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PROSPECTUS
STATE BOND CASH MANAGEMENT FUND
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
Phone: (507) 354-2144
December 1, 1996
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.
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TABLE OF CONTENTS
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Page
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Shareholder Transaction And Operating Expense Table.......... 1
Financial Highlights......................................... 2
What Are The Fund's Investment Objectives,
Policies and Risks?........................................ 3
How Is The Fund Managed?..................................... 5
How Can You Invest In The Fund?.............................. 6
When Does Your Purchase Begin Earning Dividends?............. 7
How Can Shares Be Redeemed?.................................. 7
How Does the Fund's Exchange Privilege Work?................. 9
How Does the Fund Pay Dividends?.............................10
What Is The Federal Tax Status Of Dividends You Receive?.....10
How Does The Fund Pay Distribution Expenses?.................10
Who Is the Fund's Accounting Agent and Its Custodian?........11
What Services Does the Fund Provide?.........................11
General Information About State Bond Cash Management Fund....11
Yield........................................................12
</TABLE>
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SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase
(as a percentage of offering price)................................. 0.00%
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average daily net assets)
Management Fee (After Expense Reimbursement)......................... .09%
12b-1 Fee (After Expense Reimbursement).............................. .04%
Other Expenses (After Expense Reimbursement)......................... .67%
------
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?"
<TABLE>
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EXAMPLE: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following aggregate expenses on a
$1,000 investment, assuming: (1) 5% annual return and
(2) redemption at the end of each time period:.......... $8 $26 $44 $99
</TABLE>
Note: This Example is not a representation of past or future expenses and
actual expenses may be more or less than those shown above.
The 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, 1996. 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 2.97% and total expenses
would have been 3.57%. For more information concerning fees and expenses, see
"How Is The Fund Managed?"
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FINANCIAL HIGHLIGHTS
The information presented below for the fiscal years ended July 31, 1996 and
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 eight-year period ended
July 31, 1994 has been audited by 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)
YEAR ENDED JULY 31
<TABLE>
<CAPTION>
1996 1995# 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- -------- ------- ------- ------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 .05 .04 .03 .02 .04 .06 .08 .08 .06 .05
Less distributions:
From net investment income (.05) (.04) (.03) (.02) (.04) (.06) (.08) (.08) (.06) (.05)
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 4.72% 4.51% 2.54% 2.40% 3.74% 6.28% 7.82% 8.34% 6.20% 5.31%
Ratios and Supplemental Data:
Net assets, end of year (in thousands) $3,219 $2,718 $2,020 $3,657 $4,770 $9,378 $11,750 $8,742 $6,971 $4,704
Ratio of expenses to average net assets .80% .80% .80% .80% .90% 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to
average net assets 4.58% 4.49% 2.55% 2.38% 3.71% 6.19% 7.52% 8.10% 6.05% 5.17%
Ratio of expenses to average net assets
before voluntary reimbursements 3.57% 3.83% 3.38% 2.54% 1.99% 1.54% 1.52% 1.63% 1.58% 2.01%
Ratio of net investment income
to average net assets before
voluntary reimbursements 1.81% 1.46% (.01%) .64% 2.91% 5.64% 7.00% 7.47% 5.46% 4.10%
</TABLE>
# ARM Capital Advisors, Inc. began managing the investment operations of the
Fund on June 14, 1995.
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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 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 Services, a division of the McGraw-Hill Companies, Inc. ("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,
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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 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
temporary purposes and in an aggregate amount
4
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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 $6.0 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, Senior Vice President and Senior Portfolio Manager
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.
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 $500 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, 1996, total expenses of the Fund, after expense reimbursements, amounted to
.80% of its average daily net assets.
