STATE BOND MONEY FUNDS INC, 497, 1995-11-28

STATE BOND MONEY FUNDS INC
497, 1995-11-28

Previous: HALLWOOD GROUP INC, DEF 14A, 1995-11-28

Next: PRIMARK CORP, 8-K/A, 1995-11-28

<PAGE>

PROSPECTUS

STATE BOND CASH MANAGEMENT FUND
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069.
Phone: (612) 835-0097

December 1, 1995

State Bond Cash Management Fund (the "Fund") is a mutual fund which seeks high
current income, preservation of capital, and liquidity. The Fund is a money
market mutual fund. The Fund is the only investment portfolio of State Bond
Money Funds, Inc. In pursuing its goals, the Fund invests in high-quality money
market instruments. To the extent the Fund emphasizes preservation of capital
and liquidity, current income could be lessened. Shares of the Fund are issued
at net asset value without a sales charge or redemption fee.

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 neither insured nor guaranteed by the U.S.
Government. There can be no assurance that the Fund will be able to maintain a
stable net asset value of $1.00 per share.

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

Page
----
Shareholder Transaction And Operating Expense Table ........................ 3
Financial Highlights ....................................................... 4
What Are The Fund's Investment Objectives, Policies and Risks? ............. 4
How Is The Fund Managed? ................................................... 7
How Can You Invest In The Fund? ............................................ 8
When Does Your Purchase Begin Earning Dividends? ........................... 9
How Can Shares Be Redeemed? ................................................ 9
How Does the Fund's Exchange Privilege Work? ............................... 11
How Does the Fund Pay Dividends? ........................................... 12
What Is The Federal Tax Status Of Dividends You Receive? ................... 13
How Does The Fund Pay Distribution Expenses? ............................... 13
Who Are the Fund's Accounting Agent and Custodian? ......................... 13
What Services Does the Fund Provide? ....................................... 14
General Information About State Bond Cash Management Fund .................. 14
Yield ...................................................................... 15

<PAGE>

SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE

SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Load Imposed on Purchase (as a percentage of offer price).. 0.00%

ANNUAL FUND OPERATING EXPENSES
(As a percentage of average daily net assets)

Management Fee (After Expense Reimbursement)............................. .08%
12b-1 Fee (After Expense Reimbursement).................................. .04%
Other Expenses (After Expense Reimbursement)............................. .68%

Total Fund Operating Expenses (After Expense Reimbursements)....... .80%
=====

A fee of $10 will be charged upon any redemption by wire transfer. See "How Can
Shares Be Redeemed?"

EXAMPLE: 1 Year 3 Years 5 Years 10 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: ................................ $8 $26 $44 $99

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 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 July 31, 1995. The above
operating expenses are net of expense reimbursements. Without such
reimbursements, the management fee would have been .40%, the 12b-1 fee would
have been .20%, the other expenses would have been 3.23% and total expenses
would have been 3.83%. For more information concerning fees and expenses, see
"How Is The Fund Managed?" and "Does The Fund Bear Distribution Expenses?"

<PAGE>

FINANCIAL HIGHLIGHTS

The information presented below for the fiscal year ended July 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
July 31, 1994 has been audited by Deloitte & Touche LLP, the previous auditors
for the Fund. Further information about 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>

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED JULY 31 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ------ ------ ------- ------ ------ ------ ------

Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00

Income from investment operations
Net investment income............... .04 .03 .02 .04 .06 .08 .08 .06 .05 .06
Less distributions:
From net investment
income............................ (.04) (.03) (.02) (.04) (.06) (.08) (.08) (.06) (.05) (.06)
------ ------ ------ ------ ------ ------- ------ ------ ------ ------

Net asset value, end of
year............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ======= ====== ====== ====== ======
TOTAL RETURN........................... 4.51% 2.54% 2.40% 3.74% 6.28% 7.82% 8.34% 6.20% 5.31% 6.53%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year
(in thousands)..................... $2,718 $2,020 $3,657 $4,770 $9,378 $11,750 $8,742 $6,971 $4,704 $4,626
Ratio of expenses to
average net assets................. .80% .80% .80% .90% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net income
to average net assets.............. 4.49% 2.55% 2.38% 3.71% 6.19% 7.52% 8.10% 6.05% 5.17% 6.32%
Ratio of expenses to
average net assets
before voluntary
reimbursements..................... 3.83% 3.38% 2.54% 1.99% 1.54% 1.52% 1.63% 1.58% 2.01% 2.35%
Ratio of net income to
average net assets before
voluntary reimbursements........... 1.46% (.01%) .64% 2.91% 5.64% 7.00% 7.47% 5.46% 4.10% 4.97%

</TABLE>

WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES AND RISKS?

The Fund's investment objectives are high current income, preservation of
capital, and liquidity. There can be no assurance that the Fund's investment
objectives will be attained. The value of securities in the Fund's portfolio
generally can be expected to vary inversely to changes in prevailing interest
rates. The Fund attempts to maintain a constant net asset value of $1.00 per
share, although there is no assurance that it will always be able to do so.

The Fund invests in high quality money market instruments, including
the following:

U.S. Government Obligations: Obligations issued by or guaranteed as to
principal and interest by the United States, its agencies or instrumentalities,
including Treasury bills, notes, and bonds. U.S. Treasury obligations differ
mainly in their maturities. Treasury bills have a maturity of one year or less,
Treasury notes have maturities of one to ten years, and Treasury bonds generally
have maturities greater than five years. Some obligations of U.S. Government
agencies and instrumentalities are supported by the full faith and credit of the
U.S. Treasury; others are supported by the right of the issuer to borrow from
the

4
<PAGE>

Treasury. Securities of some U.S. Government instrumentalities are supported
only by the credit of the issuer, to which the U.S. Government may not be
legally obligated to provide financial support.

Bank Obligations: Obligations, or instruments secured by such obligations,
issued by U.S. domestic banks (including foreign branches), savings
institutions, and foreign banks (including U.S. branches or agencies). These
obligations include negotiable and non-negotiable certificates of deposit,
bankers' acceptances, fixed time deposits, and letters of credit. Investments in
such obligations will be limited to the obligations of (a) domestic banks and
savings institutions having total assets over one billion dollars which are
subject to regulatory supervision by the U.S. Government or state governments,
(b) domestic banks and savings institutions which are fully insured by the
Federal Deposit Insurance Corporation, but only in an aggregate amount not to
exceed 10% of the value of the Fund's total assets, and (c) the 50 largest
foreign banks, in terms of assets, having branches or agencies in the United
States. Fixed time deposits, unlike negotiable certificates of deposit,
generally do not have a market and may be subject to penalties for early
withdrawal of funds. However, it is the current policy of the Fund not to invest
in fixed time deposits subject to withdrawal penalties, other than overnight
deposits, if more than 10% of its assets would be invested in such deposits.

Investments in foreign banks and foreign branches of United States banks
involve certain risks. While domestic banks are required to maintain certain
reserves and are subject to other regulations, those requirements and
regulations may not apply to foreign branches. Investments in foreign banks and
branches also may be subject to other risks, including future political and
economic developments, the possible imposition of withholding taxes on interest
income, the seizure or nationalization of foreign deposits, and the
establishment of exchange controls or other restrictions. Also, accounting and
reporting standards may be different for foreign banks.

Commercial Paper: Short-term unsecured promissory notes with maturities not
exceeding nine months. Investments in rated commercial paper will be limited to
those rated at the time of investment within the two highest grades by Standard
& Poor's Ratings Group ("S&P") or by Moody's Investors Service, Inc. ("Moody's")
or such other rating organizations as may be approved by the Fund's Board of
Directors. Investments in unrated commercial paper will be limited to those
issued or guaranteed as to payment of principal and interest by companies which
have an existing debt security rated at the time of investment within the two
highest grades by S&P or Moody's or such other rating organizations as may be
approved by the Fund's Board of Directors.

Corporate Debt Securities: Corporate debt securities (other than commercial
paper). As is discussed below, Rule 2a-7 imposes a number of requirements upon
investments in long-term securities.

