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[LOGO] STATE BOND
Tax Exempt Fund
State Bond
Tax Exempt Fund
Annual
Report
June 30, 1996
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State Bond Tax Exempt Fund
Notes to Financial Statements (continued)
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,
1996.
Fees paid to SBM Financial Services for underwriting services in connection
with sales of the Fund's capital shares aggregated $94,224 for the fiscal
year ended June 30, 1996. 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 statement of changes in net assets.
Certain officers and directors of the Fund are also officers of ARM, ARM
Capital Advisors, ARM Transfer Agency, 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, 1996, amounted to
$12,419,715 and $13,812,288, respectively.
4. CAPITAL SHARES
At June 30, 1996, the Fund had authority to issue ten billion shares of
common stock, with a par value of $.00001 each.
5. 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 Federated Municipal
Opportunities Fund, Inc. (the "Federated Fund"), a mutual fund advised by
Federated Investors, in exchange for shares of the Federated Fund. 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.
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Report of Independent Auditors
The 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, 1996 and the related statement 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
audits. The financial highlights for the three years ended June 30, 1994 of the
State Bond Tax Exempt Fund were audited by other auditors whose report dated
July 29, 1994 expressed and 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 June 30,
1996, 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 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 Tax Exempt Fund at June 30, 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 9, 1996,
except for Note 5,
as to which the date is
August 26, 1996.
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BOARD OF DIRECTORS
William B. Faulkner
President, William Faulkner & Associates, Inc.
Director, State Bond mutual funds
John Katz
Executive Vice President, Equitable Investment Corporation, retired 1991
Director, State Bond mutual funds
John R. Lindholm
Executive Vice President, ARM Financial Group, Inc.
Chairman, State Bond mutual funds
Chris L. Mahai
Senior Vice President, Strategic Integration, Star Tribune
Director, State Bond mutual funds
Theodore S. Rosky
Executive Vice President and Chief Financial Officer,
Providian Corporation, retired 1992
Director, State Bond mutual funds
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INVESTMENT ADVISER
ARM Capital Advisors, Inc.
GENERAL DISTRIBUTOR
SBM Financial Services, Inc.
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
1-800-328-4735
CUSTODIAN
Investors Fiduciary Trust Company
Kansas City, Missouri
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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.
Catalog #001723(8/96)