Proposed Reorganization of the Fund
The Board of Directors of the Fund has approved a proposal to reorganize
the Fund. The reorganization will involve
5
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the sale of the Fund's assets, subject to certain liabilities, to Automated Cash
Management Trust (the "Federated Fund"), a mutual fund advised by Federated
Investors. Shares of the Fund would be exchanged at net asset value for shares
of equivalent value of the Federated Fund. The reorganization transaction is
subject to approval by Fund shareholders and to certain other conditions prior
to closing, including the receipt of an opinion as to the tax-free nature of the
reorganization for the Fund and its shareholders by outside counsel for the
Federated Fund. It is anticipated that the proxy statement/prospectus relating
to the proposed reorganization will be mailed to shareholders in November 1996
and that the meeting of shareholders will be held in early December 1996. No
sales charges would be imposed on the proposed reorganization.
Federated Investors, a Pittsburgh-based money management firm, was founded
in 1955. Federated is a global investment manager with $90 billion in mutual
fund assets under management or administration across more than 250 funds.
HOW CAN YOU INVEST IN THE FUND?
SBM Financial Services, Inc. (the "Distributor"), and ARM Transfer
Agency, Inc. (the "Shareholder Servicing Agent"), each a subsidiary of ARM, act
as distributor and transfer agent, respectively, of the Fund's shares. Their
address is 100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-
0069.
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 application to SBM Financial Services, Inc.,
100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069.
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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 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.
7
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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 the check clears, which may be up to fifteen days after purchase. 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
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
8
<PAGE>
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.
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
9
<PAGE>
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.
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.
10
<PAGE>
WHO ARE THE FUND'S FUND ACCOUNTING AGENT AND ITS CUSTODIAN?
Investors Fiduciary Trust Company ("IFTC") serves as the Fund's fund
accounting agent, and in that capacity, maintains certain books and records
pursuant to an agreement with the Fund. IFTC's address is 127 West 10th Street,
Kansas City, Missouri 64105. IFTC also serves as custodian for the Fund's
portfolio securities and cash, and in that capacity, maintains certain financial
and accounting books and records pursuant to a separate agreement with the Fund.
WHAT SERVICES DOES THE FUND 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
11
<PAGE>
non-assessable, and each is freely transferable.
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 PRZOSPECTUS (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.
12
<PAGE>
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
Cat. #001744 (12/96)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
December 1, 1996
STATE BOND CASH MANAGEMENT FUND
100 North Minnesota Street
--------------------------
P.O. Box 69
-----------
New Ulm, Minnesota 56073-0069.
------------------------------
Telephone No. (507) 354-2144
============================
This Statement of Additional Information supplements the information
contained in the current Prospectus of State Bond Cash Management Fund (the
"Fund") dated December 1, 1996. This Statement of Additional Information is not
a Prospectus, but should be read in conjunction with the Fund's Prospectus,
which may be obtained by contacting the Fund at the address or telephone number
noted above.
TABLE OF CONTENTS
Page
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
APPENDIX A................................................................ A-1
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, 1996, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT
CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE OR JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. THE DELIVERY OF THIS STATEMENT OF
ADDITIONAL INFORMATION AT ANY TIME SHALL NOT IMPLY THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF.
<PAGE>
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES 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 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. 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, 1996:
Total dividends per share from net
investment income (seven days ended
July 31, 1996) $.0005155
Annualized (365 day basis) .02688
Average net asset value per share 1.000
Annualized historical net yield per
share for seven calendar days ended
July 31, 1996 = 2.69%*
Effective yield (seven days ended
July 31, 1996) 2.72%**
Weighted average life to maturity of
investments was 18.9 days.
*This represents the average of annualized net investment income per share
for the seven days ended July 31, 1996.
**Average of annualized net investment income for the seven days ended July
31, 1996 with dividends reinvested.
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;
6. Make loans, except loans of portfolio securities and except to the
extent that the purchase of
3
<PAGE>
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 515 W. Market Street, Louisville, Kentucky 40202.
4
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- --------------------- ---------------------- -----------------------------------------
<S> <C> <C>
William B. Faulkner (68) Director President, William Faulkner &
Associates, 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
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 (57) 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.
