<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1996
Registration Nos. 2-22365 and 811-1256
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. 50 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 22 [X]
STATE BOND INVESTMENT FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (507) 354-2144
Kevin L. Howard, Esq.
239 S. Fifth Street, 12th floor
Louisville, KY 40202-3271
(Name and Address of Agent for Service)
Copies to:
Joel H. Goldberg, Esq.
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
---------------------------------------
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on May 1, 1996 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2(a)(1) under the Investment Company Act of 1940, the
Registrant has registered an indefinite number or amount of its securities under
the Securities Act of 1933. The Rule 24f-2 Notice of the Registrant for the
fiscal year ended December 31, 1995 was filed on February 23, 1996.
<PAGE>
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(a) UNDER THE SECURITIES ACT OF 1933
Item # and Caption Heading in
Form N-lA Prospectus
------------------ ----------
Part A
Item 1. Cover Page...............................................COVER PAGE
Item 2. Synopsis....................................SHAREHOLDER TRANSACTION
AND OPERATING EXPENSE TABLE
Item 3. Condensed Financial Information................FINANCIAL HIGHLIGHTS
Item 4. General Description of Registrant...............GENERAL INFORMATION
ABOUT STATE BOND U.S. GOVERNMENT
AND AGENCY SECURITIES FUND;
WHAT ARE THE FUND'S INVESTMENT
OBJECTIVES, POLICIES AND RISKS?
Item 5. Management of the Fund.....................HOW IS THE FUND MANAGED?
Item 5A. Management's Discussion of
Fund Performance................................................N/A
Item 6. Capital Stock and other Securities..............GENERAL INFORMATION
ABOUT STATE BOND U.S. GOVERNMENT
AND AGENCY SECURITIES FUND
Item 7. Purchase of Securities Being Offered.............HOW CAN YOU INVEST
IN THE FUND?
HOW ARE THE FUND'S SALES CHARGES
DETERMINED? WHAT IS THE FUND'S
PLAN OF DISTRIBUTION? HOW DOES THE
FUND'S EXCHANGE PRIVILEGE WORK?
WHAT SERVICES DOES THE FUND OFFER?
Item 8. Redemption of Repurchase.........................HOW CAN YOU "SELL"
YOUR SHARES?
Item 9. Legal Proceedings....................................NOT APPLICABLE
Part B
Item 10. Cover Page...............................................COVER PAGE
Item 11. Table of Contents........................................COVER PAGE
Item 12. General Information and History.................GENERAL INFORMATION
Item 13. Investment Objectives and Policies..............WHAT ARE THE FUND'S
INVESTMENT OBJECTIVES,
POLICIES AND RISKS?
WHAT ARE FUND'S
INVESTMENT LIMITATIONS?
Item 14. Management of the Registrant..................WHO MANAGES THE FUND?
THE MANAGER
Item 15. Control Persons and Principal Holders
of Securities...........................................WHO MANAGES
THE FUND?
THE MANAGER
Item 16. Investment Advisory and Other................WHO MANAGES THE FUND?;
Services MANAGEMENT AGREEMENT AND EXPENSES;
TRANSFER AGENT; CUSTODIAN;
INDEPENDENT AUDITORS
Item 17. Brokerage Allocation...........PORTFOLIO TRANSACTIONS AND BROKERAGE
Item 18. Capital Stock and Other Securities...............PURCHASE OF SHARES
i
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Item 19. Purchase, Redemption and Pricing of
Securities Being Offered......................PURCHASE OF SHARES;
HOW IS THE OFFERING PRICE DETERMINED?
HOW CAN YOU "SELL" YOUR SHARES?
HOW IS NET ASSET VALUE
PER SHARE DETERMINED?
Item 20. Tax Status................................TAX STATUS OF THE FUND?
WILL THE FUND WITHHOLD
TAXES ON DISTRIBUTIONS?
Item 21. Underwriters................................PLAN OF DISTRIBUTION;
HOW ARE SHARES DISTRIBUTED?
Item 22. Calculation of Performance Data....................CALCULATION OF
PERFORMANCE DATA
Item 23. Financial Statements.........................FINANCIAL STATEMENTS
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment to the
Registration Statement.
ii
<PAGE>
PROSPECTUS
STATE BOND DIVERSIFIED FUND
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
Phone: (507) 354-2144
May 1, 1996
State Bond Diversified Fund (the "Fund") is a mutual fund that seeks to
produce reasonable current income and long-term capital value growth
without exposing capital to undue risk. The Fund is the only investment
portfolio of State Bond Investment Funds, Inc.
This Prospectus concisely sets forth information about the Fund which
investors should know before investing. Please read it carefully before
you invest and keep it for future reference.
Additional information about the Fund is contained in a Statement of
Additional Information filed with the Securities and Exchange Commission
and is available upon request and without charge by calling or writing the
Fund at (800) 328-4735, 100 North Minnesota Street, P.O. Box 69, New Ulm,
Minnesota 56073-0069. The Statement of Additional Information is dated the
same date as this Prospectus and is incorporated herein by reference in its
entirety.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK AND IS NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER FEDERAL AGENCY. AN INVESTMENT IN THE FUND INVOLVES
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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>
TABLE OF CONTENTS
SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE.......................
FINANCIAL HIGHLIGHTS......................................................
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?...........
HOW IS THE FUND MANAGED?..................................................
WHAT ABOUT BROKERAGE COMMISSIONS?.........................................
HOW CAN YOU INVEST IN THE FUND?...........................................
HOW IS THE OFFERING PRICE OF THE FUND'S SHARES DETERMINED?................
HOW ARE THE FUND'S SALES CHARGES DETERMINED?..............................
HOW CAN YOU "SELL" YOUR SHARES?...........................................
How Can You Reinstate Your Investment?................................
HOW DOES THE FUND'S EXCHANGE PRIVILEGE WORK?..............................
HOW DOES THE FUND PAY DIVIDENDS AND DISTRIBUTIONS?........................
What Are Your Dividend And Capital Gain Distribution Options?.........
WHAT IS THE TAX STATUS OF DIVIDENDS AND DISTRIBUTIONS YOU RECEIVE?........
WHAT IS THE FUND'S PLAN OF DISTRIBUTION?..................................
WHO ARE THE FUND'S FUND ACCOUNTING AGENT AND ITS CUSTODIAN?...............
WHAT SERVICES DOES THE FUND OFFER?........................................
What About Shareholder Information?...................................
What Reports Will You Receive From the Fund?..........................
Are Certificates Issued For Shares?...................................
Other Services........................................................
What Tax Deferred Retirement Plans Are Available?.....................
GENERAL INFORMATION ABOUT STATE BOND DIVERSIFIED FUND.....................
INVESTMENT PERFORMANCE....................................................
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE...............................
2
<PAGE>
SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)................................................................. 4.75%
ANNUAL FUND EXPENSES (as a percentage of average daily net assets)
Management Fee......................................................... .65%
12b-1 Plan Fee......................................................... .25%
Other Expenses......................................................... .27%
-----
Total Fund Expenses.................................................... 1.17%
=====
A $10.00 fee will be charged for certain redemptions by wire transfer.
See "How Can You 'Sell' Your Shares?"
EXAMPLE:
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
You would pay the following aggregate
expenses on a $1,000 investment,
assuming (1) 5% annual return and (2)
redemption at the end of each time period $59 $83 $109 $183
Note: This Example is not a representation of past or future expenses and
actual expenses may be more or less than those shown above.
The Fund's shares have an asset-based sales fee, which may result in long-term
shareholders paying more than the economic equivalent of the maximum front-end
sales charge permitted by NASD regulations.
The purpose of the above table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly as an investor in
the Fund. The expense information in the above table is based upon expenses
incurred by the Fund during its fiscal year ended December 31, 1995. For more
information concerning fees and expenses, see "How Is The Fund Managed?" and
"What is the Fund's Plan of Distribution?"
3
<PAGE>
FINANCIAL HIGHLIGHTS
The information presented below for the fiscal year ended December 31, 1995 has
been audited by Ernst & Young LLP, independent auditors for the Fund, and the
financial statements of the Fund, along with the report of Ernst & Young LLP
thereon, are set forth in the Statement of Additional Information. The
information presented below for each fiscal year in the four-year period ended
December 31, 1994 has been audited by Deloitte & Touche LLP, the previous
auditors for the Fund. Further information about the performance of the Fund is
contained in the Fund's most recent annual report to shareholders which may be
obtained, without charge, by calling or writing the Fund at the telephone number
or address on the front cover of this Prospectus.
PER SHARE INVESTMENT INCOME AND CAPITAL CHANGES
(for a share outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended December 31
1995* 1994 1993 1992 1991 1990 1989 1988 1987 1986
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of $ 8.44 $ 9.24 $ 9.19 $ 9.68 $ 7.93 $ 8.84 $ 7.39 $ 6.94 $ 7.42 $ 7.15
period........................ ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income........ .23 .23 .32 .24 .27 .34 .33 .31 .28 .22
Net realized and unrealized
gain (loss) on investments... 2.18 (.21) .56 (.10) 2.18 (.48) 1.71 .74 (.04) 1.15
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations................... 2.41 .02 .88 .14 2.45 (.14) 2.04 1.05 .24 1.37
LESS DISTRIBUTIONS:
From net investment
income....................... (.23) (.23) (.32) (.24) (.28) (.34) (.36) (.31) (.28) (.25)
From net realized gains...... (.44) (.59) (.51) (.39) (.42) (.43) (.23) (.29) (.44) (.85)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions.......... (.67) (.82) (.83) (.63) (.70) (.77) (.59) (.60) (.72) (1.10)
Net asset value at end of
period........................ $ 10.18 $ 8.44 $ 9.24 $ 9.19 $ 9.68 $ 7.93 $ 8.84 $ 7.39 $ 6.94 $ 7.42
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return**................ 28.78% 0.13% 9.60% 1.45% 31.31% (1.53)% 28.03% 15.21% 2.91% 19.98%
Ratios/Supplemental Data:
Net assets, end of period
(in thousands)............... $45,437 $38,181 $38,210 $36,202 $31,316 $22,589 $22,603 $18,139 $17,370 $15,323
Ratio of expenses to
average net assets........... 1.17% 1.17% 1.20% 1.19% 1.22% 1.12% .97% .97% .84% .87%
Ratio of net investment
income to average net
assets........................ 2.35% 2.46% 3.31% 2.55% 3.10% 4.06% 3.92% 4.02% 3.47% 3.32%
Portfolio turnover rate....... 9% 22% 24% 14% 15% 11% 11% 13% 14% 20%
- -------------------------------
* ARM Capital Advisors, Inc. began managing the investment operations of the Fund on June 14, 1995.
** Total return does not contain the effects of sales load.
</TABLE>
4
<PAGE>
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?
The Fund seeks to produce reasonable current income and long-term capital value
growth without exposing capital to undue risk. Income is considered both in
terms of the dollar amount of income received and in terms of retention of
purchasing power.
The Fund emphasizes careful selection of individual securities suited to its
investment objectives, broad diversification of investment risk, and continuing
supervision of securities owned.
Assets may be held in cash or invested in all forms of securities. For many
years, common stocks have made up the bulk of securities owned. However,
substantial proportions of assets have been held, and in the future may be held,
in cash and fixed-income securities. The Fund limits its investments in non-
government fixed income securities to those which at the time of purchase are
within the four highest grades as rated by Standard and Poor's Ratings Group
("S&P") or Moody's Investors Service, Inc. ("Moody's") or to those which, while
not rated at the time of purchase, are, in the judgment of the Manager, of
comparable quality. The Fund may also invest in convertible preferred stocks.
The Fund does not have specific credit quality criteria for convertible
securities, and could invest in securities rated below investment grade. The
Fund has no current intention of investing over 5 percent of its assets in such
securities. Investments may be changed whenever considered advisable, and
portfolio turnover may vary with such changes. There can be no assurance that
the Fund will attain its objectives.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend portfolio securities to
brokers or dealers, but as a fundamental policy will only make such loans if the
aggregate market value of securities loaned does not exceed 10% of the market
value of the Fund's total assets. The borrower must maintain with the Fund cash
or U.S. Government securities equal to at least 100% of the market value of the
securities loaned. Lending of portfolio securities involves certain risks. As
with other extensions of credit, there are risks of delay in recovery of loaned
securities, or even loss of rights in collateral pledged by the borrower, should
the borrower fail financially. The Fund also may experience a loss if upon the
failure of a borrower to return loaned securities the collateral is not
sufficient in value or liquidity to cover the value of the loaned securities.
During the time portfolio securities are on loan, the borrower pays the Fund an
amount equivalent to any dividends or interest paid on the securities and the
Fund may invest the cash collateral and earn additional income or may receive an
agreed upon amount of interest income from the borrower. To the extent that the
Fund invests cash collateral, the Fund may incur additional risk associated with
the change in value of the invested collateral. The Fund has no current
intention of lending its portfolio securities.
INVESTMENT RESTRICTIONS. In addition to the policies and limitations set forth
above, the Fund is subject to certain other investment policies and limitations
set forth more fully in the Statement of Additional Information. As a matter of
fundamental policy, the Fund may not: (1) invest more than 5% of the market
value of its total assets in the securities of any one issuer, other than the
U.S. Government or its agencies, or purchase any security if, as a result, it
would hold more than 10% of the outstanding voting securities of any issuer; (2)
borrow money except from banks as a temporary emergency measure and then not in
excess of 10% of the Fund's total assets at cost;
5
<PAGE>
(3) purchase the securities of an issuer in continuous operation for less than
three years if more than 5% of the Fund's assets would be so invested; and (4)
invest more than 25% of its net asset value in any one industry.
Except as specifically noted above, the investment policies described above are
not fundamental and the Board of Directors of the Fund may change them without
the vote of a majority of the Fund's outstanding voting securities. The Board
may not change the Fund's investment objective, nor any other fundamental
policy, without such a vote. Under the Investment Company Act of 1940, a "vote
of a majority of the outstanding voting securities" of the Fund means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
the Fund or (2) 67% or more of the shares present at a shareholders' meeting if
more than 50% of the outstanding shares are represented at the meeting in person
or by proxy.
HOW IS THE FUND MANAGED?
The Board of Directors (the "Board") provides broad supervision over the affairs
of the Fund. Pursuant to an Investment Advisory and Management Agreement
approved by the Board and the shareholders of the Fund, ARM Capital Advisors,
Inc. (the "Manager") manages the investments of the Fund and administers its
business and other affairs. The address of the Manager is 200 Park Avenue, 20th
Floor, New York, New York 10166.
The Manager is a wholly-owned subsidiary of ARM Financial Group, Inc. ("ARM"), a
Delaware corporation. ARM is a financial services company providing retail and
institutional products and services to the long-term savings and retirement
market. The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley
Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P. and MSCP III
892 Investors, L.P., investment funds sponsored by Morgan Stanley Group, Inc.
("Morgan Stanley"), own approximately 91% of the outstanding shares of voting
stock of ARM. The Manager currently provides investment management services to
institutional and individual clients, including ARM and its subsidiaries, with
combined assets in excess of $4 billion.
The Manager commenced investment advisory operations on January 5, 1995, on
which date it acquired the domestic fixed income unit of Kleinwort Benson
Investment Management Americas Inc. The Manager has managed the Fund since June
14, 1995 and since that date has also managed the other mutual funds in the
State Bond Group of mutual funds: State Bond Cash Management Fund, State Bond
Common Stock Fund, State Bond U.S. Government and Agency Securities Fund, State
Bond Tax Exempt Fund and State Bond Minnesota Tax-Free Income Fund. The Manager
is also the investment manager of The Legends Fund, Inc.
Keith O. Martens, Senior Vice President and Senior Portfolio Manager of the
Manager and Vice President of the Fund, is responsible for the selection of the
investments and management of the Fund. Mr. Martens has managed the Fund since
1984. Mr. Martens is also the portfolio manager of the State Bond Common Stock
Fund, State Bond Tax Exempt Fund, State Bond Minnesota Tax-Free Income Fund, and
State Bond U.S. Government and Agency Securities Fund.
6
<PAGE>
The Fund pays the Manager a management fee, calculated daily and payable
monthly, equal to an annual fee of .65 of 1% on the first $100,000,000 of
average daily net assets of the Fund and .60 of 1% on the next $100,000,000 of
average daily net assets of the Fund and .55 of 1% of average daily net assets
of the Fund over $200,000,000. The Fund pays all its expenses other than those
assumed by the Manager. Total expenses of the Fund for its fiscal year ended
December 31, 1995, amounted to 1.17% its average daily net assets.
WHAT ABOUT BROKERAGE COMMISSIONS?
In the purchase and sale of portfolio securities for the Fund, the Manager will
seek the most favorable price and execution, and, consistent with that policy,
may give consideration to the research and statistical services furnished by
brokers to the Manager for its use. The Manager is authorized to place orders
with brokers who provide supplemental investment and market research and
security and economic analysis although the use of such brokers may result in a
higher brokerage charge to the Fund and although such research and analysis
received may be useful to the Manager in connection with its services to other
clients as well as to the Fund.
HOW CAN YOU INVEST IN THE FUND?
SBM Financial Services, Inc. (the "Distributor"), and ARM Transfer Agency, Inc.
(the "Shareholder Servicing Agent"), each a subsidiary of ARM, act as
distributor and transfer agent, respectively, of the Fund's shares. Their
address is 100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-
0069.
Shares of the Fund are offered for sale through the Distributor and through
certain broker-dealers under contract with the Distributor. After you become a
shareholder, you may buy additional shares by sending a check drawn to State
Bond Diversified Fund directly to the Shareholder Servicing Agent at 100 North
Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069. Orders for the
purchase of shares will be executed at the offering price based upon the net
asset value next determined after receipt and acceptance of the order by the
Distributor. Orders for shares placed through broker-dealers will be executed at
the offering price next determined after the receipt of the order by the broker-
dealer, provided that the broker-dealer promptly transmits the order to the
Distributor the same day. The broker-dealer is responsible for transmitting the
purchase order to the Distributor. The Fund reserves the right to reject any
order for the purchase of its shares. The minimum initial investment is $250 and
subsequent investments must be in the amount of at least $50. The Fund reserves
the right to change these minimum investments. The Fund will not be responsible
for the consequences of delays in the banking or Federal Reserve wire systems.
You may also purchase shares of the Fund by wiring the purchase price to the
Fund's account with State Bank & Trust Company of New Ulm, Minnesota. Prior to
wiring your money, you must notify the Shareholder Servicing Agent by telephone
at (800) 328-4735 of your wire purchase order. If you are making an initial
investment, the Shareholder Servicing Agent will also require that you furnish
some additional information (including your name, address and social security
number or tax identification number) and will provide you with a Fund account
number. Next,
7
<PAGE>
you should instruct your bank to wire the specified amount, along with your
account number and your name, to:
Credit account of State Bank & Trust Company of New Ulm
at Federal Reserve Bank of Minneapolis
Account #091901202
For further credit to Account #780
For benefit of Account Number (your Fund account number) of (your name).
If the wire transfer is for an initial investment, a completed investment
application must be sent to the Fund as soon as possible so the necessary
remaining information can be recorded in your account. Once your account is
established, you may automatically make additional investments (in minimum
amounts of $50) by authorizing monthly withdrawals directly from your personal
checking account. Further information on this service is available by contacting
a representative of the Distributor.
HOW IS THE OFFERING PRICE OF THE FUND'S SHARES DETERMINED?
The price you pay for shares of the Fund is the offering price, which is the
next determined net asset value of the shares plus the applicable sales charge.
Net asset value per share is determined as of the time of close of the New York
Stock Exchange (generally 3:00 p.m. Central Time) on each day that the New York
Stock Exchange is open for business. Net asset value per share is determined by
dividing the value of the total assets of the Fund, less liabilities, by the
number of shares outstanding. In determining net asset value, the Fund utilizes
the valuations of its portfolio securities furnished by a pricing service
approved by the Board of Directors. Securities are valued at current market
prices based upon readily available quotations or, in their absence, at fair
value determined by the Board of Directors. Short-term holdings maturing in 60
days or less are valued at cost plus accrued interest, which approximates market
value.
8
<PAGE>
HOW ARE THE FUND'S SALES CHARGES DETERMINED?
Sales charges are determined in accordance with the following schedule:
<TABLE>
<CAPTION>
REGULAR
DEALER
DISCOUNT
% OF % OF NET AS % OF
OFFERING AMOUNT OFFERING
PRICE INVESTED PRICE
-------- -------- --------
<S> <C> <C> <C>
Less than $50,000....................... 4.75% 4.99% 4.25%
$50,000 but less than $100,000.......... 4.00% 4.17% 3.50%
$100,000 but less than $250,000......... 3.00% 3.09% 2.50%
$250,000 but less than $500,000......... 2.50% 2.56% 2.20%
$500,000 but less than $1,000,000....... 2.00% 2.04% 1.75%
$1,000,000 but less than $2,000,000..... 1.00% 1.01% .80%
$2,000,000 or more...................... .50% .50% .40%
</TABLE>
The sales charge varies depending on the size of the purchase, the number of
shares of mutual funds in the State Bond Group you already own, whether you have
entered into a Letter of Intent to purchase additional shares during a 13-month
period, or any special purchase programs in effect. Complete details of how you
may purchase shares at reduced sales charges under Volume Discounts, Rights of
Accumulation or Letters of Intent are contained in the Statement of Additional
Information and are available from your investment agent or dealer, or the
Distributor.
Shares may be sold at net asset value without a sales charge to present and
retired directors, present and retired officers, and present and retired
employees (and their spouses and minor children) of the Fund, the other
investment companies in the State Bond Group, and ARM and its subsidiaries. Such
sales also may be made to employee benefit plans for such persons. Also, shares
may be sold at net asset value to sales representatives of the Distributor and
registered representatives of broker-dealers who have signed dealer agreements
with the Distributor for sale of the shares of the Fund (including employee
benefit plans for such persons and their spouses and minor children). Shares may
be sold to any investment advisory, custodial, trust or other fiduciary account
managed or advised by the Manager or any affiliate wherein such entity has
discretionary investment authority at a maximum sales charge of 3% or such
lesser sales charge as such account would otherwise qualify for under the Fund's
sales charge schedule and the Volume Discount, Right of Accumulation, and Letter
of Intent provisions. These sales may be made for investment purposes only, and
shares may be resold only to the Fund.
9
<PAGE>
HOW CAN YOU "SELL" YOUR SHARES?
You may redeem your shares without charge at any time by writing to the
Shareholder Servicing Agent at 100 North Minnesota Street, P.O. Box 69, New
Ulm, Minnesota 56073-0069. You will receive the net asset value per share
next determined after receipt of your request in proper form by the
Shareholder Servicing Agent. The written redemption request should
identify the account number and be signed by the shareholder(s) exactly as
the shares are registered. For share redemptions valued at $20,000 or
more, your signature(s) must be guaranteed by a national securities
exchange, a member firm of a principal stock exchange, a registered
securities association, a clearing agency, a bank or trust company, a
savings association, a credit union, a broker, a dealer, a municipal
securities broker or dealer, a government securities broker or dealer, or a
representative of the Distributor. Further documentation may be required
from corporations, executors, partnerships, administrators, trustees or
custodians. If stock certificates have been issued for the shares that you
wish to redeem, you must surrender the certificates in proper form,
endorsed for transfer or accompanied by an endorsed stock power. For your
protection, any certificates should be sent by registered mail.
Shares may also be redeemed through authorized dealers and through
representatives of the Distributor. Requests for redemption received by the
Shareholder Servicing Agent from authorized dealers or representatives of
the Distributor prior to the close of the New York Stock Exchange will be
executed at the net asset value per share determined at the close of the
New York Stock Exchange on that day. Dealers and representatives are
responsible for promptly submitting such redemption requests to the
Shareholder Servicing Agent in order to obtain that day's closing price.
Requests for redemption received by the Shareholder Servicing Agent from
dealers or representatives of the Distributor after the close of the New
York Stock Exchange will be executed at the net asset value determined at
the close of the New York Stock Exchange on the next trading day.
A check for the proceeds of the redemption of your shares ordinarily will
be mailed to you within seven calendar days after a redemption request is
received in proper form. However, where shares purchased by means of an
uncertified check are redeemed before the fifteenth day after purchase,
proceeds will not be mailed until the check clears, which may be up to
fifteen days after purchase. Proceeds of a redemption may be more or less
than the cost of the shares when purchased.
Because of the relatively high cost of handling small accounts, the Fund
reserves the right to redeem, upon not less than 30 days' written notice,
the shares in an account which have a value of less than $250. You will be
allowed to make additional investments prior to the date fixed for such a
redemption to avoid liquidation of your account. Shares will not be
involuntarily redeemed if the value of the shares drops below $250 due to
market value changes.
How Can You Reinstate Your Investment?
