AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
--
(File No. 33-11549)
Post-Effective Amendment No. 17
--
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 X
--
(File No. 811-04995)
Post-Effective Amendment No. 18
--
SIT U.S. GOVERNMENT SECURITIES FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
4600 Norwest Center, Minneapolis, Minnesota 55402
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(612) 332-3223
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Kelly K. Orning, Compliance and Administration Associate
Sit Mutual Funds
4600 Norwest Center
Minneapolis, Minnesota 55402
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
Michael J. Radmer, Esq.
Dorsey & Whitney
2200 First Bank Place East
Minneapolis, Minnesota 55402
___ immediately upon filing pursuant to paragraph (b) of rule 485
XX on August 1, 1997 pursuant to paragraph (b) of rule 485
___ 60 days after filing pursuant to paragraph (a)(1) of rule 485
___ on (specify date) pursuant to paragraph (a)(1) of rule 485
___ 75 days after filing pursuant to paragraph (a)(2) of rule 485
___ on (specify date) pursuant to paragraph (a)(2) of rule 485
The Registrant has registered an indefinite number or amount of securities under
the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. A Rule 24f-2 Notice for the Registrant's most recent fiscal year
was filed with the Securities and Exchange Commission on or about May 30, 1997.
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
--
(File No. 2-91312)
Post-Effective Amendment No. 21
--
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 X
--
(File No. 811-04033)
Post-Effective Amendment No. 22
--
SIT MUTUAL FUNDS II, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
4600 Norwest Center, Minneapolis, Minnesota 55402
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(612) 332-3223
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Kelly K. Orning, Compliance and Administration Associate
Sit Mutual Funds
4600 Norwest Center
Minneapolis, Minnesota 55402
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
Michael J. Radmer, Esq.
Dorsey & Whitney
2200 First Bank Place East
Minneapolis, Minnesota 55402
___ immediately upon filing pursuant to paragraph (b) of rule 485
XX on August 1, 1997 pursuant to paragraph (b) of rule 485
___ 60 days after filing pursuant to paragraph (a) of rule 485
___ on (specify date) pursuant to paragraph (a) of rule 485
___ 75 days after filing pursuant to paragraph (a)(2) of rule 485
___ on (specify date) pursuant to paragraph (a)(2) of rule 485
The Registrant has registered an indefinite number or amount of securities under
the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. A Rule 24f-2 Notice for the Registrant's most recent fiscal year
was filed with the Securities and Exchange Commission on or about May 30, 1997.
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
--
(File No. 2-91313)
Post-Effective Amendment No. 18
--
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 X
--
(File No. 811-04032)
Post-Effective Amendment No. 19
--
SIT MONEY MARKET FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
4600 Norwest Center, Minneapolis, Minnesota 55402
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(612) 332-3223
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Kelly K. Orning, Compliance and Administration Associate
Sit Mutual Funds
4600 Norwest Center
Minneapolis, Minnesota 55402
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
Michael J. Radmer, Esq.
Dorsey & Whitney
2200 First Bank Place East
Minneapolis, Minnesota 55402
___ immediately upon filing pursuant to paragraph (b) of rule 485
XX on August 1, 1997 pursuant to paragraph (b) of rule 485
___ 60 days after filing pursuant to paragraph (a) of rule 485
___ on (specify date) pursuant to paragraph (a) of rule 485
___ 75 days after filing pursuant to paragraph (a)(2) of rule 485
___ on (specify date) pursuant to paragraph (a)(2) of rule 485
The Registrant has registered an indefinite number or amount of securities under
the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. A Rule 24f-2 Notice for the Registrant's most recent fiscal year
was filed with the Securities and Exchange Commission on or about May 30, 1997.
<PAGE>
<TABLE>
<CAPTION>
FORM N-1A
CROSS-REFERENCE SHEET
ITEM # CAPTION PROSPECTUS CAPTION
- ------ ------- ------------------
<S> <C> <C>
1 Cover Page Inside Cover of Prospectus
2 Synopsis Prospectus Summary
3 Condensed Financial Financial Highlights
Information
4 General Description of Registrant Investment Objectives and Policies; Common
Policies and Information; Capitalization and
Voting Rights; Additional Information
5 Management of the Fund Summary of Fund Expenses; Custodian and
Transfer Agent; Management; Additional Information
6 Capital Stock and Other Dividend Reinvestment; Securities Exchanges;
Capitalization and Voting Rights; Taxes; Additional Information
7 Purchase of Securities Being How to Purchase Fund Shares; Exchanges;
Offered Retirement Accounts; Computation of Net Asset Value
8 Redemption or Repurchase Redemption of Fund Shares
9 Pending Legal Proceedings Not Applicable
ITEM # CAPTION STATEMENT OF ADDITIONAL INFORMATION CAPTION
- ------ ------- -------------------------------------------
10 Cover Page Cover Page of Statement of Additional Information
11 Table of Contents Table of Contents
12 General Information and History Not Applicable
13 Investment Objectives and Additional Investment Restrictions; Securities in
Policies which the Funds May Invest
14 Management of the Fund Management; Investment Adviser
15 Control Persons and Principal Control Persons and Principal Holders
Holders of Securities
16 Investment Advisory and Other Investment Adviser
Services
17 Brokerage Allocation Brokerage
18 Capital Stock and Other Securities Capitalization and Voting Rights (in Prospectus)
<PAGE>
19 Purchase, Redemption and Pricing Computation of Net Asset Value
of Securities Being Offered
20 Tax Status Taxes
21 Underwriters Distributor
22 Calculation of Performance Data Calculation of Performance Data
23 Financial Statements Financial Statements
</TABLE>
<PAGE>
PROSPECTUS
August 1, 1997
The Funds have the following investment objectives:
[LOGO] MONEY MARKET FUND
- --------------------------------------------------------------------------------
The objective of the Money Market Fund is to achieve maximum current income to
the extent consistent with the preservation of capital and maintenance of
liquidity. The Fund pursues this objective by investing in short-term debt
instruments which mature in 397 days or less and by maintaining a
dollar-weighted portfolio maturity of 90 days or less. AN INVESTMENT IN THE FUND
IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO
ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE.
[LOGO] U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
The objective of the U.S. Government Securities Fund is to provide high current
income and safety of principal, which it seeks to attain by investing solely in
debt obligations issued, guaranteed or insured by the U.S. government or its
agencies or its instrumentalities.
[LOGO] BOND FUND
- --------------------------------------------------------------------------------
The objective of the Bond Fund is to maximize total return, consistent with
preservation of capital. The Fund pursues this objective by investing in a
diversified portfolio of fixed-income securities.
[LOGO] TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
The objective of the Tax-Free Income Fund is to provide a high level of current
income that is exempt from federal income tax, consistent with preservation of
capital, by investing in investment-grade municipal securities.
[LOGO] MINNESOTA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
The objective of the Minnesota Tax-Free Income Fund is to provide a high level
of current income exempt from federal regular income tax and Minnesota regular
personal income tax as is consistent with the preservation of capital.
This prospectus concisely sets forth facts about the Funds that you should know
before investing and it should be retained for future reference. You should read
it to decide if any of the Funds are the right investment for you. Additional
facts about each Fund are contained in a Statement of Additional Information
(dated August 1, 1997) which has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. For a free copy, call or
write the Funds.
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>
<CAPTION>
SIT MONEY MARKET FUND, INC.
SIT U.S. GOVERNMENT SECURITIES FUND, INC.
SIT BOND FUND
SIT TAX-FREE INCOME FUND
SIT MINNESOTA TAX-FREE INCOME FUND
[LOGO] TABLE OF CONTENTS
<S> <C> <C> <C>
Summary of Fund Expenses........................ 4 Duration........................................ 27
Financial Highlights............................ 5 Portfolio Turnover.............................. 28
Performance..................................... 11 Relationship of Debt Securities &
Investment Objectives and Policies.............. 14 Interest Rates .............................. 28
Money Market Fund........................... 14 Temporary Defensive Investments................. 28
U.S. Government Securities Fund............. 16 Ratings of Debt Securities...................... 28
Bond Fund................................... 17 Other Investment Restrictions................... 29
Tax-Free Income Fund........................ 20 Computation of Net Asset Value.................. 30
Minnesota Tax-Free Income Fund.............. 21 How to Purchase Fund Shares..................... 30
Common Policies of Tax-Free Funds........... 23 Redemption of Fund Shares....................... 31
Common Policies and Information................. 25 Exchanges....................................... 33
Collateralized Mortgage Obligations......... 25 Checkwriting.................................... 33
Zero Coupon Securities...................... 25 Dividend Reinvestment........................... 34
Futures, Options & Swap Agreements.......... 25 Retirement Accounts............................. 34
When-Issued and Forward Custodian and Transfer Agent.................... 34
Commitment Securities.................. 26 Management...................................... 35
Repurchase Agreements....................... 26 Taxes........................................... 35
Illiquid Securities......................... 27 Capitalization and Voting Rights................ 37
Variable & Floating Rate Notes.............. 27 Additional Information.......................... 38
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
[LOGO]
THE FUNDS
- --------------------------------------------------------------------------------
The Funds are 100% no-load, open-end, diversified (except the Minnesota Tax-Free
Income Fund which is non-diversified), management investment companies (commonly
known as a "mutual funds"), as defined in the Investment Company Act of 1940
(the "1940 Act").
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The investment objectives of the Funds are set forth on page 1 of this
prospectus. The investment objective of each Fund is "fundamental," which means
that it may not be changed unless approved by a vote of the "majority" of the
shareholders of such Fund (as defined in the 1940 Act). There can be no
assurance that the investment objectives of any of the Funds will be achieved.
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Sit Investment Associates, Inc. (the "Adviser") serves as the investment adviser
to each Fund and receives an annual fee based on a percentage of average daily
net assets. The percentage varies from Fund to Fund. The Adviser manages more
than $6 billion for both public and private clients, including $1 billion for
the 12 Sit Mutual Funds.
PRICE OF FUND SHARES
- --------------------------------------------------------------------------------
Fund shares are sold at their net asset value ("NAV"). There is no sales charge
or redemption fee. The NAV is based upon the market value of the securities
owned by a Fund and is determined once daily as of the close of the New York
Stock Exchange on each day the Exchange is open for trading.
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
You can purchase shares of any Fund with no sales charges at the next determined
NAV by completing the application and mailing it, along with a check to the
Funds at the address as listed on the inside back cover of this prospectus or as
instructed on the application.
===================================================================
100% NO-LOAD
NO SALES COMMISSIONS
NO DEFERRED SALES CHARGES
NO 12b-1 FEES
$2,000 MINIMUM INITIAL INVESTMENT -- $100 SUBSEQUENT INVESTMENT
NO MINIMUM INVESTMENT FOR IRAS, RETIREMENT PLANS, OR
GIFTS / TRANSFERS TO MINORS (UGMA/UTMA) ACCOUNTS
ELECTRONIC TRANSFER OF FUNDS FOR PURCHASES AND REDEMPTIONS
AUTOMATIC MONTHLY INVESTMENT PLAN
NO CHARGE FOR CHECKWRITING
NO CHARGE FOR EXCHANGES
===================================================================
<PAGE>
[LOGO] SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
The fund expense summary was developed for use by all mutual funds. You should
consider this expense information as well as other important information in this
prospectus:
<TABLE>
<CAPTION>
MONEY U.S. TAX-FREE MINNESOTA
MARKET GOVERNMENT BOND INCOME TAX-FREE
SHAREHOLDER TRANSACTION EXPENSES FUND SECURITIES FUND FUND FUND INCOME FUND
- -------------------------------- ---- --------------- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
Sales load on purchases none none none none none
Sales load on reinvested dividends none none none none none
Deferred sales load none none none none none
Redemption fees none none none none none
Exchange fees none none none none none
ANNUAL FUND OPERATING EXPENSES (as a percentage of average daily net assets)
- ------------------------------
Management fees....................... .50% (1) .80% (1) .80% .79% (1) .80%
12b-1 fees............................ none none none none none
Other expenses........................ none none none none none
---- ---- ---- ---- ----
Total fund operating expenses......... .50% (1) .80% (1) .80% .79% (1) .80%
==== ==== ==== ==== ====
(1) Net of voluntary fee waiver.
- ------------------------------
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming (a) 5% annual rate of return and (b)
redemption at the end of each period.
MONEY U.S. TAX-FREE MINNESOTA
MARKET GOVERNMENT BOND INCOME TAX-FREE
FUND SECURITIES FUND FUND FUND INCOME FUND
---- --------------- ---- ---- -----------
1 year...................... $ 5 $ 8 $ 8 $ 8 $ 8
3 years..................... 16 26 26 26 26
5 years..................... 29 44 44 44 44
10 years.................... 64 99 99 99 99
</TABLE>
The purpose of the above table is to assist you in understanding the various
costs and expenses that an investor in the Funds will bear directly or
indirectly. No transaction expenses are incurred by you when you buy or sell
shares of the Funds. Management fees and other expenses are reflected in each
Fund's share price and are not charged directly to individual shareholder
accounts.
<PAGE>
Each Fund has engaged the Adviser as its investment adviser pursuant to an
Investment Management Agreement. Absent voluntary fee waivers by the Adviser,
Bond Fund, Minnesota Tax-Free Income Fund, Tax-Free Income Fund and Money Market
Fund are obligated under the Funds' Investment Management Agreements to pay the
Adviser annual management fees of .80%, (.60% of assets in excess of $50 million
for the Money Market Fund) per year of the Funds' average daily net assets; U.S.
Government Securities Fund is obligated to pay the Adviser an annual management
fee of 1.00% (.80% of assets in excess of $50 million) per year of the Fund's
average daily net assets; however, the Adviser is obligated to pay all of each
Fund's other expenses (other than extraordinary expenses, interest, brokerage
commissions and other transaction charges). See "Management - Investment
Adviser."
For the period October 1, 1993 through December 31, 1998, the Adviser has
voluntarily agreed to limit the management fee (and, thereby, all Fund expenses,
except those not payable by the Adviser as set forth above) of U.S. Government
Securities Fund and Money Market Fund to .80% and .50% of average daily net
assets per year, respectively, and of Tax-Free Income Fund to .70% of the Fund's
average daily net assets in excess of $250 million and .60% of the Fund's
average daily net assets in excess of $500 million. After December 31, 1998,
this voluntary fee waiver may be discontinued by the Adviser in its sole
discretion.
[LOGO] FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following tables show certain important financial information for evaluating
each Fund. This information has been audited by KPMG Peat Marwick LLP,
independent auditors. The independent auditors' report and additional
information about the performance of a Fund are contained in the Funds' Annual
Report and the Statement of Additional Information, which, if not included with
this Prospectus, may be obtained upon request and without charge.
Per share data for a share of capital stock outstanding during the period and
selected information for each period are as follows:
<PAGE>
SIT MONEY MARKET FUND
As of November 1, 1993, the Fund's name was changed to Sit Money Market Fund,
Inc. from Sit Investment Reserve Fund, Inc. Effective on this date, the Fund's
primary investment policy was amended to comply with Rule 2a-7 of the Investment
Company Act of 1940 governing money market funds. The Fund's investment
objective, however, remains the achievement of maximum current income to the
extent consistent with the preservation of capital and maintenance of liquidity.
Per share amounts prior to November 1, 1993 have been restated to reflect the
9.98 to 1 stock split.
<TABLE>
<CAPTION>
MONEY MARKET FUND
---------------------------------------
Period from
Nov. 1,
Years Ended March 31, 1993 to
--------------------------- March 31,
1997 1996 1995 1994(1)
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
OPERATIONS:
Net investment income 0.05 0.05 0.04 0.01
------- ------- ------- -------
Total from operations 0.05 0.05 0.04 0.01
------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (0.05) (0.05) (0.04) (0.01)
NET ASSET VALUE:
End of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Total investment return(2) 5.04% 5.44% 4.57% 1.14%
------- ------- ------- -------
Net assets at end of period
(000's omitted) $32,668 $21,260 $29,822 $17,864
RATIOS (%):
Expenses to average
daily net assets 0.50(4) 0.50(4) 0.50(4) 0.50(4)
Net investment income to
average daily net assets 4.93(4) 5.35(4) 4.63(4) 2.76(4)
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
INVESTMENT RESERVE FUND
----------------------------------------------------------------------
Period from
July 1,
1993 to Years Ended June 30,
Oct. 31, ---------------------------------------------------------
1993 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- -------
OPERATIONS:
Net investment income 0.01 0.03 0.05 0.07 0.08 .07 .06
------- ------- ------- ------- ------- ------- -------
Total from operations 0.01 0.03 0.05 0.07 0.08 .07 .06
------- ------- ------- ------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (0.01) (0.03) (0.05) (0.07) (.08) (.07) (.06)
NET ASSET VALUE:
End of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- -------
Total investment return(2) 0.92% 3.02% 5.03% 7.14% 7.94% 7.79% 6.54%
------- ------- ------- ------- ------- ------- -------
Net assets at end of period
(000's omitted) $12,626 $10,869 $16,234 $ 7,729 $ 4,764 $ 6,427 $10,954
RATIOS (%):
Expenses to average
daily net assets 0.72(4) 0.80(3) 0.80(3) 0.86(3) 1.00 1.00 1.00
Net investment income to
average daily net assets 2.67(4) 2.98(3) 4.74(3) 6.87(3) 7.61 7.24 6.43
</TABLE>
- ------------------------
(1) Period from November 1, 1993 through March 31, 1994 due to fiscal year end
change.
(2) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
(3) Prior to January 1, 1993, total Fund expenses were contractually limited to
1.00% of average daily net assets for the first $30 million of Fund net
assets. Subsequent to January 1, 1993, total Fund expenses are
contractually limited to .80% of the first $50 million of Fund net assets.
However, during the years ended June 30, 1993, 1992, and 1991, the
investment adviser voluntarily absorbed $16,480, $20,635 and $8,824 of
expenses that were otherwise payable by the Fund. Had the Fund incurred
these expenses, the ratio of expenses to daily net assets would have been
.91% for the year ended June 30, 1993 and 1.00% for the years ended June
30, 1992 and 1991 and the ratio of net investment income to daily net
assets would have been 2.87%, 4.54% and 6.73%, respectively.
(4) Percentages for the periods ended March 31, 1994, and October 31, 1993, are
adjusted to an annual rate. Total Fund expenses are contractually limited
to .80% of average daily net assets for the first $50 million in Fund net
assets and .60% of average daily net assets for Fund net assets exceeding
$50 million. However, during the periods ended March 31, 1997, 1996, 1995
and 1994, and October 31, 1993, the investment adviser voluntarily absorbed
$78,042, $66,862, $63,828, $17,565, and $3,224, respectively, in expenses
that were otherwise payable by the Fund. Had the Fund incurred these
expenses, the ratio of expenses to average daily net assets would have been
.80% for each of these periods and the ratio of net investment income to
average daily net assets would have been 4.63%, 5.05%, 4.33%, 2.46%, and
2.59%, respectively.
<PAGE>
<TABLE>
<CAPTION>
SIT U.S. GOVERNMENT SECURITIES FUND
Nine Months
Years Ended March 31, Ended
--------------------------------- March 31,
1997 1996 1995 1994(1)
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 10.47 $ 10.28 $ 10.50 $ 10.73
------- ------- ------- -------
OPERATIONS:
Net investment income .65 .70 .67 .47
Net realized and unrealized gains
(losses) on investments (.19) .19 (.22) (.18)
------- ------- ------- -------
Total from operations .46 .89 .45 .29
------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (.65) (.70) (.67) (.47)
From realized gains -- -- -- (.05)
Total Distributions (.65) (.70) (.67) (.52)
------- ------- ------- -------
NET ASSET VALUE:
End of period $ 10.28 $ 10.47 $ 10.28 $ 10.50
------- ------- ------- -------
Total investment return (2) 4.55% 8.87% 4.47% 2.70%
------- ------- ------- -------
Net assets at end of period
(000's omitted) $73,394 $52,450 $37,454 $38,683
RATIOS (%):
Expenses to average daily
net assets 0.80(4) 0.80(4) 0.80(4) 0.86(4)
Net investment income to
average daily net assets 6.30(4) 6.72(4) 6.48(4) 5.79(4)
Portfolio turnover rate
(excluding short-term securities) 85.21 51.37 38.51 73.87
[WIDE TABLE CONTINUED FROM ABOVE]
Years Ended June 30,
--------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- -------
NET ASSET VALUE:
Beginning of period $ 10.81 $ 10.54 $ 10.31 $ 10.24 $ 10.24 $ 10.10
------- ------- ------- ------- ------- -------
OPERATIONS:
Net investment income .71 .77 .79 .82 .85 .90
Net realized and unrealized gains
(losses) on investments .07 .44 .23 .07 -- .14
------- ------- ------- ------- ------- -------
Total from operations .78 1.21 1.02 .89 .85 1.04
------- ------- ------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (.71) (.77) (.79) (.82) (.84) (.90)
From realized gains (.15) (.17) -- -- (.01) --
Total Distributions (.86) (.94) (.79) (.82) (.85) (.90)
------- ------- ------- ------- ------- -------
NET ASSET VALUE:
End of period $ 10.73 $ 10.81 $ 10.54 $ 10.31 $ 10.24 $ 10.24
------- ------- ------- ------- ------- -------
Total investment return (2) 7.50% 11.87% 10.19% 9.07% 8.69% 10.70%
------- ------- ------- ------- ------- -------
Net assets at end of period
(000's omitted) $31,538 $35,353 $30,153 $13,290 $11,721 $10,748
RATIOS (%):
Expenses to average daily
net assets 0.89(3) 0.80(3) 0.90(3) 1.25 1.25 1.25
Net investment income to
average daily net assets 6.60(3) 7.28(3) 7.60(3) 8.02 8.33 8.27
Portfolio turnover rate
(excluding short-term securities) 76.66 133.86 118.27 126.34 138.79 136.12
- ---------------------------
</TABLE>
(1) Nine month period from July 1, 1993 through March 31, 1994 due to fiscal
year end change.
(2) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
(3) Prior to January 1, 1993, total Fund expenses were contractually limited to
1.25% of average daily net assets for the first $30 million of Fund average
daily net assets and 1.00% of average daily net assets exceeding $30
million. However, during the years ended June 30, 1993, 1992, and 1991, the
investment adviser voluntarily absorbed an additional $72,628, $134,559,
and $67,810 of expenses that were otherwise payable by the Fund. Had the
Fund incurred these expenses, the ratio of expenses to average daily net
assets would have been 1.11%, 1.21%, and 1.25%, respectively for these
periods, and the ratio of net investment income to average daily net assets
would have been 6.38%, 6.87%, and 7.25%, respectively.
(4) Percentages for the period March 31, 1994, are adjusted to an annual rate.
Total Fund expenses are contractually limited to 1.00% of average daily net
assets for the first $50 million in Fund net assets and .80% of average
daily net assets exceeding $50 million. However, during the periods ended
March 31, 1997, 1996, 1995 and 1994, the investment adviser voluntarily
absorbed $99,999, $88,625, $73,460 and $39,324 of expenses that were
otherwise payable by the Fund. Had the Fund incurred these expenses, the
ratio of expenses to average daily net assets would have been .97% for the
period ended March 31, 1997 and 1.00% for the periods ended March 31, 1996,
1995, and 1994 and the ratio of net investment income to average daily net
assets would have been 6.13%, 6.52%, 6.28% and 5.65%, respectively.
<PAGE>
<TABLE>
<CAPTION>
SIT BOND FUND
Period from
December 1,
Years Ended March 31, 1993 (1) to
----------------------------------- March 31,
1997 1996 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 9.83 $ 9.48 $ 9.69 $ 10.00
--------- --------- --------- ---------
OPERATIONS:
Net investment income .64 .64 .62 .19
Net realized and unrealized
gains (losses) on investments (.14) .35 (.21) (.31)
--------- --------- --------- ---------
Total from operations .50 .99 .41 (.12)
--------- --------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (.64) (.64) (.62) (.19)
From realized gains (.07) -- -- --
--------- --------- --------- ---------
Total distributions (.71) (.64) (.62) (.19)
--------- --------- --------- ---------
NET ASSET VALUE:
End of period $ 9.62 $ 9.83 $ 9.48 $ 9.69
--------- --------- --------- ---------
Total investment return (2) 5.21% 10.57% 4.51% (1.22%)
--------- --------- --------- ---------
Net assets at end of period (000's omitted) $ 6,403 $ 5,222 $ 3,533 $ 3,403
RATIOS (%):
Expenses to average daily net assets 0.80% 0.80% 0.80% 0.80%(3)
Net investment income to average daily net assets 6.52% 6.49% 6.63% 6.24%(3)
Portfolio turnover rate
(excluding short-term securities) 128.06% 159.45% 41.25% 43.49%
- --------------------------
(1) Commencement of operations.
(2) Total investment return is based on the change in net asset value of a share during the
period and assumes reinvestment of distributions at net asset value.
(3) Adjusted to an annual rate.
</TABLE>
<PAGE>
SIT TAX-FREE INCOME FUND
Since November 1, 1993, the Fund has been named Sit Tax-Free Income Fund, a
series of Mutual Funds II, Inc. Prior to November 1, 1993, the Fund was named
Sit "New Beginning" Tax-Free Income Fund, and prior to September 15, 1988, the
Fund was named Sit "New Beginning" Yield Fund, Inc. Effective September 28,
1988, the Fund's primary investment objectives and policies were changed from
earning current income (taxable) to providing a high level of federally
tax-exempt income. The securities in which the Fund now invests are not the same
as those in which it could previously invest. The information below has been
presented in separate columns for the periods before and after the change in
investment objectives and policies.
<TABLE>
<CAPTION>
TAX-FREE INCOME FUND
-------------------------------------------------------------------------------------------------
Nine Months
Years Ended March 31, Ended Years Ended June 30, Period
------------------------------ March 31, ----------------------------------------- 9/29/88-
1997 1996 1995 1994(1) 1993 1992 1991 1990 6/30/89(2)
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 9.88 $ 9.70 $ 9.63 $ 10.02 $ 9.74 $ 9.59 $ 9.61 $ 9.69 $ 9.65
-------- -------- -------- -------- -------- -------- -------- -------- --------
OPERATIONS:
Net investment income .56 .56 .56 .43 .60 .69 .74 .78 .57
Net realized and unrealized
gains (losses) on investments .10 .18 .09 (.30) .32 .15 (.02) (.08) .04
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from operations .66 .74 .65 .13 .92 .84 .72 .70 .61
-------- -------- -------- -------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (.56) (.56) (.56) (.43) (.60) (.69) (.74) (.78) (.57)
From realized gains -- -- (.02) (.09) (.04) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions (.56) (.56) (.58) (.52) (.64) (.69) (.74) (.78) (.57)
-------- -------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE:
End of period $ 9.98 $ 9.88 $ 9.70 $ 9.63 $ 10.02 $ 9.74 $ 9.59 $ 9.61 $ 9.69
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total investment return (4) 6.86% 7.73% 7.00% 1.19% 9.81% 9.09% 7.76% 7.53% 6.52%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net assets at end of period
(000's omitted) $342,540 $279,769 $255,157 $324,691 $338,977 $192,808 $ 86,997 $ 30,800 $ 12,901
RATIOS (%):
Expenses to average daily
net assets 0.79(6) 0.80(6) 0.79(6) 0.77(6) 0.80 0.80 0.80 0.80 0.80(7)
Net investment income to
average daily net assets 5.63(6) 5.65(6) 5.84(6) 5.68(6) 6.17 7.02 7.62 8.16 8.08(7)
Portfolio turnover rate
(excluding short-term
securities) 25.34 25.50 13.13 47.56 58.29 80.27 74.48 86.72 132.48
[WIDE TABLE CONTINUED FROM ABOVE]
YIELD FUND
------------------------
Period Year
7/1/88- Ended
9/29/88(3) 6/30/88
-------- --------
NET ASSET VALUE:
Beginning of period $ 10.29 $ 10.69
-------- --------
OPERATIONS:
Net investment income .24 .98
Net realized and unrealized
gains (losses) on investments (.42) (.39)
-------- --------
Total from operations (.18) .59
-------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (.46) (.99)
From realized gains -- --
-------- --------
Total distributions (.46) (.99)
-------- --------
NET ASSET VALUE:
End of period $ 9.65 $ 10.29
-------- --------
Total investment return (4) 0.39% 6.02%
-------- --------
Net assets at end of period
(000's omitted) $ 1,758 $ 6,111
RATIOS (%):
Expenses to average daily
net assets 1.00(5,7) 1.00(5)
Net investment income to
average daily net assets 7.62(5,7) 8.80(5)
Portfolio turnover rate
(excluding short-term
securities) -- 88.12
</TABLE>
- ---------------------------
(1) Nine month period from July 1, 1993 through March 31, 1994 due to fiscal
year end change.
(2) Period from September 29, 1988 (commencement of operations of Tax-Free
Income Fund) to June 30, 1989.
(3) Period from July 1, 1988 to September 28, 1988 (termination of operations
of Yield Fund).
(4) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
(5) Subsequent to September 28, 1988, total Fund expenses are contractually
limited to .80% of average daily net assets on an annual basis. Prior to
September 29, 1988, expenses were contractually limited to 1.50% of average
daily net assets for the first $30 million of Fund net assets. However,
during the period from July 1, 1988 to September 28, 1988 and the year
ended June 30, 1988, the investment adviser voluntarily absorbed an
additional $5,400 and $34,434 in expenses, respectively, that were
otherwise payable by the Fund. Had the Fund incurred these expenses, the
ratio of expenses to average daily net assets would have been 1.50% for
these periods and the ratio of net investment income to average daily net
assets would have been 7.12% and 8.30%, respectively.
(6) Percentages for the period ended March 31, 1994, are adjusted to an annual
rate. Total Fund expenses are contractually limited to .80% of average
daily net assets. However, during the periods ended March 31, 1997, 1996,
1995 and 1994, the investment adviser voluntarily absorbed $46,819,
$15,540, $24,991 and $77,029 in expenses that were otherwise payable by the
Fund. Had the Fund incurred these expenses, the ratio of expenses to
average daily net assets would have been .80% for the periods ended March
31, 1997, 1996, 1995 and 1994, and the ratio of net investment income to
average daily net assets would have been 5.62%, 5.65%, 5.83% and 5.65%,
respectively.