Theodore S. Rosky (59) 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.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
<S> <C> <C>
John R. Lindholm (47)* Director President of Integrity Life Insurance
Company ("Integrity") and Vice
President-Chief Marketing Officer of
National Integrity Life Insurance
Company ("National Integrity") since
November 26, 1993; Executive Vice
President-Chief Marketing Officer of
ARM Financial Group, Inc. since July
27, 1993; since March 1992 Chief
Marketing Officer of Analytical Risk
Management, L.P.; from June 1990 to
February 1992, Chief Marketing Officer
and a Managing Director of the ICH
Capital Management Group, ICH
Corporation, Louisville, Kentucky; prior
thereto, Chief Marketing Officer and
Managing Director for Capital Holding
Corporation's Accumulation and
Investment Group. Director of the other
mutual funds in the State Bond Group
and of The Legends Fund, Inc.
Dale C. Bauman (59) President Vice President and Sales Manager, ARM
8400 Normandale Lake Blvd. Financial Services, Inc., since June 1992;
Suite 1150 prior thereto, Vice President and Division
Minneapolis, Minnesota 55437 Manager, ARM Financial Services, Inc.,
1980 to June 1992. President of the other
mutual funds in the State Bond Group.
Keith O. Martens (57) 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>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activites in Past 5 Years
<S> <C> <C>
Barry G. Ward (35) Controller Controller of ARM Financial Group, Inc.
since April 1996. From October 1993 to
April 1996, Mr. Ward was directly
responsible for the Company's financial
reporting function. From January 1989 to
October 1993, Mr. Ward served in various
positions within Ernst & Young LLP's
Insurance Industry Accounting and
Auditing Practice, the last of which was
Manager. Controller of the other mutual
funds in the State Bond Group and of The
Legends Fund, Inc.
Kevin L. Howard (32) 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 (35) 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 (29) 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>
Directors of the Fund (including former Directors) received aggregate
remuneration of $4,906 during
7
<PAGE>
the Fund's fiscal year ended July 31, 1996. Directors and officers of the Fund
as a group owned directly or indirectly 20,692 shares, or .64% of the Fund's
capital stock at July 31, 1996.
The following table sets forth, for the fiscal year ended July 31, 1996,
compensation paid by the Fund to the non-interested Directors and, for the 1995
calendar year, the aggregate compensation paid to the non-interested Directors
by all of the funds in the 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>
Total Compensation
Aggregate from fund complex
Compensation including the State
Name of Director from Fund (a) Bond Group of Mutual
- ---------------- ------------- Funds and The
Legends Fund, Inc.(b)
---------------------
<S> <C> <C>
William B. Faulkner $1,189 $5,778
Patrick M. Finley* $ 75 $3,096
Arthur Gartland* $ 75 $6,900
Chris L. Mahai $1,189 $3,528
John Katz $1,189 $9,264
Theodore S. Rosky $1,189 $9,264
</TABLE>
_________________________
(a) There were no pension or retirement benefits accrued for any of the named
persons by any of the funds.
(b) Messrs. Faulkner, Katz and Rosky are directors of The Legends Fund, Inc., a
mutual fund which is advised by the Manager, the compensation from which is
included in the above amounts of total compensation.
* Messrs. Finley and Gartland resigned as Directors in January 1996 and
November 1995, respectively.
THE MANAGER
ARM Capital Advisors, Inc. (the "Manager") manages the investments of the
Fund and administers its business and other affairs. The address of the Manager
is 200 Park Avenue, 20th Floor, New York, New York 10166. The predecessor to the
Manager was SBM Company, which served as manager of the Fund from the Fund's
inception until June 13, 1995. The Manager assumed management of the Fund on
June 14, 1995, effective for accounting purposes as of June 1, 1995, following
the acquisition of substantially all of the business operations of SBM Company
by ARM.
The Manager is a wholly-owned subsidiary of ARM Financial Group, Inc.