If you redeem shares and then decide you should not have redeemed them, or
that you prefer to shift your investment to one of the other mutual funds
in the State Bond Group, you may, within
10
<PAGE>
30 calendar days of the date of redemption, use all or any part of the
proceeds of the redemption to reinstate, free of sales charge, your
investment in shares of the Fund, or, if you held the shares redeemed for
seven calendar days or longer before redemption, invest in shares of any of
the other mutual funds (except the Cash Management Fund) in the State Bond
Group. Your investment will be reinstated or made at the net asset value
per share next determined after your request is received. You may use this
privilege to reinstate an investment in the Fund only once.
Exercise of the Reinstatement Privilege does not alter the Federal income
tax status of any capital gain realized on a sale of Fund shares, but to
the extent that any shares are sold at a loss and the proceeds are
reinvested in shares of the same Fund, some or all of the loss will not be
allowed as a deduction, depending upon the percentage of the proceeds
reinvested.
HOW DOES THE FUND'S EXCHANGE PRIVILEGE WORK?
If you have been a shareholder for seven calendar days or more you may
exchange any or all of your investment for shares of the other mutual funds
in the State Bond Group. Any exchange for shares of other mutual funds in
the State Bond Group will be at the respective net asset values next
determined after receipt of the request for exchange. Exchanges of Fund
shares are sales, and may result in a gain or loss for Federal income tax
purposes. Before making an exchange, you should obtain and read the
prospectus for the fund which you are considering. The Fund reserves the
right to terminate or modify the terms of this exchange privilege upon 60
days' notice to shareholders. The exchange privilege is only available in
states in which the shares of the fund to be acquired are available for
purchase.
Exchange requests may be made in writing, signed by all registered owners,
to the Shareholder Servicing Agent at 100 North Minnesota Street, P.O. Box
69, New Ulm, Minnesota 56073-0069. Shares also may be exchanged by
telephone by calling (800) 328-4735, provided you have on file an
Agreement for Exchange of Shares by Telephone (included on the Investment
Application or available from the Shareholder Servicing Agent). Shares
held by trustees of retirement plans may not be exchanged by telephone.
During times of drastic economic or market changes the telephone exchange
privilege may be difficult to implement. In order to implement an exchange,
you will need to provide the name in which your account is registered, your
account number, such other personal identification information as the Fund
may request, the dollar amount or share amount you wish to exchange, the
name of the fund into which you wish to exchange and, if you already have
an account with the fund into which you wish to exchange, the account
registration and account number of such account.
The Fund is not liable for any loss arising from telephone exchanges that
the Fund reasonably believes to be genuine. The Fund will employ reasonable
procedures to confirm that instructions communicated by telephone are
genuine; if it does not, it may be liable for any losses due to
unauthorized or fraudulent instructions. The procedures used by the Fund
will include requesting several items of personal identification
information prior to acting upon telephone instructions and sending a
written confirmation on all such transactions.
11
<PAGE>
HOW DOES THE FUND PAY DIVIDENDS AND DISTRIBUTIONS?
The Fund's net investment income, if any, is paid quarterly (normally in
March, June, September, and December) to shareholders in the form of a
dividend. Payments vary in amount depending on income received from
portfolio securities and costs of operation. The Fund distributes
substantially all of any taxable net gain realized on its investments to
shareholders shortly before the calendar year-end.
WHAT ARE YOUR DIVIDEND AND GAIN DISTRIBUTION OPTIONS?
You may elect to:
1. Receive both dividends and gain distributions in additional shares of
the Fund.
2. Receive dividends in cash and gain distributions in additional shares
of the Fund.
3. Receive both dividends and gain distributions in cash
If no election is made, dividends from investment income and gain
distributions will be credited to your account in additional shares.
Dividends and gain distributions invested in shares are made at net asset
value. To change your election at any time, write to the Shareholder
Servicing Agent at 100 North Minnesota Street, P.O. Box 69, New Ulm,
Minnesota 56073-0069.
WHAT IS THE TAX STATUS OF DIVIDENDS AND DISTRIBUTIONS YOU RECEIVE?
The Fund has fulfilled, and intends to continue to fulfill, the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"),
so that it will not be subject to federal income tax on its net investment
income and capital gains, if any, that it distributes to shareholders.
Dividends paid from net investment income and any distributions from net
short-term capital gain are taxed to shareholders as ordinary income,
whether received in cash or invested in additional shares. Dividends are
eligible for the dividends received deduction available to corporations
subject to proportionate reduction if the aggregate dividends received by
the Fund from domestic corporations in any year are less then 100% of its
net income, exclusive of capital gains. Any distributions of net long-term
capital gains will be taxed as such, regardless of how long you have held
your shares.
A dividend or distribution paid shortly after shares have been purchased,
although in effect a return of money invested, is subject to taxes. Gain
distributions are taxable, whether received in cash or shares, even if they
reduce the net asset value of your shares below your cost and result in a
return of a part of your investment.
Shareholders receive a quarterly Statement of Account, which includes
Federal income tax information. Shareholders should consult their own tax
advisers with respect to their own tax situations, including with respect
to any state taxes applicable to an investment in the Fund.
12
<PAGE>
WHAT ABOUT THE PLAN OF DISTRIBUTION?
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. Under the terms of the
Plan, the Fund pays the Distributor a monthly fee equivalent on an annual
basis to .25 of 1% of the average daily net assets of the Fund. The fee may
be used by the Distributor to (i) provide initial and ongoing sales
compensation to its investment executives and to other broker-dealers in
connection with the sale of Fund shares and to pay for other advertising
and promotional expenses in connection with the sale of Fund shares
("distribution expenses"), and (ii) to provide compensation to entities
("Service Entities") in connection with the provision of certain personal
and account maintenance services to Fund shareholders including, but not
limited to, responding to shareholder inquiries and providing information
on their investments ("shareholder servicing expenses").
In the future, Service Entities may include banks and other depository
institutions which, under the Glass Steagall Act and other applicable laws
and regulations, are prohibited from engaging in the business of
underwriting, selling or distributing certain types of securities. Such
institutions will only be allowed to provide such assistance if the scope
of the assistance is such that, in the opinion of the Distributor, it does
not fall within the aforementioned prohibition.
WHO ARE THE FUND'S FUND ACCOUNTING AGENT AND ITS CUSTODIAN?
Investors Fiduciary Trust Company ("IFTC") serves as the Fund's fund
accounting agent, and in that capacity, maintains certain books and records
pursuant to an agreement with the Fund. Its address is 127 West 10th
Street, Kansas City, Missouri 64105. IFTC also serves as custodian for the
Fund's portfolio securities and cash, and in that capacity, maintains
certain financial and accounting books and records pursuant to a separate
agreement with the Fund.
WHAT SERVICES DOES THE FUND OFFER?
Information about various shareholder services is included above under "How
Can You 'Sell' Your Shares?" In addition, the Fund also provides the
following services:
What About Shareholder Information?
For general information about the Fund, call or write SBM Financial
Services, Inc., 100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota
56073-0069. Its telephone number is (800) 328-4735. For information about
your account, call or write the Shareholder Servicing Agent at 100 North
Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069, telephone
number (800) 328-4735.
What Reports Will You Receive From the Fund?
As a shareholder, you will receive the Fund's annual and semi-annual
reports. You also will receive quarterly account statements if dividends
are paid by the Fund confirming transactions in your account and the
current balance of shares you own.
13
<PAGE>
Are Certificates Issued For Shares?
All shares will be issued as book credits by the Shareholder Servicing
Agent. Certificates will not be issued. Any existing certificates may be
sent to the Shareholder Servicing Agent to be transferred in your account
to book credits.
Other Services
Pre-Authorized Payments enable you to purchase Fund shares by authorizing
your bank to make regular payments from your bank account in fixed amounts.
Payments at regular intervals can be made to you from your Fund account
under the Automatic Cash Withdrawal Plan if you own or purchase shares held
as book credits worth $5,000 or more.
What Tax-Deferred Retirement Plans Are Available?
Shares of the Fund may be purchased by all types of tax-deferred retirement
plans. The Distributor makes available plans, plan forms, and custody
agreements for:
Individual Retirement Accounts (IRAs) for persons who are employed and wish
to make contributions to a tax-deferred account for retirement.
403(b)(7) Custodial Accounts.
Simplified Employee Pension Plans (SEPs).
Qualified Profit Sharing and Money Purchase Pension Plans.
Further information on these services and others is available by contacting
the Distributor.
GENERAL INFORMATION ABOUT STATE BOND DIVERSIFIED FUND
State Bond Diversified Fund is an investment portfolio of State Bond
Investment Funds, Inc., a diversified, open-end management investment
company, or mutual fund, incorporated in Maryland on April 17, 1964. The
Fund has only one class of capital stock, $.00001 par value. Each
outstanding share has one vote and an equal right to dividends and
distributions, if any. All shares have noncumulative voting rights for the
election of directors. Each is fully paid and nonassessable, and each is
freely transferable.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Fund may refer to
"average annual total return," "cumulative total return" or data concerning
the Fund's performance since its inception. Average annual total return is
calculated by finding the average annual compounded rate of return over the
period that would equate the initial investment to the ending redeemable
value. Cumulative total
14
<PAGE>
return is the percentage change between the public offering price of one
Fund share at the beginning of a period and the net asset value of that
share at the end of the period. In calculating the average annual total
return and cumulative total return, the maximum sales charge is deducted
from the hypothetical investment and all dividends and capital gain
distributions during the period are assumed to be reinvested. All
performance data and figures are based upon historical information and are
not intended to indicate future performance. The investment return on and
principal value of an investment in the Fund will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their
original cost.
The Fund may from time to time compare its investment results to various
unmanaged indices or other mutual funds in reports to shareholders, sales
literature, and advertisements. This may include comparisons of relative
performance based upon data provided by services such as Lipper Analytical
Services, Incorporated. The results may be calculated on a total return
and/or yield basis for various periods, with or without sales charges.
Results without a sales charge will be higher. Total returns assume the
reinvestment of all dividends and capital gain distributions. The Fund also
may refer to publications which have mentioned the Fund, its Manager, or
their personnel. For additional information regarding calculation of the
Fund's total return see "Calculation of Performance Data" in the Statement
of Additional Information.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The total return for the Fund's most recent fiscal year ended December 31,
1995 was 28.78%. This total return figure assumes the reinvestment of all
distributions and does not include a sales charge. For a discussion of the
Fund's average annual return for its most recent one, five, and ten-year
periods, see the following chart.
The calendar year 1995 experienced economic conditions of moderate growth
and inflation, along with relatively low unemployment levels. The Federal
Reserve continued its inflation fighting efforts by increasing short-term
interest rates one more time in February of 1995, before reversing the
trend and reducing rates in both July and December of 1995. However, the
trend of interest rates, even at the beginning of the year, was toward
lower levels. Thus, interest rates declined throughout the year. These
favorable economic conditions coupled with very strong corporate earnings
produced an exceptionally strong year for the equity markets.
The Fund continued to invest in companies with a history of paying
dividends and showing a trend of increasing dividends. To raise dividends
generally requires a company to grow both its revenues and earnings, thus
these characteristics were also important in the Fund's investment
selection. During the year, investments were increased in the insurance,
bank, and pharmaceutical industries. Reductions in investment positions
were made in the communications, energy, and tobacco industries.
The following chart compares the performance of a hypothetical $10,000
investment in the Fund over the last ten years to the performance of an
investment in the Standard & Poor's 500 Index. Past performance is not
predictive of future performance. The information in the chart assumes
that the maximum current sales charge was paid upon acquisition of the Fund
shares and reflects
15
<PAGE>
all fund expenses during the period covered. The information in the chart
regarding the hypothetical performance of the Index assumes that no sales
charge was paid upon an investment in the Index and that there were no
expenses associated with an investment in the Index.
[CHART APPEARS HERE]
(December 31 Fiscal Year)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Peformance $9,521 $11,423 $11,755 $13,543 $17,339 $17,073 $22,418 $22,743 $24,926 $24,957 $32,139
- --------------------------------------------------------------------------------------------------------------------------------
Index Performance $10,000 $11,868 $12,492 $14,567 $19,182 $18,584 $24,248 $26,096 $28,721 $29,100 $40,021
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All performance data and figures are based upon past performance. The
investment return on and principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
The above performance data for the Fund assumes the applicability of the
current maximum sales charge and does not include adjustments for expenses
which have changed during the periods reflected.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION
REFERRED TO ON THE COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, THE MANAGER OR SBM FINANCIAL SERVICES, INC. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN A
STATE OR JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME SHALL
NOT IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE
THE DATE THEREOF.
16
<PAGE>
PROSPECTUS
MAY 1, 1996
STATE BOND
DIVERSIFIED
FUND
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069. STATE BOND
DIVERSIFIED
FUND
INVESTMENT MANAGER:
ARM Capital Advisors, Inc.
200 Park Avenue
20th Floor
New York, New York 10166
[LOGO]
DISTRIBUTOR:
SBM Financial Services, Inc.
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069.
TRANSFER, REDEMPTION AND
OTHER SHAREHOLDER
ACCOUNT SERVICES:
SBM Financial Services, Inc.
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069.
PORTFOLIO SECURITIES
CUSTODIAN:
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
STATE BOND DIVERSIFIED FUND
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
Telephone No. (612) 835-0097
This Statement of Additional Information supplements the information
contained in the current Prospectus of State Bond Diversified Fund (the "Fund")
dated May 1, 1996. This Statement of Additional Information is not a Prospectus
but should be read in conjunction with the Fund's Prospectus which may be
obtained by contacting the Fund at the address or telephone number noted above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
What Are The Fund's
Investment Objectives,
Policies, and Risks?..................
Calculation of Performance Data........
What Are the Fund's
Investment Limitations?...............
Who Manages The Fund?
(See In The Prospectus "How
Is The Fund Managed?")...............
The Manager............................
Management Agreement And Expenses
(See In The Prospectus "How
Is The Fund Managed")................
Plan Of Distribution...................
Transfer Agent.........................
Custodian..............................
Independent Auditors...................
Page
----
Portfolio Transactions.................
(See In The Prospectus "What
About Brokerage Commissions?")........
Purchase of Shares.....................
How Is The Offering Price
Determined?...........................
How Are Shares Distributed?............
How Can You "Sell" Your Shares?........
How Is Net Asset Value Per
Share Determined?.....................
What Is The Tax Status.................
Of The Fund?..........................
Will The Fund Withhold Taxes
On Distributions?.....................
General Information....................
Financial Statements...................
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS STATEMENT OF ADDITIONAL
INFORMATION OR THE PROSPECTUS DATED MAY 1, 1996, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN
OFFER TO SELL SECURITIES IN ANY STATE OR JURISDICTION IN WHICH SUCH OFFERING MAY
NOT LAWFULLY BE MADE. THE DELIVERY OF THIS STATEMENT OF ADDITIONAL INFORMATION
AT ANY TIME SHALL NOT IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
FUND SINCE THE DATE HEREOF.
<PAGE>
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?
As stated in the Prospectus, the Fund seeks to produce reasonable current
income and long-term capital value growth without exposing capital to undue
risk.
Lending of Portfolio Securities
- -------------------------------
As stated in the Prospectus, the Fund may lend portfolio securities to
certain institutional borrowers of securities and may invest the cash collateral
and obtain additional income or receive an agreed upon amount of interest from
the borrower. Any such loans generally will not exceed 90 days' duration.
Loans are subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection with a
loan and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The Fund does not have
the right to vote securities on loan, but would terminate the loan and regain
the right to vote if that were considered important with respect to the
investment. The Fund did not enter into any such loans in the last fiscal year.
Repurchase Agreements
- ---------------------
The Fund may enter into repurchase agreements with commercial banks and
with broker/dealers in order to invest cash for the short-term. A repurchase
agreement is an agreement under which the Fund acquires a fixed-income,
generally a U.S. Government obligation, subject to repurchase by the seller at
an agreed-upon price and date. The repurchase price reflects an agreed-upon
return for the period the instrument is held by the Fund and is unrelated to the
coupon provided by the instrument. Repurchase agreements are usually for
periods of one week or less, but may be for longer periods. However, as a
matter of fundamental policy, the Fund will not enter into repurchase agreements
if more than 10% of its net assets would be so invested. Repurchase agreements
will be fully collateralized. If, however, the seller defaults on its
obligation to repurchase the underlying security, the Fund may experience delay
or difficulty in exercising its rights to realize upon the security and might
incur a loss if the value of the security has declined. The Fund might also
incur disposition costs in liquidating the security. The Fund to date has not
entered into any repurchase agreements and has no present intention of doing so
in the future.
Except as otherwise stated or as described under "What Are The Fund's
Investment Limitations?" below, the foregoing investment policies are not
fundamental and the Board of Directors of the Fund may change such policies
without the vote of a majority of its outstanding voting securities (as defined
below).
High-Yield Securities
- ---------------------
The Fund currently does not anticipate that it will invest any significant
portion of its assets in securities that are rated below BBB by Standard &
Poor's Ratings Group ("S&P") or Baa by
2
<PAGE>
Moody's Investors Service, Inc. ("Moody's"). All fixed-income securities other
than convertible securities will be invested in securities rated in the top four
rating categories (generally considered to be investment grade) by S&P or
Moody's or in unrated securities regarded as being of comparable credit quality.
The Fund is not, however, prohibited by any Fund policy from investing in lower
rated convertible securities.
Securities rated BB or B by S&P or Ba or B by Moody's (or equivalently
rated by another nationally recognized statistical rating organization) are
below investment grade and generally will involve more credit risk than
securities in the higher rating categories. Such bonds are commonly known as
"junk bonds." In some cases such securities are subordinated to the prior
payment of senior indebtedness, thus potentially limiting the holder's ability
to receive payments or to recover full principal when senior securities are in
default. Also, during an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet projected business goals, and to obtain additional
financing. If the Fund did acquire any such securities, upon any default the
Fund could incur additional expenses to the extent it is required to seek
recovery of the payment of principal or interest on the relevant portfolio
holding.
In addition, lower rated securities may be thinly traded, which may have an
adverse impact on market price and the ability of the holder to dispose of
particular issues when necessary to meet its liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. A thinly traded market also may interfere with the ability of the
holder to accurately value high-yield securities and, consequently, value the
Fund's assets. Furthermore, adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the value and liquidity of
high-yield securities, especially in a thinly traded market.
Yields on high-yield securities will fluctuate over time. The prices of
high-yielding securities have been found to be less sensitive to interest rate
changes than higher-rated investments, but more sensitive to adverse economic
changes or developments affecting the issuer. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of high-yielding securities and, to the extent the Fund acquires
such securities, the Fund's asset value.
Portfolio Turnover
- ------------------
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average value of the portfolio securities owned during the fiscal year.
Securities with remaining maturities of one year or less at the date of
acquisition are excluded from the calculation. The Fund's portfolio turnover
rate was 9% for fiscal year 1995 and 22% for fiscal year 1994.
3
<PAGE>
CALCULATION OF PERFORMANCE DATA
Average Annual Total Return
- ---------------------------
The Fund's average annual total return over the one, five, and ten year
periods ended December 31, 1995, were as follows:
One Year 22.67%
Five Years 12.37%
Ten Years 12.38%
The average annual total return quotations for the one, five, and ten year
periods ending on December 31, 1995 are computed by finding the average annual
compounded rates of return over the one, five, and ten year periods that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
n
P(1+T) = ERV
Where:
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of a such period.
This calculation deducts the maximum sales charge from the hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
Cumulative Total Return
- -----------------------
Cumulative total return is computed by finding the cumulative compound rate
of return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeeming value, according to the
following formula:
4
<PAGE>
ERV - P
CTR = ------- 100
P
Where:
CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a hypothetical
$1,000 payment made at the beginning of period.
P = initial payment of $1,000
This calculation assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
WHAT ARE THE FUND'S INVESTMENT LIMITATIONS?
Under the Fund's fundamental policies, which cannot be changed except by
vote of a majority of its outstanding voting securities, the Fund may not:
1. Purchase securities on margin or sell securities short.
2. Participate on a joint or joint and several basis in any trading account in
securities.
3. Invest more than 5% of its total assets at market value in securities of any
one issuer, except United States Government securities or its agencies, or
purchase any security if, as a result, it would hold more than 10% of the
outstanding voting securities of any issuer.
4. Borrow money except from banks as a temporary emergency measure and then not
in excess of 10% of total assets at cost.
5. Lend any of its assets, except for portfolio securities, other than through
the purchase of bonds, debentures or notes and other evidences of
indebtedness.
6. Lend portfolio securities, except to brokers and dealers against not less
than 100% cash or cash equivalent collateral and only if immediately
thereafter the aggregate market value of securities loaned does not exceed
10% of the market value of its gross assets.
7. Purchase securities of other investment trusts or companies, except as part
of a plan of merger or consolidation.
5
<PAGE>
8. Purchase securities of any issuer in continuous operation for less than
three years if more than 5% of its assets would be so invested.
9. Hold the securities of any issuer if, to its knowledge, directors or
officers of the Fund or certain other related persons individually owning
beneficially more than 0.5% of the securities of that issuer, own in the
aggregate more than 5% of such securities.
10. Underwrite securities of other issuers, including the purchase of restricted
securities, except in cases where the Fund would be deemed a "statutory
underwriter" under the Securities Act of 1933.
11. Purchase interests in real estate, real estate investment trusts,
commodities or commodity contracts.
12. Make an investment which would concentrate more than 25% of its net asset
value in any one industry.
13. Mortgage or pledge any of its property, real or personal.
14. Purchase the securities of any person, firm, association, corporation,
syndicate, combination, organization, government or any subdivision thereof,
if upon such purchase, the Fund would own more than 10% of any class of the
outstanding securities of such person, firm, association, corporation,
syndicate, combination, organization, government, or subdivision. For the
purpose of this restriction, all kinds of securities of a company
representing debt shall be deemed to constitute a single class, regardless
of relative priorities, maturities, conversion rights and other differences,
and all kinds of stock of a company preferred over the common stock as to
dividends or in liquidation shall be deemed to constitute a single class
regardless of relative priorities, series designations, conversion rights,
and other differences.
Although not fundamental policies subject to shareholder vote, the Fund has
a policy not to invest in companies for the purpose of exercising control or
management; not to invest in equity securities of issuers which are not readily
marketable if more than 5% of its assets would be so invested; not to invest in
any oil, gas or mineral exploration or development programs; and not to invest
in puts, calls, spreads, straddles or combinations thereof. During the past
twelve months the Fund has not borrowed any money and has no current intention
of doing so in the foreseeable future.
Under the Investment Company Act of 1940, a "vote of a majority of the
outstanding voting securities" of the Fund means the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or
more of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
6
<PAGE>
WHO MANAGES THE FUND?
Directors and officers of the Fund, together with information as to their
principal business occupations during the past five years, are shown below.
Each Director who is an "interested person" of the Fund, as defined in the
Investment Company Act of 1940, is indicated by an asterisk. Unless otherwise
indicated, their addresses are 239 S. Fifth Street, Louisville, Kentucky 40202.
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- ------------------------------- ----------------------- ------------------------------------------------
<S> <C> <C>
William B. Faulkner (68) Director President, William Faulkner & Associates,
240 East Plato Blvd. business and institutional adviser since 1986;
St. Paul, Minnesota 55107 Consultant to American Hoist & Derrick
Company, construction equipment
manufacturer, from 1986 to 1989; prior
thereto, Vice President and Assistant to the
President, American Hoist & Derrick
Company. Director of the other mutual
funds in the State Bond Group
Chris L. Mahai (39) Director Senior Vice President, Strategic Integration
425 Portland Avenue Unit, Star Tribune/Cowles Media Company,
Minneapolis, Minnesota 55488 since August 1995; Vice President,
Marketing Director, Star Tribune, since
September 1992; from 1990 to 1992, self-
employed consultant, marketing services;
prior thereto, Senior Vice President of
Corporate Relations and marketing, First
Bank System, Inc. Director of the other
mutual funds in the State Bond Group
John R. Lindholm (46)* Director President of Integrity Life Insurance
Company ("Integrity") and Vice President-
Chief Marketing Officer of National
Integrity Life Insurance Company ("National
Integrity") since November 26, 1993;
Executive Vice President-Chief Marketing
Officer of ARM Financial Group, Inc. since
July 27, 1993; since March 1992 Chief
Marketing Officer of Analytical Risk
Management, L.P.; from June 1990 to
February 1992, Chief Marketing Officer and
a Managing Director of the ICH Capital
Management Group, ICH Corporation,
Louisville, Kentucky; prior thereto, Chief
Marketing Officer and Managing Director
for Capital Holding Corporation's
Accumulation and Investment Group.
Director of the other mutual funds in the
State Bond Group and of The Legends Fund,
Inc.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- ------------------------------- ----------------------- ------------------------------------------------
<S> <C> <C>
John Katz (56) Director Investment banker since January 1991;
10 Hemlock Road Chairman and Chief Executive Officer, Sam's
Hartsdale, NY Restaurant Group, Inc. (a restaurant holding
company), from June 1991 to August 1992;
Executive Vice President (from January 1989
to January 1991) and Senior Vice President
(from December 1985 to January 1989),
Equitable Investment Corporation (an indirect
wholly-owned subsidiary of The Equitable
Life Assurance Society of the United States,
through which it owns and manages its
investment operations). Director of the other
mutual funds in the State Bond Group and of
The Legends Fund, Inc.