Rule 2a-7: The Fund is subject to the investment restrictions of Rule 2a-7
under the Investment Company Act of 1940 in addition to its other policies and
restrictions discussed below. Rule 2a-7 requires that the Fund maintain an
average weighted maturity of not more than 90 days and invest exclusively in
securities that mature within 397 days. Rule 2a-7 also requires that all
investments by the Fund be limited to United States dollar-denominated
investments that: (1) present "minimal credit risks," and (2) are at the time of
acquisition "Eligible Securities." Eligible Securities include, among others,
securities that are rated by two Nationally Recognized Statistical Rating
Organizations ("NRSROs") in one of the two highest categories for short-term
debt obligations, such as A-1 or A-2 by S&P, or P-1 or P-2 or MIG-1 or MIG-2 by
Moody's. Eligible Securities also include a long-term security if its issuer has
received from two NRSROs a rating, with respect to a class of short-term debt
obligations that currently is comparable in priority and security with the long-
term security, in one of the two highest rating categories. It is the
responsibility of the Manager of the Fund (see "How Is The Fund Managed?") to
determine that the Fund's investments present only "minimal credit risks" and
are Eligible Securities. The Board of Directors of the Fund has

5
<PAGE>

established written guidelines and procedures for the Manager and oversees the
Manager's determination that the Fund's portfolio securities present only
"minimal credit risk" and are Eligible Securities.

Under Rule 2a-7, 95% of the assets of the Fund must be invested in Eligible
Securities that are deemed First Tier Securities, which include, among others,
securities rated by two NRSROs in the highest category (such as A-1 and P-1).
Rule 2a-7 also requires that: (1) the Fund may not (with certain exceptions)
invest more than 5% of its total assets in securities of a single issuer; and
(2) the Fund's investment in Second Tier Securities of a single issuer may not
exceed the greater of 1% of the Fund's total assets or $1,000,000. Repurchase
agreements can be entered into only with regard to Government securities or
securities that are rated in the highest rating category by two NRSROs.

The Fund may engage in the following investment activities:

Repurchase Agreements: The Fund may enter into repurchase agreements with
broker-dealers and commercial banks. A repurchase agreement is an agreement
under which the Fund will acquire a money market instrument, qualified for
purchase by the Fund, subject to resale to the seller at an agreed upon price
and date. Such resale price reflects an agreed upon return for the period of
time the instrument is held by the Fund and is unrelated to the coupon (stated
interest rate paid by the issuer) on the instrument. Repurchase agreements
usually are for one week or less, but may be for longer periods. The Fund will
not invest more than 10% of its net assets in repurchase agreements of more than
one week's duration. 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 does not currently invest in repurchase agreements and it has
no current intention of entering into such agreements.

Lending of Portfolio Securities: The Fund may lend portfolio securities to
brokers, dealers, and financial institutions provided that cash or equivalent
collateral (fixed-income securities for which there is an established market)
equal to at least 100% of the market value of the securities loaned is
maintained by the borrower with the Fund. 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 securities are on loan, the borrower will pay
the Fund any income accruing thereon and the Fund may invest the cash collateral
and earn additional income or may receive an agreed upon fee from the borrower
who has delivered equivalent collateral. 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 during the term of the loan. The Fund will
not lend more than 25% of the value of its total assets, and it is not intended
that payments received on account of interest paid on securities loaned will
exceed 10% of the annual gross income of the Fund without offset for realized
short-term capital losses, if any.

Securities Trading: The Fund may trade investments to take advantage of short-
term market movements. This may result in high portfolio turnover. The Fund does
not anticipate incurring significant brokerage or transaction expenses since
portfolio transactions ordinarily will be made directly with the issuer, a money
market dealer or other dealers or other financial institutions on a net price
basis.

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) borrow money, except for

6
<PAGE>

temporary purposes and in an aggregate amount not in excess of 10% of the value
of the total assets of the Fund, provided that borrowings in excess of 5% of
such value are permitted from banks only, and that the Fund will not purchase
securities when borrowings exceed 5% of such value; (2) invest more than 25% of
its assets in securities of issuers in any one industry (provided that the Fund
can concentrate its investments in money market instruments issued by the U.S.
government or its agencies or domestic banks); (3) mortgage or pledge assets,
except that up to 10% of the Fund's assets can be used to secure borrowings; (4)
invest more than 5% of its assets in any one issuer other than the U.S.
Government or its agencies; or (5) invest more than 5% of its assets in the
securities of issuers in operation less than three continuous years.

Except as specifically noted above, the investment policies described above
are not fundamental and the Board of Directors may change such policies without
the vote of a majority of its outstanding voting securities. The Board would not
change the Fund's investment objectives, 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 of the Fund present at a shareholder's meeting if
more than 50% of the outstanding shares of the Fund are represented at the
meeting in person or by proxy.

HOW IS THE FUND MANAGED?

The Board of Directors 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 Manager's address 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 $4.0 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 Minnesota Tax-Free Income Fund,
State Bond Common Stock Fund, State Bond Diversified Fund, State Bond Tax Exempt
Fund, and State Bond U.S. Government and Agency Securities Fund.

Keith O. Martens, Executive Vice President-Investments of the Manager and Vice
President of the Fund, is responsible for selection of investments and
management of the Fund. Mr. Martens is also the principal manager of the State
Bond Minnesota Tax-Free Income Fund, State Bond Common Stock Fund, State Bond
Diversified Fund, State Bond Tax Exempt Fund and State Bond U.S. Government and
Agency Securities Fund.

7
<PAGE>

The Fund pays the Manager a management fee for its services, calculated daily
and payable monthly, equal to .6 of 1% of the average daily net assets of the
Fund up to and including $550 million, .55 of 1% of the next $250 million, .5 of
1% of the next $250 million and .45 of 1% of such assets in excess of $1
billion. A portion of this fee is paid to SBM Financial Services, Inc. (the
"Distributor") in connection with the Fund's Plan of Distribution (the "Plan")
(See "How Does the Fund Pay Distribution Expenses?"). The Fund pays all its
expenses other than those assumed by the Manager. For its fiscal year ended July
31, 1995, total expenses of the Fund, after expense reimbursements, amounted to
.80% of its average daily net assets.

HOW CAN YOU INVEST IN THE FUND?

SBM Financial Services, Inc. (the "Distributor"), a subsidiary of ARM, acts as
distributor of the Fund's shares, which are offered on a continuous basis. Its
address is 100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-
0069.

The minimum initial investment in the Fund is $1,000 and subsequent
investments must be in an amount of at least $100 unless the subsequent
investment is made by means of the Automatic Investment Plan, in which case the
subsequent minimum is $50. The minimums for IRA, Keogh, and other tax-deferred
pension plans are $250 for initial investment and $50 for subsequent
investments.

The purchase price for shares of the Fund is their net asset value next
determined after the receipt of a purchase order in proper form.

The net asset value per share of the Fund is determined as of 3:00 p.m.
Central Time on days in which the Fund is open for business. Net asset value is
computed by dividing the value of the total assets of the Fund, less
liabilities, by the number of shares outstanding. The Fund's assets are valued
on the basis of amortized cost, which involves initially valuing a portfolio
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium regardless of the impact of fluctuating
interest rates on the market value of the instrument. The Fund follows certain
investment policies in order to seek to maintain a constant net asset value of
$1.00 per share, although there is no assurance that those policies will always
achieve such a result. See "What Are The Fund's Investment Objectives, Policies
and Risks?"

The Fund reserves the right to reject any order for the purchase of its
shares. In addition, the offering of Fund shares may be suspended by the Fund at
any time and resumed at any time thereafter.

Investments in the Fund may be made in any of the following ways:

By Mail: Checks or negotiable bank drafts payable to State Bond Cash
Management Fund should be mailed with the account application to SBM Financial
Services, Inc., 100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota
56073-0069.

By Wire Transfer: Call the Fund's Shareholder Servicing Agent at (800) 328-
4735 to advise of your investments and, for your initial investment, to obtain
an account number. If you do not have an account number prior to the wire
transfer, your wire will be returned to your bank. You should then instruct a
commercial bank to wire your money to "Credit account of State Bank & Trust
Company of New Ulm at the Federal Reserve Bank of Minneapolis - Account
#091901202, for further credit to Account #780, for benefit of Account Number
(your Fund account #) of (your name)." Be sure to include your Fund account
number and your name. If the wire transfer is for an initial investment,
promptly send a completed account

8
<PAGE>

application to SBM Financial Services, Inc., 100 North Minnesota Street, P.O.
Box 69, New Ulm, Minnesota 56073-0069.

Through SBM Financial Services, Inc. or Your Broker: You may invest in the
Fund by purchasing shares through a representative of SBM Financial Services,
Inc., the Fund's Distributor, or from certain registered securities broker-
dealers. Broker-dealers who process orders on behalf of their customers may
charge a fee for their services. The broker is responsible for transmitting the
purchase order to the Distributor. Investments made directly or through the
Distributor, without the assistance of a broker-dealer, are without charge.

Automatic Investment Plan: The Fund offers an automatic investment plan for
existing shareholders. Once you have established your account you may
automatically make additional investments ($50 minimum) by authorizing monthly
withdrawals directly from your personal bank checking account. You pay no charge
to the Fund for this service, which you may terminate at any time by calling the
Fund's Shareholder Servicing Agent at (800) 328-4735. For more information about
the Automatic Investment Plan, request the appropriate forms from the Fund by
calling (800) 328-4735 or a representative of the Distributor.