(7) Adjusted to an annual rate.
<PAGE>
<TABLE>
<CAPTION>
SIT MINNESOTA TAX-FREE INCOME FUND
Period from
December 1,
1993 (1) to
Years Ended March 31, March 31,
-------------------------------------- ----------
1997 1996 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 10.09 $ 9.96 $ 9.79 $ 10.00
---------- ---------- ---------- ----------
OPERATIONS:
Net investment income .57 .57 .56 .17
Net realized and unrealized gains
(losses) on investments .05 .13 .17 (.21)
---------- ---------- ---------- ----------
Total from operations .62 .70 .73 (.04)
---------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (.57) (.57) (.56) (.17)
---------- ---------- ---------- ----------
NET ASSET VALUE:
End of period $ 10.14 $ 10.09 $ 9.96 $ 9.79
---------- ---------- ---------- ----------
Total investment return(2) 6.26% 7.12% 7.68% (0.80%)
---------- ---------- ---------- ----------
Net assets at end of period (000's omitted) $ 93,976 $ 62,980 $ 43,881 $ 18,105
RATIOS (%):
Expenses to average daily net assets 0.80% 0.80% 0.80% 0.80%(3)
Net investment income to average daily net assets 5.56% 5.62% 5.72% 5.23%(3)
Portfolio turnover rate (excluding short-term securities) 17.16% 15.85% 34.20% 12.23%
(1) Commencement of operations.
(2) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
(3) Adjusted to an annual rate.
</TABLE>
<PAGE>
[LOGO] PERFORMANCE
- --------------------------------------------------------------------------------
From time to time the Funds (other than Money Market Fund) may refer to monthly,
quarterly, yearly or cumulative total return and average annual total return in
advertisements or other sales literature. All such figures are based on
historical performance data and are not intended to be indicative of future
performance. The investment return on and the principal value of an investment
in the Funds will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
Monthly, quarterly, yearly and cumulative total returns are computed by finding
the rates of return over the indicated periods that would equate the initial
amount invested to the ending redeemable value. Average annual total return is
computed by finding the average annual compounded rates of return over the
indicated periods that would equate the initial amount invested to the ending
redeemable value. In calculating ending redeemable value, all income and capital
gains distributions are assumed to be reinvested in additional Fund shares.
Because average annual returns tend to smooth out variations in a Fund's return,
you should recognize that they are not the same as actual year-by-year results.
To illustrate the components of overall performance, a Fund may separate its
cumulative and average annual returns into income results and capital gain or
loss.
In advertising and sales literature the Funds may compare performance with that
of other mutual funds, indices and other competing investment and deposit
products. The composition of these indices or products differs from that of the
Funds. The comparison of the Funds to an alternative investment should be made
with consideration of differences in features and expected performance. The
Funds may also be mentioned in newspapers, magazines, or other media from time
to time. The Funds assume no responsibility for the accuracy of such data. For
additional information on the types of indices, averages and periodicals that
might be utilized by the Funds in advertising and sales literature, see the
section "Calculation of Performance Data" in the Statement of Additional
Information.
The Lehman Brothers Bond indices include fixed rate debt issues rated investment
grade or higher by Moody's Investors Service, Standard and Poor's Corporation,
or Fitch Investor's Service, in that order. All issues have at least one year to
maturity and an outstanding par value of at least $100 million. Intermediate
indices include bonds with maturities of up to ten years, and long term indices
include those with maturities of ten years or longer. All returns are market
value weighted inclusive of accrued interest. The Aggregate Bond Index is made
up of the Government/Corporate Index, the Mortgage-Backed Securities Index, and
the Asset-Backed Securities Index. The Government/Corporate Bond Index includes
the Government and Corporate Bond Indices. The Government Bond Index is made up
of the Treasury Bond Index (all public obligations of the U.S. Treasury,
excluding flower bonds and foreign-targeted issues) and the Agency Bond Index
(all publicly issued debt of U.S. Government agencies and quasi-federal
corporations, and corporate debt guaranteed by the U.S. Government). The
Corporate Bond Index includes all publicly issued, fixed rate, nonconvertible
investment grade dollar-denominated, SEC-registered corporate debt. The
Mortgage-Backed Securities Index includes 15- and 30-year fixed rate securities
backed by mortgage pools of the Government National Mortgage Association (GNMA),
Federal Home Loan Mortgage Corporation (FHLMC), and Federal National Mortgage
Association (FNMA). The Asset-Backed Securities Index is composed of credit
card, auto, and home equity loans. Included in the index are pass-through,
bullet (noncallable), and controlled amortization structures; no subordinated
tranches are included. All securities have an average life of at least one year.
The Lehman Municipal Bond Index is a total return performance benchmark for the
long-term, investment-grade tax-exempt bond market. Returns and attributes for
the Muni Index are calculated semi-monthly using approximately 25,000 municipal
bonds. Bonds included in the Muni Index are selected to be representative of the
market and are classified into four main sectors: General Obligation (state and
local), Revenue Bonds (excluded insured revenue bonds), Insured Bonds (includes
all bond insurers with Aaa/AAA ratings), and Prerefunded Bonds. The Muni Index
also includes zero coupon bonds and bonds which are subject to the alternative
minimum tax ("AMT"). The Lehman 5-year Municipal Index is a subset of the Lehman
Municpal Bond Index, and is composed of bonds with a maturity range of four to
five years. The Lehman Intermediate Government Bond Index includes fixed rate
investment grade issues with maturities from one to ten years.
<PAGE>
The following tables illustrate each Fund's average annual total returns and
cumulative total returns as of March 31, 1997, and annual total returns for the
periods shown.
<TABLE>
<CAPTION>
Average Annual Total Returns and Cumulative Total Returns Annual Total Returns
- ---------------------------------------------------------------------- -----------------------------------
U.S. GOVT. SECURITIES FUND Lehman Inter. Govt Bond Index
-------------------------- ----------------------------- Year U.S. GOVT. Lehman
Period in Average Average Ended SECURITIES Inter. Govt.
Years Annual Cumulative Annual Cumulative March 31, FUND Bond Index
----- ------ ---------- ------ ---------- --------- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
9.8 years* + 8.1% + 114.5% + 7.9% + 111.8% 1997 + 4.6% + 4.8%
9 years + 7.7 + 94.3 + 7.8 + 96.6 1996 + 8.9 + 9.1
8 years + 8.0 + 84.8 + 8.3 + 88.6 1995 + 4.5 + 4.3
7 years + 7.7 + 68.3 + 7.8 + 69.3 1994 + 4.7 + 2.3
6 years + 6.8 + 48.4 + 7.1 + 51.0 1993 + 9.2 + 12.1
5 years + 6.3 + 35.9 + 6.5 + 36.7 1992 + 9.2 + 10.5
4 years + 5.6 + 24.4 + 5.1 + 21.9 1991 + 13.4 + 12.1
3 years + 5.9 + 18.9 + 6.0 + 19.2 1990 + 9.8 + 11.4
2 years + 6.7 + 13.8 + 6.9 + 14.3 1989 + 5.1 + 4.2
1 year + 4.6 + 4.6 + 4.8 + 4.8 1988* + 10.4 + 7.7
* Since Inception on 6/2/87
BOND FUND Lehman Aggregate Bond Index
------------------------- --------------------------- Year
Period in Average Average Ended BOND Lehman Aggreg.
Years Annual Cumulative Annual Cumulative March 31, FUND Bond Index
----- ------ ---------- ------ ---------- --------- ---- ----------
3.3 years* + 5.7% + 20.1% + 5.4% + 19.2% 1997 + 5.2% + 4.9%
3 years + 6.7 + 21.6 + 6.9 + 22.0 1996 + 10.6 + 10.8
2 years + 7.9 + 16.3 + 7.8 + 16.2 1995 + 4.5 + 4.9
1 year + 5.2 + 5.2 + 4.9 + 4.9 1994* - 1.2 - 2.3
* Since Inception on 12/1/93
TAX-FREE INCOME FUND Lehman 5-Year Muni Bond Index
------------------------- ----------------------------- Year
Period in Average Average Ended TAX-FREE Lehman 5-Year
Years Annual Cumulative Annual Cumulative March 31, INCOME FUND Muni Bond Index
----- ------ ---------- ------ ---------- --------------------- ---------------
8.5 years* + 7.5% + 84.3% + 7.0% + 77.2% 1997 + 6.9% + 4.2%
8 years + 7.4% + 77.6 + 7.3 + 75.9 1996 + 7.7 + 7.3
7 years + 7.3 + 63.8 + 7.0 + 60.2 1995 + 7.0 + 5.7
6 years + 7.3 + 52.6 + 6.6 + 46.5 1994 + 4.0 + 3.0
5 years + 7.1 + 41.0 + 6.1 + 34.3 1993 + 10.0 + 10.4
4 years + 6.4 + 28.2 + 5.0 + 21.7 1992 + 8.2 + 9.1
3 years + 7.2 + 23.2 + 5.7 + 18.2 1991 + 7.3 + 9.4
2 years + 7.3 + 15.1 + 5.7 + 11.8 1990 + 8.5 + 9.8
1 year + 6.9 + 6.9 + 4.2 + 4.2 1989* + 3.8 + 0.7
* Since Inception on 9/29/88
MN TAX-FREE
INCOME FUND Lehman 5-Year Muni Bond Index
------------------------- ----------------------------- Year MN
Period in Average Average Ended TAX-FREE Lehman 5-Year
Years Annual Cumulative Annual Cumulative March 31, INCOME FUND Muni Bond Index
----- ------ ---------- ------ ---------- --------------------- ---------------
3.3 years* + 6.0% + 21.6% + 4.7% + 16.5% 1997 + 6.3% + 4.2%
3 years + 7.0 + 22.6 + 5.7 + 18.2 1996 + 7.1 + 7.3
2 years + 6.7 + 13.8 + 5.7 + 11.8 1995 + 7.7 + 5.7
1 year + 6.3 + 6.3 + 4.2 + 4.2 1994* - 0.8 - 1.4
* Since Inception on 12/1/93
</TABLE>
<PAGE>
In addition to the investment performance information discussed above, the Funds
also may quote a YIELD. A Fund's yield illustrates the rate of income the Fund
earns on its investments as a percentage of the Fund's share price. Yield is
calculated by dividing the net investment income per share earned during a
30-day period by the Fund's net asset value per share on the last day of the
period. The result will then be annualized using a formula which provides for
semi-annual compounding of income.
The Money Market Fund may refer to current yield and effective yield in
advertisements or other sales literature. The current yield is based on a
seven-day period and the effective yield is computed by calculating the effect
of annualized compounding.
The Tax-Free Income Fund and Minnesota Tax-Free Income Fund may quote a TAXABLE
EQUIVALENT YIELD which is the taxable yield an investor would have to earn to
equal an after-tax yield equivalent to the Fund's tax-exempt yield. A taxable
equivalent yield is calculated by dividing the Fund's tax-exempt portion of its
yield by one minus a stated income tax rate, e.g., 1-28% = 72%. The result is
then added to that portion of the yield, if any, that is not tax exempt.
The following tables show the yield that taxable investments would have to earn
to equal tax-exempt income earned by an investment in the Tax-Free Income Fund
or the Minnesota Tax-Free Income Fund, respectively. The tax-exempt yields shown
are for illustrative purposes only and are not indicative of the Funds' yields.
<TABLE>
<CAPTION>
TAX-FREE INCOME FUND
Tax-Exempt Yields
-----------------
FEDERAL TAXABLE INCOME BRACKET MARGINAL 4.00% 5.00% 6.00% 7.00% 8.00%
------------------------------ FEDERAL ---------------------------------------
JOINT RETURNS SINGLE RETURNS TAX RATE TAXABLE EQUIVALENT YIELDS
------------- -------------- -------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0 - $41,200 $0 - $24,650 15.0% 4.71% 5.88% 7.06% 8.24% 9.41%
41,200 - 99,600 24,650 - 59,750 28.0 5.56 6.94 8.33 9.72 11.11
99,600 - 151,750 59,750 - 124,650 31.0 5.80 7.25 8.70 10.14 11.59
151,750 - 271,050 124,650 - 271,050 36.0 6.25 7.81 9.38 10.94 12.50
Over 271,050 Over 271,050 39.6 6.62 8.28 9.93 11.59 13.25
Tax rates are based on federal tax rates in effect in 1997.
MINNESOTA TAX-FREE INCOME FUND
APPROX.
COMBINED Tax-Exempt Yields
MARGINAL -----------------
FEDERAL TAXABLE INCOME BRACKET STATE & 4.00% 5.00% 6.00% 7.00% 8.00%
------------------------------ FEDERAL ---------------------------------------
JOINT RETURNS SINGLE RETURNS TAX RATE TAXABLE EQUIVALENT YIELDS
------------- -------------- -------- -------------------------
$0 - $23,690 $0 - $15,520 20.1% 5.01% 6.26% 7.51% 8.76% 10.01%
23,690 - 41,200 15,520 - 24,650 21.8 5.12 6.39 7.67 8.95 10.23
41,200 - 88,420 24,650 - 50,240 33.8 6.04 7.55 9.06 10.57 12.08
88,420 - 99,600 50,240 - 59,750 34.1 6.07 7.59 9.11 10.63 12.14
99,600 - 151,750 59,750 - 124,650 36.9 6.34 7.92 9.50 11.09 12.67
151,750 - 271,050 124,650 - 271,050 41.4 6.83 8.54 10.25 11.95 13.66
Over 271,050 Over 271,050 44.7 7.24 9.05 10.86 12.67 14.47
Tax rates are based on federal and Minnesota tax rates in effect in 1997.
</TABLE>
<PAGE>
The above tables reflect the deduction for state income taxes on the federal
income tax form, but do not reflect the federal and state rules for the
phase-out of personal exemptions and deductions. The federal tax bracket amounts
are scheduled for inflation in future years. If these scheduled changes take
effect, they will result in slightly different taxable equivalent yields for
1998 and later years than those shown in the tables.
Yield information may be helpful in considering whether to invest in a Fund.
However, because yield accounting methods differ from the methods used for other
accounting purposes, a Fund's yield may not equal its distribution rate, the
income credited to your account or the income reported in the Fund's financial
statements. A Fund's yield will vary from day to day and past yields should not
be considered a representation of future yields.
For additional information regarding the calculation of return figures and
yields, see "Calculation of Performance Data" in the Statement of Additional
Information.
Additional performance information regarding each Fund is included in the Funds'
combined annual report, which will be mailed to shareholders without charge upon
request.
[LOGO] INVESTMENT OBJECTIVES & POLICIES
- --------------------------------------------------------------------------------
The investment objective of each Fund is set forth on page 1 of this Prospectus.
The investment objective of each Fund is "fundamental," which means that it may
not be changed unless approved by a vote of the "majority" of the shareholders
of such Fund (as defined in the 1940 Act). There can be no assurance that the
investment objective of any of the Funds will be achieved.
In seeking their investment objectives, the Funds will be subject to the
following policies and limitations. Except as indicated, these policies are not
fundamental and may be changed by the Boards of Directors without shareholder
approval.
[LOGO] MONEY MARKET FUND
- --------------------------------------------------------------------------------
The Fund intends to achieve its objective by investing primarily in a
diversified portfolio of high quality short-term debt instruments maturing in
397 days or less and maintaining an average dollar-weighted portfolio maturity
of 90 days or less. THE FUND SEEKS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE. HOWEVER, THERE IS NO ASSURANCE OF A CONSTANT SHARE PRICE. All
securities in the portfolio will be denominated in U.S. dollars and will present
minimal credit risk.
The Fund may invest in:
(1) marketable securities issued or guaranteed by the United States or its
agencies or instrumentalities;
(2) corporate debt instruments, such as commercial paper and nonconvertible
corporate debt securities which are rated in the highest rating category
by at least two nationally recognized statistical rating organizations
("NRSRO"), or if not rated, issued by a company having outstanding
comparable debt rated in one of the two highest rating categories by at
least two NRSROs or, if only one NRSRO has rated the security, that NRSRO;
(3) U. S. dollar denominated bank money instruments such as certificates of
deposit (including variable rate certificates of deposit), time deposits
and bankers' acceptances; provided such instruments are a) rated in the
highest rating category of at least two NRSROs or, if only rated by one
NRSRO, that NRSRO; or b) issued or guaranteed by a company which at the
date of investment has outstanding a comparable debt issue rated in the
highest rating category by at least two NRSROs or; c) if only rated by one
NRSRO, that NRSRO;
(4) repurchase agreements; and
(5) asset-backed securities (including, but not limited to, interests in pools
of assets such as motor vehicle installment purchase obligations and credit
card receivables) which are determined to be of high quality by the Adviser
pursuant to criteria approved by the Board of Directors.
<PAGE>
The bank money instruments in which the Fund invests may be issued by U.S.
commercial banks, foreign branches of U.S. commercial banks, foreign banks, and
U.S. and foreign branches of foreign banks. The Fund's investments in bank money
instruments will be restricted to an approved list of banks recommended by the
Adviser based upon credit quality.
The Fund may not invest 1) more than 5% of its total assets in the securities of
any one issuer (except as provided in Rule 2a-7 that the Fund may invest more
than five percent of its total assets in first tier securities of a single
issuer for a period of up to three business days after the purchase); 2) more
than 5% of its total assets in securities of issuers not in the highest rating
category as determined by the requisite number of NRSROs or, if unrated, or
comparable quality; and 3) more than the greater of 1% of its total assets or $1
million in securities of any one issuer not in the highest rating category as
determined by the requisite number of NRSROs or, if unrated, of comparable
quality.
The Fund may invest in time deposits which must mature in seven days or less.
Time deposits are deposits held in foreign branches of U.S. banks which have a
specified term or maturity. Time deposits are similar to certificates of
deposit, except they are not transferable, and are, therefore, illiquid prior to
their maturity.
The Fund may invest in Eurodollar certificates of deposit subject to the 25%
limitation for concentration in any one industry. Eurodollar certificates of
deposit are negotiable deposits denominated in U.S. dollars on deposit with
foreign branches of U.S. banks which have a specified maturity.
The Fund may invest in instruments which bear rates of interest that are
adjusted periodically or which "float" continuously according to formulas
intended to minimize fluctuation in values of the instruments ("variable rate
securities"). The interest rate of such securities is ordinarily determined by
reference to, or is a percentage of, an objective standard such as a bank's
prime rate, the 90-day U.S. Treasury bill rate, or the rate of return on
commercial paper or bank certificates of deposit. Generally, changes in the
interest rate on variable rate securities reduce the fluctuation in the market
value of such securities. Accordingly, as interest rates decrease or increase,
the potential for capital appreciation or depreciation is less than for
fixed-rate obligations. Some variable rate securities ("variable rate demand
securities") have a demand feature entitling the purchaser to resell the
securities to the issuer at an amount approximately equal to amortized cost or
the principal amount thereof plus accrued interest. As is the case for other
variable rate securities, the interest rate on variable rate demand securities
varies according to some objective standard intended to minimize fluctuation in
the values of the instruments. The Fund determines the maturity of variable rate
securities in accordance with Securities and Exchange Commission rules which
allow the Fund to consider certain of such instruments as having maturities that
are less than the maturity date on the face of the instrument. Under such rules,
the maturity date may be considered to be the longer of the period remaining
until the next readjustment of the interest rate or the period remaining until
the principal amount can be recovered through demand.
The Fund may invest up to 20% of its assets in U.S. dollar denominated debt
securities of foreign corporations and foreign governments if rated in one of
the two highest categories by an NRSRO. Debt securities of foreign governments
may include securities of the governments of Canada, Japan and members of the
European Economic Community. All trades involving foreign debt securities will
be transacted through U.S. based brokerage firms or commercial banks. Canadian
investments will be made through the Toronto Stock Exchange member firms in U.S.
dollars. There may be less publicly available information about foreign issuers,
and foreign issuers generally are not subject to the uniform accounting,
auditing, and financial reporting standards and practices applicable to domestic
issuers. Delays may be encountered in settling securities transactions in
foreign markets. Custody charges are generally higher for foreign securities.
The income from foreign securities may be subject to foreign taxes.
<PAGE>
[LOGO] U.S. GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
The Fund invests solely in securities issued, guaranteed or insured by the U.S.
government, its agencies or instrumentalities whether or not backed by the "full
faith and credit" pledge of the U.S. government. Guarantees as to the timely
payment of principal and interest do not extend to the value or yield of such
securities nor do they extend to the value of the Fund's shares. There are no
percentage limitations with regard to the purchase of any of the Fund's
allowable investments. The Fund's holdings may be comprised substantially of a
limited number of certain types of securities such as pass-through securities
backed by mortgages and other debt securities. Pass-through securities and U.S.
Treasury securities will be the principal holdings in the Fund, although this
may change. The Fund may invest in U.S. Treasury inflation-protection
securities. The value of such inflation-protection securities is adjusted for
inflation and periodic interest payments are in amounts equal to a fixed
percentage of the inflation adjusted value of the principal. Securities in which
the Fund may invest may not yield as high a level of current income as
securities of lower quality. These lower quality securities in which the Fund
does not invest generally have less liquidity, greater default risk and are
subject to greater fluctuation in market value.
MORTGAGE-BACKED SECURITIES. The Fund may invest in pass-through securities which
are sold by various private, governmental and government-related organizations.
Pass-through securities are formed when mortgages and other debt instruments are
pooled together and undivided interests in the pool are sold to investors such
as the Fund. The cash flow from the underlying debt instruments is "passed
through" to the holders of the securities in the form of periodic (generally
monthly) payments of interest, principal and prepayments. Prepayments occur when
the holder of an individual debt instrument prepays the remaining principal and
interest before the final scheduled payment month. The Fund may be subject to a
higher rate of prepayments during periods of declining interest rates when
mortgages and other debt instruments may be more frequently prepaid.
Pass-through securities that the Fund will purchase are issued by Government
National Mortgage Association (GNMA), Federal National Mortgage Assocation
(FNMA), and Federal Home Loan Mortgage Corporation (FHLMC). GNMA is the
principal governmental guarantor of mortgage-related securities. Timely payment
of the principal and interest on these securities is guaranteed and is backed by
the full faith and credit of the U.S. government. FNMA issues mortgage
securities and guarantees them as to timely payment of principal and interest.
FHLMC issues participation certificates that represent an interest in mortgages
from FHLMC's portfolio and guarantees the timely payment of interest and the
ultimate payment (within one year) of principal. Securities guaranteed by FNMA
and FHLMC are not backed by the full faith and credit of the United States.
The average life of mortgages which compose a mortgage pool will vary widely and
the expected average life of pools may vary from as short as one year to as long
as eighteen years. If mortgage interest rates decrease, the value of the Fund's
mortgage securities is not likely to increase on a comparable basis with other
debt securities because of the prepayment feature which results in the average
life of the mortgages in the pool decreasing as borrowers refinance and prepay
mortgages in order to take advantage of lower rates. The proceeds to the Fund
from prepayments will have to be invested at the then prevailing lower interest
rates. On the other hand, if interest rates increase, the value of the Fund's
mortgage securities may decrease, and since it is anticipated that borrowers
will not refinance, the average life of the mortgages in a pool will be longer.
If a mortgage security is purchased at a premium because its fixed level of
interest exceeds prevailing yields, the premium is not guaranteed and a decrease
in value to par may result in a loss of the premium, especially in the event of
prepayment. See the Statement of Additional Information for more information
about the characteristics of these instruments.
MANUFACTURED HOME LOANS. The Fund invests in GNMA manufactured home loan
pass-through securities. Manufactured home loans are fixed-rate loans secured by
a manufactured home unit. In certain instances the loan may be collateralized by
a combination of a manufactured home unit and a developed lot of land upon which
the unit can be placed. Manufactured home loans are generally not considered
mortgages, however,
<PAGE>
because of the structural and operational similarities with mortgage-backed
pass-through securities and the role of GNMA, industry practice often groups the
securities within the spectrum of GNMA mortgage-backed pass-through securities
for listing purposes. Manufactured home loans have key characateristics
different from mortgage-backed securities including different prepayment rates.
Prepayment rates tend to fluctuate with interest rates and other economic
variables. Manufactured home prepayment rates generally tend to be less volatile
than the prepayment rates experienced by mortgage-backed securities. See the
above discussion regarding mortgage-backed securities.
Currently, a substantial portion of the Fund's assets are invested in
pass-through securities and the Adviser intends to continue this investment
strategy during the near future. As of June 30, 1997, pass-through securities
comprised 60.9% of the Fund's net assets.
U.S. TREASURY SECURITIES. U.S. Treasury securities are bonds, notes and bills
which are issued by the U.S. government and which differ in their interest
rates, maturities and dates of issuance. For example, Treasury bills have a
maturity of one year or less, Treasury notes have maturities of one to ten years
and Treasury bonds generally have maturities of greater than ten years at the
date of issuance.
The Fund invests in securities with maturities of one day to forty years. The
Fund generally emphasizes investments of intermediate to longer term maturities
(5 to 30 years). For defensive purposes, the Fund may invest solely in short
term maturities (1 to 90 days). With regard to investments in bonds, notes and
bills, the maturity is usually an accurate indication of the outstanding term;
however, mortgage-backed pass-through securities which receive regular principal
payments have an average life less than the maturity. The average life of
mortgage pass-through investments will typically vary from 1 to 18 years. The
average life of all investments in the portfolio will generally vary between 2
and 20 years.
Various other securities are issued, guaranteed or insured by agencies of the
U.S. government and various instrumentalities which have been established or
sponsored by the U.S. government. These securities, even when guaranteed by
federal agencies or instrumentalities, may or may not be backed by the "full
faith and credit" of the U.S. government.
In addition to Treasury obligations, the Fund may invest in the following: (1)
obligations of U.S. government agencies and instrumentalities which are secured
by the full faith and credit of the U.S. Treasury such as GNMA pass-through
certificates; (2) obligations which are secured by the right of the issuer to
borrow from the Treasury, such as securities issued by the Federal Financing
Bank or the United States Postal Service; and (3) obligations which have the
principal and interest payments guaranteed by the government agency or
instrumentality itself (but are not backed by the full faith and credit of the
U.S. government), such as securities of the Federal Home Loan Bank or FNMA.
OPTIONS ON FUTURES CONTRACTS AND SECURITIES. The Fund may purchase and sell
exchange traded put and call options on debt securities and options on futures
contracts equaling up to 5% of its net assets for the purpose of hedging. For
additional information about these investments, see the section entitled "Common
Policies and Information" below and the Statement of Additional Information.
[LOGO] BOND FUND
- --------------------------------------------------------------------------------
During normal market conditions the Fund will invest at least 65% of its total
assets in the following types of fixed income securities: mortgage and other
asset-backed securities; U.S. government securities; corporate debt securities;
corporate commercial paper; municipal securities; variable and floating rate
debt securities; bank certificates of deposit, fixed time deposits and bankers
acceptances; repurchase agreements; inflation-protection securities; obligations
of foreign governments or their subdivisions, agencies and instrumentalities, or
of international agencies or supernational entities; and foreign currency
exchange-related securities, including foreign currency warrants.
The Fund primarily invests in fixed-income securities with maturities of 2 to 30
years. Maturity is usually an accurate indication of the outstanding term,
however, pass-through securities including mortgage pass-
<PAGE>
through securities which receive regular principal payments have an average life
less than the maturity. The average life of mortgage pass-through investments
will typically vary from 1 to 18 years. The average maturity of the portfolio
will generally vary between 3 and 30 years.
The Fund may invest up to 25% of its assets in debt securities that are rated
below investment grade, i.e. rated below Baa3 by Moody's Investors Services
("Moody's) or BBB- by Standard & Poor's Corporation ("S&P"), Fitch Investors
Service, Inc. ("Fitch"), or Duff & Phelps Credit Rating Co. ("Duff & Phelps") or
comparable unrated securities. The Fund will not invest in securities rated
below B-3 by Moody's or B- by S&P, Fitch, or Duff & Phelps, at the time of
investment. Securities rated below investment grade are considered predominantly
speculative and involve greater risk of default or price changes due to changes
in the issuer's creditworthiness. DEBT SECURITIES RATED BELOW INVESTMENT GRADE
ARE COMMONLY KNOWN AS JUNK BONDS. Lower ratings may reflect a greater
possibility that the financial condition of the issuer, or adverse changes in
general economic conditions, or both, may impair the ability of the issuer to
make payments of interest and principal. The prices and yields of lower rated
securities generally fluctuate more than higher quality securities, and such
prices may decline significantly in periods of general economic difficulty or
rising interest rates. For more information on the various rating categories and
on the percentage of Fund assets in each such category, see "Common Policies and
Information - Ratings of Debt Securities." For a description of the ratings used
by Moody's, S&P, Fitch, and Duff & Phelps, see the Statement of Additional
Information.
The Fund may invest up to 20% of its assets in unrated securities that in the
opinion of the Adviser are at least similar in quality at the time of purchase
to the rated bonds the Fund purchases.
RISKS OF INVESTING IN HIGH YIELD SECURITIES. Investment in junk bonds or high
yield securities involves special risks in addition to the risks associated with
investments in higher rated debt securities. High yield securities may be
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Analysis of the
creditworthiness of issuers of high yield securities may be more complex than
for issuers of higher quality debt securities, and the ability of the Fund to
achieve its investment objective may, to the extent of its investments in high
yield securities, be more dependent upon such analysis than would be the case if
the Fund were investing in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to
interest-rate changes than more highly rated investments, but more sensitive to
adverse economic downturns or individual corporate developments.
For more information on the risks of investing in high yield securities, see the
Statement of Additional Information.
MORTGAGE-BACKED SECURITIES. The Fund may invest in pass-through securities which
are sold by various private, governmental and government-related organizations.
Pass-through securities are formed when mortgages and other debt instruments are
pooled together and undivided interests in the pool are sold to investors such
as the Fund. The cash flow from the underlying debt instruments is "passed
through" to the holders of the securities in the form of periodic (generally
monthly) payments of interest, principal and prepayments. Prepayments occur when
the holder of an individual debt instrument prepays the remaining principal and
interest before the final scheduled payment month. Therefore, the Fund may be
subject to a higher rate of prepayments during periods of declining interest
rates when mortgages and other debt instruments may be more frequently prepaid.
