<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
<TABLE>
<CAPTION>
Page
----
<S> <C>
SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE..................... 3
FINANCIAL HIGHLIGHTS.................................................... 4
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?......... 5
HOW IS THE FUND MANAGED?................................................ 6
WHAT ABOUT BROKERAGE COMMISSIONS?....................................... 6
HOW CAN YOU INVEST IN THE FUND?......................................... 7
HOW IS THE OFFERING PRICE OF THE FUND'S SHARES DETERMINED?.............. 7
HOW ARE THE FUND'S SALES CHARGES DETERMINED?............................ 8
HOW CAN YOU "SELL" YOUR SHARES?......................................... 8
How Can You Reinstate Your Investment?............................. 9
HOW DOES THE FUND'S EXCHANGE PRIVILEGE WORK?............................ 9
HOW DOES THE FUND PAY DIVIDENDS AND DISTRIBUTIONS?...................... 10
What Are Your Dividend And Capital Gain Distribution Options?...... 10
WHAT IS THE TAX STATUS OF DIVIDENDS AND DISTRIBUTIONS YOU RECEIVE?...... 10
WHAT IS THE FUND'S PLAN OF DISTRIBUTION?................................ 11
WHO ARE THE FUND'S FUND ACCOUNTING AGENT AND ITS CUSTODIAN?............. 11
WHAT SERVICES DOES THE FUND OFFER?...................................... 11
What About Shareholder Information?................................ 11
What Reports Will You Receive From the Fund?....................... 12
Are Certificates Issued For Shares?................................ 12
Other Services..................................................... 12
What Tax Deferred Retirement Plans Are Available?.................. 12
GENERAL INFORMATION ABOUT STATE BOND DIVERSIFIED FUND................... 12
INVESTMENT PERFORMANCE.................................................. 12
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE............................. 13
</TABLE>
2
<PAGE>
SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
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%
====
</TABLE>
A $10.00 fee will be charged for certain redemptions by wire transfer. See "How
Can You 'Sell' Your Shares?"
EXAMPLE:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
-------- --------- -------- -----
<S> <C> <C> <C> <C>
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
</TABLE>
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
period......................... $ 8.44 $ 9.24 $ 9.19 $ 9.68 $ 7.93 $ 8.84 $ 7.39 $ 6.94 $ 7.42 $ 7.15
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
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%
</TABLE>
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* 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.
4
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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; (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.
5
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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,
State Bond Cash Management Fund, and State Bond U.S. Government and Agency
Securities Fund.
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, .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% of 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.
6
<PAGE>
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, 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
7
<PAGE>
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.
HOW ARE THE FUND'S SALES CHARGES DETERMINED?
Sales charges are determined in accordance with the following schedule:
<TABLE>
<CAPTION>
REGULAR
DEALER
DISCOUNT AS
% OF % OF NET % 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.
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
8
<PAGE>
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 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
9
<PAGE>
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.
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.
10
<PAGE>
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.
WHAT ABOUT THE FUND'S 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.
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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.
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
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
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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.
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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. The information in the chart
assumes that the maximum current sales charge was paid upon acquisition of the
Fund shares and reflects 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.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
(December 31 Fiscal Year)
- ---------------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Performance $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>
The Fund's average annual total return for the period ending December 31, 1995
One Year ................................................... 22.67%
Five Years ................................................. 12.37%
Ten Years .................................................. 12.38%
All performance data and figures are based upon past performance. Past
performance is not indicative of 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 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.
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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 ANY CHANGE IN THE AFFAIRS OF THE
FUND SINCE THE DATE THEREOF.
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100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
Catalog #001785