Do Shares of the Fund Count Toward the Right of Accumulation for Purchases of
Shares of the Other State Bond Funds? Because shares of the Fund are offered to
investors with no sales charge, only those shares of the Fund obtained as a
result of an exchange from another mutual fund in the State Bond Group in which
sales charges are paid will be included for purposes of determining eligibility
for rights of accumulation. To receive any reduced sales charge under the right
of accumulation, the shareholder or his or her dealer must notify the
Distributor at the time of investment of the shareholder's eligibility for the
reduced sales charge.

WHEN DOES YOUR PURCHASE BEGIN EARNING DIVIDENDS?

Your purchase of Fund shares will begin to earn dividends on the day that your
order is considered effective. Many of the types of instruments in which the
Fund invests must be paid for in immediately available money, called "federal
funds." Therefore, your payments for the purchase of shares must be converted
into federal funds before your purchase is considered effective.

Payments transmitted by check or draft drawn on a member bank of the Federal
Reserve System will normally be effective, and shares will be credited to your
account, within two business days after receipt by the Shareholder Servicing
Agent. Checks drawn on banks which are not members of the Federal Reserve System
may take longer to be converted. All checks are accepted subject to collection
at full face value in United States funds and must be drawn in U.S. dollars on a
domestic bank.

Payments transmitted by wire and received and reported to the Fund by the
Shareholder Servicing Agent prior to 3:00 p.m. Central Time on any day which is
a business day of the Fund are normally effective on the same day as received.
Wire payments received or reported by the Shareholder Servicing Agent to the
Fund after that time, or on a day which is not a business day of the Fund, will
be effective depending upon the time and method payments are transmitted to the
Fund and available in federal funds.

HOW CAN SHARES BE REDEEMED?

You may convert all or any part of your investment into cash at any time by
redeeming shares. All redemptions will be made at the net asset value per share
next determined after receipt of a redemption request in proper form (or as next
determined on the next business day of the Fund if the request is made

9
<PAGE>

by telephone and received after 3:00 p.m. Central Time), including all stock
certificates, signature guarantees and other documentation that may be required
by the Shareholder Servicing Agent. Shares purchased by uncertified check may
not be redeemed for up to 15 days of receipt of the check in order to allow time
for the check to clear. You will not receive dividends on shares which are
redeemed from your account for the day that the redemption is effected.

Your account will remain open, even after all shares are redeemed, for the
remainder of the year in which the redemption is made and for the following
year. This permits you to resume investments in the Fund, conveniently and at
any time, during that period, provided that the information on your original
account application remains accurate.

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 has a value of less than $500. You will be allowed to
make additional investments prior to the date fixed for such a redemption to
avoid liquidation of your account.

You may use any of the following methods to redeem shares:

Regular Redemption by Mail: You may redeem your shares without charge at any
time by sending a letter, signed by all of the registered owners of the account
and identifying your account number, to the Shareholder Servicing Agent at 100
North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069. For share
redemptions valued at $20,000 or more, or when the proceeds of the redemption
are to be paid to someone other than you, your signature must be guaranteed by a
national securities exchange, a member firm of a principal stock exchange, a
registered securities association, a clearing agency, a savings association, a
credit union, a broker, a dealer, a municipal broker or dealer, a government
securities broker or dealer, or a representative of the Distributor. The
Distributor may request further documentation from corporations, executors,
partnerships, administrators, trustees or custodians.

A check for the proceeds of regular redemptions ordinarily will be mailed
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 fifteen days after purchase in order to allow the uncertified check to
clear. Proceeds will be sent to your address of record or, in accordance with
your request, to some other person (if the request is in writing with your
signature guaranteed).

Quick Redemption by Wire Transfer: If you have elected the Quick Redemption
service, you may request that the proceeds of a redemption of shares having a
value of $5,000 or more be wired to your account at a commercial bank in the
United States which is a member of the Federal Reserve System. This service is
available only if you have designated such a bank in your Investment Application
and no certificates have been issued for the shares to be redeemed. Redemption
proceeds of less than $5,000 will not be wired, but instead will be mailed to
the shareholder's address of record. A request for Quick Redemption may be made
to the Shareholder Servicing Agent by mail at 100 North Minnesota Street, P.O.
Box 69, New Ulm, Minnesota 56073-0069 or by telephone at (800) 328-4735. Each
request must include your name and account number. There is currently a $10.00
charge for each wire transfer, which is deducted from the redemption proceeds.
The fee is waived for banks for their fiduciary accounts. The Fund reserves the
right to modify the Quick Redemption service at any time.

Quick Redemption requests received before 3:00 p.m. Central Time on a business
day of the Fund will be effected at the net asset value determined on that day.
Quick Redemption requests received after the close of the New York Stock
Exchange will be effected at the net asset value determined on the next

10
<PAGE>

business day of the Fund. Proceeds sent by wire will be transmitted on the next
business day after the day that the redemption is effected. Proceeds sent by
mail will be transmitted within seven days of receipt of your request.

If your bank is not a member of the Federal Reserve System, Quick Redemption
proceeds may be wired to a member bank which has a correspondent relationship
with your bank, provided you designate such a correspondent bank in the
Investment Application and note that your bank should be immediately advised of
the wire transfer. The failure of a correspondent bank to notify your bank of
the wire transfer immediately could delay the crediting of redemption proceeds
to your bank.

The Fund is not liable for any loss arising from telephone redemptions 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.

If you are already a Fund shareholder, you may elect the Quick Redemption
service or change a designation of a bank account for the Quick Redemption
service by writing to the Shareholder Servicing Agent at 100 North Minnesota
Street, P.O. Box 69, New Ulm, Minnesota 56073-0069. The designation must be
signed by all of the registered owners of the Fund account, with signature(s)
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.

Check Redemptions: You may elect to participate in the Fund's free Check
Redemption service, which permits you to write checks payable to any person in
amounts of $100 or more. You may elect this service on the account application
or by later written request to the Shareholder Servicing Agent at 100 North
Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069. The Shareholder
Servicing Agent will supply you with blank checks which can be drawn on your
account with the Fund. The checks will be paid from the redemption of shares in
your account. When honoring a check presented for payment, the Shareholder
Servicing Agent will cause the Fund to redeem exactly enough full and fractional
shares in your account to cover the amount of the check. Shares for which
certificates have been issued may not be redeemed by check. Check redemption is
subject to bank rules and regulations governing checking accounts. Checks for
less than $100 will be returned and a fee may be charged. If there are
insufficient shares in your account to cover a check written under this service,
the check will be returned marked "insufficient funds" and a return fee may be
charged. Checks should not be used to close a Fund account because when the
check is written you will not know the exact total value of the account on the
day the check clears. Fund dividends and distributions continue to be earned
until a check clears for payment. The Fund reserves the right to terminate or
modify the Check Redemption service at any time upon written notice to the
Fund's shareholders. Check redemption is subject to State Bank & Trust Company
of New Ulm's rules and regulations governing checking accounts.

HOW DOES THE FUND'S EXCHANGE PRIVILEGE WORK?

Shares of the Fund purchased directly (i.e., not through an exchange from
another mutual fund in the State Bond Group) may be exchanged for shares in any
other mutual fund in the State Bond Group at the next determined public offering
price (i.e., net asset value plus the applicable sales charge) for that fund.

11
<PAGE>

If you have been a shareholder of one of the other funds in the State Bond
Group for seven days or more, you may exchange any or all of your shares in that
mutual fund for shares of the Fund. The value of the shares being exchanged must
equal the minimum investment amounts provided for direct purchases of the Fund's
shares. Shares of the Fund which you acquire through such an exchange which have
been held in your account for seven calendar days or more may later be exchanged
for shares of any of the other mutual funds in the State Bond Group at the
Fund's next determined net asset value; however, if such exchange is for shares
of any fund in the State Bond Group which has a higher sales charge than the
fund you originally purchased and you held the shares of the original fund for
less than six months, you must pay the difference in the sales charge applicable
to the purchase of shares of the original fund and the higher sales charge
applicable to the purchase of shares of the new fund. If you desire to exchange
a portion of your shares of the Fund that are attributable to exchanges from
different funds, those shares of the Fund that may be exchanged for shares of
the new fund at net asset value without a sales charge will be exchanged first.

Exchanges of 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 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 may also 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 account 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?

The Fund declares daily dividends on all outstanding shares (dividends are
declared on the day a purchase is effective but are not declared on redeemed
shares for the day of redemption). Dividends are paid monthly. A shareholder who
redeems all of his or her Fund shares receives with the redemption proceeds
(other than redemptions by check) the amount of all dividends declared for the
month up to and including the date of redemption of shares. Dividends in respect
of all other redemptions are paid on the regular dividend payment date.

