1,482,432
2,000,000 Nashville and Davidson County, Tennessee Electric System Rev. Bonds,
1992 Series B, 5.50%, 5-15-2002 Aa 2,100,760
1,000,000 Washington Public Power Supply System Nuclear Project No.1, Rev. Refunding
Bonds, Ser. 199OC, 7.70%, 7-1-2002 Aa1 1,133,050
1,080,000 Charleston, South Carolina Waterworks and Sewer Systems Rev. Refunding Bonds,
Ser. 1986A, 6.90%, 1-1-2003 A1 1,098,878
2,000,000 City of Des Moines, Iowa Sewer Rev. Bonds, Ser. 1992D, 6.00%, 6-1-2003 Aaa 2,130,540
2,500,000 City of Albuquerque, New Mexico Joint Water and Sewer Refunding Rev. Bonds,
Ser. 1990B, 7.00%, 7-1-2003 Aa3 2,715,300
2,000,000 Washington Public Power Supply System, Nuclear Project No.3 Refunding
Revenue Bonds, Series 1993C, 4.80%, 7-1-2003 Aa1 2,026,360
2,000,000 City of Lincoln, Nebraska, Water Revenue and Refunding Bonds, Series 1993,
4.90%, 8-15-2003 Aa2 2,056,060
2,850,000 City of Lincoln, Nebraska, Electric System Revenue Refunding Bonds,
1993 Series A, 4.70%, 9-1-2003 Aa 2,900,189
1,500,000 Nashville and Davidson County, Tennessee Water and Sewer Revenue
Refunding Bonds, Series 1993, 4.90%, 1-1-2004 Aaa 1,540,470
1,710,000 Southern Minnesota Municipal Power Agency, Power Supply System
Revenue Bonds, Series 1993 B, 4.60%, 1-1-2004 A2 1,708,136
1,500,000 Municipal Electric Authority of Georgia General Power Rev. Bonds,
1993A Series, 5.00%, 1-1-2004 A3 1,529,925
2,000,000 City of Dallas, Texas Waterworks and Sewer System Rev. Refunding Bonds,
Series 1993, 4.90%, 4-1-2004 Aa2 2,042,300
2,045,000 City of Iowa City, Johnson County, Iowa Sewer Rev. Bonds, 5.875%, 7-1-2004 Aaa 2,165,287
2,000,000 City of Jackson, Mississippi Water and Sewer System Rev. Refunding Bonds,
Series 1993-A, 4.85%, 9-1-2004 Aaa 2,046,160
1,685,000 Hampton Roads Sanitation District, Virginia Wastewater Refunding and
Capital Improvement Revenue Bonds, Series 1993, 4.70%, 10-1-2004 Aa 1,714,521
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 Aa3 3,071,310
2,200,000 The Water Works and Sewer Board, Birmingham, Alabama Water and
Sewer Revenue Bonds, Series 1994, 4.75%, 1-1-2005 Aa 2,231,680
1,500,000 Omaha, Nebraska Public Power District Electric System Rev. Bonds, 1993,
Series B, 5.10%, 2-1-2005 Aa2 1,557,405
1,325,000 Winston-Salem, North Carolina Water & Sewer System Revenue Bonds,
Series 1995B, 5.00%, 6-1-2007 Aa2 1,365,452
10
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
RATING
PRINCIPAL (MOODY'S
AMOUNT ISSUER OR S & P) VALUE
MUNICIPAL REVENUE (Continued)
$ 2,830,000 Sacramento County, California Sanitary District Financing Authority
Revenue Bonds, 1995, 5.00%, 12-1-2007 Aa3 $ 2,922,286
4,500,000 Nashville and Davidson County, Tennessee Water & Sewer Revenue
Refunding Bonds, Series 1996, 5.25%, 1-1-2008 Aaa 4,711,680
1,665,000 Winston-Salem, North Carolina Water & Sewer System Revenue Bonds,
Series 1995B, 5.10%, 6-1-2008 Aa2 1,714,068
1,500,000 Sacramento County, California Sanitary District Financing Authority
Revenue Bonds, 1995, 5.00%, 12-1-2008 Aa3 1,534,395
4,000,000 City of Portland, Oregon, Sewer System Revenue Refunding Bonds,
1997 Series A, 5.00%, 6-1-2011 Aaa 4,012,000
1,840,000 City of Dallas, Texas Waterworks and Sewer System Revenue Bonds, Series
1994A, 6.375%, 10-1-2012 Aa2 1,972,958
--------------
64,694,274
INDUSTRIAL REVENUE - UTILITIES (0.9%):
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 3,155,730
--------------
Total long-term municipal bonds (cost: $308,098,819) 324,439,303
SHORT-TERM INVESTMENTS (2.8%):
6,000,000 U.S. Treasury bills, 4.92% to 5.19% effective yield, due December, 1997 to
February, 1998 5,963,320
3,300,000 General Motors Acceptance Corp., 5.60%, due December, 1997 3,301,027
--------------
Total short-term investments (cost: $9,263,335) 9,264,347
--------------
TOTAL INVESTMENTS (99.2%) (cost: $317,362,154) 333,703,650
CASH AND OTHER ASSETS, LESS LIABILITIES (0.8%) 2,658,979
--------------
NET ASSETS (100.0%) $ 336,362,629
==============
</TABLE>
Note: (a) At November 30, 1997, net unrealized appreciation of $16,341,496
consisted entirely of gross unrealized appreciation based on
cost of $317,362,154 for federal income tax purposes.
(b) Ratings are unaudited. NR denotes no rating available.
