<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1996
Registration Nos. 2-77156 and 811-3454
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. __ [_]
Post-Effective Amendment No. 17 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 17 [X]
STATE BOND MUNICIPAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (507) 354-2144
Copies to:
Kevin L. Howard, Esq. Joel H. Goldberg, Esq.
515 W. Market Street 8th floor Shereff, Friedman, Hoffman & Goodman, LLP
Louisville, KY 40202-3319 919 Third Avenue
(Name and Address of Agent for Service) New York, New York 10022
------------
It is proposed that this filing will become effective (check appropriate box):
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[X] on November 1, 1996 pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2(a)(1) under the Investment Company Act of 1940, the
Registrant has registered an indefinite number or amount of its securities under
the Securities Act of 1933. The Registrant has filed a notice under such Rule
for its fiscal year ended June 30, 1996 within 60 days of such date.
<PAGE>
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
N-IA Item No.
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Part A
<S> <C>
Item 1. Cover Page...........................................COVER PAGE
Item 2. Synopsis................................SHAREHOLDER TRANSACTION
AND OPERATING EXPENSE TABLE
Item 3. Condensed Financial Information............FINANCIAL HIGHLIGHTS
Item 4. General Description of Registrant...........GENERAL INFORMATION
ABOUT STATE BOND
TAX EXEMPT FUND;
WHAT ARE THE FUND'S INVESTMENT
OBJECTIVES, POLICIES AND RISKS?
Item 5. Management of the Fund.................HOW IS THE FUND MANAGED?
Item 6. Capital Stock and other Securities..........GENERAL INFORMATION
ABOUT STATE BOND
TAX EXEMPT FUND
Item 7. Purchase of Securities Being Offered.........HOW CAN YOU INVEST
IN THE FUND?
HOW ARE THE FUND'S SALES CHARGES
DETERMINED? WHAT IS THE FUND'S
PLAN OF DISTRIBUTION? HOW DOES THE
FUND'S EXCHANGE PRIVILEGE WORK?
WHAT SERVICES DOES THE FUND OFFER?
Item 8. Redemption of Repurchase.....................HOW CAN YOU "SELL"
YOUR SHARES?
Item 9. Legal Proceedings................................NOT APPLICABLE
Part B
Item 10. Cover Page........................................COVER PAGE
Item 11. Table of Contents.................................COVER PAGE
Item 12. General Information and History..........GENERAL INFORMATION
Item 13. Investment Objectives and Policies.......WHAT ARE THE FUND'S
INVESTMENT OBJECTIVES,
POLICIES AND RISKS?
WHAT ARE FUND'S
INVESTMENT LIMITATIONS?
Item 14. Management of the Registrant.....................WHO MANAGES
THE FUND?
Item 15. Control Persons and Principal Holders of
Securities.....................................WHO MANAGES
THE FUND?
Item 16. Investment Advisory and Other Services...........WHO MANAGES
THE FUND?; TRANSFER
AGENT; CUSTODIAN;
INDEPENDENT AUDITORS
Item 17. Brokerage Allocation..................PORTFOLIO TRANSACTIONS
Item 18. Capital Stock and Other Securities........PURCHASE OF SHARES
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered..........................PURCHASE OF SHARES;
HOW IS THE OFFERING
PRICE DETERMINED?
HOW CAN YOU "SELL" YOUR SHARES?
HOW IS NET ASSET VALUE
PER SHARE DETERMINED?
Item 20. Tax Status...................................WHAT IS THE TAX
STATUS OF THE FUND?
WILL THE FUND WITHHOLD
TAXES ON DISTRIBUTIONS?
Item 21. Underwriters...........................PLAN OF DISTRIBUTION;
HOW ARE SHARES DISTRIBUTED?
Item 22. Calculation of Performance Data...............CALCULATION OF
PERFORMANCE DATA
Item 23. Financial Statements....................FINANCIAL STATEMENTS
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment to the
Registration Statement.
<PAGE>
PROSPECTUS
STATE BOND TAX EXEMPT FUND
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
Phone (507) 354-2144
November 1, 1996
The State Bond Tax Exempt Fund (the "Fund") is a mutual fund which seeks to
maximize current income exempt from federal income taxes to the extent
consistent with preservation of capital, with consideration given to the
opportunity for capital gain. The Fund is the only investment portfolio of State
Bond Municipal Funds, Inc.
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 NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER FEDERAL AGENCY. AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE 3
FINANCIAL HIGHLIGHTS 4
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS? 5
HOW IS THE FUND MANAGED? 8
WHAT ARE THE FUND'S BROKERAGE COMMISSIONS? 9
HOW CAN YOU INVEST IN THE FUND? 9
HOW IS THE OFFERING PRICE OF THE FUND'S SHARES DETERMINED? 10
HOW ARE THE FUND'S SALES CHARGES DETERMINED? 10
HOW CAN YOU "SELL" YOUR SHARES? 11
HOW DOES THE FUND'S EXCHANGE PRIVILEGE WORK? 13
HOW DOES THE FUND PAY DIVIDENDS AND DISTRIBUTIONS? 14
WHAT IS THE TAX STATUS OF DIVIDENDS AND DISTRIBUTIONS YOU RECEIVE? 14
WHAT IS THE FUND'S PLAN OF DISTRIBUTION? 15
WHO ARE THE FUND'S FUND ACCOUNTING AGENT AND ITS CUSTODIAN? 16
WHAT SERVICES DOES THE FUND OFFER? 16
GENERAL INFORMATION ABOUT STATE BOND TAX EXEMPT FUND 17
INVESTMENT PERFORMANCE 17
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE 17
<PAGE>
SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ................................ 4.50%
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average daily net assets)
Management Fee ....................................................... .50%
12b-1 Fee ............................................................ .25%
Other Expenses ....................................................... .15%
Total Fund Operating Expenses ........................................ .90%
A $10.00 fee will be charged for certain redemptions by wire transfer. See "How
Can You 'Sell' Your Shares?"
EXAMPLE:
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:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C>
$54 $72 $93 $151
</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 Fund's shares have an asset-based sales fee which may result in long-term
shareholders paying more than the economic equivalent of the maximum front-end
sales charge permitted by NASD regulations.
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 June 30, 1996. For more
information concerning fees and expenses, see "What Is The Fund's Plan Of
Distribution?" and "How Is The Fund Managed?" For information on additional
sales charges that may be payable upon exchange into a fund in the State Bond
Group which has a higher sales charge, see "How Does The Exchange Privilege
Work?".
3
<PAGE>
FINANCIAL HIGHLIGHTS
The information presented below for the fiscal years ended June 30, 1995 and
1996 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 three-year period ended
June 30, 1994 has been audited by the previous auditors for the Fund. Further
information about the performance of 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 JUNE 30
<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 $ 10.77 $ 10.58 $ 11.09 $ 10.86 $ 10.52 $ 10.39 $ 10.56 $ 10.06 $ 10.13 $ 10.25
Income from investment
operations:
Net investment income .57 .58 .59 .63 .68 .71 .72 .74 .74 .74
Net realized and unrealized
gain (loss) on investments .01 .19 (.41) .34 .36 .13 (.12) .54 (.02) (.07)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations .58 .77 .18 .97 1.04 .84 .60 1.28 .72 .67
Less distributions:
From net investment income (.57) (.58) (.59) (.63) (.68) (.71) (.72) (.74) (.74) (.74)
From net realized gain -*** - (.10) (.11) .02 - (.05) (.04) (.05) (.05)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions (.57) (.58) (.69) (.74) (.70) (.71) (.77) (.78) (.79) (.79)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of year $ 10.78 $ 10.77 $ 10.58 $ 11.09 $ 10.86 $ 10.52 $ 10.39 $ 10.56 $ 10.06 $ 10.13
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return** 5.54% 7.53% 1.55% 9.30% 10.18% 8.39% 5.96% 13.24% 7.49% 6.62%
Ratios and Supplemental Data:
Net assets, end of year (in
thousands) $81,095 $81,642 $81,149 $80,055 $70,565 $60,841 $54,093 $48,307 $40,233 $33,977
Ratio of expenses to average
net assets .90% .93% .94% .93% .87% .73% .75% .77% .85% .96%
Ratio of net investment
income to average net assets 5.27% 5.52% 5.37% 5.75% 6.33% 6.81% 6.95% 7.24% 7.40% 7.12%
Portfolio turnover rate 16% 15% 17% 21% 16% 8% 5% 12% 8% 1%
</TABLE>
- --------------------
* ARM Capital Advisors, Inc. began managing the investment operations of the
Fund on June 14, 1995.
** Total return does not consider the effects of the one time sales charge.
*** Less than $0.01 per share.
4
<PAGE>
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?
The Fund seeks to maximize current income exempt from federal income taxes
to the extent consistent with preservation of capital, with consideration
given to the opportunity for capital gain. In pursuing these goals, the
Fund invests at least 80% of the value of its assets in securities of
states, territories, and possessions of the United States and the District
of Columbia, and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from federal income
taxes ("Tax Exempt Securities"). Generally, the values of the securities
in which the Fund will invest, and accordingly the value of the Fund's
shares, will fall as interest rates rise and rise as interest rates fall.
There is no assurance that the Fund's goals will be achieved.
The Tax Exempt Securities in which the Fund invests primarily consist of a
diversified portfolio of bonds rated Aaa, Aa, A, or Baa by Moody's
Investors Service, Inc. ("Moody's") or rated AAA, AA, A, or BBB by Standard
& Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc.
("S&P"), notes rated MIG-1, MIG-2, MIG-3 or MIG-4 by Moody's or SP-1, SP-2
or SP-3 by S&P, and commercial paper rated Prime-1 or Prime-2 by Moody's
or A-1 or A-2 by S&P. The risk of default, including of nonpayment of
principal or interest, on bonds and notes rated in the lowest of these
grades (Baa or MIG-4 by Moody's or BBB or SP-3 by S&P) is higher than the
risk on such securities rated in the higher grades. Such securities are
more speculative and more sensitive to economic changes than higher rated
bonds and notes. Although it does not presently do so, and does not intend
to do so in the foreseeable future, the Fund may invest in bonds rated
below A, or below MIG-3 and SP-2 in the case of notes, including bonds and
notes rated below investment grade. The Fund may invest in Tax Exempt
Securities which are not rated if, in the judgment of ARM Capital Advisors,
Inc. (the "Manager"), such securities are of comparable quality to rated
securities in which the Fund may invest.
As a matter of fundamental policy, at least 80% of the value of the Fund's
net assets will be invested in Tax Exempt Securities. Up to 20% of the net
assets of the Fund may generate interest that is an item of tax preference
for purposes of the federal alternative minimum tax ("AMT").
In addition, while the Fund attempts, under normal market conditions, to
invest 100% of the value of its assets in Tax Exempt Securities, the Fund
temporarily may invest up to 20% of the value of its assets in taxable
obligations (i) when the Manager believes abnormal market conditions
dictate a temporary defensive posture in taxable obligations; (ii) pending
investment of proceeds of sales of shares or reinvestment of proceeds of
sales of portfolio securities; or (iii) to meet redemptions of shares by
shareholders. The taxable obligations in which the Fund may invest are
obligations of the U. S. government, its agencies or instrumentalities;
other debt securities rated within the two highest grades by either Moody's
or S&P (or if unrated, of comparable quality in the opinion of the
Manager); commercial paper rated in the two highest grades by either of
such rating services (or of comparable quality); certificates of deposit,
letters of credit and bankers' acceptances of domestic banks and savings
institutions having total assets over one billion dollars or certificates
of deposit of other domestic banks or savings institutions which are fully
insured by the Federal Deposit Insurance Corporation; and repurchase
agreements with respect to any of the foregoing investments or Tax Exempt
Securities which qualify for investment by the Fund. The Fund may also hold
its assets in cash.
Tax Exempt Securities. The Tax Exempt Securities in which the Fund invests
consist of bonds, notes, and commercial paper issued by states,
territories, and possessions of the United States and the District of
Columbia, and their political subdivisions, agencies, and
instrumentalities.
Bonds are debt obligations issued to obtain funds for various public
purposes, such as the construction or improvement of public facilities
including airports, highways, hospitals, housing, nursing homes, parks,
public buildings, recreational facilities, school facilities, and sewer and
water works. Other public purposes for which bonds may be issued include
the refunding of outstanding obligations, the anticipation of taxes or
state aids, the payment of judgments, the funding of student loans,
community redevelopment, district heating, the purchase of street
maintenance and fire fighting equipment, or any authorized corporate
purpose of the issuer, except the
5
<PAGE>
payment of current expenses. Notes and commercial paper are generally used
to provide for short-term capital needs and ordinarily have a maturity of
up to one year. Notes are frequently issued in anticipation of tax
revenue, revenue from other government sources or revenue from bond
offerings. Short-term, unsecured commercial paper is often used to finance
seasonal working capital needs or to provide interim construction
financing.
In addition, certain types of securities (generally referred to as "private
activity bonds") may be issued by or on behalf of public authorities to
finance privately operated pollution control facilities, certain local
water supply, gas, electricity or waste disposal facilities, and the
construction or improvement of certain other privately operated facilities.
Tax Exempt Securities may also be classified into two types of obligations:
general obligation and limited obligation (or revenue) securities. General
obligation securities involve the pledge of the full faith and credit of an
issuer possessing taxing power and are payable from the issuer's general
unrestricted revenues and not from any particular fund or revenue source.
The characteristics and methods of enforcement of general obligation
securities vary according to the law applicable to the particular issuer.
Limited obligation (revenue) securities are payable only from the revenues
derived from a particular facility or class of facilities, or a specific
revenue source, such as the user of the facility. Private activity bonds
are in most cases limited obligation bonds payable solely from specific
revenues of the project to be financed. The credit quality of private
activity bonds is therefore usually directly related to the credit standing
of the user of the facility (or the credit standing of a third-party
guarantor or other credit enhancement participant, if any).
Like all debt obligations, Tax Exempt Securities are subject to credit risk
and market risk. Credit risk relates to the issuer's ability to make timely
payments of principal and interest. Market risk relates to the changes in
market values that occur as a result of variations in the level of
prevailing interest rates, yield relationships and other factors in the Tax
Exempt Securities market. Generally, higher quality Tax Exempt Securities
will provide a lower yield than lower quality Tax Exempt Securities of
similar maturity and are subject to lesser credit risk than lower quality
Tax Exempt Securities. Furthermore, for any given change in the level of
interest rates, prices tend to fluctuate less for higher quality issues
than for lower quality issues, and more for longer maturity issues than for
shorter maturity issues.
Floating Rate, Variable Rate, and Inverse Floating Rate Securities. The
Fund may purchase floating and variable rate Tax Exempt Securities, which
are Tax Exempt Securities having a coupon (stated interest rate paid by the
issuer) that is adjusted or reset from time to time. Certain of these
securities ("floating or variable rate demand notes") have a stated
maturity in excess of one year, but permit the holder to demand payment of
principal plus accrued interest upon a specified number of days' notice.
The issuer of floating or variable rate demand notes normally has a
corresponding right, after a given period, to prepay at its discretion the
outstanding principal amount of the notes plus accrued interest upon a
specified number of days' notice to the noteholders. The interest rate on a
floating rate demand note is based on a known lending rate, such as a
bank's prime rate and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand note is adjusted at
specified intervals, based on a known lending rate, generally the rate on
90-day U.S. Treasury bills. Frequently, floating or variable rate demand
notes are secured by letters of credit or other credit support arrangements
provided by banks. The Fund will invest in floating or variable rate demand
notes so long as the letters of credit or other credit support arrangements
do not adversely affect the tax exempt status of these obligations. The
Manager will rely upon the opinion of the issuer's bond counsel to
determine whether such obligations are exempt from federal income taxes.
The Fund also may invest in inverse or reverse floating rate Tax Exempt
Securities. Inverse or reverse floating rate Tax Exempt Securities are
securities with a coupon that moves in the reverse direction to an
applicable index, such as the London Interbank Offered Rate ("LIBOR").
Accordingly, the coupon thereon will increase as interest rates decrease.
Inverse or reverse floating rate securities are typically more volatile
than fixed rate or other types of floating rate securities. Investments in
inverse or reverse floating rate securities may be made by the Fund to
6
<PAGE>
attempt to protect against a reduction in the income earned on the Fund's
investments due to a decline in interest rates. The Fund would be adversely
affected by the purchase of such securities in the event of an increase in
interest rates since the coupon thereon will decrease as interest rates
increase and the value of the securities may decrease more than would other
debt securities, including in some instances to zero.
The Manager will monitor the creditworthiness of the issuers of floating
rate, variable rate, and inverse or reverse floating rate Tax Exempt
Securities. Such obligations are not as liquid as many other types of Tax
Exempt Securities.
Repurchase Agreements. The Fund may enter into repurchase agreements with
broker-dealers and financial institutions. A repurchase agreement is an
agreement under which the Fund acquires an instrument subject to resale to
the seller at an agreed price and date. The resale price reflects an
agreed-upon return for the period the instrument is held by the Fund and is
unrelated to the coupon provided by the instrument. Repurchase agreements
are usually for periods of one week or less, but may be for longer periods.
The Fund will not enter into repurchase agreements of more than one week's
duration if more than 10% of its net assets would be invested in such
agreements and other securities deemed to be illiquid. 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.
When-Issued Securities. The Fund may enter into commitments to purchase
new issues of Tax Exempt Securities on a when-issued basis. Delivery and
payment for these securities normally take place 15 to 45 days after the
date of commitment. There is a risk that due to changes in interest rates
between the commitment date and settlement date the market value of the
security on the settlement date may be less than its purchase price. With
regard to each commitment agreement for when-issued securities, the Fund
will maintain in a segregated account with its custodian commencing on the
commitment date, cash or Tax Exempt Securities equal in value to the
purchase price due on the settlement date under such agreement.
The Fund will only make commitments to purchase when-issued Tax Exempt
Securities with the intention of actually acquiring the securities, but if
deemed advisable the Fund may sell these securities before the settlement
date or may meet its payment obligations from proceeds of the sale of the
when-issued securities themselves (which may then have a market value
greater or less than the Fund's payment obligation).
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 in an amount not in excess of
10% of the value of the total assets of the Fund; provided that borrowings
in excess of 5% of such value are permitted from banks only; (2) mortgage
or pledge assets, except that up to 10% of the value of the Fund's total
assets can be used to secure borrowings; or (3) purchase securities of any
issuer if immediately thereafter more than 5% of the Fund's total assets
would be invested in the securities of any one issuer, except that this
limitation does not apply to obligations issued or guaranteed as to
principal and interest either by the U.S. government or its agencies or
instrumentalities.
Except as specifically noted above, the investment policies described above
are not fundamental and the Board of Directors of the Fund may change them
without the vote of majority of the Fund's outstanding voting securities.
The Board may not change the Fund's investment objective, 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 present at
a shareholders' meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.
7
<PAGE>
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 address of the Manager 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 $5.9 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 Cash Management Fund,
State Bond Common Stock Fund, State Bond Diversified Fund, State Bond
Minnesota Tax-Free Income 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 has managed the Fund
since the Fund's inception in April of 1982. Mr. Martens is also the
principal manager of the State Bond Common Stock Fund, State Bond
Diversified Fund, State Bond U.S. Government and Agency Securities Fund,
State Bond Cash Management Fund and State Bond Minnesota Tax-Free Income
Fund.
The Fund pays the Manager a management fee, calculated daily and payable
monthly, equal to an annual fee of .5 of 1% of the average daily net assets
of the Fund. The Fund pays all its expenses other than those assumed by the
Manager. Total expenses of the Fund for its fiscal year ended June 30,
1996, amounted to .90% of 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 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 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 October 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.
8
<PAGE>
WHAT ARE THE FUND'S BROKERAGE COMMISSIONS?
The Manager places orders for the Fund's portfolio securities transactions. As
the Fund's portfolio is exclusively composed of debt (rather than equity)
securities, most of the Fund's portfolio transactions are effected with dealers
without the payment of brokerage commissions, but at net prices which usually
include a spread or markup. Most Fund transactions are with the issuer, or with
major dealers acting for their own account and not as brokers. In effecting
portfolio transactions the Fund seeks the most favorable net price consistent
with the best execution. However, frequently the Fund selects a dealer to effect
a particular transaction without contacting all dealers who might be able to
effect such transaction, because of the volatility of the market and the desire
of the Fund to accept a particular price for a security because the price
offered by the dealer meets its guidelines for profit, yield, or both. No
brokerage is allocated for the sale of Fund shares. The Fund will not deal with
affiliates of the Manager and Distributor in any transaction in which such
affiliate acts as principal.
While it is not expected that the Fund will effect any transactions on an agency
basis, if it does so the Manager will seek to obtain the best price and
execution of orders. Commission rates, being a component of price, are
considered together with other relevant factors. When consistent with these
criteria, business may be placed with broker-dealers who furnish investment
research services to the Manager. Such research services include advice, both
directly and in writing, as to the value of securities, the advisability of
investing in, purchasing, or selling securities, and the availability of
securities or purchasers or sellers of securities, as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts. This allows the Manager to
supplement its own investment research activities and enables it to obtain the
views and information of individuals and research staffs of many different
securities research firms prior to making investment decisions for the Fund. To
the extent portfolio transactions are effected with broker-dealers who furnish
research services to the Manager, the Manager receives a benefit, not capable of
evaluation in dollar amounts.
The Manager has not entered into any formal or informal agreements with any
broker-dealers, and it does not maintain any "formula" which must be followed in
connection with the placement of Fund portfolio transactions in exchange for
research services provided the Manager, except as noted below. If it is believed
to be in the best interests of the Fund, the Manager may place portfolio
transactions with brokers who provide the types of services described above,
even if it means the Fund will have to pay a higher commission (or, if the
broker's profit is part of the cost of the security, will have to pay a higher
price for the security) than would be the case if no weight were given to the
broker's furnishing of those services. This will be done, however, only if, in
the opinion of the Manager, the amount of additional commission or increased
cost is reasonable in relation to the value of the services. The Manager also
serves as investment adviser for other mutual funds. To the extent that the Fund
may pay a somewhat higher brokerage commission or somewhat higher price on a
trade because such trade is executed by a broker-dealer which also provides
research and statistical services, it is possible that said research and
statistical services may also be of value to one of the other mutual funds.
However, it is felt that this possibility of mutual benefit is not capable of
measurement.
HOW CAN YOU INVEST IN THE FUND?
ARM 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.
Shares of the Fund are offered for sale through the Distributor and through
certain broker-dealers under contract with the Distributor. After you become a
shareholder, you may buy additional shares by sending a check drawn to State
Bond Tax Exempt Fund directly to the Fund's Shareholder Servicing Agent at 100
North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069. Orders for
the purchase of shares will be executed at
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the offering price based upon the net asset value next determined after receipt
and acceptance of the order by the Distributor or the Shareholder Servicing
Agent. Orders for shares placed through broker-dealers will be executed at the
offering price next determined after the receipt of the order by the broker-
dealer, provided that the broker-dealer promptly transmits the order to the
Distributor the same day. The broker-dealer is responsible for transmitting the
purchase order to the Distributor. Shares will begin to earn dividends on the
day when payment for such shares is received by the Fund or the Distributor. The
Fund reserves the right to reject any order for the purchase of its shares. The
minimum initial investment is $500 and subsequent investments must be in the
amount of at least $50. The Fund reserves the right to change these minimum
investments. The Fund will not be responsible for the consequences of delays in
the banking or Federal Reserve wire systems.