("ARM"), a Delaware corporation. ARM is a financial services company providing
retail and institutional products and services to the long-term savings and
retirement market. The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan
Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P. and
MSCP III 892 Investors, L.P., investment
8
<PAGE>
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 $6.0 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>
The Manager received a management fee of $11,817 during the fiscal year
ended July 31, 1996, and a management fee of $1,771 for the period June 1, 1995,
the effective date for accounting purposes on which the Manager commenced its
duties as the Fund's investment adviser, through July 31, 1995. SBM Company,
the previous investment manager of the Fund, received as a management fee $7,998
and $10,334, respectively, for the fiscal periods ended July 31, 1995 and 1994.
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
fiscal year ended July 31, 1996 and the period June 1, 1995 to July 31, 1995,
the Manager reimbursed the Fund in the amount of $81,687 and $14,411,
respectively. SBM Company reimbursed the Fund during the fiscal periods ended
July 31, 1995 and 1994 in the following amounts: $59,605 and $64,232,
respectively.
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 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
ARM Transfer Agency, 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. ARM Transfer Agency, Inc. received $10,323 in transfer agency fees
from the Fund for the fiscal year ended July 31, 1996. SBM Financial Services,
Inc. acted as the Fund's transfer and dividend disbursing agent for the period
June 1, 1995 to July 31, 1995 and for the period August 1, 1995 to January 31,
1996, and received transfer agency fees of $4,067 and $13,939 during such
periods, respectively. 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 and 1994, respectively; $16,933 and $21,600.
CUSTODIAN
Investors Fiduciary Trust Company serves as custodian for the Fund's
portfolio securities and cash, and in that capacity, maintains certain financial
and accounting books and records pursuant to a separate agreement with the Fund.
INDEPENDENT AUDITORS
Ernst & Young LLP, One Kansas City Place, 1200 Main Street, Kansas City,
Missouri 64105-2143, independent auditors, 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
10
<PAGE>
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 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
11
<PAGE>
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, 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 $5,908 in such fees and incurred $15,587 in expenses.
The Distributor used these fees toward the following expenses: compensation of
sales personnel - $4,347; compensation of marketing and sales administration
personnel- $1,517; marketing materials - $9,551; promotion and travel - $172.
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 Ratings Services 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
14
<PAGE>
to competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of 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 Ratings Services
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.
15
<PAGE>
State Bond Cash Management Fund
Schedule of Investments
July 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-------------------------------
<S> <C> <C>
COMMERCIAL PAPER (63.5%)
American Express Credit Corporation, 5.30%, due 8/7/96 $ 122,000 $ 121,892
Associates Corporation of North America, 5.27%, due 8/9/96 161,000 160,811
Beneficial Corporation, 5.28%, due 8/6/96 143,000 142,895
CIT Group Holdings, Inc., 5.25%, due 8/2/96 119,000 118,983
Chevron Oil Finance Corporation, 5.28%, due 8/19/96 161,000 160,575
Deere and Company, 5.36%, due 8/5/96 140,000 139,916
Ford Motor Credit Company, 5.35%, due 8/6/96 156,000 155,884
General Electric Capital Corporation, 5.27%, due 8/9/96 160,000 159,813
GMAC, 5.52%, due 11/18/96 175,000 172,075
Household Finance Corporation, 5.32%, due 8/20/96 108,000 107,697
IBM Corporation, 5.12%, due 8/1/96 160,000 160,000
Norwest Financial, 5.34%, due 8/14/96 148,000 147,715
Prudential Funding, 5.33%, due 8/26/96 145,000 144,463
Sears, 5.35%, due 8/12/96 161,000 160,737
-------------
TOTAL COMMERCIAL PAPER (Cost $2,053,456) 2,053,456
U.S. TREASURY BILLS (36.5%)
4.86%, due 8/8/96 500,000 499,527
5.02%, due 8/22/96 135,000 134,605
4.91%, due 8/29/96 550,000 547,900
-------------
TOTAL U.S. TREASURY BILLS (Cost $1,182,032) 1,182,032
-------------
TOTAL INVESTMENTS (100%) (Cost $3,235,488) $ 3,235,488
=============
</TABLE>
See accompanying notes.