11
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Investments, at value (cost $317,362,154) $ 333,703,650
Cash 338,833
Receivable for:
Interest $ 5,508,590
Shares of the Fund sold 70,608
Sundry 5,316 5,584,514
-------------
Prepaid expenses 15,773
-------------
Total assets 339,642,770
LIABILITIES AND NET ASSETS
Payable for:
Dividends to shareowners 2,778,489
Shares of the Fund redeemed 384,783
Other accounts payable (including $106,948 to Manager) 116,869
-------------
Total liabilities 3,280,141
-------------
Net assets applicable to 39,893,402 shares outstanding
of $1.00 par value common stock (100,000,000
shares authorized) $ 336,362,629
=============
Net asset value, offering price and redemption
price per share $ 8.43
=============
ANALYSIS OF NET ASSETS
Excess of amounts received from sales of shares
over amounts paid on redemptions of shares
on account of capital $ 320,021,133
Net unrealized appreciation of investments 16,341,496
-------------
Net assets applicable to shares outstanding $ 336,362,629
=============
</TABLE>
See accompanying notes to financial statements
12
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENTS OF OPERATIONS
Year ended November 30,
1997 1996
INVESTMENT INCOME:
Tax-exempt interest $ 18,341,212 17,621,142
Taxable interest 450,856 735,320
--------------------------
Total investment income 18,792,068 18,356,462
EXPENSES:
Investment advisory and management fees 400,859 385,258
Audit fees 22,724 21,106
Legal fees 1,984 3,006
Fidelity bond expense 4,158 4,433
Directors' fees 3,300 3,000
Reports to shareowners 3,204 5,141
Securities evaluation fees 18,314 19,874
Franchise taxes 17,859 16,602
Custodian fees 13,387 24,936
Other 17,873 18,775
--------------------------
Total expenses 503,662 502,131
Less: Custodian fees paid indirectly - 18,709
--------------------------
Net expenses 503,662 483,422
--------------------------
Net investment income 18,288,406 17,873,040
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on sales of investments - 121,825
Change in net unrealized appreciation (222,358) (1,805,995)
--------------------------
Net realized and unrealized gain on investments (222,358) (1,684,170)
--------------------------
Net change in net assets resulting from operations $ 18,066,048 16,188,870
==========================
See accompanying notes to financial statements
13
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED NOVEMBER 30,
1997 1996
From operations:
Net investment income $ 18,288,406 17,873,040
Net realized gain on sales of investments - 121,825
Change in net unrealized appreciation (222,358) (1,805,995)
--------------------------
Net change in net assets resulting from operations 18,066,048 16,188,870
Dividends to shareowners from:
Net investment income (per share $.47
in 1997, and $.48 in 1996) (18,288,406) (17,873,040)
Net realized gain (per share $.003 in 1997
and $.006 in 1996) (121,825) (214,926)
--------------------------
Total distributions to shareowners (18,410,231) (18,087,966)
From Fund share transactions:
Proceeds from shares sold 27,490,904 27,900,088
Reinvestment of ordinary income dividends
and capital gain distributions 14,256,886 13,618,482
--------------------------
41,747,790 41,518,570
Less payments for shares redeemed 26,190,599 25,886,170
--------------------------
Net increase in net assets from Fund
share transactions 15,557,191 15,632,400
--------------------------
Total increase in net assets 15,213,008 13,733,304
--------------------------
Net assets:
Beginning of year 321,149,621 307,416,317
--------------------------
End of year $336,362,629 321,149,621
==========================
See accompanying notes to financial statements
14
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. OBJECTIVE
The investment objective of the State Farm Municipal Bond Fund, Inc.
(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.
2. 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 at amortized cost which
approximates market value. Any securities not valued as described above are
valued at fair value as determined in good faith by the Board of Directors or
its delegate.
SECURITY TRANSACTIONS AND INTEREST INCOME -
Security transactions are accounted for on the trade date (date the
order to buy or sell is executed). Interest income is recorded on the accrual
basis; 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.
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 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.
CUSTODIAN FEES - For the period ended November 30, 1997, the Fund no
longer receives fee reductions for balances maintained with the custodian, as
interest on cash balances ($12,539) is reflected as income rather than an
offset to custodian fees. Custodian fees for the year ended November 30, 1996
were reduced based on the Fund's cash balances maintained with the custodian.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
15
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
3. TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory and management services agreement
with State Farm Investment Management Corp. (Manager) pursuant to which the
Fund pays the Manager an annual fee (computed on a daily basis and paid
quarterly) of .20% of the first $50 million of average net assets, .15% of the
next $50 million of average net assets and .10% of average net assets in
excess of $100 million. The Manager guarantees that all operating expenses of
the Fund, including 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 $400,859
for 1997 and $385,258 for 1996. 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, 1997, except for directors'
fees of $3,300 for 1997 and $3,000 for 1996 paid to the Fund's independent
directors.
4. INVESTMENT TRANSACTIONS
Investment transactions (exclusive of short-term investments) for each
of the two years ended November 30 were as follows:
1997 1996
Purchases $ 28,925,145 30,463,407
Proceeds from sales and maturities 17,572,918 17,540,000
============================
5. FUND SHARE TRANSACTIONS
Proceeds and payments on Fund shares as shown in the statement of
changes in net assets are in respect of the following number of shares:
YEAR ENDED NOVEMBER 30,
1997 1996
Shares sold 3,283,948 3,324,581
Shares issued in reinvestment of ordinary
income dividends and capital gain distributions 1,706,790 1,626,301
------------------------
4,990,738 4,950,882
Less shares redeemed 3,132,346 3,088,643
------------------------
Net increase in shares outstanding 1,858,392 1,862,239
========================
16
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 8.44 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 .47 .48 .48 .48 .50 .53 .54 .58 .58 .57
Net gain or losses on
securities (both realized
and unrealized) (.01) (.06) .62 (.69) .25 .19 .17 .02 .20 .18
-----------------------------------------------------------------------
Total from investment
operations .46 .42 1.10 (.21) .75 .72 .71 .60 .78 .75
Less Distributions
------------------
Net investment income (.47) (.48) (.48) (.48) (.50) (.53) (.54) (.58) (.58) (.57)
Capital gain (a) - - - (.02) - - - - - -
-----------------------------------------------------------------------
Total distributions (.47) (.48) (.48) (.50) (.50) (.53) (.54) (.58) (.58) (.57)
Net asset value, end of period $ 8.43 8.44 8.50 7.88 8.59 8.34 8.15 7.98 7.96 7.76
=======================================================================
Total Return 5.68% 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 year
(millions) $336.4 321.1 307.4 269.9 276.4 211.3 167.2 132.8 110.0 85.2
Ratio of expenses to
average net assets .15% .16% .17%(b) .16% .18% .19% .21% .23% .25% .29%
Ratio of net investment
income to average
net assets 5.61% 5.76% 5.80% 5.80% 5.84% 6.36% 6.75% 7.30% 7.42% 7.36%
Portfolio turnover rate 6% 6% 7% 8% 5% 4% 2% 8% 7% 2%
Number of shares
outstanding at end
of year (millions) 39.9 38.0 36.2 34.3 32.2 25.3 20.5 16.6 13.8 11.0
</TABLE>
Notes: (a) Distributions representing less than $.01 were made in 1997, 1996,
1993 and 1992.