12
<PAGE>

Dividends are invested in additional shares of the Fund at net asset value,
or, at the shareholder's election, paid in cash. Shares received from the
investment of dividends are credited to the shareholder's account.

Distribution from taxable net realized investment gains, if any, will
generally be declared at least once each year, in shares of the Fund, or in cash
if so elected by the shareholder.

WHAT IS THE FEDERAL TAX STATUS OF DIVIDENDS YOU RECEIVE?

Dividends paid from net investment income and any distributions from net
realized short-term investment gain, if any, are taxed to shareholders as
ordinary income, whether received in cash or reinvested in additional shares.
Any distributions of net realized long-term capital gains will be taxed as such,
regardless of how long you have held your shares.

Shareholders are sent a quarterly statement of account reflecting all
transactions during the period, including dividends and gain distributions.
Also, at year-end, all shareholders are sent a statement of account and
information on the aggregate amount and tax status of dividends and gain
distributions paid during the calendar year.

HOW DOES THE FUND PAY DISTRIBUTION EXPENSES?

The Fund has adopted a Plan of Distribution (the "Plan") pursuant to
Rule 12b-1 under the Act. Under the terms of the Plan and the Investment
Advisory and Management Agreement (the "Agreement"), a portion of the management
fee paid to the Manager is paid to the Distributor. Under the Plan and the
Agreement, the Fund pays the Distributor, indirectly through the Manager, a
monthly fee equivalent on an annual basis to .2 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 Manager, it does not fall within the aforementioned
prohibition.

WHO ARE THE FUND'S FUND ACCOUNTING AGENT AND ITS CUSTODIAN?

Investors Fiduciary Trust Company 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. Investor Fiduciary Trust Company 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 an agreement with
the Fund.

13
<PAGE>

WHAT SERVICES DOES THE FUND PROVIDE?

Information about various shareholder services is included above under "How Can
Shares Be Redeemed?" 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 will also receive statements confirming each transaction in your
account as well as quarterly statements confirming dividends paid by the Fund,
all transactions in your account for the quarter 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.

Other Services

The Automatic Investment Plan enables you to authorize withdrawals from your
bank checking account at regular intervals for fixed amounts to purchase shares.
See "How Can You Invest in the Fund?"

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.

Further information on these services and others is available by contacting
the Distributor.

What About Tax-Deferred Retirement Plans?

Shares of the Fund may be purchased by all types of tax-deferred retirement
plans. By contacting your investment dealer or the Distributor, you may obtain
plans, plan forms, and custody agreements for: Individual Retirement Accounts
(IRAs) for persons who are employed and wish to make limited tax-deductible
contributions to a tax-deferred account for retirement; 403(b)(7) Custodial
accounts; Simplified Employee Pension Plans (SEPs); Keogh Plans for self-
employed individuals; and Corporate Pension and Profit Sharing Plans.

GENERAL INFORMATION ABOUT STATE BOND CASH MANAGEMENT FUND

State Bond Cash Management Fund is an investment portfolio of State Bond Money
Funds, Inc., a diversified, open-end investment company, or mutual fund,
incorporated in Maryland on October 26, 1981. The Fund has one class of Capital
Stock, $.00001 par value. Each outstanding share has one vote and an equal right
to dividends and distributions of its portfolio. All shares have non-cumulative
voting rights for the election of directors. Each share is fully paid and non-
assessable, and each is freely transferable.

14
<PAGE>

Shares of the Fund offer individuals, fiduciaries, corporations, and
institutions a liquid investment in professionally-managed portfolios invested
in money market instruments. By combining the assets of shareholders, the Fund
seeks the higher yields offered by money market instruments of larger
denominations which are not available to smaller investors. Moreover,
shareholders of the Fund are relieved of the detailed bookkeeping and operating
procedures normally associated with investments in money market instruments,
such as scheduling maturities, surveying markets to obtain favorable yields,
evaluating credit risks and safeguarding the receipt, custody, and delivery of
securities.

YIELD

The Fund's yield is computed by determining the net change exclusive of
capital changes in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of a seven-day calendar period, dividing
the net change in account value by the value of the account at the beginning of
the period, and multiplying the return over the seven-day period by 365/7.
Effective yield is computed by annualizing the seven-day return with all
dividends reinvested in additional Fund shares. The Statement of Additional
Information describes the methods used to calculate the Fund's current and
effective yields in more detail.

Yields may fluctuate daily and do not provide a basis for determining future
yields. Because yields fluctuate, they cannot be used to compare the yields on
an investment in Fund shares with yields on savings accounts or other investment
alternatives which provide an agreed to or guaranteed fixed yield for a stated
period of time. However, yield information may be useful to an investor
considering temporary investments in money market instruments. In comparing the
yield of one money market fund to another, consideration should be given to each
fund's investment policies, including the votes and quality of investments
owned, lengths of maturities of the portfolios, and whether there are any
special charges which may reduce the yield.

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 HEREOF.

15
<PAGE>

THE STATE BOND GROUP OF MUTUAL FUNDS

GENERAL AUTHORIZATION FORM

TO OPEN A NEW ACCOUNT BY MAIL:

1. Complete the General Authorization Form. Be sure to indicate the Fund in
which your Account should be opened. Also indicate the services you will want
to use. Special attention should be given to Section 9 of the Form. BE SURE
TO SIGN THE CERTIFICATION IN SECTION 9.

2. Send the completed Form and your check, payable to SBM Financial Services,
Inc. to:

SBM Financial Services, Inc. - 100 N. Minnesota St. - P.O. Box 69 -
New Ulm, MN 56073-0069 - (800) 328-4735

PLEASE CHECK:
[_] STATE BOND COMMON STOCK FUND DATE _______________
[_] STATE BOND DIVERSIFIED FUND

THIS FORM MAY NOT BE USED TO ESTABLISH OR REVISE AN ACCOUNT OR SERVICE IN
STATE BOND CASH MANAGEMENT FUND, STATE BOND TAX EXEMPT FUND, STATE BOND
U.S. GOVERNMENT AND AGENCY SECURITIES FUND, OR STATE BOND MINNESOTA-TAX FREE
INCOME FUND. FORMS FOR THOSE FUNDS ARE INCLUDED IN THEIR PROSPECTUSES, COPIES
OF WHICH MAY BE OBTAINED FROM SBM FINANCIAL SERVICES, INC., 100 N. MINNESOTA
ST., P.O. BOX 69, NEW ULM, MN 56073-0069.

- --------------------------------------------------------------------------------
I wish to ESTABLISH [_] or REVISE [_] an Account (No. _______________) [_] check
enclosed for $___________ in the mutual fund checked above in accordance with
these instructions, the terms and conditions of this Form and the current
prospectus of the Fund, a copy of which I have received.
<TABLE>
<CAPTION>

<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
1 REGISTRATION: AGE
-----------------------------------------------------------------------------------------------------------
PLEASE PRINT NAME(S) AGE
IN WHICH SHARES ARE -----------------------------------------------------------------------------------------------------------
TO BE REGISTERED STREET OR P.O. BOX
WITH TRUST NAME -----------------------------------------------------------------------------------------------------------
IF APPLICABLE. CITY State ZIP CODE
-----------------------------------------------------------------------------------------------------------
MAILING ADDRESS: HOME PHONE BUSINESS PHONE
-----------------------------------------------------------------------------------------------------------
BIRTHDATE
- ------------------------------------------------------------------------------------------------------------------------------------
Objective Suitability Information
2 LEGAL FORM OF OWNERSHIP (CHECK ONE)
1. [_] Individual ownership ____________ Conservation of Capital Approx. income $______________
2. [_] Joint tenants with right of survivorship
3. [_] Tenants in common ____________ Income Approx. Net Worth (exclusive
4. [_] Corporate ownership of property, home furnishings
5. [_] Partnership ownership ____________ Long term growth and automobiles) $_____________
6. [_] Uniform Gifts/Transfers to Minors
Act of State of _____________________ ____________ Speculative capital gains
7. [_] IRA/*/ Approx. Tax Bracket ___________%
8. [_] Tax-Qualified Retirement Plan/*/ ____________ Deferral of taxes
9. [_] Trust (date trust
established _____________________) ____________ Tax Exempt Income

/*/ Additional documentation Employer _________________________________________________________________
may be required.
Business Address _________________________________________________________

_________________________________________________________

Occupation _______________________________________________________________

Is client of legal age? ___ Yes ___ No

Is client employed by or registered with another securities firm?
___ No ___ Yes, with ____________________________________________________

