<PAGE>
State Bond
Tax Exempt Fund
A Member of the ARM Financial Group
[LOGO]
State Bond
Tax Exempt Fund
Annual
Report
June 30, 1995
<PAGE>
State Bond Tax Exempt Fund
TO THE SHAREHOLDERS:
With this Annual Report, the State Bond Tax Exempt Fund (the "Fund") observes
the completion of eleven years of operations. We welcome new shareholders who
joined us during the year and thank all of our shareholders for their interest
and support.
Realizing that tax exempt income is important to shareholders, the Fund
seeks to provide a favorable level of income consistent with the quality
requirements of the Fund. A total of 58 cents per share for the fiscal year
was distributed through monthly dividends.
During this fiscal year ended June 30, 1995, the Federal Reserve continued its
efforts to curb future inflationary pressures by increasing short-term interest
rates in August, November, and February by a total of 1.75%. With these
increases, the 30 year Treasury Bond yield, which began the fiscal year at 7.6%,
increased to over 8.0% in November and held near that level through December.
However, even though the Federal Reserve increased short-term interest rates by
an additional 0.5% in February, the 30 year Treasury Bond yield began to
decrease in January and continued its downward trend, closing the fiscal year
near the 6.6% level as weaker economic data suggested a slowing economy. The
Fund's net asset per share began the fiscal year at $10.58, and as interest
rates increased, its value decreased to $10.26 at the end of December. Then as
interest rates began to decrease, the net asset value per share increased and
this rally brought the net asset value per share to $10.77 at the close of the
fiscal year.
At June 30, 1995, the Fund owns 68 tax-exempt issues representing
investments in 28 states. This portfolio of investments provides shareholders
with both issue and geographic diversification.
The portfolio's quality as of June 30, 1995 is reflected in the rating of
each security by Moody's Investors Service, Inc. and/or Standard & Poor's
Corporation. By selecting the higher rating awarded to each issue by either
service, bonds comprising 29.7% of the total portfolio market value were triple
A rated, 22.5% were double A rated, and 45.7% were single A rated. The
remaining 2.1% of the portfolio was invested in quality rated short-term
securities.
Should you desire additional information, we would welcome your inquiries.
Sincerely,
/s/ Keith O. Martens
--------------------
Keith O. Martens
Vice President
<PAGE>
State Bond Tax Exempt Fund
Schedule of Investments
June 30, 1995
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
--------------------------------
MUNICIPAL BONDS (97.9%)
<S> <C> <C> <C>
ALASKA
Alaska Housing Finance Corp.,
Collateralized Veterans Mortgage
Program, Series 1991 B-1, 6.900%, due
2032 Aaa/AAA $ 810,000 $ 833,344
Alaska Housing Finance Corp.,
Collateralized Home Mortgage Bonds,
1988 Series A-1, 7.625%, due 2013 Aaa/AAA 325,000 344,851
ARIZONA
Arizona Industrial Development
Authority, 5.450%, due 2009 A3/A 1,500,000 1,447,440
CALIFORNIA
Central Coast Water Authority Rev.
Bonds, Series 1992, 6.350%, due 2007 Aaa/AAA 1,000,000 1,061,630
Walnut Valley, CA, Water District,
Certificate of Participation, 6.125%,
due 2009 Aaa/AAA 1,000,000 1,018,420
COLORADO
Housing Finance Agency, Single Family
Housing Rev. Bonds, 1986 Series A,
8.000%, due 2017 Aa/NR 320,000 332,662
DISTRICT OF COLUMBIA
District of Columbia University Rev.
Bonds, 6.300%, due 2013 NR/AAA 1,250,000 1,267,738
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
--------------------------------
MUNICIPAL BONDS (CONTINUED)
<S> <C> <C> <C>
ILLINOIS
Chicago, Illinois, Water Rev. Bonds,
7.200%, due 2016 A1/A+ $2,000,000 $2,249,320
Chicago, Illinois, Public District
Capital Improvement Bonds, 5.450%, due
2004 Aaa/AAA 1,000,000 1,013,570
City of Chicago, Illinois, Gas Supply
Rev. Bonds, 7.500%, due 2015 Aa3/AA- 1,480,000 1,621,370
City of Chicago, Illinois, Gas Supply
Rev. Bonds, 7.500%, due 2015 Aa3/AA- 1,100,000 1,205,072
Illinois State University Auxiliary
Facility System, Board of Regents Rev.