(b) The ratio based on net custodian expenses would have been .16% in
1995.
STATE FARM MUNICIPAL BOND FUND, INC.
TAX INFORMATION
The Fund paid ordinary income dividends in March, June, September and
December 1997. Of those dividends, 98% in March, 98% 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 1998.
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.
NOTE: The taxable portion of the dividends 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>
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18
<PAGE>
(This page intentionally left blank.)
19
<PAGE>
ANNUAL
REPORT
November 30, 1997
STATE
FARM
MUNICIPAL
BOND
FUND, INC.
ONE STATE FARM PLAZA
BLOOMINGTON, ILLINOIS 61710
Telephone (309) 766-2029
(800) 447-0740
<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 13th day of March, 1998.
STATE FARM MUNICIPAL BOND FUND, INC.
By: /s/ Edward B. Rust, Jr.
------------------------------
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.
/s/ Edward B. Rust, Jr. Director
- ----------------------------------- and President
Edward B. Rust, Jr. (Principal Executive
Officer)
/s/ Roger Joslin Director, Vice President,
- ----------------------------------- and Treasurer
Roger Joslin (Principal financial
and accounting officer)
/s/ Albert H. Hoopes Director March 13, 1998
- ----------------------------------- --------------
Albert H. Hoopes
/s/ Thomas M. Mengler Director
- -----------------------------------
Thomas M. Mengler
/s/ Davis U. Merwin Director
- -----------------------------------
Davis U. Merwin
/s/ James A. Shirk Director
- -----------------------------------
James A. Shirk
<PAGE>
INDEX FOR EXHIBITS
FILED WITH THIS AMENDMENT
-------------------------
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
2 Amended and restated bylaws of
registrant dated March 13, 1998
11 Consent of Independent Auditors
dated March 20, 1998
16 Schedule for computation of
performance quotations
27 Financial Data Schedule
BYLAWS
------
STATE FARM MUNICIPAL BOND FUND, INC.
(as amended and restated March 13, 1998)
ARTICLE I
OFFICES
Section 1.01. Principal office. The principal office of the
corporation in the State of Maryland shall be located in the City of
Baltimore.
Section 1.02. Other offices. The corporation may also have offices
at such other places both within and without the State of Maryland as the
board of directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01. Place of meetings. All meetings of the stockholders
shall be held in the City of Bloomington, State of Illinois, or at such other
place in the United States as shall be designated from time to time by the
board of directors, at such time and place, as shall be stated in the notice
of the meeting or in a duly executed waiver of notice thereof.
Section 2.02. Annual meeting. As long as the corporation is
registered as an investment company under the Investment Company Act of 1940,
the corporation shall not be required to hold an annual meeting of
stockholders during any year in which none of the following is required to be
acted on by stockholders under that Act: (1) an election of directors; (2)
approval of an investment advisory agreement; (3) ratification of a selection
of independent public accountants; and (4) approval of a distribution
agreement. If there is to be an annual meeting, it shall be held on the first
Friday after the second Monday of March if not a legal holiday, and if a legal
holiday, then on the next secular day following, at 10:00 a.m., or at such
other date and time within the month of March as shall be designated from time
to time by the board of directors and stated in the notice of the meeting, at
which they shall elect a board of directors and transact such other business
as may properly be brought before the meeting.
<PAGE>
Section 2.03. Special meetings. Special meetings of stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or by the
articles of incorporation, may be called at any time by the president or the
board of directors. Special meetings of stockholders shall be called by the
secretary upon the written request of stockholders entitled to cast at least
25 percent of all the votes entitled to be cast at such meeting, provided that
(a) such request shall state the purpose or purposes of the meeting and the
matters proposed to be acted on at it; and (b) the stockholders requesting the
meeting shall have paid to the corporation the reasonably estimated cost of
preparing and mailing the notice thereof, which the secretary shall determine
and specify to such stockholders. Upon payment of these costs to the
corporation, the secretary shall notify each stockholder entitled to notice of
the meeting. Unless requested by stockholders entitled to cast a majority of
all the votes entitled to be cast at the meeting, a special meeting need not
be called to consider any matter which is substantially the same as a matter
voted on at any special meeting of stockholders held during the preceding
twelve months.
Section 2.04. Stockholders entitled to vote; number of votes. If a
record date has been fixed for the determination of stockholders entitled to
notice of or to vote at any meeting of stockholders, each stockholder of the
corporation shall be entitled to vote, in person or by proxy, each share of
stock (or fraction thereof) registered in his name on the books of the
corporation outstanding at the close of business on such record date, with one
vote (or fraction of a vote) for each share (or fraction thereof) so
outstanding.
Section 2.05. Notice of meetings. Written notice of each meeting of
stockholders stating the place, date and hour of the meeting and, in the case
of a special meeting or if otherwise required by law, the purpose or purposes
for which the meeting is called, shall be given, not less than 10 nor more
than 90 days before the date of the meeting, to each stockholder entitled to
vote at such meeting.
Section 2.06. Quorum; adjournment. The holders of a majority of the
stock entitled to vote at a meeting of stockholders, present in person or
represented by proxy, shall constitute a quorum at the meeting for the
transaction of business except as otherwise provided by statute or by the
articles of incorporation. If, however, such quorum shall not be present or
represented at any meeting of stockholders, the stockholders entitled to vote
thereat present in person or represented by proxy shall have the power to
adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present or represented. At any
adjourned meeting at which a quorum shall be present or represented any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than 120 days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder entitled to
vote at the meeting.
Section 2.07. Voting. When a quorum is present at any meeting, the
vote of the holders of a majority of the stock having voting power present in
person or represented by proxy and voting on the question shall decide any
question brought before such meeting, unless the question is one upon which,
by express provision of any statute or the charter or these bylaws, a
different vote is required, in which case such express provision shall govern
and control the decision of such question.
<PAGE>
Section 2.08. Proxies. No proxy shall be valid more than eleven
months after its date, unless it provides for a longer period.
Section 2.09. Action without meeting. Any action required or
permitted to be taken at a meeting of stockholders may be taken without a
meeting if a unanimous written consent which sets forth the action is signed
by each stockholder entitled to vote on the matter is filed with the record of
stockholders' meetings.
Section 2.10. Stock ledger. The secretary of the corporation shall
cause an original or duplicate stock ledger to be maintained at the office of
the corporation's transfer agent. The stock ledger shall contain the name and
address of each stockholder and the number of shares of stock which the
stockholder holds.