Theodore S. Rosky (57) Director Retired since April 1992; Executive Vice
2304 Speed Avenue President, Capital Holding Corporation (from
Louisville, KY December 1991 to April 1992); prior thereto,
Executive Vice President and Chief Financial
Officer, Capital Holding Corporation.
Director of the other mutual funds in the State
Bond Group and of The Legends Fund, Inc.
Dale C. Bauman (58) President Vice President and Sales Manager, SBM
8400 Normandale Lake Blvd. Financial Services, Inc., since June 1992;
Suite 1150 prior thereto, Vice President and Division
Minneapolis, Minnesota 55437 Manager, SBM Financial Services, Inc.,
1980 to June 1992. President of the other
mutual funds in the State Bond Group.
Keith O. Martens (56 ) Vice President Senior Portfolio Manager, ARM Capital
200 Park Avenue, 20th Floor Advisors, Inc. since June 14, 1995; Executive
New York, New York 10166 Vice President - Investments, SBM Company;
Vice President State Bond and Mortgage Life
Insurance Company and SBM Certificate
Company. Vice President of the other mutual
funds in the State Bond Group.
Don W. Cummings (32) Controller Controller of ARM Financial Group, Inc.
since July 15, 1993, and Integrity and
National Integrity since November 26, 1993.
Prior to November 26, 1993 he served as
Controller of ARM, Ltd., a position he held
from July 1992. From 1985 to June 1992,
Mr. Cummings served in various positions
within Ernst & Young LLP's Insurance
Industry Accounting and Auditing Practice,
the last of which was Manager. Controller of
the other mutual funds in the State Bond
Group and of The Legends Fund, Inc.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- ------------------------------- ----------------------- ------------------------------------------------
<S> <C> <C>
Kevin L. Howard (31) Vice President and Assistant General Counsel of ARM Financial
Secretary Group, Inc. since January 31, 1994; Assistant
General Counsel of Capital Holding
Corporation from April 1992 to January 1994;
Attorney, Greenebaum Doll & McDonald,
1989 to April 1992. Vice President and
Secretary of the other mutual funds in the
State Bond Group and Secretary of The
Legends Fund, Inc.
Peter S. Resnik (34) Treasurer Treasurer of ARM Financial Group, Inc.,
Integrity and National Integrity since
December 1993; employed in various financial
and operational capacities by Analytical Risk
Management Ltd. since December 14, 1992;
Assistant Vice President of the
Commonwealth Life Insurance Company
subsidiary of Capital Holding Corporation
from 1986 to December 1992. Treasurer of
the other mutual funds in the State Bond
Group and of The Legends Fund, Inc.
Pam Freeman (28) Assistant Secretary Financial Analyst with ARM Financial Group,
Inc. since October 1993; Senior Accountant
and various other capacities with Ernst &
Young LLP from 1989 to September 1993.
</TABLE>
- --------
* Mr. Lindholm is an interested person, as defined in the 1940 Act, by virtue
of his positions with ARM Financial Group, Inc.
Directors and officers of the Fund (including former Directors) received
aggregate remuneration of $3,606 during the Fund's fiscal year ended December
31, 1995. Directors and officers of the Fund as a group owned directly or
indirectly 1,311.707 shares, or .03% of the Fund's capital stock at December 31,
1995.
The following table sets forth, for the fiscal year ended December 31,
1995, compensation paid by the Fund to the non-interested Directors and, for the
1995 calendar year, the aggregate compensation paid to the non-interested
Directors by all of the funds in the State Bond Group of mutual funds.
Directors who are interested persons, as defined in the Investment Company Act
of 1940, received no compensation from the Fund.
9
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Compensation from fund
Compensation complex including the State Bond
Name of Director from Fund (a) Group of Mutual Funds
- ---------------------- -------------- --------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------
William B. Faulkner $588 $5,778
- ------------------------------------------------------------------------
Patrick M. Finley $516 $3,096
- ------------------------------------------------------------------------
Chris L. Mahai $588 $3,528
- ------------------------------------------------------------------------
John Katz(b) $588 $9,264
- ------------------------------------------------------------------------
Theodore S. Rosky(b) $588 $9,264
- ------------------------------------------------------------------------
</TABLE>
(a) There were no pension or retirement benefits accrued for any of the named
persons by any of the funds.
(b) Messrs. Katz and Rosky have been directors of the Fund, and the other
mutual funds in the State Bond Group, since June 1, 1995. In addition,
they are directors of The Legends Fund, Inc., a mutual fund which is
advised by the Manager, which may be deemed to be a part of the same fund
complex as the State Bond Group of Mutual Funds. From June 1, 1995 through
December 31, 1995, these directors each received aggregate compensation
from all of the mutual funds in the State Bond Group in the amount of
$1,764.
THE MANAGER
ARM Capital Advisors, Inc. (the "Manager") manages the investments of the
Fund and administers its business and other affairs. The address of the Manager
is 200 Park Avenue, 20th Floor, New York, New York 10166. The predecessor to
the Manager was SBM Company, which served as manager of the Fund from the Fund's
inception until June 13, 1995. The Manager assumed management of the Fund on
June 14, 1995, effective for accounting purposes as of June 1, 1995, following
the acquisition of substantially all of the business operations of SBM Company
by ARM.
The Manager is a wholly-owned subsidiary of ARM Financial Group, Inc.
("ARM"), a Delaware corporation. ARM is a financial services company providing
retail and institutional products and services to the long-term savings and
retirement market. The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan
Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P. and
MSCP III 892 Investors, L.P., investment funds sponsored by Morgan Stanley
Group, Inc. ("Morgan Stanley"), own approximately 91% of the outstanding shares
of voting stock of ARM. The Manager currently provides investment management
services to institutional and individual clients, including ARM and its
subsidiaries, with combined assets in excess of $4 billion.
The Manager is also manager of The Legends Fund, Inc. and the other mutual
funds in the State Bond Group of mutual funds: State Bond Cash Management Fund,
State Bond U.S.
10
<PAGE>
Government and Agency Fund, State Bond Common Stock Fund, State Bond Minnesota
Tax-Free Income Fund and State Bond Tax Exempt Fund.
MANAGEMENT AGREEMENT AND EXPENSES
Under the Investment Advisory and Management Agreement (the "Agreement"),
dated June 14, 1995, subject to the control of the Board of Directors, the
Manager manages the investment of the assets of the Fund, including making
purchases and sales of portfolio securities consistent with the Fund's
investment objectives and policies and administers its business and other
affairs. The Manager provides the Fund with such office space, administrative
and other services, and executive and other personnel as are necessary for Fund
operations. The Manager pays all the compensation of the directors of the Fund
who are employees of the Manager and of the officers and employees of the Fund.
The Fund pays the Manager a management fee for its services, calculated
daily and payable monthly, equal to an annual fee of .65 of 1% on the first
$100,000,000 of average daily net assets of the Fund, .60 of 1% on the next
$100,000,000 of average daily net assets of the Fund and .55 of 1% of average
daily net assets of the Fund over $200,000,000. The predecessor to the Manager,
SBM Company, was paid the following amounts from the Fund as a management fee
during its fiscal years ended December 31, 1995, 1994 and 1993, respectively:
$108,775; $248,964, and $245,829. The Manager received $162,706 from the Fund
as a management fee from June 1, 1995, the effective date for accounting
purposes on which the Manager commenced its duties as the Fund's investment
adviser, through December 31, 1995.
The Fund pays all its expenses other than those assumed by the Manager,
including fees and expenses of independent attorneys and auditors; interest,
taxes, governmental fees or membership dues; brokerage commissions or charges;
custodian, transfer agent or registrar fees; expense of preparing share
certificates and other expenses of issue, sale, underwriting, distribution,
redemption or repurchase of Fund shares; expenses of registering and
distributing reports, notices and dividends to shareholders; cost of stationery;
costs of stockholder and other meetings; travel expenses of officers, directors
and employees; and other normal corporate expenses. However, under the
Agreement, the Manager will pay all corporate expenses which, in any one fiscal
year, exceed 1 1/2% of the first $30,000,000 of the average daily net assets of
the Fund, and 1% of any additional average daily net assets of the Fund,
exclusive of interest, taxes, brokerage commissions, extraordinary expenses and
fees paid pursuant to the Rule 12b-1 plan. Under the terms of the Agreement, if
the Agreement between the Fund and the Manager is terminated, the Fund will
eliminate from its corporate name any reference to the name "State Bond".
Under the regulations of various states in which the Fund's shares are
qualified for sale, the amount of annual expenses which the Fund may receive are
limited to certain percentages of its average net assets. The most stringent of
such requirements limits such expenses, with certain limited categories of
expenses excepted, to 2 1/2% of the first $30 million of average net assets, 2%
of the next $70 million, and 1 1/2% of the remaining average net assets.
11
<PAGE>
The Agreement was approved by the directors of the Fund, including a
majority of the disinterested directors, at a meeting held March 24, 1995, and
by the shareholders of the Fund and a meeting held May 15, 1995. The Agreement
may be terminated at any time on 60 days' written notice by the Board of
Directors, or by vote of a majority of the outstanding shares or by the Manager.
The Agreement will terminate automatically upon assignment. The Agreement will
continue in effect for a period of more than two years from the date of its
execution only so long as such continuance is specifically approved at least
annually by either the Board of Directors or by a vote of the majority of the
outstanding voting shares of the Fund, provided that in either event such
continuance is also approved by the vote of a majority of the directors who are
not parties to such agreement or interested persons of such parties, cast in
person at a meeting called for the purpose of voting on such approval.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940 pursuant to which the Fund pays
certain expenses of distribution for the Fund's shares and shareholder
servicing, as described below.
SBM Financial Services, Inc. (the "Distributor"), a subsidiary of ARM, acts
as distributor of the shares of the Fund and of the other mutual funds in the
State Bond Group. Under the Plan the Fund pays the Distributor a monthly fee
equivalent on an annual basis to .25 of 1% of the average daily net assets of
the Fund. The fee is used to compensate those who provide administration,
shareholder service, and distribution assistance, and to pay certain other
expenses of selling Fund shares. A portion of the fee may be used for
advertising and promotional expenses including, by way of example but not by way
of limitation, costs of printing and mailing prospectuses, statements of
additional information and shareholder reports to prospective investors;
preparation and distribution of sales literature; advertising of any type; an
allocation of overhead and other expenses of the Distributor related to the
distribution of Fund shares; and payments to, and expenses of, officers,
employees or representatives of the Distributor, of other broker-dealers, banks
or other financial institutions, and of any other person who provides support
services in connection with the distribution of Fund shares, including travel,
entertainment, and telephone expenses.
During the fiscal year ended December 31, 1995 the Distributor received
approximately $103,684 in such fees. It utilized these funds approximately as
follows: compensation of sales personnel - $76,361; compensation of marketing
and distribution-related administrative personnel -$31,289; marketing materials
$5,558; promotion and travel - $5,663; and miscellaneous - $534. Amounts
expended in excess of the $103,684 received by the Distributor were paid for
from the Distributor's general funds.
12
<PAGE>
The arrangements under which the Fund compensates, indirectly, those who
provide administration, shareholder service, and distribution assistance, as
described above, are set forth in the Plan. The Plan provides:
(i) That it shall continue in effect for a period of more than one year
from the date of its execution or adoption only so long as such continuance is
specifically approved at least annually by the Board of Directors and by the
Directors who are not interested persons of the Fund and have no direct or
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan;
(ii) That any person authorized to direct the disposition of moneys paid or
payable by the Fund pursuant to the Plan or any related agreement shall provide
to the Fund's Board of Directors, and the Directors shall review, at least
quarterly, a written report of the amounts so expended and the purposes for
which such expenditures were made; and
(iii) That it may be terminated at any time by vote of a majority of the
members of the Board of Directors of the Fund who are not interested persons of
the Fund and have no direct or indirect financial interest in the operation of
the Plan or in any agreements related to the Plan or by vote of a majority of
the outstanding voting shares of the Fund.
The Plan provides that it may not be amended to increase materially the
amount to be spent for distribution without shareholder approval and that all
material amendments of the Plan must be approved by the Fund's Board of
Directors, including a majority of the Directors who are not interested persons
of the Fund and have no financial interest in the operation of the Plan or any
related agreements. The Fund may implement the Plan only if the selection and
nomination of the Fund's disinterested Directors are committed to the discretion
of the Fund's existing disinterested Directors. Under the terms of Rule 12b-1,
the Fund must preserve copies of any plan, agreement or report made pursuant to
the Rule for a period of not less than six years in an easily accessible place.
TRANSFER AGENT
ARM Transfer Agency, Inc. acts as the transfer and dividend disbursing
agent for the Fund pursuant to an agreement with the Fund dated February 1,
1996, and is compensated on a transactional basis under a schedule approved by
the Fund's Board of Directors. Under this agreement ARM Transfer Agency, Inc.
maintains shareholders lists, processes requested account registration changes
and stock certificate issuance and redemption requests, administers withdrawal
plans, administers mailing and tabulation of Fund proxy solicitations, and
administers payment of distributions declared by the Fund. SBM Financial
Services, Inc. acted as the Fund's transfer agent pursuant to an agreement with
the Fund dated June 14, 1995, and received fees of $24,087 during the Fund's
fiscal year ended December 31, 1995. SBM Company, as the Fund's previous
transfer and dividend disbursing agent, received the following amounts from the
Fund as transfer
13
<PAGE>
agent, registrar, and disbursing agent for its fiscal years ended December 31,
1995, 1994 and 1993, respectively: $17,553; $37,500, and $35,400.
CUSTODIAN
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as portfolio securities custodian for the Fund.
INDEPENDENT AUDITORS
Ernst & Young LLP, independent certified public accountants, have been
selected as auditors of the Fund and issue a report on the Fund's financial
statements. Their address is One Kansas City Place, 1200 Main Street, Kansas
City, Missouri 64105-2143.
PORTFOLIO TRANSACTIONS
The Fund paid brokerage commissions as follows for the fiscal years ended
December 31, 1995, 1994, and 1993, respectively: $24,973, $54,309, and $65,341.
The Fund seeks to execute its portfolio security transactions on the most
favorable terms (including the price to be paid for the security) and in the
most effective manner possible, giving due consideration to various relevant
factors including, without limitation, the size and type of the transaction, the
nature and the character of the markets for the security, the confidentiality,
speed and certainty of effective execution required for the transaction, the
financial condition and executing and settlement capabilities of the broker, the
availability of research and statistical services, the value of such services to
the Fund, and the reasonableness of the brokerage commission. The
reasonableness of the brokerage commission, in relation to the other factors
enumerated, is determined based upon a knowledge of the brokerage community's
general rate structure.
While there is no understanding or agreement to do so, the Fund tries to
effect transactions through brokers who furnish the Manager with research or
statistical services, when not in conflict with the criteria enumerated above.
Typically these research and statistical services include such things as written
research reports, statistical computations and compilations, economic forecasts
and projections, security recommendations based upon research and analysis, and
conferences with the Fund management and Manager. Some of the Fund's brokerage
transactions during the fiscal year 1995 were directed to certain brokers as a
part of understandings with these brokers to provide research and statistical
services. These transactions amounted to approximately $1,638,763 with
resulting commissions of approximately $3,270. It is believed that these
transactions met the portfolio brokerage criteria enumerated above.
14
<PAGE>
Where portfolio transactions are executed by brokers who provide research
and statistical services, it is possible that the Fund may incur a somewhat
higher brokerage commission expense under certain circumstances than if the same
portfolio transaction was executed by a broker who does not provide such
services. To the extent that this is the case, it is authorized by law where
the value of the brokerage and research services charged is reasonable in
relation to the commission charged, and it has been authorized by the Board of
Directors of the Fund.
The Manager also serves as investment adviser for [six] other mutual funds.
To the extent that the Fund may pay a somewhat higher brokerage commission on a
trade because it is executed by a broker which also provides research and
statistical services, it is possible that said brokerage commission may also be
of value to one of the other mutual funds. However, it is felt that this
possibility of mutual benefit is not capable of measurement. The Manager deems
the availability of these research and statistical services to be of
considerable value to the Fund.
During the Fund's most recent fiscal year, the Fund did not purchase any
securities issued by the following categories of brokers, or their parent
companies: (1) the ten brokers who executed the largest dollar amounts of the
Fund's portfolio transactions; (2) the ten brokers who executed the largest
dollar amounts of principal transactions with the Fund; or (3) the ten brokers
who hold the largest dollar amounts of the Fund's shares.
PURCHASE OF SHARES
What Reductions Are Provided?
- ----------------------------
Volume discounts are provided if the total amount being invested in shares
of the Fund alone, or in any combination of shares of the Fund and the other
funds in the State Bond Group having a sales charge, reaches levels indicated in
the sales charge schedule set forth in the Prospectus.
The Right of Accumulation allows you to combine the amount being invested
in shares of the Fund and the other mutual funds in the State Bond Group having
a sales charge with the total net asset value of shares of those mutual funds
already owned and the total net asset value of shares you own of State Bond Cash
Management Fund which were acquired through an exchange of shares of another
mutual fund in the State Bond Group to determine reduced sales charges in
accordance with the schedule in the Prospectus. The value of the shares owned,
including the value of shares of State Bond Cash Management Fund acquired in an
exchange, will be taken into account in orders placed, however, only if the
Distributor is notified by you or your dealer of the amount owned at the time
your purchase is made and is furnished sufficient information to permit
confirmation.
The schedule of sales charges is also applicable to the aggregate amount of
purchases made by a single person within a period of 13 months pursuant to a
written Purchase Intention and Price Agreement (the "Letter of Intent") provided
by the Distributor. The Letter of Intent provides for a price adjustment
applicable to the amount of intended purchases specified in the Letter of Intent
15
<PAGE>
based upon the amount of purchases specified plus the total net asset value of
the shares of the other mutual funds in the State Bond Group already owned that
have a sales charge and the total net asset value of the shares owned of State
Bond Cash Management Fund which were acquired through an exchange of shares.
The investor considering the possibility of signing such a Letter of Intent
should read it carefully. The schedule of sales charges applicable to all
amounts invested under the Letter of Intent is computed as if the aggregate
amount had been invested immediately. Reduced sales charges also may apply to
purchases made within a 13-month period starting up to 90 days before the date
of execution of the Letter of Intent. Shares with a net asset value equal to 5%
of the minimum purchase amount specified are held in escrow to be applied toward
any sales charge deficiency that might result if the Letter of Intent is not
completed. The shares so held may be redeemed and proceeds thereof used as
required to pay additional sales charges which may be due if the amount of
purchases by such person during the 13 month period aggregates less than the
amount specified in the Letter of Intent. Escrow shares not redeemed will be
delivered to the investor upon completion of purchases under the Letter of
Intent.
If the gross amount invested within the 13 month period covered by the
Letter of Intent exceeds the specified purchase amount and reaches a level
allowing a smaller sales charge, a price adjustment will be made on the day it
reaches the new level. The Letter of Intent is not a binding agreement upon the
investor to purchase, or the Fund to sell, the full indicated amount.
Who Is Entitled To Reductions?
- -----------------------------
Reductions in sales charges apply to purchases by a "single person,"
including an individual; members of a family unit comprising husband, wife and
minor children; or a trustee or other fiduciary purchasing for a single
fiduciary account, including employee benefit plans qualified under Section 401
of the Internal Revenue Code of 1986, as amended (the "Code").
HOW IS THE OFFERING PRICE DETERMINED?
The public offering price per share is determined by dividing the Fund's
current net asset value per share (as described under "How is Net Asset Value
Per Share Determined?") by the sales charge percentage applicable to the
transaction. The following sample calculation is based upon the total net
assets of the Fund on December 31, 1995 of $45,436,796 and the total shares of
the Fund outstanding as of that date of 4,461,874 and a transaction with an
applicable sales charge of the maximum 4.75%.
Net Asset Value Per Share
($45,436,796 divided by 4,461,874) $10.18
======
shares outstanding)
Maximum Offering Price Per Share
($10.18 divided by .9525) $10.69
======
16
<PAGE>
HOW ARE SHARES DISTRIBUTED?
SBM Financial Services, Inc., a subsidiary of ARM, acts as distributor of
the shares of the Fund and of the other mutual funds in the State Bond Group.
As distributor of the Fund's capital stock, SBM Financial Services, Inc. allows
concessions to all dealers up to 4.25% on purchases to which the 4.75% sales
charge applies. The Distributor also pays sales commission to its own agents
who sell Fund shares. The Distributor retains the balance of sales charges paid
by investors. The sales charges paid by investors received by the Distributor
amounted to the following amounts for the Fund's fiscal years ended December 31,
1995, 1994, and 1993, respectively: $75,964; $141,150, and $140,730.
The agreement between the Fund and the Distributor provides that the
Distributor will pay certain expenses such as printing costs of prospectuses
used in offering shares to prospective investors, applications and
confirmations, and all other expenses in connection with the issuance and sale
of the Fund's shares. The Fund will pay the costs of registering and qualifying
shares for sale and of preparing, setting in print, and printing and
distributing prospectuses to existing shareholders.
HOW CAN YOU "SELL" YOUR SHARES?
The procedure for redemption of Fund shares under ordinary circumstances is
set forth in the Prospectus.
In unusual circumstances, payment may be postponed, if the orderly
liquidation of portfolio securities is prevented by the closing of, or
restricted trading on, the New York Stock Exchange during periods of emergency,
or such other periods as ordered by the Securities and Exchange Commission.
The Fund has committed itself to pay in cash all requests for redemptions
by the shareholder of record limited in amount during any 90-day period to the
lesser of $250,000 or 1% of the net asset value of the Fund at the beginning of
such period. Such commitment is irrevocable without the prior approval of the
Securities and Exchange Commission. Requests for redemption in excess of the
above limits may be paid in whole or in part, in portfolio securities or in
cash, as the Board of Directors may deem advisable; however, payments will be
made wholly in cash unless the Board of Directors believes that economic
conditions exist which would make such a practice detrimental to the best
interests of the Fund. If requests for redemption are paid in portfolio
securities, such securities would be valued in accordance with the procedures
described under "How Is Net Asset Value Per Share Determined?". A shareholder
would likely incur brokerage expenses if he converted these securities to cash.
17
<PAGE>
HOW IS NET ASSET VALUE PER SHARE DETERMINED?
Net asset value per Fund share is determined as of the close of the New
York Stock Exchange on each day that the New York Stock Exchange is open for
business. The New York Stock Exchange is closed on Saturdays and Sundays and is
also closed in observance of the following holidays: New Year's Day,
Washington's Birthday (observed), Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day. Net asset value is determined
by dividing the value of the total assets of the Fund, less liabilities, by the
number of shares outstanding.
Securities owned by the Fund for which market quotations are readily
available are valued at current market value, or, in their absence, at fair
value determined by the Board of Directors. Securities traded on an exchange are
valued at last sales prices or, in their absence and in the case of over-the-
counter securities, the mean of the latest closing bid and asked prices. Short-
term holdings are valued at cost plus accrued interest which approximates
current market value.
WHAT IS THE TAX STATUS OF THE FUND?
The Fund has fulfilled during its most recent fiscal year, and intends to
continue to fulfill, the requirements of subchapter M of the Code to qualify as
a regulated investment company, and so long as it remains so qualified, it will
not be liable for Federal income tax to the extent that it distributes all of
its net taxable and non-taxable income to shareholders.
WILL THE FUND WITHHOLD TAXES ON DISTRIBUTIONS?
Under Federal law, the Fund is required, subject to certain exceptions, to
withhold and remit to the U.S. Treasury 31% of dividends paid and other
reportable payments on an account if the holder of the account provides the Fund
with either an incorrect tax identification number or no number at all, or fails
to certify to the Fund that he is not subject to such withholding.
GENERAL INFORMATION
State Bond Diversified Fund is a diversified, open-end management
investment company, or mutual fund, incorporated in Maryland in 1964. The Fund
is currently the sole investment portfolio of State Bond Investment Funds, Inc.
Under Maryland law, each director of State Bond Investment Funds, Inc. owes
certain duties to the Fund and its shareholders. Maryland law provides that a
director shall "perform his duties as a director in good faith, in a manner he
reasonably believes to be in the best interests of the corporation and with the
care that an ordinarily prudent person in a like position would use under
similar circumstances." Fiduciary duties of a director of a Maryland
corporation include, therefore, both a duty of "loyalty" (to act in good faith
and in a manner reasonably believed to be in the best interest of the
corporation) and a duty of "care" (to act with the care an ordinarily
18
<PAGE>
prudent person in a like position would use under similar circumstances).