HOW IS THE OFFERING PRICE OF THE FUND'S SHARES DETERMINED?
The price you pay for shares of the Fund is the offering price, that is, the
next determined net asset value of the shares plus the applicable sales charge.
Net asset value per share is determined as of the time of close of the New York
Stock Exchange (generally 3:00 p.m. Central Time) on each day that the New York
Stock Exchange is open for business. Net asset value is determined by dividing
the value of the total assets of the Fund, less liabilities, by the number of
shares outstanding. In determining net asset value, the Fund utilizes the
valuations of its portfolio securities 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 or the yield equivalents when quotations are readily
available. 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 using methods which include
consideration of yields or prices of municipal bonds of comparable quality, type
of issue, coupon, maturity, and rating, indications as to value from dealers,
and general market conditions. The pricing service may employ electronic data
processing techniques and/or a matrix system to determine valuations. Short-term
holdings maturing in 60 days or less are valued at cost plus accrued interest
which approximates market value.
HOW ARE THE FUND'S SALES CHARGES DETERMINED?
Sales charges are determined in accordance with the following schedule:
<TABLE>
<CAPTION>
Regular Dealer
% of Net Amount Discount as % of
% of Offering Price Invested Offering Price
------------------- --------------- ----------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
$50,000 but less than $100,000 4.00% 4.17% 3.50%
$100,000 but less than $250,000 3.00% 3.09% 2.50%
$250,000 but less than $500,000 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 2.00% 2.04% 1.50%
$1,000,000 but less than $2,000,000 1.00% 1.01% 0.50%
$2,000,000 or more 0.50% 0.50% 0.25%
</TABLE>
The sales charge varies depending on the size of the purchase, the number of
shares of the mutual funds in the
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<PAGE>
State Bond Group you already own, whether you have entered into a Letter of
Intent to purchase additional shares during a 13-month period, or any special
purchase programs in effect. Complete details of how you may purchase shares at
reduced sales charges under Volume Discounts, Rights of Accumulation or Letters
of Intent are contained in the Statement of Additional Information and are
available from your investment agent or dealer, or the Distributor.
Shares may be sold at net asset value without a sales charge to present and
retired directors, present and retired officers, and present and retired
employees (and their spouses and minor children) of the Fund, the other
investment companies in the State Bond Group, and ARM and its subsidiaries. Such
sales also may be made to employee benefit plans for such persons. Also, shares
may be sold at net asset value to sales representatives of the Distributor and
registered representatives of broker-dealers who have signed dealer agreements
with the Distributor for sale of the shares of the Fund (including employee
benefit plans for such persons and their spouses and minor children). Shares may
be sold to any investment advisory, custodial, trust or other fiduciary account
managed or advised by the Manager or any affiliate wherein such entity has
discretionary investment authority at a maximum sales charge of 3% or such
lesser sales charge as such account would otherwise qualify for under the Fund's
sales charge schedule and the Volume Discount, Right of Accumulation, and Letter
of Intent provisions. These sales may be made for investment purposes only, and
shares may be resold only to the Fund.
HOW CAN YOU "SELL" YOUR SHARES?
You may redeem your shares without charge at any time by writing to the
Shareholder Servicing Agent at 100 North Minnesota Street, P.O. Box 69, New Ulm,
Minnesota 56073-0069. You will receive the net asset value per share next
determined after receipt of your request in proper form by the Shareholder
Servicing Agent. The written redemption request should identify the account
number and be signed by the shareholder(s) exactly as the shares are registered.
For share redemptions valued at $20,000 or more, your signature or signatures
must be 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. Further
documentation may be required from corporations, executors, partnerships,
administrators, trustees or custodians. If stock certificates have been issued
for the shares that you wish to redeem, you must surrender the certificates in
proper form, endorsed for transfer or accompanied by an endorsed stock power.
For your protection, any certificates should be sent by registered mail.
Shares may also be redeemed through authorized dealers and through
representatives of the Distributor. Requests for redemption received by the
Shareholder Servicing Agent from authorized dealers or representatives of the
Distributor prior to the close of the New York Stock Exchange will be executed
at the net asset value per share determined at the close of the New York Stock
Exchange on that day. Dealers and representatives are responsible for promptly
submitting such redemption requests to the Shareholder Servicing Agent in order
to obtain that day's closing price. Requests for redemption received by the
Shareholder Servicing Agent from dealers or representatives of the Distributor
after the close of the New York Stock Exchange will be executed at the net asset
value determined at the close of the New York Stock Exchange on the next trading
day.
A check for the proceeds of the redemption of your shares ordinarily will be
mailed to you 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 of a redemption may be more or less than the cost of the shares when
purchased. You will not receive dividends on shares which are redeemed from your
account for the day that the redemption is effected.
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 have a value of less than $500. You will be
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<PAGE>
allowed to make additional investments prior to the date fixed for such a
redemption to avoid liquidation of your account. Shares will not be
involuntarily redeemed if the value of the shares drops below $500 due to market
value changes.
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 the close of the New York Stock
Exchange 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 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 $250 or more
(but not more that $100,000), provided that you have an account balance of
$5,000 or more. You may elect this service on the Investment 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
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<PAGE>
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 $250 or more
than $100,000 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.
How Can You Reinstate Your Investment?
If you redeem shares and then decide you should not have redeemed them, or
that you prefer to shift your investment to one of the other mutual funds
in the State Bond Group, you may, within 30 calendar days of the date of
redemption, use all or any part of the proceeds of the redemption to
reinstate, free of sales charge, your investment in shares of the Fund, or,
if you held the shares redeemed for seven calendar days or longer before
redemption, invest in shares of any of the other mutual funds (except the
Cash Management Fund) in the State Bond Group. To make such an investment
free of sales charges in shares of the State Bond Funds which have a higher
sales charge than the Fund, you also must have held the shares of the Fund
for six months or longer before their redemption. Your investment will be
reinstated or made at the net asset value per share next determined after
your request is received. You may use this privilege to reinstate an
investment in the Fund only once.
Exercise of the Reinstatement Privilege does not alter the Federal income
tax status of any capital gain realized on a sale of Fund shares, but to
the extent that any shares are sold at a loss and the proceeds are
reinvested in shares of the same Fund, some or all of the loss will not be
allowed as a deduction, depending upon the percentage of the proceeds
reinvested.
HOW DOES THE FUND'S EXCHANGE PRIVILEGE WORK?
If you have been a shareholder for seven calendar days or more, you may
exchange any or all of your investment for shares of the other mutual funds
in the State Bond Group. Any exchange for shares of other mutual funds in
the State Bond Group will be at the next determined respective net asset
values after receipt of the request for exchange. Exchanges generally will
be made without any sales charges; except that if, within six months of
your investment in the Fund, you exchange for shares of any fund in the
State Bond Group which has a higher sales charge, you must pay the
difference in the sales charge applicable to the purchase of shares of the
Fund and the higher sales charge applicable to the purchase of shares of
such other fund. Exchanges of Fund 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 also may 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 Investment
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
13
<PAGE>
number, such other personal identification information as the Fund may
request, the dollar amount or share amount you wish to exchange, the name
of the fund into which you wish to exchange and, if you already have an
account with the fund into which you wish to exchange, the account
registration and account number of such account.
The Fund is not liable for any loss arising from telephone exchanges that
the Fund reasonably believes to be genuine. The Fund will employ reasonable
procedures to confirm that instructions communicated by telephone are
genuine; if it does not, it may be liable for any losses due to
unauthorized or fraudulent instructions. The procedures used by the Fund
will include requesting several items of personal identification
information prior to acting upon telephone instructions and sending a
written confirmation on all such transactions.
HOW DOES THE FUND PAY DIVIDENDS AND DISTRIBUTIONS?
The Fund declares daily dividends on all outstanding shares (dividends are
declared for the day on which shares are purchased but are not declared for
redeemed shares on the day of redemption). A shareholder who redeems all
of his of her Fund shares receives with the redemption proceeds the amount
of all dividends declared for the month to and including the date of
redemption of shares. Dividends in respect of all other redemptions are
paid on the regular dividend payment date. Distributions from taxable net
realized investment gains, if any, will generally be declared at least once
each year.
What Are Your Dividend And Gain Distribution Options?
You may elect to:
1. Receive both dividends and gain distributions in additional shares of
the Fund.
2. Receive dividends in cash and gain distributions in additional shares
of the Fund.
3. Receive both dividends and gain distributions in cash.
If no election is made, dividends from investment income and gain
distributions will be reinvested and credited to your account as additional
shares. Dividends and gain distributions reinvestments are made at net
asset value. To change your election at any time, write to the Shareholder
Servicing Agent at 100 North Minnesota Street, P.O. Box 69, New Ulm,
Minnesota 56073-0069.
WHAT IS THE TAX STATUS OF DIVIDENDS AND DISTRIBUTIONS YOU RECEIVE?
The Fund has fulfilled, and intends to continue to fulfill, the
requirements of the Internal Revenue Code of 1986, as amended (the "Code")
which will enable it to designate distributions from the interest income
generated by its investments in Tax Exempt Securities, which income is
exempt from Federal income tax when received by the Fund, as "Exempt
Interest Dividends." Shareholders receiving Exempt Interest Dividends will
not be subject to Federal income tax on the amount of such dividends.
Distributions by the Fund of net interest income received from certain
temporary investments and net short-term capital gains realized by the
Fund, if any, will be taxable to shareholders as ordinary income whether
received in cash or additional shares. Any distributions of net long-term
capital gains will be taxed as such, regardless of how long you have held
your shares. Distributions to shareholders will not qualify for the
dividends received deduction for corporations. Market discount recognized
on taxable investments and Tax Exempt Securities is taxable as ordinary
income.
Up to 20% of the assets of the Fund may be invested in securities which
generate interest that is an item of tax
14
<PAGE>
preference for purposes of the Federal alternative minimum tax ("AMT").
Moreover, all Exempt Interest Dividends received by corporate shareholders
will be a component of "adjusted current earnings" for purposes of the
corporate AMT. Individual and corporate taxpayers whose taxable income plus
certain tax preference items less an exemption amount multiplied by the
applicable alternative minimum tax rate exceeds regular individual or
corporate income tax liability (with certain adjustments) are subject to
AMT. Because AMT liability is dependent upon the regular tax liability and
tax preference items of a specific taxpayer, investors should consult their
tax advisers regarding the AMT consequences of an investment in the Fund.
In addition, shareholders who are or may become recipients of Social
Security should be aware that exempt-interest dividends are includable in
computing "modified adjusted gross income" for purposes of determining the
amount, if any, of social security benefits required to be included in
gross income for federal and Minnesota personal income tax purposes.
The exemption from Federal income tax for distributions of interest income
from Tax Exempt Securities which are designated Exempt Interest Dividends
will not necessarily result in exemption under the income or other tax laws
of any state or local taxing authority. The laws of the several states and
local taxing authorities vary with respect to the taxation of such
distributions, and shareholders of the Fund are advised to consult their
own tax advisors in that regard.
Upon a sale or exchange of his or her shares, a shareholder will realize a
taxable gain or loss depending on his or her basis in the shares. Such
gains or loss will be treated as a capital gain or loss if the shares are
capital assets in the shareholder's hands and will be a long-term capital
gain or loss if the shares have been held for more than one year.
Generally, any loss realized on a sale or exchange will be disallowed to
the extent shares disposed of are replaced within a period of sixty-one
days beginning thirty days before and ending thirty days after the shares
are disposed of. Any loss realized by a shareholder on the sale of shares
of the Fund held by the shareholder for six months or less will be
disallowed to the extent of any Exempt Interest Dividends received by the
shareholder with respect to such shares, and will be treated for tax
purposes as a long-term capital loss to the extent of any distributions of
net capital gains received by the shareholder with respect to such shares.
In certain circumstances (such as the exercise of an exchange privilege), a
load charge may not be taken into account in determining the gain or loss
on the sale on redemption of shares in the Fund within 90 days of their
acquisition. In such case, the load charge is treated as incurred with
respect to the shares subsequently purchased.
Under the Internal Revenue Code, interest on indebtedness incurred or
continued to purchase or carry Fund shares which is deemed to relate to
exempt-interest dividends is not deductible.
Entities or persons who are "substantial users" (or related persons) of
facilities financed by "private activity" bonds (some of which were
formerly referred to as "industrial development" bonds) should consult
their tax advisers before purchasing shares of the Fund. "Substantial
user" is defined generally as including a "non-exempt person" who regularly
uses in its trade or business a part of a facility financed from the
proceeds of industrial development bonds.
Statements as to the tax status of dividends and distributions, and as to
the portion thereof attributable to each state of the United States, will
be mailed annually to shareholders. Shareholders should consult their own
tax advisers with respect to their own tax situations, including with
respect to any applicable state taxes applicable to an investment in the
Fund.
WHAT IS THE FUND'S PLAN OF DISTRIBUTION?
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. Under the terms of the
Plan, the Fund pays the Distributor a monthly fee equivalent on an annual
15
<PAGE>
basis to .25 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, currently are prohibited from engaging in the business of
underwriting, selling or distributing certain types of securities. Such
institutions will only be allowed to provide administration, shareholder
service, and distribution assistance if the scope of the assistance is such
that, in the opinion of the Distributor, it does not fall within the
aforementioned prohibition.
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. Its 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 OFFER?
Information about various shareholder services is included above under "How
Can You `Sell' Your Shares?" In addition, the Fund also provides the
following services:
What About Shareholder Information?
For general information about the Fund, call or write ARM 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.
What Reports Will You Receive From the Fund?
As a shareholder, you will receive the Fund's annual and semi-annual
reports. You also will receive quarterly account statements confirming
dividends paid by the Fund, transactions in your account 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. Any existing certificates may be
sent to the Shareholder Servicing Agent to be transferred in your account
to book credits.
Other Services
Pre-Authorized Payments enable you to purchase Fund shares by authorizing
your bank to make regular payments from your bank account in fixed amounts.
16
<PAGE>
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.
GENERAL INFORMATION ABOUT STATE BOND TAX EXEMPT FUND
State Bond Tax Exempt Fund is an investment portfolio of State Bond
Municipal Funds, Inc., a diversified open-end investment company, or mutual
fund, incorporated in Maryland on April 23, 1982. The Fund has only one
class of capital stock, common shares par value $.00001 per share. Each
outstanding share has one vote and an equal right to dividends and
distributions, if any. All shares have noncumulative voting rights for the
election of directors. Each share is fully paid and nonassessable, and each
is freely transferable.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Fund may refer to
"yield," "tax equivalent yield," "average annual total return,"
"cumulative total return" or data concerning the Fund's performance since
its inception. When the Fund advertises yield, it also will advertise its
average annual total return for the most recent one year, five year, and
ten year periods.
When the advertised yield of the Fund is characterized as the "SEC 30-day
yield," it will be based upon a 30-day period stated in the advertisement
and calculated in accordance with a standardized method promulgated by
regulations of the Securities and Exchange Commission. Such yield is
calculated by dividing the net investment income per share (as defined in
such regulations) earned during the period by the maximum offering price
per share on the last day of the period. Maximum offering price includes
the maximum sales charge and any other nonrecurring charges. The result is
then annualized using a formula that provides for semi-annual compounding
of income. The tax-equivalent yield is calculated based on the Fund's
yield, except that the yield is increased by using a stated income tax to
demonstrate the taxable yield necessary to produce an after-tax yield
equivalent to the Fund's yield.
Average annual total return is calculated by finding the average annual
compounded rate of return over the period that would equate the initial
investment to the ending redeemable value. Cumulative total return is the
percentage change between the public offering price of one Fund share at
the beginning of a period and the net asset value of that share at the end
of the period with dividend and capital gain distributions treated as
reinvested. In calculating the average annual total return and cumulative
total return, the maximum sales charge is deducted from the hypothetical
investment and all dividends and distributions during the period are
assumed to be reinvested.
The Fund may from time to time compare its investment results to various
unmanaged indices or other mutual funds in reports to shareholders, sales
literature, and advertisements. This may include comparisons of relative
performance based upon data provided by services such as Lipper Analytical
Services, Incorporated. The results may be calculated on a total return
and/or yield basis for various periods, with or without sales charges.
Results without a sales charge will be higher. Total returns assume the
reinvestment of all dividends and capital gain distributions. The Fund also
may refer to publications which have mentioned the Fund, its Manager, or
their personnel.
For additional information regarding the calculation of the Fund's yield,
tax equivalent yield and total return, see "Calculation of Performance
Data" in the Statement of Additional Information.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
17
<PAGE>
The Fund's investment performance during the year ended June 30, 1996, was
primarily affected by changes in interest rates and the investment
decisions related to those changes. During the fiscal year ended June 30,
1996, the Federal Reserve reversed its position of the previous year and
became accommodative with reductions of .25% to the Federal Fund's rate in
July 1995, December 1995, and January 1996. With these decreases, the 30
year Treasury Bond yield, which began the fiscal year at 6.6%, decreased to
below 6.0% in December 1995. However, economic activity began to increase
during the first quarter of 1996, and continued through June. This economic
strength resulted in the 30 year Treasury Bond yield increasing to the 6.9%
level at June 30, 1996.
Due to the declining interest rate levels of the third and fourth quarters
of 1995, the Fund attempted to hold its higher yielding quality bonds and
did little trading. With the increased interest rates experienced in the
second quarter of 1996, the Fund did some trading of bonds, purchasing
issues having maturities of 15 to 25 years. These purchased bonds extended
the portfolio's duration, but more importantly, produced higher yields for
the Fund's shareholders.
The Fund continued its practice of maintaining a conservative, high quality
investment portfolio by limiting its investments to only A-rated or higher
securities, and selling any securities that receive a downgrade to a rating
below the A quality level. This resulted in the Fund's portfolio having a
weighted average quality of AA at the conclusion of the fiscal year ended
June 30, 1996.
The Fund's average annual total return for the period ended June 30, 1996
(including the effects of the one time sales charge) was as follows:
<TABLE>
<CAPTION>
<S> <C>
One Year.................... 0.77%
Five Year................... 5.79%
Ten Year.................... 7.05%
Life of Fund................ 8.17%
</TABLE>
Past performance is not predictive of future performance.
The following chart compares the performance of a hypothetical $10,000
investment in the Fund over the last 10 years to the performance of an
investment in the Lehman Brothers Municipal Bond Index (the "Index"). The
information in the chart assumes that the maximum current sales charge was
paid upon acquisition of the Fund shares and reflects all expenses during
the period covered. The information in the chart regarding the performance
of the hypothetical investment in the Index assumes that no sales charge
was paid upon an investment in the Index and that there were no expenses
associated with an investment in the Index.
<TABLE>
<CAPTION>
Year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund $10,185 $10,948 $12,398 $13,137 $14,239 $15,689 $17,148 $17,414 $18,726 $19,763
Performance
- --------------------------------------------------------------------------------------------------------
Index $12,789 $13,738 $15,303 $16,345 $17,818 $19,915 $22,297 $22,335 $24,305 $25,918
Performance
- --------------------------------------------------------------------------------------------------------
</TABLE>
[ADD GRAPH]
18
<PAGE>
All performance data and figures are based upon past performance. The
investment return on and principal value of an investment in the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
The above performance data for the Fund assumes the applicability of the
current maximum sales charge and does not include adjustments for expenses
which have changed during the periods reflected. The performance of the
Fund is affected by the imposition of the Rule 12b-1 plan, effective
November 1, 1991, under which Fund assets are used to pay distribution and
account servicing costs. See "What Is The Plan of Distribution?" above.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION
REFERRED TO ON THE COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, THE MANAGER OR ARM FINANCIAL SERVICES, INC. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN A
STATE 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.
19
<PAGE>
STATE BOND
TAX EXEMPT
FUND
- --------------------------------
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069.
INVESTMENT MANAGER:
ARM Capital Advisors, Inc.
200 Park Avenue
20th Floor
New York, New York 10166
DISTRIBUTOR
ARM Financial Services, Inc.
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069.
TRANSFER, REDEMPTION AND
OTHER SHAREHOLDER
ACCOUNT SERVICES:
ARM Transfer Agency, Inc.
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069.
PORTFOLIO SECURITIES
CUSTODIAN:
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105.
PROSPECTUS
NOVEMBER 1, 1996
STATE BOND
TAX EXEMPT FUND
[LOGO]
A MUTUAL FUND SEEKING
TO MAXIMIZE
CURRENT INCOME
EXEMPT FROM FEDERAL
INCOME TAXES TO THE
EXTENT CONSISTENT WITH
PRESERVATION OF CAPITAL
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1996
STATE BOND TAX EXEMPT 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 Tax Exempt Fund, (the "Fund")
dated November 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>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS? 2
CALCULATION OF PERFORMANCE DATA 5
WHAT ARE THE FUND'S INVESTMENT LIMITATIONS? 8
WHO MANAGES THE FUND? 9
(See in the Prospectus "How is the Fund Managed?")
THE MANAGER 13
MANAGEMENT AGREEMENT AND EXPENSES 13
(See in the Prospectus "How is the Fund Managed?")
TRANSFER AGENT 15
PLAN OF DISTRIBUTION 15
CUSTODIAN 16
INDEPENDENT AUDITORS 16
PORTFOLIO TRANSACTIONS 16
(See in the Prospectus "What Are the Fund's Brokerage Commission?")
PURCHASE OF SHARES 17
HOW IS THE OFFERING PRICE DETERMINED? 18
HOW ARE SHARES DISTRIBUTED? 19
HOW CAN YOU "SELL" YOUR SHARES? 19
HOW IS NET ASSET VALUE PER SHARE DETERMINED? 19
WHAT IS THE TAX STATUS OF THE FUND? 20
WILL THE FUND WITHHOLD TAXES ON DISTRIBUTIONS? 20
GENERAL INFORMATION 20
ACCOUNTANTS' REPORT 17
FINANCIAL STATEMENTS 2
APPENDIX A A-1
</TABLE>
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 NOVEMBER 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.
1
<PAGE>
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?
The Fund seeks to maximize current income exempt from federal income
taxes to the extent consistent with preservation of capital, with consideration
given to the opportunity for capital gain. In pursuing its goals, the Fund
invests at least 80% of the value of its assets in securities of states,
territories, and possessions of the United States and the District of Columbia,
and their political subdivisions, agencies, and instrumentalities, the interest
on which is exempt from federal income taxes ("Tax Exempt Securities").
The Tax Exempt Securities in which the Fund invests primarily consist
of a diversified portfolio of bonds rated Aaa, Aa, A, or Baa by Moody's
Investors Service, Inc. ("Moody's") or rated AAA, AA, A, or BBB by Standard &
Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc. ("S&P"),
notes rated MIG-1, MIG-2, MIG-3 or MIG-4 by Moody's or SP-1, SP-2 or SP-3 by
S&P, and commercial paper rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by
S&P. The Fund will under no circumstances invest more than 25% of its assets in
securities not rated at the time of purchase within the grades referred to
above.