ARTICLE III
DIRECTORS AND COMMITTEES
Section 3.01. Function and powers. The business and affairs of the
corporation shall be managed under the direction of its board of directors.
All powers of the corporation may be exercised by or under the authority of
the board of directors except as conferred on or reserved to the stockholders
by statute or the charter or these bylaws.
Section 3.02. Number. The number of directors which shall constitute
the entire board of directors shall be not less than three nor more than
fifteen. Within such limits the number of directors may be changed by
resolution, or by amendment to these bylaws, adopted by a majority of the
entire board of directors, but no such action shall affect the tenure of
office of any director.
Section 3.03. Election and term of office. The directors shall be
elected at the annual meeting of the stockholders (if any such meeting is
held), except as provided in Section 3.04 of this article, and each director
elected shall hold office until his successor is elected and qualifies or
until his earlier resignation or removal. Directors need not be stockholders
of the corporation.
Section 3.04. Vacancies. Any vacancy occurring in the board of
directors for any cause other than by reason of an increase in the number of
directors may be filled by a majority of the remaining members of the board of
directors, although such majority is less than a quorum; provided, however,
that no vacancy shall be so filled unless immediately thereafter at least
two-thirds of the directors then holding office shall have been elected to
such office by the stockholders, and provided further that if at any time less
than a majority of the directors holding office at that time were elected by
<PAGE>
the stockholders, a meeting of the stockholders shall be held promptly and in
any event within 60 days for the purpose of electing directors to fill any
existing vacancy in the board of directors, unless the Securities and Exchange
Commission shall by order extend such period under the authority granted by
section 16(a) of the Investment Company Act of 1940. A director elected to
fill a vacancy shall be elected to hold office until the next annual meeting
of stockholders or until his successor is elected and qualifies.
Section 3.05. Regular meetings. The board of directors from time to
time may provide for the holding of regular meetings of the board and fix
their time and place.
Section 3.06. Special meetings. Special meetings of the board may be
called by the president on 24 hours notice to each director, either
personally, by mail, by telegram or by facsimile transmission. Special
meetings shall be called by the president or secretary in like manner and on
like notice on the written request of a majority of the directors or a
majority of the members of the executive committee.
Section 3.07. Quorum and voting. At all meetings of the board a
majority of the directors in office shall constitute a quorum for the
transaction of business, and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the board of
directors, except as may be otherwise specifically provided by statute or the
articles of incorporation or these bylaws. If a quorum shall not be present
at any meeting of the board of directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present.
Section 3.08. Telephone meetings. Members of the board of directors
or any committee thereof may participate in a meeting of such board or
committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other at the same time, and participation by such means shall constitute
presence in person at the meeting.
Section 3.09. Action without meeting. Unless otherwise restricted by
statute or the articles of incorporation or these bylaws, any action required
or permitted to be taken at any meeting of the board of directors or of any
committee thereof may be taken without a meeting if a unanimous written
consent which sets forth the action is signed by each member of the board or
committee, as the case may be, and filed with the minutes of proceedings of
the board or committee.
<PAGE>
Section 3.10. Committees. The board of directors may, by resolution
passed by a majority of the entire board, designate an executive committee and
other committees, each committee to consist of two or more directors of the
corporation. In the absence of a member of a committee, the members thereof
present at any meeting, whether or not they constitute a quorum, may appoint
another member of the board of directors to act at the meeting in the place of
any such absent member.
Section 3.11. Executive committee. Unless otherwise provided by
resolution of the board of directors, the executive committee shall have and
may exercise all powers of the board of directors in the management of the
business and affairs of the corporation that may lawfully be exercised by an
executive committee, except the power to: (i) declare dividends or
distributions on stock; (ii) issue stock; (iii) recommend to the stockholders
any action which requires stockholder approval; (iv) amend the bylaws; or (v)
approve any merger or share exchange which does not require stockholder
approval.
Section 3.12. Other committees. To the extent provided by resolution
of the board of directors, other committees of the board shall have and may
exercise any of the powers that may lawfully be granted to the executive
committee.
Section 3.13. Minutes of committee meetings. Each committee shall
keep regular minutes of its meetings and report the same to the board of
directors when required.
Section 3.14. Expenses and compensation of directors. Directors
shall not receive any stated salary for their services as directors, but, by
resolution of the board of directors, a fixed sum, and expenses of attendance,
if any, may be allowed to directors for attendance at each regular or special
meeting of the board of directors, or of any committee thereof, but nothing
herein contained shall be construed to preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
ARTICLE IV
NOTICES
Section 4.01. Type of notice. Whenever, under the provisions of any
statute or the articles of incorporation or these bylaws, notice is required
to be given to any director or stockholder, such notice may be given in
writing, by personal delivery, or by mail, addressed to such director or
stockholder, at his or her address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to
be given at the time when the same shall be deposited in the United States
mail. Notice to directors may also be given by telegram or by facsimile
transmission.
<PAGE>
Section 4.02. Waiver of notice. Whenever the provisions of any
statute or the articles of incorporation or these bylaws require notice of the
time, place or purpose of a meeting of the board of directors or a committee
of the board, or of stockholders, each person who is entitled to the notice
waives notice if: (a) before or after the meeting he or she signs a waiver of
notice which is filed with the records of the meeting; or (b) he or she is
present at the meeting or, in the case of a stockholders' meeting, is
represented by proxy.
ARTICLE V
OFFICERS
Section 5.01. Offices. The officers of the corporation shall be
elected by the board of directors and shall be a president, one or more vice
presidents, a secretary and a treasurer. The board of directors may also
appoint a chairperson of the board, assistant secretaries and assistant
treasurers. Any number of offices may be held by the same person, unless the
articles of incorporation or these bylaws otherwise provide, except that no
one may serve concurrently as both president and vice president. A person who
holds more than one office may not act in more than one capacity to execute,
acknowledge or verify an instrument required by law to be executed,
acknowledged or verified by more than one officer.
Section 5.02. Annual election. The board of directors annually shall
elect a president one or more vice presidents, a secretary and a treasurer.
The board of directors may elect one of its members to serve as chairperson of
the board.
Section 5.03. Other officers and agents. The board of directors may
appoint such other officers and agents as it shall deem necessary, who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the board.
Section 5.04. Term of office; removal; vacancies. The officers of
the corporation shall hold office until their respective successors are chosen
and qualify. Any officer elected or appointed by the board of directors may
be removed at any time by the affirmative vote of a majority of the board of
directors, when the board in its judgment finds that the best interests of the
corporation will be served by such action. The removal of an officer or agent
does not prejudice his contract rights, if any. Any vacancy occurring in any
office of the corporation shall be filled by the board of directors.