Maryland law allows Maryland corporations to eliminate or limit the personal
liability of a director or an officer to the corporation or its shareholder for
monetary damages for breach of the fiduciary duty of "care".
The Amended and Restated Articles of Incorporation of State Bond Investment
Funds, Inc. contain a provision eliminating liability of directors and officers
to the corporation or its shareholders to the fullest extent permitted by
Maryland law. Therefore, directors and officers of State Bond Investment Funds,
Inc. will not be liable for monetary damages to the Fund or its shareholders for
breach of the duty of care. However, such elimination of Maryland law regarding
a director's duty of care does not permit the elimination or limitation of
liability (1) to the extent that it is proved that the person actually received
an improper benefit or profit in money, property or services for the amount of
the benefit or profit in money, property or services actually received; (2) to
the extent that a judgment or other final adjudication adverse to the person is
entered in a proceeding based on a finding in the proceeding that the person's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceeding; or (3)
for any action or failure to act occurring prior to February 18, 1988. In
addition, due to the provisions of the Investment Company Act of 1940,
shareholders would still have a right to pursue monetary claims against
directors or officers for acts involving willful malfeasance, bad faith, gross
negligence or reckless disregard of their duties as directors or officers.
FINANCIAL STATEMENTS
[Insert Financials and Auditor's Report]
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of State Bond Investment Funds, Inc.
and Shareholders of State Bond Diversified Fund
We have audited the accompanying balance sheet and statement of net assets of
State Bond Diversified Fund (the Fund) as of December 31, 1994 and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. 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 the securities owned as of
December 31, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of State
Bond Diversified Fund as of December 31, 1994, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
January 23, 1995 (Except for Note E, dated February 16, 1995)
Minneapolis, Minnesota
<PAGE>
INVESTMENT RECORD
The chart below illustrates the annual changes in the value of an assumed
investment of $10,000 for the period from June 25, 1964 (inception date), to
December 31, 1995. This period was one of fluctuating common stock prices. The
results shown should not be considered as a representation of the distributions
from net investment income or net realized gain which may be realized from an
investment made in the Fund today.
[GRAPH APPEARS HERE]
All Dividends & Distributions from Value of
Date Distributions Net Realized Gain Original Shares
---- --------------- ------------------ ---------------
6/25/64 $ 9,523.81 $ 9,523.81 $ 9,523.81
12/31/64 9,695.05 9,600.00 9,600.00
12/31/65 10,535.24 10,174.54 9,942.86
12/31/66 9,599.57 9,003.28 8,685.71
12/31/67 12,212.12 11,142.62 10,342.86
12/31/68 14,752.43 13,123.83 11,600.00
12/31/69 13,017.90 11,227.45 9,923.81
12/31/70 14,189.30 11,766.19 10,400.00
12/31/71 15,506.63 12,505.58 10,933.33
12/31/72 17,119.04 13,460.45 11,561.91
12/31/73 14,721.33 11,234.67 9,238.10
12/31/74 11,506.16 8,395.22 6,361.91
12/31/75 16,128.20 11,298.01 8,342.86
12/31/76 20,981.27 14,189.62 10,190.48
12/31/77 20,944.51 13,628.98 9,390.48
12/31/78 21,567.39 13,310.49 8,800.00
12/31/79 25,521.22 15,074.80 9,771.43
12/31/80 32,526.94 18,331.45 11,523.81
12/31/81 30,840.56 16,392.62 9,980.95
12/31/82 37,067.22 18,511.96 10,800.00
12/31/83 44,222.20 20,983.27 12,019.05
12/31/84 46,912.98 21,231.32 11,657.14
12/31/85 59,836.43 25,995.35 13,619.05
12/31/86 71,791.85 30,214.38 14,133.33
12/31/87 73,879.55 30,064.50 13,219.05
12/31/88 85,118.89 33,267.39 14,076.19
12/31/89 108,973.17 40,836.31 16,838.10
12/31/90 107,305.08 38,607.59 15,104.76
12/31/91 140,896.50 49,192.80 18,438.10
12/31/92 142,935.31 48,665.90 17,504.76
12/31/93 156,657.89 51,610.27 17,600.00
12/31/94 156,852.63 50,412.73 16,076.19
12/31/95 201,993.00 63,448.00 19,390.00
- -Total value assuming reinvestment of all dividends and distributions--$201,993
- -Total value assuming reinvestment of distributions from net realized gain--
$63,448 (an additional $25,596 received in cash dividends)
- -Value of original shares--$19,390
The chart above and the table on the following page assume the applicability of
the current maximum sales charge of 4.75% throughout the life of the Fund,
although the maximum sales charge was higher prior to March 1, 1990. Future
performance of the Fund will be affected by the establishment of a Rule 12b-1
plan, effective May 1, 1990, under which Fund assets may be used to pay
distribution costs. Initial net asset value is the amount received by the Fund
after deducting from the cost of investment the 4.75% sales charge described in
the prospectus. There is no sales charge on distributions taken in shares. No
adjustment has been made for any income taxes payable by shareholders on
distributions received in shares.
THE AVERAGE ANNUAL TOTAL RETURN FOR THE ONE, FIVE, AND TEN YEAR PERIODS ENDED
DECEMBER 31, 1995, WAS 22.67%, 12.37%, AND 12.38%, RESPECTIVELY. The performance
data quoted represents only past performances which is not predictive of future
performance. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
2
<PAGE>
Investment Record (continued)
<TABLE>
<CAPTION>
RESULTS ASSUMING
REINVESTMENT OF NET REALIZED
PER SHARE DATA GAIN DISTRIBUTIONS ONLY*
-------------------------------------------------------------------------
YEAR NET NET REALIZED
ENDED ASSET GAIN DIVIDEND NET REALIZED CASH
DECEMBER 31 VALUE DISTRIBUTION INCOME GAIN** DIVIDENDS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1964 $5.04 $ - $.050 $ - $ 95.24
1965 5.22 .120 .130 228.57 247.61
1966 4.56 .060 .140 116.95 272.87
1967 5.43 .210 .150 414.62 296.17
1968 6.09 .312 .150 640.24 307.80
1969 5.21 - .170 - 366.35
1970 5.64 - .200 - 431.00
1971 5.74 .063 .160 135.76 348.60
1972 6.07 .104 .150 226.58 332.63
1973 4.85 .264 .150 585.43 347.47
1974 3.34 .341 .170 802.20 414.70
1975 4.38 .091 .170 228.73 438.51
1976 5.35 .129 .180 332.75 477.41
1977 4.93 .212 .190 562.28 525.25
1978 4.62 .191 .250 528.02 720.26
1979 5.13 .094 .220 270.82 646.49
1980 6.05 .159 .260 467.23 787.80
1981 5.24 .187 .320 566.61 1,001.07
1982 5.67 .206 .320 644.44 1,044.76
1983 6.31 .106 .320 346.08 1,064.12
1984 6.12 .262 .280 871.25 971.37
1985 7.15 .289 .270 1,002.59 981.63
1986 7.42 .846 .250 3,163.90 949.12
1987 6.94 .440 .277 1,791.69 1,127.95
1988 7.39 .286 .305 1,250.95 1,337.56
1989 8.84 .229 .365 1,030.88 1,643.12
1990 7.93 .427 .342 1,972.52 1,579.86
1991 9.68 .415 .276 2,020.45 1,343.72
1992 9.19 .388 .237 1,971.78 1,204.40
1993 9.24 .508 .317 2,691.19 1,678.68
1994 8.44 .586 .225 3,270.88 1,256.75
1995 10.18 .442 .227 2,642.49 1,355.88
-----------------------------
$30,777.88 $25,596.15
=============================
</TABLE>
* Based upon an investment of $10,000 on June 25, 1964 (inception date).
**This amount represents each years net realized gain distribution assuming all
previous capital gain distributions were reinvested.
If all dividends and distributions had been taken in cash, the value of the
account on December 31, 1995, would have been $19,390. A total of $13,754 in net
investment income and $15,176 in net realized gains would have been paid to the
shareholder.
3
<PAGE>
State Bond Diversified Fund
Schedule of Investments
December 31, 1995
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCKS (85.9%)
ADVERTISING (2.0%)
Omnicom Group Inc. 24,000 $ 894,000
AMUSEMENT AND RECREATION SERVICES (1.2%)
ITT Corporation (a) 10,000 530,000
CHEMICALS AND ALLIED PRODUCTS (8.3%)
Dow Chemical Company 10,000 703,750
Eastman Chemical Company 10,000 626,250
Hercules, Inc. 20,000 1,127,500
Minnesota Mining and Manufacturing Company 20,000 1,325,000
----------
3,782,500
CONGLOMERATES (5.0%)
Hanson PLC 30,000 457,500
ITT Industries 10,000 240,000
Tenneco, Inc. 13,000 645,125
United Technologies Corporation 10,000 948,750
----------
2,291,375
CONSUMER PRODUCTS (2.0%)
Coca-Cola Company 12,000 891,000
DEPOSITORY INSTITUTIONS (3.1%)
Chase Manhattan Bank 10,000 606,250
Fleet Financial Group Inc. 20,000 815,000
----------
1,421,250
DRUGS AND PHARMACEUTICALS (4.4%)
Bristol-Myers Squibb Company 12,000 1,030,500
Merck & Company 15,000 986,250
----------
2,016,750
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ----------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT (5.4%)
AMP, Inc. 24,000 $ 921,000
Emerson Electric 10,000 817,500
Maytag Corporation 35,000 708,750
----------
2,447,250
ENERGY (10.3%)
Enron Corporation 25,000 953,125
Exxon Corporation 5,000 400,625
MCN Corporation 40,000 930,000
Repsol SA 15,000 493,125
Sonat, Inc. 20,000 712,500
Texaco, Inc. 10,000 785,000
YPF Sociedad Anonima 20,000 432,500
----------
4,706,875
FINANCIAL SERVICES (3.6%)
Dean Witter Discover Company 15,000 705,000
MBNA Corporation 25,000 921,875
----------
1,626,875
FOOD AND KINDRED PRODUCTS (1.9%)
General Mills, Inc. 15,000 866,250
HOTELS (1.4%)
Hilton Hotels Corporation 10,000 615,000
HOUSEHOLD PRODUCTS (2.3%)
Colgate Palmolive Corporation 15,000 1,053,750
INSURANCE CARRIERS (4.6%)
Allstate Corporation 13,905 571,843
CIGNA Corporation 10,000 1,032,500
ITT Hartford Group 10,000 483,750
----------
2,088,093
</TABLE>
5
<PAGE>
State Bond Diversified Fund
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
LUMBER AND WOOD PRODUCTS (1.2%)
Weyerhauser Company 13,000 $ 562,250
PAPER AND ALLIED PRODUCTS (2.7%)
Kimberly-Clark Corporation 15,000 1,241,250
PHOTOGRAPHY (2.7%)
Eastman Kodak Company 18,000 1,206,000
PRINTING AND PUBLISHING (3.9%)
Gannett Company 15,000 920,625
McGraw Hill Inc. 10,000 871,250
----------
1,791,875
RETAIL (2.5%)
May Department Store Company 13,000 549,250
Sears Roebuck and Company 15,000 585,000
----------
1,134,250
TELECOMMUNICATIONS (11.3%)
AirTouch Communications (a) 25,000 706,250
ALLTEL Corporation 30,000 885,000
British Telecommunication PLC 8,000 452,000
GTE Corporation 25,000 1,100,000
Pacific Telesis Group 25,000 840,625
SBC Communications, Inc. 20,000 1,150,000
----------
5,133,875
TRANSPORTATION (2.3%)
Conrail, Inc. 15,000 1,050,000
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES OR
PRINCIPAL
AMOUNT VALUE
----------- -----------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
UTILITIES (3.8%)
NIPSCO Industries Inc. 10,000 $ 382,500
Northeast Utilities 18,000 438,750
Peco Energy Company 20,000 602,500
Unicom Corporation 10,000 327,500
-----------
1,751,250
-----------
TOTAL COMMON STOCKS (Cost $26,042,611) 39,101,718
SHORT-TERM SECURITIES (14.1%)
American Express Credit Corporation,
5.60% due 01/10/96 $1,625,000 1,622,725
Ford Motor Credit Company, 5.72% due
01/03/96 1,850,000 1,849,412
General Electric Credit Corporation,
5.63% due 01/03/96 1,000,000 999,689
General Electric Credit Corporation,
5.80% due 01/05/96 975,000 974,370
Sears Roebuck Acceptance Corporation,
5.98% due 01/09/96 975,000 973,704
-----------
TOTAL SHORT-TERM SECURITIES
(Cost $6,419,900) 6,419,900
-----------
TOTAL INVESTMENTS (100%)
(Cost $32,462,511) (b) $45,521,618
===========
</TABLE>
(a) Non-income producing.
(b) Also represents cost for federal income tax purposes.
See accompanying notes.
7
<PAGE>
State Bond Diversified Fund
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investment in securities, at value (cost $32,462,511)
(Note 1)-See accompanying schedule $45,521,618
Dividends, interest and other receivables 113,332
-----------
TOTAL ASSETS 45,634,950
LIABILITIES
Cash overdraft 146,642
Payable to affiliates 36,458
Other payables and accrued expenses 15,054
-----------
TOTAL LIABILITIES 198,154
-----------
NET ASSETS $45,436,796
===========
Net Assets consist of:
Paid-in capital $32,377,689
Net unrealized appreciation on investment securities 13,059,107
-----------
NET ASSETS, for 4,461,874 shares outstanding $45,436,796
===========
NET ASSET VALUE and redemption price per share $ 10.18
===========
Maximum offering price per share (includes maximum
sales charge of 4.75%-reduced on purchases
of $50,000 or more) $ 10.69
===========
</TABLE>
See accompanying notes.
8
<PAGE>
State Bond Diversified Fund
Statement of Operations
Year Ended December 31, 1995
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Dividends $ 1,176,330
Interest 292,309
-----------
Total investment income 1,468,639
EXPENSES (Note 2)
Investment advisory and management fees 271,481
Rule 12b-1 plan fees 103,684
Transfer agent fees 41,640
Registration fees 13,581
Professional fees 20,989
Shareholders' reports 10,325
Custodian fees 11,899
Other expenses 14,922
-----------
Total expenses 488,521
-----------
Net investment income 980,118
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 1)
Net realized gain on investments 1,886,807
Change in unrealized appreciation on investment
securities 7,672,815
-----------
Net realized and unrealized gain on investments 9,559,622
-----------
Net increase in net assets resulting from operations $10,539,740
===========
</TABLE>
See accompanying notes.
9
<PAGE>
State Bond Diversified Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
-----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 980,118 $ 943,089
Net realized gain on investments 1,886,807 2,472,164
Net unrealized appreciation
(depreciation) 7,672,815 (3,315,204)
-----------------------------
Net increase in net assets
resulting from operations 10,539,740 100,049
Distributions to shareholders from:
Net investment income (985,587) (940,453)
Net realized gain (1,887,050) (2,472,772)
-----------------------------
Total distributions to shareholders (2,872,637) (3,413,225)
Capital share transactions:
Proceeds from sales of shares 2,625,089 4,060,096
Proceeds from reinvested dividends 2,588,104 3,090,198
Cost of shares redeemed (5,624,366) (3,866,269)
-----------------------------
Net increase (decrease) in net
assets resulting from share
transactions (411,173) 3,284,025
-----------------------------
Total increase (decrease) in net assets 7,255,930 (29,151)
NET ASSETS
Beginning of period 38,180,866 38,210,017
-----------------------------
End of period (including undistributed
net investment income of $5,549 at
December 31, 1994) $45,436,796 $38,180,866
=============================
OTHER INFORMATION
Shares:
Sold 277,506 446,525
Issued through reinvestment of 258,183 361,162
dividends
Redeemed (595,251) (422,208)
-----------------------------
Net increase (decrease) (59,562) 385,479
=============================
</TABLE>
See accompanying notes.
10
<PAGE>
State Bond Diversified Fund
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1995 1994 1993 1992 1991
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning
of period $ 8.44 $ 9.24 $ 9.19 $ 9.68 $ 7.93
Income from investment
operations:
Net investment income .23 .23 .32 .24 .27
Net realized and unrealized gain
(loss) on investments 2.18 (.21) .56 (.10) 2.18
--------------------------------------------------
Total from investment operations 2.41 .02 .88 .14 2.45
Less distributions:
From net investment income (.23) (.23) (.32) (.24) (.28)
From net realized gain (.44) (.59) (.51) (.39) (.42)
--------------------------------------------------
Total distributions (.67) (.82) (.83) (.63) (.70)
--------------------------------------------------
Net asset value, end of period $ 10.18 $ 8.44 $ 9.24 $ 9.19 $ 9.68
==================================================
TOTAL RETURN* 28.78% 0.13% 9.60% 1.45% 31.31%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in thousands) $45,437 $38,181 $38,210 $36,202 $31,316
Ratio of expenses to
average net assets 1.17% 1.17% 1.20% 1.19% 1.22%
Ratio of net investment
income to average net
assets 2.35% 2.46% 3.31% 2.55% 3.10%
Portfolio turnover rate 9% 22% 24% 14% 15%
</TABLE>
* Total returns do not consider the effects of the one time sales charge.
11
<PAGE>
State Bond Diversified Fund
Notes to Financial Statements
December 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The State Bond Diversified Fund (the "Fund") is the only investment portfolio of
State Bond Investment Funds, Inc. The Fund is registered under the Investment
Company Act of 1940, as amended, as a diversified open-end management investment
company. The Fund seeks to produce reasonable current income and long-term
capital value growth without exposing capital to undue risk.
On June 14, 1995, ARM Financial Group, Inc. ("ARM") completed the acquisition of
substantially all of the assets and business operations of SBM Company ("SBM").
As part of the acquisition, ARM Capital Advisors, Inc. ("ARM Capital Advisors"),
a subsidiary of ARM, assumed the responsibilities of SBM as manager of the Fund.
The Investment Advisory and Management Agreement between the Fund and ARM
Capital Advisors contains the same material terms and conditions (including the
fees payable to ARM Capital Advisors) as are contained in the Fund's prior
Investment Advisory and Management Agreement with SBM.
As part of the acquisition, ARM acquired all of the issued and outstanding
common stock of SBM Financial Services, Inc. ("SBM Financial Services"), the
Fund's distributor. Effective June 14, 1995, SBM Financial Services also became
the transfer agent for the Fund. Prior to the acquisition SBM functioned as the
transfer agent for the Fund.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for investment companies.
INVESTMENTS IN SECURITIES
Securities listed on national securities exchanges are valued at closing market
quotations at the end of each day. Unlisted securities are valued at the mean
between current bid and asked prices as quoted in the over-the-counter market.
Short-term securities are valued at cost plus accrued interest, which
approximates market value. Security transactions are accounted for on the date
the order to buy or sell is executed, and dividends declared but not received
are accrued on the ex-dividend date. Realized gains or losses from security
transactions are determined on the basis of specific identification.
12
<PAGE>
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 1995, net unrealized appreciation on a Federal income tax basis
was $13,059,107, which is comprised of unrealized appreciation of $13,384,585
and unrealized depreciation of $325,478.
INCOME TAX STATUS AND RELATED MATTERS
The Fund complied with the requirements of the Internal Revenue Code applicable
to regulated investment companies and distributed its taxable net investment
income and net realized gains. Therefore, no provision for federal or state
income taxes is required.
Dividends paid by the Fund from net investment income are taxable as ordinary
income on the shareholder's tax return. The portion of the ordinary income
dividends (including net short-term capital gains) attributable to the fiscal
year ended December 31, 1995, that qualified for the dividends received
deduction for corporate shareholders was 100%. The Fund has designated
$1,886,807 as a capital gain dividend for the purpose of the dividends paid
deduction.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders from net investment income, if any, are paid
quarterly. The Fund distributes substantially all of its taxable net realized
gain on investment securities annually. Dividends and distributions are recorded
on the ex-dividend date.
2. INVESTMENT ADVISORY AGREEMENT AND PAYMENTS TO RELATED PARTIES
ARM Capital Advisor is the Fund's investment adviser. The investment advisory
fee is computed at the annual rate of .65% on the first $100 million of average
daily net assets of the Fund, .60% on the next $100 million of average net
assets of the Fund and .55% of the average daily net assets of the Fund in
excess of $200 million. In addition, the Fund pays .25% of the average daily net
assets to SBM Financial Services under a Rule 12b-1 plan of share distribution.
ARM Capital Advisors has voluntarily agreed to reimburse the Fund for expenses
(including the advisory fee but excluding taxes) in excess of 1.5% of the first
$30 million of the average daily net assets of the Fund and 1.0% of the average
daily net assets in excess of $30 million. No such reimbursements were required
during the year ended December 31, 1995.
13
<PAGE>
State Bond Diversified Fund
Notes to Financial Statements (continued)
2. INVESTMENT ADVISORY AGREEMENT AND PAYMENTS TO RELATED PARTIES (CONTINUED)
Fees paid to SBM Financial Services for underwriting services in connection with
the sale of the Fund's capital shares aggregated $75,964 for the fiscal year
ended December 31, 1995. Such fees are not an expense of the Fund and are
excluded from the proceeds received by the Fund for sales of its capital shares.
Certain officers and directors of the Fund are also officers of ARM, ARM Capital
Advisors, and SBM Financial Services.
3. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and proceeds from sales of securities, excluding short-term
investments during the fiscal year ended December 31, 1995, amounted to
$3,182,743 and $7,805,960, respectively.
4. CAPITAL SHARES
At December 31, 1995, the Fund had authority to issue ten billion shares of
common stock, with a par value of $.00001 each.
14
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
State Bond Diversified Fund
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments of the State Bond Diversified Fund (the "Fund") as
of December 31, 1995, and the related statements of operations and changes in
net assets and financial highlights for the year then ended. 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 audit. The statement of changes
in net assets for the year ended December 31, 1994 and financial highlights for
each of the four years in the period ended December 31, 1994 of the State Bond
Diversified Fund were audited by other auditors whose report dated January 23,
1995 expressed an unqualified opinion.
We conducted our audit 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 securities owned at December 31, 1995, 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
audit provides 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 the
State Bond Diversified Fund at December 31, 1995, and the results of its
operations, changes in its net assets and financial highlights for the year then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
January 26, 1996
15
<PAGE>
PART C
OTHER INFORMATION
STATE BOND INVESTMENT FUNDS, INC.
Item 24. Financial Statements and Exhibits
- -------------------------------------------
(a) Financial Statements and Independent Auditors' Reports:
Included in Part A:
Financial Highlights for each year in the ten
year period ended December 31, 1995
Included in Part B:
Schedule of Investments - December 31, 1995
Statement of Assets and Liabilities -
December 31, 1995
Statement of Operations - Year ended December 31,
1995
Statements of Changes in Net Assets - Years ended
December 31, 1995 and 1994
Financial Highlights for each period in the five
years ended December 31, 1995
Notes to Financial Statements
Independent Auditors' Reports
(b) Exhibits
(1) Articles of Incorporation - filed as an exhibit to Post-Effective
Amendments Nos. 47 and 19 to Form N-1A Registration
Statement of State Bond Investment Funds, Inc. on February
24, 1994, File Nos. 2-22365 and 811-1256 respectively, and
incorporated herein by reference.
(2) Bylaws - filed as an exhibit to Post-Effective Amendments Nos. 47
and 19 to Form N-1A Registration Statement of State Bond
Investment Funds, Inc. on February 24, 1994, File Nos.
2-22365 and 811-1256 respectively, and incorporated herein
by reference.
(3) Not applicable.
(4) See generally Article IV of the Articles of Incorporation, and
Articles II and VII of the Bylaws, filed as exhibits to Post-
Effective Amendments Nos. 47 and 19 to Form N-1A Registration
Statement of State Bond Investment Funds, Inc. on February 24,
1994, File Nos. 2-22365 and 811-1256 respectively, and
incorporated herein by reference.
(5) Investment Advisory Contract - filed as an exhibit
hereto.
(6) (a) Underwriting Agreement - filed as an exhibit
hereto.
<PAGE>
(b) Agreements between principal underwriters and dealers filed
as an exhibit to Amendment No. 20 to Form N-1A of State Bond
Securities Funds, Inc. on September 27, 1993, File No.
2-30162 and incorporated herein by reference.
(7) Not applicable.
(8) Form of Custodian Agreement - filed as an exhibit
hereto.
(9) Administration Agreement (Transfer Agent Agreement) - filed as
an exhibit hereto.
(10) Opinion of Counsel - filed as an exhibit hereto.
(11) Other opinions, appraisals or rulings, and
consents.
(i) Independent Auditors' Consent:
Ernst & Young LLP dated February 26, 1996
(ii) Independent Auditors' Consent:
Deloitte & Touche LLP dated February 26, 1996
(12) Not applicable.
(13) Purchase agreement form signed by initial stockholders - filed as
an exhibit to Amendment #39 to Form N-1 on November 12,
1979, File #2-19600, and incorporated herein by reference.
