<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 1995
Registration Nos. 33-1176 and 811-4445
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___
Post-Effective Amendment No. 11
----
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 11
----
STATE BOND INCOME FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (507) 354-2144
Kevin L. Howard, Esq.
239 S. Fifth Street, 12th floor
Louisville, KY 40202-3271
(Name and Address of Agent for Service)
Copies to:
Joel H. Goldberg, Esq.
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
---------------------------------------
It is proposed that this filing will become effective (check appropriate box):
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[X] on March 1, 1996 pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2(a)(1) under the Investment Company Act of 1940, the
Registrant has registered an indefinite number or amount of its securities under
the Securities Act of 1933. The Rule 24f-2 Notice of the Registrant for the
fiscal year ended October 31, 1995 was filed on December 12, 1995.
<PAGE>
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Item # and Caption Heading in
Form N-lA Prospectus
------------------ ----------
<S> <C>
Part A
Item 1. Cover Page......................................................................COVER PAGE
Item 2. Synopsis...........................................................SHAREHOLDER TRANSACTION
AND OPERATING EXPENSE TABLE
Item 3. Condensed Financial Information.......................................FINANCIAL HIGHLIGHTS
Item 4. General Description of Registrant......................................GENERAL INFORMATION
ABOUT STATE BOND U.S. GOVERNMENT
AND AGENCY SECURITIES FUND;
WHAT ARE THE FUND'S INVESTMENT
OBJECTIVES, POLICIES AND RISKS?
Item 5. Management of the Fund............................................HOW IS THE FUND MANAGED?
Item 6. Capital Stock and other Securities.....................................GENERAL INFORMATION
ABOUT STATE BOND U.S. GOVERNMENT
AND AGENCY SECURITIES FUND
Item 7. Purchase of Securities Being Offered....................................HOW CAN YOU INVEST
IN THE FUND?
HOW ARE THE FUND'S SALES CHARGES
DETERMINED? WHAT IS THE FUND'S
PLAN OF DISTRIBUTION? HOW DOES THE
FUND'S EXCHANGE PRIVILEGE WORK?
WHAT SERVICES DOES THE FUND OFFER?
Item 8. Redemption of Repurchase................................................HOW CAN YOU "SELL"
YOUR SHARES?
Item 9. Legal Proceedings...........................................................NOT APPLICABLE
Part B
Item 10. Cover Page................................................................COVER PAGE
Item 11. Table of Contents.........................................................COVER PAGE
Item 12. General Information and History..................................GENERAL INFORMATION
Item 13. Investment Objectives and Policies...............................WHAT ARE THE FUND'S
INVESTMENT OBJECTIVES,
POLICIES AND RISKS?
WHAT ARE FUND'S
INVESTMENT LIMITATIONS?
Item 14. Management of the Registrant...................................WHO MANAGES THE FUND?
THE MANAGER
Item 15. Control Persons and Principal Holders of Securities......................WHO MANAGES
THE FUND?
THE MANAGER
Item 16. Investment Advisory and Other Services........................WHO MANAGES THE FUND?;
MANAGEMENT AGREEMENT AND EXPENSES;
TRANSFER AGENT; CUSTODIAN;
INDEPENDENT AUDITORS
Item 17. Brokerage Allocation............................PORTFOLIO TRANSACTIONS AND BROKERAGE
Item 18. Capital Stock and Other Securities................................PURCHASE OF SHARES
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered....................................................PURCHASE OF SHARES;
HOW IS THE OFFERING PRICE DETERMINED?
HOW CAN YOU "SELL" YOUR SHARES?
HOW IS NET ASSET VALUE
PER SHARE DETERMINED?
Item 20. Tax Status...................................................TAX STATUS OF THE FUND?
WILL THE FUND WITHHOLD
TAXES ON DISTRIBUTIONS?
Item 21. Underwriters...................................................PLAN OF DISTRIBUTION;
HOW ARE SHARES DISTRIBUTED?
Item 22. Calculation of Performance Data.......................................CALCULATION OF
PERFORMANCE DATA
Item 23. Financial Statements............................................FINANCIAL STATEMENTS
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment to the
Registration Statement.
<PAGE>
PROSPECTUS
STATE BOND U.S. GOVERNMENT AND AGENCY
SECURITIES FUND
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
Phone: (507) 354-2144
March 1, 1996
State Bond U.S. Government and Agency Securities Fund (the "Fund") is a
mutual fund which seeks to maximize current income to the extent consistent with
preservation of capital. The Fund is the only investment portfolio of State
Bond Income Funds, Inc.
This Prospectus concisely sets forth information about the Fund which
investors should know before investing. Please read it carefully before you
invest and keep it for future reference.
Additional information about the Fund is contained in a Statement of
Additional Information filed with the Securities and Exchange Commission and is
available upon request and without charge by calling or writing the Fund at 800-
328-4735, 100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-
0069. The Statement of Additional Information is dated the same date as this
Prospectus and is incorporated herein by reference in its entirety.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK AND IS NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER FEDERAL AGENCY. AN INVESTMENT IN THE FUND INVOLVES
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE........................ 3
FINANCIAL HIGHLIGHTS....................................................... 4
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?............ 5
HOW IS THE FUND MANAGED?................................................... 11
WHAT ABOUT BROKERAGE COMMISSIONS?.......................................... 12
HOW CAN YOU INVEST IN THE FUND?............................................ 13
HOW IS THE OFFERING PRICE OF THE FUND'S SHARES DETERMINED?................. 14
HOW ARE THE FUND'S SALES CHARGES DETERMINED?............................... 15
HOW CAN YOU "SELL" YOUR SHARES?............................................ 16
Quick Redemption by Wire Transfer........................................ 17
Check Redemptions........................................................ 18
How Can You Reinstate Your Investment?................................... 18
HOW DOES THE FUND'S EXCHANGE PRIVILEGE WORK?............................... 19
HOW DOES THE FUND PAY DIVIDENDS AND DISTRIBUTIONS?......................... 19
What Are Your Dividend And Capital Gain Distribution Options?............ 20
WHAT IS THE TAX STATUS OF DIVIDENDS AND DISTRIBUTIONS YOU RECEIVE?......... 20
WHAT IS THE FUND'S PLAN OF DISTRIBUTION?................................... 21
WHO ARE THE FUND'S FUND ACCOUNTING AGENT AND ITS CUSTODIAN?................ 21
WHAT SERVICES DOES THE FUND OFFER?......................................... 21
What About Shareholder Information?...................................... 21
What Reports Will You Receive From the Fund?............................. 22
Are Certificates Issued For Shares?...................................... 22
Other Services........................................................... 22
GENERAL INFORMATION ABOUT STATE BOND U.S. GOVERNMENT AND AGENCY
SECURITIES FUND.......................................................... 22
INVESTMENT PERFORMANCE..................................................... 22
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE................................ 23
GENERAL AUTHORIZATION FORM................................................. 25
</TABLE>
2
<PAGE>
SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)..............5.00%
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average daily net assets)
Management Fee (After Expense Reimbursement)............................................. .15%
12b-1 Fee................................................................................ .25%
Other Expenses........................................................................... .60%
Total Fund Operating Expenses (After Expense Reimbursements).............................1.00%
=====
A $10.00 fee will be charged for certain redemptions by wire transfer. See "How Can You
'Sell' Your Shares?"
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
You would pay the following aggregate
expenses on a $1,000 investment,
assuming: (1) 5% annual return and (2)
redemption at the end of each time period: $60 $80 $102 $166
</TABLE>
Note: This Example is not a representation of past or future expenses
and actual expenses may be greater or lesser than those shown above.
The Fund's shares have an asset-based sales fee, which may result in long-
term shareholders paying more than the economic equivalent of the maximum front-
end sales charge permitted by NASD regulations.
The purpose of the above table is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly as an
investor in the Fund. The expense information in the above table is based upon
expenses incurred by the Fund during its fiscal year ended October 31, 1995.
The above operating expenses are net of expense reimbursements. Without such
reimbursements, the management fee would have been .40%. For more information
concerning fees and expenses, see "How Is The Fund Managed?" and "What About The
Plan of Distribution?" See "How Does the Exchange Privilege Work?" for
information on additional sales charges that may be payable upon exchange into a
fund in the State Bond Group that has a higher sales charge.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The information presented below for the fiscal year ended October 31, 1995
has been audited by Ernst & Young LLP, independent auditors for the Fund, and
the financial statements of the Fund, along with the report of Ernst & Young LLP
thereon, are set forth in the Statement of Additional Information. The
information presented below for each fiscal year in the four-year period ended
October 31, 1994 has been audited by Deloitte & Touche LLP, the previous
auditors for the Fund. Further information about the performance of the Fund is
contained in the Fund's most recent annual report to shareholders which may be
obtained, without charge, by calling or writing the Fund at the telephone number
or address on the front cover of this Prospectus.