Mortgage pass-through securities include (1) obligations of U.S. government
agencies and instrumentalities which are secured by the full faith and credit of
the U.S. Treasury such as Government National Mortgage Association ("GNMA")
pass-through certificates; (2) obligations which are secured by the right of the
issuer to borrow from the Treasury, such as securities issued by the Federal
Financing Bank, the Federal Home Loan Banks and the United States Postal
Service; and (3) obligations which have the principal and interest payments
<PAGE>
guaranteed by the government agency or instrumentality itself (but are not
backed by the full faith and credit of the U.S. government), such as securities
of the Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC"); and (4) obligations of private corporations.
The average life of mortgages which compose a mortgage pool will vary widely and
the expected average life of pools may vary from as short as one year to as long
as eighteen years. If mortgage interest rates decrease, the value of the Fund's
mortgage securities is not likely to increase on a comparable basis with other
debt securities because of the prepayment feature which results in the average
life of the mortgages in the pool decreasing as borrowers refinance and prepay
mortgages in order to take advantage of lower rates. The proceeds to the Fund
from prepayments will have to be invested at the then prevailing lower interest
rates. On the other hand, if interest rates increase, the value of the Fund's
mortgage securities may decrease, and since it is anticipated that borrowers
will not refinance, the average life of the mortgages in a pool will be longer.
If a mortgage security is purchased at a premium because its fixed level of
interest exceeds prevailing yields, the premium is not guaranteed and a decrease
in value to par may result in a loss of the premium, especially in the event of
prepayment. See the Statement of Additional Information for more information
about the characteristics of these instruments.
U.S. GOVERNMENT SECURITIES. The Fund may invest in securities issued, guaranteed
or insured by the U.S. government, its agencies or instrumentalities whether or
not backed by the "full faith and credit" pledge of the U.S. government.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of such securities nor do they extend to the value of the
Fund's shares. U.S. Treasury securities are bonds, notes and bills which are
issued by the U.S. government and which differ in their interest rates,
maturities and dates of issuance. The Fund may invest in U.S. Treasury
inflation-protection securities. The value of such inflation-protection
securities is adjusted for inflation and periodic interest payments are in
amounts equal to a fixed percentage of the inflation adjusted value of the
principal. See the Statement of Additional Information for further information.
Other instrumentalities of the U.S. government which issue or guarantee
securities which the Fund may purchase include, for example, the Federal Farm
Credit System, Federal Land Banks, the Federal Intermediate Credit Bank, the
Bank for Cooperatives, Federal Home Loan Banks, and the Student Loan Marketing
Association. The U.S. Treasury is not obligated by law to provide support to all
U.S. government instrumentalities and agencies, and the Fund will invest in
securities which are not backed by the full faith and credit of the U.S.
Treasury issued by such instrumentalities and agencies only when the Fund's
Adviser determines that the credit risk with respect to the instrumentality or
agency issuing such securities does not make its securities unsuitable
investments for the Fund. See the Statement of Additional Information for
further information.
OTHER ASSET-BACKED SECURITIES. In addition to mortgage-backed securities, the
Fund may invest in other types of asset-backed securities which represent other
forms of consumer credit such as automobile and credit card receivables,
manufactured (mobile) home loans, home improvement loans and home equity loans.
Asset-backed securities are generally privately issued and, similar to
mortgage-backed securities, pass through cash flows to investors. Generally,
asset-backed securities include many of the risks associated with
mortgage-related securities. In general, however, the collateral supporting
asset-backed securities is of shorter maturity than mortgage loans. In addition,
prepayments are less sensitive to changes in interest rates than mortgage
pass-throughs. Asset-backed securities involve certain risks that are not posed
by mortgage-backed securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, including the bankruptcy laws, some of which
may reduce the ability to obtain full payment. In the case of automobile
receivables, due to various legal and economic factors, proceeds for repossessed
collateral may not always be sufficient to support payments on these securities.
CORPORATE DEBT SECURITIES. The Fund may invest in corporate debt securities
(corporate bonds, debentures, notes and other similar corporate debt
instruments, in-
<PAGE>
cluding convertible securities) which meet the minimum ratings criteria set
forth by the Fund, or, if unrated, are in the Adviser's opinion of comparable
quality to corporate debt securities in which the Fund may invest.
CORPORATE COMMERCIAL PAPER. The commercial paper purchased by the Fund will
consist only of direct obligations which, at the time of purchase, are rated in
the highest rating category by at least two nationally recognized statistical
rating organizations ("NRSRO"), or if not rated, issued by a company having
outstanding comparable debt rated in one of the two highest rating categories by
at least two NRSROs or, if only one NRSRO has rated the security, that NRSRO.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). The Fund may invest in CMOs. See the
discussion regarding CMOs under the section entitled "Common Policies and
Information" below.
FUTURES, OPTIONS & SWAP AGREEMENTS. The Fund may invest up to 10% of its assets
in futures, options, options on futures and may enter into swap agreements for
hedging purposes or as part of its investment strategy. For additional
information about these investments, see the section entitled "Common Policies
and Information" below and the Statement of Additional Information.
FOREIGN CORPORATE DEBT SECURITIES. The Fund may invest up to 20% of its assets
in debt securities of foreign governments or foreign corporate debt securities
denominated in foreign currencies which are rated at least A by Moody's, S&P,
Fitch or Duff & Phelps or, if unrated, are in the Adviser's opinion of
comparable quality. All trades involving foreign debt securities will be
transacted through U.S. based brokerage firms or commercial banks. Foreign
investments are subject to certain unique risks, such as fluctuations in the
value of the currencies, and potential adverse political and economic
developments. There also may be less publicly available information about
foreign issuers, and foreign issuers generally are not subject to the uniform
accounting, auditing, and financial reporting standards and practices applicable
to domestic issuers. Delays may be encountered in settling securities
transactions in foreign markets. Custody charges are generally higher for
foreign securities. The income from foreign securities may be subject to foreign
taxes.
FOREIGN CURRENCIES AND CURRENCY EXCHANGE TRANSACTIONS. The Fund may engage in
foreign currency exchange transactions by means of buying or selling foreign
currencies on a spot basis, entering into foreign currency forward contracts,
and buying and selling foreign currency options, foreign currency futures, and
options on foreign currency futures. Foreign currency exchange transactions may
be entered into for the purpose of hedging against foreign currency exchange
risk arising from the Fund's investment or anticipated investment in securities
denominated in foreign securities. Foreign currency exchange transactions will
be limited to the total value of securities denominated in foreign currencies.
For more information on foreign currency exchange transactions, see the
Statement of Additional Information.
INVESTMENT IN SIT MONEY MARKET FUND. The Fund may invest up to the greater of 5%
of its total net assets or $2.5 million in Sit Money Market Fund ("Money Market
Fund"), which also is advised by the Adviser, subject to the conditions
contained in an exemptive order (the "Exemptive Order") issued to the Fund and
the Adviser by the Securities and Exchange Commission. Such investments may be
made in lieu of direct investments in short term money market instruments if the
Adviser believes that they are in the best interest of the Fund. The Exemptive
Order requires the Adviser and its affiliates, in their capacities as service
providers for the Money Market Fund, to remit to the Fund, or waive, an amount
equal to all fees otherwise due to them under their advisory and other
agreements with the Money Market Fund to the extent such fees are based upon the
Fund's assets invested in shares of Money Market Fund. This requirement is
intended to prevent shareholders of the Fund from being subjected to double
management and other asset-based fees as a result of the Fund's investments in
Money Market Fund.
[LOGO] TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
In normal market conditions, the Tax-Free Income Fund will endeavor to invest
100% of its assets in tax-exempt municipal securities. Such securities generate
interest that, in the opinion of bond counsel, is exempt from regu-
<PAGE>
lar federal income taxes (and, as discussed below, the federal alternative
minimum tax). Such municipal securities may include securities that are issued
by states, territories and possessions of the United States and the District of
Columbia and their agencies, instrumentalities and political subdivisions. See
the Statement of Additional Information for more details. As a fundamental
policy, in normal market conditions, the Fund may not invest more than 20% of
its net assets in taxable obligations or municipal securities that are subject
to the federal alternative minimum tax.
Of the municipal securities in which the Fund invests, 100% will be rated
investment grade at the time of purchase or, if unrated, judged by the Adviser
to be of comparable quality to securities rated as investment grade. A security
is considered investment grade if it is rated within the four highest grades of
either Moody's, S&Ps, Fitch, or Duff & Phelps. Securities in which the Fund will
invest may not yield as high a level of current income as securities of lower
quality. The Fund does not invest in lower quality securities because they
generally have less liquidity, greater market risk and higher default risk. The
lowest investment grade category involves some speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher-grade bonds.
During periods of abnormal market conditions, the Fund may invest all of its
assets in taxable obligations on a temporary basis for defensive purposes. Such
taxable obligations may include obligations of the U.S. government, its agencies
or instrumentalities; corporate bonds rated within the four highest grades by
either Moody's, S&P, Fitch, or Duff & Phelps; commercial paper rated in the
highest grades by either of such rating services (Prime-1 by Moody's or A-1+ or
A-1 by S&P, F-1+ or F-1 by Fitch, or Duff 1+, Duff 1, or Duff 1- by Duff &
Phelps); certificates of deposit and banker's acceptances of domestic banks;
taxable municipal bonds; and repurchase agreements with respect to any of the
foregoing investments. The Fund may also hold its assets in cash.
The Fund has no restriction on portfolio maturity. The dollar-weighted average
maturity is currently expected to range between 5 and 22 years. The Adviser will
shorten or lengthen the maturity based on its judgment of interest rate trends.
Generally, the Fund's average maturity will be shorter when interest rates are
expected to rise and longer when interest rates are expected to fall.
Longer-term bonds generally offer a higher current yield than are offered by
short-term securities, but also generally involve greater volatility of price
and risk of capital than shorter-term securities.
The Fund expects that new types of tax-exempt securities, futures contracts,
options thereon, and put and call options on municipal securities and indexes
may be developed in the future. As new types of tax-exempt instruments are
developed and offered to investors, the Adviser will be permitted to invest in
them provided that the Adviser believes their quality is equivalent to the
Fund's quality standards.
[LOGO] MINNESOTA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
In normal market conditions, the Fund will endeavor to invest 100% of its assets
in tax-exempt municipal securities. Such securities generate interest income
that, in the opinion of bond counsel, is exempt from federal regular income tax
and Minnesota regular personal income tax. The Fund anticipates that
substantially all of its distributions to its shareholders will be exempt from
federal regular income tax and Minnesota regular personal income tax. For
investors subject to the alternative minimum tax ("AMT"), up to 20% of the
Fund's income may be treated as an item of tax preference that is included in
the alternative minimum taxable income.
As a fundamental policy, during normal market conditions at least 80% of the
Fund's net assets will be invested in municipal securities, the income from
which is exempt from federal regular income tax. The Fund will invest at least
65% of its total assets in Minnesota tax-exempt obligations.
The Fund may invest without percentage limitation, in investment grade municipal
securities. A security is considered investment grade if, at the time of
purchase, it is rated within the four highest grades of either Moody's, S&P,
Fitch, or Duff & Phelps ratings for municipal securities, or for securities
which are unrated, if such se-
<PAGE>
curities are judged by the Adviser to be of comparable quality to securities
rated within such four highest grades. It should be noted that securities in the
fourth highest grade are considered medium grade and contain certain speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than is the case with higher grade bonds.
Although the Fund will primarily invest in investment grade securities, the Fund
may invest up to 30% of its assets in municipal securities rated below Baa3 by
Moody's or below BBB- by S&P, Fitch, or Duff & Phelps or, if unrated, are
determined by the Adviser to be of comparable quality. The minimum grade of
municipal securities in which the Fund may invest is rated B 3 by Moody's or B-
by S&P, Fitch, or Duff & Phelps. Securities rated below investment grade are
considered predominantly speculative and involve greater risk of default or
price changes due to changes in the issuer's creditworthiness. DEBT SECURITIES
RATED BELOW INVESTMENT GRADE ARE COMMONLY KNOWN AS JUNK BONDS. Lower ratings may
reflect a greater possibility that the financial condition of the issuer, or
adverse changes in general economic conditions, or both, may impair the ability
of the issuer to make payments of interest and principal. The prices and yields
of lower rated securities generally fluctuate more than higher quality
securities, and such prices may decline significantly in periods of general
economic difficulty or rising interest rates. For more information on the
various rating categories and on the percentage of Fund assets in each such
category, see "Common Policies and Information - Ratings of Debt Securities."
For a description of the ratings used by Moody's, S&P, Fitch, and Duff & Phelps,
see the Statement of Additional Information. For more information on the risks
of investing in junk bonds, see "Bond Fund - Risks of Investing in High Yield
Securities" above.
As a fundamental policy, the Fund may not invest more than 20% of its assets in
taxable obligations; however, during periods of abnormal market conditions, the
Fund may invest all of its assets in high-grade taxable obligations on a
temporary basis for defensive purposes. Such taxable obligations may include
obligations of the U.S. government, its agencies or instrumentalities; corporate
bonds rated within the two highest grades by either Moody's or S&P; commercial
paper rated in the highest grade by either of such rating services (Prime-1 by
Moody's, A-1+ or A-1 by S&P, F-1+ or F-1 by Fitch, or Duff 1+ or Duff 1 or Duff
1- by Duff & Phelps); certificates of deposit and banker's acceptances of
domestic banks (subject to the Fund's approved list of banks recommended by the
Adviser); and high-grade taxable municipal bonds. The Fund may also hold its
assets in cash.
DIVERSIFICATION. The Minnesota Tax-Free Income Fund is a non-diversified fund,
as defined by the 1940 Act, but intends to conduct its operations so as to
qualify as a regulated investment company for purposes of the Internal Revenue
Code of 1986, as amended, (the "Code"). Pursuant to the Code at least 50% of the
value of the Fund's total assets must be represented by one or more of the
following: 1) cash and cash items, including receivables, Government securities
and securities of other regulated investment companies; and 2) other securities,
limited in respect of the securities of any one issuer as follows: (a) the
entire amount of the securities of any one issuer may not have a value of more
than 5% of the value of the Fund's total assets; and (b) the entire amount of
the securities of any one issuer may not represent more than 10% of the
outstanding voting securities of the issuer. Since a relatively high perentage
of the assets of the Fund may be invested in obligations of a limited number of
issuers, some of which may be within the same economic sector, the Fund's
portfolio securities may be more susceptible to any single economic, political
or regulatory occurrence than the portfolio securities of diversified investment
companies.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN MINNESOTA TAX-EXEMPT OBLIGATIONS.
The value of tax-exempt securities owned by the Fund may be adversely affected
by local political and economic conditions and developments within Minnesota.
Adverse conditions in an industry significant to a local economy could have a
correspondingly adverse effect on the financial condition of local issuers.
Other factors that could affect tax-exempt securities include a change in the
local, state or national economy, demographic factors, ecological or
environmental concerns, statutory limitations on the issuer's ability to
increase taxes and other developments generally affecting the revenues of
issuers (for example,
<PAGE>
legislation or court decisions reducing state aid to local governments or
mandating additional services).
A more detailed description of the factors affecting issuers of Minnesota
municipal securities is set forth in the Statement of Additional Information. In
addition, investors in the Minnesota Tax-Free Income Fund should note that the
1995 Minnesota Legislature enacted a statement of intent specifying certain
circumstances under which interest on the Minnesota municipal securities held by
the Fund might become taxable for Minnesota income tax purposes. See "Taxes -
Minnesota Income Taxation - Minnesota Tax-Free Income Fund," in the Statement of
Additional Information.
[LOGO] COMMON POLICIES FOR TAX-FREE INCOME FUND
AND MINNESOTA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES. The yields on municipal securities are dependent on a
variety of factors, including the general level of interest rates, the financial
condition of the issuer, general conditions of the tax-exempt securities market,
the size of the issue, the maturity of the obligation and the rating of the
issue. Ratings are general, and not absolute, standards of quality.
Consequently, securities of the same maturity, interest rate and rating may have
different yields, while securities of the same maturity and interest rate with
different ratings may have the same yield.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities ("private activity" bonds). Under current tax law, interest
income earned by the Funds from certain private activity bonds is an item of
"tax preference" which is subject to the alternative minimum tax when received
by a shareholder in a tax year during which the shareholder is subject to the
alternative minimum tax.
Municipal securities in which the Funds invest include securities that are
issued by a state or its agencies, instrumentalities, municipalities and
political subdivisions, or by territories or possessions of the United States.
Tax-exempt municipal securities include municipal bonds, municipal notes and
municipal commercial paper. MUNICIPAL BONDS generally have maturities at the
time of issuance ranging from one to thirty years, or more. MUNICIPAL NOTES are
short-term and generally mature in three months to three years. Municipal
commercial paper matures in one year or less.
Municipal bonds are issued to raise money for various public purposes. The two
principal types of municipal bonds are general obligation bonds and revenue
bonds. The Funds may invest in both in any proportion. General obligation bonds
are secured by the full faith, credit and taxing power of the issuing
municipality and not from any particular fund or revenue source. Revenue bonds
are backed only from the revenues derived from a facility or class of facilities
or, in some cases, from the proceeds of a special excise or other specific
revenue source and not from the general taxing power.
FUTURES AND OPTIONS. The Funds may purchase exchange traded put and call options
on debt securities equaling up to 5% of its net assets for the purpose of
hedging. The Funds may invest in interest rate futures contracts and index
futures contracts and may buy options on such contracts for the purpose of
hedging its portfolio of fixed income securities (and not for speculative
purposes) against the adverse effects of anticipated movements in interest
rates. For additional information about these investments, see the section
entitled "Common Policies and Information" below and the Statement of Additional
Information.
HOUSING AUTHORITY BONDS. The Funds may invest without limitation in obligations
of municipal housing authorities which include both single-family and
multi-family mortgage revenue bonds. Weaknesses in federal housing subsidy
programs and their administration may result in a decrease of subsidies
available for payment of principal and interest on multi-family housing
authority bonds. Economic developments, including fluctuations in interest rates
and increasing construction and operating costs, may also adversely impact
revenues of housing authorities. In the case of some housing authorities,
inability to obtain additional financing could also reduce revenues available to
pay existing obligations. Mortgage revenue bonds are subject to extraordinary
mandatory redemption at par in whole or in part from the proceeds derived from
prepayments of underlying mortgage loans and also from the unused proceeds of
the issue within a stated period of time. The exclusion from gross income
<PAGE>
for federal income tax purposes of certain housing authority bonds depends on
qualification under relevant provisions of the Code and on other provisions of
federal law. These provisions of federal law contain certain ongoing
requirements relating to the cost and location of the residences financed with
the proceeds of the single family mortgage bonds and the income levels of
occupants of the housing units financed with the proceeds of the single and
multi-family housing bonds. While the issuers of the bonds, and other parties,
including the originators and servicers of the single family mortgages and the
owners of the rental projects financed with the multi-family housing bonds,
covenant to meet these ongoing requirements and generally agree to institute
procedures designed to insure that these requirements are met, there can be no
assurance that these ongoing requirements will be consistently met. The failure
to meet these requirements could cause the interest on the bonds to become
taxable, possibly retroactively from the date of issuance, thereby reducing the
value of the bonds, subjecting shareholders to unanticipated tax liabilities and
possibly requiring the Fund to sell the bonds at the reduced value. Furthermore,
any failure to meet these ongoing requirements might not constitute an event of
default under the applicable mortgage which might otherwise permit the holder to
accelerate payment of the bond or require the issuer to redeem the bond. In any
event, where the mortgage is insured by the Federal Housing Administration
("FHA"), the consent of the FHA may be required before insurance proceeds would
become payable to redeem the mortgage subsidy bonds.
INDUSTRIAL DEVELOPMENT REVENUE BONDS. Industrial development revenue bonds are
backed by the user of the facilities and the specific revenues of the project to
be financed. The credit quality of industrial development bonds is usually
directly related to the credit standing of the user of the facilities or the
credit standing of a third-party guarantor or other credit enhancement
participant, if any.
STATE OR MUNICIPAL LEASE OBLIGATIONS. Each Fund may invest up to 25% of its net
assets in municipal lease obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities.
Traditionally, municipal lease obligations have been viewed by the SEC staff as
illiquid investments. However, subject to Board consideration similar to the
approval applicable to restricted securities, the Adviser may treat certain
municipal lease obligations as liquid investments and not subject to the policy
limiting investments in illiquid investments. The Funds' Adviser will be
responsible for determining the credit quality of such leases, on an ongoing
basis, including the assessment of the likelihood that the lease will not be
cancelled. Although municipal lease obligations do not constitute general
obligations of the issuer for which such issuer's taxing power is pledged, a
municipal lease obligation is ordinarily backed by the issuer's covenant to
budget for, appropriate and make the payments due under the obligation. However,
certain municipal lease obligations contain "non-appropriation" clauses which
provide that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In the case of a "non-appropriation" lease, the Fund's ability to
recover under the lease in the event of non-appropriation or default will be
limited solely to the repossession of the leased property, without recourse to
the general credit of the lessee, and disposition of the property in the event
of foreclosure might prove difficult. See the Statement of Additional
Information for further information.
CONCENTRATION POLICY. As a fundamental policy, each Fund will not invest more
than 25% of its assets in revenue bonds payable only from revenues derived from
facilities or projects within a single industry; however, because other
appropriate available investments may be in limited supply, the industry
limitation does not apply to housing authority obligations or securities issued
by governments or political subdivisions of governments. Appropriate available
investments may be in limited supply from time to time in the opinion of the
Adviser due to the Funds' investment policy of investing primarily in
"investment grade" securities. The Tax-Free Income Fund does not intend to
invest more than 25% of its net assets in securities of governmental units or
issuers located in the same state, territory or possession of the U.S.
<PAGE>
[LOGO] COMMON POLICIES & INFORMATION
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
The Funds, except for the Money Market Fund, may invest in CMOs. CMOs are hybrid
instruments with characteristics of both mortgage-backed bonds and mortgage
pass-through securities. Similar to a bond, interest and prepaid principal on a
CMO are paid, in most cases, monthly. CMOs may be collateralized by whole
mortgage loans, but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA. Since CMOs derive
their return from underlying mortgages, they are commonly referred to as
derivative securities. CMOs are structured into multiple classes, with each
class bearing a different stated maturity. Monthly payments of principal,
including prepayments, are first returned to investors holding the shortest
maturity class; investors holding the longer maturity classes receive principal
only after the earlier classes have been retired. CMOs that are issued or
guaranteed by the U.S. Government or by any of its agencies or instrumentalities
will be considered U.S. Government securities by the U.S. Government Securities
Fund, while other CMOs, even if collateralized by U.S. Government securities,
will have the same status as other privately issued securities for purposes of
applying the Funds' diversification tests. For a discussion of prepayment risks
see "Mortgage and Other Asset-Backed Securities" within the Bond Fund's
Investment Objectives and Policies section above.
ZERO COUPON SECURITIES
The Funds are permitted to invest in zero coupon securities. Such securities are
debt obligations which do not entitle the holder to periodic interest payments
prior to maturity and are issued and traded at a discount from their face
amounts. The discount varies depending on the time remaining until maturity,
prevailing interest rates, liquidity of the security and the perceived credit
quality of the issuer. The discount, in the absence of financial difficulties of
the issuer, decreases as the final maturity of the security approaches and this
acceretion (adjusted for amortization) is recognized as interest income. Zero
coupon securities can be sold prior to their due date in the secondary market at
the then-prevailing market value which depends primarily on the time remaining
to maturity, prevailing levels of interest rates and the preceived credit
quality of the issuer. The market prices of zero coupon securities are more
volatile than the market prices of securities of comparable quality and similar
maturity that pay interest periodically and may respond to a greater degree to
fluctuations in interest rates than do such non-zero coupon securities.
FUTURES, OPTIONS & SWAP AGREEMENTS
Use of these instruments may involve certain costs and risks, including the risk
that the Funds may not be able to close out a futures or option position when it
might be most advantageous to do so, and the risk of an imperfect correlation
between the value of the security being hedged and the value of the particular
instrument. Since such instruments derive their return from underlying
securities, they are commonly referred to as derivative securities.
FUTURES CONTRACTS. An interest rate futures contract is an agreement to purchase
or deliver a debt security in the future for a specified price on a certain
date. The Funds, except the Money Market Fund and the Government Fund, may buy
or sell interest rate futures contracts, and the Funds, except the Money Market
Fund, may buy or sell options on interest rate futures contracts for the purpose
of hedging against changes in the value of securities which the Funds own or
anticipate purchasing due to changes in interest rates. See the Statement of
Additional Information for further information.
OPTIONS - PUTS AND CALLS. Each Fund, except the Money Market Fund, may buy and
sell options on debt securities for the purpose of hedging against changes in
the value of securities which the Funds own or anticipate purchasing due to
changes in interest rates. A put option gives the purchaser of the option, in
return for a premium paid, the right to sell the underlying security at a
specified price during the term of the option. A call option gives the purchaser
of the option, in return for a premium, the right to buy the security underlying
the option at a specified exercise price at any time during the term of the
option. While the Funds do not anticipate utilizing puts and calls on a regular
basis, the Funds
<PAGE>
may from time to time write exchange-traded call options on debt securities, for
which they will receive a purchase premium from the buyer, and may purchase and
sell exchange-traded call and put options on debt securities written by others
or combinations thereof. The Funds will not write put options. The aggregate
cost of all outstanding options purchased and held by the Funds will at no time
exceed 5% of a Fund's net assets (10% of the Bond Fund's net assets).
SWAP AGREEMENTS. Swap agreements are two party contracts entered into primarily
by institutional investors in which two parties agree to exchange the returns
(or differential rates of return) earned or realized on particular predetermined
investments or instruments. The Funds, except the Money Market Fund, may enter
into swap agreements for purposes of attempting to obtain a particular
investment return at a lower cost to the Funds than if the Funds had invested
directly in an instrument that provided that desired return. Each Fund bears the
risk of default by its swap counterpart and may not be able to terminate its
obligations under the agreement when it is most advantageous to do so. In
addition, certain tax aspects of swap agreements are not entirely clear and
their use, therefore, may be limited by the requirements relating to the
qualification of a Fund as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code").
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Funds may purchase securities on an "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. When such transactions are
negotiated, the price is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date, which can be a month
or more after the date of the transaction. The Funds will not accrue income in
respect of a security purchased on a forward commitment basis prior to its
stated delivery date. At the time the Funds make the commitment to purchase
securities on a when-issued or forward commitment basis, they will record the
transaction and thereafter reflect the value of such securities in determining
their net asset value. At the time the Funds enter into a transaction on a
when-issued or forward commitment basis, a segregated account consisting of cash
and liquid high grade debt obligations equal to the value of the when-issued or
forward commitment securities will be established and maintained with the
custodian and will be marked to the market daily. On the delivery date, the
Funds will meet their obligations from securities that are then maturing or
sales of the securities held in the segregated asset account and/or from then
available cash flow. If the Funds dispose of the right to acquire a when-issued
security prior to its acquisition or disposes of its right to deliver or receive
against a forward commitment, it can incur a gain or loss due to market
fluctuation.
There is always a risk that the securities may not be delivered and that the
Funds may incur a loss or will have lost the opportunity to invest the amount
set aside for such transaction in the segregated asset account. Settlements in
the ordinary course of business, which may take substantially more than five
business days for non-U.S. securities, are not treated by the Funds as
when-issued or forward commitment transactions and, accordingly, are not subject
to the foregoing limitations even though some of the risks described above may
be present in such transactions.
REPURCHASE AGREEMENTS
Each Fund, except U.S. Government Securities Fund, is permitted to invest in
repurchase agreements. A repurchase agreement is a contract by which a Fund
acquires the security ("collateral") subject to the obligation of the seller to
repurchase the security at a fixed price and date (within seven days). A
repurchase agreement may be construed as a loan pursuant to the 1940 Act. The
Funds may enter into repurchase agreements with respect to any securities which
they may acquire consistent with their investment policies and restrictions. The
Funds' custodian will hold the securities underlying any repurchase agreement in
a segregated account. In investing in repurchase agreements, the Funds' risk is
limited to the ability of the seller to pay the agreed-upon price at the
maturity of the repurchase agreement. In the opinion of the Adviser, such risk
is not material, since in the event of default, barring extraordinary
circumstances, the Funds would be entitled to sell the underlying securities or
otherwise receive adequate protection under federal bankruptcy laws for their
interest in such securities. However, to the extent that proceeds from any sale
upon a default are less than the repurchase price, the Funds could suffer a
loss. In addition,
<PAGE>
the Funds may incur certain delays in obtaining direct ownership of the
collateral. The Adviser will continually monitor the value of the underlying
securities to ensure that their value always equals or exceeds the repurchase
price. The Adviser will submit a list of recommended issuers of repurchase
agreements and other short-term securities which it has reviewed for credit
worthiness to the Funds' directors at least quarterly for their approval.
ILLIQUID SECURITIES
Each Fund, except the U.S. Government Securities Fund and Money Market Fund, may
invest up to 15% of its net assets in all forms of "illiquid securities." As a
fundamental policy, the U.S. Government Securities Fund is prohibited from
investing any of its assets in any form of restricted or illiquid securities.
The Money Market Fund may invest up to 10% of its assets in "illiquid
securities."
An investment is generally deemed to be "illiquid" if it cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which such securities are valued by the Fund. Restricted securities are
securities which were originally sold in private placements and which have not
been registered under the Securities Act of 1933 (the "1933 Act"). Such
securities generally have been considered illiquid by the staff of the
Securities and Exchange Commission (the "SEC"), since such securities may be
resold only subject to statutory restrictions and delays or if registered under
the 1933 Act. However, the SEC has acknowledged that a market exists for certain
restricted securities (for example, securities qualifying for resale to certain
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act).
Additionally, a similar market exists for commercial paper issued pursuant to
the private placement exemption of Section 4(2) of the 1933 Act. The Funds may
invest without limitation in these forms of restricted securities if such
securities are determined by the Adviser to be liquid in accordance with
standards established by the Funds' Board of Directors. Under these standards,
the Adviser must consider (a) the frequency of trades and quotes for the
security, (b) the number of dealers willing to purchase or sell the security and
the number of other potential purchasers, (c) dealer undertakings to make a
market in the security, and (d) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer).