The Fund may, however, invest in Tax Exempt Securities which are not
rated if, in the judgment of ARM Capital Advisors, Inc. the Fund's investment
manager (the "Manager"), the securities are of comparable quality to the rated
securities in which the Fund may invest. In determining suitability of
investment in an unrated security, the Manager will take into consideration
asset and debt service coverage, the purpose of the financing, history of the
issuer, existence of other rated securities of the issuer and other
considerations as may be relevant, including comparability to other issuers.
As a matter of fundamental policy, at least 80% of the value of the
Fund's assets will be invested in Tax Exempt Securities. Up to 20% of the assets
of the Fund may generate interest that is an item of tax preference for purposes
of the federal alternative minimum tax ("AMT").
In addition, while the Fund attempts, under normal market conditions,
to invest 100% of the value of its assets in Tax Exempt Securities, the Fund
temporarily may invest up to 20% of the value of its assets in taxable
obligations (i) when the Manager believes abnormal market conditions dictate a
temporary defensive posture in taxable obligations; (ii) pending investment of
proceeds of sales of shares or reinvestment of proceeds of sales of portfolio
securities; or (iii) to meet redemptions of shares by investors. The taxable
obligations in which the Fund may invest are obligations of the United States
government, its agencies or instrumentalities; other debt securities rated
within the two highest grades by either Moody's or S&P (or if unrated, of
comparable quality in the opinion of the Manager); commercial paper rated in the
two highest grades by either of such rating services (or of comparable quality);
certificates of deposits, letters of credit and bankers' acceptances of domestic
banks and savings institutions having total assets over one billion dollars or
certificates of deposit of other domestic banks or savings institutions which
are fully insured by the Federal Deposit Insurance Corporation; and repurchase
agreements with respect to any of the foregoing investments or Tax Exempt
Securities which qualify for investment by the Fund. The Fund may also hold its
assets in cash.
A description of the grades of Tax Exempt Securities, debt securities,
and commercial paper in which the Fund may invest is set forth in Appendix A to
this Statement of Additional Information. The ratings of Moody's and S&P
represent their respective opinions of the qualities of the securities they
undertake to rate and such ratings are general and are not absolute standards of
quality.
2
<PAGE>
Tax Exempt Securities.
- ---------------------
The Tax Exempt Securities in which the Fund invests consist of bonds,
notes, and commercial paper issued by states, territories, and possessions of
the United States and the District of Columbia, and their political
subdivisions, agencies, and instrumentalities.
Bonds are debt obligations issued to obtain funds for various public
purposes, such as the construction or improvement of public facilities including
airports, highways, hospitals, housing, nursing homes, parks, public buildings,
recreational facilities, school facilities, and sewer and water works. Other
public purposes for which bonds may be issued include the refunding of
outstanding obligations, the anticipation of taxes or state aids, the payment of
judgments, the funding of student loans, community redevelopment, district
heating, the purchase of street maintenance and fire fighting equipment, or any
authorized corporate purpose of the issuer, except the payment of current
expenses. Notes and commercial paper are generally used to provide for short-
term capital needs and ordinarily have a maturity of up to one year. Notes are
frequently issued in anticipation of tax revenue, revenue from other government
sources or revenue from bond offerings. Short-term, unsecured commercial paper
is often used to finance seasonal working capital needs or to provide interim
construction financing.
In addition, certain types of securities (generally referred to as
"private activity bonds") may be issued by or on behalf of public authorities to
finance privately operated pollution control facilities, certain local water
supply, gas, electricity or waste disposal facilities, and the construction or
improvement of certain other privately operated facilities.
Tax Exempt Securities may also be classified into two types of
obligations: general obligation and limited obligation (or revenue) securities.
General obligation securities involve the pledge of the full faith and credit of
an issuer possessing taxing power and are payable from the issuer's general
unrestricted revenues and not from any particular fund or revenue source. The
characteristics and methods of enforcement of general obligation securities vary
according to the law applicable to the particular issuer. Limited obligation
(revenue) securities are payable only from the revenues derived from a
particular facility or class of facilities, or a specific revenue source, such
as the user of the facility. Private activity bonds are in most cases limited
obligation bonds payable solely from specific revenues of the project to be
financed. The credit quality of private activity bonds is therefore usually
directly related to the credit standing of the user of the facility (or the
credit standing of a third-party guarantor or other credit enhancement
participant, if any).
Like all debt obligations, Tax Exempt Securities are subject to credit
risk and market risk. Credit risk relates to the issuer's ability to make timely
payments of principal and interest. Market risk relates to the changes in market
values that occur as a result of variations in the level of prevailing interest
rates, yield relationships and other factors in the tax exempt securities
market. Generally, higher quality tax exempt securities will provide a lower
yield than lower quality tax exempt securities of similar maturity and are
subject to lesser credit risks than lower quality tax exempt securities.
Furthermore, for any given change in the level of interest rates, prices tend to
fluctuate less for higher quality issues than for lower quality issues, and more
for longer maturity issues than for shorter maturity issues.
For the purpose of the Fund's investment restrictions, the
identification of the "issuer" of Tax Exempt Securities which are not general
obligation bonds is made by the Fund's Manager on the basis of characteristics
of the obligation, the most significant of which is the source of funds for the
payment of principal of and interest on such securities. If the assets and
revenues of an agency, authority, instrumentality or other political subdivision
are separate from those of the government creating the subdivision and the
obligation is backed only
3
<PAGE>
by the assets and revenues of the subdivision, such subdivision is regarded as
the sole issuer. Similarly, in the case of a private activity bond, if the bond
is backed only by the assets and revenues of the nongovernmental user, the
nongovernmental user is regarded as the sole issuer. If in either case the
creating government or another entity guarantees an obligation, the guaranty is
regarded as a separate security and treated as an issue of such guarantor.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on Tax Exempt Securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of Tax Exempt
Securities for investment by the Fund would be reduced, and the value of the
Fund's portfolio may be affected. In such event, the Fund may re-evaluate its
investment goals, policies, and limitations.
Fixed-Income Securities
- -----------------------
Although the Manager seeks to manage the Fund with a view toward
reducing the price volatility of its portfolio, it can be expected that the net
asset value of the Fund will change with changes in the value of its portfolio
securities. When interest rates decline, the value of a fixed-income portfolio
can be expected to rise. Conversely, when interest rates rise, the value of a
fixed-income portfolio can be expected to decline.
Interest rate fluctuations may affect payment expectations on fixed-
income securities. For example, certain municipal obligations may contain
redemption or call provisions. If an issuer exercises these provisions in a
declining interest rate market, the Fund would likely have to replace the
security with a lower yielding security, resulting in a decreased return for
investors. Conversely, a municipal obligation's value will decrease in a rising
interest rate market, resulting in a decrease in the value of the Fund's assets.
If the Fund experiences unexpected net redemptions, this may force it to sell
its portfolio securities without regard to their investment merits, thereby
decreasing the asset base upon which the Fund's expenses can be spread and
possibly reducing the Fund's rate of return.
High-Yield Securities
- ---------------------
The Fund currently does not invest in securities rated below A by S&P
or Moody's, and has no current intention of investing in such securities. The
Fund is not, however, prohibited by any fundamental policy from investing in
such securities.
Securities rated BB or B by S&P or Ba or B by Moody's (or equivalently
rated by another nationally recognized statistical rating organization) are
below investment grade and generally will involve more credit risk than
securities in the higher rating categories. Such bonds are commonly known as
"junk" bonds. In some cases such securities are subordinated to the prior
payment of senior indebtedness, thus potentially limiting the holder's ability
to receive payments or to recover full principal when senior securities are in
default. Also, during an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet projected business goals, and to obtain additional
financing. If the Fund did acquire any such securities, upon any default, the
Fund could incur additional expenses to the extent it is required to seek
recovery of the payment of principal or interest on the relevant portfolio
holding.
In addition, lower rated securities may be thinly traded, which may
have an adverse impact on market price and the ability of the holder to dispose
of particular issues when necessary to meet its liquidity needs or in response
to a specific economic event such as a deterioration in the creditworthiness of
the issuer. A thinly traded
4
<PAGE>
market also may interfere with the ability of the holder to accurately value
high-yield securities and, consequently, value the Fund's assets. Furthermore,
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the value and liquidity of high-yield securities,
especially in a thinly traded market.
Yields on high-yield securities will fluctuate over time. The prices
of high-yielding securities have been found to be less sensitive to interest
rate changes than higher-rated investments, but more sensitive to adverse
economic changes or developments affecting the issuer. In addition, periods of
economic uncertainty and changes can be expected to result in increased
volatility of market prices of high-yielding securities and, to the extent the
Fund acquires such securities, the Fund's asset value.
Portfolio Turnover
- ------------------
Portfolio transactions will be undertaken principally to accomplish
the Fund's goals in relation to anticipated movements in the general level of
interest rates, but the Fund may also engage in short-term trading consistent
with its goals. Securities may be sold in anticipation of a market decline (a
rise in interest rates) or purchased in anticipation of a market rise (a decline
in interest rates) and later sold. In addition, a security may be sold and
another purchased at approximately the same time to take advantage of what the
Manager believes to be a temporary disparity in the normal yield relationship
between the two securities. Yield disparities may occur for reasons not
directly related to the investment quality of particular issues or the general
movement of interest rates, due to such factors as changes in the overall demand
for or supply of various types of Tax Exempt Securities or changes in the
investment objectives of investors.
The Fund's investment policies may lead to frequent changes in
investment, particularly in periods of rapidly fluctuating interest rates. A
change in securities held by the Fund is known as "portfolio turnover" and may
involve the payment by the Fund of dealer mark-ups or underwriting commissions,
and other transaction costs, on the sale of securities, including Tax Exempt
Securities, as well as on the reinvestment of the proceeds in other securities.
Portfolio turnover rate for a fiscal year is the ratio of the lesser of
purchases or sales of portfolio securities to the monthly average of the value
of portfolio securities, excluding securities whose maturities at acquisition
were one year or less. The Fund's portfolio turnover rate will not be a limiting
factor when the Fund deems it desirable to sell or purchase securities. The
Fund's portfolio turnover rate was 16% for the Fund's fiscal year ended June 30,
1996.
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Fund may quote "SEC
30-day yield," "tax-equivalent yield," and "total return" data. Such
performance data is computed on a standardized basis pursuant to formulas
established by the rules and regulations of the Securities and Exchange
Commission.
SEC 30-Day Yield
- ----------------
The Fund's SEC 30-day yield for the 30-day period ended June 30, 1996
was 4.65%. Such yield is computed by dividing the net investment income per
share (as defined under Securities and Exchange Commission rules and
regulations) earned during the computation period by the maximum offering price
per share on the last day of the period, according to the following formula:
5
<PAGE>
6
YIELD = 2[(a-b +1) -1]
---
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the
period.
Tax Equivalent Yield
- --------------------
The Fund's tax equivalent yield for the 30-day period ended June 30,
1996 was 7.41%. The Fund calculates its tax equivalent yield over a 30-day
period. The tax equivalent yield will be determined by first computing the
yield as discussed above. The Fund will then determine what portion of the
yield is attributable to securities, the income of which is exempt for federal
tax purposes. This portion of the yield will then be divided by one minus 39.6%
(the assumed maximum tax rate for individual taxpayers not subject to the
Alternative Minimum Tax) and then added to the portion of the yield that is
attributable to other securities.
The Fund's tax equivalent yield is calculated according to the
following formula:
Tax Equivalent Yield = Yield
------
1-.396
Average Annual Total Return
- ---------------------------
The Fund's average total annual return over the one, five, and ten-year
periods ended June 30, 1996 were as follows:
<TABLE>
<CAPTION>
One Year Five Years Ten Years
-------- ---------- ---------
<S> <C> <C> <C>
Average Annual
Total Return 0.77% 5.79% 7.05%
</TABLE>
The average annual total return figures are computed by finding the
average annual compounded rates of return over the periods indicated that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
6
<PAGE>
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period.
This calculation deducts the maximum sales charge from the initial
hypothetical $1,000 investment, assumes all dividends and capital gains
distributions are reinvested at net asset value on the appropriate reinvestment
dates as described in the Prospectus, and includes all recurring fees, such as
investment advisory and management fees, charged to all shareholder accounts.
Cumulative Total Return
- -----------------------
Cumulative total return is computed by finding the cumulative compound rate
of return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeeming value, according to the
following formula:
CTR = ERV - P X 100
-------
P
Where: CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of period.
P = initial payment of $1,000
This calculation assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
Other Yields
- ------------
Current and effective yields of the Fund, not calculated in accordance with
the guidelines of the SEC as explained above, also may be quoted in reports and
sales literature. Non-SEC current yield is computed based upon a recent seven-
calendar-day period 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 the period, dividing the net change in account value
by the value of the account at the beginning of the period to obtain a base
period return, and multiplying the base period return by 365/7. Non-SEC
effective yield is computed by annualizing the seven-day return with all
dividends reinvested in additional Fund shares. The Fund's non-SEC yield
quotation may be inclusive or exclusive of taxable income, if any, as indicated
in such quotation. The Fund's non-SEC yield may fluctuate daily depending upon
such factors as market conditions, the composition of the Fund's portfolio,
7
<PAGE>
and operating expenses. Therefore, the Fund's non-SEC yield in the future may
be higher or lower than its past non-SEC yields and there can be no assurance
that historical yields will continue. That the Fund's non-SEC current yield
will fluctuate and that shareholders' principal is not guaranteed or insured
should be taken into account when comparing the yield on an investment in Fund
shares with yields on fixed-yield investments, such as insured savings accounts.
These factors and possible differences in the methods used in calculating non-
SEC yield should be considered when comparing the Fund's non-SEC current yield
to non-SEC yields published for other investment companies and other investment
vehicles. Yield also should be considered relative to changes in the value of
the Fund's shares and the Fund's investment goals and policies.
WHAT ARE THE FUND'S INVESTMENT LIMITATIONS?
Under the Fund's fundamental policies, which cannot be changed except by
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. As to 100% of the value of its total assets, purchase securities of any
issuer if immediately thereafter more than 5% of total assets at market
value would be invested in the securities of any one issuer, except that
this limitation does not apply to obligations issued or guaranteed as to
principal and interest either by the U.S. Government or its agencies or
instrumentalities;
4. Buy or hold any real estate or real estate investment trust securities;
5. Buy or hold any commodity or commodity futures contracts, or any oil, gas
or mineral exploration or development program;
6. Make loans except to the extent that the purchase of notes, bonds or debt
obligations or the entry into repurchase agreements 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. Buy securities which have legal or contractual restrictions on resale,
except in connection with repurchase agreements; or
11. 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.
8
<PAGE>
If a percentage restriction described above is complied with at the time an
investment is made, a later increase or decrease in percentage resulting from a
change in values of portfolio securities or in the amount of net assets of the
Fund will not be considered a violation of any of those restrictions. During the
past fiscal year the Fund did not borrow any money, and the Fund has no current
intention of borrowing in the foreseeable future.
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 present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
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.
<TABLE>
<CAPTION>
Other Business
Name, Age and Address Position with the Fund Activities in Past 5 Years
- --------------------- ---------------------- --------------------------
<S> <C> <C>
William B. Faulkner (68) Director President, William
240 East Plato Blvd. Faulkner & Associates,
St. Paul, Minnesota 55107 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,
425 Portland Avenue Strategic Integration
Minneapolis, Minnesota Unit, Star Tribune/Cowles
55488 Media Company, since
August 1995; 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
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
<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.
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.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- --------------------- ---------------------- -----------------------------------------
<S> <C> <C>
Theodore S. Rosky (58) 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.
Dale C. Bauman (59) President Vice President and Sales Manager, SBM
8400 Normandale Lake Blvd. Financial Services, Inc., since June
Suite 1150 1992; prior thereto, Vice President and
Minneapolis, Minnesota 55437 Division Manager, SBM 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
200 Park Avenue, 20th Floor Advisors, Inc. since June 14, 1995;
New York, New York 10166 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.
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.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- --------------------- ---------------------- -----------------------------------------
<S> <C> <C>
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. since
December 14, 1992; 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.
</TABLE>
- ---------------
* Mr. Lindholm is an interested person, as defined in the 1940 Act, by virtue
of his positions with ARM Financial Group, Inc.
Directors of the Fund (including former Directors) received aggregate
remuneration of $5,716 during the Fund's fiscal year ended June 30, 1996.
Directors and officers of the Fund as a group owned directly or indirectly 1,227
shares, or 0.02%, of the Fund's capital stock at June 30, 1996.
The following table sets forth, for the fiscal year ended June 30, 1996,
compensation paid by the Fund to the non-interested Directors and, for the 1995
calendar year, the aggregate compensation paid by the six funds in the State
Bond Group of mutual funds to the non-interested Directors. Directors who are
interested persons, as defined in the 1940 Act, received no compensation from
the Fund.
12
<PAGE>
<TABLE>
<CAPTION>
Total Compensation
from State Bond
Aggregate Group of Mutual
Compensation Funds and The
Name of Director from Fund (a) Legends Fund, Inc.(b)
- ---------------- ------------- ---------------------
<S> <C> <C>
William B. Faulkner $1,336 $15,514
Patrick Finley* $ 222 $ 1,332
Arthur Gartland* $ 150 $ 900
John Katz $1,336 $15,514
Chris L. Mahai $1,336 $ 8,014
Theodore S. Rosky $1,336 $15,514
</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 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 $5.9 billion.
The Manager is also manager of the other mutual funds in the State Bond
Group of mutual funds: State Bond Cash Management Fund, State Bond Common Stock
Fund, State Bond Diversified Fund, State Bond Minnesota Tax-Free Income Fund,
and State Bond U.S. Government and Agency Securities Fund.
MANAGEMENT AGREEMENT AND EXPENSES
13
<PAGE>
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, equal to an annual fee of .5 of 1% of the average
daily net assets of the Fund. The Manager received a management fee of $407,880
during the fiscal year ended June 30, 1996, and a management fee of $35,996 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 June 30,
1995. The predecessor to the Manager, SBM Company, was paid the following
amounts by the Fund as a management fee during its fiscal years ended June 30,
1995 and 1994, respectively: $369,459; and $408,475. The Manager has
voluntarily undertaken, and SBM Company previously voluntarily undertook, to
reimburse the Fund for any expenses incurred by it in excess of 1% of average
daily net assets, despite the fact that higher expenses may be permitted by
state law. No reimbursements by SBM Company or the Manager were required for
the Fund's fiscal years ended June 30, 1996, 1995, and 1994.
The Fund pays all its expenses other than those assumed by the Manager,
including the investment advisory and management fee; the charges of custodians,
transfer agents, accounting services agents and other agents; bookkeeping,
recordkeeping and Fund portfolio and share pricing expenses; expenses of issue,
repurchase and redemption of shares; the expenses of registering and qualifying
shares for sale; the cost of reports by SBM Company or the Manager and notices
to shareholders; costs of shareholder and other meetings of the Fund; travel
expenses of officers, directors, and employees of the Fund; the expenses of
preparing, setting in print, printing, and distributing prospectuses and
Statements of Additional Information, if any, to existing shareholders; outside
auditing and legal fees; interest, taxes, and governmental fees; expenses
incurred in connection with membership in investment company organizations;
brokerage commissions; the fees of independent directors and the salaries of any
officers or employees who are not affiliated with the Manager; its pro rata
portion of the 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 for a period of more than two years from the
date of its execution only so long as such continuance is specifically approved
at least annually by either the Board of Directors or by a vote of the majority
of the outstanding voting shares of the Fund, 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.
14
<PAGE>
Accounting Services Agreement
Prior to June 1, 1995 SBM Company also acted as the accounting services
agent for the Fund pursuant to a separate agreement. Under this agreement, SBM
Company was paid a fee for keeping current the books, accounts, records,
journals, and other records of original entry relating to the business of the
Fund. The Manager received $0 and $1,125, respectively, from the Fund for
accounting services the Manager provided for the fiscal year ended June 30, 1996
and for the period June 1, 1995 to June 14, 1995. SBM Company, as the Fund's
previous accounting services agent, received the following amounts from the Fund
for its fiscal years ended June 30, 1995, and 1994, respectively: $24,750; and
$27,000.
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 $16,939 in transfer agency fees
from the Fund for the fiscal year ended June 30, 1996. SBM Financial Services,
Inc. served as the Fund's transfer agent for the period June 1, 1995 to June 30,
1995 and for the period July 1, 1995 to January 31, 1996, and received $3,135
and $14,522 in transfer agency fees for such periods, respectively. SBM Company
served as the Fund's previous transfer agent, for which it received the
following amounts from the Fund for the fiscal years ended June 30, 1995, and
1994, respectively: $27,965; and $32,300.
PLAN OF DISTRIBUTION
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 the Fund pays
certain expenses of distribution of the Fund's shares and shareholder servicing,
as described below.
ARM Financial Services, Inc. (the "Distributor"), a subsidiary of ARM, acts
as distributor of the shares of the Fund and of the other mutual funds in the
State Bond Group. Under the Plan the Fund pays to the Distributor a fee to be
used to compensate those who provide administration, shareholder service, and
distribution assistance and to pay other expenses of selling Fund shares. The
Distributor receives a monthly fee equivalent on an annual basis to .25 of 1% of
the average daily net assets of the Fund. A portion of the fee 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.
During the fiscal year ended June 30, 1996, the Distributor received
$204,057 in such fees. The Distributor used these fees to cover the following
expenses: compensation of sales personnel - $155,082; compensation of marketing
and sales administration personnel - $44,238; marketing materials - $8,967; and
promotion and travel - $5,923.
15
<PAGE>
The arrangements under which the Fund compensates, indirectly, those who
provide administration, shareholder service, and distribution assistance, as
described above, are set forth in the Plan. 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 and by the Directors 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 agreement related to the Plan;
(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 holders of a majority of the Fund's outstanding shares. 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 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.
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.
PORTFOLIO TRANSACTIONS
As the Fund's portfolio is exclusively composed of debt (rather than
equity) securities, most of the Fund's portfolio transactions are effected with
dealers without the payment of brokerage commissions, but at net prices which
usually include a spread or markup. Most Fund transactions are with the issuer,
or with major dealers acting for their own account and not as brokers. In
effecting portfolio transactions the Fund seeks the most favorable net price
consistent with the best execution. However, frequently the Fund selects a
dealer to effect a
16
<PAGE>
particular transaction without contacting all dealers who might be able to
effect such transaction, because of the volatility of the market and the desire
of the Fund to accept a particular price for a security because the price
offered by the dealer meets its guidelines for profit, yield, or both. No
brokerage is allocated for the sale of Fund shares.
While it is not expected that the Fund will effect any transactions on an
agency basis, if it does so the Manager will seek to obtain the best price and
execution of orders. Commission rates, being a component of price, are
considered together with other relevant factors. When consistent with these
criteria, business may be placed with broker-dealers who furnish investment
research services to the Manager. Such research services include advice, both
directly and in writing, as to the value of securities, the advisability of
investing in, purchasing, or selling securities, and the availability of
securities or purchasers or sellers of securities, as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts. This allows the Manager to
supplement its own investment research activities and enables it to obtain the
views and information of individuals and research staffs of many different
securities research firms prior to making investment decisions for the Fund. To
the extent portfolio transactions are effected with broker-dealers who furnish
research services to the Manager, the Manager receives a benefit, not capable of
evaluation in dollar amounts.