(14) Copy of prototype defined contribution plan -
filed as an exhibit to Amendment #20 to Form N-1A of State
Bond Securities Funds, Inc. on September 27, 1993, File No.
2-30162 and incorporated herein by reference.
(15) Plan pursuant Rule 12b-1 - filed as an Exhibit to Post-Effective
Amendments Nos. 47 and 19 to Form N-1A Registration
Statement of State Bond Investment Funds, Inc. on
February 24, 1994, File Nos. 2-22365 and 811-1256
respectively, and incorporated herein by reference.
(16) Computation of Performance Quotations - filed as an exhibit
hereto.
(17) Other Exhibits - Power of Attorney dated July 31, 1995 - filed as
an exhibit hereto.
(18) Not applicable.
(27) Financial Data Schedule - filed as an exhibit hereto.
Item 25. Persons Controlled by or under Common Control with Registrant
- ----------------------------------------------------------------------
None
Item 26. Number of Holders of Securities
- ----------------------------------------
Number of Record Holders
Title of Class (within last 90 days)
-------------- ------------------------
common - $.00001 par 2,855 as of December 31, 1995
<PAGE>
Item 27. Indemnification
- -------------------------
Article VII, Section 1 of the Amended and Restated Articles of
Incorporation of the Registrant provides that the Registrant shall indemnify its
directors and officers, whether serving the Registrant or at its request any
other entity, to the full extent permitted by the laws of the State of Maryland.
This indemnification shall not protect any director or officer against liability
to the Registrant or its shareholders to which he otherwise would be subject by
reason of willful misfeasance, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
Section 6.01 of the By-Laws of the Registrant provides that the Registrant
shall indemnify any person who was or is a party or is threatened to be made a
party to any action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than a proceeding by or in the right of the Registrant
in which such person shall have been adjudged to be liable to the Registrant),
by reason of being or having been a director or officer of the Registrant, or
serving or having served at the request of the Registrant as a director,
officer, partner, trustee, employee or agent of another entity in which the
Registrant has an interest as a shareholder, creditor or otherwise (a "Covered
Person"), against all liabilities and penalties, and reasonable expenses
(including attorney's fees) actually incurred by the Covered Person in
connection with such action, suit or proceeding, except (i) liability in
connection with any proceeding in which it is determined that (A) the act or
omission of the Covered Person was material to the matter giving rise to the
proceeding, and was committed in bad faith or was the result of active and
deliberate dishonesty, or (B) the Covered Person actually received an improper
personal benefit in money, property or services, or (C) in the case of any
criminal proceeding, the Covered Person had reasonable cause to believe that the
act or omission was unlawful and (ii) liability to the Corporation or its
security holders to which the Covered Person 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.
Article VII, Section 2 of the Amended and Restated Articles of
Incorporation of the Registrant provides that no director or officer of the
Registrant shall be personally liable to the Registrant or its security holders
for money damages, to the full extent permitted by Maryland law and the
Investment Company Act of 1940.
Pursuant to the Registrant's agreement with its principal underwriter, the
Registrant has agreed to indemnify the underwriter from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending such claims, demands or liabilities and any counsel fees incurred
in connection therewith) which it or any controlling person may incur, under the
Investment Company Act of 1940, or under common law or
<PAGE>
otherwise, arising out of or based upon any alleged untrue statement of a
material fact contained in the Registrant's registration statement or prospectus
or arising out of or based upon any alleged omission to state a material fact
required to be stated in either thereof or necessary to make the statements in
either thereof not misleading; provided, however, that the indemnity agreement,
to the extent that it might require indemnity of any person who is a controlling
person and who is also a director of the Registrant, may not inure to the
benefit of such person unless a court of competent jurisdiction shall determine,
or it shall have been determined by controlling precedent, that such result
would not be against public policy as expressed in the Investment Company Act of
1940; and further provided that in no event shall any thing contained in the
indemnity agreement be so construed as to protect the underwriter against any
liability to the Registrant or its security holders to which the underwriter
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence, in the performance of its duties, or by reason of its reckless
disregard of any obligations and duties under the underwriting agreement.
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 provision, 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 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.
The Registrant, its investment adviser, and its principal underwriter have
obtained directors and officers and errors and omissions liability insurance
insuring the activities of the Registrant, the investment advisory activities of
the investment adviser, and the activities of the principal underwriter as
distributor of investment company securities.
Item 28. Business and Other Connections of Investment Adviser
- --------------------------------------------------------------
Arm Capital Advisors, Inc., the Registrant's investment adviser, is a registered
investment adviser providing investment management services to investment
companies and institutional and individual companies.
<PAGE>
The business, profession, vocation or employment of a substantial nature which
each director or officer of the investment adviser, is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner, or trustee is as follows:
<TABLE>
<CAPTION>
Position and Offices
Name and Principal Business Address* with Adviser
- ------------------------------------ ---------------------
<S> <C>
John Franco Director and Co-Chief
Co-Chief Executive Officer Executive Officer
Martin H. Ruby Director and Co-Chief
Co-Chief Executive Officer Executive Officer
Emad A. Zikry Director and President
Since October 1994:
Executive Vice President-Chief
Investment Officer
200 Park Avenue, 20th Floor
New York NY 10166
1992-October 1994:
President-Chief Investment Officer
Klienwort Benson Investment Management
Americas Inc.
200 Park Avenue, 20th Floor
New York NY 10166
Keith O. Martens Senior Vice President
Since June 1995: and Senior Portfolio
200 Park Avenue, 20th Floor Manager
New York NY 10166
1969-June 1995:
Executive Vice President-Investments
SBM Company
8400 Normandale Lake Boulevard
Suite 1150
Minneapolis MN 55437
John R. McGeeney Secretary
Co-General Counsel and Secretary
Peter S. Resnik Treasurer
Treasurer
Don W. Cummings Controller
Controller
Rose M. Culbertson Tax Officer
Tax Officer
</TABLE>
<PAGE>
Kevin Howard Assistant Secretary
Since January 1994: and Compliance Officer
Assistant General Counsel and
Compliance Officer
1992-January 1994:
Providian Corp.
Assistant General Counsel
400 West Market Street
Louisville KY 40202
*All addresses are ARM Financial Group, Inc., 239 S. Fifth Street, 12th Floor,
Louisville KY 40202. Unless otherwise indicated, each individual has been
employed by ARM Financial Group or its predecessor-in-interest, Analytical Risk
Management, Ltd., for the last two years.
Item 29. Principal Underwriters
- --------------------------------
(a) SBM Financial Services, Inc. acts as principal underwriter for the Fund,
and for each of the following investment companies:
State Bond Income Funds, Inc.
(State Bond U.S. Government and Agency Securities Fund Portfolio)
State Bond Equity Funds, Inc.
(State Bond Common Stock Fund Portfolio)
State Bond Money Funds, Inc.
(State Bond Cash Management Fund Portfolio)
State Bond Tax-Free Income Funds, Inc.
(State Bond Minnesota Tax-Free Income Fund Portfolio)
State Bond Municipal Funds, Inc.
SBM Certificate Company
(b) The following table sets forth information concerning each director,
officer or partner of the principal underwriter.
<TABLE>
<CAPTION>
Name and Principal Positions & Offices Positions & Offices
Business Address with Underwriter with Registrant
- ------------------------ ---------------------- -------------------
<S> <C> <C>
John R. McGeeney* Director, Secretary, None
General Counsel and
Compliance Officer
Edward J. Haines* Director and President None
</TABLE>
<PAGE>
Walter W. Balek*** Vice President None
Dale C. Bauman*** Vice President President
Robert Bryant Vice President None
1550 East Shaw, #120
Fresno CA 93710
Richard M. Carlblom*** Vice President None
Ronald Geiger*** Vice President None
Peter S. Resnik* Treasurer Treasurer
Don W. Cummings* Controller Controller
William H. Guth** Operations Officer None
David L. Anders** Marketing Officer None
Rose M. Culbertson* Tax Officer None
Sheri L. Bean* Assistant Secretary None
* Address is 239 S. Fifth Street, 12th Floor, Louisville KY 40202
** Address is 200 East Wilson Bridge Road, Worthington OH 43085
*** Address is 100 North Minnesota Street, New Ulm MN 56073
(c) Not applicable.
Item 30. Location of Accounts and Records
- ------------------------------------------
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105-1716
SBM Financial Services, Inc.
100 North Minnesota Street
New Ulm MN 56073
Item 31. Management Services
- -----------------------------
None
Item 32. Undertakings
- ----------------------
None
<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 Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(a) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Louisville and State of Kentucky, on the 29th day of February, 1996.
STATE BOND INVESTMENT FUNDS, INC.
By: /s/Kevin Howard
------------------------
Kevin Howard, Vice President and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/Dale Bauman President February 29, 1996
- ------------------- (Principal Executive
Officer)
/s/Peter Resnik Treasurer February 29, 1996
- ------------------- (Principal Financial
Officer)
/s/Don Cummings Controller February 29, 1996
- ------------------- (Principal Accounting
Officer)
* Director
- -------------------
(William B. Faulkner)
* Director
- -------------------
(John R. Lindholm)
<PAGE>
* Director
- ------------------
(John Katz)
* Director
- ------------------
(Theodore S. Rosky)
* This Amendment has been signed
by each of the persons so indicated
by the undersigned as Attorney-in-Fact.
*By: /s/Kevin Howard February 29, 1996
---------------------
<PAGE>
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT, made this 14th day of June, 1995, by and between
State Bond Investment Funds, Inc., a Maryland corporation (hereinafter called
the "Investment Corporation"), and ARM Capital Advisors, Inc., a Delaware
corporation (hereinafter called the "Manager"),
WITNESSETH:
WHEREAS, the Investment Corporation has been organized for the purpose of
investing its funds in common stock and other securities, and wishes to make use
of the experience, sources of information, advice, assistance and facilities
available to the Manger, and to have the Manager perform for it various
management, statistical, accounting and clerical services; and the Manager is
willing to furnish such advice, facilities and services on the terms and
conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed as follows:
1. The Investment Corporation shall at all times keep the Manager fully
informed with regard to the securities owned by it, its funds available, or to
become available, for investment, and generally as to the condition of its
affairs. It shall furnish the Manager with a certified copy of all financial
statements, and a singed copy of each report prepared by certified public
accountants, and with such other information with regard to its affairs as the
Manager may from time to time reasonably request.
2. The Manager shall furnish to the Board of Directors and officers of the
Investment Corporation advice and recommendations with respect to the
acquisition, by purchase, exchange, subscription or otherwise, the holding and
disposal, through sale, exchange or otherwise, of securities, and advice and
recommendations with respect to other aspects of the business and affairs of the
Investment Corporation; and shall perform such functions of management and
supervision as may be directed by the Board of Directors of the Investment
Corporation.
3. The Manager shall supply at its expense, the Board of Directors and
officers of the Investment Corporation with all statistical information
reasonably required by them and reasonably available to the Manager; shall
furnish the Investment Corporation with office facilities, including space,
furniture and equipment and all personnel reasonably necessary for the operation
of the Investment Corporation; shall authorize and permit any of its directors,
officers and employees, who may be elected as directors or officers of the
Investment Corporation, to serve in the capacities in which they are elected.
Other than as herein specifically indicated, the Manager will not be responsible
for Investment Corporation expenses. Such Investment Corporation expenses
include, by way of example but not by way of limitation, all expenses incurred
in the operation of the Investment Corporation and any public offering of its
shares including, among others, distribution fees payable pursuant to any plan
of distribution pursuant to Rule 12b-1 under the Investment Company Act of 1940,
as amended ("Rule 12b-1 Plan of Distribution"); legal, auditing and accounting
expenses; interest, taxes, governmental fees or membership dues; brokerage
commissions or charges; custodian, transfer agent or registrar fees; expense of
preparing share certificates and other expenses of issue, sale, underwriting and
distribution of its shares; expenses of redemption or repurchase of Investment
Corporation shares; expenses of registering and distributing reports, notices
and dividends to shareholders; costs of stationery; costs of stockholders and
other meetings; and traveling expenses of officers, directors and employees, if
any.
4. No director, officer or employee of the Investment Corporation shall
receive from the Investment Corporation any salary or other compensation as such
director, officer or employee while he is at the same time a director, officer
or employee of the Manager. This paragraph shall not apply to directors,
executive committee members, consultants and other persons who are not regular
members of the Manager's staff.
5. As compensation for the services performed and the facilities furnished
by the Manager, including the services of any consultants retained by the
Manager, the Investment Corporation shall pay the Manager subject to the
provisions of Paragraph 6 hereof, as promptly as possible after the last day of
each month, a monthly fee of 1/12th of .65 of 1% on the first $100,000,000 of
average net assets of the Investment Corporation, 1/12th of .60 of 1% on the
next
<PAGE>
$100,000,000 of average daily net assets and 1/12th of .55 of 1% on average
daily net assets over $200,000,000. The first payment shall be made as promptly
as possible at the end of the month next succeeding the effective date of this
contract, and shall constitute a full payment of the fee due the Manger for all
services prior to that date. If this Agreement is terminated as of any date not
the last day of a month, such fee shall be paid as promptly as possible after
such date of termination, shall be based on the average daily net assets of the
Investment Corporation in the period from the beginning of such month to such
date of termination and shall be that proportion of such average daily net
assets as the number of business days in such period bears to the number of
business days in such month. The average daily net assets of the Investment
Corporation shall in all cases be based only on business days and shall be
computed as of the time of closing of the New York Stock Exchange. Each such
payment shall be accompanied by a report of the Investment Corporation or by a
reputable firm of independent accountants which shall show the amount properly
payable to the Manager under this Agreement and the detailed computation
thereof.
The parties agree that from time to time, the Manager may recommend that
the Investment Corporation execute all or a portion of its portfolio
transactions through SBM Financial Services, Inc., or some other subsidiary or
affiliate of the Manager; provided the execution of such portfolio transactions
is consistent with the Fund's obligations under the Investment Company Act of
1940, as amended. When such recommendations are accepted by the officers of the
Investment Corporation, and brokerage commissions are paid to SBM Financial
Services, Inc., or any other subsidiary of the Manger, the management fee
payable as above described will be reduced to the extent of the "net profits" of
such brokerage operation as hereinafter defined. This offset will be credited
after the close of the calendar year against the management fee due to the
Manager for the next succeeding month or months.
"Net profits" of the brokerage operations shall be determined in the
following manner:
Gross revenues of SBM Financial Services, Inc. (or other subsidiaries or
affiliate) from brokerage transactions for the portfolio of the Investment
Corporation will be credited to an "offset account" for the Investment
Corporation.
It is understood that brokerage services may also be rendered to others,
including other funds and institutions, and revenues attributable to such other
broker transactions will not be credited to the Investment Corporation's offset
account. Those revenues which cannot be specifically attributed to a
particular person or fund will be apportioned quarterly, on the basis of the
volume of portfolio transactions of the Investment Corporation (whether
transacted by the subsidiary or not), relative to the dollar volume of
transactions of other funds (whether transacted by the subsidiary or not) for
which the Manager (or a subsidiary) is the advisor, and a brokerage account is
maintained with the Manager or its subsidiaries. Such dollar volume of
portfolio transactions shall not include transactions in government securities,
commercial paper, cash equivalents, net trades, or principal transactions of the
Investment Corporation. This prorated amount will be credited to the offset
account for the Investment Corporation. Revenues to be so apportioned shall
include commissions received by the subsidiary from reciprocal transactions,
including those participations in commissions generally known as "give ups."
The offset account will be charged with all the direct expense of each
transaction, such as clearing broker fees, floor broker fees, transfer taxes,
exchange fees or other fees; and a share of the expense of the subsidiary
brokerage operations. The share of expenses to be charged to the offset account
shall be prorated on the basis of the subsidiary's gross brokerage revenues
attributable to the Investment Corporation, attributable to the Investment
Corporation, compared to the subsidiary's gross brokerage revenue from all
sources. Such prorated expenses shall include salaries for all personnel
regularly engaged in the brokerage operations, including record keeping,
accounting and administration. If any employee who is regularly engaged in
brokerage operations is not employed full time in such operation, the proportion
of his salary that shall be deemed an expense that is to be prorated shall be
determined according to generally accepted accounting principles. Other costs
and expenses such as rent, telephone, stock quotation, and other expenses and
adjustments customary to a brokerage operation which are made to the offset
account shall be determined according to generally accepted accounting
principles.
In addition, there shall be a deduction for the expenses of general
overhead, executive supervision, and general administration in an amount equal
to 20% of the gross revenues allocated to the offset account. The net amount,
determined as set forth above, shall be subject to a deduction for income taxes,
the sum to deducted for this purpose is to computed as if the offset account
were to file a separate income tax return. The balance of the account after all
the above deductions will be considered "net profits."
<PAGE>
6. The maximum charges per annum incurred by the Investment Corporation,
inclusive of management fee computed without regard to the offset described
above, but exclusive of Rule 12b-1 Plan of Distribution fees, interest, taxes,
brokerage fees, and extraordinary expenses, shall not exceed one and one-half
percent (1 1/2%) of the first $30,000,000 of the average annual value of the net
assets of the Investment Corporation and one percent (1%) of the average annual
value of any additional net assets of the Investment Corporation, exclusive of
the amount, if any, of funds borrowed for investment purposes, computed at least
quarterly. The Manager will assume and pay all expenses of the Investment
Corporation in excess of the expense limitations provided for herein, up to an
amount not exceeding its management and advisory fees for the period for which
reimbursement is made, such reimbursement to be made not less frequently than
annually.
7. Appropriate officers of the Manager shall provide the directors of the
Investment Corporation with such information as is required by any plan of
distribution adopted by the Investment Corporation pursuant to Rule 12b-1 under
the Investment Company Act of 1940, as amended.
8. The Manager assumes no responsibility under this Agreement other than
to render the services called for hereunder, in good faith, and shall not be
responsible for any action of the Board of Directors of the Investment
Corporation in following or declining to follow any advice or recommendations of
the Manager.
9. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Manager who may also be a director,
officer or employee of the Investment Corporation to engage in any other
business or to devote this time and attention in part to the management or other
aspects of any other business, whether of a similar nature or a dissimilar
nature, nor to limit or restrict the right of the Manager to engage in any other
business or to render services of any kind to any other corporation, firm,
individual or association.
10. As used in this Agreement, the terms "assignment" and "majority of the
outstanding voting securities" shall have the meanings given to them by Section
2(a) of the Investment Company Act of 1940.
11. This Agreement shall terminate automatically in the event of its
assignment by the Manager and shall not be assignable by the Investment
Corporation without the consent of the Manager.
12. This Agreement may be terminated at any time, without the payment of
any penalty, (a) by the Board of Directors of the Investment Corporation or by
vote of a majority of the outstanding voting securities of the Investment
Corporation by sixty days' written notice addressed to the Manager at its
principal place of business; and (b) by the Manager by sixty days' written
notice addressed to the Investment Corporation at its principal place of
business.
13. This Agreement shall be submitted for approval to the Board of
Directors of the Investment Corporation annually and shall continue in effect
only so long as specifically approved annually by the Board of Directors or by a
majority of the outstanding voting securities, and in either event by the vote
of a majority of the directors who are not parties to such contract or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval.
14. This Agreement shall become effective as of the later of June 14, 1995
or the date of this Agreement is approved by a vote of the holders of at least a
majority of the outstanding voting securities, as defined in the Investment
Company Act of 1940, of the Investment Corporation.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
STATE BOND INVESTMENT FUNDS, INC.
By: /s/ Edward L. Zeman
----------------------------
Its: Vice President
---------------------------
<PAGE>
ARM CAPITAL ADVISORS, INC.
By: /s/ Martin H. Ruby
---------------------------
Its: Co-Chief Executive Officer
---------------------------
<PAGE>
STATE BOND INVESTMENT FUNDS, INC.
SBM Financial Services, Inc.
8400 Normandale Lake Boulevard
Suite 1150
Minneapolis, Minnesota 55437
Dear Sirs:
This is to confirm that, in consideration of the agreements on your part
herein contained, we have agreed that you shall be, for the period of this
agreement, the exclusive distributor for the unsold portion of such number of
shares of our capital stock as may from time to time be effectively registered
under the Securities Act of 1933, as amended (hereinafter referred to as the
"Act"): provided, however, that nothing contained herein shall prevent us from
selling, at asset value, if we so elect, shares of our Capital Stock directly to
permit, e.g., acquisition of other companies.
1. We agree to sell and deliver from time to time, upon the terms
hereinafter set forth, such of the remaining unsold balance of our fully-paid
and nonassessable shares of capital stock as are then effectively registered
under the Act as you shall order from us, but only to the extent that you shall
have received purchase orders therefor. All orders from you hereunder shall be
subject to confirmation by us. We shall have the right at our election to
deliver hereunder either shares issued upon original issue or treasury shares.
2. You may sell as principal and distribute any shares so purchased by
you, through dealers or otherwise, in such manner and on such terms not
inconsistent with the provisions hereof, or our prospectus under the Act, as you
may determine from time to time, any you agree to use your best efforts to
effect such sale and distribution. You shall not make (a) any short sale of our
shares and you shall not make, unless otherwise notified by us in writing, (b)
any sale of such shares to any officer, director, or employee of the Fund, any
person or organization furnishing managerial, supervisory or distributing
services to the Fund or any officer, director, partner, stockholder, employee or
trustee of any such person or organization furnishing managerial, supervisory or
distributing services to the Fund, unless you are advised in writing that the
purchase is for investment purpose and that the purchaser will advise the Fund
of any sale of shares so purchased. You shall promptly advise us of all such
sales of shares known to you. You shall in addition, insofar as they concern
you, comply with all applicable laws, rules and regulations including, without
limiting the generality of the foregoing, all rules or regulations made or
adopted pursuant to Section 22 of the Investment Company Act of 1940 by the
Securities and Exchange Commission or any securities association registered
under the Securities and Exchange Act of 1934.
3. All shares offered for sale and sold by you, whether purchased from us
or otherwise, shall be (except as may be otherwise provided in our Prospectus)
offered for sale and sold by you at a price per share (hereinafter called the
offering price) approximately equal to (a) the asset value per share (determined
as authorized from time to time by our Board of Directors pursuant to the
authority conferred upon it in our Articles of Incorporation) plus (b) a sales
commission as specified in our Prospectus, which price, if not an exact multiple
of one cent, shall be adjusted to the nearest full cent. We shall determine and
promptly thereupon furnish to you a statement of such offering price applicable
in single transactions of less than $15,000.00 as often and at such times as our
Board of Directors shall by resolution determine, provided, however, that
subject to the provisions hereinafter contained in this paragraph numbered 3, we
shall determine and furnish such offering price at least once on each business
day on which the New York Stock Exchange is open for trading. Each such
offering price shall become effective at such time, and shall remain in effect
during such period, as may be stated in the statement thereof furnished to you
as above provided. Every statement of the offering price furnished to you as
above provided shall show the basis for of its computation. We agree to accept
and confirm every order which you may present to us for the sale to you of
shares of such stock, provided that such order contemplates the sale of such
shares by us to you at a price to you equal to the offering price in effect at
the time of
<PAGE>
confirmation by us of such order, less the applicable sales commission. We
shall also accept and confirm at the offering price in effect before a price
change less the applicable sales commission, such orders as are entered by you
to fill orders placed with you prior to such time of price change, but only if
such orders are received by us within a time deemed by us to be reasonable after
the time at which the then current offering price became effective and if such
orders are time stamped or bear other evidence to show that they are filed for
transmission at the point of origin prior to the time at which the then current
offering price became effective. We shall not in any event sell to you more
than the unsold portion of the shares of our stock then effectively registered
under the Act. Anything to the contrary herein notwithstanding, however,
whenever in their judgment such action is warranted by market, economic or
political conditions or by abnormal circumstances of any kind, our officers may
suspend the offering price currently in effect, give you notice of such
suspension and thereafter may, without incurring any liability under any of the
provisions of this agreement, decline to accept or confirm any orders for or
make any sales of any shares of our capital stock to you under this agreement
until such time as they shall deem it advisable to accept and confirm such
orders and to make such sales, and during any period during which the offering
price currently if effect shall be suspend or during which our officers shall
decline to accept or confirm any such orders or make any such sales, we shall be
under no obligation to confirm or accept any such orders or make any such sales
at any price.
4. At or prior to the time of delivery by us to you, or for your account,
of any shares of our capital stock you will pay or cause to be paid to us or to
our order an amount equal to the offering price of such shares at which your
order has been confirmed by us, less the applicable sales commission, which
sales commission shall constitute your concession for selling and distributing
such shares and may be deducted by you from the offering price in making payment
to us hereunder. You may in your discretion allow concessions to dealers
accounting to you out of such concession.
In addition, the Company shall pay you a monthly distribution fee equal to
1/12 of .25% of the average daily net assets of the Company. You shall use the
distribution fee to compensate those who sell Company shares, including your
registered representatives, and to pay certain other expenses of selling Company
shares, as set forth the Fund's Plan of Distribution, as such may be amended
from time to time, and any related agreements which shall comply with Rule 12b-1
under the Investment Company Act of 1940, as such rule may be periodically
amended.