PER SHARE INVESTMENT INCOME AND CAPITAL CHANGES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
November 20,
1985
(Commencement
of Operations)
to
October 31,
-----------
YEAR ENDED OCTOBER 31 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 4.73 $ 5.29 $ 5.24 $ 5.21 $ 4.90 $ 4.95 $ 4.91 $ 4.73 $ 5.04 $ 5.00
------- ------- ------- ------- ------- ------ ------ ------- ------- -------
Income from investment
operations:
Net investment income...... .32 .31 .33 .37 .41 .41 .41 .40 .40 .41
Net realized and
unrealized gain
(loss) on investments..... .39 (.54) .08 .03 .31 (.05) .04 .18 (.31) .04
------- ------- ------- ------- ------- ------ ------ ------- ------- -------
Total from investment
operations................ .71 (.23) .41 .40 .72 .36 .45 .58 .09 .45
Less distributions:
From net investment
income.................... (.32) (.31) (.33) (.37) (.41) (.41) (.41) (.40) (.40) (.41)
From capital gains......... (.02) (.02) (.03) --- --- --- --- --- --- --
------- ------- ------- ------- ------- ------ ------ ------- ------- -------
Total distributions........ (.34) (.33) (.36) (.37) (.41) (.41) (.41) (.40) (.40) (.41)
------- ------- ------- ------- ------- ------ ------ ------- ------- -------
Net asset value, end of
period.................... $ 5.10 $ 4.73 $ 5.29 $ 5.24 $ 5.21 $ 4.90 $ 4.95 $ 4.91 $ 4.73 $ 5.04
======= ======= ======= ======= ======= ====== ====== ======= ======= =======
Total Return** 15.48% (4.50)% 8.11% 7.93% 15.30% 7.61% 9.68% 12.78% 1.77% 7.96%*
Ratios and Supplemental
Data
Net assets, end of period
(in thousands)............ $13,999 $13,524 $15,958 $14,713 $11,285 $9,421 $9,680 $10,568 $11,406 $ 8,301
Ratio of expenses to
average net assets....... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%*
Ratio of net
investment income to
average net assets....... 6.46% 7.22% 6.30% 7.01% 8.03% 8.33% 8.51% 8.32% 8.13% 8.58%*
Ratio of expenses to
average net assets
before voluntary expense
reimbursements........... 1.25% 1.23% 1.21% 1.22% 1.37% 1.51% 1.43% 1.26% 1.29% 1.74%*
Ratio of net investment
income to average net
assets before voluntary
expense reimbursements... 6.20% 6.00% 6.12% 6.77% 7.69% 7.86% 8.08% 8.06% 7.84% 7.85%*
Portfolio turnover
rate..................... 7% 23% 9% 47% 8% 52% 4% 5% 35% 10%*
</TABLE>
* Annualized
** Total return does not consider the effects of the one time sales charge.
4
<PAGE>
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?
The Fund seeks to maximize current income to the extent consistent
with preservation of capital. In pursuing this objective, the Fund will
invest at least 75% of the value of its assets in obligations issued or
guaranteed by the U.S. Government or by its agencies or instrumentalities
("U.S. Government Securities"). This is a fundamental policy and cannot be
changed without a vote of a majority of the Fund's shares. There is, of
course, no assurance that the Fund's objective will be achieved.
Generally, the values of the securities in which the Fund will invest, and
accordingly the value of the Fund's shares, will fall as interest rates
rise and rise as interest rates fall.
"U.S. Government Securities" in which the Fund may invest include
Government National Mortgage Association ("GNMA") Certificates, Federal
National Mortgage Association ("FNMA") Certificates, Federal Home Loan
Mortgage Corporation ("FHLMC") Certificates and U.S. Treasury Notes, Bills
or Bonds. U.S. Government Securities may also include collateralized
mortgage obligations or multiple-class mortgage pass-through certificates
(collectively, "CMOs") that are issued by an agency or instrumentality of
the U.S. Government. The Fund's assets not so invested in U.S. Government
Securities will be invested in Repurchase Agreements (see below) relating
to U.S. Government Securities and privately-issued CMOs which are
collateralized by or represent an interest in U.S. Government Securities.
As described below, special payment characteristics and risks may be
associated with some types of agency-issued and privately-issued CMOs.
Depending on market conditions, the Fund may invest a substantial
portion of its assets in "GNMA" Certificates. At October 31, 1995, 72.2%
of the Fund's assets were invested in GNMA Certificates. GNMA Certificates
are mortgage-backed securities. Each Certificate evidences an interest in
a specific pool of mortgages insured by the Federal Housing Administration
or the Farmers Home Administration or guaranteed by the Veterans
Administration. Scheduled payments of principal and interest are made to
the registered holders of GNMA Certificates. The GNMA Certificates in
which the Fund will invest are of the modified pass-through type. GNMA
guarantees the timely payment of monthly installments of principal and
interest on modified pass-through certificates at the time such payments
are due, whether or not such amounts are collected by the issuer on the
underlying mortgages. The GNMA guarantee is backed by the full faith and
credit of the U.S. Government.
The average life of GNMA Certificates varies with the maturities of
the underlying mortgage instruments, which may have maximum maturities of
30 years. The average life of a GNMA Certificate is likely to be
substantially less than the original maturity of the mortgages contained in
the pools underlying the securities as the result of prepayments (including
by refinancing) of such mortgages or foreclosure. Prepayments on the
mortgages are passed through to the security holder with the regular
monthly payments of principal and interest, and have the effect of reducing
future payments.
To the extent the Fund buys GNMA Certificates at par or at discount,
the GNMA Certificates offer a high degree of safety of the principal
investment because of the GNMA guarantee. If the Fund
5
<PAGE>
buys GNMA Certificates at a premium, however, payments of principal
(including prepayments) by mortgagors will result in a loss of the Fund's
principal investment to the extent of the premium paid.
The coupon rate of interest of GNMA Certificates is lower than the
interest rate paid on the VA-guaranteed or FHA-insured mortgages underlying
the Certificates, but only by the amount of the servicing fees. Such fees
in the aggregate usually amount to approximately .50 of 1%.
Yields on pass-through securities are typically quoted by investment
dealers and brokers based on the coupon, the maturity of the underlying
instruments, and the associated average life assumption (based on expected
rates and factors described as follows). In periods of falling interest
rates the rate of prepayment tends to increase, thereby shortening the
actual average life of a pool of mortgage-related securities. Conversely,
in periods of rising rates the rate of prepayment tends to decrease,
thereby lengthening the actual average life of the pool.
The average life of pass-through pools varies with the interest coupon
and maturities of the underlying mortgage instruments. In addition, a
pool's term may be shortened by unscheduled or early payments of principal
and interest on the underlying mortgages. The occurrence of mortgage
prepayments 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 vary widely, it is
not possible to accurately predict the average life of a particular pool.
However, statistics indicate that the average life of the type of mortgages
backing the majority of outstanding GNMA Certificates is initially
approximately 12 years. For this reason, in the past it has been standard
practice to treat GNMA Certificates as 30-year mortgage-backed securities
with principal dollars outstanding an average of twelve years. Pools of
mortgages with other maturities or different characteristics would have
varying assumptions for average life. The assumed average life of pools of
mortgages having maturities of less than 30 years is less than 12 years,
but typically not less than eight years.
Market prices of the securities in which the Fund will invest will
fluctuate and will tend to vary inversely with changes in prevailing
interest rates. If interest rates increase from the time a security is
purchased, such security, if sold, might be sold at a price less than its
purchase price. Conversely, if interest rates decline from the time a
security is purchased, such security, if sold, might be sold at a price
greater than its purchase price. In either situation, if the security is
held to maturity, no loss or gain normally would be realized as a result of
these fluctuations.
In a falling interest rate environment, principal prepayments
generally will increase and the average life of the Fund's pass-through
securities will shorten. Any amounts received by the Fund as prepayments
would then be re-invested at then-current lower rates of interest. If
interest rates were to increase, it could be expected that at some point
prepayments would decrease, which would have the effect of increasing the
average lives of the pass-through securities held by the Fund. If this
were to occur, any securities held by the Fund could remain outstanding for
longer than originally anticipated by the Fund.
6
<PAGE>
Assets of the Fund which are invested in U.S. Government Securities
other than GNMA Certificates will be invested in other obligations issued
or guaranteed by the U.S. Government or by its agencies or
instrumentalities. These instruments may be either direct obligations of
the Treasury, such as U.S. Treasury Notes, Bills or Bonds, or securities
issued or guaranteed by U.S. Government agencies or instrumentalities. Of
the obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government, some are backed by the full faith and credit of the
U.S. Government, such as securities issued by the Export-Import Bank, and
others are backed only by the rights of the issuer to borrow from the U.S.
Treasury, such as securities issued by the Federal Financing Bank or the
Student Loan Marketing Association.
U.S. Government Securities in which the Fund may invest also include
FNMA Certificates and FHLMC Certificates. Each FNMA Certificate and FHLMC
Certificate represents a fractional undivided interest or participation
interest in a specific pool of residential mortgage loans formed or
guaranteed by FNMA or FHLMC, as applicable. The mortgage loans represented
by FNMA Certificates and FHLMC Certificates may be insured by the Federal
Housing Administration or partially guaranteed by the Veterans
Administration or, more typically, may be "conventional" loans, i.e., not
insured by either such entity. As of October 31, 1995, 22.5% of the Fund's
assets were invested in FNMA Certificates.
FNMA guarantees to each registered holder of a FNMA Certificate the
timely distribution of scheduled principal and interest (at the pass-
through interest rate provided for in such FNMA Certificate) on the
mortgage loans represented by such certificate whether or not received, and
of the full principal amount of any foreclosed or other finally liquidated
mortgage loan whether or not recovered. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act, as amended. The guarantee of
FNMA is not backed by the full faith and credit of the United States.