__________________________________________________________________________
Prior investment experience ________________ years
Note: if client refuses to provide information have client initial here___
- -----------------------------------------------------------------------------------------------------------------------------------
3 I elect to receive: [_] 1. Dividends in shares, gain distributions in shares.
DIVIDENDS [_] 2. Dividends in cash, gain distributions in shares.
AND GAIN [_] 3. Dividends in cash, gain distributions in cash.
DISTRIBUTIONS NOTE: IF NO ELECTION IS MADE, OPTION NO. 1 AUTOMATICALLY WILL BE PUT INTO EFFECT.
Dividends and gain distributions will be invested at net asset value.
- -----------------------------------------------------------------------------------------------------------------------------------
4 [_] Please arrange with my bank to draw pre-authorized payments and invest $___________________ in my
PRE-AUTHORIZED Account.
PAYMENTS [_] Monthly [_] Twice a Month [_] Every Other Month [_] Quarterly
on the: [_] 1st of Month [_] 16th of Month
I have completed the attached "Bank Authorization to Honor Pre-Authorized Payments."
(Also complete Section 3 above)
- ----------------------------------------------------------------------------------------------------------------------------------
5 [_] Please send a check for $_______________ beginning on the 15th day
AUTOMATIC of __________________ 19__, and thereafter on the 15th day of every:
CASH [_] Month [__] 3rd Month [_] 6th Month [_] 12th Month
WITHDRAWAL
Make payments to: Name _________________________________________________________________________________

Address ______________________________________________________________________________

City _______________________ State ______________________ Zip ______________________
Shares having a current value at offering price of $5,000 or more must be held in the Account at
initiation of Service, and all shares must be in "book credit" form.
- -----------------------------------------------------------------------------------------------------------------------------------
6 I intend to purchase, although I am not obligated to do so, shares of the above-designated Fund, and
LETTER one or more of the other mutual funds in the State Bond Group which bear a sales charge as written in
OF INTENT below, within a 13-month period which, together with the present net total asset value of
shares now owned, by me, will aggregate at least:

[_] $50,000 [_] $100,000 [_] $250,000
[_] $500,000 [_] $1,000,000 [_] $2,000,000

I agree to the escrow provisions contained in this application.
[_] This Letter of Intent may be backdated up to 90 days to include shares previously purchased.
Backdate to___________________________
- -----------------------------------------------------------------------------------------------------------------------------------
7
QUANTITY PURCHASE [_] I own shares of more than one fund in the State Bond Group which may entitle me to a reduced sales
Optional. (Attach charge.
a separate sheet My account numbers are: ______________________________________________________________________________
if necessary.)
[_] The registration of some of my shares differs. Their account numbers are:_________________________
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
8. DIVIDEND If you wish to have your dividend payments made to
DIRECTION another party please complete the following:
OPTION I hereby authorize and request that my dividend payments
be made to:
Name ____________________________________________________________________

Address _________________________________________________________________

City ___________________ State _________________ Zip ________________

Signature Investor ______________________________________________________

Signature Co-Investor ___________________________________________________
- ---------------------------------------------------------------------------------------------------------------------
9. SIGNATURE Under penalties of perjury I certify that the number shown
AND on this form is my correct taxpayer identification number/
CERTIFICATION social security number and that I am not subject to backup
withholding either because I have not been notified that I
am subject to backup withholding as a result of a failure
to report all interest or dividends, or the Internal Revenue
Service has notified me that I am no longer subject to backup
withholding. I (we) certify that I (we) are of legal age and
that I (we) have legal capacity to purchase or redeem shares
of the Fund for my (our) own Account, or for the Account of
the organization named below. I (we) have received a current
Prospectus of the Fund and appoint SBM Company as my (our)
agent to act in accordance with my (our) instructions herein.

SIGNATURE(x) SIGNATURE(x)
------------------------- ------------------------
SOC. SEC. NO. OR TAXPAYER SOC. SEC. NO. OR TAXPAYER
IDENTIFICATION NO.________ IDENTIFICATION NO.________
- ---------------------------------------------------------------------------------------------------------------------
10. DEALER Please establish the Account specified by the Investor
INFORMATION and purchase through SBM Financial Services, Inc., general
ONLY distributor, at the public offering price, shares which
you are authorized to purchase from us for the investor.
The investor is authorized to send any future payments
directly to you for investment. Confirm each transaction
to the investor and to us. We guarantee the genuineness
of the investor's signature. We are a duly registered
and licensed dealer and have a sales agreement with SBM
Financial Services, Inc.

_____________________________________________ _____________________________________________
Dealer Name Representative's Name Number

_____________________________________________ _____________________________________________
Address Address

_____________________________________________ _____________________________________________
City State Zip Code City State Zip Code

X____________________________________________ Representative's Phone Number (___)__________
Authorized Signature of Broker/Dealer Date
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

TERMS AND CONDITIONS

OPEN ACCOUNT

Investments will be made in as many shares of the Fund, including fractions to
the third decimal place, as can be purchased at the public offering price at the
close of business on the day the order is accepted. Shareholders will receive
dividends from investment income and any distributions from long-term gain
realized on investments in shares or in cash according to the option elected.
Dividend and gain options may be changed at any time by notifying the Fund in
writing. Stock certificates will not be issued.

PRE-AUTHORIZED PAYMENT SERVICE

The Pre-Authorized Payment Service is available to all shareholders. Your
application is subject to acceptance by your bank and the Fund. Payments in the
amount specified will be drawn automatically on your bank on the day of each
month in which an investment is scheduled and invested at the pubic offering
price at the close of business on the same date. If a payment is not honored by
your bank, the Service will be suspended. It will be reinstated upon written
request indicating that the cause of interruption has been corrected. This
Service may be terminated by you or the Fund at any time by written notice. You
agree to hold the Fund and its agents free from all liability which may result
from acts done in good faith and pursuant to these terms. Instructions for
establishing Pre-Authorized Payment Service are given on the following page.

AUTOMATIC CASH WITHDRAWAL SERVICE

All income and gain distributions on shares held in your account subject to this
withdrawal service will be reinvested in additional shares. A sufficient number
of full and fractional shares will be redeemed to provide the amount requested.
You may change the amount of scheduled payments or you may suspend payments for
not more than one year by written notice to the Fund at least ten days prior to
the effective date of such a change or suspension. Your service may be
terminated by you or the Fund at any time by written notice. It will be
terminated upon proper notification of the death or legal incapacity of the
shareholder. The Service may be considered terminated in the event a withdrawal
of shares, other than to make scheduled withdrawal payments, reduces the value
of shares remaining on deposit to less than $5,000. Redeeming shares to make
these payments represents a return of capital and will result in tax
consequences. Withdrawals, concurrently with purchases of shares of this or any
other investment company will be disadvantageous to you because of the payment
of duplicative sales charges. For this reason, additional purchases of Fund
shares when the Withdrawal Service is in effect are discouraged.

LETTER OF INTENT

SBM Financial Services, Inc. will hold in escrow shares equal to 5% of the
minimum purchase amount specified. Dividends and distributions on the escrowed
shares will be paid to you or credited to your Account. Upon completion of the
specified minimum purchase within the thirteen-month period, all shares held in
escrow will be deposited in your account or delivered to you. You may include
the total asset value of shares of the State Bond Funds (except State Bond Cash
Management Fund shares,) owned as of the date of a Letter of Intent toward the
completion of the Letter. If the total amount invested within the thirteen-month
period does not equal or exceed the specified minimum purchase, you will be
requested to pay the difference between the amount of the sales charge paid and
the amount of the sales charge applicable to the total purchase made. If, within
20 days following the mailing of a written request, you have not paid this
additional sales charge to SBM Financial Services, Inc., sufficient escrowed
shares will be redeemed for payment of the additional sales charge. Shares
remaining in escrow after this payment will be released to you Account. The
Letter of Intent may be backdated by as much as 90 days to change the purchase
price for previous purchases. The thirteen-month period begins on the date to
which you have backdated.

Shares of the State Bond Cash Management Fund, which have been acquired by an
exchange may be taken into account in completing a Letter of Intent or for
Rights of Accumulation. However, shares of that Fund which have been purchased
directly may not be used for purposes of determining reduced sales charges on
additional purchases of the other Mutual Funds in the State Bond Group.

<PAGE>

Accounts eligible for the Rights of Accumulation or to be used toward completion of a Letter of Intent.