<PAGE>
Section 5.05. The chairperson of the board of directors. The
chairperson of the board of directors, if one shall be elected, shall preside
at all meetings of the directors and stockholders, and shall perform such
other duties as the board of directors may prescribe.
Section 5.06. The president. The president shall be the chief
executive officer of the corporation and shall have general management of the
business of the corporation, and shall see that all orders and resolutions of
the board of directors are carried into effect. In the absence of a
chairperson of the board of directors, or if a chairperson is not elected, the
president shall preside at all meetings of the directors and stockholders. The
president may execute bonds, mortgages and other contracts requiring a seal,
under the seal of the corporation, except where required or permitted by law
to be otherwise signed and executed and except where the signing and execution
thereof shall be expressly delegated by the board of directors to some other
officer or agent of the corporation.
Section 5.07. The vice presidents. In the absence of the president
or in the event of the president's inability or refusal to act, the vice
president (or in the event there be more than one vice president, the vice
presidents in the order designated, or in the absence of any designation, then
in the order of their election) shall perform the duties of the president, and
when so acting shall have all the powers of and be subject to all the
restrictions upon the president. The vice presidents shall perform such other
duties and have such other powers as the board of directors may from time to
time prescribe.
Section 5.08. The secretary. The secretary shall record all votes
and proceedings of meetings of directors and stockholders in the corporation
records. The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and meetings of the board of directors when
notice thereof is required. The secretary shall have custody of the seal of
the corporation and may affix the same to any instrument requiring the
corporate seal and attest to the same with his or her signature. The
secretary shall perform such other duties as the board of directors may
prescribe.
Section 5.09. The assistant secretary. The assistant secretary, or
if there be more than one, the assistant secretaries in the order determined
by the board of directors (or if there be no such determination, then in the
order of their election), shall, in the absence of the secretary or in the
event of the secretary's inability or refusal to act, perform the duties and
exercise the powers of the secretary and shall perform such other duties and
have such other powers as the board of directors may from time to time
prescribe.
Section 5.10. The treasurer. The treasurer: (a) shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation; (b) shall deposit with the corporation's custodian all moneys and
other valuable effects in the name and to the credit of the corporation; (c)
shall direct the custodian to make such disbursements of the funds of the
corporation as may be ordered by the board of directors, taking proper
vouchers for such disbursements; and (d) shall render to the president
<PAGE>
and the board of directors, at its regular meetings, or when the board of
directors so requires, an account of all his or her transactions as treasurer
and financial statements of the corporation.
Section 5.11. The assistant treasurer. The assistant treasurer, or
if there shall be more than one, the assistant treasurers in the order
determined by the board of directors (or if there be no such determination,
then in the order of their election), shall, in the absence of the treasurer
or in the event of the treasurer's inability or refusal to act, perform the
duties and exercise the powers of the treasurer and shall perform such other
duties and have such other powers as the board of directors may from time to
time prescribe.
ARTICLE VI
CAPITAL STOCK
Section 6.01. Certificates of stock. Every holder of stock in the
corporation shall be entitled, upon request, to have a certificate or
certificates, signed by, or in the name of the corporation by, the president
or a vice president and countersigned by the treasurer, an assistant
treasurer, the secretary or an assistant secretary of the corporation,
certifying the number of full shares owned by him in the corporation. No
certificates shall be issued for fractional shares. Where a certificate is
countersigned by a transfer agent other than the corporation or its employee,
any other signature on the certificate may be facsimile. In case any officer
or transfer agent who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer or transfer agent
before such certificate is issued, it may be issued by the corporation with
the same effect as if he were such officer or transfer agent at the date of
issue.
Section 6.02. Lost certificates. The board of directors may direct a
new certificate or certificates be issued in place of any certificate or
certificates previously issued by the corporation which are alleged to be
lost, mutilated or destroyed, upon such terms and upon such conditions as the
board of directors may prescribe.
Section 6.03. Transfers of stock. The shares of stock of the
corporation shall be transferable on the books of the corporation at the
request of the record holder thereof in person or by a duly authorized
attorney, upon presentation to the corporation or its transfer agent of a duly
executed assignment or authority to transfer, or proper evidence of
succession, and, if the shares are represented by a certificate, a duly
endorsed certificate or certificates of stock surrendered for cancellation,
and with such proof of the authenticity of the signatures as the corporation
or its transfer agent may reasonably require. The transfer shall be recorded
on the books of the corporation, the old certificates, if any, shall be
cancelled, and the new record holder, upon request, shall be entitled to a new
certificate or certificates.
<PAGE>
Section 6.04. Fixing of record date. The board of directors may fix
in advance a date as a record date for the determination of the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or to receive payment of any dividend or other distribution
or allotment of any rights, or to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other
lawful action, provided that such record date shall not be a date more than 90
days, and in the case of a meeting of stockholders not less than 10 days,
prior to the date on which the particular action requiring such determination
of stockholders is to be taken. In such case only such stockholders as shall
be stockholders of record on the record date so fixed shall be entitled to
such notice of, and to vote at, such meeting or adjournment, or to give such
consent, or to receive payment of such dividend or other distribution, or to
receive such allotment of rights, or to exercise such rights, or to take such
other action, as the case may be, notwithstanding any transfer of any shares
on the books of the corporation after any such record date.
Section 6.05. Registered stockholders. The corporation shall be
entitled to treat the holder of record of shares as the holder in fact thereof
and, accordingly, shall not be bound to recognize any equitable or other claim
to or interest in such shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
statute.
ARTICLE VII
CUSTODIAN
Section 7.01. Qualifications. The corporation shall at all times
employ, pursuant to a written contract, one or more banks or trust companies,
each having an aggregate capital, surplus and undivided profits (as shown in
its last published report) of at least $2,000,000, as custodian to hold the
funds and securities of the corporation.