The Manager has not entered into any formal or informal agreements with any
broker-dealers, and it does not maintain any "formula" which must be followed in
connection with the placement of Fund portfolio transactions in exchange for
research services provided the Manager, except as noted below. If it is believed
to be in the best interests of the Fund, the Manager may place portfolio
transactions with brokers who provide the types of services described above,
even if it means the Fund will have to pay a higher commission (or, if the
broker's profit is part of the cost of the security, will have to pay a higher
price for the security) than would be the case if no weight were given to the
broker's furnishing of those services. This will be done, however, only if, in
the opinion of the Manager, the amount of additional commission or increased
cost is reasonable in relation to the value of the services. The Manager also
serves as investment adviser for other mutual funds. To the extent that the Fund
may pay a somewhat higher brokerage commission or somewhat higher price on a
trade because such trade is executed by a broker-dealer which also provides
research and statistical services, it is possible that said research and
statistical services may also be of value to one of the other mutual funds.
However, it is felt that this possibility of mutual benefit is not capable of
measurement.
No brokerage commissions were paid by the Fund in any of the fiscal years
ended June 30, 1996, 1995 and 1994.
PURCHASE OF SHARES
What Reductions Are Provided?
Volume Discounts are provided if the total amount being invested in shares
of the Fund alone, or in any combination of shares of the Fund and the other
funds in the State Bond Group having a sales charge, reaches levels indicated in
the sales charge schedule set forth in the Prospectus.
The Right of Accumulation allows you to combine the amount being invested
in shares of the Fund and the other mutual funds in the State Bond Group having
a sales charge with the total net asset value of shares of those mutual funds
already owned and the total net asset value of shares you own of State Bond Tax
Exempt Fund which were acquired through an exchange of shares of another mutual
fund in the State Bond Group to
17
<PAGE>
determine reduced sales charges in accordance with the schedule in the
Prospectus. The value of the shares owned, including the value of shares of
State Bond Tax Exempt Fund acquired in an exchange, will be taken into account
in orders placed, however, only if the Distributor is notified by you or your
dealer of the amount owned at the time your purchase is made and is furnished
sufficient information to permit confirmation.
The schedule of sales charges is also applicable to the aggregate amount of
purchases made by a single person within a period of 13 months pursuant to a
written Purchase Intention and Price Agreement (the "Letter of Intent"), a form
of which is available from the Distributor. The Letter of Intent provides for a
price adjustment applicable to the amount of intended purchases specified in the
Letter of Intent based upon the amount of purchases specified plus the total net
asset value of the shares of the other mutual funds in the State Bond Group
already owned that have a sales charge and the total net asset value of the
shares owned of State Bond Tax Exempt Fund which were acquired through an
exchange of shares. The investor considering the possibility of signing a Letter
of Intent should read it carefully. The schedule of sales charges applicable to
all amounts invested under the Letter of Intent is computed as if the aggregate
amount had been invested immediately. Reduced sales charges also may apply to
purchases made within a 13-month period starting up to 90 days before the date
of execution of the Letter of Intent. Shares with a net asset value equal to 5%
of the minimum purchase amount specified are held in escrow to be applied toward
any sales charge deficiency that might result if the Letter of Intent is not
completed. The shares so held may be redeemed and proceeds thereof used as
required to pay additional sales charges which may be due if the amount of
purchases by such person during the 13 month period aggregates less than the
amount specified in the Letter of Intent. Escrow shares not redeemed will be
delivered to the investor upon completion of purchases under the Letter of
Intent.
If the gross amount invested within the 13 month period covered by the
Letter of Intent exceeds the specified purchase amount and reaches a level
allowing a smaller sales charge, a price adjustment will be made on the day it
reaches the new level. The Letter of Intent is not a binding agreement upon the
investor to purchase, or the Fund to sell, the full indicated amount.
Who Is Entitled To Reductions?
Reductions in sales charges apply to purchases by a "single person,"
including an individual; members of a family unit comprising husband, wife, and
minor children; or a trustee or other fiduciary purchasing for a single
fiduciary account, including employee benefit plans qualified under Section 401
of the Internal Revenue Code.
HOW IS THE OFFERING PRICE DETERMINED?
The public offering price is determined by dividing the Fund's current net
asset value per share (as described under "How is Net Asset Value Per Share
Determined?") by the sales charge percentage applicable to the transaction. The
following sample calculation is based upon the total net assets of the Fund on
June 30, 1996 of $81,094,562 and the total shares of the Fund outstanding as of
that date of 7,522,296 and a transaction with an applicable sales charge of the
maximum 4.5%.
Net Asset Value Per Share $10.78
($81,094,562 divided by
7,522,296 shares outstanding)
Maximum Offering Price Per Share $11.29
18
<PAGE>
($10.78 divided by .955)
HOW ARE SHARES DISTRIBUTED?
ARM Financial Services, Inc., a subsidiary of ARM, acts as distributor of
the shares of the Fund and of the other mutual funds in the State Bond Group. As
distributor of the Fund's capital stock, ARM Financial Services, Inc. allows
concessions to all dealers up to 4.0% on purchases to which the 4.5% sales
charge applies. The Distributor also pays sales commissions to its own agents
who sell Fund shares. The Distributor retains the balance of sales charges paid
by investors. The sales charges paid by investors and received by the
Distributor amounted to the following amounts during the Fund's fiscal years
ended June 30, 1996, 1995, and 1994, respectively: $94,224; $138,549; and
$191,037. The Distributor retained these entire amounts.
The agreement between the Fund and the Distributor provides that the
Distributor will pay certain expenses such as printing costs of prospectuses and
Statements of Additional Information used in offering shares to prospective
investors, applications and confirmations, and all other expenses in connection
with the issuance and sale of the Fund's shares. The Fund will pay the costs of
registering and qualifying shares for sale and of preparing, setting in print,
and printing and distributing prospectuses to existing shareholders.
HOW CAN YOU "SELL" YOUR SHARES?
The procedure for redemption of Fund shares under ordinary circumstances is
set forth in the Prospectus.
In unusual circumstances, payment may be postponed if the orderly
liquidation of portfolio securities is prevented by the closing of, or
restricted trading on, the New York Stock Exchange during periods of emergency,
or such other periods as ordered by the Securities and Exchange Commission.
HOW IS NET ASSET VALUE PER SHARE DETERMINED?
Net asset value per Fund share is determined as of the close of the New
York Stock Exchange on each day that the New York Stock Exchange is open for
business. The New York Stock Exchange is closed on Saturdays and Sundays and
also is closed in observance of the following holidays: New Year's Day,
Washington's Birthday (Observed), Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day. Net asset value is determined by
dividing the value of the total assets of the Fund, less liabilities, by the
number of shares outstanding.
The securities in which the Fund invests are traded primarily in the over-
the-counter market. Tax Exempt Securities and other short-term holdings maturing
in more than 60 days are valued on the basis of valuations provided by a pricing
service, approved by the Directors, which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities, and various relationships between securities in
determining value. In the absence of such valuations, the valuations of such
securities and holdings are based upon fair value as determined by the Board of
Directors. Taxable securities for which market quotations are readily available
are stated at market value, which currently is determined using the last
reported sale price or, if no sales are reported -- as in the case of most
securities traded over-the-counter -- the last reported bid price, except that
U.S. government securities are
19
<PAGE>
stated as the mean between the last reported bid and asked prices. Short-term
holdings having remaining maturities of 60 days or less are valued at cost plus
accrued interest, which approximates fair market value.
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.
GENERAL INFORMATION
The Fund was incorporated in Maryland on April 23, 1982. Originally, the
name of the Fund was "State Bond Government Securities Fund, Inc.", and its
investment goals were to produce high current income, preserve capital, and
maintain liquidity by investing in securities issued or guaranteed by the United
States Government and its agencies and instrumentalities, and repurchase
agreements secured by such securities. In May 1984, the Fund's sole shareholder
approved an amendment to its articles of incorporation to change its name to
"State Bond Tax Exempt Fund, Inc." and amendments to its investment goals and
policies to those stated herein. In March 1993, the Fund was reorganized as an
individual investment portfolio of a series fund, State Bond Municipal Funds,
Inc.
Under Maryland law, each director of State Bond Municipal Funds, Inc. owes
certain duties to the Fund and its shareholders. Maryland law provides that a
director shall "perform his duties as a director in good faith, in a manner he
reasonably believes to be in the best interests of the corporation and with the
care that an ordinarily prudent person in a like position would use under
similar circumstances." Fiduciary duties of a director of a Maryland corporation
include, therefore, both a duty of "loyalty" (to act in good faith and in a
manner reasonably believed to be in the best interest of the corporation) and a
duty of "care" (to act with the care an ordinarily prudent person in a like
position would use under similar circumstances). Maryland law allows Maryland
corporations to eliminate or limit the personal liability of a director or an
officer to the corporation or its shareholder for monetary damages for breach of
the fiduciary duty of "care".
The Amended and Restated Articles of Incorporation of State Bond Municipal
Funds, Inc. contain a provision eliminating liability of directors and officers
to the corporation or its shareholders to the fullest extent permitted by
Maryland law. Therefore, directors and officers of State Bond Municipal Funds,
Inc. will not be liable for monetary damages to the Fund or its shareholders for
breach of the duty of care. However, such elimination of Maryland law regarding
a director's duty of care does not permit the elimination or limitation of
liability (1) to the extent that it is proved that the person actually received
an improper benefit or profit in money, property or services for the amount of
the benefit or profit in money, property or services actually received; (2) to
the extent that a judgment or other final adjudication adverse to the person is
entered in a proceeding based on a finding in the proceeding that the person's
action, or failure to act, was the result
20
<PAGE>
of active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding; or (3) for any action or failure to act occurring
prior to February 18, 1988. In addition, due to the provisions of the Investment
Company Act of 1940, shareholders would still have a right to pursue monetary
claims against directors or officers for acts involving willful malfeasance, bad
faith, gross negligence or reckless disregard of their duties as directors or
officers.
21
<PAGE>
State Bond Tax Exempt Fund
Schedule of Investments
June 30, 1996
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
--------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (96.5%)
ALASKA
Alaska Housing Finance Corp.,
Collateralized Veterans Mortgage
Program, Series 1991 B-1, 6.900%, due
2032 Aaa/AAA $ 690,000 $ 708,865
Alaska Housing Finance Corp.,
Collateralized Home Mortgage Bonds,
1988 Series A-1, 7.625%, due 2013 Aaa/AAA 325,000 335,322
Alaska Valdez Marine Terminal, 5.650%,
due 2028 Aa3/AA- 1,000,000 928,990
ARIZONA
Arizona Industrial Development
Authority, 5.450%, due 2009 A2/A 1,500,000 1,450,785
CALIFORNIA
Berkeley, CA School District, 5.800%,
due 2020 Aaa/AAA 500,000 493,580
Central Coast Water Authority Rev.
Bonds, Series 1992, 6.350%, due 2007 Aaa/AAA 1,000,000 1,070,730
Walnut Valley, CA, Water District,
Certificate of Participation, 6.125%,
due 2009 Aaa/AAA 1,000,000 1,028,540
COLORADO
Housing Finance Agency, Single Family
Housing Rev. Bonds, 1986 Series A,
8.000%, due 2017 Aa/NR 220,000 225,196
DISTRICT OF COLUMBIA
District of Columbia University Rev.
Bonds, 6.300%, due 2013 NR/AAA 1,250,000 1,269,100
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
MOODY'S/S/P PRINCIPAL
RATING AMOUNT VALUE
---------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
ILLINOIS
Chicago, Illinois, Water Rev. Bonds,
7.200%, due 2016 A1/AA- $2,000,000 $2,195,240
Chicago, Illinois, Public District
Capital Improvement Bonds, 5.450%, due Aaa/AAA 1,000,000 1,020,100
2004
City of Chicago, Illinois, Gas Supply
Rev. Bonds, 7.500%, due 2015 Aa3/AA- 1,480,000 1,608,952
City of Chicago, Illinois Gas Supply
Rev. Bonds, 7.500%, due 2015 Aa3/AA- 1,100,000 1,195,843
Cook County, Illinois Community Cons.
School District #6, 5.875%, due 2008 Aaa/AAA 1,000,000 1,021,030
Illinois Health Facility Authorized
Revenue, 6.000%, due 2015 Aaa/AAA 1,400,000 1,395,338
Illinois State Dedicated Tax, 6.000%,
due 2015 Aaa/AAA 1,000,000 1,002,680
Illinois State University Auxiliary
Facility System, Board of Regents Rev.
Bonds, Series 1989, 7.400%, due 2014 Aaa/A 1,050,000 1,157,373
Illinois State University Auxiliary
Facility System, Board of Regents Rev.
Bonds, Series 1989, 7.400%, due 2013 Aaa/A 500,000 551,130
Metropolitan Pier Exposition Authority,
Illinois Dedicated State Tax Rev.
Bonds, 6.000%, due 2014 A/A+ 2,350,000 2,349,718
Rolling Meadows, Illinois Mortgage Rev.
Bonds Woodfield Garden, 7.750%,
due 2004 NR/A- 2,000,000 2,125,640
INDIANA
Beech Grove, IN, IDR for Westvaco
Corp., 8.750%, due 2010 A1/A 550,000 556,798
Highland, IN, School Building Corp.,
6.750%, due 2012 NR/AAA 1,000,000 1,107,260
</TABLE>
3
<PAGE>
State Bond Tax Exempt Fund
Schedule of Investments (continued)
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
INDIANA (CONTINUED)
Indiana Municipal Power Agency, Series
1992 A, 6.000%, due 2007 Aaa/AAA $1,300,000 $1,360,762
Indiana State Toll Roads, Revenue
Refunding Bond, 6.00%, due 2013 A-/A 1,100,000 1,101,023
Indiana Transportation Finance
Authority, Series A, 6.250%, due 2016 A/NR 1,150,000 1,160,281
Indianapolis, IN, Public Improvement
Bonds, Bank Series C, 6.700%, due 2017 Aaa/NR 3,225,000 3,554,982
LOUISIANA
Rapides Parish, LA, Housing & Mortgage
Finance Authority, Single Family
Mortgage, 7.250%, due 2010 Aaa/AA- 750,000 804,645
MAINE
Maine State Housing Authority, Mortgage
Purchase Bonds, 1988 Series B, 8.000%,
due 2015 A1/AA- 400,000 421,620
MARYLAND
Maryland City Housing Multi-Family
Housing, FNMA, Series A, 7.250%, due
2023 NR/AAA 745,000 776,834
MASSACHUSETTS
Massachusetts State Housing Project
Financial Agency, 6.300%, due 2013 A1/A+ 1,000,000 1,006,560
Massachusetts State Housing Project
Financial Agency, 6.100%, due 2016 Aaa/AAA 1,000,000 1,002,390
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
----------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
MICHIGAN
Clintondale, Michigan Community Schools,
5.750%, due 2016 Aa/AA $ 500,000 $ 491,825
Michigan State Housing Development
Authority, Single Family, Series A,
7.550%, due 2014 NR/AA+ 145,000 145,779
Michigan State Housing Development,
Series B, 6.950%, due 2020 NR/AA+ 1,000,000 1,053,010
MINNESOTA
Burnsville, Minnesota, Multi-Family Rev.
Ref. Bonds, Coventry Court Apartments
Project, Series 1989, 7.500%, due 2027 NR/AAA 800,000 837,680
City of Minnetonka, MN, Multi-Family
Rental Housing Rev. Bonds, 7.250%,
due 2002 NR/AAA 800,000 834,144
Minneapolis, Minnesota Special School
District # 001, 5.900%, due 2011 Aaa/AAA 2,000,000 2,034,740
Minnesota Housing Finance Agency, Single
Family Mortgage, 6.250%, due 2015 Aa/AA+ 1,300,000 1,316,224
Minnesota Housing Finance Agency Single
Family Mortgage Rev. Bonds 1989
Series D, 7.350%, due 2016 Aa/AA+ 525,000 555,408
Minnesota Housing Finance Authority,
Series 1993 E, 6.000%, due 2014 NR/AA+ 1,460,000 1,456,759
NEVADA
Clark County, Nevada Improvement
District, 5.850%, due 2015 Aaa/AAA 350,000 348,842
Clark County, Nevada School District,
General Obligation Bonds, 5.300%,
due 2004 Aaa/AAA 1,000,000 1,008,860
</TABLE>
5
<PAGE>
State Bond Tax Exempt Fund
Schedule of Investments (continued)
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
-----------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
NEVADA (CONTINUED)
Humboldt County, NV, Pollution Control
Rev. Bonds, Idaho Power Company,
8.300%, due 2014 NR/A+ $1,000,000 $1,161,170
Lyon County, Nevada School District,
6.750%, due 2011 Aaa/AAA 800,000 894,488
Washoe County, Nevada, General
Obligation Bonds, 6.000%, due 2009 Aaa/AAA 585,000 604,299
NEW HAMPSHIRE
New Hampshire Municipal Bond Bank,
Series 91 J, Non-State Guaranteed,
6.900%, due 2012 NR/A+ 1,080,000 1,188,108
State of New Hampshire Turnpike System
Rev. Bonds, 8.375%, due 2017 Aaa/A 900,000 969,957
NEW YORK
New York Metro Transit Authority, 5.100%,
due 2004 Aaa/AAA 1,000,000 1,003,910
New York State Environmental Pollution
Control Rev. Bonds, 7.250%, due 2010 Aa/A 2,900,000 3,238,517
New York State Local Government
Assistance Corp., 6.000%, due 2016 A/A 1,000,000 1,006,980
NORTH CAROLINA
Wake County, Ind. Facilities Pollution
Control, Carolina Power and Light,
6.900%, due 2009 A2/A1 1,000,000 1,071,610
NORTH DAKOTA
North Dakota Housing, Single Family
Mortgage, 1992 Series A, 6.750%,
due 2012 Aa/A+ 1,590,000 1,651,500
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
-----------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
OREGON
Portland Oregon Sewer System, 6.050%,
due 2009 A1/A+ $ 500,000 $ 521,355
PENNSYLVANIA
Erie County, PA, Industrial Development
Auth., Pollution Control Rev. Ref. Bonds,
Series 1991, 7.150%, due 2013 A3/A- 400,000 423,428
RHODE ISLAND
Rhode Island Depositors, Economic
Protection Corp. Bonds, 6.625%, due 2019 Aaa/AAA 1,675,000 1,847,642
SOUTH DAKOTA
South Dakota Housing Development, Multi-
Family Housing Rev. Bonds, 6.700%,
due 2020 A1/A+ 1,400,000 1,422,568
South Dakota State Building Authority
Co-op, Series A, 7.500%, due 2016 A1/A+ 950,000 979,773
TEXAS
Brownsville, Texas Utility System Rev.,
6.875%, due 2020 Aaa/AAA 1,000,000 1,097,570
Houston, Texas, Water & Sewer Rev. Ref.
Bonds, 6.400%, due 2009 A/A 1,545,000 1,625,973
Texas Water Development Board Rev., State
Revolving Fund Bonds, 6.400%, due 2007 Aa1/AAA 1,000,000 1,070,290
</TABLE>
7
<PAGE>
State Bond Tax Exempt Fund
Schedule of Investments (continued)
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
----------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
UTAH
Intermountain Power Agency Utah Power
Supply, 6.000%, due 2016 Aa/AA- $1,000,000 $ 998,840
Utah State Municipal Finance Co-op,
Government Revenue Bonds, 6.400%, due
2009 A/A 1,000,000 1,018,050
VIRGINIA
Virginia Housing Authority, Residential
Mortgage Rev. Bonds, Series B, 7.550%,
due 2012 Aa/AAA 460,000 461,090
Virginia Housing Development
Authority, Series C 1992, 6.500%, due Aa1/AA+ 500,000 522,915
2007
WASHINGTON
Skagit County Washington Cons. School
District, 6.700%, due 2007 Aaa/AAA 1,000,000 1,083,500
Washington State Municipal Finance
Co-op, Government Revenue Bonds,
5.600%, due 2007 Aa/AA 1,500,000 1,450,980
WISCONSIN
Wisconsin Housing and Economic
Development Authority, Series A,
7.100%, due 2023 Aa/AA 985,000 1,034,083
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
---------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
WISCONSIN (CONTINUED)
Wisconsin Housing and Economic
Development Authority, 6.000%,
due 2015 Aa/AA $ 550,000 $ 543,164
WYOMING
Sweetwater County, WY, PCR for Idaho
Power, 7.625%, due 2013 A3/A 2,150,000 2,230,088
-----------
TOTAL MUNICIPAL BONDS
(Cost $73,868,197) 77,192,426
SHORT-TERM SECURITIES (3.5%)
American Express Credit Corp., 5.320%,
due 07/05/96 1,000,000 999,409
Ford Motor Credit Corp., 5.360%, due
07/03/96 1,540,000 1,539,541
General Electric Capital Corp.,
5.280%, due 07/02/96 300,000 299,956
-----------
TOTAL SHORT-TERM SECURITIES
(Cost $2,838,906) 2,838,906
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $76,707,103*) $80,031,332
===========
</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.
9
<PAGE>
State Bond Tax Exempt Fund
Statement of Assets and Liabilities
June 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investment in securities, at value (cost $76,707,103)
See accompanying schedule $80,031,332
Interest receivable 1,350,043
-----------
TOTAL ASSETS 81,381,375
LIABILITIES
Cash overdraft 175,599
Dividends payable 57,694
Payable to affiliates 46,323
Accrued expenses 7,197
-----------
TOTAL LIABILITIES 286,813
-----------
NET ASSETS $81,094,562
===========
Net Assets consist of:
Paid-in capital $77,730,196
Accumulated undistributed net realized gain on investments 40,137
Net unrealized appreciation on investments 3,324,229
-----------
NET ASSETS, for 7,522,296 shares outstanding $81,094,562
===========
NET ASSET VALUE and redemption price per share $ 10.78
===========
Maximum offering price per share (includes maximum sales
charge of 4.5%-reduced on purchases of $50,000 or more) $ 11.29
===========
</TABLE>
See accompanying notes.
10
<PAGE>
State Bond Tax Exempt Fund
Statement of Operations
Year Ended June 30, 1996
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Interest $5,041,950
EXPENSES
Investment advisory and management fees 407,880
Rule 12b-1 plan fees 204,057
Transfer agent fees 31,461
Printing expenses 18,150
Accounting and custodian fees 30,415
Professional fees 20,498
Other expenses 23,952
----------
Total expenses 736,413
----------
Net investment income 4,305,537
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 40,206
Change in unrealized appreciation on investment 64,146
----------
Net gain on investments 104,352
----------
Net increase in net assets resulting from operations $4,409,889
==========
</TABLE>
See accompanying notes.