At the present time, it is not possible to predict with accuracy how the markets
for certain restricted securities will develop. Investing in restricted
securities could have the effect of increasing the level of a Fund's illiquidity
to the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities.
VARIABLE AND FLOATING RATE NOTES
The Funds may purchase floating and variable rate notes. The interest rate is
adjusted either at predesignated periodic intervals (variable rate) or when
there is a change in the index rate on which the interest rate on the obligation
is based (floating rate). These notes normally have a demand feature which
permits the holder to demand payment of principal plus accrued interest upon a
specified number of days' notice. The issuer of floating and variable rate
demand notes normally has a corresponding right, after a given period, to prepay
at its discretion the outstanding principal amount of the note plus accrued
interest upon a specified number of days' notice to the noteholders.
DURATION
Duration is a measure of the expected life of a fixed income security on a
present value basis. Duration incorporates a bond's yield, coupon interest
payments, final principal at maturity and call features into one measure. It
measures the expected price sensitivity of a fixed income security (or
portfolio) for a given change in interest rates. For example, if interest rates
rise by one percent, the market value of a security (or portfolio) having a
duration of two years generally will fall by approximately two percent. The
Adviser uses several methods to compute various duration estimates appropriate
for particular securities held in portfolios.
Duration incorporates payments prior to maturity and therefore it is considered
a more precise measure of interest rate risk than "term to maturity." "Term to
maturity" measures only the time until a debt security pro-
<PAGE>
vides its final payment, and does not account for pre-maturity payments. Most
debt securities provide coupon interest payments in addition to a final ("par")
payment at maturity, and some securities have call provisions which allow the
issuer to repay the instrument in part or in full before the maturity date. Each
of these may affect the security's price sensitivity to interest rate changes.
For bonds that are not subject to calls prior to their maturity, duration is an
effective measure of price sensitivity to changing interest rates. However, it
does not properly reflect certain types of interest rate risk as bonds may be
subject to optional or special mandatory redemption provisions that affect the
timing of principal repayment and thus, the duration of the debt security. These
provisions include refunding calls, sinking fund calls and prepayment calls. For
example, while the stated final maturity of mortgage "pass-through" securities
is generally 30 years, expected prepayment rates are more important in
determining duration. Municipal bonds may also be subject to special redemption
from unexpended proceeds, excess revenues, sale proceeds or other sources of
funds, and municipal bonds may be advance refunded. Floating and variable rate
debt securities may have final maturities of ten or more years, yet their
interest rate risk corresponds to the frequency and benchmark index of the
coupon reset. In such situations, the Adviser uses more sophisticated analytical
techniques that incorporate these additional variables to arrive at a modified,
effective, implied or average life duration to reflect interest rate risk. These
techniques may involve the portfolio manager's expectations of future economic
conditions, and these assumptions may vary from actual future conditions. The
various methods used to compute appropriate duration estimates for certain bond
issues, particularly those that are traded infrequently and that have a low
amount of outstanding debt such as municipal bonds, may require greater reliance
on the use of such assumptions by the Adviser. Therefore, for those issues, the
effective or implied duration may be a less accurate estimate of interest rate
risk than it is for other types of bond issues.
PORTFOLIO TURNOVER
Generally, the Funds will not trade in securities for short-term profits, but if
circumstances warrant, securities may be sold without regard to length of time
held. Debt 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.
Increased turnover results in increased brokerage costs and higher transaction
costs for the Funds and may affect the taxes shareholders pay. If a security
that has been held for less than the holding period set by law is sold, any
resulting gains will be taxed in the same manner as ordinary income as opposed
to long-term capital gain. Each Fund's turnover rate may vary from year to year.
For additional information, refer to the prospectus section entitled "Taxes" and
the Statement of Additional Information sections entitled "Taxes" and
"Brokerage." The portfolio turnover rates for each of the Funds are contained in
the Financial Highlights tables in this prospectus.
RELATIONSHIP OF DEBT SECURITIES AND INTEREST RATES
The value of debt securities purchased by the Funds may be affected by changes
in interest rates. There is normally an inverse relationship between the market
value of securities sensitive to prevailing interest rates and actual changes in
interest rates. When interest rates decline, the value of debt securities
generally increases and when interest rates rise, the value of debt securities
generally decreases. Therefore, changes in interest rates may affect the Funds'
net asset values.
TEMPORARY DEFENSIVE INVESTMENTS
For temporary defensive purposes, the Funds may invest all or a portion of their
assets in cash, short-term debt securities including certificates of deposit,
bankers' acceptances and other bank obligations, corporate and direct U.S.
obligation bonds, notes, bills, commercial paper and repurchase agreements.
RATINGS OF DEBT SECURITIES
Investment grade debt securities are rated AAA, AA, A or BBB by Standard &
Poor's Corporation ("S& P"), Fitch Investors Service, Inc. ("Fitch"), and Duff &
Phelps Credit Rating Co. ("Duff & Phelps"); or Aaa, Aa, A or Baa by Moody's
Investors Services ("Moody's"). Investment grade municipal notes are rated MIG
1, MIG 2, MIG 3 or MIG 4 (VMIG 1, VMIG
<PAGE>
2, VMIG 3 or VMIG 4 for notes with a demand feature) by Moody's or SP-1 or SP-2
by S&P. Securities rated Baa, MIG 4, VMIG 4 or BBB are medium grade, involve
some speculative elements and are the lowest investment grade available. Changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case with
higher grade bonds. These securities generally have less certain protection of
principal and interest payments than higher rated securities. Securities rated
Ba or BB are judged to have some speculative elements with regard to capacity to
pay interest and repay principal. Securities rated B by Moody's are considered
to generally lack characteristics of a desirable investment and the assurance of
interest and principal payments over any long period of time may be small. S&P
considers securities rated B to have greater vulnerability to default than other
speculative grade securities. Adverse economic conditions will likely impair
capacity or willingness to pay interest and principal. DEBT SECURITIES RATED
BELOW INVESTMENT GRADE ARE COMMONLY KNOWN AS JUNK BONDS. See the Statement of
Additional Information for further information about ratings.
The commercial paper purchased by the Funds will consist only of direct
obligations which, at the time of purchase, are (a) rated Prime-1 by Moody's or
A-1 by S&P, or (b) if not rated, issued by companies having an outstanding
unsecured debt issue which at the time of purchase is rated Aa or higher by
Moody's or AA or higher by S&P.
Subsequent to their purchase, particular securities or other investments may
cease to be rated or their ratings may be reduced below the minimum rating
required for purchase by the Fund. Neither event will require the elimination of
an investment from a Fund's portfolio, but the Adviser will consider such an
event in its determination of whether the Fund should continue to hold the
security.
With respect to the Bond Fund, Minnesota Tax-Free Income Fund, and the Tax-Free
Income Fund, the weighted average percentage during the year ended March 31,
1997, of each Fund's long-term securities in each rating category assigned by
Moody's Investors Service, Inc. (Moody's) or Standard & Poor's Corporation
(S&P), as well as in unrated securities, is set forth in the following table:
Tax-Free MN Tax-Free
Moody's Rating Bond Income Income
(S&P Equivalent) Fund Fund Fund
- ---------------- ---- ---- ----
Govt & Agency............. 12.6
Mtge-Backed & CMOs........ 35.3
Aaa(AAA)................. 15.5 13.3 22.5
Aa(AA).................. 10.8 20.5
A(A).................... 16.1 35.0 12.7
Baa(BBB)......... 14.9 38.3 6.1
Ba(BB)...................
Unrated................... 33.1*
Cash & Equivalents........ 5.6 2.6 5.1
TOTALS (%):............... 100.0 100.0 100.0
* Detail of the Adviser's implied ratings (33.1%):
AA 0.7% BBB 23.1% B 1.0%
A 1.2% BB 7.1
OTHER INVESTMENT RESTRICTIONS
In addition to the investment policies and restrictions referred to above, each
Fund is subject to various other investment restrictions. These restrictions,
which are set forth in more detail in the Statement of Additional Information,
include, but are not limited to, restrictions whereby each Fund may (a) not
invest more than 25% of the value of its assets in any particular industry,
except with regard to the purchase of obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities, and (b) except as part of a
merger, consolidation, acquisition, or reorganization, not invest more than 5%
of the value of its total assets in the securities of any one investment company
or more than 10% of the value of its total assets, in the aggregate, in the
securities of two or more investment companies, or acquire more than 3% of the
total outstanding voting securities of any one investment company. Since the
Adviser does not waive its fees if and to the extent a Fund invests in the
securities of one or more other investment companies (except to the extent the
Bond Fund invests in shares of the Money Market Fund), the Funds indirectly pay
duplicate advisory fees with respect to such investments. However, the Adviser
believes that the return and liquidity features of investment company securities
may, from time to time, be more beneficial to the Funds than alternative
short-term, liquid investments, and that the duplicate fees and expenses will
have a relatively small impact on overall Fund expenses.
<PAGE>
[LOGO] COMPUTATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value per share (the value of an individual share in a Fund) is
determined as of the close of the New York Stock Exchange (NYSE) on each day
that the exchange is open for business. Normally the NYSE closes at 3:00 p.m.
Central time. The net asset value is calculated by dividing the total value of a
Fund's investments and other assets (including accrued income), less any
liabilities, by the number of shares outstanding. The net asset value per share
of each Fund will fluctuate. However, the Money Market Fund seeks to maintain a
stable net asset value.
Debt securities may be valued on the basis of prices furnished by a pricing
service when the Adviser believes such prices accurately reflect the fair market
value of such securities. Such a pricing service utilizes electronic data
processing techniques to determine prices for normal institutional-size trading
units of debt securities without regard to sale or bid prices. When prices are
not readily available from a pricing service, or when restricted or illiquid
securities are being valued, securities may be valued at fair value using
methods selected in good faith by the Boards of Directors. Short-term
investments in debt securities with maturities of less than 60 days when
acquired, or which subsequently are within 60 days of maturity, are valued by
using the amortized cost method of valuation. The amortized cost method of
valuation will be used only if the Boards of Directors, in good faith, determine
that the fair value of the securities shall be their amortized cost value,
unless the particular circumstances dictate otherwise.
Any assets or liabilities initially expressed in terms of foreign currencies are
translated into U.S. dollars at the official exchange rate or, alternatively, at
the mean of the current bid and asked prices of such currencies against the U.S.
dollar last quoted by a major bank that is a regular participant in the foreign
exchange market or on the basis of a pricing service that takes into account the
quotes provided by a number of such major banks. If neither of these
alternatives is available or both are deemed not to provide a suitable
methodology for converting a foreign currency into U.S. dollars, the Board of
Directors in good faith will establish a conversion rate for such currency.
[LOGO] HOW TO PURCHASE FUND SHARES
- --------------------------------------------------------------------------------
Shares of the Funds may be purchased without a sales commission at the net asset
value per share (see "Computation of Net Asset Value") next determined after
receipt of a purchase order in proper form. The minimum initial investment is
$2,000 for each Fund and additional investments must be at least $100. Accounts
may be established with a $500 minimum initial purchase if an Automatic
Investment Plan for at least $100 per month is also established. The minimum
purchase requirements do not apply to UGMA/UTMA accounts or retirement accounts
(see "Retirement Accounts"). SEE THE INSIDE BACK COVER OF THIS PROSPECTUS FOR
THE FUNDS' MAILING ADDRESS, TELEPHONE NUMBERS, AND WIRE INSTRUCTIONS.
INITIAL INVESTMENT
BY MAIL. To open an account, complete and sign an application and mail it with a
check to the Funds as instructed on the application.
BY WIRE. Shares of the Funds may be purchased by wiring Federal Funds from your
bank, which may charge you a fee. Before money is wired for an initial purchase
(new account), you must call the Funds and provide the following information:
name or names of the account registration; address; social security or tax
identification number; the amount being wired; the name of the wiring bank; and
the name and telephone number of the person at your bank. The Funds will provide
you with an account number and your bank must then wire the specified amount
(minimum $2,000 if non-retirement account) to your account.
YOU MUST MAIL A COMPLETED APPLICATION TO THE FUNDS AFTER OPENING AN ACCOUNT BY
WIRE TRANSFER. IF A COMPLETED APPLICATION IS NOT RECEIVED OR YOUR SOCIAL
SECURITY OR TAX IDENTIFICATION NUMBER IS NOT CERTIFIED WITH A FORM W-9, YOUR
ACCOUNT WILL BE SUBJECT TO BACK-UP WITHHOLDING WITHIN 60 DAYS.
<PAGE>
Wire orders will be accepted only on a day on which the Funds and the Funds'
Transfer Agent are open for business. A wire purchase will not be considered
made until the wired money is received and the purchase is accepted by the
Funds. Any delays which may occur in wiring money, including delays which may
occur in processing by the banks, are not the responsibility of the Funds or the
Funds' Transfer Agent.
WHEN ORDERS ARE EFFECTIVE
Purchases made by mail will be effective at the net asset value per share next
determined after receipt of the purchase order in proper form.
Purchases transmitted by wire to the Funds and received prior to the close of
the New York Stock Exchange (NYSE), normally 3:00 p.m. Central time, will be
invested at the net asset value per share calculated for that day. If received
after this deadline, the purchase will be made at the net asset value next
calculated. You become a shareholder after declaration of any dividend on the
day on which the order is effective. Dividends begin to accrue after you become
a shareholder.
ADDITIONAL INVESTMENTS
BY MAIL. You may make subsequent purchases (minimum $100) by mailing the
personalized investment sllip or a letter of instruction (providing your account
number and the name(s) on the account) together with a check made payable to the
Fund.
BY WIRE. You may purchase additional shares by wiring funds. For wire
instructions, see the inside back cover of this prospectus. After you have
initiated the wire purchase through your bank, please notify the Funds that a
wire purchase is being made to your account.
BY ACH. You may purchase shares for non-IRA accounts via electronic transfer of
funds if you have selected this option in Step 4 of the application. If you call
the Funds prior to the close of the NYSE, normally 3:00 p.m. Central time, your
purchase will be effective at the net asset value on the first business day
after your telephone call and your bank account will be debited within 1-2
business days.
BY AUTOMATIC INVESTMENT PLAN. After your initial investment of $2,000 or more,
you can make automatic monthly purchases (on any day of the month) of $100 or
more. If an Automatic Investment Plan is established at the time the account is
opened, the minimum initial investment is $500. To use this option, you must
complete the Automatic Investment Plan section of the application or if adding
this option to an existing account, complete the Change of Account Options form.
Changing an account option requires a signature guarantee. You can change the
amount or terminate this option by written notice to the Funds at any time.
OTHER PURCHASE INFORMATION
All purchases are subject to acceptance by authorized officers of the Funds and
are not binding until accepted. The Funds reserve the right to reject purchase
orders when, in the judgment of management, such rejection is in the best
interests of the Funds. At their discretion, the Funds may accept telephone
purchases and redemptions from a broker and/or a broker-dealer. Investors who
purchase or redeem shares through a broker and/or a broker-dealer may be charged
transaction fees or other fees by such broker-dealer.
[LOGO] REDEMPTION OF FUND SHARES
- --------------------------------------------------------------------------------
You may redeem (sell) all or a portion of your shares at any time that the net
asset value is calculated. Shares will be redeemed at the net asset value per
share next determined after the request is received. A redemption may be more or
less than your cost depending on the market value of the Fund's securities. IF
YOU REQUEST A REDEMPTION (WHICH INCLUDES WRITING A DRAFT ON YOUR ACCOUNT) AFTER
A PURCHASE BY PERSONAL CHECK, e.g. NONGUARANTEED FUNDS, THE FUND MAY DELAY
SENDING YOUR REDEMPTION PROCEEDS (OR MAY RETURN YOUR DRAFT) UNTIL YOUR CHECK HAS
CLEARED (GOOD PAYMENT HAS BEEN COLLECTED), WHICH MAY TAKE UP TO TEN DAYS. YOU
MAY AVOID THIS DELAY BY PURCHASING SHARES WITH A CERTIFIED CHECK OR BANK WIRE OF
FEDERAL FUNDS.
Each Fund may suspend redemption privileges or postpone the date of payment (1)
during any period that the New York Stock Exchange is closed other than
custom-
<PAGE>
ary weekend or holiday closings, or when trading is restricted, as determined by
the Securities and Exchange Commission, (2) during any period when an emergency
exists, as determined by the Securities and Exchange Commission, as a result of
which it is not reasonably practical for the Fund to dispose of securities owned
by it or to fairly determine the value of its assets, and (3) for such other
periods as the Securities and Exchange Commission may permit.
BY MAIL. You may request a redemption by sending a written request in "good
order" to the Funds. "Good order" means that the request for redemption must
include the following:
1. A letter of instruction specifying the name of the Fund, account number and
number of shares or dollar amount to be redeemed, signed by all registered
owners exactly as their names appear on the account.
2. Other supporting legal documents as required for estates, trusts,
guardianships, custodianships, corporations, pension and profit sharing
plans and other organizations.
Payment will generally be made within 7 days after receipt of a redemption
request in "good order". A request for redemption cannot be canceled or revoked.
A SIGNATURE GUARANTEE IS REQUIRED IF YOU REQUEST A REDEMPTION TO BE MADE PAYABLE
TO SOMEONE OTHER THAN THE REGISTERED OWNERS AND/OR IF YOU REQUEST THE PROCEEDS
TO BE SENT TO AN ADDRESS OTHER THAN THE REGISTERED ADDRESS.
If you are uncertain of the requirements for redemption, write or call the Funds
at 800-332-5580 or 612-334-5888.
BY WIRE. If you desire to make a redemption by wire of Federal Funds, a written
request in "good order" must first be received by the Funds. Your request should
contain specific wire instructions including the bank to which the proceeds are
to be wired, its address, your account number, and be signature guaranteed.
Shares will be redeemed at the net asset value next determined after the
redemption request is received in good order. If the proceeds are wired to your
account at a bank which is not a member of the Federal Reserve System, there
could be a delay in crediting the funds to your bank account. You may be
required to pay a charge for the wiring cost which will be deducted from the
balance of your account or from the amount being wired if your account has been
completely redeemed.
TELEPHONE REDEMPTION
You may redeem up to $50,000 per day by telephone if you have authorized this
option for your account. This limitation does not apply to omnibus accounts. For
purposes of this limitation, accounts with the same registration in different
Funds will be aggregated.
If you call the Funds prior to the close of the NYSE, normally 3:00 p.m. Central
time, your redemption will be effective at the net asset value that same day.
You must complete the Telephone Redemption Authorization section of the
application to establish this option for each account for which you want this
option. THE FUND WILL EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT TELEPHONE
INSTRUCTIONS ARE GENUINE, INCLUDING REQUIRING THAT PAYMENTS BE MADE ONLY TO THE
SHAREHOLDER'S ADDRESS OF RECORD OR THE BANK ACCOUNT DESIGNATED ON THE
APPLICATION AND REQUIRING CERTAIN MEANS OF TELEPHONIC IDENTIFICATION. If the
Fund fails to employ such procedures, it may be liable for any losses suffered
by Fund shareholders as a result of unauthorized or fraudulent instructions.
During times of chaotic economic or market circumstances, a shareholder may have
difficulty reaching the Funds by telephone. Consequently, an exchange or
redemption by telephone may be difficult to implement at those times.
BY MAIL. Telephone redemption proceeds can be mailed to your address of record.
If you wish to change your address or bank information and you have elected the
telephone redemption option, a signature guarantee is necessary to make these
changes.
BY WIRE. Telephone redemption proceeds can be wired to your bank. Proceeds will
be wired to your bank account the next business day after you request a
telephone redemption. You may be required to pay a charge for the wiring cost
which will be deducted from the balance of your account or from the amount being
wired if your account has been completely redeemed.
BY ACH. Electronic transfer of funds via Automated Clearing House (ACH) is
available for redemption of shares for non-IRA accounts. Your bank account will
be credited within 1-2 business days after you request a
<PAGE>
telephone redemption. To establish this option, complete Step 4 of the
application.
SYSTEMATIC WITHDRAWAL PLAN
You may establish a Systematic Withdrawal Plan to receive periodic redemptions
of at least $100 on a monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals may eventually exhaust your account. Each withdrawal
constitutes a redemption and any gain or loss realized must be recognized for
federal income tax purposes.
OTHER REDEMPTION INFORMATION
At the discretion of the Board of Directors, each Fund may involuntarily redeem
accounts which have a balance less than $2,000. Such accounts may be redeemed
after giving written notice to the registered owner of the account. If the
shareholder does not increase the amount of the account above $2,000 within 30
days, the Fund may send the shareholder a check for the redemption proceeds as
determined at the next calculated net asset value.
[LOGO] EXCHANGES
- --------------------------------------------------------------------------------
An exchange is made by redeeming shares of one Fund and using the proceeds to
buy shares of another Sit Fund. There is no charge for this service, but the
Funds reserve the right to charge a fee in the future. An exchange results in a
sale of shares for federal income tax purposes and therefore you may realize
either a long-term or short-term capital gain or loss on the shares redeemed.
Before making an exchange, you should read the prospectus and consider the
investment objective of the Fund to be purchased.
An exchange may be done by telephone (subject to the same procedures for
telephone identification as telephone redemption above) or by written request to
the Funds. A written request must be signed by all registered owners of the
account. There is no charge for this service, but the Fund reserves the right to
charge a fee in the future. When you establish your account, the exchange
privilege will automatically be established unless you indicate that you do not
want it. If your exchange creates a new account, the new account ownership must
be identical and you must satisfy the minimum initial purchase requirement. You
may make an exchange to a new account or an existing account. There is a limit
of four exchanges out of each Fund per year per account. Exchanges may be made
only in states where allowed by law.
In addition, each Fund reserves the right to refuse exchanges if, in the
Adviser's judgment, the Fund would be unable to invest effectively in accordance
with its investment objectives and policies, or would otherwise potentially be
adversely affected. Exchanges may be restricted or refused if a Fund receives or
anticipates simultaneous orders affecting significant portions of the Fund's
assets. Although the Fund will attempt to give prior notice whenever it is
reasonably able to do so, it may impose these restrictions at any time. The
Funds reserve the right to terminate or modify the exchange privilege in the
future.
SYSTEMATIC EXCHANGE PLAN
If you wish to exchange fixed periodic amounts between Funds, you may establish
the Systematic Exchange Plan. You may exchange a predetermined amount from one
Fund to another Fund on any business day of the month. An exchange may be done
monthly, or you may choose which months you wish to have the exchange made.
Systematic exchanges are subject to the same requirements as other exchanges.
[LOGO] CHECKWRITING
- --------------------------------------------------------------------------------
Checkwriting is available on the Funds. You may redeem shares by writing checks
in amounts of $250 or more. To use this option, you must complete the
checkwriting section of the application. You will be provided with free checks
and you may order additional checks as needed. The checkwriting privilege is
subject to the Funds' procedures and rules. The checkwriting privilege may be
terminated or suspended and/or a fee may be imposed for this service. There is
currently no charge for the checkwriting privilege.
A check that you write will be treated as a redemption of shares equal to the
amount of the check. You will receive a confirmation of the redemption and your
can-
<PAGE>
celled check will be returned. You will be entitled to distributions paid on
your shares until the check is presented to the Fund for payment.
YOU CANNOT LIQUIDATE YOUR ACCOUNT USING THE CHECKWRITING PRIVILEGE BECAUSE YOUR
ACCOUNT BALANCE WILL CHANGE EACH DAY AS A RESULT OF DAILY DIVIDENDS AND
FLUCTUATION OF THE NET ASSET VALUE PER SHARE. If you wish to make a total
redemption, see "Redemption of Fund Shares."
[LOGO] DIVIDEND REINVESTMENT
- --------------------------------------------------------------------------------
Each day on which the Funds determine the offering price of their shares, the
Funds declare dividends of substantially all of their net investment income to
shareholders of record; such dividends are declared daily and paid monthly (on
the last business day of the month). Net investment income includes dividends on
stocks and interest earned on bonds or other debt securities less operating
expenses.
When a Fund sells portfolio securities, it may realize a gain or loss, depending
on whether it sells them for more or less than its cost. Net realized capital
gain, if any, will be distributed at least once annually by each Fund.
Income dividends and capital gain distributions are automatically reinvested in
additional shares at the net asset value per share on the distribution date.
Dividends may be automatically directed from one Fund to another Fund. You may
request a cash payment of dividends and/or capital gain distributions on the
application or by separate written notice to the Funds. Shareholders will
receive a confirmation statement reflecting the payment of dividends. If cash
payment is requested, a check normally will be mailed within five business days
after the payable date. If you withdraw your entire account, all dividends
accrued to the time of withdrawal, including the day of withdrawal, will be paid
at that time.
[LOGO] RETIREMENT ACCOUNTS
- --------------------------------------------------------------------------------
Taxes on current income can be deferred by investing in Keogh plans, Individual
Retirement Accounts (IRAs), Simplified Employee Pensions (SEPs), 401(k),
pension, profit-sharing, employee benefit, deferred compensation and other
qualified retirement plans. The federal tax law governing these tax-deferred
retirement plans must be complied with to avoid adverse tax consequences.
The Funds are available for your tax-deferred retirement plan with no minimum
investment requirements for initial or additional contributions. Such retirement
plans must have a qualified plan sponsor or trustee. The Adviser sponsors
prototype 401(k), profit sharing, and money purchase plans as well as IRA,
SEP-IRA and Keogh plans. You should contact the Adviser for specific plan
documentation. You should also consult your tax adviser before investing.
[LOGO] CUSTODIAN AND TRANSFER AGENT
- --------------------------------------------------------------------------------
The Northern Trust Company, 50 LaSalle Street, Chicago, IL 60675, acts as
Custodian for each Fund pursuant to the terms of a Custodian Agreement. The
Custodian holds all securities and cash, receives and pays for securities
purchased, delivers against payment for securities sold, receives and collects
income from investments and performs other administrative duties, all under the
supervision of officers of the Funds or the Adviser.
Pursuant to the terms of a Transfer Agency and Services Agreement and the
Accounting Services Agreement with each Fund, First Data Investor Services
Group, Inc., 4400 Computer Drive, Westboro, MA 01581, is the transfer agent,
dividend disbursing agent and accounting services agent for each Fund. First
Data processes purchase orders, redemption orders and all related shareholder
accounting services.
<PAGE>
[LOGO] MANAGEMENT
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
The Funds or their corporate issuers have corporate officers and Boards of
Directors. Pursuant to Minnesota law, the Boards of Directors are responsible
for the management of the Funds and the establishment of the Funds' policies.
The officers of the Funds manage the day-to-day operation of the Funds.
INVESTMENT ADVISER
Sit Investment Associates, Inc. (the Adviser") was incorporated in Minnesota on
July 14, 1981 and serves as the Funds' investment adviser pursuant to Investment
Management Agreements (the "Agreements"). In addition to the Funds, the Adviser
together with its affiliates currently manage public and private accounts with
combined assets of approximately $6 billion. The address of the Adviser is 4600
Norwest Center, Minneapolis, Minnesota 55402.
Under the Agreements, each Fund is obligated to pay the Adviser a flat monthly
fee based on the average daily net assets ("net assets") on an annual basis as
follows:
Money Market Fund .80% of net assets
U.S. Government Securities Fund 1.00% of net assets
Bond Fund .80% of net assets
Tax-Free Income Fund .80% of net assets
Minnesota Tax-Free Income Fund .80% of net assets
Under each Fund's Agreement, the Adviser has agreed to bear all of the Fund's
expenses, except for extraordinary expenses (as designated by a majority of the
Fund's disinterested directors), interest, brokerage commissions and other
transaction charges relating to the investing activities of the Fund. Investment
advisory fees in excess of .75% per year of a fund's average daily net assets
are considered to be higher than investment advisory fees paid by most other
investment companies; however, the Adviser has either agreed to pay or reimburse
each Fund for all or certain of their other operating expenses as more fully set
forth above.
For the period October 1, 1993 through December 31, 1998, the Adviser has
voluntarily agreed to limit the management fee (and, thereby, all Fund expenses,
except those not payable by the Adviser as set forth above) of U.S. Government
Securities Fund and Money Market Fund to .80% and .50% per year, respectively,
of the Fund's average daily net assets. For the period July 1, 1993 through
December 31, 1998, the Adviser has voluntary agreed to limit the management fee
(and, thereby, all Fund expenses, except those not payable by the Adviser as set
forth above) of the Tax-Free Income Fund to .70% of net assets in excess of $250
million, and .60% of net assets in excess of $500 million. After December 31,
1998, these voluntary fee waivers may be discontinued by the Adviser in its sole
discretion.
PORTFOLIO MANAGEMENT
All investment decisions of all Funds are made by committee. Michael C. Brilley
oversees all day-to-day investment decisions for the Funds. He is Senior
Portfolio Manager for all Funds. Mr. Brilley is currently Senior Vice President
of the Adviser, and from 1984-1993 was Vice President and Senior Fixed Income
Officer of the Adviser.
DISTRIBUTOR
The Funds have entered into Underwriting and Distribution Agreements with SIA
Securities Corp. ("Securities"), an affiliate of the Adviser, pursuant to which
Securities will act as the Funds' principal underwriter. Securities will market
the Funds' shares only to certain institutional investors and all other sales of
the Funds' shares will be made by each Fund. The Adviser will pay all expenses
of Securities in connection with such services and Securities is otherwise not
entitled to any other compensation under the Underwriting and Distribution
Agreement. The Funds will incur no additional fees or expenses in connection
with the Underwriting and Distribution Agreement.
[LOGO] TAXES
- --------------------------------------------------------------------------------
Each Fund qualified as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), during its last taxable
year and intends to continue to do so during the current
<PAGE>
taxable year in order to be relieved of payment of federal income taxes on
amounts distributed to shareholders (both net investment income and net realized
capital gains).
FEDERAL INCOME TAXATION
Dividends paid from net investment income by the Money Market Fund, the U.S.
Government Securities Fund, and the Bond Fund are taxable to shareholders as
ordinary income, whether or not the shareholder elects to have such dividends
automatically reinvested in additional shares.