Bonds, Series 1989, 7.400%, due 2014 A1/A 1,050,000 1,187,876
Illinois State University Auxiliary
Facility System, Board of Regents Rev.
Bonds, Series 1989, 7.400%, due 2013 A1/A 500,000 565,655
Illinois School District #065, 5.875%,
due 2008 Aaa/AAA 1,000,000 1,010,180
Metropolitan Pier Exposition Authority,
Illinois Dedicated State Tax Rev.
Bonds, 6.000%, due 2014 A/A+ 2,100,000 2,010,666
Rolling Meadows, Illinois Mortgage Rev.
Bonds Woodfield Garden, 7.750%, due
2004 NR/AA- 2,000,000 2,173,340
INDIANA
Beech Grove, IN, IDR for Westvaco
Corp., 8.750%, due 2010 A1/A 550,000 553,536
Highland, IN, School Building Corp.,
6.750%, due 2012 NR/A 1,000,000 1,126,010
Indiana Transportation Finance
Authority, Series A, 6.250%, due 2016 A/A 1,150,000 1,141,847
Indianapolis, IN, Public Improvement
Bonds, Bank Series C, 6.700%, due 2017 A1/A+ 3,225,000 3,338,939
</TABLE>
3
<PAGE>
State Bond Tax Exempt Fund
Schedule of Investments (continued)
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
--------------------------------
MUNICIPAL BONDS (CONTINUED)
<S> <C> <C> <C>
INDIANA (CONTINUED)
Indianapolis, IN, Resource Recovery
Rev. Bonds, Series A, 7.900%, due 2008 A/A $1,115,000 $1,185,178
Indianapolis, IN, Resource Recovery
Rev. Bonds, Series B, 7.900%, due 2008 A/A 430,000 457,008
Indiana Municipal Power Agency, Series
1992 A, 6.000%, due 2007 Aaa/AAA 1,300,000 1,348,581
Indiana State Toll Roads, Revenue
Refunding Bond, 6.00%, due 2013 A/A 1,100,000 1,063,590
LOUISIANA
Rapides Parish, LA, Housing & Mortgage
Finance Authority, Single Family
Mortgage, 7.250%, due 2010 Aaa/AA- 750,000 804,248
MAINE
Maine State Housing Authority, Mortgage
Purchase Bonds, 1988 Series B, 8.000%,
due 2015 A1/AA- 455,000 487,400
MARYLAND
Maryland City Housing Multi-Family,
FNMA, Series A, 7.250%, due 2023 NR/AAA 750,000 789,998
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
--------------------------------
MUNICIPAL BONDS (CONTINUED)
<S> <C> <C> <C>
MICHIGAN
Michigan State Housing Development
Authority, Single Family, Series A,
7.550%, due 2014 NR/AA $ 145,000 $ 155,195
Michigan State Housing Development,
Series B, 6.950%, due 2020 NR/AA+ 1,000,000 1,039,250
MINNESOTA
Burnsville, Minnesota, Multi-Family
Rev. Ref. Bonds, Coventry Court
Apartments Project, Series 1989,
7.500%, due 2027 NR/AAA 800,000 844,728
City of Minnetonka, MN, Multi-Family
Rental Housing Rev. Bonds, 7.250%, due
2002 NR/AAA 800,000 831,480
Minnesota Housing Finance Agency,
Single Family Mortgage, 6.250%, due
2015 Aa/NR 1,300,000 1,322,334
Minnesota Housing Finance Agency Single
Family Mortgage Rev. Bonds 1989 Series
D, 7.350%, due 2016 Aa/AA 640,000 677,165
Minnesota Housing Finance Authority,
Series 1993 E, 6.000%, due 2014 NR/A+ 1,460,000 1,451,794
NEBRASKA
Nebraska Public Power Agency, Series C