11
<PAGE>
State Bond Tax Exempt Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 4,305,537 $ 4,457,677
Net realized gain on investments 40,206 38,720
Change in net unrealized appreciation 64,146 1,466,299
---------------------------
Net increase in net assets resulting
from operations 4,409,889 5,962,696
Distributions to shareholders from:
Net investment income (4,305,537) (4,457,677)
Net realized gain (38,789) -
---------------------------
Total distributions to shareholders (4,344,326) (4,457,677)
Capital share transactions:
Proceeds from sales of shares 3,140,961 4,250,461
Proceeds from reinvested distributions 3,149,165 3,066,110
Cost of shares redeemed (6,903,498) (8,328,499)
---------------------------
Net decrease in net assets resulting
from share transactions (613,372) (1,011,928)
---------------------------
Total increase (decrease) in net assets (547,809) 493,091
NET ASSETS
Beginning of year 81,642,371 81,149,280
---------------------------
End of year $81,094,562 $81,642,371
===========================
OTHER INFORMATION
Shares:
Sold 290,245 404,927
Issued through reinvestment of
distributions 289,771 291,063
Redeemed (636,574) (788,793)
---------------------------
Net decrease (56,558) (92,803)
===========================
</TABLE>
See accompanying notes.
12
<PAGE>
State Bond Tax Exempt Fund
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------
SELECTED PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.77 $ 10.58 $ 11.09 $ 10.86 $ 10.52
Income from investment operations:
Net investment income .57 .58 .59 .63 .68
Net realized and unrealized gain
(loss) on investments .01 .19 (.41) .34 .36
-------------------------------------------------------
Total from investment operations .58 .77 .18 .97 1.04
Less distributions:
From net investment income (.57) (.58) (.59) (.63) (.68)
From net realized gain (.00) (B) - (.10) (.11) (.02)
-------------------------------------------------------
Total distributions (.57) (.58) (.69) (.74) (.70)
-------------------------------------------------------
Net asset value, end of year $ 10.78 $ 10.77 $ 10.58 $ 11.09 $ 10.86
=======================================================
TOTAL RETURN (A) 5.54% 7.53% 1.55% 9.30% 10.18%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $81,095 $81,642 $81,149 $80,055 $70,565
Ratio of expenses to average net assets .90% .93% .94% .93% .87%
Ratio of net investment income to
average net assets 5.27% 5.52% 5.37% 5.75% 6.33%
Portfolio turnover rate 16% 15% 17% 21% 16%
</TABLE>
(A) Total returns do not consider the effects of the one time sales charge.
(B) Less than $0.01 per share.
13
<PAGE>
State Bond Tax Exempt Fund
Notes to Financial Statements
June 30, 1996
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.
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.
14
<PAGE>
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 60 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 60 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, 1996, net unrealized appreciation on a federal income tax basis was
$3,324,229, which is comprised of unrealized appreciation of $3,475,338 and
unrealized depreciation of $151,109 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 sufficient to relieve it from all, or
substantially all, federal income, excise, and state income taxes.
The Fund hereby designates $38,789 as capital gain dividends attributable to the
fiscal year ended June 30, 1996 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.
15
<PAGE>
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.
16
<PAGE>
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.
17
<PAGE>
APPENDIX A
Description of Tax-Exempt Securities Ratings
Tax-Exempt Bonds
Moody's Investors Service, Inc.
Aaa: Tax-exempt bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Tax-exempt bonds which are rated Aa are judged to be a 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 the best bonds because
margins of protection may not be as large or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Tax-exempt bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Tax-exempt bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Tax-exempt bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Tax-exempt bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
NOTE: Moody's applies numerical modifiers 1,2, and 3 in each generic
rating classification from Aa through B in its bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category. The modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Ratings Services
AAA: Tax-exempt bonds rated AAA are highest grade obligations. They
possess the ultimate degree
A-1
<PAGE>
of protection as to principal and interest. In the market they move with
interest rates, and hence provide the maximum safety on all counts.
AA: Tax-exempt bonds rated AA also qualify as high-grade obligations, and
in the majority of instances differ from AAA issues only in small degree. Here,
too, prices move with the long-term money market.
A: Tax-exempt bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior, but
also to some extent, economic conditions.
BBB: Tax-exempt bonds rated BBB are regarded as having adequate capacity
to pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB or B: Tax-exempt bonds rated BB or B are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and B a higher degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
NOTE: The S&P ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
Tax-Exempt Notes
Moody's
Moody's ratings for state, municipal and other short-term obligations are
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in short-
term borrowing, while various factors of primary importance in long-term
borrowing risk are of lesser importance in the short run. Symbols used are as
follows:
MIG-1: Notes are of the best quality enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both.
MIG-2: Notes are of high quality, with margins of protection ample,
although not so large as in the preceding group.
MIG-3: Notes are of favorable quality, with all security elements
accounted for, but lacking the undeniable strength of the preceding grades.
Market access for refinancing, in particular, is likely to be less well
established.
Standard & Poor's
Until June 29, 1984, Standard & Poor's used the same rating symbols for
notes and bonds. After June
A-2
<PAGE>
29, 1984, for new municipal note issues due in three years or less the ratings
below usually will be assigned. Notes maturing beyond three years will most
likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong
capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Commercial Paper
----------------
Moody's
- -------
Moody's Commercial Paper ratings, which are also applicable to municipal
paper investments permitted to be made by the Fund, are opinions of the ability
of issuers to repay punctually their promissory obligations not having an
original maturity in excess of nine months. Moody's employs the following
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated Issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
Standard & Poor's
- -----------------
S&P's ratings are a current assessment of the likelihood of timely
payment of debt having an original maturity of no more than 365 days. Ratings
are graded into four categories, ranging from "A" for the highest quality
obliga
A-3
<PAGE>
PART C
OTHER INFORMATION
STATE BOND TAX EXEMPT FUND
Item 24. Financial Statements and Exhibits
- ------------------------------------------
(a) Financial Statements and Report of Independent Auditors:
Contained in Part A:
Financial Highlights for each year in the ten year period
ended June 30, 1996
Contained in Part B:
Schedule of Investments - June 30, 1996
Statement of Assets and Liabilities - June 30, 1996
Statement of Operations - Year ended June 30, 1996
Statement of Changes in Net Assets - Years ended June 30, 1996
and 1995
Financial Highlights for each period in the five year period
ended June 30, 1996
Notes to Financial Statements
Report of Independent Auditors
(b) Exhibits
(1) Articles of Incorporation--filed as an Exhibit to Post-
Effective Amendment No. 16 to Form N-1A Registration Statement
of this Registrant on August 29, 1995, File Nos. 2-77156 and
811-3454, and incorporated herein by reference.
(2) Bylaws--filed as an Exhibit to Post-Effective Amendment No. 16
to Form N-1A Registration Statement of this Registrant on
August 29, 1995, File Nos. 2-77156 and 811-3454, and
incorporated herein by reference.
(3) Not applicable.
(4) Instruments Defining Rights of Shareholders--see generally
Article IV of the Articles of Incorporation, and Articles II
and VII of the Bylaws, filed as Exhibits to Post-Effective
Amendment No. 16 to Form N-1A Registration Statement of this
Registrant on August 29, 1995, File Nos. 2-77156 and 811-3454,
and incorporated herein by reference.
(5) Investment Advisory Contract--filed as an Exhibit to Post-
Effective Amendment No. 16 to Form N-1A Registration Statement
of this Registrant on August 29, 1995, File Nos. 2-77156 and
811-3454, and incorporated herein by reference.
(6) (a) Underwriting Agreement--filed as an Exhibit to Post-
Effective Amendment No. 16 to Form N-1A Registration
Statement of this Registrant on August 29, 1995, File Nos.
2-77156 and 811-3454, and incorporated herein by
reference.
(b) Form of Agreement between principal underwriter and
dealers--filed as an Exhibit to Amendment No. 20 to Form
N-1A Registration Statement of State Bond Securities
Funds, Inc. on September 28, 1993, File No. 2-30162 and
incorporated herein by reference.
(7) Not applicable.
(8) Custodian Agreement, filed as an Exhibit hereto.
<PAGE>
(9) Transfer Agency Agreement, filed as an Exhibit hereto.
(10) Opinion of Counsel--filed as an Exhibit to Post-Effective
Amendment No. 16 to Form N-1A Registration Statement of this
Registrant on August 29, 1995, File Nos. 2-77156 and 811-3454,
and incorporated herein by reference.
(11) Consent of Ernst & Young LLP, dated September 11, 1996 and
filed as an Exhibit hereto.
(12) Not applicable.
(13) Agreement Regarding Initial Capital--filed as an Exhibit to
Pre-Effective Amendment No.1 to Form N-1A Registration
Statement of this Registrant on June 30, 1982, File No.
2-77156, and incorporated herein by reference.
(14) Not applicable.
(15) Plan of Distribution--filed as an Exhibit to Post-Effective
Amendment No. 16 to Form N-1A Registration Statement of this
Registrant on August 29, 1995, File Nos. 2-77156 and 811-3454,
and incorporated herein by reference.
(16) Schedule for Computation of Performance Data, filed as an
Exhibit hereto.
(17) Other Exhibits--Power of attorney dated July 31, 1995, filed
as an Exhibit to Post-Effective Amendment No. 16 to Form N-1A
Registration Statement of this Registrant on August 29, 1995,
File Nos. 2-77156 and 811-3454, and incorporated herein by
reference.
(18) Not applicable.
(27) Financial Data Schedule, filed as an Exhibit hereto.
Item 25. Persons Controlled by or under Common Control with Registrant
- -----------------------------------------------------------------------
None
Item 26. Number of Holders of Securities
- -----------------------------------------
Number of Record Holders
Title of Class (within last 90 days)
-------------- -------------------------------
common - $.00001 par 1,937 as of July 31, 1996
Item 27. Indemnification
- -------------------------
Article VII, Section 1 of the Amended and Restated Articles of
Incorporation of the Registrant provides that the Registrant shall indemnify its
directors and officers, whether serving the Registrant or at its request any
other entity, to the full extent permitted by the laws of the State of Maryland.
This indemnification shall not protect any director or officer against liability
to the Registrant or its shareholders to which he otherwise would be subject by
reason of willful misfeasance, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
Section 6.01 of the By-Laws of the Registrant provides that the Registrant
shall indemnify any person who was or is a party or is threatened to be made a
party to any action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than a proceeding by or in the right of the Registrant
in which such person shall have been adjudged to be liable to the Registrant),
by reason of being or having been a director or officer of the Registrant, or
serving or having served at the request of the Registrant as a director,
officer, partner, trustee, employee or agent of another entity in which the
Registrant has an interest as a shareholder, creditor or otherwise
<PAGE>
(a "Covered Person"), against all liabilities and penalties, and reasonable
expenses (including attorney's fees) actually incurred by the Covered Person in
connection with such action, suit or proceeding, except (i) liability in
connection with any proceeding in which it is determined that (A) the act or
omission of the Covered Person was material to the matter giving rise to the
proceeding, and was committed in bad faith or was the result of active and
deliberate dishonesty, or (B) the Covered Person actually received an improper
personal benefit in money, property or services, or (C) in the case of any
criminal proceeding, the Covered Person had reasonable cause to believe that the
act or omission was unlawful and (ii) liability to the Corporation or its
security holders to which the Covered Person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
Article VII, Section 2 of the Amended and Restated Articles of
Incorporation of the Registrant provides that no director or officer of the
Registrant shall be personally liable to the Registrant or its security holders
for money damages, to the full extent permitted by Maryland law and the
Investment Company Act of 1940.
Pursuant to the Registrant's agreement with its principal underwriter, the
Registrant has agreed to indemnify the underwriter from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending such claims, demands or liabilities and any counsel fees incurred
in connection therewith) which it or any controlling person may incur, under the
Investment Company Act of 1940, or under common law or otherwise, arising out of
or based upon any alleged untrue statement of a material fact contained in the
Registrant's registration statement or prospectus or arising out of or based
upon any alleged omission to state a material fact required to be stated in
either thereof or necessary to make the statements in either thereof not
misleading; provided, however, that the indemnity agreement, to the extent that
it might require indemnity of any person who is a controlling person and who is
also a director of the Registrant, may not inure to the benefit of such person
unless a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent, that such result would not be against
public policy as expressed in the Investment Company Act of 1940; and further
provided that in no event shall anything contained in the indemnity agreement
be so construed as to protect the underwriter against any liability to the
Registrant or its security holders to which the underwriter would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence, in the
performance of its duties, or by reason of its reckless disregard of any
obligations and duties under the underwriting agreement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provision, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Registrant, its investment adviser, and its principal underwriter have
obtained directors and officers and errors and omissions liability insurance
insuring the activities of the Registrant, the investment advisory activities of
the investment adviser, and the activities of the principal underwriter as
distributor of investment company securities.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
- --------------------------------------------------------------
ARM Capital Advisors, Inc., the Registrant's investment adviser, is a
registered investment adviser providing investment management services to
investment companies and institutional and individual clients.
The business, profession, vocation or employment of a substantial nature
which each director or officer of the investment adviser, is or has been, at any
time during the past two fiscal years, engaged for his own account or in the
capacity of director, officer, employee, partner, or trustee is as follows:
<TABLE>
<CAPTION>
Name and Principal Business Address* Position and Offices with Adviser
- ------------------------------------ ---------------------------------
<S> <C>
John Franco Director and Co-Chief Executive Officer
Co-Chief Executive Office
Martin H. Ruby Director and Co-Chief Executive Officer
Co-Chief Executive Officer
Emad A. Zikry Director, President and
Since October 1994: Chief Investment Officer
Executive Vice President--Chief Investment Officer
200 Park Avenue, 20th Floor
New York, NY 10166
1992-October 1994:
President--Chief Investment Officer
Klienwort Benson Investment Management
Americas Inc.
200 Park Avenue, 20th Floor
New York, NY 10166
Keith O. Martens Senior Vice President and
Since June 1995: Senior Portfolio Manager
200 Park Avenue, 20th Floor
New York, NY 10166
1969-June 1995:
Executive Vice President--Investments
SBM Company
8400 Normandale Lake Boulevard
Suite 1150
Minneapolis, MN 55437
</TABLE>
<PAGE>
Robert E. Mackey Chief Operating Officer
Since January 1995:
200 Park Avenue, 20th Floor
New York NY 10166
1993-December 1994:
Sr. Portfolio Manager-Client
Services Manager-Managing Director
Kleinwort Benson Investment Management
Americas Inc.
200 Park Avenue, 20th Floor
New York NY 10166
Robert L. Maddox Chief Compliance Officer
Since October 1995: and Secretary
Legal Officer and Assistant Counsel
1994-October 1995:
Assistant General Counsel
Providian Corp.
400 West Market Street
Louisville KY 40202
Peter S. Resnik Treasurer
Treasurer
Barry G. Ward Controller
Controller
Rose M. Culbertson Tax Officer
Tax Officer
Kevin Howard Assistant Secretary
Legal Officer and Assistant Counsel
*All addresses are ARM Financial Group, Inc., 515 W. Market Street, 8th Floor,
Louisville, KY 40202. Unless otherwise indicated, each individual has been
employed by ARM Financial Group or its predecessor-in-interest, Analytical Risk
Management, Ltd., for the last two years.
<PAGE>
Item 29. Principal Underwriters
(a) SBM Financial Services acts as principal underwriter for the Fund,
and for each of the following investment companies:
State Bond Investment Funds, Inc.
(State Bond Diversified Fund Portfolio)
State Bond Money Funds, Inc.
(State Bond Cash Management Fund Portfolio)
State Bond Equity Funds, Inc.
(State Bond Common Stock Fund Portfolio)
State Bond Income Funds, Inc.
(State Bond U.S. Government and Agency Securities Fund
Portfolio)
State Bond Tax-Free Income Funds, Inc.
(State Bond Minnesota Tax-Free Income Fund Portfolio)
SBM Certificate Company
(b) The following table sets forth information concerning each director,
officer or partner of the principal underwriter.
<TABLE>
<CAPTION>
Name and Principal Positions & Offices Positions & Offices
Business Address with Underwriter with Registrant
- ---------------------- ------------------------------------- ------------------------
<S> <C> <C>
John R. McGeeney* Director, Secretary, General None
Counsel and Compliance Officer
Edward J. Haines* Director and President None
Walter W. Balek*** Vice President None
Dale C. Bauman*** Vice President President
Robert Bryant Vice President None
1550 East Shaw, #120
Fresno, CA 93710
Ronald Geiger*** Vice President None
Peter S. Resnik* Treasurer Treasurer
Barry G. Ward* Controller Controller
William H. Guth** Operations Officer None
David L. Anders** Marketing Officer None
Rose M. Culbertson* Tax Officer None
Sheri L. Bean* Assistant Secretary None
</TABLE>
<PAGE>
* Address is 515 W. Market Street, 8th Floor, Louisville, KY 40202
** Address is 200 East Wilson Bridge Road, Worthington, OH 43085
*** Address is 100 North Minnesota Street, New Ulm, MN 56073
(c) Not applicable.
Item 30. Location of Accounts and Records
- ------------------------------------------
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105-1716
SBM Financial Services, Inc.
100 North Minnesota Street
New Ulm, MN 56073
Item 31. Management Services
- -----------------------------
None
Item 32. Undertakings
- ----------------------
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(a) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Louisville and State of Kentucky, on the 12th day of Septembert, 1996.
STATE BOND MUNICIPAL FUNDS, INC.
By: /s/ Kevin L. Howard
-----------------------------------
Kevin L. Howard, Vice President
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Dale Bauman President September 12, 1996
- ---------------------------------- (Principal Executive
Officer)
/s/ Peter Resnik Treasurer September 12, 1996
- ---------------------------------- (Principal Financial
Officer)
/s/ Barry G. Ward Controller September 12, 1996
- ---------------------------------- (Principal Accounting
Officer)
* Director
- ----------------------------------
(William B. Faulkner)
* Director
- ----------------------------------
(John R. Lindholm)
* Director
- ----------------------------------
(John Katz)
* Director
- ----------------------------------
(Theodore S. Rosky)
* This Amendment has been signed
by each of the persons so indicated
by the undersigned as Attorney-in-Fact.
*By: /s/ Kevin Howard September 12, 1996
------------------------------
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibits
(1) Articles of Incorporation--filed as an Exhibit to Post-
Effective Amendment No. 16 to Form N-1A Registration Statement
of this Registrant on August 29, 1995, File Nos. 2-77156 and
811-3454, and incorporated herein by reference.
(2) Bylaws--filed as an Exhibit to Post-Effective Amendment No. 16
to Form N-1A Registration Statement of this Registrant on
August 29, 1995, File Nos. 2-77156 and 811-3454, and
incorporated herein by reference.
(3) Not applicable.
(4) Instruments Defining Rights of Shareholders--see generally
Article IV of the Articles of Incorporation, and Articles II
and VII of the Bylaws, filed as Exhibits to Post-Effective
Amendment No. 16 to Form N-1A Registration Statement of this
Registrant on August 29, 1995, File Nos. 2-77156 and 811-3454,
and incorporated herein by reference.
(5) Investment Advisory Contract--filed as an Exhibit to Post-
Effective Amendment No. 16 to Form N-1A Registration Statement
of this Registrant on August 29, 1995, File Nos. 2-77156 and
811-3454, and incorporated herein by reference.
(6) (a) Underwriting Agreement--filed as an Exhibit to Post-
Effective Amendment No. 16 to Form N-1A Registration
Statement of this Registrant on August 29, 1995, File Nos.
2-77156 and 811-3454, and incorporated herein by
reference.
(b) Form of Agreement between principal underwriter and
dealers--filed as an Exhibit to Amendment No. 20 to Form
N-1A Registration Statement of State Bond Securities
Funds, Inc. on September 28, 1993, File No. 2-30162 and
incorporated herein by reference.
(7) Not applicable.
(8) Custodian Agreement, filed as an Exhibit hereto.
(9) Transfer Agency Agreement, filed as an Exhibit hereto.
(10) Opinion of Counsel--filed as an Exhibit to Post-Effective
Amendment No. 16 to Form N-1A Registration Statement of this
Registrant on August 29, 1995, File Nos. 2-77156 and 811-3454,
and incorporated herein by reference.
(11) Consent of Ernst & Young LLP, dated September 11, 1996 and
filed as an Exhibit hereto.
(12) Not applicable.
(13) Agreement Regarding Initial Capital--filed as an Exhibit to
Pre-Effective Amendment No.1 to Form N-1A Registration
Statement of this Registrant on June 30, 1982, File No.
2-77156, and incorporated herein by reference.
(14) Not applicable.
(15) Plan of Distribution--filed as an Exhibit to Post-Effective
Amendment No. 16 to Form N-1A Registration Statement of this
Registrant on August 29, 1995, File Nos. 2-77156 and 811-3454,
and incorporated herein by reference.
(16) Schedule for Computation of Performance Data, filed as an
Exhibit hereto.
(17) Other Exhibits--Power of attorney dated July 31, 1995, filed
as an Exhibit to Post-Effective Amendment No. 16 to Form N-1A
Registration Statement of this Registrant on August 29, 1995,
File Nos. 2-77156 and 811-3454, and incorporated herein by
reference.
(18) Not applicable.
(27) Financial Data Schedule, filed as an Exhibit hereto.
<PAGE>
CUSTODY AND INVESTMENT ACCOUNTING AGREEMENT
-------------------------------------------
THIS AGREEMENT made the 30th day of October, 1995, by and between INVESTORS
FIDUCIARY TRUST COMPANY, a trust company chartered under the laws of the state
of Missouri, having its trust office located at 127 West 10th Street, Kansas
City, Missouri 64105 ("Custodian"), and STATE BOND MUNICIPAL FUNDS, INC., a
Maryland corporation, having its principal office and place of business at 100
North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069 ("Fund").
WITNESSETH:
WHEREAS, Fund desires to appoint Investors Fiduciary Trust Company as
custodian of the securities and monies of Fund's investment portfolio and as its
agent to perform certain investment accounting and recordkeeping functions; and
WHEREAS, Investors Fiduciary Trust Company is willing to accept such
appointment;
NOW THEREFORE, for and in consideration of the mutual promises contained
herein, the parties hereto, intending to be legally bound, mutually covenant and
agree as follows:
1. APPOINTMENT OF CUSTODIAN. Fund hereby constitutes and appoints Custodian
as:
A. Custodian of the securities and monies at any time owned by the Fund;
and
B. Agent to perform certain accounting and recordkeeping functions
relating to portfolio transactions required of a duly registered
investment company under Rule 31a of the Investment Company Act of
1940 (the "1940 Act") and to calculate the net asset value of the
Fund.
2. REPRESENTATIONS AND WARRANTIES.
A. Fund hereby represents, warrants and acknowledges to Custodian:
1. That it is a corporation or trust (as specified above) duly
organized and existing and in good standing under the laws of its
state of organization, and that it is registered under the 1940
Act; and
<PAGE>
2. That it has the requisite power and authority under applicable
law, its articles of incorporation and its bylaws to enter into
this Agreement; that it has taken all requisite action necessary
to appoint Custodian as custodian and investment accounting and
recordkeeping agent for the Fund; that this Agreement has been
duly executed and delivered by Fund; and that this Agreement
constitutes a legal, valid and binding obligation of Fund,
enforceable in accordance with its terms.