Dividends distributed from interest earned by the Minnesota Tax-Free Income Fund
and the Tax-Free Income Fund on tax-exempt securities are exempt from federal
regular income taxes but may be subject to state and local taxes. However, see
discussion of Minnesota Income Taxation below. The Tax-Free Income Fund and the
Minnesota Tax-Free Income Fund generally intend to purchase only securities
whose interest is exempt from federal taxes although they may invest in taxable
obligations under certain circumstances. Dividends distributed from taxable
investments, if any, net realized short-term gains, and gains realized on the
disposition of tax-exempt securities to the extent of the accrued market
discount will be taxable as ordinary income and distributions from net realized
long-term gains will be taxable as long-term capital gains for federal income
tax purposes whether or not the shareholder elects to have such dividends
automatically reinvested in additional shares.
Dividends paid by the Funds will not be eligible for the 70% deduction for
dividends received by corporations if, as expected, none of the Funds' income
consist of dividends paid by U.S. corporations.
Each Fund distributes annually any net realized capital gains. Dividends paid
from the net capital gains of each Fund and designated as capital gain dividends
will be taxable to shareholders as long-term capital dividends, regardless of
the length of time for which they have held their shares in the Fund. The Money
Market Fund does not expect to distribute any net realized capital gains.
Gain or loss realized upon the sale of shares in each Fund will be treated as
capital gain or loss, provided that the shares represented a capital asset in
the hands of the shareholder. Such gain or loss will be long-term gain or loss
if the shares were held for more than one year.
Income dividends are accrued daily and paid monthly and do not affect the value
per share; however, the value of a share in the Funds (except the Money Market
Fund) drops by the amount of the distribution when these Funds distribute
capital gains, generally once per year. If you purchase shares shortly before
the record date of a dividend or capital gain distribution, you will pay the
full price for the shares ("buying a dividend") and then receive some portion of
the price back as a taxable dividend or capital gain distribution.
Pursuant to the Code, distributions of net investment income by the Funds to a
shareholder who, as to the U.S., is a nonresident alien individual, nonresident
alien fiduciary of a trust or estate, foreign corporation, or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax
(at a rate of 30% or lower treaty rate). Withholding will not apply if a
dividend paid by the Funds to a foreign shareholder is "effectively connected"
with a U.S. trade or business of such shareholder, in which case the reporting
and withholding requirements applicable to U.S. citizens or domestic
corporations will apply. Distributions of net long-term capital gains are not
subject to tax withholding but, in the case of a foreign shareholder who is a
nonresident alien individual, such distributions ordinarily will be subject to
U.S. income tax at a rate of 30% if the individual is physically present in the
U.S. for more than 182 days during the taxable year. The Funds will report
annually to its shareholders the amount of any withholding.
Each Fund is required by federal law to withhold 31% of reportable payments
(which may include dividends, capital gain distributions and redemptions) paid
to certain accounts whose owners have not complied with IRS regulations. In
connection with this withholding requirement, you will be asked to certify on
your account application that the social security or taxpayer identification
number you provide is correct and that you are not subject to 31% backup
withholding for previous underreporting to the IRS.
<PAGE>
ALTERNATIVE MINIMUM TAX
For federal income tax purposes, an alternative minimum tax ("AMT") is imposed
on taxpayers to the extent that such tax exceeds a taxpayer's regular income tax
liability (with certain adjustments). Exempt-interest dividends attributable to
interest income on certain tax-exempt obligations issued after August 7, 1986 to
finance certain private activities are treated as an item of tax preference that
is included in alternative minimum taxable income for purposes of computing the
federal AMT for all taxpayers and the federal environmental tax on corporations.
The Tax-Free Income Fund and the Minnesota Tax-Free Income Fund may invest in
securities that generate interest that is treated as an item of tax preference.
In addition, all other tax-exempt interest received by a corporation, including
exempt-interest dividends, will be included in adjusted current earnings and in
earnings and profits for purposes of determining the federal corporate AMT, the
environmental tax imposed on corporations by Section 59A of the Code, and the
branch profits tax imposed on foreign corporations under Section 884 of the
Code.
Because liability for the AMT will depend upon the regular tax liability and tax
preference items of a specific taxpayer, the extent, if any, to which any tax
preference items resulting from investment in the Fund would be subject to the
tax will depend upon each shareholder's individual situation. Each shareholder
is advised to consult his or her tax adviser with respect to the possible
effects of such tax preference items.
MINNESOTA INCOME TAXATION
Minnesota taxable net income is based generally on federal taxable income. The
portion of exempt-interest dividends that is derived by the Minnesota Tax-Free
Income Fund from interest on Minnesota tax-exempt obligations is excluded from
the Minnesota taxable net income of individuals, estates and trusts, provided
that the portion of the exempt-interest dividends from such Minnesota sources
paid to all shareholders represents 95% or more of the exempt-interest dividends
paid by the Fund. The remaining portion of such dividends, and dividends that
are not exempt-interest dividends or capital gain dividends, are included in the
Minnesota taxable net income of individuals, estates and trusts, except for
dividends directly attributable to interest on obligations of the U.S.
government or its possessions and territories. Exempt-interest dividends are not
excluded from the Minnesota taxable income of corporations and financial
institutions. Dividends qualifying for federal income tax purposes as capital
gain dividends are to be treated by shareholders as long-term capital gains for
Minnesota income tax purposes. Minnesota has repealed the favorable treatment of
long-term capital gains, while retaining restrictions on the deductibility of
capital losses. Exempt-interest dividends attributable to interest on certain
private activity bonds issued after August 7, 1986 will be included in Minnesota
alternative minimum taxable income of individuals, estates and trusts for
purposes of computing Minnesota's alternative minimum tax. Dividends generally
will not qualify for the dividends-received deduction for corporations and
financial institutions.
This is a general summary of the federal and Minnesota tax law in effect as of
the date of this prospectus. See the Statement of Additional Information for
further details. You may also be subject to local taxes, depending on the laws
of your locality. Distributions may also be subject to local taxes, even if all
or a substantial part of such distributions are derived from interest on U.S.
government obligations which, if you received them directly, would be exempt
from state income tax. Information about the tax status of each year's dividends
and distribution will be mailed to shareholders annually. Because some states
exempt their own municipal obligations from tax, you will receive tax
information each year showing the percentage of the Tax-Free Income Fund's
dividends attributable to each state.
[LOGO] CAPITALIZATION AND VOTING RIGHTS
- --------------------------------------------------------------------------------
Each of the Funds (or the corporate issuer of their shares) is organized as a
Minnesota corporation. Each of the Funds (or its corporate issuer) has only one
class of shares -- common shares. The U.S. Government Securities Fund and Money
Market Fund each has one series of common shares consisting of ten billion
shares with a par value of one-tenth of one cent per share. The corporate issuer
of Tax-Free Income Fund, Minnesota Tax-Free Income Fund, and Bond Fund (Sit
Mutual Funds II, Inc.) is organized as a series fund with one
<PAGE>
trillion shares of common stock authorized and a par value of one tenth of one
cent per share. Ten billion of these shares have been designated by the Board of
Directors for each series: Series A Common Shares, which represent shares of
Tax-Free Income Fund; Series B Common Shares, which represent shares of
Minnesota Tax-Free Income Fund; Series C Common Shares which represent shares of
Bond Fund. The Board of Directors of Sit Mutual Funds II, Inc. is empowered to
issue other series of common stock without shareholder approval.
The shares of each Fund are nonassessable, can be redeemed or transferred and
have no preemptive or conversion rights. All shares have equal, noncumulative
voting rights which means that the holders of more than 50% of the shares voting
for the election of Directors can elect all of the Directors if they choose to
do so. A shareholder is entitled to one vote for each full share (and a
fractional vote for each fractional share) then registered in his/her name on
the books of each Fund. The shares of each Fund are of equal value and each
share is entitled to a pro rata portion of the income dividends and any capital
gain distributions.
[LOGO] ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Under Minnesota law, the Board of Directors of each Fund has overall
responsibility for managing the Funds, in good faith, in a manner reasonably
believed to be in the best interests of each Fund, and with the care an ordinary
prudent person would exercise in similar circumstances.
This prospectus omits certain of the information contained in the Registration
Statements filed with the Securities and Exchange Commission, Washington, D.C.
20549. Items of information which are omitted may be obtained from the
Securities and Exchange Commission upon payment of the fees prescribed by the
rules and regulations of the Commission.
In the opinion of the staff of the Securities and Exchange Commission, the use
of this combined Prospectus may possibly subject all Funds to a certain amount
of liability for any losses arising out of any statement or omission in this
prospectus regarding a particular Fund. In the opinion of the Funds' management,
however, the risk of such liability is not materially increased by the use of a
combined prospectus.
<PAGE>
[LOGO] Directors:
Eugene C. Sit, CFA
Peter L. Mitchelson, CFA
Michael C. Brilley
William E. Frenzel
John E. Hulse
Sidney L. Jones
Donald W. Phillips
Director Emeritus:
Melvin C. Bahle
Officers:
Eugene C. Sit, CFA Chairman
Peter L. Mitchelson, CFA Vice Chairman
Michael C. Brilley Senior Vice President
Mary K. Stern President
Paul E. Rasmussen Vice President & Treasurer
Debra A. Sit, CFA Vice President - Investments &
Assistant Treasurer
Bryce A. Doty, CFA(1) Vice President - Investments
Paul J. Jungquist, CFA(2) Vice President - Investments
Michael P. Eckert Vice President
Michael J. Radmer Secretary
Carla J. Rose Assistant Secretary
(1) U.S. Government Securities Fund and Bond Fund only
(2) Money Market Fund only
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
SIT MONEY MARKET FUND, INC.
SIT U.S. GOVERNMENT SECURITIES FUND, INC.
SIT BOND FUND, INC.
SIT TAX-FREE INCOME FUND
SIT MINNESOTA TAX-FREE INCOME FUND
4600 Norwest Center, 90 S. 7th Street
Minneapolis, Minnesota 55402-4130
612-334-5888
800-332-5580
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Funds' prospectus which may be obtained from the Funds
without charge by contacting the Funds at 4600 Norwest Center, 90 S. 7th Street,
Minneapolis, Minnesota 55402-4130. Telephone: (612) 334-5888 or (800) 332-5580.
The date of this Statement of Additional Information is August 1, 1997, and it
is to be used with the Funds' prospectus dated August 1, 1997.
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT RESTRICTIONS
Money Market Fund..................................................... 2
U.S. Government Securities Fund....................................... 3
Bond Fund............................................................. 3
Tax-Free Income Fund.................................................. 4
Minnesota Tax-Free Income Fund........................................ 4
All Funds............................................................. 5
DIVERSIFICATION............................................................ 5
SECURITIES IN WHICH THE THE MONEY MARKET FUND MIGHT INVEST................. 6
SECURITIES IN WHICH THE BOND FUND MIGHT INVEST............................. 7
SECURITIES IN WHICH MINNESOTA TAX-FREE INCOME FUND MIGHT INVEST............ 8
COMMON INVESTMENTS......................................................... 9
COMPUTATION OF NET ASSET VALUE............................................. 16
CALCULATION OF PERFORMANCE DATA............................................ 17
MANAGEMENT................................................................. 19
INVESTMENT ADVISER......................................................... 20
DISTRIBUTOR ............................................................... 22
BROKERAGE.................................................................. 22
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES........................ 24
TAXES...................................................................... 24
FINANCIAL STATEMENTS....................................................... 27
OTHER INFORMATION.......................................................... 27
LIMITATION OF DIRECTOR LIABILITY........................................... 27
APPENDIX A - BOND AND COMMERCIAL PAPER RATINGS............................. 29
APPENDIX B - MUNICIPAL BOND RATINGS........................................ 31
<PAGE>
ADDITIONAL INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment objectives, policies and restrictions of the Funds are set forth
in the Prospectus. Certain additional investment information is set forth below.
All capitalized terms not defined herein have the same meanings as set forth in
the Prospectus. In addition to the restrictions in the prospectus, each Fund is
subject to other restrictions which are fundamental and may not be changed
without shareholder approval. Shareholder approval, as defined in the Investment
Company Act of 1940, means the lesser of the vote of (a) 67% of the shares of a
Fund at a meeting where more than 50% of the outstanding shares of the Fund are
present in person or by proxy or (b) more than 50% of the outstanding shares of
a Fund. A percentage limitation must be met at the time of investment and a
later deviation resulting from a change in values or net assets will not be a
violation.
MONEY MARKET FUND
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The Money Market Fund is subject to the following restrictions which are
fundamental. The Fund will not:
1. Concentrate more than 25% of the value of its net assets in any one
industry. Water, communications, electric and gas utilities shall each be
considered a separate industry. Banks shall be categorized as commercial
banks and savings and loan institutions, and each category shall be
considered a separate industry. As to finance companies, the following
categories will be considered separate industries: 1) captive automobile
finance companies; 2) captive equipment finance companies; 3) captive
retail finance companies; 4) consumer loan companies; 5) diversified
finance companies; and 6) captive oil finance companies. This limitation
does not apply to obligations issued by the U.S. government or its agencies
or instrumentalities;
2. Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government or its agencies or instrumentalities), if, as a
result, more than 5% of the Fund's net assets would be invested in
securities of such issuer. This restriction is limited to 75% of the Fund's
net assets.
3. Purchase more than 10% of any voting class of securities of any issuer;
4. Invest more than 10% of the Fund's net assets in securities of companies
which have (with their predecessors) a record of less than five years of
continuous operations;
5. Purchase or retain the securities of any issuer if, in total, the holdings
of all officers and directors of the Fund and of its investment adviser,
who individually own beneficially more than 0.5% of such securities,
represent more than 5% of the issuer's securities;
6. Borrow money, except from banks for temporary or emergency purposes but not
for the purpose of purchase of investments, and then, not in excess of 5%
of the Fund's net assets;
7. Lend money to others except through the purchase of debt obligations
(including repurchase agreements) of the type which the Fund is permitted
to purchase;
8. Except as part of a merger, consolidation, acquisition or reorganization,
invest more than 5% of the value of its total assets in the securities of
any one investment company or more than 10% of the value of its total
assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting
securities of any one investment company;
9. Purchase on margin or sell short except to obtain short-term credit as may
be necessary for the clearance of transactions;
10. Invest for the purpose of controlling management of any company;
11. Underwrite the securities of other issuers;
12. Invest in commodities or commodity futures contracts or in real estate,
although it may invest in securities which are secured by real estate and
securities of issuers which invest or deal in real estate;
13. Invest in exploration or development for oil, gas or other minerals,
although it may invest in the securities of issuers which invest in or
sponsor such programs;
14. Purchase common stocks, preferred stocks, warrants, other equity
securities, state bonds, municipal bonds, or industrial revenue bonds;
15. Issue senior securities as defined in the Investment Company Act of 1940;
16. Invest more than 15% of its net assets collectively in all types of
illiquid securities.
The following investment restrictions of the Money Market Fund are not
fundamental and may be changed by the Board of Directors of the Fund. The Fund
will:
1. Not invest more than 10% of its net assets collectively in all types of
illiquid securities;
<PAGE>
2. Comply with all requirements of Rule 2a-7 under the Investment Company Act
of 1940, as such rule may be amended from time to time;
3. Not invest more than 5% of its net assets in any one issuer other than as
permitted pursuant to Rule 2a-7 under the Investment Company Act of 1940,
as such rule may be amended from time to time.
U.S. GOVERNMENT SECURITIES FUND
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The U.S. Government Securities Fund is subject to the following restrictions
which are fundamental. The Fund will not:
1. Purchase securities of any issuer except securities issued, guaranteed or
insured by the U.S. government, its agencies or instrumentalities;
2. Have any limitation with regard to concentration for the purchase of
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
3. Invest in commodities, commodity contracts or interest rate future
contracts; or purchase or sell real estate, although it may purchase and
sell securities of companies which deal in real estate and may purchase and
sell securities which are secured by interests in real estate;
4. Make loans except by purchasing publicly distributed debt securities such
as bonds, debentures and similar obligations;
5. Purchase on margin or sell short except to obtain short term credit as may
be necessary for the clearance of transactions;
6. Invest in repurchase agreements;
7. Borrow money;
8. Underwrite the securities of other issuers;
9. Invest in securities subject to legal or contractual restrictions on resale
or securities which are otherwise illiquid;
10. Except as part of a merger, consolidation, acquisition, or reorganization,
invest more than 5% of the value of its total assets in the securities of
any one investment company or more than 10% of the value of its total
assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting
securities of any one investment company;
11. Invest in exploration or development for oil, gas or other minerals;
12. Issue senior securities as defined in the Investment Company Act of 1940.
BOND FUND
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The Fund is subject to the following restrictions which are fundamental. The
Fund will not:
1. Invest in real estate (including real estate limited partnerships),
although it may invest in securities which are secured by or represent
interests in real estate;
2. Purchase or sell commodities or commodity contracts, provided that this
restriction does not apply to financial futures contracts or options
thereon;
3. Make loans except by purchase of debt obligations (including repurchase
agreements) in which it may invest consistent with its investment policies;
4. Underwrite securities of other issuers except to the extent that, in
connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws;
5. Borrow money, except for temporary or emergency purposes but not for the
purchase of investments, and then not in excess of 5% of the Fund's net
assets; or pledge, mortgage or hypothecate the Fund's assets, transfer,
assign or otherwise encumber them in an amount exceeding the amount of the
borrowing secured thereby;
6. Issue senior securities as defined in the Investment Company Act of 1940;
or
7. Invest more than 25% of its assets in a single industry except with regard
to the purchase of obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities;
The following investment restrictions of the Fund are not fundamental and may be
changed by the Board of Directors of the Fund. The Fund will not:
1. Purchase on margin or sell short except to obtain short-term credit as may
be necessary for the clearance of transactions and it may make margin
deposits in connection with futures contracts;
2. Except as part of a merger, consolidation, acquisition or reorganization,
invest more than 5% of the value of its total assets in the securities of
any one investment company or more than 10% of the value of its total
assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting
securities of any one investment company;
3. Write put options;
<PAGE>
4. Invest more than 15% of its net assets collectively in all types of
illiquid securities;
5. Invest in more than 10% of the outstanding voting securities of any one
issuer; or
6. Invest in oil, gas or other mineral leases, rights or royalty contracts,
although it may invest in securities of companies investing in the
foregoing.
TAX-FREE INCOME FUND
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The Tax-Free Income Fund is subject to the following restrictions which are
fundamental. The Fund will not:
1. Purchase on margin or sell short except to obtain short-term credit as may
be necessary for the clearance of transactions and it may make margin
deposits in connection with futures contracts;
2. Invest in real estate, although it may invest in securities which are
secured by or represent interests in real estate;
3. Purchase or sell commodities or commodity contracts, provided that this
restriction does not apply to index futures contracts, interest rate
futures contracts or options on interest rate futures contracts for
hedging;
4. Make loans except by purchase of debt obligations (including repurchase
agreements) in which it may invest consistent with its investment policies;
5. Underwrite securities of other issuers except to the extent that, in
connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws;
6. Write put or call options;
7. Mortgage, pledge or hypothecate its assets except in an amount not
exceeding 10% of its net assets to secure temporary or emergency borrowing;
8. Issue senior securities as defined in the Investment Company Act of 1940;
9. Invest in more than 10% of the outstanding voting securities of any one
issuer;
10. Invest more than 15% of its net assets collectively in all types of
illiquid securities.
The following investment restrictions of the Tax-Free Income Fund are not
fundamental and may be changed by the Board of Directors of the Fund. The Fund
will not:
1. Invest in oil, gas or other mineral leases, rights or royalty contracts,
although it may invest in securities of companies investing in the
foregoing;
2. Except as part of a merger, consolidation, acquisition or reorganization,
invest more than 5% of the value of its total assets in the securities of
any one investment company or more than 10% of the value of its total
assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting
securities of any one investment company;
3. Invest for the purpose of exercising control or management;
4. Invest more than 5% of its net assets in foreign securities, provided that
the Fund may invest without limitation in tax- exempt securities issued by
U.S. territorial possessions;
MINNESOTA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
The Fund is subject to the following restrictions which are fundamental. The
Fund will not:
1. Invest in real estate, although it may invest in securities which are
secured by or represent interests in real estate;
2. Purchase or sell commodities or commodity contracts, provided that this
restriction does not apply to index futures contracts, interest rate
futures contracts or options on interest rate futures contracts for
hedging;
3. Make loans except by purchase of debt obligations (including repurchase
agreements) in which it may invest consistent with its investment policies;
4. Underwrite securities of other issuers except to the extent that, in
connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws;
5. Borrow money, except for temporary or emergency purposes but not for the
purchase of investments, and then not in excess of 5% of the Fund's net
assets; or pledge, mortgage or hypothecate the Fund's assets, transfer,
assign or otherwise encumber them in an amount exceeding the amount of the
borrowing secured thereby;
6. Issue senior securities as defined in the Investment Company Act of 1940.
7. Invest more than 25% of its assets in the securities of issuers in any
single industry, except that the Fund may invest without limitation in
housing.
<PAGE>
The following investment restrictions of the Fund are not fundamental and may be
changed by the Board of Directors of the Fund. The Fund will not:
1. Purchase on margin or sell short, except to obtain short-term credit as may
be necessary for the clearance of transactions and it may make margin
deposits in connection with futures contracts;
2. Except as part of a merger, consolidation, acquisition or reorganization,
invest more than 5% of the value of its total assets in the securities of
any one investment company or more than 10% of the value of its total
assets, in the aggregate, in the securities of two or more investment
companies, or acquire more than 3% of the total outstanding voting
securities of any one investment company;
3. Write put options;
4. Invest more than 5% of its net assets in foreign securities, provided that
the Fund may invest without limitation in tax- exempt securities issued by
U.S. territorial possessions;
5. Invest more than 15% of its net assets collectively in all types of
illiquid securities; or
6. Invest in oil, gas or other mineral leases, rights or royalty contracts,
although it may invest in securities of companies investing in the
foregoing.
ALL FUNDS
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In October 1995 the shareholders of each Fund approved a change to each Fund's
fundamental investment restrictions and authorized each Fund to lend portfolio
securities to brokers, dealers and other financial institutions needing to
borrow securities to complete certain transactions. To date, the Funds have not
loaned securities, and neither the Funds nor the Adviser intend to lend
securities in the immediate future.
DIVERSIFICATION
- --------------------------------------------------------------------------------
As a fundamental policy (in addition to the fundamental policies and
restrictions set forth in the Prospectus and this Statement of Additional
Information), each Fund (except Minnesota Tax-Free Income Fund) intends to
operate as a "diversified" management investment company, as defined in the
Investment Company Act of 1940, as amended. A "diversified" investment company
means a company which meets the following requirements: At least 75% of the
value of the company's total assets is represented by cash and cash items
(including receivables), "Government Securities", securities of other investment
companies, and other securities for the purposes of this calculation limited in
respect of any one issuer to an amount not greater in value than 5% of the value
of the total assets of such management company and to not more than 10% of the
outstanding voting securities of such issuer. "Government Securities" means
securities issued or guaranteed as to principal or interest by the United
States, or by a person controlled or supervised by and acting as an
instrumentality of the Government of the United States pursuant to authority
granted by the Congress of the United States; or certificates of deposit for any
of the foregoing. Additionally, as set forth above, each of the Funds has
adopted certain restrictions that are more restrictive than the policies set
forth in this paragraph.
The Minnesota Tax-Free Income Fund is a nondiversified investment company as
defined in the 1940 Act which means that the Fund is not restricted by the
provisions of the 1940 Act with respect to diversification of its investments.
However, the Fund intends to comply with the diversification requirements
contained in the Internal Revenue Code of 1986. Accordingly, at the end of each
quarter of the Fund's taxable year (a) at least 50% of the market value of the
Fund's assets must be invested in cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and not more than 10% of the outstanding voting securities of the issuer,
and (b) not more than 25% of the value of the Fund's total assets can be
invested in the securities of any one issuer (other than U.S. Government
securities). Since a relatively high percentage of the Fund's assets may be
invested in the obligations of a limited number of issuers, some of which may be
within the same economic sector, the Fund's portfolio securities may be more
susceptible to any single economic, political or regulatory occurrence than the
portfolio securities of diversified investment companies.
For purposes of such diversification, the identification of the issuer of
tax-exempt securities depends on the terms and conditions of the security. If a
State or a political subdivision thereof pledges its full faith and credit to
payment of a security, the State or the political subdivision, respectively, is
deemed the sole issuer of the security. If the assets and revenues of an agency,
authority or instrumentality of a State or a political subdivision thereof are
separate from those of the State or political subdivision and the security is
backed only by the assets and revenues of the agency, authority or
<PAGE>
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer. Moreover, if the security is backed only by revenues of an
enterprise of specific projects of the state, a political subdivision or agency,
authority or instrumentality, such as utility revenue bonds, and the full faith
and credit of the governmental unit is not pledged to the payment thereof, such
enterprise or specific project is deemed the sole issuer. If, however, in any of
the above cases, a state, political subdivision or some other entity guarantees
a security and the value of all securities issued or guaranteed by the guarantor
and owned by the Fund exceeds 10% of the value of the Fund's total assets, the
guarantee is considered a separate security and is treated as an issue of the
guarantor.
SECURITIES IN WHICH THE MONEY MARKET FUND MIGHT INVEST
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OBLIGATIONS OF BANKS
- --------------------------------------------------------------------------------
Bank money instruments in which the Fund may invest include certificates of
deposit, including variable rate certificates of deposit, bankers' acceptances
and time deposits. "Bank" includes commercial banks, savings banks and savings
and loan associations. Certificates of deposit are generally short-term,
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution.
Variable rate certificates of deposit are certificates of deposit on which the
interest rate is periodically adjusted prior to their stated maturity, usually
at 30, 90 or 180 day intervals ("coupon dates"), based upon a specified market
rate, which is tied to the then prevailing certificate of deposit rate, with
some premium paid because of the longer final maturity date of the variable rate
certificate of deposit. As a result of these adjustments, the interest rate on
these obligations may be increased or decreased periodically. Variable rate
certificates of deposit normally carry a higher interest rate than fixed rate
certificates of deposit with shorter maturities, because the bank issuing the
variable rate certificate of deposit pays the investor a premium as the bank has
the use of the investors' money for a longer period of time. Variable rate
certificates of deposit can be sold in the secondary market. In addition,
frequently banks or dealers sell variable rate certificates of deposit and
simultaneously agree, either formally or informally, to repurchase such
certificates, at the option of the purchaser of the certificate, at par on the
coupon dates. In connection with the Fund's purchase of variable rate certifies
of deposit, it may enter into formal or informal agreements with banks or
dealers allowing the Fund to resell the certificates to the bank or dealer, at
the Fund's option. If the agreement to repurchase is informal, there can be no
assurance that the Fund would always be able to resell such certificates. Before
entering into any such transactions governed by formal agreements, however, the
Fund will comply with the provisions of SEC Release 10666 which generally
provides that the repurchase agreement must be fully collateralized. With
respect to variable rate certificates of deposit maturing in 180 days or less
from the time of purchase with interest rates adjusted on a monthly cycle, the
Fund uses the period remaining until the next rate adjustment date for purposes
of determining the average weighted maturity of its portfolio. With respect to
all variable rate instruments not meeting the foregoing criteria, the Fund uses
the remaining period to maturity for purposes of determining the average
weighted maturity of its portfolio until such time as the Securities and
Exchange Commission has determined otherwise.
A banker's acceptance is a time draft drawn on a commercial bank by a borrower
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). The borrower is liable for
payment as well as the bank, which unconditionally guarantees to pay the draft
at its face amount on the maturity date. Most acceptances have maturities of six
months or less and are traded in secondary markets prior to maturity.
Both domestic banks and foreign branches of domestic banks are subject to
extensive, but different, governmental regulations which may limit both the
amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry is largely
dependent upon the availability and cost of funds for the purpose of financing
lending operations under prevailing short-term debt conditions. General economic
conditions, as well as exposure to credit losses arising from possible financial
difficulties of borrowers, also play an important part in the operations of the
banking industry.
As a result of federal and state laws and regulations, domestic banks are, among
other things, generally required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and are subject
to other regulations designed to promote financial soundness. Since the
portfolio may contain securities of foreign banks and foreign branches of
domestic banks, the Fund may be subject to additional investment risks that are
different in some respects from those incurred by a fund that invests only in
debt obligations of domestic banks.
<PAGE>
The Fund only purchases certificates of deposit from savings and loan
institutions which are members of the Federal Home Loan Bank and are insured by
the Federal Savings and Loan Insurance Corporation. Such savings and loan
associations are subject to regulation and examination. Unlike most savings
accounts, certificates of deposit held by the Fund do not benefit materially
from insurance either from the Federal Deposit Insurance Corporation or the
Federal Savings and Loan Insurance Corporation. Certificates of deposit of
foreign branches of domestic banks are not covered by such insurance and
certificates of deposit of domestic banks purchased by the Fund are generally in
denominations far in excess of the dollar limitations on insurance coverage.
COMMERCIAL PAPER AND OTHER CORPORATE DEBT SECURITIES
- --------------------------------------------------------------------------------
Short-term corporate debt instruments purchased by the Fund consist of
commercial paper (including variable amount master demand notes), which refers
to short-term, unsecured promissory notes issued by corporations to finance
short-term credit needs. Commercial paper is usually sold on a discount basis
and has a maturity at the time of issuance not exceeding nine months. Variable
amount master demand notes are demand obligations that permit the investment of
fluctuating amounts at varying market rates of interest pursuant to arrangements
between the issuer and a commercial bank acting as agent for the payees of such
notes, whereby both parties have the right to vary the amount of the outstanding
indebtedness of the notes.
The Fund may also invest in fixed interest rate non-convertible corporate debt
securities (i.e., bonds and debentures) with no more than 397 days remaining to
maturity at date of settlement.