Name________________________________ Fund______________________________ Account No. _________________________________
Name________________________________ Fund______________________________ Account No. _________________________________
Name________________________________ Fund______________________________ Account No. _________________________________
Name________________________________ Fund______________________________ Account No. _________________________________
Name________________________________ Fund______________________________ Account No. _________________________________

TO: SBM COMPANY THE STATE BOND GROUP OF MUTUAL FUNDS
100 N. MINNESOTA ST. REQUEST AND AUTHORIZATION FOR PRE-AUTHORIZED PAYMENTS
P.O. BOX 69
NEW ULM, MN 56073-0069

To start your Pre-Authorized Payment Service, fill out Section A and the "Bank Authorization to Honor Pre-Authorized
Payments" below, and forward it with an unsigned blank check from your regular checking account (marked "void.")
- --------------------------------------------------------------------------------------------------------------------------
A. Pre-Authorized Payments
[_] Please arrange with my bank to draw pre-authorized payments and invest $________________ in my Account:
[_] Monthly [_] Twice a Month [_] Every Other Month [_] Quarterly
On the [_] 1st of Month [_] 16th of Month I have completed the "Bank Authorization To Honor
Pre-Authorized Payments" below.
If not completed, the 1st will be assumed.

Starting Month ________________________ ____________________________________________________________________
Signature(s) of Investor(s)

____________________________________________________________________
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

BANK AUTHORIZATION TO HONOR PRE-AUTHORIZED PAYMENTS

AUTHORIZATION TO HONOR DEBITS (INCLUDING CHECKS, DRAFTS, AND OTHER ORDERS
WHETHER BY ELECTRONIC OR PAPER MEANS) BY THE SBM COMPANY.

Depositor's Name:_______________________________________________________________
(Print name(s) exactly as shown on my Bank, or other
Financial Institution, Account)

Depository Name:________________________________________________________________
(Print name of Bank or Financial Institution and Branch, if any)

________________________________________________________________________________
(Print address of Bank, Financial Institution or Branch where Account is
maintained)

I hereby authorize SBM Company to initiate debit entries to my account as
listed below and the depository named above to debit the same to such
account. This authorization will remain in full force and effect until SBM
Company and depository receive written notification from either of us to
the other and in such time and in such manner so as to afford SBM Company
and depository a reasonable opportunity to act on it.

Signature of Depositor X ______________________________________________________

If required by the Financial Institution,
Signature of Joint Depositor X ______________________________________

My Account Number at said Financial Institution is ______________ Date ________

SBM COMPANY
100 N. MINNESOTA ST.
P.O. BOX 69
NEW ULM, MINNESOTA 56073-0069

<PAGE>

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

December 1, 1995

STATE BOND CASH MANAGEMENT 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 Cash Management Fund (the
"Fund") dated December 1, 1995. 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 and Policies? 2
(See "What are The Fund's Investment Objectives,
Policies and Risks?" in the Prospectus)
Calculation of Yield 2
What Are The Fund's Investment Limitations? 3
Who Manages the Fund? 4
(See "How Is The Fund Managed?" in the Prospectus)
The Manager 8
Management Agreement and Expenses 9
(See "How is the Fund Managed?" in the Prospectus)
Transfer Agent 10
Custodian 10
Independent Auditors 10
Redemption Of Shares 10
(See "How Can Shares Be Redeemed?" in the Prospectus)
What Is The Tax Status of The Fund? 11
Will The Fund Withhold Taxes On Distributions? 11
How Is Net Asset Value Per Share Determined? 11
Does The Fund Bear Distribution Expenses? 12
General Information about the State Bond Cash Management Fund 13
</TABLE>

APPENDIX A

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 DECEMBER 1, 1995, 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 AND POLICIES?

The Fund's objectives are high current income, preservation of capital, and
liquidity.

The Fund invests in high-quality money market instruments, including
securities issued or guaranteed by the U.S. Government or its agencies and
instrumentalities, obligations of domestic and foreign commercial banks,
commercial paper, and high-grade short-term debt securities (such as bonds and
notes). The Fund may enter into repurchase agreements with respect to U.S.
Government or Government agency securities. A more complete description of the
investments and ratings of investments the Fund may make is contained in the
Appendix.

In addition to its other policies and restrictions, the Fund is subject to
the investment restrictions of Rule 2a-7 under the Investment Company Act of
1940. Rule 2a-7 requires that the Fund maintain an average weighted maturity of
not more than 90 days and invest exclusively in securities that mature within
397 days. Rule 2a-7 also requires that all investments by the Fund be limited
to United States dollar-denominated investments that: (1) present "minimal
credit risks," and (2) are at the time of acquisition "Eligible Securities."
Eligible Securities include, among others, securities that are rated by two
Nationally Recognized Rating Organizations ("NRSROs") in one of the two highest
categories for short-term debt obligations, such as A-1 or A-2 by Standard and
Poor's Ratings Group ("S&P") or P-1 or P-2, or MIG-1 or MIG-2 by Moody's
Investors Service, Inc. ("Moody's"). It is the responsibility of the Manager to
determine that the Fund's investments present only "minimal credit risks" and
are Eligible Securities. The Board of Directors of the Fund has established
written guidelines and procedures for the Manager and oversees the Manager's
determination that the Funds' portfolio securities present only "minimal credit
risk" and are Eligible Securities.

Under Rule 2a-7, 95% of the assets of the Fund must be invested in Eligible
Securities that are deemed First Tier Securities, which include, among others,
securities rated by two NRSROs in the highest category (such as A-1 and P-1).
Rule 2a-7 also requires that with regard to funds such as the Fund: (1) a fund
may not (with certain exceptions) invest more than 5% of its total assets in
securities of a single issuer; and (2) a fund's investment in Second Tier
Securities of a single issuer may not exceed the greater of 1% of the fund's
total assets or $1,000,000.

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. 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 has not loaned any portfolio securities to date.

CALCULATION OF YIELD

The current and effective yields of the Fund may be quoted in reports,
sales literature, and advertisements published by the Fund. Current yield is
computed by determining the net change exclusive of capital changes in the value
of a hypothetical pre-existing account having a balance of 1 share at the
beginning of a seven-day calendar period, dividing the net change in account
value by the value of the account at the beginning of the period, and
multiplying the return over the seven-day period by 365/7. For purposes of the
calculation, net change in account value reflects the value of additional shares
purchased with dividends from the original share and dividends declared on both
the original share and any such additional shares, but does not reflect realized
gains or losses or unrealized appreciation or depreciation. Effective yield is
computed by annualizing the seven-day return with all dividends reinvested in
additional Fund shares.

2
<PAGE>

The following is an example of the yield calculation for the seven-day
period ended July 31, 1995:
<TABLE>

<S> <C>
Total dividends per share from net
investment income (seven days ended
July 31, 1995) $.0009234

Annualized (365 day basis) .048149

Average net asset value per share 1.000

Annualized historical net yield per
share for seven calendar days ended
July 31, 1995 4.93%*

Effective yield (seven days ended
July 31, 1995) 4.82%**

Weighted average life to maturity of
investments was 14.5 days.

*This represents the average of annualized net investment income per share
for the seven days ended July 31, 1995.

**Average of annualized net investment income for the same period with
dividends reinvested.
</TABLE>

WHAT ARE THE FUND'S INVESTMENT LIMITATIONS?

Under the Fund's fundamental policies, which cannot be changed except by a
vote of a majority of its outstanding voting securities, the Fund may not:

1. Borrow money, except for temporary purposes in an aggregate amount not
to exceed 10% of the value of the total assets of the Fund; provided,
that borrowings in excess of 5% of such value will be only from banks,
and the Fund will not purchase additional portfolio securities while
its borrowings exceed 5%;

2. Underwrite the securities of other issuers;

3. Invest more than 25% of the market value of its total assets in
securities of issuers in any one industry, except that the Fund
reserves the right to concentrate investments in money market
instruments issued by the U.S. Government or its agencies or
instrumentalities or by domestic banks;

4. Buy or hold any real estate, except that the Fund may buy and hold
marketable securities of companies which invest in real estate or
interests therein;

5. Buy or hold any commodity or commodity futures contracts, or any oil,
gas or mineral exploration or development program;

3
<PAGE>

6. Make loans, except loans of portfolio securities and except to the
extent that the purchase of notes, bonds or debt obligations, or the
entry into repurchase agreements or deposits may be considered loans;

7. Mortgage or pledge any of its assets, except to the extent, up to a
maximum of 10% of the value of its total assets, necessary to secure
borrowings permitted by paragraph 1;

8. Buy securities on "margin" or make "short" sales of securities;

9. Write or purchase put or call options;

10. Invest more than 5% of its total assets (taken at market value) in the
securities of any one issuer, other than the U.S. Government, its
agencies or instrumentalities;

11. Buy more than 10% of the securities of any one issuer, other than the
U.S. Government, its agencies or instrumentalities;

12. Invest more than 5% of its total assets (taken at market value) in the
securities of issuers which (including predecessors) have been in
operation fewer than three continuous years, but this restriction will
not apply to such securities which are guaranteed by a company which
(including predecessors) has been in operation at least three
continuous years;

13. Buy securities which have legal or contractual restrictions on resale,
except in connection with repurchase agreements;

14. Buy or hold the securities of any issuer if, to its knowledge,
directors or officers of the Fund or of its investment adviser
individually owning beneficially more than 1/2 of 1% of the securities
of that issuer, own in the aggregate more than 5% of such securities;
or

15. Buy securities of any issuer for the purpose of exercising control or
management; or buy securities issued by any other investment company,
except in connection with a merger, consolidation, acquisition or
reorganization.