B. Custodian hereby represents, warrants and acknowledges to Fund:
1. That it is a trust company duly organized and existing and in
good standing under the laws of the State of Missouri; and
2. That it has the requisite power and authority under applicable
law, its charter and its bylaws to enter into and perform this
Agreement; that this Agreement has been duly executed and
delivered by Custodian; and that this Agreement constitutes a
legal, valid and binding obligation of Custodian, enforceable in
accordance with its terms.
3. DUTIES AND RESPONSIBILITIES OF CUSTODIAN.
A. Delivery of Assets
Except as permitted by the 1940 Act, Fund will deliver or cause to be
delivered to Custodian on the effective date of this Agreement, or as
soon thereafter as practicable, and from time to time thereafter, all
portfolio securities acquired by it and monies then owned by it or
from time to time coming into its possession during the time this
Agreement shall continue in effect. Custodian shall have no
responsibility or liability whatsoever for or on account of securities
or monies not so delivered.
-2-
<PAGE>
B. Delivery of Accounts and Records
Fund shall turn over or cause to be turned over to Custodian all of
the Fund's relevant accounts and records previously maintained.
Custodian shall be entitled to rely conclusively on the completeness
and correctness of the accounts and records turned over to it, and
Fund shall indemnify and hold Custodian harmless of and from any and
all expenses, damages and losses whatsoever arising out of or in
connection with any error, omission, inaccuracy or other deficiency of
such accounts and records or in the failure of Fund to provide, or to
provide in a timely manner, any accounts, records or information
needed by the Custodian to perform its functions hereunder.
C. Delivery of Assets to Third Parties
Custodian will receive delivery of and keep safely the assets of Fund
delivered to it from time to time segregated in a separate account, and
if Fund is comprised of more than one portfolio of investment
securities (each a "Portfolio") Custodian shall keep the assets of each
Portfolio segregated in a separate account. Custodian will not deliver,
assign, pledge or hypothecate any such assets to any person except as
permitted by the provisions of this Agreement or any agreement executed
by it according to the terms of Section 3.S. of this Agreement. Upon
delivery of any such assets to a subcustodian pursuant to Section 3.S.
of this Agreement, Custodian will create and maintain records
identifying those assets which have been delivered to the subcustodian
as belonging to the Fund, by Portfolio if applicable. The Custodian is
responsible for the safekeeping of the securities and monies of Fund
only until they have been transmitted to and received by other persons
as permitted under the terms of this Agreement, except for securities
and monies transmitted to subcustodians appointed under Section 3.S. of
this Agreement, for which Custodian remains responsible to the extent
provided in Section 3.S. hereof. Custodian may participate directly or
indirectly through a subcustodian in the Depository Trust Company
-3-
<PAGE>
(DTC), Treasury/Federal Reserve Book Entry System (Fed System),
Participant Trust Company (PTC) or other depository approved by the
Fund (as such entities are defined at 17 CFR Section 270.17f-4(b))
(each a "Depository" and collectively, the "Depositories").
D. Registration of Securities
The Custodian shall at all times hold registered securities of the
Fund in the name of the Custodian, the Fund, or a nominee of either of
them, unless specifically directed by instructions to hold such
registered securities in so-called "street name," provided that, in
any event, all such securities and other assets shall be held in an
account of the Custodian containing only assets of the Fund, or only
assets held by the Custodian as a fiduciary or custodian for
customers, and provided further, that the records of the Custodian at
all times shall indicate the Fund or other customer for which such
securities and other assets are held in such account and the
respective interests therein. If, however, the Fund directs the
Custodian to maintain securities in "street name", notwithstanding
anything contained herein to the contrary, the Custodian shall be
obligated only to utilize its best efforts to timely collect income
due the Fund on such securities and to notify the Fund of relevant
corporate actions including, without limitation, pendency of calls,
maturities, tender or exchange offers. All securities, and the
ownership thereof by Fund, which are held by Custodian hereunder,
however, shall at all times be identifiable on the records of the
Custodian. The Fund agrees to hold Custodian and its nominee harmless
for any liability as a shareholder of record of securities held in
custody, except to the extent attributable to any negligence or
willful misconduct of the Custodian.
-4-
<PAGE>
E. Exchange of Securities
Upon receipt of instructions as defined herein in Section 4.A.,
Custodian will exchange, or cause to be exchanged, portfolio
securities held by it for the account of Fund for other securities or
cash issued or paid in connection with any reorganization,
recapitalization, merger, consolidation, split-up of share, change of
par value, conversion or otherwise, and will deposit any such
securities in accordance with the terms of any reorganization or
protective plan. Without instructions, Custodian is authorized to
exchange securities held by it in temporary form for securities in
definitive form, to effect an exchange of shares when the par value of
the stock is changed, and, upon receiving payment therefor, to
surrender bonds or other securities held by it at maturity or when
advised of earlier call for redemption, except that Custodian shall
receive instructions prior to surrendering any convertible security.
F. Purchases of Investments of the Fund -- Other Than Options and Futures
Fund will, on each business day on which a purchase of securities
(other than options and futures) shall be made by it, deliver to
Custodian instructions which shall specify with respect to each such
purchase:
1. If applicable, the name of the Portfolio making such purchase;
2. The name of the issuer and description of the security;
3. The number of shares and the principal amount purchased, and
accrued interest, if any;
4. The trade date;
5. The settlement date;
6. The purchase price per unit and the brokerage commission, taxes
and other expenses payable in connection with the purchase;
7. The total amount payable upon such purchase;
-5-
<PAGE>
8. The name of the person from whom or the broker or dealer through
whom the purchase was made; and
9. Whether the security is to be received in certificated form or
via a specified Depository.
In accordance with such instructions, Custodian will pay for such
securities held for the account of Fund, but only insofar as such
monies are available for such purpose, and receive the portfolio
securities so purchased by or for the account of Fund, except that
Custodian may in its sole discretion advance funds to the Fund which
may result in an overdraft because the monies held by the Custodian on
behalf of the Fund are insufficient to pay the total amount payable
upon such purchase. Except as otherwise instructed by Fund, such
payment shall be made by the Custodian only upon receipt of
securities: (a) by the Custodian; (b) by a clearing corporation of a
national exchange of which the Custodian is a member; or (c) by a
Depository. Notwithstanding the foregoing, (i) in the case of a
repurchase agreement, the Custodian may release funds to a Depository
prior to the receipt of advice from the Depository that the securities
underlying such repurchase agreement have been transferred by book-
entry into the account maintained with such Depository by the
Custodian, on behalf of its customers, provided that the Custodian's
instructions to the Depository require that the Depository make
payment of such finds only upon transfer by book-entry of the
securities underlying the repurchase agreement in such account; (ii)
in the case of time deposits, call account deposits, currency deposits
and other deposits, foreign exchange transactions, futures contracts
or options, the Custodian may make payment therefor before receipt of
an advice or confirmation evidencing said deposit or entry into such
transaction; and (iii) in the case of the purchase of securities, the
settlement of which occurs outside of the United States of America,
the Custodian may make, or cause a subcustodian appointed pursuant to
Section 3.S.2. of this Agreement to
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make, payment therefor in accordance with generally accepted local
custom and market practice.
G. Sales and Deliveries of Investments of the Fund -- Other than Options and
Futures Fund will, on each business day on which a sale of investment
securities (other than options and futures) of Fund has been made, deliver
to Custodian instructions specifying with respect to each such sale:
1. If applicable, the name of the Portfolio making such sale;
2. The name of the issuer and description of the securities;
3. The number of shares and principal amount sold, and accrued interest,
if any;
4. The date on which the securities sold were purchased or other
information identifying the securities sold and to be delivered;
5. The trade date;
6. The settlement date;
7. The sale price per unit and the brokerage commission, taxes or other
expenses payable in connection with such sale;
8. The total amount to be received by Fund upon such sale; and
9. The name and address of the broker or dealer through whom or person to
whom the sale was made.
In accordance with such instructions, Custodian will deliver or cause to be
delivered the securities thus designated as sold for the account of Fund to
the broker or other person specified in the instructions relating to such
sale. Except as otherwise instructed by Fund, such delivery shall be made
upon receipt of payment therefor: (a) in such form as is satisfactory to
the Custodian; (b) credit to the account of the Custodian with a clearing
corporation of a national securities exchange of which the Custodian is a
member; or (c) credit to the account of the Custodian, on behalf of its
customers, with a Depository. Notwithstanding the foregoing: (i) in the
case of
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securities held in physical form, such securities shall be delivered in
accordance with "street delivery custom" to a broker or its clearing agent;
or (ii) in the case of the sale of securities, the settlement of which
occurs outside of the United States of America, the Custodian may make, or
cause a subcustodian appointed pursuant to Section 3.S.2. of this Agreement
to make, payment therefor in accordance with generally accepted local
custom and market practice.
H. Purchases or Sales of Options and Futures
Fund will, on each business day on which a purchase or sale of the
following options and/or futures shall be made by it, deliver to Custodian
instructions which shall specify with respect to each such purchase or
sale:
1. If applicable, the name of the Portfolio making such purchase or sale;
2. Security Options
a. The underlying security:
b. The price at which purchased or sold;
c. The expiration date;
d. The number of contracts;
e. The exercise price;
f. Whether the transaction is an opening, exercising, expiring or
closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased;
i. Market on which option traded; and
j. Name and address of the broker or dealer through whom the sale or
purchase was made.
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3. Options on Indices
a. The index;
b. The price at which purchased or sold;
c. The exercise price;
d. The premium;
e. The multiple;
f. The expiration date;
g. Whether the transaction is an opening, exercising, expiring or
closing transaction;
h. Whether the transaction involves a put or call;
i. Whether the option is written or purchased; and
j. The name and address of the broker or dealer through whom the
sale or purchase was made, or other applicable settlement
instructions.
4. Security Index Futures Contracts
a. The last trading date specified in the contract and, when
available, the closing level, thereof;
b. The index level on the date the contract is entered into;
c. The multiple;
d. Any margin requirements;
e. The need for a segregated margin account (in addition to
instructions, and if not already in the possession of Custodian,
Fund shall deliver a substantially complete and executed
custodial safekeeping account and procedural agreement which
shall be incorporated by reference into this Custody Agreement);
and
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<PAGE>
f. The name and address of the futures commission merchant through
whom the sale or purchase was made, or other applicable
settlement instructions.
5. Options on Index Future Contracts
a. The underlying index future contract;
b. The premium;
c. The expiration date;
d. The number of options;
e. The exercise price;
f. Whether the transaction involves an opening, exercising, expiring
or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased; and
i. The market on which the option is traded.
I. Securities Pledged or Loaned
If specifically allowed for in the prospectus of Fund, and subject to such
additional terms and conditions as Custodian may require:
1. Upon receipt of instructions, Custodian will release or cause to be
released securities held in custody to the pledgee designated in such
instructions by way of pledge or hypothecation to secure any loan
incurred by Fund; provided, however, that the securities shall be
released only upon payment to Custodian of the monies borrowed, except
that in cases where additional collateral is required to secure a
borrowing already made, further securities may be released or caused
to be released for that purpose upon receipt of instructions. Upon
receipt of instructions, Custodian will pay, but only from funds
available for such purpose, any such loan upon redelivery to it of the
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securities pledged or hypothecated therefor and upon surrender of the
note or notes evidencing such loan.
2. Upon receipt of instructions, Custodian will release securities held
in custody to the borrower designated in such instructions; provided,
however, that the securities will be released only upon deposit with
Custodian of full cash collateral as specified in such instructions,
and that Fund will retain the right to any dividends, interest or
distribution on such loaned securities. Upon receipt of instructions
and the loaned securities, Custodian will release the cash collateral
to the borrower.
J. Routine Matters
Custodian will, in general, attend to all routine and mechanical matters in
connection with the sale, exchange, substitution, purchase, transfer, or
other dealings with securities or other property of Fund except as may be
otherwise provided in this Agreement or directed from time to time by the
Fund in writing.
K. Deposit Accounts
Custodian will open and maintain one or more special purpose deposit
accounts in the name of Custodian ("Accounts"), subject only to draft or
order by Custodian upon receipt of instructions. All monies received by
Custodian from or for the account of Fund shall be deposited in said
Accounts. Barring events not in the control of the Custodian such as
strikes, lockouts or labor disputes, riots, war or equipment or
transmission failure or damage, fire, flood, earthquake or other natural
disaster, action or inaction of governmental authority or other causes
beyond its control, at 9:00 a.m., Kansas City time, on the second business
day after deposit of any check into an Account, Custodian agrees to make
Fed Funds available to the Fund in the amount of the check. Deposits made
by Federal Reserve wire will be available to the Fund immediately and ACH
wires will be available to the Fund on the next business day.
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<PAGE>
Income earned on the portfolio securities will be credited to the Fund based
on the schedule attached as Exhibit A. The Custodian will be entitled to
reverse any credited amounts were credits have been made and monies are not
finally collected. If monies are collected after such reversal, the
Custodian will credit the Fund in that amount. Custodian may open and
maintain Accounts in its own banking department, or in such other banks or
trust companies as may be designated by it or by Fund in writing, all such
Accounts, however, to be in the name of Custodian and subject only to its
draft or order. Funds received and held for the account of different
Portfolios shall be maintained in separate Accounts established for each
Portfolio.
L. Income and Other Payments to Fund
---------------------------------
Custodian will:
1. Collect, claim and receive and deposit for the account of Fund all
income and other payments which become due and payable on or after the
effective date of this Agreement with respect to the securities
deposited under this Agreement, and credit the account of Fund in
accordance with the schedule attached hereto as Exhibit A. If, for any
reason, the Fund is credited with income that is not subsequently
collected, Custodian may reverse that credited amount.
2. Execute ownership and other certificates and affidavits for all federal,
state and local tax purposes in connection with the collection of bond
and note coupons; and
3. Take such other action as may be necessary or proper in connection with:
a. the collection, receipt and deposit of such income and other
payments, including but not limited to the presentation for payment
of:
1. all coupons and other income items requiring presentation; and
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2. all other securities which may mature or be called, redeemed,
retired or otherwise become payable and regarding which the
Custodian has actual knowledge, or should reasonably be
expected to have knowledge; and
b. the endorsement for collection, in the name of the Fund, of all
checks, drafts or other negotiable instruments.
Custodian, however, will not be required to institute suit or take other
extraordinary action to enforce collection except upon receipt of
instructions and upon being indemnified to its satisfaction against the
costs and expenses of such suit or other actions. Custodian will receive,
claim and collect all stock dividends, rights and other similar items and
will deal with the same pursuant to instructions. Unless prior instructions
have been received to the contrary, Custodian will, without further
instructions, sell any rights held for the account of Fund on the last trade
date prior to the date of expiration of such rights.
M. Payment of Dividends and other Distributions
--------------------------------------------
On the declaration of any dividend or other distribution on the shares of
capital stock of Fund ("Fund Shares") by the Board of Directors of Fund,
Fund shall deliver to Custodian instructions with respect thereto. On the
date specified in such instructions for the payment of such dividend or
other distribution, Custodian will pay out of the monies held for the
account of Fund, insofar as the same shall be available for such purposes,
and credit to the account of the Dividend Disbursing Agent for Fund, such
amount as may be specified in such instructions.
N. Shares of Fund Purchased by Fund
--------------------------------
Whenever any Fund Shares are repurchased or redeemed by Fund, Fund or its
agent shall advise Custodian of the aggregate dollar amount to be paid for
such shares and shall confirm such advice in writing. Upon receipt of such
advice, Custodian shall
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charge such aggregate dollar amount to the account of Fund and either
deposit the same in the account maintained for the purpose of paying for the
repurchase or redemption of Fund Shares or deliver the same in accordance
with such advice. Custodian shall not have any duty or responsibility to
determine that Fund Shares have been removed from the proper shareholder
account or accounts or that the proper number of Fund Shares have been
cancelled and removed from the shareholder records.
O. Shares of Fund Purchased from Fund
----------------------------------
Whenever Fund Shares are purchased from Fund, Fund will deposit or cause to
be deposited with Custodian the amount received for such shares. Custodian
shall not have any duty or responsibility to determine that Fund Shares
purchased from Fund have been added to the proper shareholder account or
accounts or that the proper number of such shares have been added to the
shareholder records.
P. Proxies and Notices
-------------------
Custodian will promptly deliver or mail or have delivered or mailed to Fund
all proxies properly signed, all notices of meetings, all proxy statements
and other notices, requests or announcements affecting or relating to
securities held by Custodian for Fund and will, upon receipt of
instructions, execute and deliver or cause its nominee to execute and
deliver or mail or have delivered or mailed such proxies or other
authorizations as may be required. Except as provided by this Agreement or
pursuant to instructions hereafter received by Custodian, neither it nor its
nominee will exercise any power inherent in any such securities, including
any power to vote the same, or execute any proxy, power of attorney, or
other similar instrument voting any of such securities, or give any consent,
approval or waiver with respect thereto, or take any other similar action.
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Q. Disbursements
-------------
Custodian will pay or cause to be paid, insofar as funds are available for
the purpose, bills, statements and other obligations of Fund (including but
not limited to obligations in connection with the conversion, exchange or
surrender of securities owned by Fund, interest charges, dividend
disbursements, taxes, management fees, custodian fees, legal fees, auditors'
fees, transfer agents' fees, brokerage commissions, compensation to
personnel, and other operating expenses of Fund0 pursuant to instructions of
Fund setting forth the name of the person to whom payment is to be made, the
amount of the payment, and the purpose of the payment.
R. Daily Statement of Accounts
---------------------------
Custodian will, within a reasonable time, render to Fund a detailed
statement of the amounts received or paid and of securities received or
delivered for the account of Fund during each business day. Custodian will,
from time to time, upon request by Fund, render a detailed statement of the
securities and monies held for Fund under this Agreement, and Custodian will
maintain such books and records as are necessary to enable it to do so.
Custodian will permit such persons as are authorized by Fund, including
Fund's independent public accountants, reasonable access to such records or
will provide reasonable confirmation of the contents of such records, and if
demanded, Custodian will permit federal and state regulatory agencies to
examine the securities, books and records. Upon the written instructions of
Fund or as demanded by federal or state regulatory agencies, Custodian will
instruct any subcustodian to permit such persons as are authorized by Fund,
including Fund's independent public accountants, reasonable access to such
records or to provide reasonable confirmation of the contents of such
records, and to permit such agencies to examine the books, records and
securities held by such subcustodian which relate to the Fund.
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<PAGE>
S. Appointment of Subcustodian
---------------------------
1. Notwithstanding any other provisions of this Agreement, all or any of
the monies or securities of Fund may be held in Custodian's own custody
or in the custody of one or more other banks or trust companies acting
as sub custodians as may be selected by Custodian. Any such subcustodian
selected by the Custodian must have the qualifications required for a
custodian under the 1940 Act, as amended. Custodian shall be responsible
to the Fund for any loss, damage or expense suffered or incurred by the
Fund resulting from the actions or omissions of any subcustodians
selected and appointed by Custodian (except subcustodians appointed at
the request of Fund and as provided in Subsection 2 below) to the same
extent Custodian would be responsible to the Fund under Section 5. of
this Agreement if it committed the act or omission itself. Upon request
of the Fund, Custodian shall be willing to contract with other
subcustodians reasonably acceptable to the Custodian for purposes of (i)
effecting third-party repurchase transactions with banks, brokers,
dealers, or other entities through the use of a common custodian or
subcustodian, or (ii) providing depository and clearing agency services
with respect to certain variable rate demand note securities, or (iii)
for other reasonable purposes specified by Fund; provided, however, that
the Custodian shall be responsible to the Fund for any loss, damage or
expense suffered or incurred by the Fund resulting from the actions or
omissions of any such subcustodian only to the same extent such
subcustodian is responsible to the Custodian. The Fund shall be entitled
to review the Custodian's contracts with any such subcustodians
appointed at the request of Fund. Custodian shall be responsible to the
Fund for any loss, damage or expense suffered or incurred by the Fund
resulting from the actions or omissions of any
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Depository only to the same extent such Depository is responsible
to Custodian.
2. Notwithstanding any other provisions of this Agreement, Fund's
foreign securities (as defined in Rule 17f-5(c)(1) under the 1940
Act) and Fund's cash or cash equivalents, in amounts deemed by
the Fund to be reasonably necessary to effect Fund's foreign
securities transactions, may be held in the custody of one or
more banks or trust companies acting as subcustodians, and
thereafter, pursuant to a written contract or contracts as
approved by Fund's Board of Directors, may be transferred to
accounts maintained by any such subcustodian with eligible
foreign custodians, as defined in Rule 17f-5(c)(2). Custodian
shall be responsible to the Fund for any loss, damage or expense
suffered or incurred by the Fund resulting from the actions or
omissions of any foreign subcustodian only to the same extent the
foreign subcustodian is liable to the domestic subcustodian with
which the Custodian contracts for foreign subcustody purposes.
T. Accounts and Records
Custodian will prepare and maintain, with the direction and as
interpreted by the Fund, Fund's accountants and/or other advisors, in
complete, accurate and current form all accounts and records (i)
required to be maintained by Fund with respect to portfolio
transactions under Rule 31a of the 1940 Act, (ii) required to be
maintained as a basis for calculation of the Fund's net asset value,
and (iii) as otherwise agreed upon between the parties. The Custodian
shall also perform such accounting and recordkeeping functions and
other ministerial administrative services as are necessary to enable
it to complete on a timely basis worksheets in the forms attached
hereto as Exhibit B, as they may be amended by agreement of the
parties from time to time (the "Worksheets"); provided, however, that
the Custodian shall not be
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responsible for rendering any legal or tax advice or opinions in
connection therewith, or for advising the Fund as to the resolution of
any compliance issues thereby identified. Custodian will preserve all
records prepared hereunder in the manner and for the periods
prescribed in the 1940 Act or for such longer period as is agreed upon
by the parties. Custodian relies upon Fund to furnish, in writing or
its electronic digital equivalent, accurate and timely information
needed by Custodian to complete Fund's records and the Worksheets and
perform daily calculation of the Fund's net asset value. Custodian
shall incur no liability and Fund shall indemnify and hold harmless
Custodian from and against any liability arising from any failure of
Fund to furnish such information in a timely and accurate manner, even
if Fund subsequently provides accurate but untimely information. It
shall be the responsibility of Fund to furnish Custodian with the
declaration, record and payment dates and amounts of any dividends or
income and any other special actions required concerning each of its
securities when such information is not readily available from
generally accepted securities industry services or publications.
U. Accounts and Records Property of Fund
Custodian acknowledges that all of the accounts and records maintained
by Custodian pursuant to this Agreement are the property of Fund, and
will be made available to Fund for inspection or reproduction within a
reasonable period of time, upon demand. Custodian will assist Fund's
independent auditors, or upon approval of Fund, or upon demand, any
regulatory body, in any requested review of Fund's accounts and
records but shall be reimbursed by Fund for all expenses and employee
time invested in any such review outside of routine and normal
periodic reviews. Upon receipt from Fund of the necessary information
or instructions, Custodian will supply information from the books and
records it maintains for Fund that Fund needs for tax returns,
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questionnaires, period reports to shareholders and such other reports
and information requests as Fund and Custodian shall agree upon from
time to time.