Although the Secretary of the Treasury of the United States has
discretionary authority to advance funds to FNMA, neither the United States
government nor any agency or instrumentality thereof is obligated to assume
FNMA's obligations or to assist FNMA in any manner.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely distribution of interest (at the pass-through interest rate provided
for in such FHLMC Certificate) on the mortgage loans represented by such
certificate, whether or not received. FHLMC also guarantees the
distribution of the unpaid principal balance of any defaulted mortgage loan
represented by such certificate no later than one year after acceleration
of such mortgage loan, whether or not recovered, but FHLMC does not
guarantee the timely distribution of scheduled principal payments on such
mortgage loans. FHLMC is a corporate instrumentality of the United States
created pursuant to Title III of the Emergency Home Finance Act of 1970, as
amended, and its common stock is owned by the Federal Home Loan Banks. The
guarantee of FHLMC is not backed by the full faith and credit of the United
States or by the Federal Home Loan Banks. Neither the United States
government nor any agency or instrumentality thereof is obligated to assume
FHLMC's obligation or to assist FHLMC in any manner.
7
<PAGE>
Securities issued by FNMA and FHLMC differ from GNMA securities in
several significant respects. First, as is discussed above, FNMA and FHLMC
Certificates, unlike GNMA Certificates, do not have the full faith and
credit of the United States government expressly pledged to their
repayment. The Fund must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment of FNMA and
FHLMC Certificates and will not be able to assert a claim against the
United States itself in the event the agency or instrumentality does not
meet its commitments. Second, the mortgages underlying FNMA and FHLMC
pools may prepay somewhat more quickly than the mortgages in GNMA pools.
GNMA pools include only loans that are issued or guaranteed by the Farmers
Home Administration, Federal Housing Administration, or Veteran's
Administration. These loans have a maximum value of $185,000, with the
majority of the loans being in a significantly smaller amount. In
contrast, the maximum value of loans contained in FNMA and FHLMC pools is
approximately $203,150. Persons receiving loans that underlie FNMA or
FHLMC securities typically are more affluent and generally are regarded as
being more mobile. In addition, these mortgages are not assumable. These
factors result in a faster prepayment rate on FNMA and FHLMC loans than on
loans underlying GNMA securities, so that FNMA and FHLMC Certificates
typically pay off at a faster rate than GNMA Certificates.
The Fund also may invest in CMOs collateralized by or representing
securities that are issued or guaranteed by an agency of the U.S.
Government (such as GNMA, FNMA or FHLMC). CMOs may be issued by agencies
or instrumentalities of the United States Government or by private
organizations. Any CMO issued by a private organization which is purchased
by the Fund will be rated in the highest rating category by at least one
nationally recognized statistical rating organization at the time of
purchase.
A single series of CMOs, collateralized by or representing a discreet
pool of mortgage assets, generally is issued in several classes. Each such
class bears or accrues any interest to which it is entitled at a specified
rate or at a rate calculated in a specified manner. Principal on the
mortgage loans ultimately underlying a series of CMOs may be allocated
among the several classes within such series in a variety of ways,
resulting in classes of CMOs which return principal at a faster or slower
rate than the rate of repayment on the underlying mortgage loans. By
varying the rates or methods of calculating interest on several classes
within a series of CMOs and the allocations of principal among such
classes, a CMO issuer can create "derivative" securities with a wide range
of payment characteristics. These securities may include, but are not
limited to, floating and variable rate securities, inverse floating rate
securities, zero coupon securities, and two-tiered index bonds ("TTIBs").
The Fund has no current intention of investing in interest-only or
principal-only obligations.
A floating rate security has an interest rate that is based on a known
index such as the Cost of Funds Index ("COFI") or the London Interbank
Offered Rate ("LIBOR"), and is adjusted periodically, typically monthly, as
such rate changes. The interest rate paid on the security will fluctuate
with fluctuations in the index. The interest rate on a variable rate
security is adjusted at specific intervals, based on a known lending rate,
such as the rate on 90 day U.S. Treasury Bills. Floating rate and variable
rate classes of CMOs typically are subject to interest rate "caps" which
8
<PAGE>
prevent the interest rate borne by a class from increasing beyond a
specified level even if the related lending or index rate so increases.
Once a floating or variable rate class of CMOs reaches its interest rate
"cap," further increases in market rates of interest are likely to result
in a decline in the market value of such class.
Inverse floating rate securities are securities with a coupon that
moves in the reverse direction to an applicable index such as COFI.
Accordingly, the coupon thereon will increase as interest rates decrease
and decrease as rates increase, in some cases by a greater amount than the
amount of change in the related index rate. Inverse floating rate
securities are typically more volatile than fixed rate or other types of
floating rate securities and, like floating rate securities, may be subject
to interest rate "caps" or "floors". Inverse floating securities would be
purchased by the Fund in an attempt to protect against a reduction in the
income earned on the Fund's investments due to a decline in interest rates
and a corresponding increase in prepayments. The Fund would be adversely
affected by the purchase of such securities in the event of an increase in
interest rates since the coupon thereon will decrease as interest rates
increase and the value of the securities may decrease more than would other
debt securities, including in some instances to zero.
A zero coupon class of CMOs is a class which does not pay periodic
interest, but rather accumulates interest at a specified rate until the
principal of the class becomes payable. The accumulated interest then is
paid when the principal is repaid. Like other zero coupon securities, a
zero coupon class of CMOs enables the holder to avoid reinvestment risk
(i.e., the risk of having to reinvest interest payments at progressively
lower interest rates) in a period of declining interest rates. However, in
a period of increasing interest rates, a zero coupon class of CMOs is
likely to experience a greater decline in value than a current-interest
class with the same interest rate and principal payment schedule.
A TTIB is a CMO class whose coupon is fixed until the applicable index
(e.g., COFI) reaches a specified level known as the first strike. When the
index is higher than the first strike, the TTIB becomes an inverse floater
whose coupon declines to its floor at the second strike. The floor at the
second strike typically will be zero. On initial purchase date the first
strike on a TTIB is generally two to three hundred basis points (2-3%)
above the current level of the applicable index. Consequently, it is
unlikely at the date of purchase that the first strike would be reached in
the near future. The average life of a CMO TTIB can vary greatly, however,
depending upon prepayments, which in a period of rising interest rates can
increase the possibility of reaching the first strike. The Fund would
purchase TTIBs in anticipation of a stable interest rate environment and an
environment in which prepayments would remain at moderate to high levels in
which event the TTIBs generally would pay off before the first strike is
reached. Nevertheless, if interest rates increased and prepayments slowed,
the value of the TTIB would be expected to decline, perhaps significantly,
even if the first strike were not reached.
The Fund's Manager will monitor the creditworthiness of the issuer's
derivative securities. Such obligations are not as liquid as many other
types of securities. The Fund will not acquire derivative securities that
the Fund deems to be illiquid securities.
9
<PAGE>
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
relating to U.S. Government Securities with primary reporting dealers that
report to the Federal Reserve Bank of New York and the 100 largest United
States commercial banks. A repurchase agreement is an agreement under
which the Fund acquires an instrument subject to repurchase by the seller
at an agreed-upon price and date. The repurchase price reflects an agreed-
upon return for the period the instrument is held by the Fund and is
unrelated to the coupon provided by the instrument. Repurchase agreements
are usually for periods of one week or less, but may be for longer periods.
The Fund will not invest more than 25% of its assets in repurchase
agreements. Additionally, as a fundamental policy, the Fund will not enter
into repurchase agreements of more than seven days' duration if more than
10% of its net assets would be invested collectively in such agreements and
in other securities deemed to be illiquid. Repurchase agreements will be
fully collateralized. If, however, the seller defaults on its obligation
to repurchase the underlying security, the Fund may experience delay or
difficulty in exercising its rights to realize upon the security and might
incur a loss if the value of the security has declined. The Fund might
also incur disposition costs in liquidating the security.
WHEN-ISSUED SECURITIES. The Fund may enter into commitments to
purchase new issues of U.S. Government Securities on a when-issued basis.
Delivery and payment for these securities normally takes place 15 to 45
days after the date of commitment. There is a risk that due to changes in
interest rates between the commitment date and settlement date the market
value of the security on the settlement date may be less than its purchase
price. With regard to each commitment agreement for when-issued
securities, the Fund will maintain in a segregated account with its
custodian, commencing on the commitment date, cash or U.S. Government
Securities equal in value to the purchase price due on the settlement date
under such agreement. The Fund will only make commitments to purchase
when-issued U.S. Government Securities with the intention of actually
acquiring the securities, but if deemed advisable the Fund may sell these
securities before the settlement date. When payment is due for when-issued
securities, the Fund will meet its obligations from then available cash
flow, the sale of securities or, although it would not normally expect to
do so, from sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation).
LENDING OF PORTFOLIO SECURITIES. The Fund may lend portfolio
securities to brokers or dealers, but as a fundamental policy will only
make such loans if the aggregate market value of securities loaned does not
exceed 10% of the market value of the Fund's total assets. The borrower
must maintain with the Fund cash or U.S. Government Securities equal to at
least 100% of the market value of the securities loaned. Lending of
portfolio securities involves certain risks. As with other extensions of
credit, there are risks of delay in recovery of loaned securities, or even
loss of rights in collateral pledged by the borrower, should the borrower
fail financially. The Fund also may experience a loss if upon the failure
of a borrower to return loaned securities the collateral is not sufficient
in value or liquidity to cover the value of the loaned securities. During
the time portfolio securities are on loan, the borrower pays the Fund an
amount equivalent to any dividends or interest paid on the securities and
the Fund may invest the cash collateral and earn additional income or may
receive an agreed upon amount of interest income from the borrower. To the
extent that the Fund
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<PAGE>
invests cash collateral, the Fund may incur additional risk associated with
the change in value of the invested collateral.