Section 7.02. Contract. Such contract shall be upon such terms and
conditions and may provide for such compensation as the board of directors
deems necessary or appropriate, provided such contract shall further provide
that the custodian shall deliver securities owned by the corporation only upon
sale of such securities for the account of the corporation and receipt of
payment therefor by the custodian or when such securities may be called,
redeemed, retired or otherwise become payable. Such limitation shall not,
however, prevent:
(a) the delivery of securities for examination to the broker
selling the same in accord with the "street delivery" custom whereby such
securities are delivered to such broker in exchange for a
<PAGE>
delivery receipt exchanged on the same day for an uncertified check of such
broker to be presented on the same day for certification;
(b) the delivery of securities of an issuer in exchange for or
conversion into other securities alone or cash and other securities pursuant
to any plan of merger, consolidation, reorganization, recapitalization or
readjustment of the securities of such issuer;
(c) the conversion by the custodian of securities owned by the
corporation pursuant to the provisions of such securities into other
securities;
(d) the surrender by the custodian of warrants, rights or similar
securities owned by the corporation in the exercise of such warrants, rights
or similar securities, or the surrender of Municipal Bond receipts or
temporary securities for definitive securities;
(e) the delivery of securities owned by the corporation as a
redemption in kind of securities issued by the corporation.
The custodian shall deliver funds of the corporation only upon the purchase of
securities for the portfolio of the corporation and the delivery of such
securities to the custodian, but such limitation shall not prevent the release
of funds by the custodian for redemption of shares issued by the corporation,
for payment of interest, dividend disbursements, taxes and management fees,
for payments in connection with the conversion, exchange or surrender of
securities owned by the corporation as set forth in sub-paragraphs (b), (c)
and (d) above, for operating expenses of the corporation and for any other
purpose authorized by the board of directors.
Section 7.03. Termination of contract. The contract of employment of
the custodian shall be terminable by either party on 60 days' written notice
to the other party. Upon any termination, the board of directors shall use
its best efforts to obtain a successor custodian, but lacking success in the
appointment of a successor custodian, the question of whether the corporation
shall be liquidated or shall function without a custodian shall be submitted
to the stockholders before delivery of any funds or securities of the
corporation to any person other than a successor custodian, including a
temporary successor selected by the retiring custodian. If a successor
custodian is found, the retiring custodian shall deliver funds and securities
owned by the corporation directly to the successor custodian.
Section 7.04. Agents of custodian. The provisions of any other
section of these bylaws to the contrary notwithstanding, any contract of
employment of a custodian to hold the funds and
<PAGE>
securities of the corporation may authorize the custodian, upon approval of
the board of directors, to appoint other banks or trust compan ies meeting the
requirements of this article, domestic and foreign (including domestic and
foreign branches), to perform all or a part of the duties of the custodian
under its contract with the corporation.
Section 7.05. Negotiable instruments. All checks and drafts for
the payment of money shall be signed in the name of the corporation by such
officer or officers or such other person or persons as the board of directors
may designate, and all requisitions or orders for the payment of money by the
custodian or for the issue of checks and drafts therefor, all promissory
notes, all assignments of shares or securities standing in the name of the
corporation, and all requisitions or orders for the assignment of shares or
securities standing in the name of the custodian or its nominee, or for the
execution of powers to transfer the same, shall be signed in the name of the
corporation by not less than two of its officers. Promissory notes, checks or
drafts payable to the corporation may be endorsed only to the order of the
custodian or its agent.
ARTICLE VIII
TRANSACTIONS WITH OFFICERS AND DIRECTORS
Section 8.01. Purchase and sale of securities. The corporation shall
not purchase any securities (other than shares issued by the corporation)
from, or sell any securities (other than shares issued by the corporation and
securities paid in satisfaction of shares deposited for redemption during a
period during which the corporation is redeeming its shares principally in
kind) to, any director or officer of the corporation, or any director, officer
or partner of any firm which acts as investment adviser or principal
underwriter for the corporation acting as principal, except to the extent
permitted to do so under the Investment Company Act of 1940 or the rules or
regulations thereunder or by appropriate order or written advice of the
Securities and Exchange Commission.
Section 8.02. Concentration in any one issuer. The corporation shall
not purchase or retain securities of a company if all of the directors and
officers of the corporation and of its investment adviser who individually own
beneficially more than 1/2% of the securities of the company collectively own
more than 5% of such securities.
Section 8.03. Transactions in shares of the corporation. No director
or officer of the corporation or of its investment adviser shall take a long
or short position in the capital stock of the corporation, except that
officers or directors may purchase shares of the corporation for investment
purposes at the same price as that available to the public at the time of
purchase.
<PAGE>
ARTICLE IX
INDEMNIFICATION
Section 9.01. Indemnification. Each person who is or was a director
or officer of the corporation, and each person who serves or served at the
request of the corporation as a director or officer of another corporation
(and their respective heirs, executors and administrators), shall be
indemnified by the corporation in accordance with, and to the fullest extent
authorized by, the General Corporation Law of the State of Maryland as it may
be in effect from time to time, provided that (unless otherwise permitted by
the Investment Company Act of 1940, the rules and regulations thereunder or
the Securities and Exchange Commission):
(a) this provision shall not protect any person against any
liability to the corporation or to its stockholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office;
(b) if there is neither a final court determination on the merits
that the person seeking indemnification is not liable nor a court
determination that he was not guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, no indemnification shall be permitted unless a determination that the
person was not guilty of any such misconduct has been made by (i) the vote of
a majority of a quorum of directors who are neither "interested persons" of
the corporation as defined in section 2(a)(19) of the Investment Company Act
of 1940 nor parties to the proceedings ("disinterested, non-party directors")
or (ii) an independent legal counsel (not including a counsel who does work
for either the corporation, its investment adviser or principal underwriter,
or any person affiliated with any of these persons); and
(c) before the final disposition of a proceeding, the corporation
may pay the expenses, including attorneys' fees, incurred by any such person
in defending a civil or criminal action, suit or proceeding, only if:
(i) authorized in the specific case, by a majority of the
disinterested, non-party directors, or if there are no disinterested,
non-party directors, by the board of directors;
(ii) any advances are limited to amounts used, or to be
used, for the preparation and/or presentation of a defense to the action
(including costs connected with preparation of a settlement);
<PAGE>
(iii) any advances are accompanied by a written promise by,
or on behalf of, the recipient to repay that amount of the advance which
exceeds the amount which it is ultimately determined that the recipient is
entitled to receive from the corporation by reason of indemnification;
(iv) such promise is secured by (1) a surety bond or other
security provided by the recipient of the advance or (2) other suitable
insurance, unless a majority of a quorum of the disinterested, non-party
directors, or an independent legal counsel in a written opinion, has
determined, based on a review of readily available facts, that there is reason
to believe that the recipient of the advance ultimately will be found entitled
to indemnification.