5. Delivery of certificates for shares of our capital stock shall be made
as promptly as practicable against payment therefor by you. The certificates
for such shares shall be registered in such names and amounts as you may specify
in writing to us or our agent designated for the purpose.
6. The Company will, at its own expense, register its shares with the
Securities and Exchange Commission, State and other regulatory bodies and pay
the related registration and filing fees therefor.
During the period of this contract, you shall pay, cause to be paid, or
indemnify the Company against each and all of the following expenses, but no
others:
(a) All expenses and costs of printing prospectuses to be distributed to
prospective investors, application forms, confirmation forms, and any other
forms or sales literature used or to be used in connection with the offering and
sale of the Company's shares, including the costs of issuing and handling,
specifically excluding stock certificates. The Company will bear the expense of
preparing, setting in print, and printing and distributing prospectuses to
shareholders of the Company.
(b) Federal documentary stamp taxes payable on account of the transfer of
shares of the Company, but not of original issue of shares.
(c) All premiums required to be paid in connection with any bonds required
of you, your agents, salesmen and representatives, under the securities laws of
the various states in which our securities may be registered or qualified for
sale.
You will pay all expenses connected with your own qualification as a dealer
or broker under State or Federal laws and, except as otherwise specifically
provided in this agreement, all other expenses incurred by you in connection
<PAGE>
with the sale of our shares as contemplated in this agreement (including the
expense of qualifying us as dealer or broker under the laws of such states as
may be designed by you, if deemed necessary or advisable by us, and the net
additional expense, if any, including State and local taxes, of our qualifying
as a foreign corporation and doing business in any jurisdiction should that be
deemed desirable for the purpose of facilitating sales of our shares).
7. We shall furnish you from time to time, for use in connection with the
sale of our shares, such information with respect to us and our shares as you
may reasonably request, all of which shall be signed by one or more of our duly
authorized officers; and we warrant that the statements contained in any such
information, when so signed by our officers, shall be true and correct. We
shall also furnish you with annual audits of our books and accounts made by
independent public accountants regularly retained by us with a monthly itemized
list of the securities in our portfolio, with monthly balance sheets as soon as
practicable after the end of each month, and from time to time with such
additional information regarding our financial condition as you may reasonably
request.
8. If and to the extent that you may at any time be authorized so to do by
our Board of Directors, you may act as our agent for the sale of our shares,
upon such terms and conditions as our Board of Directors shall approve.
9. As used in this agreement, the term "registration statement" shall mean
and include the registration statement with respect to shares of our capital
stock which will be filed under the Act, and also any other registration
statement filed by us under the Act which shall become effective in each case
including any amendment thereto filed after the effective date thereof which
amendment shall become effective. As used in this agreement, the term
"prospectus" shall mean and include the then current prospectus filed by us as a
part of any such registration statement or any such amendment thereto under the
Act. We represent to you that our registration statement and prospectus under
the Act have been or will be, as the case may be, carefully prepared in
conformity with the requirements of the Act and the rules and regulations of the
Securities and Exchange Commission thereunder. We represent and warrant to you
that our registration statement and prospectus contain or will contain all
statements required to be stated therein in accordance with the Act and the
rules and regulations of said Commission, and that all statements of fact
contained or to be contained therein are or will be true and correct at the time
indicated or the effective date as the case may be; that neither our
registration statement nor our prospectus, when it shall become effective or be
authorized for use, will include any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading to a purchaser of our shares. We will from
time to time file such amendment or amendments to our registration statement and
prospectus as, in the light of future developments, shall, in the opinion of our
counsel, be necessary in order to have our registration statement and prospectus
at all times contain all material facts required to be stated therein or
necessary to make any statements therein not misleading to a purchaser of our
shares, but, if we shall not file such amendment or amendments within fifteen
days after receipt by us of a written request from you to do so, you may, at
your option, terminate this agreement immediately. We shall not file any
amendment or amendments within fifteen days after receipt by us of a written
request from you to do so, you may, at your option, terminate this agreement
immediately. We shall not file any amendment to our registration statement or
prospectus without giving you reasonable notice thereof in advance; provided,
however, that nothing in this agreement contained shall in any way limit our
right to file at any time such amendments to our registration statement and/or
prospectus, of whatever character, as we may deem advisable, such right being in
all respects absolute and unconditional. We represent and warrant to you that
any amendment to our registration statement or prospectus hereafter filed by us
will, when it became effective, contain all statement required to be stated
therein in accordance with the Act and the rules and regulations of said
Commission, that all statements of fact contained therein will, when the same
shall become effective, be true and correct and that no such amendment, when it
becomes effective, will include an untrue statement of a material fact or will
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading to a purchaser of our shares.
10. We agree to prepare and furnish you from time to time a copy of our
offering prospectus in form as then most recently filed with the Securities and
Exchange Commission. We authorize you and dealers to use such prospectuses, in
the form furnished to you from time to time, in connection with the sale of our
shares. We agree to indemnify, defend and hold you, and any person who controls
you within the meaning of Section 15 of the Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which you or any such controlling
person may incur, under the Act, or under common law or otherwise, arising out
of or based upon any alleged untrue statement of a material fact contained in
our registration statement or prospectus or arising out of or based
<PAGE>
upon any alleged omission to state a material fact required to be stated in
either thereof or necessary to make the statements in either thereof not
misleading; provided, however, that this indemnity agreement, to the extent that
it might require indemnity of any person who is such a controlling person and
who is also a director of the Fund, shall not inure to the benefit of such
person unless a court of competent jurisdiction shall determine, or it shall
have been determined by controlling precedent, that such result would not be
against public policy as expressed in the Act; and further provided; that in no
event shall anything herein contained be so construed as to protect you against
any liability to us or our security holders to which you would otherwise be
subject by reason of willfully misfeasance, bad faith, or gross negligence, in
the performance of your duties, or by reason of your reckless disregard of your
obligations and duties under this agreement. Our agreement to indemnify you and
any such controlling person as aforesaid is expressly conditioned upon our being
notified of any action brought against you or any such controlling person, such
notification to be given by letter or by telegram addressed to us at our
principal office in Minneapolis, Minnesota, and sent to us by the person against
whom such action as brought, within ten days after the summons or other first
legal process shall have been served. The failure so to notify us of any such
action shall not relive us from any liability which we may have to the person
against whom such action is brought by reason of any such alleged untrue
statement or omission otherwise than on account of our indemnity agreement
contained in this paragraph numbered 10. We will be entitled to assume the
defense of any suit brought to enforce any such claim, demand or liability, but
in such case, such defense shall be conducted by counsel of good standing chosen
by us and approved by you. In the event we do elect to assume the defense of
any such suit and retain counsel of good standing approved by you. In the event
we do elect to assume the defense of any such suit, or in case you do not
approve of counsel chosen by us, we will reimburse you or the controlling person
or persons named as defendant or defendants in such suit, for the fees and
expenses of any counsel chosen by us, we will reimburse you or the controlling
person or persons named as defendant or defendants in such suit, for the fees
and expenses of any counsel retained by you or them. Our indemnification
agreement contained in this paragraph number 19 and our representations and
warranties in this agreement shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of you or any controlling
person and shall survive the delivery of any shares or our capital stock
hereunder. This agreement of indemnity will inure exclusively to your benefit,
to the benefit of you successors and their respective estates, and to the
benefit of any controlling persons and their successors. We agree promptly to
notify you of the commencement of any litigation or proceedings against us in
connection with the issue and sale of any of our capital stock.
11. You agree to indemnify, defend and hold us, our several officers and
directors, and any person who controls us within the meaning of Section 15 of
the Act, free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any counsel fees incurred in connection
therewith) which we, our officers or directors, or any such controlling person
may incur under the Act or under common law or otherwise; but only to the extent
that such liability or expense incurred by us, our officers or directors or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by you to us for use in our registration
statement or prospectus or shall arise out of or be based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the registration statement or prospectus or necessary to make
such information not misleading. Your agreement to indemnify us, our officers
and directors, and any such controlling person as aforesaid is expressly
contained upon your being notified of any action brought against us, our
officers or directors or any such controlling person, such notification to be
given by letter or telegram addressed to you at your principal office in
Minneapolis, Minnesota, and sent to you by the person against whom such action
is brought, within ten days after the summons or other first legal process shall
have been served. You shall have a right to control the defense of such action,
with counsel of your own choosing, satisfactory to us, if such action is based
solely upon such alleged misstatement or omission on your part, and in any other
event you or such controlling person shall each have the right to participate in
the defense or preparation of the defense of an such action. The failure so to
notify you of any such action shall not relieve you from any liability which you
may have to us, our officers or directors, or to such controlling person by
reason of any such untrue statement or omission on your part otherwise than on
account of your indemnity agreement contained in this paragraph numbered 11.
12. No shares of our capital stock shall be bought or sold by either you
or us under any of the provisions of this agreement and no orders for the
purchase or sale of such stock hereunder shall be confirmed or accepted by us if
and so long as the effectiveness of our registration statement, or any
necessary amendments thereto, covering such stock, shall be suspended under any
of the provisions of the Act; provided, however, that nothing in this paragraph
numbered 12 contained shall in any way restrict or limit or have any application
to or bearing upon our obligation to
<PAGE>
redeem shares of our capital stock from any stockholder in accordance with the
provisions of our Articles of Incorporation. We will use our best efforts at
all times to have shares effectively registered under the Act.
13. We agree to advise you immediately:
(a) of any request by the Securities and Exchange Commission for amendments
to our registration statement or prospectus or for additional information;
(b) In the event of the issuance by the Securities and Exchange Commission
of any stop order suspending the effectiveness of our registration statement or
prospectus or the initiation of any proceedings for that purpose,
(c) of the happening of any material event which makes untrue any statement
made in our registration statement or prospectus or which requires the making of
a change in either thereof in order to make the statements therein not
misleading, and
(d) of all action of the Securities and Exchange Commission with respect to
any amendments to our registration statement or prospectus which may from time
to time be filed with the Securities and Exchange Commission under the Act.
14. You are authorized, as our agent, to accept offers for resale to us
and to repurchase shares of our capital stock upon such terms and conditions as
our Board of Directors by resolution shall determine. At least once on each
business day on which the New York Stock Exchange is open for trading we shall
determine and promptly thereupon furnish to you a statement of the price at
which such repurchases may be made during the period or periods specified in
such statement and, upon your request, we shall advise you of the price at which
such repurchase may be made at other times. Insofar as they concern us we agree
to comply with all applicable laws, rules and regulations, including without
limiting the generality of the foregoing, all rules or regulations made or
adopted pursuant to Section 22 of the Investment Company Act of 1940 by the
Securities and Exchange Commission or any securities association registered
under the Securities and Exchange Act of 1934.
15. You may, if you so desire, appoint or employ agents, at your own cost
and expense, to assist in the carrying out of your obligations hereunder, but no
such appointment or employment shall in any way relieve you of any of your
responsibilities or obligations to us hereunder.
16. Subject to the provisions of paragraph numbered 9 hereof, this
agreement shall continue in effect until such time as there shall then remain no
unsold balance of our shares of capital stock effectively registered under the
Act; provided, however, that this agreement shall continue in effect for a
period of more than two years from the date hereof only so long as such
continuance is specifically approved at least annually by a majority of the
Directors who are not parties to the contract or affiliate persons of any such
party, or by rate of a majority of our outstanding voting securities (as defined
in the Investment Company Act of 1940); provided further that this agreement
shall automatically terminate in the event of its assignment (as defined in said
Investment Company Act) by you; and provided, in any event, that this agreement
may be terminated at any time by us or by you without penalty upon sixty days'
written notice to the other.
<PAGE>
Please confirm that the foregoing is in accordance with you understanding
by indicating your acceptance hereof at the place below indicated, whereupon it
shall become a binding agreement between us.
Very truly yours,
STATE BOND INVESTMENT FUNDS, INC.
By: /s/ Edward L. Zeman
-----------------------------
Its: Vice President
--------------
Accepted: June 14, 1995
SBM FINANCIAL SERVICES, INC.
By: /s/ John R. McGeeney
-----------------------------
Its: Secretary
---------
<PAGE>
CUSTODY AND INVESTMENT ACCOUNTING AGREEMENT
-------------------------------------------
THIS AGREEMENT made the _____ day of December, 1995, by and between
INVESTORS FIDUCIARY TRUST COMPANY, a trust company chartered under the laws of
the state of Missouri, having its trust office located at 127 West 10th Street,
Kansas City, Missouri 64105 ("Custodian"), and STATE BOND INVESTMENT FUNDS,
INC., a Maryland corporation, having its principal office and place of business
at 100 North Minnesota Street, New Ulm, Minnesota 56073 ("Fund").
WITNESSETH:
WHEREAS, Fund desires to appoint Investors Fiduciary Trust Company as
custodian of the securities and monies of Fund's investment portfolio and as its
agent to perform certain investment accounting and recordkeeping functions; and
WHEREAS, Investors Fiduciary Trust Company is willing to accept such
appointment;
NOW, THEREFORE, for and in consideration of the mutual promises contained
herein, the parties hereto, intending to be legally bound, mutually covenant and
agree as follows:
1. APPOINTMENT OF CUSTODIAN. Fund hereby constitutes and appoints Custodian
as:
A. Custodian of the securities and monies at any time owned by the Fund;
and
B. Agent to perform certain accounting and recordkeeping functions relating
to portfolio transactions required of a duly registered investment
company under Rule 31a of the Investment Company Act of 1940 (the "1940
Act") and to calculate the net asset value of the Fund.
2. REPRESENTATIONS AND WARRANTIES.
A. Fund hereby represents, warrants and acknowledges to Custodian:
1. That it is a corporation or trust (as specified above) duly
organized and existing and in good standing under the laws of its
state of organization, and that it is registered under the 1940 Act;
and
<PAGE>
2. That it has the requisite power and authority under applicable law,
its articles of incorporation and its bylaws to enter into this
Agreement; that it has taken all requisite action necessary to
appoint Custodian as custodian and investment accounting and
recordkeeping agent for the Fund; and that this Agreement
constitutes a legal, valid and binding obligation of Fund,
enforceable in accordance with its terms.
B. Custodian hereby represents, warrants and acknowledges to Fund:
1. That it is a trust company duly organized and existing and in good
standing under the laws of the State of Missouri; and
2. That it has the requisite power and authority under applicable law,
its charter and its bylaws to enter into and perform this Agreement;
that this Agreement has been duly executed and delivered by
Custodian; and that this Agreement constitutes a legal, valid and
binding obligation of Custodian, enforceable in accordance with its
terms.
3. DUTIES AND RESPONSIBILITIES OF CUSTODIAN.
A. Delivery of Assets
Except as permitted by the 1940 Act, Fund will deliver or cause to be
delivered to Custodian on the effective date of this Agreement, or as
soon thereafter as practicable, and from time to time thereafter, all
portfolio securities acquired by it and monies then owned by it or from
time to time coming into its possession during the time this Agreement
shall continue in effect. Custodian shall have no responsibility or
liability whatsoever for or on account of securities or monies not so
delivered.
B. Delivery of Accounts and Records
Fund shall turn over or cause to be turned over to Custodian all of the
Fund's relevant accounts and records previously maintained. Custodian
shall be entitled to rely
-2-
<PAGE>
conclusively on the completeness and correctness of the accounts and
records turned over to it, and Fund shall indemnify and hold Custodian
harmless of and from any and all expenses, damages and losses whatsoever
arising out of or in connection with any error, omission, inaccuracy or
other deficiency of such accounts and records or in the failure of Fund
to provide, or to provide in a timely manner, any accounts, records or
information needed by the Custodian to perform its functions hereunder.
C. Delivery of Assets to Third Parties
Custodian will receive delivery of and keep safely the assets of Fund
delivered to it from time to time segregated in a separate account, and
if Fund is comprised of more than one portfolio of investment securities
(each a "Portfolio") Custodian shall keep the assets of each Portfolio
segregated in a separate account. Custodian will not deliver, assign,
pledge or hypothecate any such assets to any person except as permitted
by the provisions of this Agreement or any agreement executed by it
according to the terms of Section 3.S. of this Agreement. Upon delivery
of any such assets to a subcustodian pursuant to Section 3.S. of this
Agreement, Custodian will create and maintain records identifying those
assets which have been delivered to the subcustodian as belonging to the
Fund, by Portfolio if applicable. The Custodian is responsible for the
safekeeping of the securities and monies of Fund only until they have
been transmitted to and received by other persons as permitted under the
terms of this Agreement, except for securities and monies transmitted to
subcustodians appointed under Section 3.S. of this Agreement, for which
Custodian remains responsible to the extent provided in Section 3.S.
hereof. Custodian may participate directly or indirectly through a
subcustodian in the Depository Trust Company (DTC), Treasury/Federal
Reserve Book Entry System (Fed System), Participant Trust Company (PTC)
or other depository approved by the Fund (as such entities are
-3-
<PAGE>
defined at 17 CFR Section 270.17f-4(b)) (each a "Depository" and
collectively, the "Depositories").
D. Registration of Securities
The Custodian shall at all times hold registered securities of the Fund
in the name of the Custodian, the Fund, or a nominee of either of them,
unless specifically directed by instructions to hold such registered
securities in so-called "street name," provided that, in any event, all
such securities and other assets shall be held in an account of the
Custodian containing only assets of the Fund, or only assets held by the
Custodian as a fiduciary or custodian for customers, and provided
further, that the records of the Custodian at all times shall indicate
the Fund or other customer for which such securities and other assets
are held in such account and the respective interests therein. If,
however, the Fund directs the Custodian to maintain securities in
"street name", notwithstanding anything contained herein to the
contrary, the Custodian shall be obligated only to utilize its best
efforts to timely collect income due the Fund on such securities and to
notify the Fund of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
All securities, and the ownership thereof by Fund, which are held by
Custodian hereunder, however, shall at all times be identifiable on the
records of the Custodian. The Fund agrees to hold Custodian and its
nominee harmless for any liability as a shareholder of record of
securities held in custody.
E. Exchange of Securities
Upon receipt of instructions as defined herein in Section 4.A.,
Custodian will exchange, or cause to be exchanged, portfolio securities
held by it for the account of Fund for other securities or cash issued
or paid in connection with any reorganization, recapitalization, merger,
consolidation, split-up of share, change of par value, conversion or
otherwise, and will deposit any such securities in
-4-
<PAGE>
accordance with the terms of any reorganization or protective plan.
Without instructions, Custodian is authorized to exchange securities
held by it in temporary form for securities in definitive form, to
effect an exchange of shares when the par value of the stock is changed,
and, upon receiving payment therefor, to surrender bonds or other
securities held by it at maturity or when advised of earlier call for
redemption, except that Custodian shall receive instructions prior to
surrendering any convertible security.
F. Purchases of Investments of the Fund -- Other Than Options and Futures
Fund will, on each business day on which a purchase of securities
(other than options and futures) shall be made by it, deliver to
Custodian instructions which shall specify with respect to each such
purchase:
1. If applicable, the name of the Portfolio making such purchase;
2. The name of the issuer and description of the security;
3. The number of shares and the principal amount purchased, and
accrued interest, if any;
4. The trade date;
5. The settlement date;
6. The purchase price per unit and the brokerage commission, taxes
and other expenses payable in connection with the purchase;
7. The total amount payable upon such purchase;
8. The name of the person from whom or the broker or dealer through
whom the purchase was made; and
9. Whether the security is to be received in certificated form or
via a specified Depository.
In accordance with such instructions, Custodian will pay for out of
monies held for the account of Fund, but only insofar as such monies
are available for such purpose,
-5-
<PAGE>
and receive the portfolio securities so purchased by or for the account
of Fund, except that Custodian may in its sole discretion advance funds
to the Fund which may result in an overdraft because the monies held by
the Custodian on behalf of the Fund are insufficient to pay the total
amount payable upon such purchase. Except as otherwise instructed by
Fund, such payment shall be made by the Custodian only upon receipt of
securities: (a) by the Custodian; (b) by a clearing corporation of a
national exchange of which the Custodian is a member; or (c) by a
Depository. Notwithstanding the foregoing, (i) in the case of a
repurchase agreement, the Custodian may release funds to a Depository
prior to the receipt of advice from the Depository that the securities
underlying such repurchase agreement have been transferred by book-entry
into the account maintained with such Depository by the Custodian, on
behalf of its customers, provided that the Custodian's instructions to
the Depository require that the Depository make payment of such finds
only upon transfer by book-entry of the securities underlying the
repurchase agreement in such account; (ii) in the case of time deposits,
call account deposits, currency deposits and other deposits, foreign
exchange transactions, futures contracts or options, the Custodian may
make payment therefor before receipt of an advice or confirmation
evidencing said deposit or entry into such transaction; and (iii) in the
case of the purchase of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make, or
cause a subcustodian appointed pursuant to Section 3.S.2. of this
Agreement to make, payment therefor in accordance with generally
accepted local custom and market price.
G. Sales and Deliveries of Investments of the Fund -- Other than Options
and Futures Fund will, on each business day on which a sale of
investment securities (other than options and futures) of Fund has been
made, deliver to Custodian instructions specifying with respect to each
such sale:
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<PAGE>
1. If applicable, the name of the Portfolio making such sale;
2. The name of the issuer and description of the securities;
3. The number of shares and principal amount sold, and accrued
interest, if any;
4. The date on which the securities sold were purchased or other
information identifying the securities sold and to be delivered;
5. The trade date;
6. The settlement date;
7. The sale price per unit and the brokerage commission, taxes or other
expenses payable in connection with such sale;
8. The total amount to be received by Fund upon such sale; and
9. The name and address of the broker or dealer through whom or person
to whom the sale was made.
In accordance with such instructions, Custodian will deliver or cause to
be delivered the securities thus designated as sold for the account of
Fund to the broker or other person specified in the instructions
relating to such sale. Except as otherwise instructed by Fund, such
delivery shall be made upon receipt of payment therefor: (a) in such
form as is satisfactory to the Custodian; (b) credit to the account of
the Custodian with a clearing corporation of a national securities
exchange of which the Custodian is a member; or (c) credit to the
account of the Custodian, on behalf of its customers, with a Depository.
Notwithstanding the foregoing: (i) in the case of securities held in
physical form, such securities shall be delivered in accordance with
"street delivery custom" to a broker or its clearing agent; or (ii) in
the case of the sale of securities, the settlement of which occurs
outside of the United States of America, the Custodian may make, or
cause a subcustodian appointed pursuant to Section 3.S.2. of this
Agreement to make, payment therefor in accordance with generally
accepted local custom and market practice.
-7-
<PAGE>
H. Purchases or Sales of Options and Futures
Fund will, on each business day on which a purchase or sale of the
following options and/or futures shall be made by it, deliver to
Custodian instructions which shall specify with respect to each such
purchase or sale:
1. If applicable, the name of the Portfolio making such purchase or
sale;
2. Security Options
a. The underlying security:
b. The price at which purchased or sold;
c. The expiration date;
d. The number of contracts;
e. The exercise price;
f. Whether the transaction is an opening, exercising, expiring or
closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased;
i. Market on which option traded; and
j. Name and address of the broker or dealer through whom the sale
or purchase was made.
3. Options on Indices
a. The index;
b. The price at which purchased or sold;
c. The exercise price;
d. The premium;
e. The multiple;
f. The expiration date;
-8-
<PAGE>
g. Whether the transaction is an opening, exercising, expiring or
closing transaction;
h. Whether the transaction involves a put or call;
i. Whether the option is written or purchased; and
j. The name and address of the broker or dealer through whom the
sale or purchase was made, or other applicable settlement
instructions.
4. Security Index Futures Contracts
a. The last trading date specified in the contract and, when
available, the closing level, thereof;
b. The index level on the date the contract is entered into;
c. The multiple;
d. Any margin requirements;
e. The need for a segregated margin account (in addition to
instructions, and if not already in the possession of Custodian,
Fund shall deliver a substantially complete and executed
custodial safekeeping account and procedural agreement which
shall be incorporated by reference into this Custody Agreement);
and
f. The name and address of the futures commission merchant through
whom the sale or purchase was made, or other applicable
settlement instructions.
5. Options on Index Future Contracts
a. The underlying index future contract;
b. The premium;
c. The expiration date;
d. The number of options;
e. The exercise price;
-9-
<PAGE>
f. Whether the transaction involves an opening, exercising,
expiring or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased; and
i. The market on which the option is traded.
I. Securities Pledged or Loaned
If specifically allowed for in the prospectus of Fund, and subject to
such additional terms and conditions as Custodian may require:
1. Upon receipt of instructions, Custodian will release or cause to be
released securities held in custody to the pledgee designated in
such instructions by way of pledge or hypothecation to secure any
loan incurred by Fund; provided, however, that the securities shall
be released only upon payment to Custodian of the monies borrowed,
except that in cases where additional collateral is required to
secure a borrowing already made, further securities may be released
or caused to be released for that purpose upon receipt of
instructions. Upon receipt of instructions, Custodian will pay, but
only from funds available for such purpose, any such loan upon
redelivery to it of the securities pledged or hypothecated therefor
and upon surrender of the note or notes evidencing such loan.