SECURITIES IN WHICH THE BOND FUND MIGHT INVEST
- --------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSACTIONS
- --------------------------------------------------------------------------------
As discussed in the Prospectus, the Bond Fund may engage in foreign currency
exchange transactions in connection with the purchase and sale of its
investments. A forward foreign currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract as agreed by the parties, at a
price set at the time of the contract. In the case of a cancelable forward
contract, the holder has the unilateral right to cancel the contract at maturity
by paying a specified fee. The contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
Forward foreign currency exchange contracts differ from foreign currency futures
contracts in certain respects. For example, the maturity date of a forward
contract may be any fixed number of days from the date of the contract agreed
upon by the parties, rather than a predetermined date in any given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Fund may either accept or
make delivery of the currency specified in the contract, or, at or prior to
maturity, enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract. Closing transactions with respect to futures contracts are affected on
a commodities exchange: a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
Options on foreign currencies operate similarly to options on securities and are
traded primarily on the over-the-counter market, although options on foreign
currencies have recently been listed on several exchanges. Options traded on the
over-the-counter market are illiquid and it may not be possible for the Fund to
dispose of an option it has purchased or terminate its obligations under an
option it has written at a time when the Adviser believes it would be
advantageous to do so. Options on foreign currencies are affected by all of
those factors which influence foreign exchange rates and investments generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar and may have no relationship to the
investment merits of a foreign debt security. Because foreign currency
transactions occurring in the interbank market involve substantially larger
amounts than those that may be involved in the use of foreign currency options,
investors may be disadvantaged by having to deal in an odd-lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots. There is no
systematic
<PAGE>
reporting of last sale information for foreign currencies and there is no
regulatory requirement that quotations available through dealers or other market
sources be provided on a timely basis. Available quotation information is
generally representative of very large transactions in the interbank market and
thus may not reflect relatively smaller transactions (less than $1 million)
where rates may be less favorable. The interbank market in foreign currencies in
a global, around-the-clock market. To the extent that the U.S. options markets
are closed while the markets for the underlying currencies remain open,
significant price and rate movements may take place in the underlying markets
that cannot be reflected in the options markets.
Although foreign exchange dealers do not charge a fee for currency conversions,
they do realize a profit based upon the difference between prices at which they
are buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Bond Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
SECURITIES IN WHICH THE MINNESOTA TAX-FREE INCOME FUND MIGHT INVEST
- --------------------------------------------------------------------------------
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN MINNESOTA TAX-EXEMPT OBLIGATIONS
- --------------------------------------------------------------------------------
As described in the Prospectus relating to the Minnesota Tax-Free Income Fund,
except during temporary defensive periods, this Fund will invest primarily in
Minnesota tax-exempt obligations, which include obligations of the State of
Minnesota or a political subdivision, municipality, agency or instrumentality of
the State of Minnesota. This Fund therefore is susceptible to political,
economic and regulatory factors affecting issuers of Minnesota tax-exempt
obligations. The following information provides only a brief summary of the
complex factors affecting the financial situation in Minnesota. This information
is derived from sources that are generally available to investors and is based
in part on information obtained from various state and local agencies in
Minnesota. It should be noted that the creditworthiness of obligations issued by
local Minnesota issuers may be unrelated to the creditworthiness of obligations
issued by the State of Minnesota, and that there is no obligation on the part of
Minnesota to make payment on such local obligations in the event of death.
Minnesota's constitutionality prescribed fiscal period is a biennium, and
Minnesota operates on a biennial budget basis. Legislative appropriations for
each biennium are prepared and adopted during the final legislative session of
the immediately preceding biennium. Prior to each fiscal year of a biennium,
Minnesota's Department of Finance allots a portion of the applicable biennial
appropriation to each agency or other entity for which an appropriation has been
made. An agency or other entity may not expend moneys in excess of its
allotment. If revenues are insufficient to balance total available resources and
expenditures, Minnesota's Commissioner of Finance, with the approval of the
Governor, is required to reduce allotments to the extent necessary to balance
expenditures and forecasted available resources for the then current biennium.
The Governor may prefer legislative action when a large reduction in
expenditures appears necessary, and if Minnesota's legislature is not in session
the Governor is empowered to convene a special session.
Diversity and a significant natural resource base are two important
characteristics of the Minnesota economy. Generally, the structure of the
State's economy parallels the structure of the United States economy as a whole.
There are, however, employment concentrations in durable goods and non-durable
goods manufacturing, particularly industrial machinery, instruments and
miscellaneous, food, paper and related industries, and printing and publishing.
During the period from 1980 to 1990, overall employment growth in Minnesota
lagged behind national employment growth, in large part due to declining
agricultural employment. The rate of non-farm employment growth in Minnesota
exceeded the rate of national growth, however, in the period of 1990 to 1996.
Since 1980, Minnesota per capita income generally has remained above the
national average. During 1995, 1996, and the first five months of 1997, the
State's monthly employment rate had been less than the national unemployment
rate.
The State relies heavily on a progressive individual income tax and a retail
sales tax for revenue, which results in a fiscal system that is sensitive to
economic conditions. Frequently in recent years, legislation had been required
to eliminate projected budget deficits by raising additional revenue, reducing
expenditures, including aids to political subdivisions and higher education,
reducing the State's budget reserve, imposing a sales tax on purchases by local
governmental units, and making other budgetary adjustments. The Minnesota
Department of Finance June 1997 Estimates project that, under current laws, the
State will complete its current biennium June 30, 1999 with a $32 million
surplus, plus a $350 million cash flow account balance, plus a $522
<PAGE>
million budget reserve. Total General Fund expenditures and transfers for the
biennium are projected to be $20.9 billion. The State is party to a variety of
civil actions that could adversely affect the State's General Fund. In addition,
substantial portions of State and local revenues are derived from federal
expenditures, and reductions in federal aid to the State and its political
subdivisions and other federal spending cuts may have substantial adverse
effects on the economic and fiscal condition of the State and its local
governmental units. Risks are inherent in making revenue and expenditure
forecasts. Economic or fiscal conditions less favorable than those reflected in
State budget forecasts may create additional budgetary pressures.
State grants and aids represent a large percentage of the total revenue of
cities, towns, counties and school districts in Minnesota, but generally the
State has no obligation to make payments on local obligations in the event of a
default. Even with respect to revenue obligations, no assurance can be given
that economic or other fiscal difficulties and the resultant impact on State and
local government finances will not adversely affect the ability of the
respective obligors to make timely payment of the principal and interest on
Minnesota Municipal Bonds that are held by the Fund or the value or
marketability of such obligations.
Recent Minnesota tax legislation and possible future changes in federal and
State income tax laws, including rate reductions, could adversely affect the
value and marketability of Minnesota Tax-exempt Obligations that are held by the
Minnesota Tax-Free Income Fund. See "Taxes - Minnesota Income Taxation," in the
Prospectus.
COMMON INVESTMENTS
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
- --------------------------------------------------------------------------------
The mortgage-backed securities in which the Bond Fund and Government Fund invest
provide funds for mortgage loans made to residential home buyers. These include
securities which represent interests in pools of mortgage loans made by lenders
such as savings and loan institutions, mortgage banks, commercial banks and
insurance companies. Pools of mortgage loans are assembled for sale to investors
such as the Funds by various private, governmental and government-related
organizations.
Interests in pools of mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates.
Mortgage-backed securities provide monthly payments which consist of both
interest and principal payments to the investor. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-backed
securities, i.e., GNMA's, are described as "modified pass-through." These
securities entitle the holders to receive all interest and principal payments
owed on the mortgages in the pool, net of certain fees, regardless of whether or
not the mortgagors actually make the payments. The principal government
guarantor of mortgage-backed securities is the Government National Mortgage
Association ("GNMA"). GNMA is a wholly-owned U.S. government corporation within
the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. government, the timely
payment of principal and interest on securities issued by approved institutions
and backed by pools of FHA-insured or VA-guaranteed mortgages.
Residential mortgage loans are pooled by the Federal Home Loan Mortgage
Corporation ("FHLMC"). FHLMC is a corporate instrumentality of the U.S.
government and was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. Its stock is owned by
the twelve Federal Home Loan Banks. FHLMC issues Participation Certificates
("PC's") which represent interest in mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, however, PC's are not backed by the full faith and credit of the U.S.
government.
The Federal National Mortgage Association ("FNMA") is a government sponsored
corporation owned entirely by private stockholders. It is subject to general
regulation by the Secretary of Housing and Urban Development. FNMA purchases
residential mortgages from a list of approved seller/servicers which include
state and federally-chartered savings and loan
<PAGE>
associations, mutual savings banks, commercial banks and credit unions and
mortgage banks. Pass-through securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA, but are not backed by the full
faith and credit of the U.S. government.
The Federal Housing Administration ("FHA") was established by Congress in 1934
under the National Housing Act. A major purpose of the Act was to encourage the
flow of private capital into residential financing on a protected basis. FHA is
authorized to insure mortgage loans, primarily those related to residential
housing. FHA does not make loans and does not plan or build housing. FHA Project
Pools are pass-through securities representing undivided interests in pools of
FHA-insured multi-family project mortgage loans.
The Funds may purchase securities which are insured but not issued or guaranteed
by the U.S. government, its agencies or instrumentalities. An example of such a
security is a housing revenue bond (the interest on which is subject to federal
taxation) issued by a state and insured by an FHA mortgage loan. The Funds have
not purchased this type of security and have no current intent to do so. This
type of mortgage is insured by FHA pursuant to the provisions of Section
221(d)(4) of the National Housing Act of 1934, as amended. After a mortgagee
files a claim for insurance benefits, FHA will pay insurance benefits up to 100%
of the unpaid principal amount of the mortgage (generally 70% of the amount is
paid within six months of the claim and the remainder within the next six
months). The risks associated with this type of security are the same as other
mortgage securities -- prepayment and/or redemption prior to maturity, loss of
premium (if paid) if the security is redeemed prior to maturity and fluctuation
in principal value due to an increase or decrease in interest rates.
The average life of pass-through pools varies with the maturities of the
underlying mortgage instruments. In addition, the pool's term may be shortened
by unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayment is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage and other social and demographic conditions.
As prepayment rates of individual pools vary widely, it is not possible to
accurately predict the average life of a particular pool. Mortgage pass-through
securities which receive regular principal payments have an average life less
than their maturity. The average life of mortgage pass-through investments will
typically vary from 1 to 18 years.
Yields on pass-through mortgage-backed securities are typically quoted based on
the maturity of the underlying instruments and the associated average life
assumption. Actual prepayment experience may cause the yield to differ from the
assumed average life yield. The compounding effect from reinvestments of monthly
payments received by the Fund will increase the yield to shareholders.
MANUFACTURED HOME LOANS
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The U.S. Government Securities Fund and the Bond Fund invest in GNMA
manufactured home loan pass-through securities. Manufactured home loans are
fixed-rate loans secured by a manufactured home unit. In certain instances the
loan may be collateralized by a combination of a manufactured home unit and a
developed lot of land upon which the unit can be placed. Manufactured home loans
are generally not mortgages, however, because of the structural and operational
similarities with mortgage backed pass-through securities and the role of GNMA,
industry practice often groups the securities within the spectrum of GNMA
mortgage backed pass-through securities for listing purposes. Manufactured home
loans have key characteristics different from mortgage backed securities
including different prepayment rates. Prepayment rates tend to fluctuate with
interest rates and other economic variables. Manufactured home loan prepayment
rates generally tend to be less volatile than the prepayment rates experienced
by mortgage backed securities. See the above discussion regarding mortgage
backed securities.
OTHER ASSET-BACKED SECURITIES
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The Bond Fund may invest in asset-backed securities that are backed by consumer
credit such as automobile receivables, and consumer credit card receivables.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMO)
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The Funds, except the Money Market Fund, may invest in CMOs. CMOs are hybrid
instruments with characteristics of both mortgage-backed bonds and mortgage
pass-through securities. CMOs are commonly referred to as derivative securities.
<PAGE>
Similar to a bond, interest and prepaid principal on a CMO is paid, in most
cases, semiannually. CMOs may be collateralized by whole mortgage loans, but are
more typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, or FNMA. CMOs are structured into multiple classes,
each bearing a different stated maturity. Monthly payments of principal,
including prepayments, are first returned to investors holding the shortest
maturity class; investors holding the longer maturity classes receive principal
only after the first class has been retired. CMOs that are issued or guaranteed
by the U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities by the Funds, while other CMOs, even if
collateralized by U.S. Government securities, will have the same status as other
privately issued securities for purposes of applying each Fund's diversification
tests.
In a typical CMO transaction, a corporation ("issuer") issues multiple series
("A, B, C, Z") of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to
purchase mortgage instruments or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently paid off. When the Series A, B, and C Bonds are paid in full, interest
and principal on the Series Z Bond begin to be paid currently. With some CMOs,
the issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
MUNICIPAL LEASES
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The Minnesota Tax-Free Income Fund and the Tax-Free Income Fund may invest up to
25% of their net assets in municipal lease obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Municipal leases may take the form of a lease, an installment
purchase contract, a conditional sales contract or a participation certificate
in any of the above. In determining leases in which the Funds will invest, the
Adviser will carefully evaluate the outstanding credit rating of the issuer (and
the probable secondary market acceptance of such credit rating). Additionally,
the Adviser may require that certain municipal lease obligations be issued or
backed by a letter of credit or put arrangement with an independent financial
institution.
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds. The constitutions and statutes of all
states contain requirements that the state or a municipality must meet to incur
debt. These often include voter referendum, interest rate limits and public sale
requirements. Leases and installment purchase or conditional sale contracts
(which normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to acquire
property and equipment without meeting the constitutional and statutory
requirements for the issuance of debt. The debt-issuance limitations are deemed
to be inapplicable because of the inclusion in many leases or contracts of
"nonappropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis.
In addition to the "nonappropriation" risk, municipal leases have additional
risk aspects because they represent a relatively new type of financing that has
not yet developed the depth of marketability associated with conventional bonds;
moreover, although the obligations will be secured by the leased equipment, the
disposition of the equipment in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. In addition, in certain instances the
tax-exempt status of the obligations will not be subject to the legal opinion of
a nationally recognized "bond counsel," as is customarily required in larger
issues of municipal securities.
Municipal lease obligations, except in certain circumstances, are considered
illiquid by the staff of the Securities and Exchange Commission. Municipal lease
obligations held by a Fund will be treated as illiquid unless they are
determined to be liquid pursuant to guidelines established by the Fund's Board
of Directors. Under these guidelines, the Adviser will consider factors
including, but not limited to 1) whether the lease can be canceled, 2) what
assurance there is that the assets represented by the lease can be sold, 3) the
municipality's general credit strength (e.g. its debt, administrative, economic
and financial characteristics), 4) the likelihood that the municipality will
discontinue appropriating funding for the leased property because the property
is no longer deemed essential to the operations of the municipality (e.g. the
potential for an "event of non- appropriation"), and 5) the legal recourse in
the event of failure to appropriate.
<PAGE>
MUNICIPAL NOTES
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Municipal notes, which generally mature in three months to three years, are a
type of municipal security which may be purchased by the Minnesota Tax-Free Fund
and the Tax-Free Income Fund.
OBLIGATIONS OF, OR GUARANTEED BY, THE UNITED STATES GOVERNMENT, ITS AGENCIES OR
INSTRUMENTALITIES
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Securities issued or guaranteed by the United States include a variety of
Treasury securities, which differ only in their interest rates, maturities and
dates of issuance. Treasury bills have a maturity of one year or less. Treasury
notes have maturities of one to ten years and Treasury bonds generally have
maturities of greater than ten years at the date of issuance. The prospectus
also refers to securities which are issued or guaranteed by agencies of the U.S.
government and various instrumentalities which have been established or
sponsored by the U.S. government. Except for U.S. Treasury securities, these
U.S. government obligations, even those which are guaranteed by federal agencies
or instrumentalities, may or may not be backed by the "full faith and credit" of
the United States. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does not meet its commitment.
Some of the government agencies which issue or guarantee securities are the
Department of Housing and Urban Development, the Department of Health and Human
Services, the Government National Mortgage Association, the Farmers Home
Administration, the Department of Transportation, the Department of Defense and
the Department of Commerce. Instrumentalities which issue or guarantee
securities include the Export-Import Bank, the Federal Farm Credit System,
Federal Land Banks, the Federal Intermediate Credit Bank, the Bank for
Cooperatives, Federal Home Loan Banks, the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation. Instrumentalities of the U.S.
government which issue or guarantee securities which the Fund may purchase
include the Federal Farm Credit System, Federal Land Banks, the Federal
Intermediate Credit Bank, the Bank for Cooperatives, Federal Home Loan Banks,
FHLMC and the Student Loan Marketing Association. The U.S. Treasury is not
obligated by law to provide support to all U.S. government instrumentalities and
agencies, and the Funds will invest in securities which are not backed by the
full faith and credit of the U.S. Treasury issued by such instrumentalities and
agencies only when the Funds' Adviser determines that the credit risk with
respect to the instrumentality or agency issuing such securities does not make
its securities unsuitable investments for the Funds.
The Funds may purchase securities which are insured but not issued or guaranteed
by the U.S. government, its agencies or instrumentalities. An example of such a
security is a housing revenue bond (the interest on which is subject to federal
taxation) issued by a state and insured by an FHA mortgage loan. The Funds have
not purchased this type of security and have no current intent to do so.
U.S. TREASURY INFLATION-PROTECTION SECURITIES
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Inflation-protection securities are a new type of marketable book-entry security
issued by the United States Department of Treasury ("Treasury") with a nominal
return linked to the inflation rate in prices. Inflation-protection securities
will be auctioned and issued on a quarterly basis on the 15th of January, April,
July, and October, beginning on January 15, 1997. Initially, they will be issued
as 10-year notes, with other maturities added thereafter. The index used to
measure inflation will be the non- seasonably adjusted U.S. City Average All
Items Consumer Price Index for All Urban Consumers ("CPI-U").
The value of the principal will be adjusted for inflation, and every six months
the security will pay interest, which will be an amount equal to a fixed
percentage of the inflation-adjusted value of the principal. The final payment
of principal of the security will not be less than the original par amount of
the security at issuance.
The principal of the inflation-protection security will be indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance is
multiplied by the index ratio applicable to that valuation date. The index ratio
for any date is the ratio of the reference CPI applicable to such date to the
reference CPI applicable to the original issue date. Semiannual coupon interest
is determined by multiplying the inflation-adjusted principal amount by one-half
of the stated rate of interest on each interest payment date.
<PAGE>
Inflation-adjusted principal or the original par amount, whichever is larger,
will be paid on the maturity date as specified in the applicable offering
announcement. If at maturity the inflation-adjusted principal is less than the
original principal value of the security, an additional amount will be paid at
maturity so that the additional amount plus the inflation-adjusted principal
equals the original principal amount. Some inflation-protection securities may
be stripped into principal and interest components. In the case of a stripped
security, the holder of the stripped principal would receive this additional
amount. The final interest payment, however, will be based on the final
inflation-adjusted principal value, not the original par amount.
The reference CPI for the first day of any calendar month is the CPI-U for the
third preceding calendar month. (For example, the reference CPI for December 1
is the CPI-U reported for September of the same year, which is released in
October). The reference CPI for any other day of the month is calculated by a
linear interpolation between the reference CPI applicable to the first day of
the month and the reference CPI applicable to the first day of the following
month.
Any revisions the Bureau of Labor Statistics (or successor agency) makes to any
CPI-U number that had been previously released will not be used in calculations
of the value of outstanding inflation-protection securities. In the case that
the CPI-U for a particular month is not reported by the last day of the
following month, the Treasury will announce an index number based on the last
year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation- protection security that need
that month's CPI-U number will be based on the index number that the Treasury
had announced. If the CPI-U is rebased to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of the Treasury
in the regard are final.
Inflation-protection securities will be held and transferred in either of wo
book-entry systems: the commercial book-entry system (TRADES) and TREASURY
DIRECT. The securities will be maintained and transferred at their original par
amount, i.e., not at their inflation-adjusted value. STRIPS components will be
maintained and transferred in TRADES at their value based on the original par
amount of the fully constituted security.
FUTURES CONTRACTS, OPTIONS AND OPTIONS ON FUTURES CONTRACTS
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The Bond Fund, Minnesota Tax-Free Income Fund, and the Tax-Free Income Fund may
invest in interest rate futures contracts, index futures contracts and may buy
options on such contracts for the purpose of hedging its portfolio of fixed
income securities (and not for speculative purposes) against the adverse effects
of anticipated movements in interest rates. The U.S. Government Securities Fund
may buy and sell options on interest rate futures contracts and index futures
contracts for the purpose of hedging. As a result of entering into futures
contracts, no more than 10% of the Fund's (5% for Tax-Free Income Fund's) total
assets may be committed to margin.
Each Fund (except the Money Market Fund) may purchase exchange traded put and
call options on debt securities of an amount up to 5% of its net assets (10% for
Bond Fund) for the purpose of hedging. A put option (sometimes called a standby
commitment) gives the purchaser of the option, in return for a premium paid, the
right to sell the underlying security at a specified price during the term of
the option. The writer of the put option receives the premium and has the
obligation to buy the underlying securities upon exercise at the exercise price
during the option period. A call option (sometimes called a reverse standby
commitment) gives the purchaser of the option, in return for a premium, the
right to buy the security underlying the option at a specified exercise price at
any time during the term of the option. The writer of the call option receives
the premium and has the obligation at the exercise of the option, to deliver the
underlying security against payment of the exercise price during the option
period. A principal risk of standby commitments is that the writer of a
commitment may default on its obligation to repurchase or deliver the
securities.
An interest rate futures contract is an agreement to purchase or deliver an
agreed amount of debt securities in the future for a stated price on a certain
date. The Fund may use interest rate futures solely as a defense or hedge
against anticipated interest rate changes and not for speculation. The Fund
presently could accomplish a similar result to that which it hopes to achieve
through the use of futures contracts by selling debt securities with long
maturities and investing in debt securities with short maturities when interest
rates are expected to increase, or conversely, selling short-term debt
securities and investing in long-
<PAGE>
term debt securities when interest rates are expected to decline. However,
because of the liquidity that is often available in the futures market, such
protection is more likely to be achieved, perhaps at a lower cost and without
changing the rate of interest being earned by the Fund, through using futures
contracts.
DESCRIPTION OF FUTURES CONTRACTS. A futures contract sale creates an obligation
by the Fund, as seller, to deliver the type of financial instrument called for
in the contract at a specified future time for a stated price. A futures
contract purchase creates an obligation by the Fund, as purchaser, to take
delivery of the underlying financial instrument at a specified future time for a
stated price. The specific securities delivered or taken, respectively, at
settlement date, are not determined until at or near that date. The
determination is made in accordance with the rules of the exchange on which the
futures contract sale or purchase was made.
Although futures contracts by their terms call for actual delivery or acceptance
of securities, in most cases the contracts are closed out before the settlement
date without the making or taking of delivery. Closing out a futures contract
sale is effected by purchasing a futures contract for the same aggregate amount
of the specific type of financial instrument and the same delivery date. If the
price of the initial sale of the futures contract exceeds the price of the
offsetting purchase, the Fund is paid the difference and realizes a gain. If the
price of the offsetting purchase exceeds the price of the initial sale, the Fund
pays the difference and realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the Fund entering into a futures contract sale.
If the offsetting sale price exceeds the purchase price, the Fund realizes a
gain, and if the purchase price exceeds the offsetting sale price, the Fund
realizes a loss.
The Funds are required to maintain margin deposits with brokerage firms through
which they enter into futures contracts. Margin balances will be adjusted at
least weekly to reflect unrealized gains and losses on open contracts. In
addition, the Funds will pay a commission on each contract, including offsetting
transactions.
Futures contracts are traded only on commodity exchanges--known as "contract
markets"--approved for such trading by the Commodity Futures Trading Commission
("CFTC"), and must be executed through a futures commission merchant or
brokerage firm which is a member of the relevant contract market. The CFTC
regulates trading activity on the exchanges pursuant to the Commodity Exchange
Act. The principal exchanges are the Chicago Board of Trade, the Chicago
Mercantile Exchange and the New York Futures Exchange. Each exchange guarantees
performance under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership. The CFTC rules
provide that a mutual fund does not have to register a "commodity pool" if the
Fund uses commodity futures and options positions solely (1) for "bona fide
hedging" purposes (as that term is used in the rules and regulations of the
CFTC) or (2) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed five
percent of the liquidation value of the Fund's portfolio.
RISKS IN FUTURES CONTRACTS. One risk in employing futures contracts to protect
against cash market price volatility is the prospect that futures prices will
correlate imperfectly with the behavior of cash prices. The ordinary spreads
between prices in the cash and futures markets, due to differences in the
natures of those markets, are subject to distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures market depends on participants entering into offsetting transactions
rather than making or taking delivery. To the extent participants decide to make
or take delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of speculators the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of general interest trends by the Adviser may
still not result in a successful transaction.
Another risk is that the Adviser would be incorrect in its expectation as to the
extent of various interest rate movements or the time span within which the
movements take place. Closing out a futures contract purchase at a loss because
of higher interest rates will generally have one or two consequences depending
on whether, at the time of closing out, the "yield curve" is normal (long-term
rates exceeding short-term). If the yield curve is normal, it is possible that
the Fund will still be engaged in a program of buying long-term securities.
Thus, closing out the futures contract purchase at a loss will reduce the
<PAGE>
benefit of the reduced price of the securities purchased. If the yield curve is
inverted, it is possible that the Fund will retain its investments in short-term
securities earmarked for purchase of longer term securities. Thus, closing out
of a loss will reduce the benefit of the incremental income that the Fund will
experience by virtue of the high short-term rates.
RISKS OF OPTIONS. The use of options and options on interest rate futures
contracts also involves additional risk. Compared to the purchase or sale of
futures contracts, the purchase of call or put options and options on futures
contracts involves less potential risk to a Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs).
The effective use of options strategies is dependent, among other things, upon
the Fund's ability to terminate options positions at a time when the Adviser
deems it desirable to do so. Although the Fund will enter into an option
position only if the Adviser believes that a liquid secondary market exists for
such option, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Funds'
transactions involving options on futures contracts will be conducted only on
recognized exchanges.
The Funds' purchase or sale of put or call options and options on futures
contracts will be based upon predictions as to anticipated interest rates by the
Adviser, which could prove to be inaccurate. Even if the expectations of the
Adviser are correct, there may be an imperfect correlation between the change in
the value of the options and of the Funds' portfolio securities.
The Funds, except the Money Market Fund, may purchase and sell put and call
options and options on interest rate futures contracts which are traded on a
United States exchange or board of trade as a hedge against changes in interest
rates, and will enter into closing transactions with respect to such options to
terminate existing positions. An interest rate futures contract provides for the
future sale by one party and the purchase by the other party of a certain amount
of a specific financial instrument (debt security) at a specified price, date,
time and place. An option on an interest rate futures contract, as contrasted
with the direct investment in such a contract, gives the purchaser the right, in
return for the premium paid, to assume a position in an interest rate futures
contract at a specified exercise price at any time prior to the expiration date
of the option. Options on interest rate futures contracts are similar to options
on securities, which give the purchaser the right, in return for the premium
paid, to purchase or sell securities.
A call option gives the purchaser of such option the right to buy, and obliges
its writer to sell, a specified underlying futures contract at a stated exercise
price at any time prior to the expiration date of the option. A purchaser of a
put option has the right to sell, and the writer has the obligation to buy, such
contract at the exercise price during the option period. Upon exercise of an
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account, which represents the amount by which the
market price of the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the interest rate futures contract on the expiration date. The
potential loss related to the purchase of an option on interest rate futures
contracts is limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the point of sale, there are
no daily cash payments to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and that change
would be reflected in the net asset values of the Fund.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS. The Funds (except the Money Market
Fund) may purchase put options on futures contracts if the Adviser anticipates a
rise in interest rates. Because the value of an interest rate or municipal bond
index futures contract moves inversely in relation to changes in interest rates,
a put option on such a contract becomes more valuable as interest rates rise. By
purchasing put options on futures contracts at a time when the Adviser expects
interest rates to rise, the Funds will seek to realize a profit to offset the
loss in value of its portfolio securities.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS. The Funds (except the Money
Market Fund) may purchase call options on futures contracts if the Adviser
anticipates a decline in interest rates. The purchase of a call option on an
interest rate or index futures contract represents a means of obtaining
temporary exposure to market appreciation at limited risk. Because the value of
an interest rate or index futures contract moves inversely in relation to
changes to interest rates, a call option on
<PAGE>
such a contract becomes more valuable as interest rates decline. The Funds will
purchase a call option on a futures contract to hedge against a decline in
interest rates in a market advance when the Funds are holding cash. The Funds
can take advantage of the anticipated rise in the value of long-term securities
without actually buying them until the market is stabilized. At that time, the
options can be liquidated and the Funds' cash can be used to buy long-term
securities.
The Funds expect that new types of futures contracts, options thereon, and put
and call options on securities and indexes may be developed in the future. As
new types of instruments are developed and offered to investors, the Adviser
will be permitted to invest in them provided that the Adviser believes their
quality is equivalent to the Funds' quality standards.
RISKS OF INVESTING IN HIGH YIELD SECURITIES
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The Bond Fund and Minnesota Tax-Free Income Fund may each invest in high yield
securities or "junk bonds." Junk bonds are regarded as being predominantly
speculative as to the issuer's ability to make payments of principal and
interest. Investment in such securities involves substantial risk. Issuers of
junk bonds may be highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risks associated with acquiring
the securities of such issuers generally are greater than is the case with
higher rated securities. For example, during an economic downturn or a sustained
period of rising interest rates, issuers of junk bonds may be more likely to
experience financial stress, especially if such issuers are highly leveraged. In
addition, the market for junk bonds is relatively new and has not weathered a
major economic recession, and it is unknown what effects such a recession might
have on such securities. During such periods, such issuers may not have
sufficient cash flows to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of junk bonds because such securities may be unsecured and may be
subordinated to the creditors of the issuer. While most of the junk bonds in
which the Funds may invest do not include securities which, at the time of
investment, are in default or the issuers of which are in bankruptcy, there can
be no assurance that such events will not occur after a Fund purchases a
particular security, in which case the Fund may experience losses and incur
costs. Junk bonds frequently have call or redemption features that would permit
an issuer to repurchase the security from the Fund. If a call were exercised by
the issuer during a period of declining interest rates, the Fund likely would
have to replace such called security with a lower yielding security, thus
decreasing the net investment income to the Fund and dividends to shareholders.