INVESTMENT RESTRICTIONS. In addition to the policies and limitations
set forth above, the Fund is subject to certain other investment policies
and limitations set forth more fully in the Statement of Additional
Information. As a matter of fundamental policy, the Fund may not (1)
borrow money, except for temporary purposes in an aggregate amount not
excess of 10% of the value of the total assets of the Fund; provided, that
borrowings in excess of 5% of such value are permitted from banks only, and
the Fund will not purchase additional portfolio securities while its
borrowings exceed 5%; (2) purchase securities of any issuer if immediately
thereafter more than 5% of total assets at market value would be invested
in the securities of any one issuer, except that this limitation does not
apply to obligations issued or guaranteed as to principal and interest
either by the U.S. Government or its agencies or instrumentalities; (3)
make loans except that to the extent the purchase of bills, notes, bonds or
other debt obligations or the entry into of repurchase agreements may be
considered loans; provided, however, that the Fund may lend portfolio
securities to brokers or dealers if the aggregate market value of the
securities loaned does not exceed 10% of the value of the Fund's total
assets; (4) mortgage or pledge assets, except that up to 10% of the value
of the Fund's total assets can be used to secure borrowings; and (5) invest
more than 10% of the value of the Fund's net assets in any combination of
illiquid securities, including repurchase agreements maturing in more than
seven days.
Except as specifically noted above, the investment policies described
above are not fundamental and the Board of Directors of the Fund may change
them without the vote of a majority of the Fund's outstanding voting
securities. The Board may not change the Fund's investment objective, nor
any other fundamental policy, without such a vote. Under the Investment
Company Act of 1940, a "vote of a majority of the outstanding voting
securities" of the Fund means the affirmative vote of the lesser of (1)
more than 50% of the outstanding shares of the Fund or (2) 67% or more of
the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
While it is not the policy of the Fund to trade actively for short-
term (less than six months) profits, the Fund will dispose of securities
without regard to the time they have been held when such action appears
advisable to the Fund's adviser. A change in securities held by the Fund,
known as "portfolio turnover", may involve the payment by the Fund of
dealer mark-ups or underwriting commissions, and other transaction costs,
on the sale of securities, including U.S. Government Securities, as well as
on the reinvestment of the proceeds in other U.S. Government Securities.
HOW IS THE FUND MANAGED?
The Board of Directors (the "Board") provides broad supervision over
the affairs of the Fund. Pursuant to an Investment Advisory and Management
Agreement approved by the Board and the shareholders of the Fund, ARM
Capital Advisors, Inc. (the "Manager") manages the investments of the Fund
and administers its business and other affairs. The address of the Manager
is 200 Park Avenue, 20th Floor, New York, New York 10166.
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<PAGE>
The Manager is a wholly-owned subsidiary of ARM Financial Group, Inc.
("ARM"), a Delaware corporation. ARM is a financial services company
providing retail and institutional products and services to the long-term
savings and retirement market. The Morgan Stanley Leveraged Equity Fund
II, L.P., Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital
Investors, L.P. and MSCP III 892 Investors, L.P., investment funds
sponsored by Morgan Stanley Group, Inc. ("Morgan Stanley"), own
approximately 91% of the outstanding shares of voting stock of ARM. The
Manager currently provides investment management services to institutional
and individual clients, including ARM and its subsidiaries, with combined
assets in excess of $4 billion.
The Manager commenced investment advisory operations on January 5,
1995, on which date it acquired the domestic fixed income unit of Kleinwort
Benson Investment Management Americas Inc. The Manager has managed the
Fund since June 14, 1995 and since that date has also managed the other
mutual funds in the State Bond Group of mutual funds: State Bond Cash
Management Fund, State Bond Common Stock Fund, State Bond Diversified Fund,
State Bond Tax Exempt Fund and State Bond Minnesota Tax-Free Income Fund.
Keith O. Martens, Senior Vice President and Senior Portfolio Manager
of the Manager and Vice President of the Fund, is responsible for
selection of investments and management of the Fund. Mr. Martens has
managed the Fund since the Fund's inception in April of 1982. Mr. Martens
is also the principal manager of the State Bond Cash Management Fund, State
Bond Common Stock Fund, State Bond Diversified Fund, State Bond Tax Exempt
Fund and State Bond Minnesota Tax-Free Income Fund.
The Fund pays the Manager a management fee, calculated daily and
payable monthly, equal to an annual fee of .65 of 1% of the average daily
net assets of the Fund. The Fund pays all its expenses other than those
assumed by the Manager. Total expenses of the Fund for its fiscal year
ended October 31, 1995, after expense reimbursements, amounted to 1.00% of
average daily net assets. The Fund's Manager has voluntarily undertaken to
reimburse the Fund for expenses in excess of 1% of the average daily net
assets, despite the fact that higher expenses may be permitted by state
law. See "Financial Highlights".
WHAT ABOUT BROKERAGE COMMISSIONS?
The Manager places orders for the Fund's portfolio securities
transactions. As the Fund's portfolio is exclusively composed of debt
(rather than equity) securities, most of the Fund's portfolio transactions
are effected with dealers without the payment of brokerage commissions, but
at net prices which usually include a spread or markup. Most Fund
transactions are with the issuer, or with major dealers acting for their
own account and not as brokers. In effecting portfolio transactions the
Fund seeks the most favorable net price consistent with the best execution.
However, frequently the Fund selects a dealer to effect a particular
transaction without contacting all dealers who might be able to effect such
transaction, because of the volatility of the market and the desire of the
Fund to accept a particular price for a security because the price offered
by the dealer meets its guidelines for
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<PAGE>
profit, yield, or both. No brokerage is allocated for the sale of Fund
shares. The Fund will not deal with affiliates of the Manager and
Distributor in any transaction in which such affiliate acts as principal.
While it is not expected that the Fund will effect any transactions on
an agency basis, if it does so the Manager will seek to obtain the best
price and execution of orders. Commission rates, being a component of
price, are considered together with other relevant factors. When
consistent with these criteria, business may be placed with broker-dealers
who furnish investment research services to the Manager. Such research
services include advice, both directly and in writing, as to the value of
securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or purchasers or sellers of
securities, as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and the
performance of accounts. This allows the Manager to supplement its own
investment research activities and enables it to obtain the views and
information of individuals and research staffs of many different securities
research firms prior to making investment decisions for the Fund. To the
extent portfolio transactions are effected with broker-dealers who furnish
research services to the Manager, the Manager receives a benefit, not
capable of evaluation in dollar amounts.
The Manager has not entered into any formal or informal agreements
with any broker-dealers, and it does not maintain any "formula" which must
be followed in connection with the placement of Fund portfolio transactions
in exchange for research services provided the Manager, except as noted
below. If it is believed to be in the best interests of the Fund, the
Manager may place portfolio transactions with brokers who provide the types
of services described above, even if it means the Fund will have to pay a
higher commission (or, if the broker's profit is part of the cost of the
security, will have to pay a higher price for the security) than would be
the case if no weight were given to the broker's furnishing of those
services. This will be done, however, only if, in the opinion of the
Manager, the amount of additional commission or increased cost is
reasonable in relation to the value of the services. The Manager also
serves as investment adviser for other mutual funds. To the extent that
the Fund may pay a somewhat higher brokerage commission or somewhat higher
price on a trade because such trade is executed by a broker-dealer which
also provides research and statistical services, it is possible that
said research and statistical services may also be of value to one of the
other mutual funds. However, it is felt that this possibility of mutual
benefit is not capable of measurement.
HOW CAN YOU INVEST IN THE FUND?
SBM Financial Services, Inc. (the "Distributor"), a subsidiary of ARM,
acts as distributor and transfer agent of the Fund's shares. Its address is
100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069.
Shares of the Fund are offered for sale through the Distributor and
through certain broker-dealers under contract with the Distributor. After
you become a shareholder, you may buy additional shares by sending a check
drawn to State Bond U.S. Government and Agency Securities
13
<PAGE>
Fund directly to the Fund's Shareholder Service Agent, SBM Financial
Services, Inc. at 100 North Minnesota Street, P.O. Box 69, New Ulm,
Minnesota 56073-0069. Orders for the purchase of shares will be executed
at the offering price based upon the net asset value next determined after
receipt and acceptance of the order by the Distributor. Orders for shares
placed through broker-dealers will be executed at the offering price next
determined after the receipt of the order by the broker-dealer, provided
that the broker-dealer promptly transmits the order to the Distributor the
same day. The broker-dealer is responsible for transmitting the purchase
order to the Distributor. Shares will begin to earn dividends on the day
when payment for such shares is received by the Fund or the Distributor.
The Fund reserves the right to reject any order for the purchase of its
shares. The minimum initial investment is $500 and subsequent investments
must be in the amount of at least $50. The Fund reserves the right to
change these minimum investments. The Fund will not be responsible for the
consequences of delays in the banking or Federal Reserve wire systems.
You may also purchase shares of the Fund by wiring the purchase price
to the Fund's account with State Bank & Trust Company of New Ulm,
Minnesota. Prior to wiring your money, you must notify the Shareholder
Service Agent by telephone at (800) 328-4735 of your wire purchase order.