ARTICLE X
GENERAL PROVISIONS
Section 10.01. Dividends.
(a) The board of directors, from time to time as they may deem
advisable, may declare and pay dividends in cash or other property of the
corporation, out of any source available for dividends, to the stockholders
according to their respective rights and interests and in accordance with the
applicable provisions of the charter.
(b) The board of directors may prescribe from time to time that
dividends declared are payable at the election of any of the stockholders,
either in cash or in shares of the corporation.
(c) The board of directors shall cause any dividend payment to be
accompanied by a written statement if paid wholly or partly from any source
other than:
(i) the corporation's accumulated undistributed net income
(determined in accordance with generally accepted accounting principles and
the rules and regulations of the Securities and Exchange Commission then in
effect) and not including profits or losses realized upon the sale of
securities or other properties; or
(ii) the corporation's net income so determined for the
current or preceding fiscal year.
<PAGE>
Such statement shall adequately disclose the source or sources of such payment
and the basis of calculation, and shall be in such form as the Securities and
Exchange Commission may prescribe.
Section 10.02. Fiscal year. The fiscal year of the corporation shall
end on November 30.
Section 10.03. Seal. The corporate seal shall have inscribed thereon
the name of the corporation and shall be in such form and contain such other
words and figures as the directors shall determine or the law require. The
seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or by placing the word "seal" adjacent to the signature
of the authorized officer of the corporation. Any officer or director of the
corporation shall have authority to affix the corporate seal of the
corporation to any document requiring the same.
ARTICLE XI
AMENDMENTS
Section 11.01. General. These bylaws may be altered, amended or
repealed, and new bylaws may be adopted solely by the board of directors, at
any meeting of the board of directors.
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights," "Financial Information" and "Independent Auditors," and to the
use of our reports dated December 12, 1997 for the State Farm Municipal Bond
Fund, Inc. in the Registration Statement (Form N-1A) of the State Farm
Municipal Bond Fund, Inc. and their incorporation by reference in the related
Prospectus and Statement of Additional Information filed with the Securities
and Exchange Commission in this Post-Effective Amendment No. 26 to the
Registration Statement under the Securities Act of 1933 (File No. 2-58161) and
in this Amendment No. 24 to the Registration Statement under the Investment
Company Act of 1940 (File No. 811-2727).
ERNST & YOUNG LLP
Chicago, Illinois
March 27, 1998
1 MONTH(S) ACCRUED DIVIDEND
NET ASSET VALUES FOR VALUATION AT VALUATION DATE
30-Nov-97 $8.43 0.069978376
29-Nov-96 8.44
29-Nov-92 8.34
30-Nov-87 7.58
STATE FARM MUNICIPAL BOND FUND
INVESTMENT RECORD - ALL DIVIDENDS AND CAPITAL GAINS REINVESTED
1. 5, AND 10 YEAR AVERAGE RETURNS
30-Nov-97
<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-87 INITIAL INVEST. N/A N/A $7.58 $1,000.00 N/A N/A 131.926 131.926
31-Dec-87 DIVIDEND* N/A 0.143893976 7.65 0.00 18.98 2.481 134.407
31-Mar-88 DIVIDEND N/A 0.141565727 7.73 0.00 6.34 0.820 135.227
30-Jun-88 DIVIDEND N/A 0.142026783 7.74 0.00 19.21 2.482 137.709
30-Sep-88 DIVIDEND N/A 0.142903983 7.79 0.00 19.68 2.526 140.235
30-Dec-88 DIVIDEND N/A 0.141590983 7.80 0.00 19.86 2.546 142.782
31-Mar-89 DIVIDEND N/A 0.148226412 7.69 0.00 21.16 2.752 145.533
30-Jun-89 DIVIDEND N/A 0.147648911 7.98 0.00 21.49 2.693 148.226
30-Sep-89 DIVIDEND N/A 0.144366158 7.83 0.00 21.40 2.733 150.959
31-Dec-89 DIVIDEND N/A 0.144590859 7.99 0.00 21.83 2.732 153.691
31-Mar-90 DIVIDEND N/A 0.145176732 7.86 0.00 22.31 2.838 156.530
30-Jun-90 DIVIDEND N/A 0.144727268 7.90 0.00 22.65 2.867 159.397
30-Sep-90 DIVIDEND N/A 0.141127468 7.78 0.00 22.50 2.892 162.289
31-Dec-90 DIVIDEND N/A 0.145942309 7.96 0.00 23.68 2.975 165.264
31-Mar-91 DIVIDEND N/A 0.133622584 8.00 0.00 22.08 2.760 168.024
30-Jun-91 DIVIDEND N/A 0.137463357 8.01 0.00 23.10 2.884 170.908
30-Sep-91 DIVIDEND N/A 0.137647359 8.15 0.00 23.53 2.887 173.795
31-Dec-91 DIVIDEND 0.002017998 0.133875048 8.27 0.35 23.27 2.856 176.651
31-Mar-92 DIVIDEND N/A 0.131308849 6.14 0.00 23.20 2.850 179.501
30-Jun-92 DIVIDEND N/A 0.130954700 8.29 0.00 23.51 2.836 182.337
30-Sep-92 DIVIDEND N/A 0.133795116 5.37 0.00 24.40 2.915 185.252
31-Dec-92 DIVIDEND 0.001436310 0.128232845 8.37 0.27 23.76 2.871 188.123
31-Mar-93 DIVIDEND N/A 0.126744151 8.48 0.00 23.84 2.811 190.935
30-Jun-93 DIVIDEND N/A 0.124495686 8.59 0.00 23.77 2.767 193.702
30-Sep-93 DIVIDEND N/A 0.124919772 8.70 0.00 24.20 2.782 196.483
31-Dec-93 DIVIDEND 0.017087489 0.121357031 8.66 3.36 23.84 3.141 199.624