2. Upon receipt of instructions, Custodian will release securities held
in custody to the borrower designated in such instructions;
provided, however, that the securities will be released only upon
deposit with Custodian of full cash collateral as specified in such
instructions, and that Fund will retain the right to any dividends,
interest or distribution on such loaned securities. Upon receipt of
instructions and the loaned securities, Custodian will release the
cash collateral to the borrower.
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J. Routine Matters
Custodian will, in general, attend to all routine and mechanical matters
in connection with the sale, exchange, substitution, purchase, transfer,
or other dealings with securities or other property of Fund except as
may be otherwise provided in this Agreement or directed from time to
time by the Fund in writing.
K. Deposit Accounts
Custodian will open and maintain one or more special purpose deposit
accounts in the name of Custodian ("Accounts"), subject only to draft or
order by Custodian upon receipt of instructions. All monies received by
Custodian from or for the account of Fund shall be deposited in said
Accounts. Barring events not in the control of the Custodian such as
strikes, lockouts or labor disputes, riots, war or equipment or
transmission failure or damage, fire, flood, earthquake or other natural
disaster, action or inaction of governmental authority or other causes
beyond its control, at 9:00 a.m., Kansas City time, on the second
business day after deposit of any check into an Account, Custodian
agrees to make Fed Funds available to the Fund in the amount of the
check. Deposits made by Federal Reserve wire will be available to the
Fund immediately and ACH wires will be available to the Fund on the next
business day. Income earned on the portfolio securities will be credited
to the Fund based on the schedule attached as Exhibit A. The Custodian
will be entitled to reverse any credited amounts were credits have been
made and monies are not finally collected. If monies are collected after
such reversal, the Custodian will credit the Fund in that amount.
Custodian may open and maintain Accounts in its own banking department,
or in such other banks or trust companies as may be designated by it or
by Fund in writing, all such Accounts, however, to be in the name of
Custodian and subject only to its draft or order. Funds received and
held for the
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account of different Portfolios shall be maintained in separate Accounts
established for each Portfolio.
L. Income and Other Payments to Fund
Custodian will:
1. Collect, claim and receive and deposit for the account of Fund all
income and other payments which become due and payable on or after
the effective date of this Agreement with respect to the securities
deposited under this Agreement, and credit the account of Fund in
accordance with the schedule attached hereto as Exhibit A. If, for
any reason, the Fund is credited with income that is not
subsequently collected, Custodian may reverse that credited amount.
2. Execute ownership and other certificates and affidavits for all
federal, state and local tax purposes in connection with the
collection of bond and note coupons; and
3. Take such other action as may be necessary or proper in connection
with:
a. the collection, receipt and deposit of such income and other
payments, including but not limited to the presentation for
payment of:
1. all coupons and other income items requiring presentation;
and
2. all other securities which may mature or be called,
redeemed, retired or otherwise become payable and regarding
which the Custodian has actual knowledge, or should
reasonably be expected to have knowledge; and
b. the endorsement for collection, in the name of the Fund, of all
checks, drafts or other negotiable instruments.
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Custodian, however, will not be required to institute suit or take other
extraordinary action to enforce collection except upon receipt of
instructions and upon being indemnified to its satisfaction against the
costs and expenses of such suit or other actions. Custodian will
receive, claim and collect all stock dividends, rights and other similar
items and will deal with the same pursuant to instructions. Unless prior
instructions have been received to the contrary, Custodian will, without
further instructions, sell any rights held for the account of Fund on
the last trade date prior to the date of expiration of such rights.
M. Payment of Dividends and other Distributions
On the declaration of any dividend or other distribution on the shares
of capital stock of Fund ("Fund Shares") by the Board of Directors of
Fund, Fund shall deliver to Custodian instructions with respect thereto.
On the date specified in such instructions for the payment of such
dividend or other distribution, Custodian will pay out of the monies
held for the account of Fund, insofar as the same shall be available for
such purposes, and credit to the account of the Dividend Disbursing
Agent for Fund, such amount as may be specified in such instructions.
N. Shares of Fund Purchased by Fund
Whenever any Fund Shares are repurchased or redeemed by Fund, Fund or
its agent shall advise Custodian of the aggregate dollar amount to be
paid for such shares and shall confirm such advice in writing. Upon
receipt of such advice, Custodian shall charge such aggregate dollar
amount to the account of Fund and either deposit the same in the account
maintained for the purpose of paying for the repurchase or redemption of
Fund Shares or deliver the same in accordance with such advice.
Custodian shall not have any duty or responsibility to determine that
Fund Shares have been removed from the proper shareholder account or
accounts or that the
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proper number of Fund Shares have been cancelled and removed from the
shareholder records.
O. Shares of Fund Purchased from Fund
Whenever Fund Shares are purchased from Fund, Fund will deposit or cause
to be deposited with Custodian the amount received for such shares.
Custodian shall not have any duty or responsibility to determine that
Fund Shares purchased from Fund have been added to the proper
shareholder account or accounts or that the proper number of such shares
have been added to the shareholder records.
P. Proxies and Notices
Custodian will promptly deliver or mail or have delivered or mailed to
Fund all proxies properly signed, all notices of meetings, all proxy
statements and other notices, requests or announcements affecting or
relating to securities held by Custodian for Fund and will, upon receipt
of instructions, execute and deliver or cause its nominee to execute and
deliver or mail or have delivered or mailed such proxies or other
authorizations as may be required. Except as provided by this Agreement
or pursuant to instructions hereafter received by Custodian, neither it
nor its nominee will exercise any power inherent in any such securities,
including any power to vote the same, or execute any proxy, power of
attorney, or other similar instrument voting any of such securities, or
give any consent, approval or waiver with respect thereto, or take any
other similar action.
Q. Disbursements
Custodian will pay or cause to be paid, insofar as funds are available
for the purpose, bills, statements and other obligations of Fund
(including but not limited to obligations in connection with the
conversion, exchange or surrender of securities owned by Fund, interest
charges, dividend disbursements, taxes, management fees, custodian fees,
legal fees, auditors' fees, transfer agents' fees, brokerage
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commissions, compensation to personnel, and other operating expenses of
Fund0 pursuant to instructions of Fund setting forth the name of the
person to whom payment is to be made, the amount of the payment, and the
purpose of the payment.
R. Daily Statement of Accounts
Custodian will, within a reasonable time, render to Fund a detailed
statement of the amounts received or paid and of securities received or
delivered for the account of Fund during each business day. Custodian
will, from time to time, upon request by Fund, render a detailed
statement of the securities and monies held for Fund under this
Agreement, and Custodian will maintain such books and records as are
necessary to enable it to do so. Custodian will permit such persons as
are authorized by Fund, including Fund's independent public accountants,
reasonable access to such records or will provide reasonable
confirmation of the contents of such records, and if demanded, Custodian
will permit federal and state regulatory agencies to examine the
securities, books and records. Upon the written instructions of Fund or
as demanded by federal or state regulatory agencies, Custodian will
instruct any subcustodian to permit such persons as are authorized by
Fund, including Fund's independent public accountants, reasonable access
to such records or to provide reasonable confirmation of the contents of
such records, and to permit such agencies to examine the books, records
and securities held by such subcustodian which relate to the Fund.
S. Appointment of Subcustodian
1. Notwithstanding any other provisions of this Agreement, all or any
of the monies or securities of Fund may be held in Custodian's own
custody or in the custody of one or more other banks or trust
companies acting as sub custodians as may be selected by Custodian.
Any such subcustodian selected by the Custodian must have the
qualifications required for a custodian under
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the 1940 Act, as amended. Custodian shall be responsible to the Fund
for any loss, damage or expense suffered or incurred by the Fund
resulting from the actions or omissions of any subcustodians
selected and appointed by Custodian (except subcustodians appointed
at the request of Fund and as provided in Subsection 2 below) to the
same extent Custodian would be responsible to the Fund under Section
5. of this Agreement if it committed the act or omission itself.
Upon request of the Fund, Custodian shall be willing to contract
with other subcustodians reasonably acceptable to the Custodian for
purposes of (i) effecting third-party repurchase transactions with
banks, brokers, dealers, or other entities through the use of a
common custodian or subcustodian, or (ii) providing depository and
clearing agency services with respect to certain variable rate
demand note securities, or (iii) for other reasonable purposes
specified by Fund; provided, however, that the Custodian shall be
responsible to the Fund for any loss, damage or expense suffered or
incurred by the Fund resulting from the actions or omissions of any
such subcustodian only to the same extent such subcustodian is
responsible to the Custodian. The Fund shall be entitled to review
the Custodian's contracts with any such subcustodians appointed at
the request of Fund. Custodian shall be responsible to the Fund for
any loss, damage or expense suffered or incurred by the Fund
resulting from the actions or omissions of any Depository only to
the same extent such Depository is responsible to Custodian.
2. Notwithstanding any other provisions of this Agreement, Fund's
foreign securities (as defined in Rule 17f-5(c)(1) under the 1940
Act) and Fund's cash or cash equivalents, in amounts deemed by the
Fund to be reasonably necessary to effect Fund's foreign securities
transactions, may be held in the
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custody of one or more banks or trust companies acting as
subcustodians, and thereafter, pursuant to a written contract or
contracts as approved by Fund's Board of Directors, may be
transferred to accounts maintained by any such subcustodian with
eligible foreign custodians, as defined in Rule 17f-5(c)(2).
Custodian shall be responsible to the Fund for any loss, damage or
expense suffered or incurred by the Fund resulting from the actions
or omissions of any foreign subcustodian only to the same extent the
foreign subcustodian is liable to the domestic subcustodian with
which the Custodian contracts for foreign subcustody purposes.
T. Accounts and Records
Custodian will prepare and maintain, with the direction and as
interpreted by the Fund, Fund's accountants and/or other advisors, in
complete, accurate and current form all accounts and records (i)
required to be maintained by Fund with respect to portfolio transactions
under Rule 31a of the 1940 Act, (ii) required to be maintained as a
basis for calculation of the Fund's net asset value, and (iii) as
otherwise agreed upon between the parties. Custodian relies upon Fund to
furnish, in writing or its electronic digital equivalent, accurate and
timely information needed by Custodian to complete Fund's records and
perform daily calculation of the Fund's net asset value. Custodian shall
incur no liability and Fund shall indemnify and hold harmless Custodian
from and against any liability arising from any failure of Fund to
furnish such information in a timely and accurate manner, even if Fund
subsequently provides accurate but untimely information. It shall be the
responsibility of Fund to furnish Custodian with the declaration, record
and payment dates and amounts of any dividends or income and any other
special actions required concerning each of its securities when such
information is not readily available from generally accepted securities
industry services or publications.
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U. Accounts and Records Property of Fund
Custodian acknowledges that all of the accounts and records maintained
by Custodian pursuant to this Agreement are the property of Fund, and
will be made available to Fund for inspection or reproduction within a
reasonable period of time, upon demand. Custodian will assist Fund's
independent auditors, or upon approval of Fund, or upon demand, any
regulatory body, in any requested review of Fund's accounts and records
but shall be reimbursed by Fund for all expenses and employee time
invested in any such review outside of routine and normal periodic
reviews. Upon receipt from Fund of the necessary information or
instructions, Custodian will supply information from the books and
records it maintains for Fund that Fund needs for tax returns,
questionnaires, period reports to shareholder and such other reports and
information requests as Fund and Custodian shall agree upon from time to
time.
V. Adoption of Procedures
Custodian and Fund may from time to time adopt procedures as they agree
upon, and Custodian may conclusively assume that no procedure approved
or directed by Fund or its accountants or other advisors conflicts with
or violates any requirements of its prospectus, articles of
incorporation, bylaws, any applicable law, rule or regulation, or any
order, decree or agreement by which Fund may be bound. Fund will be
responsible to notify Custodian of any changes in statutes, regulations,
rules, require ments or policies which might necessitate changes in
Custodian's responsibilities or procedures.
W. Calculation of Net Asset Value
Custodian will calculate Fund's net asset value, in accordance with
Fund's prospectus. Custodian will price the securities and foreign
currency holdings of Fund for which market quotations are available by
the use of outside services designated by Fund which are normally used
and contracted with for this purpose;
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all other securities and foreign currency holdings will be priced in
accordance with Fund's instructions. Custodian will have no
responsibility for the accuracy of the prices quoted by these outside
services or for the information supplied by Fund or for acting upon such
instructions.
X. Advances
In the event Custodian or any subcustodian shall, in its sole
discretion, advance cash or securities for any purpose (including but
not limited to securities settlements, purchase or sale of foreign
exchange or foreign exchange contracts and assumed settlement) for the
benefit of any Portfolio, the advance shall be payable by the Fund on
demand. Any such cash advance shall be subject to an overdraft charge at
the rate set forth in the then-current fee schedule from the date
advanced until the date repaid. As security for each such advance, Fund
hereby grants Custodian and such subcustodian a lien on and security
interests in all property at any time held for the account of the
applicable Portfolio, including without limitation all assets acquired
with the amount advanced. Should the Fund fail to promptly repay the
advance, the Custodian and each subcustodian shall be entitled to
utilize available cash and to dispose of such Portfolio's assets
pursuant to applicable law to the extent necessary to obtain
reimbursement of the amount advanced and any related overdraft charges.
Y. Exercise of Rights; Tender Offers
Upon receipt of instructions, the Custodian shall: (a) deliver warrants,
puts, calls, rights or similar securities to the issuer or trustee
thereof, or to the agent of such issuer or trustee, for the purpose of
exercise or sale, provided that the new securities, cash or other
assets, if any, are to be delivered to the Custodian; and (b) deposit
securities upon invitations for tenders thereof, provided that the
consideration for such securities is to be paid or delivered to the
Custodian or the tendered securities are to be returned to the
Custodian.
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4. INSTRUCTIONS.
A. The term "instructions," as used herein, means written (including
telecopied or telexed) or oral instructions which Custodian reasonably
believes were given by a designated representative of Fund. Fund shall
deliver to Custodian, prior to delivery of any assets to Custodian and
thereafter from time to time as changes therein are necessary, written
instructions naming one or more designated representatives to give
instructions in the name and on behalf of the Fund, which instructions
may be received and accepted by Custodian as conclusive evidence of the
authority of any designated representative to act for Fund and may be
considered to be in full force and effect (and Custodian will be fully
protected in acting in reliance thereon) until receipt by Custodian of
notice to the contrary. Unless such written instructions delegating
authority to any person to give instructions specifically limit such
authority to specific matters or require that the approval of anyone
else will first have been obtained, Custodian will be under no
obligation to inquire into the right of such person, acting alone, to
give any instructions whatsoever which Custodian may receive from such
person. If Fund fails to provide Custodian any such instructions naming
designated representatives, any instructions received by Custodian from
a person reasonably believed to be an appropriate representative of Fund
shall constitute valid and proper instructions hereunder.
B. No later than the next business day immediately following each oral
instruction, Fund will send Custodian written confirmation of such oral
instruction. At Custodian's sole discretion, Custodian may record on
tape, or otherwise, any oral instruction whether given in person or via
telephone, each such recording identifying the parties, the date and the
time of the beginning and ending of such oral instruction.
C. If Custodian shall provide Fund direct access to any computerized
recordkeeping and reporting system used hereunder or if Custodian and
Fund shall agree to utilize any
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electronic system of communication, Fund shall be fully responsible for
any and all consequences of the use or misuse of the terminal device,
passwords, access instructions and other means of access to such
system(s) which are utilized by, assigned to or otherwise made available
to the Fund. Fund agrees to implement and enforce appropriate security
policies and procedures to prevent unauthorized or improper access to or
use of such system(s). Custodian shall be fully protected in acting
hereunder upon any instructions, communications, data or other
information received by Custodian by such means as fully and to the same
effect as if delivered to Custodian by written instrument signed by the
requisite authorized representative(s) of Fund. Fund shall indemnify and
hold Custodian harmless from and against any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability which may
be suffered or incurred by Custodian as a result of the use or misuse,
whether authorized or unauthorized, of any such system(s) by Fund or by
any person who acquires access to such system(s) through the terminal
device, passwords, access instructions or other means of access to such
system(s) which are utilized by, assigned to or otherwise made available
to the Fund, except to the extent attributable to any negligence or
willful misconduct by Custodian.
5. LIMITATION OF LIABILITY OF CUSTODIAN.
A. Custodian shall at all times use reasonable care and due diligence and
act in good faith in performing its duties under this Agreement.
Custodian shall not be responsible for, and the Fund shall indemnify and
hold Custodian harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability which may
be asserted against Custodian, incurred by Custodian or for which
Custodian may be held to be liable, arising out of or attributable to:
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1. All actions taken by Custodian pursuant to this Agreement or any
instructions provided to it hereunder, provided that Custodian has
acted in good faith and with due diligence and reasonable care; and
2. The Fund's refusal or failure to comply with the terms of this
Agreement (including without limitation the Fund's failure to pay or
reimburse Custodian under this indemnification provision), the
Fund's negligence or willful misconduct, or the failure of any
representation or warranty of the Fund hereunder to be and remain
true and correct in all respects at all times.
B. Custodian may request and obtain at the expense of Fund the advice and
opinion of counsel for Fund or of its own counsel with respect to
questions or matters of law, and it shall be without liability to Fund
for any action taken or omitted by it in good faith, in conformity with
such advice or opinion. If Custodian reasonably believes that it could
not prudently act according to the instructions of the Fund or the
Fund's accountants or counsel, it may in its discretion, with notice to
the Fund, not act according to such instructions.
C. Custodian may rely upon the advice and statements of Fund, Fund's
accountants and officers or other authorized individuals, and other
persons believed by it in good faith to be expert in matters upon which
they are consulted, and Custodian shall not be liable for any actions
taken, in good faith, upon such advice and statements.
D. If Fund requests Custodian in any capacity to take any action which
involves the payment of money by Custodian, or which might make it or
its nominee liable for payment of monies or in any other way, Custodian
shall be indemnified and held harmless by Fund against any liability on
account of such action; provided, however, that nothing herein shall
obligate Custodian to take any such action except in its sole
discretion.
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E. Custodian shall be protected in acting as custodian hereunder upon any
instructions, advice, notice, request, consent, certificate or other
instrument or paper appearing to it to be genuine and to have been
properly executed. Custodian shall be entitled to receive upon request
as conclusive proof of any fact or matter required to be ascertained
from Fund hereunder a certificate signed by an officer or designated
representative of Fund. Fund shall also provide Custodian instructions
with respect to any matter concerning this Agreement requested by
Custodian.
F. Custodian shall be under no duty or obligation to inquire into, and
shall not be liable for:
1. The validity of the issue of any securities purchased by or for
Fund, the legality of the purchase of any securities or foreign
currency positions or evidence of ownership required by Fund to be
received by Custodian, or the propriety of the decision to purchase
or amount paid therefor;
2. The legality of the sale of any securities or foreign currency
positions by or for Fund, or the propriety of the amount for which
the same are sold;
3. The legality of the issue or sale of any Fund Shares, or the
sufficiency of the amount to be received therefor;
4. The legality of the repurchase or redemption of any Fund Shares, or
the propriety of the amount to be paid therefor; or
5. The legality of the declaration of any dividend by Fund, or the
legality of the issue of any Fund Shares in payment of any stock
dividend.
G. Custodian shall not be liable for, or considered to be Custodian of, any
money represented by any check, draft, wire transfer, clearinghouse
funds, uncollected funds, or instrument for the payment of money to be
received by it on behalf of Fund until Custodian actually receives such
money; provided, however, that it shall advise
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Fund promptly if it fails to receive any such money in the ordinary
course of business and shall cooperate with Fund toward the end that
such money shall be received.
H. Except as provided in Section 3.S., Custodian shall not be responsible
for loss occasioned by the acts, neglects, defaults or insolvency of any
broker, bank, trust company, or any other person with whom Custodian may
deal.
I. Custodian shall not be responsible or liable for the failure or delay in
performance of its obligations under this Agreement, or those of any
entity for which it is responsible hereunder, arising out of or caused,
directly or indirectly, by circumstances beyond the affected entity's
reasonable control, including, without limitation: any interruption,
loss or malfunction of any utility, transportation, computer (hardware
or software) or communication service; inability to obtain labor,
material, equipment or transportation, or a delay in mails; governmental
or exchange action, statute, ordinance, rulings, regulations or
direction; war, strike, riot, emergency, civil disturbance, terrorism,
vandalism, explosions, labor disputes, freezes, floods, fires, tornados,
acts of God or public enemy, revolutions, or insurrection.
J. EXCEPT FOR VIOLATIONS OF SECTION 9, IN NO EVENT AND UNDER NO
CIRCUMSTANCES SHALL EITHER PARTY TO THIS AGREEMENT BE LIABLE TO ANYONE,
INCLUDING, WITHOUT LIMITATION TO THE OTHER PARTY, FOR CONSEQUENTIAL,
SPECIAL OR PUNITIVE DAMAGES FOR ANY ACT OR FAILURE TO ACT UNDER ANY
PROVISION OF THIS AGREEMENT EVEN IF ADVISED OF THIS POSSIBILITY THEREOF.
6. COMPENSATION. In consideration for its services hereunder as Custodian and
investment accounting and recordkeeping agent, Fund will pay to Custodian
such compensation as shall be set forth in a separate fee schedule to be
agreed to by Fund and
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Custodian from time to time. A copy of the initial fee schedule is attached
hereto and incorporated herein by reference. Custodian shall also be
entitled to receive, and Fund agrees to pay to Custodian, on demand,
reimbursement for Custodian's cash disbursements and reasonable out-of-
pocket costs and expenses, including attorney's fees, incurred by Custodian
in connection with the performance of services hereunder. Custodian will
also be entitled to charge against any monies held by it for the account of
Fund the amount of any loss,
7. TERM AND TERMINATION. The initial term of this Agreement shall be for a
period of one (1) year. Thereafter, either party to this Agreement may
terminate the same by notice in writing, delivered or mailed, postage
prepaid, to the other party hereto and received not less than ninety (90)
days prior to the date upon which such termination will take effect. Upon
termination of this Agreement, Fund will pay Custodian its fees and
compensation due hereunder and its reimbursable disbursements, costs and
expenses paid or incurred to such date and Fund shall designate a successor
custodian by notice in writing to Custodian by the termination date. In the
event no written order designating a successor custodian has been delivered
to Custodian on or before the date when such termination becomes effective,
then Custodian may, at its option, deliver the securities, funds and
properties of Fund to a bank or trust company at the selection of Custodian,
and meeting the qualifications for custodian set forth in the 1940 Act and
having not less than Two Million Dollars ($2,000,000) aggregate capital,
surplus and undivided profits, as shown by its last published report, or
apply to a court of competent jurisdiction for the appointment of a
successor custodian or other proper relief, or take any other lawful action
under the circumstances; provided, however, that Fund shall reimburse
Custodian for its costs and expenses, including reasonable attorney's fees,
incurred in connection therewith. Custodian will, upon termination of this
Agreement and payment of all sums due to Custodian from Fund hereunder or
otherwise, deliver to the successor custodian so specified or appointed,
or as
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specified by the court, at Custodian's office, all securities then held by
Custodian hereunder, duly endorsed and in form for transfer, and all funds
and other properties of Fund deposited with or held by Custodian hereunder,
and Custodian will co-operate in effecting changes in book-entries at all
Depositories. Upon delivery to a successor custodian or as specified by the
court, Custodian will have no further obligations or liabilities under this
Agreement. Thereafter such successor will be the successor custodian under
this Agreement and will be entitled to reasonable compensation for its
services. In the event that securities, funds and other properties remain in
the possession of the Custodian after the date of termination hereof owing
to failure of the Fund to appoint a successor custodian, the Custodian shall
be entitled to compensation as provided in the then-current fee schedule
hereunder for its services during such period as the Custodian retains
possession of such securities, funds and other properties, and the
provisions of this Agreement relating to the duties and obligations of the
Custodian shall remain in full force and effect.
8. NOTICES. Notices, requests, instructions and other writings addressed to
Fund at 100 North Minnesota Street, New Ulm, Minnesota 56073, or at such
other address as Fund may have designated to Custodian in writing, will be
deemed to have been properly given to Fund hereunder; and notices, requests,
instructions and other writings addressed to Custodian at its offices at 127
West 10th Street, Kansas City, Missouri 64105, Attention: Custody
Department, or to such other address as it may have designated to Fund in
writing, will be deemed to have been properly given to Custodian hereunder.
9. CONFIDENTIALITY.
A. Fund shall preserve the confidentiality of the computerized investment
portfolio recordkeeping and accounting system used by Custodian (the
"Portfolio Accounting System") and the tapes, books, reference manuals,
instructions, records, programs, documentation and information of, and
other materials relevant to, the Portfolio Accounting System and the
business of Custodian ("Confidential Information").