2
<PAGE>
State Bond Cash Management Fund
Statement of Assets and Liabilities
July 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at amortized cost -
see accompanying schedule $3,235,488
Cash 3,085
Receivable for reimbursable expenses 6,333
----------
TOTAL ASSETS 3,244,906
LIABILITIES
Payable to affiliates 1,645
Accrued expenses 24,493
----------
TOTAL LIABILITIES 26,138
----------
NET ASSETS, for 3,218,768 shares outstanding $3,218,768
==========
NET ASSET VALUE, offering and redemption price per
share $ 1.00
==========
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
State Bond Cash Management Fund
Statement of Operations
Year Ended July 31, 1996
<S> <C>
INVESTMENT INCOME
Interest $ 158,922
EXPENSES
Investment advisory and management fees, net of Rule 12b-1
plan fees 11,817
Rule 12b-1 plan fees 5,908
Professional fees 12,131
Printing expenses 10,924
Transfer agent fees 24,262
Custodian fees 17,198
Directors' fees and expenses 4,774
Registration fees 18,369
---------
Total expenses before reimbursement 105,383
Less: expense reimbursement (81,687)
---------
Net expenses 23,696
---------
Net investment income 135,226
---------
Net increase in net assets resulting from operations $ 135,226
=========
</TABLE>
See accompanying notes.
4
<PAGE>
State Bond Cash Management Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1996 1995
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 135,226 $ 109,688
Distributions to shareholders from:
Net investment income (135,226) (109,688)
Capital share transactions at net
asset value of $1.00 per share:
Proceeds from sales of shares 4,963,558 5,107,717
Proceeds from reinvested distributions 165,074 98,558
Cost of shares redeemed (4,627,488) (4,508,194)
---------------------------
Net increase in net assets resulting
from share transactions 501,144 698,081
---------------------------
Total increase in net assets 501,144 698,081
NET ASSETS
Beginning of year 2,717,624 2,019,543
---------------------------
End of year $3,218,768 $2,717,624
===========================
</TABLE>
See accompanying notes.
5
<PAGE>
State Bond Cash Management Fund
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
1996 1995 1994 1993 1992
--------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of year $1.00 $1.00 $1.00 $1.00 $1.00
Income from investment operations:
Net investment income .05 .04 .03 .02 .04
Less distributions:
From net investment income (.05) (.04) (.03) (.02) (.04)
-----------------------------------------
Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00
=========================================
TOTAL RETURN 4.72% 4.51% 2.54% 2.40% 3.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $3,219 $2,718 $2,020 $3,657 $4,770
Ratio of expenses to average net assets .80% .80% .80% .80% .90%
Ratio of net investment income to average net assets 4.58% 4.49% 2.55% 2.38% 3.71%
Ratio of expenses to average net assets before
voluntary expense reimbursement 3.57% 3.83% 3.38% 2.54% 1.99%
Ratio of net investment income to average net
assets before voluntary expense reimbursement 1.81% 1.46% (.01%) .64% 2.91%
</TABLE>
See accompanying notes.
6
<PAGE>
State Bond Cash Management Fund
Notes to Financial Statements
July 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The State Bond Cash Management Fund (the "Fund") is the only investment
portfolio of State Bond Money Funds, Inc., which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
diversified management investment company. The primary investment
objective of the Fund is to maximize current income, preserve capital, and
maintain liquidity. The Fund invests exclusively in money market instruments
maturing in twelve months or less.
ARM Financial Group, Inc. ("ARM") completed the acquisition of substantially all
of the assets and business operations of SBM Company ("SBM") on June 14, 1995.
As part of this acquisition, ARM Capital Advisors, Inc. ("ARM Capital
Advisors"), a subsidiary of ARM, assumed the responsibilities of SBM as manager
of the Fund. The Investment Advisory and Management Agreement between the Fund
and ARM Capital Advisors contains the same material terms and conditions
(including the fees payable to ARM Capital Advisors) as were contained in the
Fund's prior Investment Advisory and Management Agreement with SBM.