V. Adoption of Procedures
Custodian and Fund may from time to time adopt procedures as they
agree upon, and Custodian may conclusively assume that no procedure
approved or directed by Fund or its accountants or other advisors
conflicts with or violates any requirements of its prospectus,
articles of incorporation, bylaws, any applicable law, rule or
regulation, or any order, decree or agreement by which Fund may be
bound. Fund will be responsible to notify Custodian of any changes in
statutes, regulations, rules, require ments or policies which might
necessitate changes in Custodian's responsibilities or procedures.
W. Calculation of Net Asset Value
Custodian will calculate Fund's net asset value, in accordance with
Fund's prospectus. Custodian will price the securities and foreign
currency holdings of Fund for which market quotations are available by
the use of outside services designated by Fund which are normally used
and contracted with for this purpose; all other securities and foreign
currency holdings will be priced in accordance with Fund's
instructions. Custodian will have no responsibility for the accuracy
of the prices quoted by these outside services or for the information
supplied by Fund or for acting upon such instructions, except to the
extent attributable to the negligence or willful misconduct of the
Custodian.
X. Advances
In the event Custodian or any subcustodian shall, in its sole
discretion, advance cash or securities for any purpose (including but
not limited to securities settlements, purchase or sale of foreign
exchange or foreign exchange contracts and assumed settlement) for the
benefit of any Portfolio, the advance shall be payable by the Fund
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on demand. Any such cash advance shall be subject to an overdraft
charge at the rate set forth in the then-current fee schedule from the
date advanced until the date repaid. As security for each such advance,
Fund hereby grants Custodian and such subcustodian a lien on and
security interests in all property at any time held for the account of
the applicable Portfolio, including without limitation all assets
acquired with the amount advanced. Should the Fund fail to promptly
repay the advance, the Custodian and each subcustodian shall be
entitled to utilize available cash and to dispose of such Portfolio's
assets pursuant to applicable law to the extent necessary to obtain
reimbursement of the amount advanced and any related overdraft charges.
Y. Exercise of Rights; Tender Offers
Upon receipt of instructions, the Custodian shall: (a) deliver
warrants, puts, calls, rights or similar securities to the issuer or
trustee thereof, or to the agent of such issuer or trustee, for the
purpose of exercise or sale, provided that the new securities, cash or
other assets, if any, are to be delivered to the Custodian; and (b)
deposit securities upon invitations for tenders thereof, provided that
the consideration for such securities is to be paid or delivered to the
Custodian or the tendered securities are to be returned to the
Custodian.
4. INSTRUCTIONS.
A. The term "instructions," as used herein, means written (including
telecopied or telexed) or oral instructions which Custodian reasonably
believes were given by a designated representative of Fund. Fund shall
deliver to Custodian, prior to delivery of any assets to Custodian and
thereafter from time to time as changes therein are necessary, written
instructions naming one or more designated representatives to give
instructions in the name and on behalf of the Fund, which instructions
may be received and accepted by Custodian as conclusive evidence of
the authority of any designated representative to act for Fund and may
be considered to be in full force and effect
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(and Custodian will be fully protected in acting in reliance thereon) until
receipt by Custodian of notice to the contrary. Unless such written
instructions delegating authority to any person to give instructions
specifically limit such authority to specific matters or require that the
approval of anyone else will first have been obtained, Custodian will be
under no obligation to inquire into the right of such person, acting alone,
to give any instructions whatsoever which Custodian may receive from such
person. If Fund fails to provide Custodian any such instructions naming
designated representatives, any instructions received by Custodian from a
person reasonably believed to be an appropriate representative of Fund
shall constitute valid and proper instructions hereunder.
B. No later than the next business day immediately following each oral
instruction, Fund will send Custodian written confirmation of such oral
instruction. At Custodian's sole discretion, Custodian may record on tape,
or otherwise, any oral instruction whether given in person or via
telephone, each such recording identifying the parties, the date and the
time of the beginning and ending of such oral instruction.
C. If Custodian shall provide Fund direct access to any computerized
recordkeeping and reporting system used hereunder or if Custodian and Fund
shall agree to utilize any electronic system of communication, Fund shall
be fully responsible for any and all consequences of the use or misuse of
the terminal device, passwords, access instructions and other means of
access to such system(s) which are utilized by, assigned to or otherwise
made available to the Fund. Fund agrees to implement and enforce
appropriate security policies and procedures to prevent unauthorized or
improper access to or use of such system(s). Custodian shall be fully
protected in acting hereunder upon any instructions, communications, data
or other information received by Custodian by such means as fully and to
the same effect as if delivered to Custodian by written instrument signed
by the requisite authorized representative(s)
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of Fund. Fund shall indemnify and hold Custodian harmless from and against
any and all losses, damages, payments, liability and reasonable costs and
expenses, including reasonable attorney's fees, which may be suffered or
incurred by Custodian as a result of the use or misuse, whether authorized
or unauthorized, of any such system(s) by Fund or by any person who
acquires access to such system(s) through the terminal device, passwords,
access instructions or other means of access to such system(s) which are
utilized by, assigned to or otherwise made available to the Fund, except to
the extent attributable to any negligence or willful misconduct by
Custodian.
5. LIMITATION OF LIABILITY OF CUSTODIAN.
------------------------------------
A. Custodian shall at all times use reasonable care and due diligence and
act in good faith in performing its duties under this Agreement.
Custodian shall not be responsible for, and the Fund shall indemnify
and hold Custodian harmless from and against, any and all losses,
damages, payments, liability and reasonable costs and expenses,
including reasonable attorney's fees, which may be asserted against
Custodian, incurred by Custodian or for which Custodian may be held to
be liable, arising out of or attributable to:
1. All actions taken by Custodian pursuant to this Agreement or any
instructions provided to it hereunder, provided that Custodian
has acted in good faith and with due diligence and reasonable
care, except to the extent attributable to the negligence or
willful misconduct of the Custodian; and
2. The Fund's refusal or failure to comply with the terms of this
Agreement (including without limitation the Fund's failure to pay
or reimburse Custodian under this indemnification provision), the
Fund's negligence or willful misconduct, or the failure of any
representation or warranty of the Fund hereunder to be and remain
true and correct in all respects at all times.
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B. Custodian may request and obtain, at the expense of Fund, the advice
and opinion of counsel for Fund or, of its own expense, the advice and
opinion of its own counsel with respect to questions or matters of
law, and it shall be without liability to Fund for any action taken or
omitted by it in good faith, in conformity with such advice or
opinion. If Custodian reasonably believes that it could not prudently
act according to the instructions of the Fund or the Fund's
accountants or counsel, it may in its discretion, with notice to the
Fund, not act according to such instructions.
C. Custodian may rely upon the advice and statements of Fund, Fund's
accountants and officers or other authorized individuals, and other
persons believed by it in good faith to be expert in matters upon
which they are consulted, and Custodian shall not be liable for any
actions taken, in good faith, upon such advice and statements.
D. If Fund requests Custodian in any capacity to take any action which
involves the payment of money by Custodian, or which might make it or
its nominee liable for payment of monies or in any other way,
Custodian shall be indemnified and held harmless by Fund against any
liability on account of such action; provided, however, that nothing
herein shall obligate Custodian to take any such action except in its
sole discretion.
E. Custodian shall be protected in acting as custodian hereunder upon any
instructions, advice, notice, request, consent, certificate or other
instrument or paper appearing to it to be genuine and to have been
properly executed. Custodian shall be entitled to receive upon request
as conclusive proof of any fact or matter required to be ascertained
from Fund hereunder a certificate signed by an officer or designated
representative of Fund. Fund shall also provide Custodian instructions
with respect to any matter concerning this Agreement requested by
Custodian.
F. Custodian shall be under no duty or obligation to inquire into, and
shall not be liable for:
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1. The validity of the issue of any securities purchased by or for
Fund, the legality of the purchase of any securities or foreign
currency positions or evidence of ownership required by Fund to
be received by Custodian, or the propriety of the decision to
purchase or amount paid therefor;
2. The legality of the sale of any securities or foreign currency
positions by or for Fund, or the propriety of the amount for
which the same are sold;
3. The legality of the issue or sale of any Fund Shares, or the
sufficiency of the amount to be received therefor;
4. The legality of the repurchase or redemption of any Fund Shares,
or the propriety of the amount to be paid therefor; or
5. The legality of the declaration of any dividend by Fund, or the
legality of the issue of any Fund Shares in payment of any stock
dividend.
G. Custodian shall not be liable for, or considered to be Custodian of,
any money represented by any check, draft, wire transfer,
clearinghouse funds, uncollected funds, or instrument for the payment
of money to be received by it on behalf of Fund until Custodian
actually receives such money; provided, however, that it shall advise
Fund promptly if it fails to receive any such money in the ordinary
course of business and shall cooperate with Fund toward the end that
such money shall be received.
H. Except as provided in Section 3.S., Custodian shall not be responsible
for loss occasioned by the acts, neglects, defaults or insolvency of
any broker, bank, trust company, or any other person with whom
Custodian may deal.
I. Custodian shall not be responsible or liable for the failure or delay
in performance of its obligations under this Agreement, or those of
any entity for which it is responsible hereunder, arising out of or
caused, directly or indirectly, by circumstances beyond the affected
entity's reasonable control, including, without limitation: any
interruption, loss or malfunction of any utility, transportation,
computer (hardware or
-24-
<PAGE>
software) or communication service; inability to obtain labor,
material, equipment or transportation, or a delay in mails;
governmental or exchange action, statute, ordinance, rulings,
regulations or direction; war, strike, riot, emergency, civil
disturbance, terrorism, vandalism, explosions, labor disputes,
freezes, floods, fires, tornados, acts of God or public enemy,
revolutions, or insurrection.
J. IN NO EVENT AND UNDER NO CIRCUMSTANCES SHALL EITHER PARTY TO THIS
AGREEMENT BE LIABLE TO ANYONE, INCLUDING, WITHOUT LIMITATION TO THE
OTHER PARTY, FOR CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES FOR ANY
ACT OR FAILURE TO ACT UNDER ANY PROVISION OF THIS AGREEMENT EVEN IF
ADVISED OF THIS POSSIBILITY THEREOF.
6. COMPENSATION. In consideration for its services hereunder as Custodian and
investment accounting and recordkeeping agent, Fund will pay to Custodian
such compensation as shall be set forth in a separate fee schedule to be
agreed to by Fund and Custodian from time to time. A copy of the initial
fee schedule is attached hereto and incorporated herein by reference.
Custodian shall also be entitled to receive, and Fund agrees to pay to
Custodian, on demand, reimbursement for Custodian's cash disbursements and
reasonable out-of-pocket costs and expenses, including attorney's fees,
incurred by Custodian in connection with the performance of services
hereunder. Custodian may charge such compensation against monies held by it
for the account of Fund. Custodian will also be entitled to charge against
any monies held by it for the account of Fund the amount of any loss,
damage, liability, advance, overdraft or expense for which it shall be
entitled to reimbursement from Fund, including but not limited to fees and
expenses due to Custodian for other services provided to the Fund by
Custodian. Custodian will be entitled to reimbursement by the Fund for the
losses, damages, liabilities, advances, overdrafts and expenses of
subcustodians only to the extent that (i)
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<PAGE>
Custodian would have been entitled to reimbursement hereunder if it had
incurred the same itself directly, and (ii) Custodian is obligated to
reimburse the subcustodian therefor.
7. TERM AND TERMINATION. The initial term of this Agreement shall be for a
period of one (1) year. Thereafter, either party to this Agreement may
terminate the same by notice in writing, delivered or mailed, postage
prepaid, to the other party hereto and received not less than sixty (60)
days prior to the date upon which such termination will take effect. Upon
termination of this Agreement, Fund will pay Custodian its fees and
compensation due hereunder and its reimbursable disbursements, costs and
expenses paid or incurred to such date and Fund shall designate a successor
custodian by notice in writing to Custodian by the termination date. In the
event no written order designating a successor custodian has been delivered
to Custodian on or before the date when such termination becomes effective,
then Custodian may, at its option, deliver the securities, funds and
properties of Fund to a bank or trust company at the selection of
Custodian, and meeting the qualifications for custodian set forth in the
1940 Act and having not less than Two Million Dollars ($2,000,000)
aggregate capital, surplus and undivided profits, as shown by its last
published report, or apply to a court of competent jurisdiction for the
appointment of a successor custodian or other proper relief, or take any
other lawful action under the circumstances; provided, however, that Fund
shall reimburse Custodian for its costs and expenses, including reasonable
attorney's fees, incurred in connection therewith. Custodian will, upon
termination of this Agreement and payment of all sums due to Custodian from
Fund hereunder or otherwise, deliver to the successor custodian so
specified or appointed, or as specified by the court, at Custodian's
office, all securities then held by Custodian hereunder, duly endorsed and
in form for transfer, and all funds and other properties of Fund deposited
with or held by Custodian hereunder, and Custodian will co-operate in
effecting changes in book-entries at all Depositories. Upon delivery to a
successor custodian or as specified by the court, Custodian will have no
further obligations or liabilities under this Agreement. Thereafter such
successor will be the
-26-
<PAGE>
successor custodian under this Agreement and will be entitled to reasonable
compensation for its services. In the event that securities, funds and
other properties remain in the possession of the Custodian after the date
of termination hereof owing to failure of the Fund to appoint a successor
custodian, the Custodian shall be entitled to compensation as provided in
the then-current fee schedule hereunder for its services during such period
as the Custodian retains possession of such securities, funds and other
properties, and the provisions of this Agreement relating to the duties and
obligations of the Custodian shall remain in full force and effect.
8. NOTICES. Notices, requests, instructions and other writings addressed to
Fund at 239 South Fifth Street, 12th Floor, Louisville, Kentucky 40202,
Attention: Kevin Howard, or at such other address as Fund may have
designated to Custodian in writing, will be deemed to have been properly
given to Fund hereunder; and notices, requests, instructions and other
writings addressed to Custodian at its offices at 127 West 10th Street,
Kansas City, Missouri 64105, Attention: Custody Department, or to such
other address as it may have designated to Fund in writing, will be deemed
to have been properly given to Custodian hereunder.
9. CONFIDENTIALITY.
A. Fund shall preserve the confidentiality of the computerized investment
portfolio recordkeeping and accounting system used by Custodian (the
"Portfolio Accounting System") and the tapes, books, reference
manuals, instructions, records, programs, documentation and
information of, and other materials relevant to, the Portfolio
Accounting System and the business of Custodian ("Confidential
Information"). Fund shall not voluntarily disclose any such
Confidential Information to any other person other than its own
employees who reasonably have a need to know such information pursuant
to this Agreement. Fund shall return all such Confidential Information
to Custodian upon termination or expiration of this Agreement.
-27-
<PAGE>
B. Fund has been informed that the Portfolio Accounting System is
licensed for use by Custodian from DST Systems, Inc. ("Licensor"), and
Fund acknowledges that Custodian and Licensor have proprietary rights
in and to the Portfolio Accounting System and all other Custodian or
Licensor programs, code, techniques, know-how, databases, supporting
documentation, data formats, and procedures, including without
limitation any changes or modifications made at the request or expense
or both of Fund (collectively, the "Protected Information"). Fund
acknowledges that the Protected Information constitutes confidential
material and trade secrets of Custodian and Licensor. Fund shall
preserve the confidentiality of the Protected Information, and Fund
hereby acknowledges that any unauthorized use, misuse, disclosure or
taking of Protected Information, residing or existing internal or
external to a computer, computer system, or computer network, or the
knowing and unauthorized accessing or causing to be accessed of any
computer, computer system, or computer network, may be subject to
civil liabilities and criminal penalties under applicable law. Fund
shall so inform employees and agents who have access to the Protected
Information or to any computer equipment capable of accessing the
same. Licensor is intended to be and shall be a third party
beneficiary of the Fund's obligations and undertakings contained in
this paragraph.
10. MULTIPLE PORTFOLIOS. If Fund is comprised of more than one Portfolio:
A. Each Portfolio shall be regarded for all purposes hereunder as a
separate party apart from each other Portfolio. Unless the context
otherwise requires, with respect to every transaction covered by this
Agreement, every reference herein to the Fund shall be deemed to
relate solely to the particular Portfolio to which such transaction
relates. Under no circumstances shall the rights, obligations or
remedies with respect to a particular Portfolio constitute a right,
obligation or remedy applicable to any other Portfolio. The use of
this single document to memorialize the separate agreement of
-28-
<PAGE>
each Portfolio is understood to be for clerical convenience only and
shall not constitute any basis for joining the Portfolios for any
reason.
B. Additional Portfolios may be added to this Agreement, provided that
Custodian consents to such addition, which consent shall not be
unreasonably withheld. Rates or charges for each additional Portfolio
shall be as agreed upon by Custodian and Fund in writing.
11. MISCELLANEOUS.
A. This Agreement shall be construed according to, and the rights and
liabilities of the parties hereto shall be governed by, the laws of
the State of Missouri, without reference to the choice of laws
principles thereof.
B. All terms and provisions of this Agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties hereto and
their respective successors and permitted assigns.
C. The representations and warranties, the indemnifications extended
hereunder, and the provisions of Section 9. hereof are intended to and
shall continue after and survive the expiration, termination or
cancellation of this Agreement.
D. No provisions of the Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed
by each party hereto.
E. The failure of either party to insist upon the performance of any
terms or conditions of this Agreement or to enforce any rights
resulting from any breach of any of the terms or conditions of this
Agreement, including the payment of damages, shall not be construed as
a continuing or permanent waiver of any such terms, conditions, rights
or privileges, but the same shall continue and remain in full force
and effect as if no such forbearance or waiver had occurred. No
waiver, release or discharge of any party's rights hereunder shall be
effective unless contained in a written instrument signed by the party
sought to be charged.
-29-
<PAGE>
F. The captions in the Agreement are included for convenience of
reference only, and in no way define or limit any of the provisions
hereof or otherwise affect their construction or effect.
G. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall
constitute one and the same instrument.
H. If any provision of this Agreement shall be determined to be invalid
or unenforceable, the remaining provisions of this Agreement shall not
be affected thereby, and every provision of this Agreement shall
remain in full force and effect and shall remain enforceable to the
fullest extent permitted by applicable law.
I. This Agreement may not be assigned by either party hereto without the
prior written consent of the other party.
J. Neither the execution nor performance of this Agreement shall be
deemed to create a partnership or joint venture by and between
Custodian and Fund.
K. Except as specifically provided herein, this Agreement does not in any
way affect any other agreements entered into among the parties hereto
and any actions taken or omitted by either party hereunder shall not
affect any rights or obligations of the other party hereunder.
-30-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective duly authorized officers.
INVESTORS FIDUCIARY TRUST COMPANY
By: /s/ Allen Strain
------------------------------------
Title: Executive Vice President
---------------------------------
STATE BOND MUNICIPAL FUNDS, INC.
By: /s/ Kevin L. Howard
------------------------------------
Kevin L. Howard
Title: Secretary
---------------------------------
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<PAGE>
EXHIBIT A
---------
INVESTORS FIDUCIARY TRUST COMPANY
AVAILABILITY SCHEDULE BY TRANSACTION TYPE
<TABLE>
<CAPTION>
====================================================================================================
TRANSACTION DTC PHYSICAL FED
----------- --- -------- ---
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE
- ----------------------------------------------------------------------------------------------------
Calls Puts As Received C or F* As Received C or F*
- ----------------------------------------------------------------------------------------------------
Maturities As Received C or F* Mat. Date C or F* Mat. Date F
- ----------------------------------------------------------------------------------------------------
Tender Reorgs. As Received C As Received C N/A
- ----------------------------------------------------------------------------------------------------
Dividends Paydate C Paydate C N/A
- ----------------------------------------------------------------------------------------------------
Floating Rate Int. Paydate C Paydate C N/A
- ----------------------------------------------------------------------------------------------------
Floating Rate Int. N/A As Rate Received C N/A
(No Rate)
- ----------------------------------------------------------------------------------------------------
Mtg. Backed P&I Paydate C Paydate + 1 C Paydate F
Bus. Day
- ----------------------------------------------------------------------------------------------------
Fixed Rate Int. Paydate C Paydate C Paydate F
- ----------------------------------------------------------------------------------------------------
Euroclear N/A C Paydate C
====================================================================================================
</TABLE>
Legend
- ------
C = Clearinghouse Funds
F = Fed Funds
N/A = Not Applicable
* Availability based on how received.
<PAGE>
TRANSFER AGENCY AGREEMENT
This Agreement, dated as of the 1st day of February, 1996, made by and between
State Bond Municipal Funds, Inc. (the "Fund"), a corporation operating as an
open-end investment company, duly organized and existing under the laws of the
State of Maryland, and ARM Transfer Agency, Inc., ( the "Agent"), a Delaware
corporation;
WITNESSETH THAT:
NOW, THEREFORE, in consideration of the premises and mutual covenants contained
herein, the parties hereto, intending to be legally bound, do hereby amend and
restate such agreement as follows:
Section 1. The terms as defined in this Section wherever used in this
Agreement, or in any amendment or supplement hereto, shall have the meanings
herein specified, unless the context otherwise requires.
Bank: The term Bank shall mean the entity that maintains the Fund's check
redemption account.
Custodian: The term Custodian shall mean that entity which is acting as
Custodian of the Fund's assets from time to time.
Share Certificates: The term Share Certificates shall mean the stock
certificates for the Shares of the Fund.
Shareholders: The term Shareholders shall mean the registered owners from
time to time of the Shares of the Fund in accordance with the stock registry
records of the Fund.
Shares: The term Shares shall mean the issued and outstanding shares of
common stock of the Fund.
Plan: The term Plan shall include such investment plans, dividend or
capital gains reinvestment plans, systematic withdrawal plans or other types of
plans set forth is the prospectus of the Fund, in form acceptable to the Agent,
which the fund may from time to time adopt and make available to its
Shareholders, including plans or account established for pension and profit-
sharing plans established by self-employed individuals or partnerships.
Planholder: The term Planholder shall mean a Shareholder who, at the time
of reference, is participating in a Plan, and shall include any underwriter,
representative or broker-dealer.
Section 2. The Fund hereby appoints the Agent as its Transfer, Redemption
and Dividend Disbursing Agent and as Administrator of its Plans, and the Agent
accepts such appointment and agrees to act in such capacities upon the terms set
forth in this Agreement.
TRANSFER AGENCY
Section 3. The Fund shall furnish to the Agent, as Transfer Agent, a
sufficient supply of blank Share Certificates and from time to time will renew
such supply upon the request of the Agent. Such blank Share Certificates shall
be signed manually or by facsimile signatures of officers of the Fund authorized
by law or the bylaws of the Fund to sign Share Certificates and, if required,
shall bear the corporate seal or a facsimile thereof.
Section 4. The Agent, as Transfer Agent, Shall make original issues of
Shares in accordance with the provisions of Sections 14 and 15 below and the
Fund's prospectus.