31-Mar-94 DIVIDEND N/A 0.120600170 8.26 0.00 24.07 2.914 202.538
30-Jun-94 DIVIDEND N/A 0.120336660 8.21 0.00 24.37 2.968 205.507
30-Sep-94 DIVIDEND N/A 0.120312413 8.15 0.00 24.72 3.033 208.540
31-Dec-94 DIVIDEND N/A 0.119308000 7.96 0.00 24.88 3.126 211.665
31-Mar-95 DIVIDEND N/A 0.122390227 8.25 0.00 25.91 3.141 214.806
30-Jun-95 DIVIDEND N/A 0.120734368 8.34 0.00 25.93 3.109 217.915
30-Sep-95 DIVIDEND N/A 0.118543113 8.41 0.00 25.83 3.071 220.986
31-Dec-95 DIVIDEND 0.005938192 0.117657831 8.52 1.31 26.00 3.205 224.192
31-Mar-96 DIVIDEND N/A 0.117525511 8.37 0.00 26.35 3.148 227.340
30-Jun-96 DIVIDEND N/A 0.122507665 8.29 0.00 27.B5 3.359 230.699
30-Sep-96 DIVIDEND N/A 0.119843786 8.32 0.00 27.65 3.323 234.023
31-Dec-96 DIVIDEND 0.003206019 0.124931543 8.38 0.75 29.24 3.579 237.601
31-Mar-97 DIVIDEND N/A 0.124625757 8.25 0.00 29.61 3.589 241.191
30-Jun-97 DIVIDEND N/A 0.121787707 8.35 0.00 29.37 3.517 244.708
30-Sep-97 DIVIDEND N/A 0.112953667 8.44 0.00 27.64 3.275 247.983
ACCRUED DIVIDEND/PER SHARE 0.069976376
SHARES OWNED 247.983
NAV 30-Nov-97 $ 8.43
ACCOUNT VALUE - 10 YEAR INVESTMENT $ 2,107.85
ONE YEAR AVERAGE RETURN 5.67%
FIVE YEAR AVERAGE RETURN 6.20%
TEN YEAR AVERAGE RETURN 7.74%
</TABLE>
<PAGE>
STATE FARM MUNICIPAL BOND FUND
1 MONTH(S)
<TABLE>
<CAPTION>
5 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>
29-Nov-92 INITIAL INVEST. $1,000.00 $8.34 119.904 119.904
31-Dec-92 DIVIDEND* 0.001436310 0.128232845 0.17 5.13 8.37 0.633 120.537
31-Mar-93 DIVIDEND N/A 0.126744151 0.00 15.28 8.48 1.802 122.339
30-Jun-93 DIVIDEND N/A 0.124495686 0.00 15.23 8.59 1.773 124.112
30-Sep-93 DIVIDEND N/A 0.124919772 0.00 15.50 8.70 1.782 125.894
31-Dec-93 DIVIDEND 0.017087489 0.121357031 2.15 15.28 8.66 2.013 127.906
31-Mar-93 DIVIDEND N/A 0.120600170 0.00 15.43 8.26 1.868 129.775
30-Jun-94 DIVIDEND N/A 0.120336660 0.00 15.62 8.21 1.903 131.677
30-Sep-94 DIVIDEND N/A 0.120312413 0.00 15.84 8.15 1.944 133.621
31-Dec-94 DIVIDEND N/A 0.119308000 0.00 15.94 7.96 2.003 135.623
31-Mar-95 DIVIDEND N/A 0.122390227 0.00 16.60 8.25 2.012 137.635
30-Jun-95 DIVIDEND N/A 0.120734368 0.00 16.62 8.34 1.993 139.628
30-Sep-95 DIVIDEND N/A 0.118543113 0.00 16.55 8.41 1.968 141.596
31-Dec-95 DIVIDEND 0.005938192 0.117657831 0.84 16.66 8.52 2.054 143.650
31-Mar-96 DIVIDEND N/A 0.117525511 0.00 16.88 8.37 2.017 145.667
30-Jun-96 DIVIDEND N/A 0.122507665 0.00 17.85 8.29 2.153 147.820
30-Sep-96 DIVIDEND N/A 0.119843786 0.00 17.72 8.32 2.130 149.950
31-Dec-96 DIVIDEND 0.003206019 0.124931543 0.48 18.73 8.38 2.292 152.242
31-Mar-97 DIVIDEND N/A 0.124625757 0.00 18.97 8.25 2.299 154.541
30-Jun-97 DIVIDEND N/A 0.121787707 0.00 18.82 8.35 2.254 156.795
30-Sep-97 DIVIDEND N/A 0.112953667 0.00 17.71 8.44 2.098 158.894
SHARES OWNED 158.894
NAV 30-Nov-97 $ 8.43
ACCRUED DIVIDEND 0.069978376
ACCOUNT VALUE-5 YEAR INVESTMENT $ 1,350.59
</TABLE>
<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>
29-Nov-96 INITIAL INVEST. $1,000.00 8.44 118.483 118.483
31-Dec-96 DIVIDEND 0.003200000 0.124931543 0.38 4.93 8.38 0.634 119.117
31-Mar-97 DIVIDEND N/A 0.124625757 0.00 14.85 8.25 1.800 120.917
30-Jun-97 DIVIDEND N/A 0.121787707 0.00 14.73 8.35 1.764 122.681
30-Sep-97 DIVIDEND N/A 0.112953667 0.00 l3.86 8.44 1.642 124.323
SHARES OWNED 124.323
NAV 30-Nov-97 $ 8.43
ACCRUED DIVIDEND 0.069978376
ACCOUNT VALUE - 1 YEAR INVESTMENT $ 1056.75
</TABLE>
* 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-30-1997
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 317,362,154
<INVESTMENTS-AT-VALUE> 333,703,650
<RECEIVABLES> 5,584,514
<ASSETS-OTHER> 354,606
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 339,642,770
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,280,141
<TOTAL-LIABILITIES> 3,280,141
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 320,021,133
<SHARES-COMMON-STOCK> 39,893,402
<SHARES-COMMON-PRIOR> 38,035,010
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,341,496
<NET-ASSETS> 336,362,629
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 18,792,068
<OTHER-INCOME> 0
<EXPENSES-NET> 503,662
<NET-INVESTMENT-INCOME> 18,288,406
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (222,358)
<NET-CHANGE-FROM-OPS> 18,066,048
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (18,288,406)<F1>
<DISTRIBUTIONS-OF-GAINS> (121,825)<F2>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,283,948
<NUMBER-OF-SHARES-REDEEMED> 3,132,346
<SHARES-REINVESTED> 1,706,790
<NET-CHANGE-IN-ASSETS> 15,213,008
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 121,825
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 400,859
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 503,662
<AVERAGE-NET-ASSETS> 325,887,586
<PER-SHARE-NAV-BEGIN> 8.44
<PER-SHARE-NII> .47
<PER-SHARE-GAIN-APPREC> (.01)
<PER-SHARE-DIVIDEND> (.47)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.43
<EXPENSE-RATIO> .15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Per share $.47
<F2>Per share $.003
</FN>
</TABLE>