As part of the acquisition, ARM acquired all of the issued and outstanding
common stock of SBM Financial Services, Inc. ("SBM Financial Services"), the
Fund's distributor. Effective February 1, 1996, ARM Transfer Agency, Inc. ("ARM
Transfer Agency") replaced SBM Financial Services as transfer agent for the
Fund. ARM Transfer Agency assumed SBM Financial Services' responsibility
pursuant to a transfer agency agreement with the Fund. ARM Transfer Agency is a
wholly owned subsidiary of ARM.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for investment companies.
INVESTMENTS IN SECURITIES
The Fund uses the amortized cost method for valuing portfolio securities in
accordance with Rule 2a-7 of the 1940 Act. Security transactions are accounted
for as of the trade date. Interest income, which includes amortization of
premium and accretion of original issue discount, is accrued as earned.
7
<PAGE>
State Bond Cash Management Fund
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAX STATUS AND RELATED MATTERS
The Fund complied with the requirements of the Internal Revenue Code applicable
to regulated investment companies and distributed its taxable net investment
income. Therefore, no provision for federal or state income tax is required.
The aggregate cost of investments in securities is the same for book and tax
purposes.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared daily and distributed monthly.
Dividends are recorded on the ex-dividend date.
2. INVESTMENT ADVISORY AGREEMENT AND PAYMENTS TO RELATED PARTIES
ARM Capital Advisors is the Fund's investment adviser. The investment advisory
fee is computed at the annual rate of .60% of average daily net assets of the
Fund. Included in the investment advisory fee is .20% of the average daily net
assets which ARM Capital Advisors pays to SBM Financial Services under a Rule
12b-1 plan of share distribution. ARM Capital Advisors has voluntarily
undertaken to reimburse the Fund for any expenses in excess of .80% of the
average daily net assets for the fiscal years ended 1996, 1995, 1994, and 1993
and .90% for the fiscal year ended 1992, despite the fact that higher expenses
may be permitted by state law.
Certain officers and directors of the Fund are also officers of ARM, ARM Capital
Advisors, ARM Transfer Agency, and SBM Financial Services.
3. CAPITAL SHARES
At July 31, 1996, the Fund had authority to issue twenty billion shares of
common stock, each with a par value of $.00001.
8
<PAGE>
4. SUBSEQUENT EVENT
On August 26, 1996, the Board of Directors of the Fund approved a proposal to
reorganize the Fund. The reorganization will involve the sale of the Fund's
assets, subject to certain liabilities, to Automated Cash Management Trust (the
"Federated Fund"), a mutual fund advised by Federated Investors. Shares of the
Fund would be exchanged at net asset value for shares of equivalent value of the
Federated Fund. The reorganization transaction is subject to approval by Fund
shareholders and to certain other conditions prior to closing, including the
receipt of an opinion as to the tax-free nature of the reorganization for the
Fund, the Federated Fund and their respective shareholders. No sales charges
would be imposed on the proposed reorganization.
9
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
State Bond Cash Management Fund
We have audited the accompanying statement of assets and liabilities including
the schedule of investments of the State Bond Cash Management Fund (the "Fund")
as of July 31, 1996 and the related statements of operations for the year then
ended and changes in net assets and financial highlights for each of the two
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit. The financial highlights for each of the three years in the
period ended July 31, 1994 of the State Bond Cash Management Fund were audited
by other auditors whose report dated August 26, 1994 expressed an unqualified
opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at July 31,
1996, by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
State Bond Cash Management Fund at July 31, 1996, and the results of its
operations for the year then ended, and changes in its net assets and financial
highlights for each of the two years in the period then ended in conformity with
generally accepted accounting principles.
/s/Ernst & Young LLP
Kansas City, Missouri
August 28, 1996
10