If you are making an initial investment, the Shareholder Service Agent will
also require that you furnish some additional information (including your
name, address and social security number or tax identification number) and
will provide you with a Fund account number. Next, you should instruct
your bank to wire the specified amount, along with your account number and
your name, to:
Credit account of State Bank & Trust Company of New Ulm
at Federal Reserve Bank of Minneapolis
Account #091901202
For further credit to Account #780
For benefit of Account Number (your Fund account number) of (your
name).
If the wire transfer is for an initial investment, a completed
Security Application must be sent to the Fund as soon as possible so the
necessary remaining information can be recorded in your account. Once your
account is established, you may automatically make additional investments
(in minimum amounts of $50) by authorizing monthly withdrawals directly
from your personal checking account. Further information on this service
is available by contacting a representative of the Distributor.
HOW IS THE OFFERING PRICE OF THE FUND'S SHARES DETERMINED?
The price you pay for shares of the Fund is the offering price, that
is, the next determined net asset value of the shares plus the applicable
sales charge.
Net asset value per share is determined as of the time of close of the
New York Stock Exchange (generally 3:00 p.m. Central Time) on each day that
the New York Stock Exchange is open for business. Net asset value is
determined by dividing the value of the total assets of the Fund, less
liabilities, by the number of shares outstanding. In determining net asset
value, the Fund utilizes the
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<PAGE>
valuations of its portfolio securities furnished by a pricing service
approved by the Board of Directors. The pricing service values portfolio
securities which have remaining maturities of more than sixty days from the
date of valuation at quoted bid prices or the yield equivalents when
quotations are readily available. Such securities for which quotations are
not readily available are valued at fair value. The pricing service may
employ electronic data processing techniques and/or a matrix system to
determine valuations. Short-term holdings maturing in 60 days or less are
valued at cost plus accrued interest which approximates market value.
HOW ARE THE FUND'S SALES CHARGES DETERMINED?
Sales charges are determined in accordance with the following schedule:
<TABLE>
<CAPTION>
PERCENTAGE OF NET REGULAR DEALER
PERCENTAGE OF AMOUNT INVESTED DISCOUNT AS % OF
OFFERING PRICE ------------------ OFFERING PRICE
-------------- ----------------
<S> <C> <C> <C>
Less than $25,000....................... 5.00% 5.26% 4.50%
$ 25,000 but less than $ 50,000..... 4.50% 4.71% 4.00%
$ 50,000 but less than $ 100,000..... 4.00% 4.17% 3.50%
$ 100,000 but less than $ 250,000..... 3.50% 3.63% 3.00%
$ 250,000 but less than $ 500,000..... 2.50% 2.56% 2.00%
$ 500,000 but less than $1,000,000..... 2.00% 2.04% 1.50%
$1,000,000 but less than $2,000,000..... 1.00% 1.01% 0.50%
$2,000,000 or more...................... 0.50% 0.50% 0.25%
</TABLE>
The sales charge varies depending on the size of the purchase, the
number of shares of the mutual funds in the State Bond Group you already
own, whether you have entered into a Letter of Intent to purchase
additional shares during a 13-month period, or any special purchase
programs in effect. Complete details of how you may purchase shares at
reduced sales charges under Volume Discounts, Rights of Accumulation or
Letters of Intent are contained in the Statement of Additional Information
and are available from your investment agent or dealer, or the Distributor.
Shares may be sold at net asset value without a sales charge to
present and retired directors, present and retired officers, and present
and retired employees (and their spouses and minor children) of the Fund,
the other investment companies in the State Bond Group, and ARM and its
subsidiaries. Such sales also may be made to employee benefit plans for
such persons. Also, shares may be sold at net asset value to sales
representatives of the Distributor and registered representatives of
broker- dealers who have signed dealer agreements with the Distributor for
sale of the shares of the Fund (including employee benefit plans for such
persons and their spouses and minor children). Shares may
15
<PAGE>
be sold to any investment advisory, custodial, trust or other fiduciary
account managed or advised by the Manager or any affiliate wherein such
entity has discretionary investment authority at a maximum sales charge of
3% or such lesser sales charge as such account would otherwise qualify for
under the Fund's sales charge schedule and the Volume Discount, Right of
Accumulation, and Letter of Intent provisions. These sales may be made for
investment purposes only, and shares may be resold only to the Fund.
HOW CAN YOU "SELL" YOUR SHARES?
You may redeem your shares without charge at any time by writing to
the Shareholder Servicing Agent at 100 North Minnesota Street, P.O. Box 69,
New Ulm, Minnesota 56073-0069. You will receive the net asset value per
share next determined after receipt of your request in proper form by the
Shareholder Servicing Agent. The written redemption request should
identify the account number and be signed by the shareholder(s) exactly as
the shares are registered. For share redemptions valued at $20,000 or
more, your signature(s) must be guaranteed by a national securities
exchange, a member firm of a principal stock exchange, a registered
securities association, a clearing agency, a bank or trust company, a
savings association, a credit union, a broker, a dealer, a municipal
securities broker or dealer, a government securities broker or dealer, or a
representative of the Distributor. Further documentation may be required
from corporations, executors, partnerships, administrators, trustees or
custodians. If stock certificates have been issued for the shares that you
wish to redeem, you must surrender the certificates in proper form,
endorsed for transfer or accompanied by an endorsed stock power. For your
protection, any certificates should be sent by registered mail.
Shares may also be redeemed through authorized dealers and through
representatives of the Distributor. Requests for redemption received by the
Shareholder Servicing Agent from authorized dealers or representatives of
the Distributor prior to the close of the New York Stock Exchange will be
executed at the net asset value per share determined at the close of the
New York Stock Exchange on that day. Dealers and representatives are
responsible for promptly submitting such redemption requests to the
Shareholder Servicing Agent in order to obtain that day's closing price.
Requests for redemption received by the Shareholder Servicing Agent from
dealers or representatives of the Distributor after the close of the New
York Stock Exchange will be executed at the net asset value determined at
the close of the New York Stock Exchange on the next trading day.
A check for the proceeds of the redemption of your shares ordinarily
will be mailed to you within seven calendar days after a redemption request
is received in proper form. However, where shares purchased by means of an
uncertified check are redeemed before the fifteenth day after purchase,
proceeds will not be mailed until the check clears, which may be up to
fifteen days after purchase. Proceeds of a redemption may be more or less
than the cost of the shares when purchased. You will not receive dividends
on shares which are redeemed from your account for the day that the
redemption is effected.
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<PAGE>
Because of the relatively high cost of handling small accounts, the
Fund reserves the right to redeem, upon not less than 30 days' written
notice, the shares in an account which have a value of less than $500. You
will be allowed to make additional investments prior to the date fixed for
such a redemption to avoid liquidation of your account. Shares will not be
involuntarily redeemed if the value of the shares drops below $500 due to
market value changes.
Quick Redemption by Wire Transfer.
If you have elected the Quick Redemption service, you may request that
the proceeds of a redemption of shares having a value of $5,000 or more be
wired to your account at a commercial bank in the United States which is a
member of the Federal Reserve System. This service is available only if
you have designated such a bank in your Investment Application and no
certificates have been issued for the shares to be redeemed. Redemption
proceeds of less than $5,000 will not be wired, but instead will be mailed
to the shareholder's address of record. A request for Quick Redemption may
be made to the Shareholder Servicing Agent by mail at 100 North Minnesota
Street, P.O. Box 69, New Ulm, Minnesota 56073-0069 or by telephone at (800)
328-4735. Each request must include your name and account number. There
is currently a $10.00 charge for each wire transfer, which is deducted from
the redemption proceeds. The fee is waived for banks for their fiduciary
accounts. The Fund reserves the right to modify the Quick Redemption
service at any time.
Quick Redemption requests received before the close of the New York
Stock Exchange on a business day of the Fund will be effected at the net
asset value determined on that day. Quick Redemption requests received
after the close of the New York Stock Exchange will be effected at the net
asset value determined on the next business day of the Fund. Proceeds sent
by wire will be transmitted on the next business day after the day that the
redemption is effected. Proceeds sent by mail will be transmitted within
seven days of receipt of your request.
If your bank is not a member of the Federal Reserve System, Quick
Redemption proceeds may be wired to a member bank which has a correspondent
relationship with your bank, provided you designate such a correspondent
bank in the Investment Application and note that your bank should be
immediately advised of the wire transfer. The failure of a correspondent
bank to notify your bank of the wire transfer immediately could delay the
crediting of redemption proceeds to your bank.
The Fund is not liable for any loss arising from telephone redemptions
that the Fund reasonably believes to be genuine. The Fund will employ
reasonable procedures to confirm that instructions communicated by
telephone are genuine; if it does not, it may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures used by the Fund
will include requesting several items of personal identification
information prior to acting upon telephone instructions and sending a
written confirmation on all such transactions.
If you are already a Fund shareholder you may elect the Quick
Redemption service or change a designation of a bank account for the Quick
Redemption service by writing to the Shareholder Servicing Agent at 100
North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069.
17
<PAGE>
The designation must be signed by all of the registered owners of the Fund
account, with signature(s) guaranteed by a national securities exchange, a
member firm of a principal stock exchange, a registered securities
association, a clearing agency, a bank or trust company, a savings
association, a credit union, a broker, a dealer, a municipal securities
broker or dealer, a government securities broker or dealer, or a
representative of the Distributor.