1993, 4.000%, due 1999 A1/A+ 555,000 545,215
</TABLE>
5
<PAGE>
State Bond Tax Exempt Fund
Schedule of Investments (continued)
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
--------------------------------
MUNICIPAL BONDS (CONTINUED)
<S> <C> <C> <C>
NEVADA
Clark County, Nevada School District,
General Obligation Bonds, 5.300%, due
2004 Aaa/AAA $1,000,000 $1,006,230
Humboldt County, NV, Pollution Control
Rev. Bonds, Idaho Power Company,
8.300%, due 2014 NR/A 1,000,000 1,162,680
Lyon County, Nevada School District,
6.750%, due 2011 Aaa/AAA 800,000 863,488
Washoe County, Nevada, General
Obligation Bonds, 6.000%, due 2009 Aaa/AAA 585,000 592,014
NEW HAMPSHIRE
New Hampshire Municipal Bond Bank,
Series 91 J, Non-State Guaranteed,
6.900%, due 2012 A1/A 1,080,000 1,208,585
State of New Hampshire Turnpike System
Rev. Bonds, 8.375%, due 2017 Aaa/A 900,000 1,002,672
NEW YORK
New York State Environmental Pollution
Control Rev. Bonds, 7.250%, due 2010 Aa/A 2,900,000 3,199,947
New York Metro Transit Authority,
5.100%, due 2004 Aaa/AAA 1,000,000 1,004,290
NORTH CAROLINA
North Carolina Eastern Municipal Power
Agency, Series B, 6.000%, due 2013 A/A- 2,125,000 2,000,071
North Carolina Eastern Municipal Power
Agency, 8.000%, due 2021 A/A- 200,000 221,784
Wake County, Ind. Facilities Pollution
Control, Carolina Power and Light,
6.900%, due 2009 A2/A 1,000,000 1,043,260
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
-----------------------------------
MUNICIPAL BONDS (CONTINUED)
<S> <C> <C> <C>
NORTH DAKOTA
Mercer County, ND, PCR Basin, Electric
Power Co-op, Series 84 C, 7.700%, due
2019 A2/A- $1,695,000 $1,773,445
Mercer County, ND, PCR Basin, Electric
Power Co-op, Series A, 7.700%, due 2019 A2/A- 725,000 758,517
North Dakota Housing, Single Family
Mortgage, 1992 Series A, 6.750%, due
2012 Aa/A+ 1,710,000 1,772,552
OREGON
Oregon Sewer System Revenue Bonds,
Series A, 6.050%, due 2009 A1/A+ 500,000 516,515
PENNSYLVANIA
Erie County, PA, Industrial Development
Auth., Pollution Control Rev. Ref.
Bonds, Series 1991, 7.150%, due 2013 A3/A- 400,000 424,260
Philadelphia Municipal Authority Lease,
Series C, 4.300%, due 1999 Aaa/AAA 2,175,000 2,151,858
RHODE ISLAND
Rhode Island Depositors, Economic
Protection Corp. Bonds, 6.625%, due
2019 Aaa/AAA 1,675,000 1,886,017
SOUTH DAKOTA
South Dakota Housing Development,
Multi-Family Housing Rev. Bonds,
6.700%, due 2020 A1/A+ 1,400,000 1,420,048
South Dakota State Building Authority
Co-op, Series A, 7.500%, due 2016 A1/A+ 950,000 996,379
</TABLE>
7
<PAGE>
State Bond Tax Exempt Fund
Schedule of Investments (continued)
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
------------------------------------
MUNICIPAL BONDS (CONTINUED)
<S> <C> <C> <C>
TEXAS
Houston, Texas, Water & Sewer Rev. Ref.