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Fund shall not voluntarily disclose any such Confidential Information to any
other person other than its own employees who reasonably have a need to know
such information pursuant to this Agreement. Fund shall return all such
Confidential Information to Custodian upon termination or expiration of this
Agreement.
B. Fund has been informed that the Portfolio Accounting System is licensed
for use by Custodian from DST Systems, Inc. ("Licensor"), and Fund
acknowledges that Custodian and Licensor have proprietary rights in and
to the Portfolio Accounting System and all other Custodian or Licensor
programs, code, techniques, know-how, databases, supporting
documentation, data formats, and procedures, including without
limitation any changes or modifications made at the request or expense
or both of Fund (collectively, the "Protected Information"). Fund
acknowledges that the Protected Information constitutes confidential
material and trade secrets of Custodian and Licensor. Fund shall
preserve the confidentiality of the Protected Information, and Fund
hereby acknowledges that any unauthorized use, misuse, disclosure or
taking of Protected Information, residing or existing internal or
external to a computer, computer system, or computer network, or the
knowing and unauthorized accessing or causing to be accessed of any
computer, computer system, or computer network, may be subject to civil
liabilities and criminal penalties under applicable law. Fund shall so
inform employees and agents who have access to the Protected Information
or to any computer equipment capable of accessing the same. Licensor is
intended to be and shall be a third party beneficiary of the Fund's
obligations and undertakings contained in this paragraph.
10. MULTIPLE PORTFOLIOS. If Fund is comprised of more than one Portfolio:
A. Each Portfolio shall be regarded for all purposes hereunder as a
separate party apart from each other Portfolio. Unless the context
otherwise requires, with respect to every transaction covered by this
Agreement, every reference herein to the Fund
-27-
<PAGE>
shall be deemed to relate solely to the particular Portfolio to which
such transaction relates. Under no circumstances shall the rights,
obligations or remedies with respect to a particular Portfolio
constitute a right, obligation or remedy applicable to any other
Portfolio. The use of this single document to memorialize the separate
agreement of each Portfolio is understood to be for clerical convenience
only and shall not constitute any basis for joining the Portfolios for
any reason.
B. Additional Portfolios may be added to this Agreement, provided that
Custodian consents to such addition. Rates or charges for each
additional Portfolio shall be as agreed upon by Custodian and Fund in
writing.
11. MISCELLANEOUS.
A. This Agreement shall be construed according to, and the rights and
liabilities of the parties hereto shall be governed by, the laws of the
State of Missouri, without reference to the choice of laws principles
thereof.
B. All terms and provisions of this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns.
C. The representations and warranties, the indemnifications extended
hereunder, and the provisions of Section 9. hereof are intended to and
shall continue after and survive the expiration, termination or
cancellation of this Agreement.
D. No provisions of the Agreement may be amended or modified in any manner
except by a written agreement properly authorized and executed by each
party hereto.
E. The failure of either party to insist upon the performance of any terms
or conditions of this Agreement or to enforce any rights resulting from
any breach of any of the terms or conditions of this Agreement,
including the payment of damages, shall not be construed as a continuing
or permanent waiver of any such terms, conditions, rights or privileges,
but the same shall continue and remain in full force and effect
-28-
<PAGE>
and if no such forbearance or waiver had occurred. No waiver, release or
discharge of any party's rights hereunder shall be effective unless
contained in a written instrument signed by the party sought to be
charged.
F. The captions in the Agreement are included for convenience of reference
only, and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
G. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall
constitute one and the same instrument.
H. If any provision of this Agreement shall be determined to be invalid or
unenforceable, the remaining provisions of this Agreement shall not be
affected thereby, and every provision of this Agreement shall remain in
full force and effect and shall remain enforceable to the fullest extent
permitted by applicable law.
I. This Agreement may not be assigned by either party hereto without the
prior written consent of the other party.
J. Neither the execution nor performance of this Agreement shall be deemed
to create a partnership or joint venture by and between Custodian and
Fund.
K. Except as specifically provided herein, this Agreement does not in any
way affect any other agreements entered into among the parties hereto
and any actions taken or omitted by either party hereunder shall not
affect any rights or obligations of the other party hereunder.
-29-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective duly authorized officers.
INVESTORS FIDUCIARY TRUST COMPANY
By:
-------------------------
Title:
--------------------
STATE BOND INVESTMENT FUNDS, INC.
By: /s/ Kevin L. Howard
-------------------------
Kevin L. Howard
Title: Secretary
--------------------
-30-
<PAGE>
EXHIBIT A
INVESTORS FIDUCIARY TRUST COMPANY
AVAILABILITY SCHEDULE BY TRANSACTION TYPE
<TABLE>
<CAPTION>
TRANSACTION DTC PHYSICAL FED
- -------------------- ----------------------- ---------------------------- -----------------------
TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Calls Puts As Received C or F* As Received C or F*
- ----------------------------------------------------------------------------------------------------
Maturities As Received C or F* Mat. Date C or F* Mat. Date F
- ----------------------------------------------------------------------------------------------------
Tender Reorgs. As Received C As Received C N/A
- ----------------------------------------------------------------------------------------------------
Dividends Paydate C Paydate C N/A
- ----------------------------------------------------------------------------------------------------
Floating Rate Int. Paydate C Paydate C N/A
- ----------------------------------------------------------------------------------------------------
Floating Rate Int. N/A As Rate Received C N/A
(No Rate)
- ----------------------------------------------------------------------------------------------------
Mtg. Backed P&I Paydate C Paydate + 1 C Paydate F
Bus.
Day
- ----------------------------------------------------------------------------------------------------
Fixed Rate Int. Paydate C Paydate C Paydate F
- ----------------------------------------------------------------------------------------------------
Euroclear N/A C Paydate c
- ----------------------------------------------------------------------------------------------------
</TABLE>
Legend
- ------
C = Clearinghouse Funds
F = Fed Funds
N/A = Not Applicable
* Availability based on how received.
<PAGE>
AGENCY AGREEMENT
This is an agreement made this 1st day of February, 1996, by and between State
Bond Investment Funds, Inc., a Maryland corporation, (hereinafter called the
"Fund") and ARM Transfer Agency, Inc., a Delaware corporation, (hereinafter
called "ARM").
WITNESSETH THAT:
ARM is hereby appointed Transfer Agent for the shares of the Fund and Dividend
Disbursing Agent for the Fund under the following terms and conditions:
1. DOCUMENTS. In connection with the appointment of ARM as Transfer Agent, the
Fund shall file with ARM the following documents:
A. Certified Copies of the Articles of Incorporation of the Fund and all
amendments thereto;
B. A certified copy of the By-Laws of the Fund as amended to date;
C. A copy of the resolution of the Fund authorizing this Agreement;
D. Specimens of all forms of outstanding and new stock certificates in the
forms approved by the Board of Directors of the Fund with a certificate of the
Secretary of the Fund as to such approval;
E. All account application forms and other documents relating to
shareholders' accounts;
F. A certified list of shareholders of the Fund with the name, address and
tax identification number of each shareholder, the number of shares held by
each, certificate numbers an denominations (if any have been issued), the plan
account number of each shareholder having a plan, lists of any accounts against
which stops have been placed, together with the reasons for said stops, and the
number of shares redeemed by the Fund;
G. A copy of the Underwriting Agreement presently in effect between the
Fund and ARM, the distributor of its shares.
2. FURTHER DOCUMENTATION. The Fund will also furnish from time to time the
following documents.
A. Each resolution of the Board of Directors of the Fund authorizing the
original issue of its shares;
B. Each Registration Statement filed with the Securities and Exchange
Commission and amendment and orders thereto in effect with respect to the sale
of shares of the Fund;
C. A certified copy of each amendment to the Articles of Incorporation and
the By-Laws of the Fund;
D. Certified copies of each vote of the Board of Directors authorizing
officers to give instructions to the Transfer Agent;
E. Specimens of all new stock certificates accompanied by Board of
Directors' resolutions approving such forms;
F. Such other certificates, documents or opinions which ARM may, in its
discretion, deem necessary or appropriate in the proper performance of its
duties.
3. AUTHORIZED SHARES. The Fund certifies to ARM that as of the close of
business on the date of this Agreement, it has authorized 10 billion shares of
its Capital Stock, $.00001 par value and certifies that by virtue of its
<PAGE>
Articles of Incorporation and the provisions of the law of the state of its
incorporation shares of its Capital Stock which are redeemed by the Fund from
their holders are restored to the status of authorized and unissued shares.
4. ARM TO RECORD TRANSFERS. ARM is authorized to transfer on the records of
the Fund maintained by it from time to time shares of the Fund's Capital Stock,
$.00001 par value.
5. NOTICE OF DISTRIBUTION. The Fund will promptly inform ARM of the
declaration of any dividend or distribution on account of its capital stock.
6. DIVIDEND DISBURSEMENTS. ARM shall act as Dividend Disbursing Agent for the
Fund, and, as such, shall prepare and mail or credit income and capital gain
payments to investors. The Dividend Disbursing Agent will, on or before the
payment date of any such dividend or distribution, notify the Custodian of the
estimated amount required to pay any portion, notify the Custodian of the
estimated amount request to pay any portion of said dividend or distribution
which is payable in cash, and the Fund agrees that on or before the payment date
of such distribution, it shall instruct the Custodian to make available to the
Dividend Disbursing Agent sufficient funds for the cash amount to be paid out.
If an investor is entitled to receive additional shares by virtue of any such
distribution or dividend, appropriate credits will be made to his account.
7. REDEMPTIONS. ARM shall receive and shall stamp with the date of receipt,
all certificates delivered to it for redemption or repurchase as well as all
requests for redemptions or repurchase of shares and shall process said
redemptions and repurchase requests as follows:
A. If such certificate, redemption request or repurchase request complies
with the standards for redemption or repurchase as approved by the Fund, ARM
shall notify the Fund and Distributor of the total number of shares presented
and covered by such requests received by ARM on said date;
B. On or prior to the seventh calendar day succeeding any such request for
redemption or repurchase, ARM shall, from funds available in the account of the
Custodian, pay the applicable redemption or repurchase price, as the case may
be, to the investor as set forth in the current prospectus of the Fund;
C. If any such certificates or request for redemption or repurchase does
not comply with said standards, ARM shall promptly notify the investor of such
fact, together with the reason therefore, and shall effect such redemption or
repurchase at the price in effect at the time of receipt of documents complying
with said standards or, in the case of a repurchase, at such other time as the
Distributor, as agent for the Fund shall so direct;
D. Unless otherwise notified by the Fund, ARM shall treat all requests for
redemption or repurchase as request for repurchase.
8. WITHDRAWAL PLANS. ARM shall process withdrawal orders in accordance with
the terms of withdrawal plans duly executed by investors. Payments upon such
withdrawal orders and redemptions of shares held in withdrawal plan accounts for
the payment of the amount required shall be made at such times as the Fund may
determine with the approval of ARM.
9. TAX RETURNS. ARM will prepare, file with the Internal Revenue Service and
with the appropriate State Agencies, and, if required, mail to investors such
returns for reporting income and capital gain dividends paid as are required to
be filed and mailed, and shall withhold such sums as are required to be withheld
under applicable Federal and State income tax laws, rules and regulations.
10. BOOKS AND RECORDS. ARM shall maintain records showing for each inventor's
account the following:
A. Names, address and tax identification numbers;
B. Number of shares held;
<PAGE>
C. Historical information regarding the account of each shareholder,
including dividends paid and date of price for all transactions on a
shareholder's account;
D. Any stop or restraining order placed against a shareholder's account;
E. Information with respect to withholdings on foreign accounts;
F. Any dividend reinvestment order, plan application, dividend address and
correspondence relating to the current maintenance of a shareholder's account;
G. Certificate numbers and denominations for any shareholders holding
certificates;
H. Any information required in order for ARM to perform the calculations
contemplated under Section 7, 8, and 9 hereof.
Any such records required to be maintained by Rule 31a-1 under the Investment
Company Act of 1940 will be preserved for the period prescribed in Rule 31a-2 of
said rules. Such record retention shall be at the expense of the Fund. Such
records may be inspected by the Fund at reasonable times.
11. OTHER INFORMATION TO THE FUND. ARM will furnish to the Fund such other
information, including shareholder lists, and statistical information as may be
agreed upon from time to time between ARM, the Fund and the Distributor.
12. CORRESPONDENCE. ARM will answer that correspondence from shareholders
relating to their share accounts and such other correspondence as may from time
to time be mutually agreed upon.
13. PROXIES. ARM shall mail such proxy cards and other material supplied to it
by the Fund in connection with shareholder meetings of the Fund and shall
receive, examine and tabulate returned proxies and certify the vote of the Fund.
14. FEES AND CHARGES. ARM will receive such compensation from the Fund for its
services as the Fund's Transfer and Dividend Disbursing Agent and for its other
duties pursuant hereto as may be agreed from time to time, and shall be
reimbursed for the cost of any and all forms, including blank checks and
proxies, unused by it in communicating with shareholders of the Fund, or
especially prepared for use in connection with its actions hereunder, as well as
the cost of postage, telephone and telegraph used in communicating with
shareholders of the Fund. All forms for which ARM has received reimbursement
from the Fund shall be and remain the property of the Fund until used. ARM shall
also receive from the Fund all counsel fees incurred by it in connection with
the performance of its duties under this Agreement, unless such fees are
incurred on a matter involving ARM willful misconduct or gross negligence.
15. REFERENCES TO ARM. The Fund shall not circulate any printed matter which
contains any reference to ARM without prior written approval of ARM, expecting
solely such printed matter as merely identifies ARM as Transfer Agent and
Dividend Disbursing Agent. The Fund will submit printed matter requiring
approval by ARM in draft form, allowing sufficient time for review by ARM and
its counsel prior to any deadline for printing.
16. INDEMNIFICATION. The Fund will indemnify and hold ARM harmless from all
loss, cost, damage, and expense, including reasonable expenses for counsel,
incurred by it resulting from any claim, demand, action or omission by it in the
performance of its duties hereunder, or the functions of Transfer and Dividend
Disbursing Agent, or as a result of acting upon any instruction believed by it
to have been executed by a duly authorized officer of the Fund, provided that
this indemnification shall not apply to actions or omissions of ARM in cases of
its own willful misconduct or negligence, and further provided, that prior to
confessing any claim against it which may be subject of this indemnification,
ARM shall give the Fund reasonable opportunity to defend against said claim in
its own name of ARM.
17. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate this purpose
hereof.
<PAGE>
18. AMENDMENT AND TERMINATION. This Agreement may be modified or amended from
time to time by mutual agreement between the parties hereto and maybe terminated
by one hundred twenty (120) days' written notice given by one party to the
other. Upon termination hereof the Fund shall pay to ARM such compensation as
may be due as of the date of such termination, and shall likewise reimburse ARM
for its costs, expenses and disbursements.
STATE BOND INVESTMENT FUNDS, INC.
By: Kevin L. Howard
-----------------------------
Its: Secretary
----------------------
ARM TRANSFER AGENCY, INC.
By: John R. McGeeney
-----------------------------
Its: Secretary
----------------------
<PAGE>
February 28, 1996
State Bond Investment Funds, Inc.
100 North Minnesota Street
New Ulm, Minnesota 56073-0069
Dear Sirs:
State Bond Investment Funds, Inc. proposes to issue and sell an indefinite
number of shares (the "Shares") of its Common Stock par value $.00001 per share
(the "Common Stock") in the manner and on the terms set forth in its
Registration Statement on Form N-1A filed with the Securities and Exchange
Commission (File No. 2-19600).
I have, as counsel, participated in various corporate and other proceedings
relating to the Fund and to the Shares. I have examined copies, either
certified or otherwise proved to my satisfaction to be genuine, of its Articles
of Incorporation and By-Laws, as currently in effect, a certificate of good
standing issued by the State Department of Assessments and Taxation of the State
of Maryland and other documents relating to its organization and operation. I
have also reviewed the above-mentioned Registration Statement and all amendments
filed as of the date of this opinion and the documents filed as exhibits
thereto. I am generally familiar with the corporate affairs of the Fund.
Based upon the foregoing, it is my opinion that:
1. The Fund has been duly organized and is validly existing under the laws
of the state of Maryland.
2. The Fund is authorized to issue ten billion (10,000,000,000) shares of
Common Stock. Under Maryland law, shares of Common Stock which are issued and
subsequently redeemed by the Fund will be, by virtue of such redemption,
restored to the status of authorized and unissued shares.
3. Subject to the effectiveness of the above-mentioned Registration
Statement and compliance with applicable state securities laws, upon the
issuance of the Shares for a consideration not less than the par value thereof
as required by the laws of Maryland, and not less than the net asset value
thereof as required by the Investment Company Act of 1940 and in accordance with
the terms of the Registration Statement, such Shares will be legally issued and
outstanding and fully paid and non-assessable.
I hereby consent to the filing of this opinion with the Securities and
Exchange Commission as part of the above-mentioned Registration Statement and
with any state securities commission where such filing is required. In giving
this consent I do not admit that I come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended.
I am a member of the Bar of the State of Kentucky and do not hold myself
out as being conversant with the laws of any jurisdiction other than those of
the United States of America and the State of Kentucky. I note that I am not
licensed to practice law in the State of Maryland, and to the extent that any
opinion expressed herein involves the law of Maryland, such opinion should be
understood to be based solely upon my review of the good standing certificate
referred to above, the published statues of that State and, where applicable,
published cases, rules or regulations or regulatory bodies of that State.
Very truly yours,
/s/Kevin L. Howard
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the use of our report dated
January 26, 1996, in the Post-Effective Amendment No. 20 to the Registration
Statement (Form N-1A) and related Prospectus of the State Bond Common Stock
Fund.
/s/ Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
February 26, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Board of Directors of State Bond Equity Funds, Inc.
and Shareholders of State Bond Common Stock Fund
We consent to the use in the Post-Effective Amendment No. 20 to the Registration
Statement on Form N-1A of State Bond Common Stock Fund, filed under the
Investment Company Act of 1940 and the Securities Act of 1933, of our report
dated January 23, 1995 (except for Note E, dated February 16, 1995) accompanying
the financial statements of State Bond Common Stock Fund for the year ended
December 31, 1994, as listed in Item 24(a) of such Registration Statement, and
to the reference to us under the heading "Financial Highlights" appearing in the
Prospectus which is part of such Registration Statement.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 26, 1996
<PAGE>
Exhibit (16)
Computation of Performance Quotations
Average annual total return figures for the current one year, five year, and
ten year periods ending December 31, 1995, are calculated as follows:
n 1/n
Formula: P(1+T) = ERV or T = ERV/P -1
Where: P = hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
period.
One year period:
22.67% = 1,227 -1
-----
1000
Five year period:
1/5
12.37% = 1,792 -1
-----
1000
Ten year period:
1/10
12.38% = 3,214 -1
-----
1000
Cumulative total return figures for the life of the fund, beginning June 25,
1964, and ending December 31, 1995 are calculated as follows:
Formula: CTR = ERV - P
------- 100
P
Where: CTR = cumulative total return
ERV = ending redeemable value at the
end of the period of a
hypothetical $1,000 payment made
at the beginning of the period
P = initial payment of $1,000
1,920% = $20,199 - $1,000
---------------- 100
$1,000
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond Diversified Fund, a Maryland
corporation, hereby constitutes and appointed Kevin L. Howard, Richard M.
Carlblom, Peter S. Resnik and Don W. Cummings and each of them (with full power
to each of them to act alone), his true and lawful attorney-in-fact and agent,
with full power of substitution to each, for him and on his behalf and in his
name, place and stead, to execute and file any of the documents referred to
below relating to registrations under the Securities Act of 1933 or the
Investment Company Act of 1940 (the "Acts"): registration statements on any form
or forms under the Acts, and any and all amendments and supplements thereto
(including post-effective amendments), with all exhibits and all agreements,
consents, exemptive applications and other documents and instruments necessary
or appropriate in connection therewith, each of said attorneys-in-fact and
agents being empowered to act with or without the others or other, to have full
power and authority to do or cause to be done in the name and on behalf of the
undersigned each and every act and thing requisite and necessary or appropriate
with respect thereto to be done in and about the premises in order to effectuate
the same, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/William Faulkner
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond Diversified Fund, a Maryland
corporation, hereby constitutes and appointed Kevin L. Howard, Richard M.
Carlblom, Peter S. Resnik and Don W. Cummings and each of them (with full power
to each of them to act alone), his true and lawful attorney-in-fact and agent,
with full power of substitution to each, for him and on his behalf and in his
name, place and stead, to execute and file any of the documents referred to
below relating to registrations under the Securities Act of 1933 or the
Investment Company Act of 1940 (the "Acts"): registration statements on any form
or forms under the Acts, and any and all amendments and supplements thereto
(including post-effective amendments), with all exhibits and all agreements,
consents, exemptive applications and other documents and instruments necessary
or appropriate in connection therewith, each of said attorneys-in-fact and
agents being empowered to act with or without the others or other, to have full
power and authority to do or cause to be done in the name and on behalf of the
undersigned each and every act and thing requisite and necessary or appropriate
with respect thereto to be done in and about the premises in order to effectuate
the same, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/John R. Lindholm
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond Diversified Fund, a Maryland
corporation, hereby constitutes and appointed Kevin L. Howard, Richard M.
Carlblom, Peter S. Resnik and Don W. Cummings and each of them (with full power
to each of them to act alone), his true and lawful attorney-in-fact and agent,
with full power of substitution to each, for him and on his behalf and in his
name, place and stead, to execute and file any of the documents referred to
below relating to registrations under the Securities Act of 1933 or the
Investment Company Act of 1940 (the "Acts"): registration statements on any form
or forms under the Acts, and any and all amendments and supplements thereto
(including post-effective amendments), with all exhibits and all agreements,
consents, exemptive applications and other documents and instruments necessary
or appropriate in connection therewith, each of said attorneys-in-fact and
agents being empowered to act with or without the others or other, to have full
power and authority to do or cause to be done in the name and on behalf of the
undersigned each and every act and thing requisite and necessary or appropriate
with respect thereto to be done in and about the premises in order to effectuate
the same, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/John Katz
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond Diversified Fund, a Maryland
corporation, hereby constitutes and appointed Kevin L. Howard, Richard M.
Carlblom, Peter S. Resnik and Don W. Cummings and each of them (with full power
to each of them to act alone), his true and lawful attorney-in-fact and agent,
with full power of substitution to each, for him and on his behalf and in his
name, place and stead, to execute and file any of the documents referred to
below relating to registrations under the Securities Act of 1933 or the
Investment Company Act of 1940 (the "Acts"): registration statements on any form
or forms under the Acts, and any and all amendments and supplements thereto
(including post-effective amendments), with all exhibits and all agreements,
consents, exemptive applications and other documents and instruments necessary
or appropriate in connection therewith, each of said attorneys-in-fact and
agents being empowered to act with or without the others or other, to have full
power and authority to do or cause to be done in the name and on behalf of the
undersigned each and every act and thing requisite and necessary or appropriate
with respect thereto to be done in and about the premises in order to effectuate
the same, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/Theodore S. Rosky
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE STATE BOND DIVERSIFIED FUND AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000029199
<NAME> STATE BOND INVESTMENT FUNDS, INC.
<SERIES>
<NUMBER> 1
<NAME> STATE BOND DIVERSIFIED FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 32,462,511
<INVESTMENTS-AT-VALUE> 45,521,618
<RECEIVABLES> 113,332
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 45,634,950
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 198,154
<TOTAL-LIABILITIES> 198,154
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,377,689
<SHARES-COMMON-STOCK> 4,461,874
<SHARES-COMMON-PRIOR> 4,521,436
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,059,107
<NET-ASSETS> 45,436,796
<DIVIDEND-INCOME> 1,176,330
<INTEREST-INCOME> 292,309
<OTHER-INCOME> 0
<EXPENSES-NET> 488,521
<NET-INVESTMENT-INCOME> 980,118
<REALIZED-GAINS-CURRENT> 1,886,807
<APPREC-INCREASE-CURRENT> 7,672,815
<NET-CHANGE-FROM-OPS> 10,539,740
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 985,587
<DISTRIBUTIONS-OF-GAINS> 1,887,050
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 277,506
<NUMBER-OF-SHARES-REDEEMED> 595,251
<SHARES-REINVESTED> 258,183
<NET-CHANGE-IN-ASSETS> 7,255,930
<ACCUMULATED-NII-PRIOR> 5,549
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 271,481
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 488,521
<AVERAGE-NET-ASSETS> 41,766,308
<PER-SHARE-NAV-BEGIN> 8.44
<PER-SHARE-NII> .23
<PER-SHARE-GAIN-APPREC> 2.18
<PER-SHARE-DIVIDEND> .23
<PER-SHARE-DISTRIBUTIONS> .44
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.18
<EXPENSE-RATIO> 1.17
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