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 of the Fund present at a shareholders' meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy.

During the past twelve months the Fund has not borrowed any money and has
no current intention of doing so in the foreseeable future.

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.

4
<PAGE>

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, business and institutional
adviser since 1986; 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

Patrick M. Finley (57) Director President, Universal Cooperatives, Inc., a
farmers' cooperative. Director of the
other mutual funds in the State Bond
Group

Chris L. Mahai (40) Director Senior Vice President, Strategic
Integration Unit, Star Tribune/Cowles
Media Company, since August 1993;
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 Katz (56) Director Investment banker since January 1991;
10 Hemlock Road Chairman and Chief Executive Officer,
Hartsdale, NY Sam's 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.
</TABLE>

5
<PAGE>

<TABLE>

Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- ---------------------------- ------------------------ ----------------------------------------------
<S> <C> <C>
Theodore S. Rosky (57) Director Retired since April 1992; Executive Vice
2304 Speed Avenue President, Capital Holding Corporation
Louisville, KY (from 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.

John R. Lindholm (46)* 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.

Keith O. Martens (56) Vice President Senior Portfolio Manager, ARM Capital
Advisors, Inc. since June 14, 1995; prior to
June 14, 1995, Executive 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.
</TABLE>

6
<PAGE>

<TABLE>

Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- ---------------------------- ------------------------ ----------------------------------------------
<S> <C> <C>
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 July 15, 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'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.

Kevin L. Howard (31) Vice President and Assistant General Counsel of ARM
Secretary Financial 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. from
December 1992 to December 1993;
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.

Pamela R. 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.

_________
* Mr. Lindholm is an interested person, as defined in the 1940 Act, by
virtue of his positions with ARM Financial Group, Inc.
</TABLE>

7
<PAGE>

Directors of the Fund (including former Directors) received aggregate
remuneration of $3,897 during the Fund's fiscal year ended July 31, 1995.
Directors and officers of the Fund as a group owned directly or indirectly
39,866.31 shares, or 1.47% of the Fund's capital stock at July 31, 1995.

The following table sets forth, for the fiscal year ended July 31, 1995,
compensation paid by the Fund to the non-interested Directors and, for the 1994
calendar year, the aggregate compensation paid to the non-interested Directors
by all of the funds in the fund complex including the six funds in the State
Bond Group of mutual funds. Directors who are interested persons, as defined in
the 1940 Act, received no compensation from the Fund.
<TABLE>
<CAPTION>
Aggregate Total Compensation from fund
Compensation complex including the State Bond
Name of Director from Fund (a) Group of Mutual Funds (b)
- ---------------- ------------- --------------------------------
<S> <C> <C>
William B. Faulkner $588 $ 3,528
Patrick M. Finley $588 $ 3,528
Chris L. Mahai $588 $ 3,528
John Katz* $147 $10,000
Theodore S. Rosky* $147 $10,000
____________________
</TABLE>
(a) There were no pension or retirement benefits accrued for any of the named
persons by any of the funds.

(b) This includes the aggregate compensation paid to the named persons by all
of the mutual funds in the State Bond Group and also the amounts paid to
such persons in calendar year 1994 by the State Bond Progress Fund
("Progress Fund"). The Progress Fund formerly was a member of the State
Bond Group of mutual funds. All of the assets of Progress Fund were
acquired by State Bond Common Stock Fund on June 24, 1994.

* Messrs. Katz and Rosky have been directors of the Fund, and the other
mutual funds in the State Bond Group, since June 14, 1995. In addition,
they are directors of The Legends Fund, Inc. a mutual fund which is advised
by Integrity Life Insurance Company, an affiliate of ARM, and which may be
deemed to be a part of the same fund complex as the State Bond Group of
Mutual Funds. The amounts paid to such directors in 1994 were paid
exclusively by The Legends Fund, Inc. From June 14, 1995 through July 31,
1995, these directors each received aggregate compensation from all of the
mutual funds in the State Bond Group in the amount of $882.

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.

8
<PAGE>

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 $4.0
billion.

The Manager is also manager of the other mutual funds in the State Bond
Group of mutual funds: State Bond Common Stock Fund, State Bond Diversified
Fund, State Bond Minnesota Tax-Free Fund, State Bond Tax Exempt Fund, and State
Bond U.S. Government and Agency Securities 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, based upon the Fund's average daily net assets as set
forth in the following table:
<TABLE>
<CAPTION>

Average Daily Net Assets Annual Investment Advisory and Management Fee
------------------------ ---------------------------------------------
<S> <C>
For the first $500 million .60 of 1%

For the next $250 million .55 of 1%

For the next $250 million .50 of 1%

For assets over $1 billion .45 of 1%
</TABLE>

For the period from June 1, 1995, the effective date for accounting
purposes on which the Manager assumed its duties with respect to the Fund
through, July 31, 1995, the Manager received a management fee of $1,771. SBM
Company, the previous investment manager of the Fund, received as a management
fee $7,998, $10,334 and $16,425, respectively, for the fiscal years ended July
31, 1995, 1994 and 1993. The Manager has voluntarily undertaken, and SBM
Company previously voluntarily undertook, to reimburse the Fund for any expenses
incurred by the Fund to the extent the Fund's total expenses exceeded .80% of
average daily net assets, despite the fact that higher expenses may be permitted
by state law. For the period June 1, 1995 to July 31, 1995, the Manager
reimbursed the Fund in the amount of $14,411. SBM Company reimbursed the Fund
during the fiscal periods ended July 31, 1995, 1994, and 1993 in the following
amounts: $59,605, $64,232, and $71,688.

The Fund pays all its expenses other than those assumed by the Manager,
including outside legal, auditing, and accounting expenses; bookkeeping, record
keeping, and Fund portfolio and Fund share pricing expenses; interest, taxes,
and governmental fees; expenses incurred in connection with membership in
investment company organizations; brokerage commissions or charges, if any;
fees of custodians, transfer agents, registrars, accounting services agents, or
other agents; expense of preparing share certificates; expenses relating to the
redemption or repurchase of the Fund's shares; investor services expenses;
expenses of registering and qualifying Fund shares for sale under applicable
Federal and State law; expenses of preparing, setting in print, printing, and

9
<PAGE>

distributing prospectuses, reports, notices, and dividends to Fund shareholders;
cost of stationery; costs of stockholder and other meetings of the Fund;
traveling expenses of officers, directors, and employees of the Fund, if any;
fees of the Fund's independent directors and salaries of any officers or
employees who are not affiliated with the Manager; the Fund's pro rata portion
of premiums on any fidelity bond and insurance covering the Fund; and general
corporate fees and expenses.

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 pay 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.

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 at 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 from year to year so long as continuance is approved annually
by either the Board of Directors of the Fund or by a vote of a majority of the
outstanding voting shares, 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.

TRANSFER AGENT

SBM Financial Services, Inc. acts as the transfer and dividend disbursing
agent for the Fund pursuant to an agreement with the Fund and is compensated on
a transactional basis under a schedule approved by the Fund's Board of
Directors. The transfer agent 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. received $4,067 in transfer agency fees
from the Fund for the period June 1, 1995 to July 31, 1995. SBM Company, the
Fund's previous transfer and dividend disbursing agent, received the following
amounts from the Fund for the fiscal years ended July 31, 1995, 1994, and 1993,
respectively; $16,933; $21,600; and $27,400.

CUSTODIAN

Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri, 64105 serves as the custodian for the Fund.

INDEPENDENT AUDITORS

Ernst & Young LLP, One Kansas City Place, 1200 Main Street, Kansas City,
Missouri 64105-2143, independent certified public accountants, have been
selected as auditors of the Fund and issue a report on the Fund's financial
statements.

REDEMPTION OF SHARES

Whether shares are redeemed pursuant to the Regular or the Quick Redemption
Service (if less than $500), a check for the proceeds ordinarily will be sent
within seven calendar days following redemption. The Fund intends to pay all
redemptions in cash. However, payment may be made in securities, subject to the
review of some state securities commissions, if the Board of Directors believes
that economic conditions exist which

10
<PAGE>

would make the practice of redemption for cash 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 procedures described under "How Is
Net Asset Value Per Share Determined?". If payment were to be made in
securities, shareholders receiving securities could incur certain transaction
costs.