Junk bonds tend to be more volatile than higher-rated fixed income securities,
so that adverse economic events may have a greater impact on the prices of junk
bonds than on higher-rated fixed income securities. Factors adversely affecting
the market value of such securities are likely to affect adversely the Fund's
net asset value. Like higher-rated fixed income securities, junk bonds generally
are purchased and sold through dealers who make a market in such securities for
their own accounts. However, there are fewer dealers in the junk bond market,
which may be less liquid than the market for higher-rated fixed income
securities, even under normal economic conditions. Also there may be significant
disparities in the prices quoted for junk bonds by various dealers. Adverse
economic conditions and investor perceptions thereof (whether or not based on
economic fundamentals) may impair the liquidity of this market and may cause the
prices the Fund receives for its junk bonds to be reduced. In addition, the Fund
may experience difficulty in liquidating a portion of its portfolio when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Under such conditions, judgment may play a greater role in valuing certain of
the Fund's portfolio securities than in the case of securities trading in a more
liquid market. In addition, the Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default on a portfolio holding or to
participate in the restructuring of the obligation.
COMPUTATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value is determined as of the close of the New York Stock Exchange on
each day that the exchange is open for business and on any other day on which
there is sufficient trading in a Fund's securities to materially affect the
Fund's net asset value per share. The customary national business holidays
observed by the New York Stock Exchange and on which the Funds are closed are:
New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday,
Memorial Day, July Fourth, Labor Day, Thanksgiving Day and Christmas Day. The
net asset value per share will not be determined on these national holidays.
<PAGE>
On March 31, 1997 the net asset value and public offering price per share for
each Fund was calculated as follows:
<TABLE>
<CAPTION>
Money Market Fund:
<S> <C> <C>
net assets ($32,668,098)
------------
shares outstanding (32,671,098) = NAV per share = public offering price per share ($1.00)
U.S. Government Securities Fund:
net assets ($73,393,871)
------------
shares outstanding (7,138,283) = NAV per share = public offering price per share ($10.28)
Bond Fund:
net assets ($6,403,462)
-----------
shares outstanding (665,705) = NAV per share = public offering price per share ($9.62)
Tax-Free Income Fund:
net assets ($342,540,206)
-------------
shares outstanding (34,338,517) = NAV per share = public offering price per share ($9.98)
Minnesota Tax-Free Income Fund:
net assets ($93,975,904)
------------
shares outstanding (9,265,489) = NAV per share = public offering price per share ($10.14)
</TABLE>
CALCULATION OF PERFORMANCE DATA
- --------------------------------------------------------------------------------
Advertisements and other sales literature for the Funds (other than Money Market
Fund) may refer to cumulative total return, average annual total return and
yield.
CUMULATIVE TOTAL RETURNn Total return means cumulative total return and is
calculated by finding the cumulative compounded rate of return over the period
indicated that would equate the initial amount invested to the ending redeemable
value, according to the following formula:
CTR = (ERV-P)
----- X 100
P
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 such 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 and includes
all recurring fees, such as investment advisory and management fees, charged to
all shareholder accounts.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is 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:
n
P(1+T) = ERV
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 assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates and includes
all recurring fees, such as investment advisory and management fees, charged to
all shareholder accounts.
<PAGE>
YIELD. 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:
6
Yield = 2[(a-b/cd + 1) - 1]
a = dividends and interest earned during the periods;
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.
The Funds' yields for the 30-day period ended March 31, 1997 were:
U.S. Government Securities Fund 6.65%
Bond Fund 6.68
Tax-Free Income Fund 5.47
Minnesota Tax-Free Income Fund 5.54
CURRENT YIELD AND EFFECTIVE YIELD FOR MONEY MARKET FUND
- --------------------------------------------------------------------------------
CURRENT YIELD The Money Market Fund's current yield is based on a seven-day
period and is computed by determining the net change in value, exclusive of
capital changes, of a hypothetical account having a balance of one share at the
beginning of the period. This number is then divided by the price per share at
the beginning of the period to obtain the base period return, and then
multiplying the base period return by (365/7) with the resulting yield figure
carried to at least the nearest hundredth of one percent.
EFFECTIVE YIELD The Money Market Fund's effective yield is computed by using the
base period return as calculated above as follows: Effective yield = [ (Base
period return + 1) 365/7 ] - 1
TAXABLE EQUIVALENT YIELD. The Tax-Free Income Fund and Minnesota Tax-Free Income
Fund may state a taxable equivalent yield which is computed by dividing that
portion of the yield of the Fund (as computed above) which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield of the Fund that is not tax-exempt. The taxable equivalent yield
for the Tax-Free Income Fund and Minnesota Tax-Free Income Fund assuming a 39.6%
marginal federal tax bracket and an 8.5% tax bracket for Minnesota residents
were 9.06% and 10.02% respectively, for the 30-day period ended March 31, 1997.
DISTRIBUTION RATE. The distribution rate is computed by dividing the net
investment income distributed to shareholders for a given period divided by a
Fund's average net asset value per share for that period, according to the
following formula:
Distribution Rate = a/b
--- X 365 X 100
c
a = net investment income distributed for the period;
b = number of days in the period;
c = average net asset value during the period;
The Funds' distribution rates for the 12-month period ended March 31, 1997 were:
U.S. Government Securities Fund 6.29%
Bond Fund 6.54
Tax-Free Income Fund 5.64
Minnesota Tax-Free Income Fund 5.59
As noted in the Prospectus, a Fund may advertise its relative performance as
compiled by outside organizations or refer to publications which have mentioned
its performance. The Adviser may refer to the following indices in
advertisements and other sales literature: Lehman Aggregate Bond Index, Lehman
5-Year Municipal Bond Index, Lehman Intermediate Bond Index.
<PAGE>
MANAGEMENT
- --------------------------------------------------------------------------------
The Funds as a group pay each director, who is not also an officer, an annual
total fee of $8,000, $2,000 for each meeting attended, and provide reimbursement
for travel and other expenses. The names, addresses, principal occupations and
other affiliations of directors and officers of the Funds are given below.
Except as noted below, the business address of each officer and director is the
same as that of the Adviser - 4600 Norwest Center, Minneapolis, Minnesota.
<TABLE>
<CAPTION>
NAME & ADDRESS POSITION WITH THE FUNDS PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- -------------- ----------------------- ----------------------------------------
<S> <C> <C>
Eugene C. Sit * Director and Chairman, CEO and CIO Sit Investment Associates, Inc.
Chairman (the "Adviser"); Chairman, CEO and CIO of Sit/Kim
International Investment Associates, Inc. ("Sit/Kim");
Director and Chairman of the Sit Funds and Director of
SIA Securities Corp. (the "Distributor")
Peter L. Mitchelson * Director and President and Director of the Adviser; Executive Vice
Vice Chairman President and Director of Sit/Kim; Director and Vice
Chairman of the Sit Funds and Director of the Distributor
Michael C. Brilley * Director, Senior Vice President, Senior Vice President and Senior Fixed Income Officer of
and Senior Portfolio Manager the Adviser
Melvin C. Bahle Director Emeritus Financial consultant; Director and/or Officer
#1 Muirfield Lane of several companies, foundations and religious
St. Louis, MO 63141 organizations.
William E. Frenzel * Director Director of the Sit Funds; Advisory Director of the
1775 Massachusetts Ave. NW Adviser; Director of Sit/Kim; Senior Visiting Scholar
Washington, DC 20036 at the Brookings Institution; Formerly a Senior member
of Congress and a ranking member on the House Ways
and Means Committee and Vice Chairman of the House
Budget Committee
John E. Hulse Director Director of the Sit Funds; Director, Vice Chairman and 4303
Quail Run Lane Chief Financial Officer at Pacific Telesis Group until
Danville, CA 64506 June 1992; Trustee, Benild Religious & Charitable Trust;
Trustee, Pacific Gas & Electric Nuclear Decommissioning Trust
Sidney L. Jones Director Director of the Sit Funds; Adjunct Faculty, Center for
8505 Parliament Drive Public Policy Education, The Brookings Institution and
Potomac, MD 20854 Visiting Professor, Dartmouth College and Carleton
College; Former Assistant Secretary for Economic Policy,
United States Department of the Treasury
Donald W. Phillips Director Director of the Sit Funds; President of Forstmann-Leff 111
West Jackson Blvd International, Inc.; Executive Vice President and Director
Chicago, IL 60606 of Equity Financial and Management Company until
1997; Chairman of Equity Institutional Investors, Inc.,
until 1997; Chief Investment Officer of Ameritech, Inc.,
Chicago, IL until 1990
<PAGE>
NAME & ADDRESS POSITION WITH THE FUNDS PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- -------------- ----------------------- ----------------------------------------
Mary K. Stern President President of the Sit Mutual Funds; President of Mutual
Fund Group and Executive Vice President of Society
Bank, Cleveland, Ohio until 1994; Vice President of
Norwest Bank Minnesota, N.A. until 1992
Paul E. Rasmussen Vice President & Treasurer Vice President, Secretary and Controller for the Adviser;
Vice President and Treasurer of the Sit Funds; President
and Treasurer of the Distributor
Debra A. Sit Vice President - Investments; Vice President - Investments of the Tax-Free Fund and
Assistant Treasurer Minnesota Tax-Free Fund and Assistant Treasurer of all
Funds
Bryce A. Doty Vice President - Investments Vice President - Investments of the U.S. Government
Securities Fund and Bond Fund; Head of the Public
Trading desk at Minnesota Mutual Life Insurance
Company until November, 1995
Paul J. Jungquist Vice President - Investments Vice President - Investments of the Money Market Fund;
Associate with Grant Thornton until 1994
Michael P. Eckert Vice President Vice President - Mutual Fund Sales of the Adviser;
Regional Vice President of MacKenzie Investment
Management Company until October, 1989
Michael J. Radmer Secretary Secretary of the Sit Funds; Partner of the Funds' general 220
South Sixth Street counsel, Dorsey & Whitney, LLP
Minneapolis, MN
* Directors who are deemed to be "interested persons" of the Funds as that term is defined by the Investment Company
Act of 1940. Messrs. Sit, Brilley and Mitchelson are interested persons because they are officers of the Adviser. Mr.
Frenzel may be deemed to be an interested person because he is an advisory director of the Adviser.
Ms. Debra Sit is the daughter of Eugene C. Sit.
</TABLE>
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
The Adviser (or an affiliate) has served as the investment adviser for each Fund
since the inception of each Fund.
TERMS COMMON TO ALL FUNDS' INVESTMENT MANAGEMENT AGREEMENTS
- --------------------------------------------------------------------------------
Each Fund's Investment Management Agreement provides that the Adviser will
manage the investment of the Fund's assets, subject to the applicable provisions
of the Fund's articles of incorporation, bylaws and current registration
statement (including, but not limited to, the investment objective, policies and
restrictions delineated in the Fund's current prospectus and Statement of
Additional Information), as interpreted from time to time by the Fund's Board of
Directors. Under each Agreement, the Adviser has the sole and exclusive
responsibility for the management of the Fund's investment portfolio and for
making and executing all investment decisions for the Fund. The Adviser is
obligated under each Agreement to report to the Fund's Board of Directors
regularly at such times and in such detail as the Board may from time to time
determine appropriate, in order to permit the Board to determine the adherence
of the Adviser to the Fund's investment policies. Each Agreement also provides
that the Adviser shall not be liable for any loss suffered by the Fund in
connection with the matters to which the Agreement relates, except losses
resulting from willful misfeasance, bad faith or gross negligence on the part of
<PAGE>
the Adviser in the performance of its obligations and duties or by reason of its
reckless disregard of its obligations and duties under the Agreement.
Each Agreement provides that the Adviser shall, at its own expense, furnish all
office facilities, equipment and personnel necessary to discharge its
responsibilities and duties under the Agreement and that the Adviser will
arrange, if requested by the Fund, for officers or employees of the Adviser to
serve without compensation from the Fund as directors, officers or employees of
the Fund if duly elected to such positions by the shareholders or directors of
the Fund.
Each Agreement provides that it will continue in effect from year to year only
as long as such continuance is specifically approved at least annually by the
applicable Fund's Board of Directors or shareholders and by a majority of the
Board of Directors who are not "interested persons" (as defined in the 1940 Act)
of the Adviser or the Fund. The Agreement is terminable upon 60 days' written
notice by the Adviser or the Fund and will terminate automatically in the event
of its "assignment" (as defined in the 1940 Act).
COMPENSATION AND ALLOCATION OF EXPENSES
- --------------------------------------------------------------------------------
Under each of the Fund's Investment Management Agreement, the Fund is obligated
to pay the Adviser a flat monthly fee, which is equal on an annual basis to
.80%, (except for the U.S. Government Securities Fund and Money Market Fund) of
the average daily net assets of each Fund. However, under each such Fund's
Agreement, the Adviser has agreed to bear all of the Fund's expenses, except for
extraordinary expenses (as designated by a majority of the Fund's disinterested
directors), interest, brokerage commissions and other transaction charges
relating to the investing activities of the Fund.
Under the current Investment Management Agreement for each of U.S. Government
Securities Fund and Money Market Fund, the Fund is obligated to pay the Adviser
a flat monthly fee (equal on an annual basis to 1.00% of the first $50 million
of average daily net assets and .80% of average daily net assets in excess of
$50 million for U.S. Government Securities Fund and equal on an annual basis to
.80% of the first $50 million of average daily net assets and .60% of average
daily net assets in excess of $50 million for Money Market Fund). However, under
each such Fund's current Agreement, the Adviser is obligated to bear all of the
Fund's expenses, except for extraordinary expenses (as designated by a majority
of the Fund's disinterested directors), interest, brokerage commissions and
other transaction charges relating to the investing activities of the Fund.
For the period October 1, 1993 through December 31, 1998 the Adviser has
voluntarily agreed to limit the management fee (and, thereby, all Fund expenses,
except those not payable by the Adviser as set forth above) of Government Fund
and Money Market Fund to .80% and .50% of average daily net assets per year,
respectively, and of Tax-Free Income Fund to .70% of the Fund's average daily
net assets in excess of $250 million and .60% of the Funds' daily net assets in
excess of $500 million. After December 31, 1998, this voluntary fee waiver may
be discontinued by the Adviser in its sole discretion.
On February 11, 1994 the Board of Directors changed the fiscal year end from
June 30 to March 31. Set forth below are the investment management fees paid by
each Fund, during the fiscal years ended March 31, 1997, 1996, 1995, and other
fees and expenses paid by the Funds during such years and fees and expenses of
the Funds waived or paid by the Adviser during such years:
<TABLE>
<CAPTION>
MONEY U.S. GOVT. TAX-FREE MN TAX-FREE
MARKET SECURITIES BOND INCOME INCOME
1997 FUND FUND FUND FUND FUND
- ---- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE NET ASSETS $25,971,000 $57,925,388 $5,462,994 $296,175,655 $73,642,770.47
Investment Advisory Fees 208,145 564,216 43,801 2,374,577 590,061
Other Expenses
Expenses Waived (78,042) (99,999) 00 (46,819) 00
Net Fund Expenses 130,103 464,217 43,801 2,327,758 590,061
Ratio of expenses to average daily net assets .50% .80% .80% .79% .80%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MONEY U.S. GOVT. TAX-FREE MN TAX-FREE
MARKET SECURITIES BOND INCOME INCOME
1996 FUND FUND FUND FUND FUND
- ---- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE NET ASSETS $22,216,443 $44,538,307 $4,845,015 $265,004,492 $54,570,121
Investment Advisory Fees 178,297 445,304 38,803 2,123,785 436,992
Other Expenses
Expenses Waived (66,862) (88,625) 00 (15,540) 00
Net Fund Expenses 111,435 356,679 38,803 2,108,245 436,992
Ratio of expenses to average daily net assets .50% .80% .80% .80% .80%
1995
- ----
AVERAGE NET ASSETS $21,254,204 $36,625,411 $3,337,957 $274,227,924 $32,146,887
Investment Advisory Fees 169,942 366,490 26,701 2,195,496 256,587
Other Expenses
Expenses Waived (63,828) (73,460) 00 (24,991) 00
Net Fund Expenses 106,114 293,030 26,701 2,170,505 256,587
Ratio of expenses to average daily net assets .50% .80% .80% .79% .80%
</TABLE>
DISTRIBUTOR
- --------------------------------------------------------------------------------
Sit Mutual Funds II, Inc. (the "Company") on behalf of the Bond Fund, Minnesota
Tax-Free Income Fund, and the Tax-Free Income Fund; the Government Fund, and the
Money Market Fund have entered into an Underwriting and Distribution Agreement
with SIA Securities Corp. ("Securities"), an affiliate of the Adviser, pursuant
to which Securities will act as each Fund's principal underwriter. Securities
will market each Fund's shares only to certain institutional investors and all
other sales of each Fund's shares will be made by each Fund. The Adviser will
pay all expenses of Securities in connection with such services and Securities
is otherwise not entitled to any other compensation under the Underwriting and
Distribution Agreement. Each Fund will incur no additional fees in connection
with the Underwriting and Distribution Agreement.
Pursuant to the Underwriting and Distribution Agreement, Securities has agreed
to act as the principal underwriter for each Fund in the sale and distribution
to the public of shares of each Fund, either through dealers or otherwise.
Securities has agreed to offer such shares for sale at all times when such
shares are available for sale and may lawfully be offered for sale and sold. The
Underwriting and Distribution Agreement is renewable from year to year if the
Fund's directors approve such agreement. The Fund or Securities can terminate
the Underwriting and Distribution Agreement at any time without penalty on 60
days' notice written notice to the other party. The Underwriting and
Distribution Agreement terminates automatically upon its assignment. In the
Underwriting and Distribution Agreement, Securities agrees to indemnify each
Fund against all costs of litigation and other legal proceedings and against any
liability incurred by or imposed on the Fund in any way arising out of or in
connection with the sale or distribution of each Fund's shares, except to the
extent that such liability is the result of information which was obtainable by
Securities only from persons affiliated with the Fund but not Securities.
BROKERAGE
- --------------------------------------------------------------------------------
Transactions on a stock exchange in equity securities will be executed primarily
through brokers that will receive a commission paid by the applicable Fund.
Fixed income securities, as well as equity securities traded in the
over-the-counter market, are generally traded on a "net" basis with dealers
acting as principals for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten fixed income and equity offerings, securities are purchased at a
fixed price that includes an amount of compensation to the underwriter,
generally referred to as the underwriter's selling concession or discount.
Certain of these securities may also be purchased directly from the issuer, in
which case neither commissions nor discounts are paid.
The Adviser selects and, where applicable, negotiates commissions with the
broker-dealers who execute the transactions for one or more of the Funds. The
primary criterion for the selection of a broker-dealer is the ability of the
broker-dealer, in the opinion of the Adviser to secure prompt execution of the
transactions on favorable terms, including the best price of the security, the
reasonableness of the commission and considering the state of the market at the
time. When consistent with
<PAGE>
these objectives, business may be placed with broker-dealers who furnish
investment research or services to the Adviser. Such research or 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. Such
services also may include analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts. This allows the Adviser to supplement its own investment research
activities and enables the Adviser to obtain the views and information of
individuals and research staffs of many different securities firms prior to
making investment decisions for the Funds. To the extent portfolio transactions
are effected with broker-dealers who furnish research services to the Adviser,
the Adviser receives a benefit, not capable of valuation in dollar amounts,
without providing any direct monetary benefit to the applicable Funds from these
transactions. The Adviser believes that most research services they receive
generally benefit several or all of the investment companies and private
accounts which they manage, as opposed to solely benefiting one specific managed
fund or account. Normally, research services obtained through managed funds or
accounts investing in common stocks would primarily benefit the managed funds or
accounts which invest in common stock; similarly, services obtained from
transactions in fixed income securities would normally be of greater benefit to
the managed funds or accounts which invest in debt securities.
The Adviser maintains an informal list of broker-dealers, which is used from
time to time as a general guide in the placement of Fund business, in order to
encourage certain broker-dealers to provide the Adviser with research services
which the Adviser anticipates will be useful to them in managing the Funds.
Because the list is merely a general guide, which is to be used only after the
primary criterion for the selection of broker-dealers (discussed above) has been
met, substantial deviations from the list are permissible and may be expected to
occur. The Adviser will authorize a Fund to pay an amount of commission for
effecting a securities transaction in excess of the amount of commission another
broker-dealer would have charged only if the Adviser determines in good faith
that such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either that particular transaction or the Adviser's overall responsibilities
with respect to the accounts as to which it exercises investment discretion.
Generally, the Fund pays commissions higher than the lowest commission rates
available.
Fund management does not currently anticipate that the Fund will effect
brokerage transactions in its portfolio securities with any broker-dealer
affiliated directly or indirectly with the Funds or the Adviser.
The Adviser has entered into agreements with Capital Institutional Services,
Inc. ("CIS"), and Lipper Analytical Securities Corporation ("LAS"), unaffiliated
registered broker-dealers located in Dallas and New York respectively. All
transactions placed with CIS and LAS are subject to the above criteria. CIS and
LAS provide the Adviser with a wide variety of economic, performance, and
investment research information.
Investment decisions for each Fund are made independently of those for other
clients of the Adviser, including the other Funds. When the Funds or clients
simultaneously engage in the purchase or sale of the same securities, the price
of the transactions is averaged and the amount allocated in accordance with a
formula deemed equitable to each Fund and client. In some cases, this system may
adversely affect the price paid or received by the Fund or the size of the
position obtainable. All trades will be transacted through U.S. based brokerage
firms and commercial banks. Brokerage commissions paid by the Funds for the
fiscal years ended March 31, 1997, 1996, 1995, and for the period July 1, 1993
through fiscal year end March 31, 1994:
<TABLE>
<CAPTION>
1997 1996 1995 1994
---- ---- ------ -----
<S> <C> <C> <C> <C>
Money Market Fund 0 0 0 0
U.S. Government Securities Fund $2,891 $4,123 $1,000 $1,173
Bond Fund 1,214 1,936 195 113
Tax-Free Income Fund 0 0 0 5,370
Minnesota Tax-Free Income Fund 225 0 1,669 4,688
</TABLE>
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- --------------------------------------------------------------------------------
The following persons owned of record or beneficially 5% or more of the
respective Fund's outstanding shares as of July 11, 1997:
<TABLE>
<CAPTION>
Record Beneficially Of Record &
Person Only Only Beneficially
------ ---- ---- ------------
MONEY MARKET FUND
- -----------------
<S> <C> <C> <C>
Charles G. Koch, Attn: Ruth Williams, 4111 E. 37th Street N.,
Wichita, KS 9.57%
Pembroke Limited, Craigmuir Chambers, P.O. Box 71, Road Town,
Tortola, British Virgin Islands 6.70%
U.S. GOVERNMENT SECURITIES FUND
- -------------------------------
Charles Schwab & Company, Inc., Special Custody Account for
Benefit Cust, 101 Montgomery Street, San Francisco, CA 26.35%
BOND FUND
- ---------
Northern Trust Cust IRA Rollover for Benefit Cust, S. Walter Richey,
900 2nd Avenue S. Ste. 1800, Minneapolis, MN 10.46%
Norwest Bank MN NA, Cust Victor C. Wallestad FDN U/A DTD 11/24/89,
733 Marquette Avenue MS 0036, Minneapolis, MN 49.43%
TAX-FREE INCOME FUND
- --------------------
Charles Schwab & Company, Inc., Special Custody Account for
Benefit Cust, 101 Montgomery Street, San Francisco, CA 10.23%
MINNESOTA TAX-FREE INCOME FUND
- ------------------------------
W. John Driscoll, 332 Minnesota Street, Ste. 2100, St. Paul, MN 5.23%
Charles Schwab & Company, Inc., Special Custody Account for
Benefit Cust, 101 Montgomery Street, San Francisco, CA 8.10%
John Allen Gambell, 3100 Foxpoint Rd., Burnsville, MN 6.58%
</TABLE>
TAXES
- --------------------------------------------------------------------------------
The tax status of the Funds and the distributions which they may make are
summarized in the prospectus in the section entitled "Taxes." Each Fund intends
to fulfill the requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), as a regulated investment company. If so
qualified, each Fund will not be liable for federal income taxes to the extent
it distributes its taxable income to its shareholders. To qualify under
Subchapter M for tax treatment as a regulated investment company, each Fund
must, among other things: (1) distribute to its shareholders at least 90% of its
investment company taxable income (as that term is defined in the Code
determined without regard to the deduction for dividends paid) and 90% of its
net tax-exempt income; (2) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock or securities, or other income derived with
respect to its business of investing in such stock, securities, or currency; (3)
derive less than 30% of its annual gross income from the sale or other
disposition of stock, securities, options, futures, or forward contracts held
for less than three months; and (3) diversify its holdings so that, at the end
of each fiscal quarter of the Fund, (a) at least 50% of the market value of the
Fund's assets is represented by cash, cash items, United States Government
securities and securities of other regulated investment companies, and other
securities, with these other securities limited, with respect to any one issuer,
to an amount no greater than 5% of the Fund's total assets and no greater than
10% of the outstanding voting securities of such issuer, and (b) not more than
25% of the market value of the Fund's
<PAGE>
total assets is invested in the securities of any one issuer (other than United
States Government securities or securities of other regulated investment
companies).
Each Fund is subject to a non-deductible excise tax equal to 4% of the excess,
if any, of the amount required to be distributed for each calendar year over the
amount actually distributed. In order to avoid the imposition of this excise
tax, each Fund must declare and pay dividends representing 98% of its net
investment income for that calendar year and 98% of its capital gains (both
long-term and short-term) for the twelve-month period ending October 31 of the
calendar year.
When shares of a Fund are sold or otherwise disposed of, the Fund shareholder
will realize a capital gain or loss equal to the difference between the purchase
price and the sale price of the shares disposed of, if, as is usually the case,
the Fund shares are a capital asset in the hands of the Fund shareholder. In
addition, pursuant to a special provision in the Code, if Fund shares with
respect to which a long-term capital gain distribution has been made are held
for six months or less, any loss on the sale or other disposition of such shares
will be a long-term capital loss to the extent of such long-term capital gain
distribution. Any loss on the sale or exchange of shares of the Tax-Free Income
Fund or the Minnesota Tax-Free Income Fund held for six months or less (although
regulations may reduce this time period to 31 days) will be disallowed for
federal income tax purposes to the extent of the amount of any exempt-interest
dividend received with respect to such shares. Certain deductions otherwise
allowable to financial institutions and property and casualty insurance
companies will be eliminated or reduced by reason of the receipt of certain
exempt-interest dividends.
Any loss on the sale or exchange of shares of a Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
Under the Code, interest on indebtedness incurred or continued to purchase or
carry shares of an investment company paying exempt-interest dividends, such as
the Tax-Free Income Fund or the Minnesota Tax-Free Income Fund, will not be
deductible by a shareholder in proportion to the ratio of exempt-interest
dividends to all dividends other than those treated as long-term capital gains.
Indebtedness may be allocated to shares of the Tax-Free Income Fund or the
Minnesota Tax-Free Income Fund even though not directly traceable to the
purchase of such shares. Federal law also restricts the deductibility of other
expenses allocable to shares of such Fund.
The Tax-Free Income Fund and the Minnesota Tax-Free Income Fund intend to take
all actions required under the Code to ensure that each Fund may pay
"exempt-interest dividends." Distributions of net interest income from
tax-exempt obligations that are designated by the Funds as exempt-interest
dividends are excludable from the gross income of the Funds' shareholders. The
Funds' present policy is to designate exempt-interest dividends annually. The
Funds will calculate exempt-interest dividends based on the average annual
method and the percentage of income designated as tax-exempt for any particular
distribution may be substantially different from the percentage of income that
was tax-exempt during the period covered by the distribution. Shareholders are
required for information purposes to report exempt-interest dividends and other
tax-exempt interest on their tax return. Distributions paid from other taxable
interest income and from any net realized short-term capital gains will be
taxable to shareholders as ordinary income, whether received in cash or in
additional shares.
For federal income tax purposes, an alternative minimum tax ("AMT") is imposed
on taxpayers to the extent that such tax exceeds a taxpayer's regular income tax
liability (with certain adjustments). Exempt-interest dividends attributable to
interest income on certain tax-exempt obligations issued after August 7, 1986 to
finance certain private activities are treated as an item of tax preference that
is included in alternative minimum taxable income for purposes of computing the
federal AMT for all taxpayers and the federal environmental tax on corporations.
The Tax-Free Income Fund and Minnesota Tax-Free Income Fund may each invest up
to 20% of its net assets in securities that generate interest that is treated as
an item of tax preference. In addition, a portion of all other tax-exempt
interest received by a corporation, including exempt-interest dividends, will be
included in adjusted current earnings and in earnings and profits for purposes
of determining the federal corporate AMT, the environmental tax imposed on
corporations by Section 59A of the Code, and the branch profits tax imposed on
foreign corporations under Section 884 of the Code.
Because liability for the AMT depends upon the regular tax liability and tax
preference items of a specific taxpayer, the extent, if any, to which any tax
preference items resulting from investment in the Tax-Free Income Fund or the
Minnesota
<PAGE>
Tax-Free Income Fund will be subject to the tax will depend upon each
shareholder's individual situation. For shareholders with substantial tax
preferences, the AMT could reduce the after-tax economic benefits of an
investment in the Tax-Free Income Fund or the Minnesota Tax-Free Income Fund.
Each shareholder is advised to consult his or her tax adviser with respect to
the possible effects of such tax preference items.
In addition, shareholders who are or may become recipients of Social Security
benefits should be aware that exempt-interest dividends are includable in
computing "modified adjusted gross income" for purposes of determining the
amount of Social Security benefits, if any, that is required to be included in
gross income. The maximum amount of Social Security benefits includable in gross
income is 85%.
The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt bonds
which, if not satisfied, could result in loss of tax exemption for interest on
such bonds, even retroactively to the date of issuance of the bonds. Proposals
may be introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
securities. The Tax-Free Income Fund and the Minnesota Tax-Free Income Fund
cannot predict what additional legislation may be enacted that may affect
shareholders. The Funds will avoid investment in tax-exempt securities which, in
the opinion of the investment adviser, pose a material risk of the loss of tax
exemption. Further, if a tax-exempt security in a Fund's portfolio loses its
exempt status, the Fund will make every effort to dispose of such investment on
terms that are not detrimental to the Fund.
If the Funds invest in zero coupon obligations upon their issuance, such
obligations will have original issue discount in the hands of the Fund.