Section 5. Transfers of Shares shall be registered and new Share
Certificates issued by the Agent upon surrender of outstanding Shall
Certificates (a) in form deemed by the Agent to be properly endorsed for
transfer, (b) with all necessary endorsers' signatures guaranteed in such manner
and form as the Agent may require by a guarantor reasonably believed by the
Agent to be responsible, accompanied by (c) such assurances of the Agent shall
deem necessary or appropriate to evidence the genuineness and effectiveness of
each necessary endorsement, and (d) satisfactory evidence of compliance with all
applicable laws relating to the payment of collection of taxes.
<PAGE>
Section 6. When mail is used for delivery of Share Certificates, the Agent
shall forward Share Certificates in "non-negotiable" form by first-class mail,
and Share Certificates in "negotiable" form by registered mail, and mail
deliveries to be covered while in transit to the addressee by insurance arranged
for by the Agent.
Section 7. In registering transfers, the Agent, as Transfer Agent, may
rely upon the Uniform Commercial Code or any other statutes which in the opinion
of counsel protect the Agent and the Fund in not requiring complete
documentation, in registering transfer without inquiry into adverse claims, in
delaying registration for purposes of such inquiry, or in refusing registration
where in its judgment an adverse claim requires such refusal.
Section 8. The Agent, as Transfer Agent, may issue new Share Certificates
in place of Share Certificates represented to have been lost, destroyed or
stolen, upon receiving indemnity satisfactory to the Agent and may issue new
Share Certificates in exchange for, and upon surrender of, mutilated Share
Certificates.
Section 9. In case any officer of the Fund who shall have signed manually
or whose facsimile signature shall have been affixed to blank Share Certificates
shall die, resign or be removed prior to the issuance of such Share
Certificates, the Agent, as Transfer Agent, may issue or register such Share
Certificates as the Share Certificates of the Fund notwithstanding such death,
resignation or removal; and the Fund shall file promptly with the Agent such
approval, adoption or ratification as may be required by law.
Section 10. The Agent will maintain stock registry records in the usual
form in which it will note the issuance and redemption of Shares and the
issuance and transfer of Share Certificates, and is also authorized to maintain
an account entitled Unissued Certificate Account in which it will record the
Shares and fractions issued and outstanding from time to time for which issuance
of Shares Certificates is deferred. The Agent is authorized to keep records,
which will be part of the stock transfer records, and well as its records of the
Plans, in which it will note the names and registered addresses of Planholders,
and the number of Shares and fractions from time to time owned by them for
which no Share Certificates are outstanding. Each Shareholder or Planholder,
whether he holds one or more Share Certificates or owns Shares held under one or
more Plans, or whether he holds or owns Shares by both methods, will be assigned
a single account number. Whenever a Shareholder deposits Shares represented by
Share Certificates in a Plan permitting the deposit of Shares thereunder, the
Agent, as Transfer Agent, upon receipt of the Share Certificates registered in
the name of the Shareholder (or, if not so registered, in proper form for
transfer), shall cancel such Share Certificates, debit the Shareholder's
individual stock account and credit the Shares to the Unissued Certificate
Account. The Agent, as Plan Administrator, shall credit the Shares so deposited
to the proper Plan account.
Section 11. The Agent will issue Share Certificates for Shares of the Fund
only upon receipt of a written request from a Shareholder. In all other cases,
the Fund authorizes the Agent to dispense with the issuance and countersignature
of Share Certificates whenever Shares are purchased. In such case, the Agent,
as Transfer Agent, shall merely note on its stock registry records the issuance
of the Shares and fractions (if any), shall credit the Unissued Certificate
Account with the Shares and fractions issued and shall credit the proper number
of Shares and fractions to the respective Shareholders. Likewise, whenever a
Shareholder requests the redemption of Shares for which the Agent's records
indicate that no Share Certificates have been issued, the Agent may cause said
Shares to be redeemed without tender of Share Certificates for same. The Fund
authorizes the Agent in such cases to process the transactions by appropriate
entries in its stock transfer records, and debiting of the Unissued Certificate
Account and the records of issued Shares outstanding.
Section 12. The Agent in its capacity as Transfer Agent will, in addition
to the duties and functions above-mentioned, perform the usual duties and
functions of a stock transfer agent for a corporation. It will countersign for
issuance or reissuance Share Certificates representing original issue or
reissued treasury shares, and will transfer Share Certificates, and Shareholder
account registrations where no Share Certificates are outstanding, registered
in the name of Shareholders from one Shareholder to another in the usual manner.
The Agent may rely conclusively and act without further investigation upon any
list, instruction, certification, authorization, Share Certificate or other
instrument or paper believed by it in good faith to be genuine and unaltered,
and to have been signed, countersigned or executed by duly authorized person or
persons, or upon the instructions of any officer of the Fund, or upon the advice
of counsel for the Fund or for the Agent. The agent may record any transfer of
Share Certificates which is reasonably believed by it in good faith to have been
duly authorized or may refuse to record any transfer of Share Certificates if in
good faith the Agent in its capacity as Transfer Agent reasonably deems such
refusal necessary in order to avoid any liability either
<PAGE>
to the fund or to the Agent. The Fund agrees to indemnify and hold harmless the
Agent from and against any and all losses, costs, claims and liability which it
may suffer or incur by reason of so relying or acting or refusing to act.
Section 13. In case of any request or demand for the inspection of the
share records of the Fund, the Agent, as Transfer Agent, shall endeavor to
notify the Fund and to secure instructions as to permitting or refusing such
inspection. However, the Agent may exhibit such records to any person in any
case where it is advised by its counsel that it may be held liable for failure
to do so.
Section 14. Prior to the daily determination of net shall process all
payments by Shareholders and Planholders received since the last determination
of the Fund's net asset value for which the Agent has sufficient information to
establish a new Shareholder account or purchase Shares for a existing account.
Immediately after the Fund's calculation of its net asset value on each day that
both the Fund and the Agent are open for business, the Agent shall obtain from
the Fund a quotation (on which it may conclusively rely) of the net asset value
per Share determined on that day. The Agent shall proceed to calculate the
amount available for investment in Shares at the quoted net asset value and the
number of Shares and fractional Shares to be purchased. The Agent, as agent for
the Shareholders and Planholders, shall place a purchase order on each day that
both the Fund and the Agent are open for business with the Fund for the proper
number of Shares and fractional Shares to be purchased and confirm such number
to the Fund.
Section 15. The proper number of Shares and fractional Shares shall then
be issued daily and credited by the Agent to the Unissued Certificate Account.
The Shares and fractional Shares purchased for each Shareholder and Planholder
will be credited by the Agent to such Shareholder's or Planholder's separate
account. The Agent shall then cause to be mailed to each Shareholder and
Planholder a confirmation of each purchase, with copies to the Fund if
requested. Such confirmations will show the prior Share balance, the new Share
balance, the Shares held under a Plan (if any), the Shares for which Stock
Certificates are outstanding (if any), the amount invested and the price paid
for the newly purchased Shares.
REDEMPTIONS
Section 16. Except for check redemptions, which shall be governed by the
check redemption procedures provided for in Sections 18 through 24, the Agent
shall, prior to the daily determination of net asset value in accordance with
the Fund's prospectus, process all requests from Shareholders to redeem Shares
received in accordance with the procedures set forth in the Fund's prospectus.
The Fund shall then quote to the Agent the applicable net asset value, whereupon
the Agent shall determine the number of Shares required to be redeemed to make
monthly payments, automatic payments or the like. The Agent shall then advise
the Fund of the number of Shares and fractional Shares requested to be redeemed
and shall process the redemption by filing with the Custodian an appropriate
statement and making the proper distribution and application of the redemption
proceeds in accordance with the Fund's prospectus. The stock registry books
recording outstanding Shares, the Unissued Certificate Account and the
individual account of the Shareholder or Planholder shall be properly debited.
Section 17. The proceeds of redemption shall be remitted by the Agent in
accordance with the Fund's prospectus as follows:
(a) By check mailed to the Shareholder of Planholder at his registered
address. If a request for redemption of Shares is valued at $20,000 or more, or
the proceeds of the redemption are to be paid to someone other than the
Shareholder, a signature guarantee of 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, SBM
Financial Services, Inc. shall accompany the redemption request.
(b) By instructions to the Fund's Custodian to wire redemption proceeds on
the next business day to a designated bank upon telephone, telegraphic, or
written request, without signature guarantee, if such redemption procedure has
been requested by the Shareholder or Planholder on an authorized form filed with
the Agent and the redemption proceeds are $20,000 or more. Any change in the
designated bank account will be accepted by the Agent only if made in writing by
the Shareholder or Planholder with signature guaranteed as required by paragraph
(a) of this Section 17.
<PAGE>
(c) By check redemption procedures as provided for in Sections 18 through
24.
(d) By other procedures commonly followed by mutual funds and mutually
agreed upon by Fund and the Agent.
CHECK REDEMPTION
Section 18. The Agent shall perform check redemption services for the Fund
subject to the terms and conditions set forth in the Fund's prospectus. The
duties and obligations of the Agent with respect to check redemptions are
limited to those specifically set forth in Sections 18 through 24 of this
Agreement.
Section 19. The Fund shall maintain balances in a check redemption account
with the Bank which shall be sufficient to pay all checks received by the Bank
drawn against the check redemption account. The balance to be maintained in the
check redemption account shall be estimated from time to time by the Fund and
the Agent, based on redemption experience.
Section 20. The Agent shall provide, at the Fund's expense, check blank
forms for the check redemption account to Shareholders of the Fund who
appropriately request the same on the Fund's investment application form and
shall process checks drawn by said Shareholders on the check redemption account
in accordance with applicable laws and rules governing checks; provided,
however, that the Agent shall be required, in verifying the drawer's signature,
only to ascertain whether the signature(s) on the check reasonably appear to be
the signature(s) on the Shareholder's signature card, but shall not be required,
either as drawee or as redemption agent for any Shareholder, to obtain any
guarantee of any Shareholder signature.
Section 21. If there are not sufficient Shares in the drawer's Share
Account which have been held for 15 days or more which are not represented by
issued Share Certificates to cover the check, the Agent shall direct the Bank
not to pay the check and shall immediately notify the Fund of such fact.
Section 22. The Agent shall, from time to time as often as necessary for
the purpose of properly performing its check redemption duties hereunder,
determine whether the Fund has deposited in the check redemption account
sufficient balances to pay all checks received by the Bank drawn against the
check redemption account. If the Fund has not deposited sufficient balances to
pay all such checks, the Bank shall pay checks only to the extent balances are
in the check redemption account. The Agent may select those checks to be paid
and those to be returned arbitrarily by any method selected by the Agent. If
checks received by the Bank drawn against the check redemption account exceed
the balances in the check redemption account, the Agent shall immediately notify
the Fund of such fact and give the Fund reasonable time to provide sufficient
collected balances. In no event shall "reasonable time" for the Fund to provide
sufficient collected balances extend beyond 10:00 a.m. on the day of the Bank's
midnight deadline with respect to any check. In no event shall the Agent
authorize the Bank to honor or pay checks drawn on the check redemption account
for which balances are not on hand in the check redemption account, and the Fund
hereby agrees to indemnify, defend and hold the Bank and the Agent harmless from
any loss, claim or expense arising out of the return of redemption checks due to
any such insufficiency of collected balances of which the Agent gave the Fund
immediate notices as required below.
Section 23. The Agent shall notify the Fund, as of the morning of the next
business day, of the balances in the check redemption account and a list of all
redemptions paid the preceding day, by name of Shareholder and amount.
Section 24. The Fund may terminate the check redemption procedure at any
time upon 30 days written notice to the Agent, and in the event of such
termination, the effect shall be to delete all references to check redemption
procedures in this Agreement.
DIVIDENDS AND DISTRIBUTIONS
Section 25. It is mutually understood by the parties that the Fund intends
to declare daily dividends payable to Shareholders and Planholders of record as
of the close of business each day, and that all dividends are to be payable and
automatically reinvested in additional Shares as of the fourth business day
prior to the end of each month, except
<PAGE>
in cases where Shareholders have elected to receive dividends in cash, in which
case checks will be mailed within three business days after the payable date.
On each business day, the Fund shall notify the Agent of the amount of net
income of the Fund earned for the business day and the amount of net income that
will be earned for the ensuing days that will not be business days. Based on
the number of Shares outstanding as of the close of business on each such
business day, the Agent shall thereupon compute the dividends per Share payable
with respect to the account of each Shareholder and Planholder and monthly the
number of additional Shares and fractional Shares to be issued with respect to
such dividends. The Agent shall notify the Fund monthly of the total number of
additional Shares and fractional Shares issued and the amount of dividends to be
paid in cash. On or before the payment date for each dividend, the Fund shall
transfer, or cause the Custodian to transfer, to the Bank sufficient cash to pay
those dividends payable in cash on that payment date. Dividend checks will be
mailed by the Agent within three days after the payment date. The Agent shall
maintain records as to the additional Shares and fractional Shares issued with
respect to dividends which are reinvested in additional Shares by crediting each
Shareholder's or Planholder's account for Shares purchased by them by means of
reinvestment of dividends payable on Shares in their account. The Agent shall
cause to be mailed to each Shareholder and Planholder a confirmation of each
such purchase by reinvestment of such dividend.
Section 26. In the event that the Fund changes its dividend policy or the
Fund orders the distribution of any extraordinary long-term gains, the Fund
shall notify the Agent of each resolution of the Fund's Board of Directors
declaring such distribution or change in its dividend policy, the amount payable
per share, the record date for determining Shareholders or Planholders entitled
to payment, the net asset value to be used for reinvestments of such other
distribution or dividends, and the payment date. The Agent shall, prior to the
designated payment date, calculate the amount of such dividend or other
distribution to be reinvested in Shares and fractional Shares of each
Shareholder and Planholder and the amount to be paid in cash. On or before each
payment date the Fund shall transfer, or cause the Custodian to transfer, to the
Bank sufficient cash to pay and such dividends or other distributions payable in
cash. Checks for such dividends or distributions payable in cash will be mailed
by the Agent within three business days after the payment date. The Agent shall
maintain records as to additional Shares and fractional Shares issued with
respect to such dividends or other distributions with are reinvested in
additional Shares by crediting each Shareholder's or Planholder's account from
Shares purchased by them by means of reinvestment of such dividends or
distributions payable on Shares in their account. The Agent shall caused to be
mailed to each Shareholder and Planholder a confirmation of each such purchase
by reinvestment of such dividend or distribution.
GENERAL PROVISIONS
Section 27. The Agent shall maintain records (which may be part of the
stock transfer records) in connection with the issuance and redemption of
Shares, the disbursement of dividends and the administration of the Plans and
dividend reinvestments, in which will be noted the transactions effected for
each Shareholder and Planholder and the number of Shares and fractional Shares
owned by each for which no Share Certificates are outstanding.
Section 28. In addition to the services provided for in this Agreement,
the Agent will perform other services for the Fund as agreed from time to time,
including but not limited to, preparation of the mailing Federal 1099 Forms,
mailing semi-annual reports of the Fund preparation of an annual list of
Shareholders and Planholders, mailing notices of Shareholder's meeting, proxies
and proxy statements, and examination and tabulation of returned proxies and
certification of the vote to the Fund.
Section 29. Nothing contained in this Agreement is intended to or shall
require the Agent, in any capacity hereunder, to perform any functions or duties
on any holiday or other day of special observance on which the Agent is closed.
Functions or duties normally scheduled to be performed on such days shall be
performed on, and as of, the next business day on which the Fund and the Agent
are open.
Section 30. The Fund agrees to pay the Agent compensation for its services
and to reimburse the Agent for its expenses as shall be agreed upon from time to
time.
Section 31. The Agent shall not be liable for any taxes, assessments or
governmental charges which may be levied or assessed on any basis whatsoever,
upon the securities held or processed hereunder, or otherwise in connection with
the Agent's activities or status under this Agreement.
<PAGE>
Section 32. The Agent, at any time, may apply to the Fund for instructions
with respect to any matter in connection with the Agent's performance of its
duties under this Agreement, and the Agent shall be entitled to rely
conclusively on such instructions from the Fund.
The Fund will indemnify and hold the Agent harmless from all loss, cost,
damage and expense, including reasonable expenses for counsel, incurred by it
resulting from any claim, demand, action or omission by it in the performance of
its duties hereunder, or as a result of acting upon any instruction believed by
it to have been given by a duly authorized officer of the Fund; provided that is
indemnification shall not apply to actions or omissions of the Agent in cases of
its own willful misfeasance, bad faith, gross negligence or reckless disregard
of its duties hereunder; and further provided that, prior to confessing any
claim against it which may be the subject of this indemnification, the Agent
shall give the Fund reasonable opportunity to defend against said claim in its
own name or in the name of the Agent.
The Agent will indemnify and hold the Fund harmless from all loss, cost,
damage and expense, including reasonable expenses for counsel, incurred or
sustained by it as a result of or in connection with the Agent's failure to give
the Bank instructions to refuse acceptance and payment of any check under the
Fund's check redemption service which is wrongfully paid either when a signature
on a particular check is not authentic according to the applicable authorized
signature card supplies by the Shareholder or when the number of Shares in a
Shareholder's account is insufficient to cover the amount of the check.
Section 33. The practices and procedures of the Agent and the Fund set
forth in this Agreement, or any other terms or conditions of this Agreement, may
be altered or modified from time to time as may be mutually agreed by the
parties to this Agreement without the consent of any Shareholder or Planholder,
so long as the intent and purposes of the Plans, as stated from time to time in
time prospectus of the Fund, or other applicable limitations of the prospectus,
are observed. In special cases the parties hereto may adopt such procedures as
may be appropriate or practical under the circumstances, and the Agent may
conclusively assume that any special procedure which has been approved by the
Fund does not conflict with or violate any requirements of its Articles of
Incorporation, Bylaws or prospectus, or any rule, regulation or requirement of
any regulatory body.
Section 34. This Agreement may be amended from time to time by a
supplemental agreement executed by the Fund and the Agent.
Section 35. Either the Fund or the Agent may give 60 days' written notice
to the other of the termination of this Agreement, such termination to take
effect at the time specified in the notice.
Section 36. Any notice or other communication required by or permitted to
be given in connection with this Agreement shall be in writing, and shall be
delivered in person or sent by first-class mail, postage prepaid, to the
respective parties as follows:
If to the Fund:
State Bond Municipal Funds, Inc.
100 N. Minnesota Street
New Ulm, Minnesota 56073
If to the Agent:
ARM Transfer Agency, Inc.
100 N. Minnesota Street
New Ulm, Minnesota 56073
Section 37. This Agreement may be executed in two or more counterparts,
each of which when so executed shall be deemed an original, but such
counterparts shall together constitute but one and the same instrument.
Section 38. This Agreement shall be governed by the laws of the State of
Minnesota.
<PAGE>
Section 39. This Agreement shall extend to and shall be binding upon the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable by the Fund without the written
constant of the Agent or by the Agent without the written consent of the Fund,
authorized or approved by a resolution of its Board of Directors.
Section 40. The accounts and records, in the agreed upon format, specified
herein to be maintained by the Bank shall be preserved for the periods specified
by Rule 31a-2 under the Investment Company Act of 1940 and shall be the property
of the Fund and shall be made available to the Fund within a reasonable period
and time upon proper demand. The Agent shall assist the Fund's independent
auditors, or upon approval of the Fund or upon demand, any regulatory body, in
any requested review of the Fund's accounts and records, but shall be reimbursed
for all expenses and employee time invested in any such review outside of
routine and normal periodic reviews. Upon receipt from the Fund of the
necessary information, the Agent shall supply the necessary data for the Fund or
accountant's completion of any necessary tax returns, questionnaires, periodic
reports to Shareholders and such other reports and information requests as the
Fund and the Agent shall agree upon from time to time.
IN WITNESS WHEREOF, the Fund and the Agent have caused this Agreement to be
signed by their respective duly authorized officers as of the day and year first
above written.
STATE BOND MUNICIPAL FUNDS, INC.
By: /s/ Kevin L. Howard
-----------------------------
Kevin L. Howard
Its: Secretary
-----------------------
ARM TRANSFER AGENCY, INC.
By: /s/ John R. McGeeney
-----------------------------
John R. McGeeney
Its: Secretary
-----------------------
<PAGE>
EXHIBIT 11
Consent of Independent Auditors
We consent to the references to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the use of our report dated August
9, 1996, except for Note 5, as to which the date is August 26, 1996, in the
Post-Effective Amendment No. 17 to the Registration Statement (Form N-1A) and
related Prospectus of the State Bond Tax Exempt Fund.
/s/ Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
September 11, 1996
<PAGE>
Exhibit 16
Computation of Performance Quotations
The Fund's 30-day yield for the period ended June 30, 1996 is calculated as
follows:
Formula:
6
30-Day Yield = 2[(a-b +1) -1]
---
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
6
4.65% = 2 x [(386,563.06 - 60,286.94 +1) -1]
---------------------------
(7,531,916.568) (11.29)
Average annual total return figures for the current one, five, and ten year
periods ending June 30, 1996 are calculated as follows:
n 1/n
Formula: P = (1+T) = ERV; or T = (ERV/P) -1
Where: P = hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the period
One year period:
0.77% = 1,007.65 -1
--------
1,000
Five year period:
1/5
5.79% = 1,324.98 -1
--------
1,000
Ten year period:
1/10
7.05% = 1,976.30 -1
--------
1,000
<PAGE>
Tax Equivalent Yield figure for the period ended June 30, 1996 is calculated as
follows:
Formula: Tax Equivalent Yield = Yield
-----
1-.396
7.41% = 4.65 x .9620
------------
.604
Cumulative total return figures for the period beginning August 1, 1984 ending
June 30, 1996 are calculated as follows:
Formula: CTR = ERV - P x 100
-------
P
Where: CTR = cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of the
period
P = initial payment of $1,000
154.70% = 2,546.98 - $1,000 x 100
-----------------
$1,000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE STATE BOND TAX EXEMPT FUND AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000702133
<NAME> STATE BOND MUNICIPAL FUNDS, INC.
<SERIES>
<NUMBER> 1
<NAME> STATE BOND TAX EXEMPT FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 76,707,103
<INVESTMENTS-AT-VALUE> 80,031,332
<RECEIVABLES> 1,350,043
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 81,381,375
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 286,813
<TOTAL-LIABILITIES> 286,813
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 77,730,196
<SHARES-COMMON-STOCK> 7,522,296
<SHARES-COMMON-PRIOR> 7,578,854
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 40,137
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,324,229
<NET-ASSETS> 81,094,562
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,041,950
<OTHER-INCOME> 0
<EXPENSES-NET> 736,413
<NET-INVESTMENT-INCOME> 4,305,537
<REALIZED-GAINS-CURRENT> 40,206
<APPREC-INCREASE-CURRENT> 64,146
<NET-CHANGE-FROM-OPS> 4,409,889
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,305,537
<DISTRIBUTIONS-OF-GAINS> 38,789
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 290,245
<NUMBER-OF-SHARES-REDEEMED> 636,574
<SHARES-REINVESTED> 289,771
<NET-CHANGE-IN-ASSETS> (547,809)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 38,720
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 407,880
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 736,413
<AVERAGE-NET-ASSETS> 81,576,000
<PER-SHARE-NAV-BEGIN> 10.77
<PER-SHARE-NII> 0.57
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> 0.57
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.78
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