The Fund reserves the right to suspend redemptions or postpone the date of
payment (1) for any periods during which the New York Stock Exchange is closed
(other than for the customary weekend and holiday closings), (2) when trading in
the markets the Fund usually utilizes is restricted or an emergency exists, as
determined by the Securities and Exchange Commission, so that disposal of the
Fund's investments or the determination of the Fund's net asset value is not
reasonably practicable, or (3) for such other periods as the Securities and
Exchange Commission by order may permit for the protection of the Fund's
shareholders.

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 Internal Revenue
Code of 1986, as amended (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.

HOW IS NET ASSET VALUE PER SHARE DETERMINED?

The net asset value per share of the Fund is determined as of 3 p.m.
Central time, on days on which the Fund is open for business. It is computed by
dividing the value of the net assets of the Fund (i.e., the value of its assets
less liabilities) by the total number of outstanding shares of the Fund. All
expenses of the Fund, including the Manager's fee, are accrued daily and taken
into account for the purpose of determining its net asset value.

Pursuant to an exemptive rule of the Securities and Exchange Commission,
the Fund's portfolio securities are valued by the amortized cost method. This
method of valuation involves valuing a security at its cost at the time of
purchase and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the security. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Fund would receive if it
sold the security. During periods of declining interest rates, the quoted yield
on shares of the Fund may tend to be higher than that of a fund with identical
investments which uses a method of valuation based on market prices and
estimates of market prices for all its portfolio securities. Thus, if the use
of amortized cost by the Fund resulted in lower aggregate portfolio value on a
particular day, a prospective investor in the Fund would be able to obtain a
somewhat higher yield if he purchased shares on that day than he would be able
to receive from a fund using solely market values and existing investors in the
Fund would receive less investment income. The converse is true in a period of
rising interest rates.

The rule permitting the Fund to use the amortized cost method of valuation
requires that, under the direction of the Board of Directors, certain procedures
be adopted to monitor and stabilize the price per share of the Fund.
Calculations are made to compare the value of its investments valued at
amortized cost with market values. Market valuations are obtained by using
actual quotations provided by issuers or market makers,

11
<PAGE>

estimates of market value, or values obtained from yield data relating to
classes of money market instruments or U.S. Government securities published by
reputable sources at the mean between the bid and asked prices for the
instruments. In the event that a deviation of 1/2 of 1% or more exists
between the Fund's $1.00 per share net asset value and the net asset value
calculated by reference to market quotations, or if there is any other deviation
which the Board of Directors believes would result in a material dilution of
shareholders or purchasers, the Board of Directors will promptly consider what
action, if any, should be initiated.

Under the exemptive rule of the Securities and Exchange Commission allowing
the Fund to use the amortized cost method of valuation of portfolio securities,
the Fund must maintain a dollar-weighted average portfolio maturity of 90 days
or less. In addition, all investments in securities must be in First Tier
Securities or Second Tier Securities (as defined in the exemptive rule) and,
with certain limited exceptions, the Fund cannot invest more than 5% of its
assets in the securities of a single issuer (other than government securities).
Investments in Second Tier securities in the aggregate must be limited to 5% of
the Fund's total assets, and investment in a single Second Tier Security cannot
exceed the greater of 1% of total assets or $1 million. See "What Are The
Fund's Investment Objectives and Policies?"

The Fund can only invest in instruments having remaining maturities of 397
days or less and can only invest in securities determined by the Board of
Directors to be of high quality with minimal credit risks.

DOES THE FUND BEAR DISTRIBUTION EXPENSES?

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 a portion of
the advisory fee the Fund pays the Manager is paid by the Manager to the
Distributor, as described below. The Plan as amended was approved by the Board
of Directors of the Company on September 23, 1994 and was most recently approved
by the Fund's shareholders on March 17, 1993.

Under the Investment Advisory and Management Agreement (the "Agreement"), a
portion of the advisory fee the Fund pays the Manager is paid by the Manager to
the Distributor to be used to pay for account servicing, to compensate those who
sell Fund shares, and to pay certain other expenses of selling Fund shares. As
noted above, for the first $500 million of Fund assets, the Manager will receive
a monthly fee equivalent on an annual basis to .6 of 1% of the average daily net
assets of the Fund. From this amount, of which .2 of 1% of the average daily
net assets of the Fund will be paid under the Plan to the Distributor to pay for
account servicing and to compensate those who sell Fund shares and to pay
certain other selling expenses. This .2 of 1% paid to the Distributor remains
constant, although the percentage fee paid to the Manager decreases when the
Fund attains average daily net assets in excess of $500 million. A portion of
the fee paid to the Distributor 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.

The Prospectus outlines the general uses to which the Distributor is
authorized to apply the fees received by it. During the Fund's last fiscal year
the Distributor received $4,885 in such fees and incurred $11,291 in expenses.
The Distributor used these fees toward the following expenses: compensation of
sales personnel - $3,049; compensation of sales administration personnel -
$2,366; marketing materials - $5,146; miscellaneous marketing expenses - $185;
promotion and travel - $536; branch office - $9.

12
<PAGE>

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 in the manner described above for its original approval;

(ii) That any person authorized to direct the disposition of monies 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 and shareholders in the manner described above for its original
approval. 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 the referenced 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 from the date of
such plan, agreement, or report, the first two years in an easily accessible
place.

GENERAL INFORMATION ABOUT STATE BOND CASH MANAGEMENT FUND

State Bond Money Funds, Inc. is a diversified, open-end investment
company, or mutual fund, incorporated in Maryland in 1981. State Bond Money
Funds, Inc. currently consists of one investment portfolio, the State Bond Cash
Management Fund (the "Fund").

13
<PAGE>

APPENDIX A

Description of Investments:
- --------------------------

U.S. GOVERNMENT, AGENCY AND INSTRUMENTALITY OBLIGATIONS - are securities issued
or guaranteed as to principal and interest by the United States government or by
agencies or instrumentalities thereof and include a variety of obligations,
which differ in their interest rates, maturities, and dates of issue. Some of
these obligations are issued directly by the United States Treasury such as U.S.
Treasury bills, notes, and bonds; others are guaranteed by the U.S. Treasury,
such as securities issued by the Small Business Administration, the General
Services Administration, and Farmers Home Administration; others are supported
by the right of the issuer to borrow from the Treasury, such as securities
issued by Federal Home Loan Banks; while others are supported only by the credit
of the agency or instrumentality and not by the Treasury, such as securities
issued by the Federal National Mortgage Association. There can be no assurance
that the U.S. Government will provide financial support to such an agency or
instrumentality if it is not obligated to do so by law.

REPURCHASE AGREEMENTS - involve the purchase of obligations which the Fund is
qualified to purchase and the simultaneous agreement to resell the same
obligations on demand or at a future specified date and at an agreed upon price.
Such transactions afford an opportunity for the Fund to earn a return which is
only temporarily available.

NEGOTIABLE CERTIFICATES OF DEPOSIT - are certificates issued against funds
deposited in a bank. They are for a definite period of time, earn a specified
rate of return, and are negotiable.

BANKERS' ACCEPTANCES - are short-term credit instruments primarily used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.

FIXED TIME DEPOSITS - represent funds deposited in a bank. They are for a
definite period of time and earn a specified rate of return. Unlike negotiable
certificates of deposit, they do not have a market, and they may be subject to
penalties for early withdrawal of funds. Fixed time deposits are made in
foreign branches of domestic banks and in foreign banks.

COMMERCIAL PAPER - refers to promissory notes issued by corporations to finance
short-term credit needs.

CORPORATE DEBT SECURITIES - include bonds and notes issued by corporations to
finance longer-term credit needs.

Description of A-1, A-2, and P-1, P-2 Commercial Paper Ratings:
- --------------------------------------------------------------

Commercial paper rated A-1 or A-2 by Standard & Poor's has the following
characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are
unquestioned. The relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated A-1, A-2 or A-3.

The ratings Prime-1 and Prime-2 are the two highest commercial paper
ratings assigned by Moody's. Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of
<PAGE>

earnings over a period of ten years; (7) financial strength of a parent company
and the relationships which exist with the issuer; and (8) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. Relative
strength or weakness of the above factors determines whether the issuer's
commercial paper is rated Prime-1, 2 or 3.

Description of Bond Ratings:
- ---------------------------

Bonds rated AAA have the highest rating Standard & Poor's assigns to a debt
obligation. Such a rating indicates an extremely strong capacity to pay
principal and interest. Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very strong, and in the
majority of instances they differ from AAA issues only in a small degree.

Bonds rated Aa by Moody's are judged by Moody's to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than Aaa bonds because margins
of protection may not be as large or fluctuations of protective elements may be
of greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat large.