Generally, the original issue discount equals the difference between the "stated
redemption price at maturity" of the obligation and its "issue price" as those
terms are defined in the Code. If a Fund acquires an already issued zero coupon
bond from another holder, the bond will have original issue discount in the
Fund's hands, equal to the difference between the "adjusted issue price" of the
bond at the time a Fund acquires it (that is, the original issue price of the
bond plus the amount of original issue discount accrued to date) and its stated
redemption price at maturity. In each case, a Fund is required to accrue as
ordinary interest income a portion of such original issue discount even though
it receives no cash currently as interest payment on the obligation.
Furthermore, if a Fund invests in U.S. Treasury inflation-protection securities,
it will be required to treat as original issue discount any increase in the
principal amount of the securities that occurs during the course of its taxable
year. If a Fund purchases such inflation-protection securities that are issued
in stripped form either as stripped bonds or coupons, it will be treated as if
it had purchased a newly issued debt instrument having original issue discount.
Because each Fund is required to distribute substantially all of its net
investments income (including accrued original issue discount), a Fund investing
in either zero coupon bonds or U.S. Treasury inflation protection securities may
be required to distribute to shareholders an amount greater than the total cash
income it actually receives. Accordingly, in order to make the required
distributions, the Fund may be required to borrow or to liquidate securities.
The extent to which the Fund may liquidate securities at a gain may be limited
by the requirement that generally less than 30% of the Fund's gross income
during its taxable year consist of gains from the sale of securities held for
less than three months.
The foregoing relates only to federal income taxation and is a general summary
of the federal tax law in effect as of the date of this Statement of Additional
Information.
MINNESOTA INCOME TAXATION - MINNESOTA TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
Minnesota taxable net income is based generally on federal taxable income. The
portion of exempt-interest dividends paid by the Minnesota Tax-Free Income Fund
that is derived from interest on Minnesota tax exempt obligations is excluded
from the Minnesota taxable net income of individuals, estates and trusts,
provided that the portion of the exempt-interest dividends from such Minnesota
sources paid to all shareholders represents 95% or more of the exempt-interest
dividends paid by the Fund. The remaining portion of such dividends, and
dividends that are not exempt-interest dividends or capital gain dividends, are
included in the Minnesota taxable net income of individuals, estates and trusts,
except for dividends directly attributable to interest on obligations of the
U.S. government, its territories and possessions. Exempt-interest dividends are
not excluded from the Minnesota taxable income of corporations and financial
institutions. Dividends qualifying for federal income tax purposes as capital
gain dividends are to be treated by shareholders as long-term capital gains.
Minnesota has repealed the favorable treatment of long-term capital gains, while
retaining restrictions on the deductibility of capital losses.
<PAGE>
Exempt-interest dividends attributable to interest on certain private activity
bonds issued after August 7, 1986 will be included in Minnesota alternative
minimum taxable income of individuals, estates and trusts for purposes of
computing Minnesota's alternative minimum tax. Dividends generally will not
qualify for the dividends-received deduction for corporations and financial
institutions.
The 1995 Minnesota Legislature has enacted a statement of intent that interest
on obligations of Minnesota governmental units and Indian tribes be included in
net income of individuals, estates and trusts for Minnesota income tax purposes
if a court determines that Minnesota's exemption of such interest unlawfully
discriminates against interstate commerce because interest on obligations of
governmental issuers located in other states is so included. This provision
applies to taxable years that begin during or after the calendar year in which
any such court decision becomes final, irrespective of the date on which the
obligations were issued. Minnesota Tax-Free Income Fund is not aware of any
decision in which a court has held that a state's exemption of interest on its
own bonds or those of its political subdivisions or Indian tribes, but not of
interest on the bonds of other states or their political subdivisions or Indian
tribes, unlawfully discriminates against interstate commerce or otherwise
contravenes the United States Constitution. Nevertheless, the Fund cannot
predict the likelihood that interest on the Minnesota bonds held by the Fund
would become taxable under this Minnesota statutory provision.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The information contained in the financial statements and annual reports to
shareholders of the Funds is incorporated by reference in this Statement of
Additional Information.
OTHER INFORMATION
- --------------------------------------------------------------------------------
CUSTODIAN; COUNSEL; ACCOUNTANTS
- --------------------------------------------------------------------------------
The Northern Trust Co., 50 South LaSalle Street, Chicago, IL 60675 acts as
custodian of the Funds' assets and portfolio securities; Dorsey & Whitney LLP,
220 South Sixth Street, Minneapolis, Minnesota 55402, is the independent General
Counsel for the Funds; and KPMG Peat Marwick LLP, 4200 Norwest Center,
Minneapolis, Minnesota 55402, acts as the Funds' independent accountants.
LIMITATION OF DIRECTOR LIABILITY
- --------------------------------------------------------------------------------
Under Minnesota law, each director of the Funds owes certain fiduciary duties to
the Funds and to their shareholders. Minnesota law provides that a director
"shall discharge the duties of the position of director in good faith, in a
manner the director reasonably believes to be in the best interest of the
corporation, and with the care an ordinarily prudent person in a like position
would exercise under similar circumstances." Fiduciary duties of a director of a
Minnesota corporation include, therefore, both a duty of "loyalty" (to act in
good faith and act in a manner reasonably believed to be in the best interests
of the corporation) and a duty of "care" (to act with the care an ordinarily
prudent person in a like position would exercise under similar circumstances).
Minnesota law authorizes corporations to eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of the fiduciary duty of "care". Minnesota law does not,
however, permit a corporation to eliminate or limit the liability of a director
(i) for any breach of the directors' duty of "loyalty" to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for authorizing a
dividend, stock repurchase or redemption or other distribution in violation of
Minnesota law or for violation of certain provisions of Minnesota securities
laws or (iv) for any transaction from which the director derived an improper
personal benefit. The Articles of Incorporation of the Company limit the
liability of directors to the fullest extent permitted by Minnesota statutes,
except to the extent that such liability cannot be limited as provided in the
Investment Company Act of 1940 (which Act prohibits any provisions which purport
to limit the liability of directors arising from such directors' willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a director. It
only authorizes a corporation to eliminate monetary liability for violations of
that duty. Minnesota law, further, does not permit elimination or limitation of
liability of "officers" to the corporation for breach of their duties as
officers (including the liability of directors who serve as officers for breach
of their duties as officers). Minnesota law does not permit elimination or
limitation of the availability of equitable
<PAGE>
relief, such as injunctive or rescissionary relief. Further, Minnesota law does
not permit elimination or limitation of a director's liability under the
Securities Act of 1933 or the Securities Exchange Act of 1934, and it is
uncertain whether and to what extent the elimination of monetary liability would
extend to violations of duties imposed on directors by the Investment Company
Act of 1940 and the rules and regulations adopted under such Act.
The Funds are not required under Minnesota law to hold annual or periodically
scheduled meetings of shareholders. Minnesota corporation law provides for the
Board of Directors to convene shareholder meetings when it deems appropriate.
However, the Funds intend to hold meetings of shareholders annually. In
addition, if a regular meeting of shareholders has not been held during the
immediately preceding fifteen months, a shareholder or shareholders holding
three percent or more of the voting shares of the Funds may demand a regular
meeting of shareholders by written notice of demand given to the chief executive
officer or the chief financial officer of the Funds. Within ninety days after
receipt of the demand, a regular meeting of shareholders must be held at the
expense of the Funds. Irrespective of whether a regular meeting of shareholders
has been held during the immediately preceding fifteen months, in accordance
with Section 16(c) under the 1940 Act, the Board of Directors of the Funds shall
promptly call a meeting of shareholders for the purpose of voting upon the
question of removal of any director when requested in writing so to do by the
record holders of not less than 10 percent of the outstanding shares.
Additionally, the 1940 Act requires shareholder votes for all amendments to
fundamental investment policies and restrictions and for all investment advisory
contracts and amendments thereto. The Funds will assist in communications with
other shareholders as required by Section 16(c) of the 1940 Act.
<PAGE>
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
-------------------------------
Aaa Judged to be the best quality, carry the smallest degree of
investment risk
Aa Judged to be of high quality by all standards
A Possess many favorable investment attributes and are to be
considered as higher medium grade obligations Baa Medium grade
obligations. Lack outstanding investment characteristics.
Ba Judged to have speculative elements. Protection of interest and
principal payments may be very moderate.
B Generally lack characteristics of a desirable investment.
Assurance of interest and principal payments over any
long period of time may be small.
Moody's also applies numerical indicators, 1, 2, and 3, to rating
categories Aa through Ba. The modifier 1 indicates that the security
is in the higher end of the rating category; the modifier 2 indicates
a mid-range ranking; and 3 indicates a ranking toward the lower end of
the category.
STANDARD & POOR'S CORPORATION
-----------------------------
AAA Highest grade obligations and possess the ultimate degree of
protection as to principal and interest
AA Also qualify as high grade obligations, and in the majority of
instances differ from AAA issues only in small degree
A Regarded as upper medium grade, 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
BBB Considered investment grade with adequate capacity to pay
interest and repay principal.
BB Judged to be speculative with some inadequacy to meet timely
interest and principal payments.
B Has greater vulnerability to default than other speculative grade
securities. Adverse economic conditions will likely impair
capacity or willingness to pay interest and principal.
Standard & Poor's applies indicators "+", no character, and "-" to the
above rating categories AA through BB. The indicators show relative
standing within the major rating categories.
FITCH INVESTORS SERVICE, INC.
-----------------------------
AAA Highest credit quality with exceptional ability to pay interest
and repay principal
AA Investment grade and very high credit quality ability to pay
interest and repay principal is very strong, although not quite
as strong as AAA
A Investment grade with high credit quality. Ability to pay
interest and repay principal is strong.
BBB Investment grade and has satisfactory credit quality. Adequate
ability to pay interest and repay principal.
BB Considered speculative. Ability to pay interest and repay
principal may be affected over time by adverse economic changes.
B Considered highly speculative. Currently meeting interest and
principal obligations, but probability of continued payment
reflects limited margin of safety.
+ and - indicators indicate the relative position within the rating
category, but are not used in AAA category.
DUFF & PHELPS CREDIT RATING CO.
-------------------------------
AAA Highest credit quality, risk factors are negligible
AA+, AA, AA- High credit quality with moderate risk
A+, A, A- Protection factors are average but adequate,
however, risk factors are more variable and greater
in periods of economic stress
BBB+,BBB,BBB- Below average protection factors, but still
considered sufficient for prudent investment
BB+,BB,BB- Below investment grade but likely to meet
obligations when due.
B+,B,B- Below investment grade and possessing risk that
obligations will not be met when due.
<PAGE>
COMMERCIAL PAPER RATINGS
MOODY'S
-------
Commercial paper rated "Prime" carries the smallest degree of
investment risk. The modifiers 1, 2, and 3 are used to denote relative
strength within this highest classification.
STANDARD & POOR'S
-----------------
The rating A-1 is the highest commercial paper rating assigned by
Standard & Poor's Corporation. The modifier "+" indicates that the
security is in the higher end of this rating category.
FITCH'S
-------
F-1+ Exceptionally strong credit quality
DUFF & PHELPS'
--------------
Category 1 (top grade):
Duff1+ Highest certainty of timely payment
Duff1 Very high certainty of timely payment
Duff1- High certainty of timely payment
<PAGE>
APPENDIX B
MUNICIPAL BOND, MUNICIPAL NOTE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
MUNICIPAL BOND RATINGS
STANDARD & POOR'S CORPORATION:
Rating Definition
------ ----------
AAA Highest rating; extremely strong security.
AA Very strong security; differs from AAA in only a small
degree.
A Strong capacity but more susceptible to adverse economic
effects than two above categories.
BBB Adequate capacity but adverse economic conditions more likely
to weaken capacity.
MOODY'S INVESTORS SERVICES, INC.:
Rating Definition
------ ----------
Aaa Best quality; carry the smallest degree of investment risk.
Aa High quality; margins of protection not quite as large as the
Aaa bonds.
A Upper medium grade; security adequate but could be
susceptible to impairment.
Baa Medium grade; neither highly protected nor poorly
secured--lack outstanding investment characteristics and
sensitive to changes in economic circumstances.
MUNICIPAL NOTE RATINGS
STANDARD & POOR'S CORPORATION:
Rating Definition
------ ----------
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC.:
Rating* Definition
------- ----------
MIG 1 Best quality
MIG 2 High quality
MIG 3 Favorable quality
MIG 4 Adequate quality
* A short-term issue having a demand feature, i.e., payment
relying on external liquidity and usually payable upon
demand rather than fixed maturity dates, is differentiated
by Moody's with the use of the symbols VMIG1 through VMIG4.
TAX-EXEMPT COMMERCIAL PAPER RATINGS
STANDARD & POOR'S CORPORATION:
Rating Definition
------ ----------
A-1+ Highest degree of safety.
A-1 Very strong degree of safety.
MOODY'S INVESTORS SERVICE, INC.:
Rating Definition
------ ----------
Prime 1(P-1) Superior capacity for repayment.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements (incorporated by reference in Part B of
this Registration Statement).
(b) Exhibits (Explanatory Note: This Registration Statement
contains the combined Part C for Sit U.S. Government
Securities Fund, Inc., Sit Mutual Funds II, Inc., and Sit
Money Market Fund, Inc.).
1. Articles of Incorporation
(a) Sit U.S. Government Securities Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 11 to the Fund's Registration
Statement.)
(b) Sit Mutual Funds II, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 12 to the Fund's Registration
Statement.)
(c) Sit Money Market Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 12 to the Fund's Registration
Statement.)
2. Bylaws
(a) Sit U.S. Government Securities Fund, Inc.
(Incorporated by reference to the Fund's original
Registration Statement.)
(b) Sit Mutual Funds II, Inc.
(Incorporated by reference to the Fund's original
Registration Statement.)
(c) Sit Money Market Fund, Inc.
(Incorporated by reference to the Fund's original
Registration Statement.)
4. Specimen Copy of Share Certificate
(a) Sit U.S. Government Securities Fund, Inc.
(Incorporated by reference to the Fund's original
Registration Statement.)
(b) Sit Mutual Funds II, Inc.
(Incorporated by reference to Pre-Effective
Amendment No. 1 to the Fund's Registration
Statement.)
(c) Sit Money Market Fund, Inc.
(Incorporated by reference to Pre-Effective
Amendment No. 1 to the Fund's Registration
Statement.)
5. Form of Investment Management Agreement
(a) Sit U.S. Government Securities Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 10 to the Fund's Registration
Statement.)
(b) Sit Mutual Funds II, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 11 to the Fund's Registration
Statement.)
<PAGE>
(c) Sit Money Market Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 11 to the Fund's Registration
Statement.)
6. Underwriting and Distribution Agreement
(a) Sit U.S. Government Securities Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 12 to the Fund's Registration
Statement.)
(b) Sit Mutual Funds II, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 16 to the Fund's Registration
Statement.)
(c) Sit Money Market Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 13 to the Fund's Registration
Statement.)
8.1 Custodian Agreement
(a) Sit U.S. Government Securities Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 15 to the Fund's Registration
Statement.)
(b) Sit Mutual Funds II, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 19 to the Fund's Registration
Statement.)
(c) Sit Money Market Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 17 to the Fund's Registration
Statement.)
8.2 Transfer Agency and Services Agreement
(a) Sit U.S. Government Securities Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 15 to the Fund's Registration
Statement.)
(b) Sit Mutual Funds II, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 19 to the Fund's Registration
Statement.)
(c) Sit Money Market Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 17 to the Fund's Registration
Statement.)
8.3 Accounting Services Agreement
(a) Sit U.S. Government Securities Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 15 to the Fund's Registration
Statement.)
(b) Sit Mutual Funds II, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 19 to the Fund's Registration
Statement.)
(c) Sit Money Market Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 17 to the Fund's Registration
Statement.)
<PAGE>
10. Opinions and Consents of Dorsey & Whitney
(a) Sit U.S. Government Securities Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 8 to the Fund's Registration
Statement.)
(b) Sit Mutual Funds II, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 9 to the Fund's Registration
Statement.)
(c) Sit Money Market Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 9 to the Fund's Registration
Statement.)
11. Consent of KPMG Peat Marwick (Filed herewith.)
13. Letter of Investment Intent
(a) Sit U.S. Government Securities Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 9 to the Fund's Registration
Statement.)
(b) Sit Mutual Funds II, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 10 to the Fund's Registration
Statement.)
(c) Sit Money Market Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 10 to the Fund's Registration
Statement.)
16. Calculations of Performance Data
(a) Sit U.S. Government Securities Fund, Inc. (Filed
herewith.)
(b) Sit Mutual Funds II, Inc. (Filed herewith.)
(c) Sit Money Market Fund, Inc. (Filed herewith.)
17. Powers of Attorney
(a) Sit U.S. Government Securities Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 16 to the Fund's Registration
Statement.)
(b) Sit Mutual Funds II, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 20 to the Fund's Registration
Statement.)
(c) Sit Money Market Fund, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 17 to the Fund's Registration
Statement.)
Item 25. Persons Controlled by or Under Common Control with Registrant
See the sections of the Prospectus entitled "Management" and the
section of the Statement of Additional Information entitled
"Investment Adviser."
<PAGE>
Item 26. Number of Holders of Securities
The number of holders of shares of each Registrant as of June 30, 1997
are:
<TABLE>
<CAPTION>
Fund Title of Class Record Holders
---- -------------- --------------
<S> <C> <C>
Money Market Fund, Inc. Common Stock 1,223
U.S. Government Securities Fund, Inc. Common Stock 1,364
Mutual Funds II, Inc.
Bond Fund Common Stock, Series C 148
Tax-Free Income Fund Common Stock, Series A 4,559
Minnesota Tax-Free Income Fund Common Stock, Series B 1,322
</TABLE>
Item 27. Indemnification
Each Registrant's Articles of Incorporation and Bylaws provide that the
Registrant shall indemnify such persons, for such expenses and liabilities, in
such manner, under such circumstances, and to such extent as permitted by
Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended;
provided, however, that no such indemnification may be made if it would be in
violation of Section 17(h) of the Investment Company Act of 1940, as now enacted
or hereinafter amended, and any rules, regulations or releases promulgated
thereunder.
Each Registrant may indemnify its officers and directors and other
"persons" acting in an "official capacity" (as such terms are defined in Section
302A.521) pursuant to a determination by the board of directors or shareholders
of the Registrant as set forth in Section 302A.521, by special legal counsel
selected by the board or a committee thereof for the purpose of making such a
determination, or by a Minnesota court upon application of the person seeking
indemnification. If a director is seeking indemnification for conduct in the
capacity of director or officer of a Registrant, then such director generally
may not be counted for the purpose of determining either the presence of a
quorum or such director's eligibility to be indemnified.
In any case, indemnification is proper only if the eligibility determining
body decides that the person seeking indemnification:
(a) has not received indemnification for the same conduct from
any other party or organization;
(b) acted in good faith;
(c) received no improper personal benefit;
(d) in the case of criminal proceedings, had no reasonable cause
to believe the conduct was unlawful;
(e) reasonably believed that the conduct was in the best
interest of a Registrant, or in certain contexts, was not
opposed to the best interest of a Registrant; and
(f) had not otherwise engaged in conduct which precludes
indemnification under either Minnesota or Federal law
(including, but not limited to, conduct constituting willful
misfeasance, bad faith, gross negligence, or reckless
disregard of duties as set forth in Section 17(h) and (i) of
the Investment Company Act of 1940).
If a person is made or threatened to be made a party to a proceeding, the
person is entitled, upon written request to a Registrant, to payment or
reimbursement by a Registrant of reasonable expenses, including attorneys' fees
and disbursements, incurred by the person in advance of the final disposition of
the
<PAGE>
proceeding, (a) upon receipt by a Registrant of a written affirmation by the
person of a good faith belief that the criteria for indemnification set forth in
Section 302A.521 have been satisfied and a written undertaking by the person to
repay all amounts so paid or reimbursed by the Registrant, if it is ultimately
determined that the criteria for indemnification have not been satisfied, and
(b) after a determination that the facts then known to those making the
determination would not preclude indemnification under Section 302A.521. The
written undertaking required by clause (a) is an unlimited general obligation of
the person making it, but need not be secured and shall be accepted without
reference to financial ability to make the repayment.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of a
Registrant pursuant to the foregoing provisions, or otherwise, each 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 a Registrant of expenses incurred or
paid by a director, officer or controlling person of such 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 its 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.
Each Registrant undertakes to comply with the indemnification requirements
of Investment Company Release 7221 (June 9, 1972) and Investment Company Release
11330 (September 2, 1980).
Item 28. Business and other Connections of Investment Adviser
Sit Investment Associates, Inc. (the "Adviser"), serves as the investment
adviser of each of the Sit Mutual Funds in addition to serving as the investment
adviser to the Sit Mutual Funds and to various other public and private
accounts.
Below is a list of the officers and directors of the Adviser and their
business/employment during the past two years.
Business and Employment During Past Two Years;
Name Principal Business Address
---- --------------------------
Eugene C. Sit Chairman, CIO and Treasurer of the Adviser;
Chairman and CEO of the Sit/Kim International
Investment Associates, Inc. ("Sit/Kim");
Chairman of the Board of Directors of all Sit
Mutual Funds.
Peter L. Mitchelson President and Director of the Adviser; Director
and Executive Vice President of the Sit/Kim;
Senior Portfolio Manager of the Sit Large Cap
Growth Fund; Vice Chairman & Director of all
Sit Mutual Funds.
Frederick Adler Director of the Adviser; Senior Partner,
Fulbright & Jaworski
1520 S. Ocean Boulevard
Palm Beach, FL 33480
<PAGE>
Business and Employment During Past Two Years;
Name Principal Business Address
---- --------------------------
Norman Bud Grossman Director of the Adviser; President,
Cogel Management
4670 Norwest Center
Minneapolis MN 55402
William Frenzel Advisory Director of the Adviser; Director of
the Sit Mutual Funds; Director of Sit/Kim;
Senior Visiting Scholar at the Brookings
Institution
Mary Kay Stern President of the Sit Mutual Funds
Michael C. Brilley Senior Vice President and Senior Fixed Income
Officer of the Adviser Director and Senior Vice
President of Sit U.S. Government Securities
Fund Inc., Sit Money Market Fund, Inc., Sit
Mutual Funds II, Inc. and Sit Balanced Fund
Paul E. Rasmussen Vice President, Secretary and Controller of the
Adviser and Sit/Kim; Vice President and
Treasurer of all Sit Mutual Funds
Debra A. Sit Vice President - Bond Investments of the
Adviser; Assistant Treasurer of all Sit Mutual
Funds; Assistant Treasurer of Sit/Kim; Vice
President - Investments of Sit U.S.
Government Securities Fund, Inc., Sit Money
Market Fund, Inc., and Sit Mutual Funds II,
Inc.
Michael P. Eckert Vice President - Mutual Fund Sales of the
Adviser
Ronald D. Sit Vice President - Equity Research and Portfolio
Management of the Adviser
Erik S. Anderson Vice President - Equity Research and Portfolio
Management of the Adviser
John K. Butler Vice President - Equity Investments of the
Adviser
Gary T. Dvorchak Vice President - Equity Investments of the
Adviser
John T. Groton, Jr. Vice President - Equity Investments of the
Adviser
Item 29. Principal Underwriters
The Distributor for each Registrant is SIA Securities Corp., 4600 Norwest
Center, Minneapolis, MN 55402, an affiliate of the Adviser, which
distributes only shares of each Registrant.
Below is a list of the officers and directors of the Distributor and their
business/employment during the past two years:
<PAGE>
Business and Employment During Past Two Years;
Name Principal Business Address
---- --------------------------
Eugene C. Sit Chairman, CIO and Treasurer of the Adviser;
Chairman and CEO of Sit/Kim; Chairman of the
Board of Directors of all Sit Mutual Funds.
Peter L. Mitchelson President and Director of the Adviser; Director
and Executive Vice President of Sit/Kim; Senior
Portfolio Manager of the Sit Large Cap Growth
Fund; ViceChairman & Director of all Sit Mutual
Funds.
Paul E. Rasmussen Vice President, Secretary, and Controller for
the Adviser; Vice President & Treasurer of all
Sit Mutual Funds
Item 30. Location of Accounts and Records
The Custodian for each Registrant is The Northern Trust Company, 50 South
LaSalle Street, Chicago, IL 60675. The Transfer Agent for each Registrant is
First Data Investor Services, 4400 Computer Drive, Westboro, MA 01581. Other
books and records are maintained by the Adviser, which is located at 4600
Norwest Center, Minneapolis, MN 55402.
Item 31. Management Services
Not applicable
Item 32. Undertakings
(a) Not applicable
(b) Not applicable
(c) Each Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a director if
requested to do so by the holders of at least 10% of such Registrant's
outstanding shares and to assist in communications with other
shareholders as required by Section 16(c) of the Investment Company
Act of 1940.
(d) Each Registrant undertakes to furnish each person to whom a prospectus
or any series of the Registrant is sent the latest Annual Report of
such series. Such Annual Report will be furnished by the Registrant
without charge upon request by such person.
<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 Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has caused this Registration
Statement on Form N-1A to be duly signed on its behalf by the undersigned,
thereunder duly authorized, in the City of Minneapolis, State of Minnesota, on
the 30th day of July, 1997.
SIT U.S. GOVERNMENT SECURITIES FUND, INC.
(Registrant)
By /s/ Eugene C. Sit
Eugene C. Sit, Chairman
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registrant's Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
Signature and Title
-------------------
/s/ Eugene C. Sit Dated: July 31, 1997
Eugene C. Sit Chairman
(Principal Executive Officer and Director)
/s/ Paul E. Rasmussen Dated: July 31, 1997
Paul E. Rasmussen, Treasurer
(Principal Financial Officer and Accounting Officer)
John E. Hulse, Director*
Sidney L. Jones, Director*
Peter L. Mitchelson, Director*
Donald W. Phillips, Director*
*By /s/ Eugene C. Sit Dated: July 31, 1997
Eugene C. Sit, Attorney-in-fact
(Pursuant to Powers of Attorney filed
previously with the Commission.)
<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 Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has caused this Registration
Statement on Form N-1A to be duly signed on its behalf by the undersigned,
thereunder duly authorized, in the City of Minneapolis, State of Minnesota, on
the 30th day of July, 1997.
SIT MUTUAL FUNDS II, INC.
(Registrant)
By /s/ Eugene C. Sit
Eugene C. Sit, Chairman
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registrant's Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
/s/ Eugene C. Sit Dated: July 31, 1997
Eugene C. Sit Chairman
(Principal Executive Officer and Director)
/s/ Paul E. Rasmussen Dated: July 31, 1997
Paul E. Rasmussen, Treasurer
(Principal Financial Officer and Accounting Officer)
John E. Hulse, Director*
Sidney L. Jones, Director*
Peter L. Mitchelson, Director*
Donald W. Phillips, Director*
*By /s/ Eugene C. Sit Dated: July 31, 1997
Eugene C. Sit, Attorney-in-fact
(Pursuant to Powers of Attorney filed
previously with the Commission.)
<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 Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has caused this Registration
Statement on Form N-1A to be duly signed on its behalf by the undersigned,
thereunder duly authorized, in the City of Minneapolis, State of Minnesota, on
the 30th day of July, 1997.
SIT MONEY MARKET FUND, INC.
(Registrant)
By /s/ Eugene C. Sit
Eugene C. Sit, Chairman
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registrant's Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
Signature and Title
-------------------
/s/ Eugene C. Sit Dated: July 31, 1997
Eugene C. Sit Chairman
(Principal Executive Officer and Director)
/s/ Paul E. Rasmussen Dated: July 31, 1997
Paul E. Rasmussen, Treasurer
(Principal Financial Officer and Accounting Officer)
John E. Hulse, Director*
Sidney L. Jones, Director*
Peter L. Mitchelson, Director*
Donald W. Phillips, Director*
*By /s/ Eugene C. Sit Dated: July 31, 1997
Eugene C. Sit, Attorney-in-fact
(Pursuant to Powers of Attorney filed
previously with the Commission.)
<PAGE>
REGISTRATION STATEMENT ON FORM N-1A
EXHIBIT INDEX
EXHIBIT NO. NAME OF EXHIBIT PAGE NO.
- ----------- --------------- --------
11 Independent Auditors' Consent C-11
16 Calculations of Performance Data C-12
EXHIBIT 11
Independent Auditors' Consent
The Board of Directors
Sit Mutual Funds II, Inc.
Sit U.S. Government Securities Fund, Inc.
Sit Money Market fund, Inc.:
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "Financial Highlights" in Part A and
"Custodian; Counsel; Accountants" in Part B of the Registration Statement.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 23, 1997
EXHIBIT 16
CALCULATIONS OF PERFORMANCE DATA
Average Annual Total Return for the period ended March 31, 1997
P(1+T)^n = ERV
One Year:
<TABLE>
<CAPTION>
Minnesota Tax-Free Tax-Free U.S. Government Money Market
Bond Fund Income Fund Income Fund Securities Fund Fund
<S> <C> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000 1,000
n = 1.00000 1.00000 1.00000 1.00000 1.00000
ERV = 1,052.052 1,062.555 1,068.551 1,045.464 1,050.395
T = 5.205239% 6.255506% 6.855104% 4.546365% 5.039547%
</TABLE>
Five Years:
<TABLE>
<CAPTION>
Minnesota Tax-Free Tax-Free U.S. Government Money Market
Bond Fund Income Fund Income Fund Securities Fund Fund
<S> <C> <C> <C> <C> <C>
P = n/a n/a 1,000 1,000 n/a
n = n/a n/a 5.00000 5.00000 n/a
ERV = n/a n/a 1,409.742 1,358.626 n/a
T = n/a n/a 7.109481% 6.321226% n/a
(not in operation (not in operation (not in operation
during period) during period) during period)
</TABLE>
Since Inception:
<TABLE>
<CAPTION>
Minnesota Tax-Free Tax-Free U.S. Government Money Market
Bond Fund Income Fund Income Fund Securities Fund Fund
<S> <C> <C> <C> <C> <C>
P = 1,000 1,000 1,000 1,000 1,000
n = 3.33151 3.33151 8.50685 9.83562 3.41370
ERV = 1,200.841 1,215.852 1,842.868 2,144.845 1,171.317
T = 5.647373% 6.042059% 7.450753% 8.067087% 4.741142%
Incept.
Date: 12/1/93 12/1/93 9/29/88 6/2/87 11/1/93
</TABLE>