Check Redemptions
You may elect to participate in the Fund's free Check Redemption
service, which permits you to write checks payable to any person in amounts
of $250 or more (but not more that $100,000), provided that you have an
account balance of $5,000 or more. You may elect this service on the
Investment Application or by later written request to the Shareholder
Servicing Agent at 100 North Minnesota Street, P.O. Box 69, New Ulm,
Minnesota 56073-0069. The Shareholder Servicing Agent will supply you with
blank checks which can be drawn on your account with the Fund. The checks
will be paid from the redemption of shares in your account. When honoring a
check presented for payment, the Shareholder Servicing Agent will cause the
Fund to redeem exactly enough full and fractional shares in your account to
cover the amount of the check. Shares for which certificates have been
issued may not be redeemed by check. Check redemption is subject to bank
rules and regulations governing checking accounts. Checks for less than
$250 or more than $100,000 will be returned and a fee may be charged. If
there are insufficient shares in your account to cover a check written
under this service, the check will be returned marked "insufficient funds"
and a return fee may be charged. Checks should not be used to close a Fund
account because when the check is written you will not know the exact total
value of the account on the day the check clears. Fund dividends and
distributions continue to be earned until a check clears for payment. The
Fund reserves the right to terminate or modify the Check Redemption service
at any time upon written notice to the Fund's shareholders.
How Can You Reinstate Your Investment?
If you redeem shares and then decide you should not have redeemed
them, or that you prefer to shift your investment to one of the other
mutual funds in the State Bond Group, you may, within 30 calendar days of
the date of redemption, use all or any part of the proceeds of the
redemption to reinstate, free of sales charge, your investment in shares of
the Fund, or, if you held the shares redeemed for seven calendar days or
longer before redemption, invest in shares of any of the other mutual funds
(except the Cash Management Fund) in the State Bond Group. To make such an
investment free of sales charges in shares of the State Bond Funds which
have a higher sales charge than the Fund, you also must have held the
shares of the Fund for six months or longer before their redemption. Your
investment will be reinstated or made at the net asset value per share next
determined after your request is received. You may use this privilege to
reinstate an investment in the Fund only once.
Exercise of the Reinstatement Privilege does not alter the federal
income tax status of any capital gain realized on a sale of Fund shares,
but to the extent that any shares are sold at a loss and
18
<PAGE>
the proceeds are reinvested in shares of the same Fund, some or all of the
loss will not be allowed as a deduction, depending upon the percentage of
the proceeds reinvested.
HOW DOES THE FUND'S EXCHANGE PRIVILEGE WORK?
If you have been a shareholder for seven calendar days or more, you
may exchange any or all of your investment for shares of the other mutual
funds in the State Bond Group. Any exchange for shares of other mutual
funds in the State Bond Group will be at the next determined respective net
asset values after receipt of the request for exchange. Exchanges
generally will be made without any sales charges; except that if, within
six months of your investment in the Fund, you exchange for shares of any
fund in the State Bond Group which has a higher sales charge, you must pay
the difference in the sales charge applicable to the purchase of shares of
the Fund and the higher sales charge applicable to the purchase of shares
of such other fund. Exchanges of Fund shares are sales, and may result in a
gain or loss for federal income tax purposes. Before making an exchange,
you should obtain and read the prospectus for the fund you are considering.
The Fund reserves the right to terminate or modify the terms of this
exchange privilege upon 60 days' notice to shareholders. The exchange
privilege is only available in states in which the shares of the fund to be
acquired are available for purchase.
Exchange requests may be made in writing, signed by all registered
owners, to the Shareholder Servicing Agent at 100 North Minnesota Street,
P.O. Box 69, New Ulm, Minnesota 56073-0069. Shares also may be exchanged
by telephone by calling (800) 328-4735, provided you have on file an
Agreement for Exchange of Shares by Telephone (included on the Investment
Application or available from the Shareholder Servicing Agent). Shares
held by trustees of retirement plans may not be exchanged by telephone.
During times of drastic economic or market changes the telephone exchange
privilege may be difficult to implement. In order to implement an exchange,
you will need to provide the name in which your account is registered, your
account number, such other personal identification information as the Fund
may request, the dollar amount or share amount you wish to exchange, the
name of the fund into which you wish to exchange and, if you already have
an account with the fund into which you wish to exchange, the account
registration and account number of such account.
The Fund is not liable for any loss arising from telephone exchanges
that the Fund reasonably believes to be genuine. The Fund will employ
reasonable procedures to confirm that instructions communicated by
telephone are genuine; if it does not, it may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures used by the Fund
will include requesting several items of personal identification
information prior to acting upon telephone instructions and sending a
written confirmation on all such transactions.
HOW DOES THE FUND PAY DIVIDENDS AND DISTRIBUTIONS?
The Fund declares daily dividends on all outstanding shares (dividends
are declared for the day on which shares are purchased but are not declared
for redeemed shares on the day of
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<PAGE>
redemption). A shareholder who redeems all of his or her Fund shares
receives with the redemption proceeds the amount of all dividends declared
for the month to and including the date of redemption of shares. Dividends
in respect of all other redemptions are paid on the regular dividend
payment date. Distributions from taxable net realized investment gains, if
any, will generally be declared at least once each year.
What Are Your Dividend And Capital Gain Distribution Options?
You may elect to:
1. Receive both dividends and capital gain distributions in additional
shares of the Fund.
2. Receive dividends in cash and capital gain distributions in
additional shares of the Fund.
3. Receive both dividends and capital gain distributions in cash.
If no election is made, dividends from investment income and gain
distributions will be reinvested and credited to your account as additional
shares. Dividends and gain distributions reinvestments are made at net
asset value. To change your election at any time, write to the Shareholder
Servicing Agent at 100 North Minnesota Street, P.O. Box 69, New Ulm,
Minnesota 56073-0069.
WHAT IS THE TAX STATUS OF DIVIDENDS AND DISTRIBUTIONS YOU RECEIVE?
The Fund has qualified and intends to continue to qualify and elect to
be treated as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the "Code"). The Fund will distribute all or
substantially all of its taxable income to shareholders. Distributions
from net investment income and net short-term capital gains generally will
be taxable to you as ordinary income, whether received in cash or in
additional shares. Since the Fund's investment income is derived from
interest rather than dividends, none of the Fund's distributions will
qualify for the dividends-received deduction for corporations. Any
distributions of net long-term capital gains will be taxed as such,
regardless of how long you have held your shares.
Upon a sale or exchange of his or her shares, a shareholder will
realize a taxable gain or loss depending on his or her basis in the shares.
Such gains or loss will be treated as a capital gain or loss if the shares
are capital assets in the shareholder's hands and will be a long-term
capital gain or loss if the shares have been held for more than one year.
Generally, any loss realized on a sale or exchange will be disallowed to
the extent shares disposed of are replaced within a period of sixty-one
days beginning thirty days before and ending thirty days after the shares
are disposed of. A capital loss recognized on the sale of shares held for
six months or less will be treated as long-term capital loss to the extent
of any long-term capital gains distributions received with respect to such
shares. In certain circumstances (such as the exercise of an exchange
privilege), a load charge may not be
20
<PAGE>
taken into account in determining the gain or loss on the sale on
redemption of shares in the Fund within 90 days of their acquisition. In
such case, the load charge is treated as incurred with respect to the
shares subsequently purchased.
The above information concerns the federal income tax status of the
payments you receive. Shareholders should consult their tax adviser to
determine whether, and the extent to which, distributions are exempt from
state and local taxes. Shareholders are sent a quarterly statement of
account reflecting all transactions in their account, including dividends
and gain distributions, during the prior month. Also, at year end all
shareholders are sent a statement of account and information on the
aggregate amount and tax status of dividends and gain distributions paid
during the calendar year. Shareholders should consult their tax advisers
with respect to any specific questions relating to federal, state, local or
foreign taxation.
WHAT IS THE FUND'S PLAN OF DISTRIBUTION?
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to
Rule 12b-1 under the Investment Company Act of 1940. Under the terms of the
Plan, the Fund pays the Distributor a monthly fee equivalent on an annual
basis to .25 of 1% of the average daily net assets of the Fund. The fee may
be used by the Distributor to (i) provide initial and ongoing sales
compensation to its investment executives and to other broker-dealers in
connection with the sale of Fund shares and to pay for other advertising
and promotional expenses in connection with the sale of Fund shares
("distribution expenses"), and (ii) to provide compensation to entities
("Service Entities") in connection with the provision of certain personal
and account maintenance services to Fund shareholders including, but not
limited to, responding to shareholder inquiries and providing information
on their investments ("shareholder servicing expenses").
In the future, Service Entities may include banks and other depository
institutions which, under the Glass Steagall Act and other applicable laws
and regulations, currently are prohibited from engaging in the business of
underwriting, selling or distributing certain types of securities. Such
institutions will only be allowed to provide administration, shareholder
service, and distribution assistance if the scope of the assistance is such
that, in the opinion of the Distributor, it does not fall within the
aforementioned prohibition.
WHO ARE THE FUND'S FUND ACCOUNTING AGENT AND ITS CUSTODIAN?
Investors Fiduciary Trust Company ("IFTC") serves as the Fund's fund
accounting agent, and in that capacity, maintains certain books and records
pursuant to an agreement with the Fund. Its address is 127 West 10th
Street, Kansas City, Missouri 64105. IFTC also serves as custodian for the
Fund's portfolio securities and cash, and in that capacity, maintains
certain financial and accounting books and records pursuant to a separate
agreement with the Fund.
