<PAGE>
STATE BOND
Diversified Fund
[LOGO]
State Bond
Diversified Fund
Annual Report
December 31, 1995
<PAGE>
State Bond Diversified Fund
JANUARY 12, 1996
TO THE SHAREHOLDERS:
The State Bond Diversified Fund (the "Fund") had total net assets at December
31, 1995 of $45.4 million. Investment decisions during the year to sell selected
securities from the Fund's portfolio resulted in net realized gains for the
Fund. Continuing the funds long-standing investment record, a long-term capital
gain distribution totaling 44 cents per share was declared and paid on December
29, 1995, along with a fourth quarter 7 cents per share dividend from net
investment income. The fourth quarter dividend brought total dividends paid from
net investment income for the year to 23 cents per share.
The net asset value per share closed the year at $10.18, compared to $8.44 on
December 31, 1994. On a total return basis which includes the reinvestment of
dividends and capital gains, the Fund for the year produced a 28.78% increase in
value.
The Fund has equity investments in 51 companies representing 22 different
industries. The emphasis of these equity investments is in telecommunication,
energy, and chemical industries. The Fund's five largest equity holdings are
Minnesota Mining and Manufacturing Company, Kimberly-Clark Corporation, Eastman
Kodak Company, SBC Communications, Inc., and Hercules, Inc. Of the total
investment securities, equities represent 85.9%, with the remaining invested in
commercial paper.
Economic conditions of moderate growth and inflation, low unemployment,
declining interest rates, and very strong corporate earnings produced an
excellent year for the equity markets. We now are faced with the challenge of a
new year. Given current economic levels, increased equity valuations, and
expected moderating corporate profits, a greater emphasis will be placed on
stock selection. Ultimately the impasse that exists in Washington on the budget
deficit plan will be resolved. This could allow the Federal Reserve to continue
its moderating policy on interest rates. Lower rates and a further potential
stimulus from a capital gains tax cut should be beneficial to stock prices.
While stock markets do not grow indefinitely, and a correction could come at any
time, stock prices in 1996 appear to have the potential for higher levels.
We appreciate your investment in the Fund and look forward to continuing to help
you meet your investment goals. Should you desire additional information, we
would welcome your inquiries.
Sincerely,
/s/ Keith O. Martens
Keith O. Martens
Vice President
<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>
BOARD OF DIRECTORS
William B. Faulkner
President, William Faulkner & Associates, Inc.
Director, State Bond mutual funds
Patrick M. Finley
President, Universal Cooperatives, Inc.
Director, State Bond mutual funds
John Katz
Executive Vice President, Equitable Investment Corporation, retired 1991
Director, State Bond mutual funds
John R. Lindholm
Executive Vice President, ARM Financial Group, Inc.
Chairman, State Bond mutual funds
Chris L. Mahai
Senior Vice President, Strategic Integration, Star Tribune
Director, State Bond mutual funds
Theodore S. Rosky
Executive Vice President and Chief Financial Officer,
Providian Corporation, retired 1992
Director, State Bond mutual funds
----------------------------------------
INVESTMENT ADVISER
ARM Capital Advisors, Inc.
GENERAL DISTRIBUTOR
SBM Financial Services, Inc.
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
1-800-328-4735
CUSTODIAN
Investors Fiduciary Trust Company
Kansas City, Missouri
----------------------------------------
This report is intended for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless
accompanied or preceded by the offering prospectus of the Fund, which contains
details of sales commissions and other information.
Catalog #001722