Bonds, 6.400%, due 2009 A/A $1,545,000 $1,637,916
Texas Water Development Board Rev.,
State Revolving Fund Bonds, 6.400%,
due 2007 Aa/AAA 1,000,000 1,064,870
Texas State Public Property Finance
Corp., 5.100%, due 2003 Aaa/AAA 890,000 881,153
Texas Utility System Revenue Bonds,
6.875%, due 2020 Aaa/AAA 1,000,000 1,071,950
UTAH
Utah State Municipal Finance Co-op,
Government Revenue Bonds, 6.400%, due
2009 A/A 1,000,000 1,008,970
VIRGINIA
Virginia Housing Authority, Residential
Mortgage Rev. Bonds, Series B, 7.550%,
due 2012 Aa/A+ 1,000,000 1,022,660
Virginia Housing Development
Authority, Series C, 1992, 6.500%, due
2007 Aa/AA 500,000 520,300
WASHINGTON
Washington State Municipal Finance
Co-op, Government Revenue Bonds,
5.600%, due 2007 Aa/AA 1,500,000 1,457,910
Washington School District #320,
General Obligation Bonds, 6.700%, due
2007 Aaa/AAA 1,000,000 1,081,130
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
---------------------------------
MUNICIPAL BONDS (CONTINUED)
<S> <C> <C> <C>
WISCONSIN
Wisconsin Housing and Economic
Development Authority, Series A,
7.100%, due 2023 Aa/A+ $ 985,000 $ 1,031,876
Wisconsin Housing and Economic
Development Authority, Home Ownership
Single Family Mtg. Rev. Bonds, 9.125%,
due 2011 Aa/AA- 20,000 20,823
Wisconsin Housing and Economic
Development Authority, Series C,
5.200%, due 2004 A1/A 2,000,000 1,947,940
WYOMING
Sweetwater County, WY, PCR for Idaho
Power, 7.625%, due 2013 A3/A- 2,150,000 2,252,641
----------
TOTAL MUNICIPAL BONDS
(Cost $75,251,298) 78,511,381
</TABLE>
9
<PAGE>
State Bond Tax Exempt Fund
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-------- -----------
<S> <C> <C>
SHORT-TERM SECURITIES (2.1%)
Ford Motor Credit Corp., 5.930%, due
07/03/95 $500,000 $ 499,423
Ford Motor Credit Corp., 5.920%, due
07/05/95 275,000 274,683
Sears Roebuck Acceptance Corp., 6.000%,
due 07/07/95 950,000 948,892
-----------
TOTAL SHORT-TERM SECURITIES
(Cost $1,722,998) 1,722,998
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $76,974,296*) $80,234,379
===========
</TABLE>
* Also represents cost for federal income tax purposes.
Ratings were provided by Moody's Investors Service, Inc. and Standard and
Poor's Corporation and are not covered by the report of Ernst & Young LLP.
See accompanying notes.
10
<PAGE>
State Bond Tax Exempt Fund
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value
(cost $76,974,296)
(Note 1)--See accompanying schedule $80,234,379
Cash 22,297
Receivable for capital shares sold 11,730
Interest receivable 1,514,557
Prepaid expenses 2,460
-----------
TOTAL ASSETS 81,785,423
LIABILITIES
Dividends payable 62,890
Payable to affiliates 56,187
Accrued expenses 23,975
-----------
TOTAL LIABILITIES 143,052
-----------
NET ASSETS $81,642,371
===========
Net Assets consist of:
Paid-in capital $78,343,568
Undistributed net realized gain on
investments 38,720
Net unrealized appreciation on
investment securities 3,260,083
-----------
NET ASSETS, for 7,578,854 shares
outstanding $81,642,371
===========
NET ASSET VALUE and redemption price
per share $ 10.77
===========
Maximum offering price per share
(includes maximum sales charge of
4.5%--reduced on purchases of $50,000 or
more) $ 11.28
===========
</TABLE>
See accompanying notes.
11
<PAGE>
State Bond Tax Exempt Fund
Statement of Operations
Year Ended June 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $5,209,032
EXPENSES (NOTE 2)
Investment advisory and management fees 405,455
12b-1 plan fees 201,900
Accounting and pricing service fees 35,300
Transfer agent fees 31,100
Shareholders' reports 18,600
Custodian fees 15,000
Professional fees 15,600
Directors' fees and expenses 5,000
Other expenses 23,400
----------
Total expenses 751,355
----------
Net investment income 4,457,677
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 1)
Net realized gain on investments 38,720
Change in unrealized appreciation on
investment securities 1,466,299
----------
Net realized and unrealized gain on
investments 1,505,019
----------
Net increase in net assets resulting
from operations $5,962,696
==========
</TABLE>
See accompanying notes.