21
<PAGE>
WHAT SERVICES DOES THE FUND OFFER?
Information about various shareholder services is included above under
"How Can You `Sell' Your Shares?" In addition, the Fund also provides the
following services:
What About Shareholder Information?
For general information about the Fund, call or write SBM Financial
Services, Inc., 100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota
56073-0069. Its telephone number is (800) 328-4735. For information about
your account, call or write the Shareholder Servicing Agent at 100 North
Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069.
What Reports Will You Receive From the Fund?
As a shareholder, you will receive the Fund's annual and semi-annual
reports. You also will receive quarterly account statements confirming
dividends paid by the Fund, transactions in your account and the current
balance of shares you own.
Are Certificates Issued For Shares?
All shares will be issued as book credits by the Shareholder Servicing
Agent. Certificates will not be issued. Any existing certificates may be
sent to the Shareholder Servicing Agent to be transferred in your account
to book credits.
Other Services
Pre-Authorized Payments enable you to purchase Fund shares by
authorizing your bank to make regular payments from your bank account in
fixed amounts.
Payments at regular intervals can be made to you from your Fund
account under the Automatic Cash Withdrawal Plan if you own or purchase
shares held as book credits worth $5,000 or more.
Further information on these services and others is available by
contacting the Distributor.
GENERAL INFORMATION ABOUT STATE BOND U.S. GOVERNMENT
AND AGENCY SECURITIES FUND
State Bond U.S. Government and Agency Securities Fund is an investment
portfolio of State Bond Income Funds, Inc., a diversified, open-end
management investment company, or mutual fund, incorporated in Maryland on
October 14, 1985. The Fund has only one class of capital stock, $.00001
par value. Each outstanding share has one vote and an equal right to
dividends and
22
<PAGE>
distributions, if any. All shares have noncumulative voting rights for the
election of directors. Each is fully paid and nonassessable, and each is
freely transferable.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Fund may refer to
its "yield," "average annual total return," "cumulative total return" or
data concerning the Fund's performance since its inception. When the Fund
advertises its yield, it also will advertise its total return for the most
recent one year, five year and ten year periods, or the life of the Fund,
if less.
When the advertised yield of the Fund is characterized as the "SEC 30-
day yield," it will be based upon a 30-day period stated in the
advertisement and calculated in accordance with a standardized method
promulgated by regulations of the Securities and Exchange Commission. Such
yield is calculated by dividing the net investment income per share (as
defined in such regulations) earned during the period by the maximum
offering price per share on the last day of the period. Maximum offering
price includes the maximum sales charge and any other nonrecurring charges.
The result is then annualized using a formula that provides for semi-annual
compounding of income.
The average annual total return is calculated by finding the average
annual compounded rate of return over the period that would equate the
initial investment to the ending redeemable value. Cumulative total return
is the percentage change between the public offering price of one Fund
share at the beginning of a period and the net asset value of that share at
the end of the period with dividend and capital gain distributions treated
as reinvested. In calculating the average annual total return and
cumulative total return, the maximum sales charge and any other
nonrecurring charges are deducted from the hypothetical investment and all
dividends and distributions are assumed to be reinvested.
The Fund may from time to time compare its investment results to
various unmanaged indices or other mutual funds in reports to shareholders,
sales literature, and advertisements. This may include comparisons of
relative performance based upon data provided by services such as Lipper
Analytical Services, Incorporated. The results may be calculated on a
total return and/or yield basis for various periods, with or without sales
charges. Results without a sales charge will be higher. Total returns
assume the reinvestment of all dividends and capital gain distributions.
The Fund also may refer to publications which have mentioned the Fund, its
Manager, or their personnel.
For additional information regarding the calculation of the Fund's
yield and total return, see "Calculation of Performance Data" in the
Statement of Additional Information.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The total return for the Fund's most recent year, ended October 31,
1995, was 15.48%. This total return figure assumes the reinvestment of all
distributions and does not include the effect of the one time sales charge.
Taking into account the effect of the one time sales charge, the Fund's
total return for the fiscal year ended October 31, 1995 was 9.68%. For a
discussion of the Fund's average
23
<PAGE>
annual return for its most recent one and five year periods, and for the
life of the Fund, see the chart that follows.
Having experienced a very difficult interest rate environment in the
previous fiscal year ended October 31, 1994, the current fiscal year began
with the Federal Reserve continuing to fight the threat of inflation by
increasing short-term interest rates, which in turn increased interest rate
levels all along the interest rate curve. At the conclusion of last fiscal
year, the 30-year Treasury bond was yielding just under the 8% level. On
November 15, 1994, the Federal Reserve increased the Fed funds and discount
rate by .75%, and the 30-year Treasury bond yield increased to over 8%.
Shortly after December 31, 1994, there were indications that the economy
was slowing as some sectors of the economy reported weaker economic data.
However, the Federal Reserve increased short-term rates again in early
February by .50%. This, in retrospect, was the final increase in a series
of seven total increases within a year by the Federal Reserve. Economic
reports gave further indications of a slowing economy and by the end of
February, 1995, the 30-year Treasury bond was at 7.75%. This trend of lower
rates continued for the remainder of the Fund's fiscal year. Aided in July
by the Federal Reserve decrease of short-term rates by .25%, the 30-year
Treasury bond closed the fiscal year at a yield of 6.33%. The investments
in the Fund's portfolio as of fiscal year end consisted of 72.2% in
Government National Mortgage Association (GNMA) certificates and 22.5% in
Federal National Mortgages Association (FNMA) certificates. These
particular investments, while producing monthly dividends which totaled 32
cents for the year, also increased in value in reaction to the trend of
lower interest rates. As a result, the net asset value of the Fund's shares
increased from $4.73 to $5.10, or 7.82%, for this twelve-month period.
The following chart compares the performance of a hypothetical $10,000
investment in the Fund over the life of the Fund (from January 1, 1986) to
the performance of an investment in the Lehman Brothers Mortgage-backed
Securities Index (the "Index"). The information in the chart assumes that
the maximum current sales charge was paid upon acquisition of the Fund
shares and reflects all Fund expenses during the period covered. The
information in the chart regarding the performance of the hypothetical
investment in the Index assumes that no sales charge was paid upon an
investment in the Index and that there were no expenses associated with an
investment in the Index.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
(October 31 Fiscal Year)
1986* 1987 1988 1989 1990 1991 1992 1993 1994 1995
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Performance $10,153 $10,333 $11,653 $12,782 $13,755 $15,859 $17,116 $18,505 $17,673 $20,409
Index Performance $11,081 $11,535 $13,120 $14,591 $15,825 $18,502 $20,011 $21,592 $21,143 $24,380
*From January 1, 1986
</TABLE>
Fund's average annual total returns for the period ending
October 31, 1995:
One Year....................................................... 9.68%
Five Years..................................................... 7.10%
Life of Fund (since 12-13-85).................................. 7.52%
Past performance is not predictive of future performance.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL
INFORMATION REFERRED TO ON THE COVER PAGE OF THIS PROSPECTUS), AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND OR SBM FINANCIAL SERVICES, INC. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN A
STATE OR JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION
24
<PAGE>
IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
SHALL NOT IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND
SINCE THE DATE THEREOF.
25
<PAGE>
THE STATE BOND GROUP OF MUTUAL FUNDS
GENERAL AUTHORIZATION FORM
TO OPEN A NEW ACCOUNT BY MAIL:
1. Complete the General Authorization Form. Be sure to indicate the Fund
in which your Account should be opened. Also indicate the services
you will want to use. Special attention should be given to Section 11
of the Form. Be sure to sign the certification in Section 11.
2. Send the completed Form and your check, payable to SBM Financial
Services, Inc. to:
SBM Financial Services, Inc. - 100 N. Minnesota St. - P.O. Box 69
New Ulm, MN 56073-0069 - (800) 328-4735
TO OPEN A NEW ACCOUNT BY BANK WIRE:
1. Call the fund at 800-328-4735 to obtain an Account Number in advance.
2. Instruct your bank to wire monies to:
The account of State Bank & Trust Company of New Ulm at the Federal
Reserve Bank of Minneapolis, Account #091901202
For further credit to Account #780
(Name of Fund)________________________________________________________
(Your name as your account is registered)_____________________________
(Your new Account Number)_____________________________________________
3. Complete the Investment Application, indicating the services you will
want to use. Special attention should be given to Section 3B of the
Form, where you should indicate appropriate wire information. Mail
the completed Form to:
SBM Financial Services, Inc. - 100 N. Minnesota Street - P.O. Box 69
- New Ulm, MN 56073-0069
PLEASE CHECK:
___ STATE BOND TAX EXEMPT FUND ....................... DATE
___ STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND
___ STATE BOND CASH MANAGEMENT FUND
___ STATE BOND MINNESOTA TAX-FREE INCOME FUND
THIS FORM MAY NOT BE USED TO ESTABLISH OR REVISE AN ACCOUNT OR SERVICE
IN STATE BOND COMMON STOCK FUND OR STATE BOND DIVERSIFIED FUND. FORMS FOR
THOSE FUNDS ARE INCLUDED IN THEIR PROSPECTUSES, COPIES OF WHICH MAY BE
OBTAINED FROM SBM FINANCIAL SERVICES, INC., 100 N. MINNESOTA ST., P.O. BOX
69, NEW ULM, MN 56073-0069.