12
<PAGE>
State Bond Tax Exempt Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1995 1994
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 4,457,677 $ 4,386,528
Net realized gain on investments 38,720 299,486
Net unrealized appreciation
(depreciation) 1,466,299 (3,455,276)
--------------------------
Net increase in net assets resulting
from operations 5,962,696 1,230,738
Distributions to shareholders from:
Net investment income (4,457,677) (4,386,528)
Net realized gain -- (716,070)
--------------------------
Total distributions to shareholders (4,457,677) (5,102,598)
Capital share transactions:
Proceeds from sales of shares 4,250,461 5,968,218
Proceeds from reinvested dividends 3,066,110 3,701,210
Cost of shares redeemed (8,328,499) (4,703,122)
--------------------------
Net increase (decrease) in net assets
resulting from share transactions (1,011,928) 4,966,306
--------------------------
Total increase in net assets 493,091 1,094,446
NET ASSETS
Beginning of year 81,149,280 80,054,834
--------------------------
End of year $81,642,371 $81,149,280
==========================
OTHER INFORMATION
Shares:
Sold 404,927 542,800
Issued through reinvestment of
dividends 291,063 336,654
Redeemed (788,793) (428,059)
--------------------------
Net increase (decrease) (92,803) 451,395
==========================
</TABLE>
See accompanying notes.
13
<PAGE>
State Bond Tax Exempt Fund
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------
1995 1994 1993 1992 1991
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of year $ 10.58 $ 11.09 $ 10.86 $ 10.52 $ 10.39
Income from investment operations:
Net investment income .58 .59 .63 .68 .71
Net realized and unrealized gain
(loss) on investments .19 (.41) .34 .36 .13
---------------------------------------------------
Total from investment operations .77 .18 .97 1.04 .84
Less distributions:
From net investment income (.58) (.59) (.63) (.68) (.71)
From net realized gain -- (.10) (.11) (.02) --
---------------------------------------------------
Total distributions (.58) (.69) (.74) (.70) (.71)
---------------------------------------------------
Net asset value, end of year $ 10.77 $ 10.58 $ 11.09 $ 10.86 $ 10.52
===================================================
TOTAL RETURN* 7.53% 1.55% 9.30% 10.18% 8.39%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $81,642 $81,149 $80,055 $70,565 $60,841
Ratio of expenses to average net assets .93% .94% .93% .87% .73%
Ratio of net investment income to
average net assets 5.52% 5.37% 5.75% 6.33% 6.81%
Portfolio turnover rate 15% 17% 21% 16% 8%
</TABLE>
* Total returns do not consider the effects of the one time sales charge.
14
<PAGE>
State Bond Tax Exempt Fund
Notes to Financial Statements
June 30, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The State Bond Tax Exempt Fund (the "Fund") is the only investment portfolio of
State Bond Municipal Funds, Inc., which is registered under the Investment
Company Act of 1940, as amended, as an open-end diversified management
investment company. The primary investment objective of the Fund is to maximize
current income exempt from Federal income taxes to the extent consistent with
the preservation of capital, with consideration given to the opportunity for
capital gains by investing in tax-exempt securities. The ability of the issuers
of the securities held by the Fund to meet their obligations may be affected by
economic developments in a specific state, industry or region.
On June 14, 1995, ARM Financial Group, Inc. ("ARM") completed the acquisition of
substantially all of the assets and business operations of SBM Company ("SBM").
As part of the acquisition, ARM Capital Advisors, Inc. ("ARM Capital Advisors"),
a subsidiary of ARM, assumed the responsibilities of SBM as manager of the Fund.
The Investment Advisory and Management Agreement between the Fund and ARM
Capital Advisors contains the same material terms and conditions (including the
fees payable to ARM Capital Advisors) as 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 June 14, 1995, SBM Financial Services also became
the transfer agent for the Fund. Prior to the acquisition SBM functioned as the
transfer agent for the Fund.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for investment companies.
15
<PAGE>
State Bond Tax Exempt Fund
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS IN SECURITIES
Investment securities are stated at aggregate market values. Market valuations
are furnished by a pricing service approved by the Board of Directors. The
pricing service values portfolio securities which have remaining maturities of
more than sixty days from the date of valuation at quoted bid prices. Such
securities for which quotations are not readily available (which constitute a
majority of the Fund's portfolio securities) are valued at fair value as
determined by the pricing service. Securities which have remaining maturities of
sixty days or less and short-term securities are valued at amortized cost which
approximates market value. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors.
Security transactions are accounted for on trade date and interest income is
recorded on the accrual basis. Realized gains or losses from investment
transactions are determined on the basis of specific identification.
At June 30, 1995, unrealized appreciation of investments aggregated $3,664,924
and unrealized depreciation of investments aggregated $404,841 for tax purposes.
INCOME TAX STATUS AND RELATED MATTERS
The Fund complied with the requirements of the Internal Revenue Code applicable
to regulated investment companies and distributed its taxable net investment
income and net realized gains. Therefore, no provision for federal or state
income tax is required.
The Fund hereby designates $38,720 as capital gain dividends attributable to the
year ended June 30, 1995 for the purpose of the dividend paid deduction on the
Fund's federal income tax returns.
DISTRIBUTIONS TO SHAREHOLDERS
Exempt interest dividends from net investment income are declared daily and
distributed monthly. Distributions from taxable net realized investment gains,
if any, will be declared at least once a year. Dividends and distributions are
recorded on the ex-dividend date.
16
<PAGE>
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 .5% on the average daily net assets of the
Fund. In addition, the Fund pays .25% of the average daily net assets to SBM
Financial Services under a Rule 12b-1 plan of share distribution. The investment
adviser has voluntarily undertaken to reimburse the Fund for any expenses in
excess of 1% of the average daily net assets despite the fact that higher
expenses may be permitted by state law. No such reimbursement was required for
the fiscal year ended June 30, 1995.
Fees paid to SBM Financial Services for underwriting services in connection with
sales of the Fund's capital shares aggregated $138,549 for the fiscal year ended
June 30, 1995. Such fees are not an expense of the Fund and are excluded from
the proceeds received by the Fund for sales of its capital shares as shown in
the accompanying statements of changes in net assets. Fees paid to SBM for
accounting services for the fiscal year ended June 30, 1995 were $24,750.
Certain officers and directors of the Fund are also officers of ARM, ARM Capital
Advisors, and SBM Financial Services.
3. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and proceeds from sales of securities, excluding short-term
investments, during the fiscal year ended June 30, 1995 amounted to $11,481,659
and $13,263,859, respectively.
4. CAPITAL SHARES
At June 30, 1995, the Fund had authority to issue ten billion shares of common
stock, each with a par value of $.00001.
17
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
State Bond Tax Exempt Fund
We have audited the accompanying statement of assets and liabilities including
the schedule of investments of the State Bond Tax Exempt Fund (the "Fund") as of
June 30, 1995 and the related statements of operations and changes in net assets
and financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the year ended June 30, 1994 and financial highlights for the four years
ended June 30, 1994 of the State Bond Tax Exempt Fund were audited by other
auditors whose report dated July 29, 1994 expressed an unqualified opinion.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at June 30, 1995, by
correspondence with the custodian. As to uncompleted securities transactions, we
performed other auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
State Bond Tax Exempt Fund at June 30, 1995, and the results of its operations,
changes in its net assets and financial highlights for the year then ended in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
----------------------
Kansas City, Missouri
August 4, 1995
18
<PAGE>
BOARD OF DIRECTORS
William B. Faulkner
President, William Faulkner & Associates, Inc.
Director, State Bond mutual funds
Patrick M. Finley
President, Universal Cooperatives, Inc.
Director, State Bond mutual funds
Arthur J. Gartland
Co-founder and President, Benedetto, Gartland & Greene, Inc.
Director, State Bond mutual funds
John Katz
Executive Vice President, Equitable Investment Corporation,
retired 1991
Director, State Bond mutual funds
John R. Lindholm
Executive Vice President, ARM Financial Group, Inc.
President, State Bond and Mortgage Life Insurance Company
Chairman, State Bond mutual funds
Chris L. Mahai
Senior Vice President, Strategic Integration, Star Tribune
Director, State Bond mutual funds
Theodore S. Rosky
Executive Vice President and Chief Financial Officer,
Providian Corporation, retired 1992
Director, State Bond mutual funds
--------------------------------------
INVESTMENT ADVISER
ARM Capital Advisors, Inc.
GENERAL DISTRIBUTOR
SBM Financial Services, Inc.
8400 Normandale Lake Blvd., Suite 1150
Minneapolis, Minnesota 55437-3807
612/835/0097
CUSTODIAN
First Bank National Association
St. Paul, Minnesota
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This report is intended for the general information of the shareholders of
the Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by the offering
prospectus of the Fund, which contains details of sales commissions and other
information.