__________________________________________________________________________
I WISH TO ESTABLISH ___ OR REVISE ___ AN ACCOUNT (NO. _______________) ___
CHECK ENCLOSED FOR $___________ IN THE MUTUAL FUND CHECKED ABOVE IN
ACCORDANCE WITH THESE INSTRUCTIONS, THE TERMS AND CONDITIONS OF THIS FORM
AND THE CURRENT PROSPECTUS OF THE FUND, A COPY OF WHICH I HAVE RECEIVED.
__________________________________________________________________________
26
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
1. REGISTRATION: AG
E
- ------------------------------------------------------------------------------------------------------------------------------------
PLEASE PRINT AG
NAME(S) IN WHICH E
SHARES ARE TO BE ----------------------------------------------------------------------------------------------
REGISTERED WITH
TRUST NAME IF ----------------------------------------------------------------------------------------------
APPLICABLE STREET OR P.O. BOX
----------------------------------------------------------------------------------------------
CITY STATE ZIP CODE
----------------------------------------------------------------------------------------------
MAILING ADDRESS: HOME PHONE BUSINESS PHONE
----------------------------------------------------------------------------------------------
BIRTH DATE
----------------------------------------------------------------------------------------------
2. LEGAL FORM OF OWNERSHIP (CHECK ONE)
1. ___ INDIVIDUAL OWNERSHIP
2. ___ JOINT TENANTS WITH RIGHT OF SURVIVORSHIP
3. ___ TENANTS IN COMMON
4. ___ CORPORATE OWNERSHIP
5. ___ PARTNERSHIP OWNERSHIP
6. ___ UNIFORM GIFTS/TRANSFERS TO MINORS ACT OF STATE OF
7. ___ IRA/*/
8. ___ TAX-QUALIFIED RETIREMENT PLAN/*/
9. ___ TRUST (DATE TRUST ESTABLISHED )
/*/ ADDITIONAL DOCUMENTATION MAY BE REQUIRED.
OBJECTIVE SUITABILITY INFORMATION
_______ CONSERVATION OF CAPITAL APPROX. INCOME $
_______ INCOME APPROX. NET WORTH (EXCLUSIVE OF PROPERTY, HOME FURNISHINGS
_______ LONG TERM GROWTH AND AUTOMOBILES) $
_______ SPECULATIVE CAPITAL GAINS APPROX. TAX BRACKET %
_______ DEFERRAL OF TAXES
EMPLOYER
BUSINESS ADDRESS
OCCUPATION
IS CLIENT OF LEGAL AGE? ___ YES ___ NO
IS CLIENT EMPLOYED BY OR REGISTERED WITH ANOTHER SECURITIES FIRM? ___ NO
____ YES WITH
PRIOR INVESTMENT EXPERIENCE YEARS
NOTE: IF CLIENT REFUSES TO PROVIDE INFORMATION HAVE CLIENT INITIAL HERE
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------
3. INITIAL A. IF PURCHASE IS BY CHECK: ATTACH IT TO APPLICATION
INVESTMENT AND MAIL TO THE FUND.
ENCLOSED IS MY CHECK PAYABLE TO SBM FINANCIAL SERVICES,
INC. FOR $____________________.
---------------------------------------------------------
B. IF PURCHASE IS BY WIRE, INSTRUCT YOUR BANK TO FOLLOW
THE WIRE INSTRUCTIONS.
WIRE SENT IN THE AMOUNT OF $____________________
THROUGH
NAME OF BANK
FUND ACCOUNT NUMBER DATE OF WIRE BRANCH
- --------------------------------------------------------------------------------------------------------
4. DIVIDENDS I ELECT TO RECEIVE: ___ 1. DIVIDENDS IN SHARES, GAIN
AND GAIN DISTRIBUTIONS IN SHARES.
DISTRIBUTIONS ___ 2. DIVIDENDS IN CASH, GAIN DISTRIBUTIONS IN SHARES.
___ 3. DIVIDENDS IN CASH, GAIN DISTRIBUTIONS IN CASH.
NOTE: IF NO ELECTION IS MADE, OPTION NO. 1 AUTOMATICALLY
WILL BE PUT INTO EFFECT.
DIVIDENDS AND GAIN DISTRIBUTIONS WILL BE INVESTED AT NET
ASSET VALUE. THESE OPTIONS DO NOT APPLY FOR AUTOMATIC
CASH WITHDRAWAL SERVICE.
- --------------------------------------------------------------------------------------------------------
5. PRE-AUTHORIZED ___ PLEASE ARRANGE WITH MY BANK TO DRAW PRE-AUTHORIZED
PAYMENTS PAYMENTS AND INVEST $ IN MY ACCOUNT
___ MONTHLY ___ TWICE A MONTH ___ EVERY OTHER
MONTH ___ QUARTERLY
ON THE: ___ 1ST OF MONTH ___ 16TH OF MONTH
I HAVE COMPLETED THE ATTACHED "BANK AUTHORIZATION TO
HONOR PRE-AUTHORIZED PAYMENTS."
(ALSO COMPLETE SECTION 4 ABOVE)
- --------------------------------------------------------------------------------------------------------
6. AUTOMATIC ___ PLEASE SEND A CHECK FOR $ BEGINNING ON THE 15TH
CASH DAY OF 19__, AND THEREAFTER ON THE 15TH DAY OF
WITHDRAWAL EVERY:
___ MONTH ___3RD MONTH ___ 6TH MONTH
___ 12TH MONTH
MAKE PAYMENTS TO: NAME
ADDRESS
CITY STATE ZIP
SHARES HAVING A CURRENT VALUE AT OFFERING PRICE OF
$5,000 OR MORE MUST BE HELD IN THE ACCOUNT AT INITIATION
OF SERVICE, AND ALL SHARES MUST BE IN "BOOK CREDIT" FORM.
- --------------------------------------------------------------------------------------------------------
7. LETTER I INTEND TO PURCHASE, ALTHOUGH I AM NOT OBLIGATED TO DO
OF INTENT SO, SHARES OF THE ABOVE-DESIGNATED FUND, AND ONE OR MORE
OF THE OTHER MUTUAL FUNDS IN THE STATE BOND GROUP WHICH
BEAR A SALES CHARGE AS WRITTEN IN BELOW, WITHIN A
13-MONTH PERIOD WHICH, TOGETHER WITH THE PRESENT NET
TOTAL ASSET VALUE OF SHARES NOW OWNED, BY ME, WILL
AGGREGATE AT LEAST:
___ $50,000 ___ $100,000 ___ $250,000
___ $500,000 ___ $1,000,000 ___ $2,000,000
I AGREE TO THE ESCROW PROVISIONS CONTAINED IN THIS
APPLICATION.
___ THIS LETTER OF INTENT MAY BE BACKDATED UP TO 90 DAYS
TO INCLUDE SHARES PREVIOUSLY PURCHASED. BACKDATE TO
- --------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------
8. DIVIDEND IF YOU WISH TO HAVE YOUR DIVIDEND PAYMENTS MADE TO
DIRECTION ANOTHER PARTY PLEASE COMPLETE THE FOLLOWING:
OPTION I HEREBY AUTHORIZE AND REQUEST THAT MY DIVIDEND PAYMENTS
BE MADE TO:
NAME
ADDRESS
CITY STATE ZIP
SIGNATURE INVESTOR
SIGNATURE CO-INVESTOR
- --------------------------------------------------------------------------------------------------------
9. CHECK ALL REGISTERED OWNERS OF YOUR FUND ACCOUNT (AS LISTED IN
REDEMPTION SECTION 1) MUST SIGN BELOW. I (WE) UNDERSTAND IF THIS
SERVICE CHECK REDEMPTION SERVICE IS ELECTED, THAT NO
CERTIFICATES FOR SHARES WILL BE ISSUED. BY SIGNING THIS
SECTION, I (WE) AGREE TO ALL OF THE TERMS AND CONDITIONS
SET FORTH IN THE PROSPECTUS AND APPLICATION.
1. 2.
3. 4.
___ CHECK HERE IF ONLY ONE SIGNATURE IS REQUIRED ON CHECKS
___ CHECK HERE IF A COMBINATION IS REQUIRED AND SPECIFY NUMBER
ACCOUNTS IN THE NAMES OF CORPORATIONS, TRUSTS,
PARTNERSHIPS, ETC. MUST INDICATE THE LEGAL TITLES OF
ALL AUTHORIZED SIGNATORIES. SHAREHOLDERS ELECTING THIS
SERVICE ARE SUBJECT TO THE CONDITIONS CONTAINED IN THIS
APPLICATION.
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
10. QUICK NO REDEMPTION OF SHARES PURCHASED BY CHECK WILL BE
REDEMPTION PERMITTED WITHIN 15 DAYS OF THE CREDIT OF THOSE SHARES
SERVICE TO YOUR ACCOUNT.
I HEREBY AUTHORIZE THE FUND TO HONOR TELEPHONE OR
WRITTEN INSTRUCTIONS RECEIVED FROM ME FOR THE REDEMPTION
OF FUND SHARES WITHOUT A SIGNATURE AND BELIEVED BY THE
FUND TO BE GENUINE. TO PROVIDE ME WITH THE PROCEEDS OF
THE REDEMPTION QUICKLY, PROCEEDS IN THE MINIMUM AMOUNT
INDICATED IN THE FUND'S CURRENT PROSPECTUS WILL BE SENT
ONLY TO THE COMMERCIAL BANK LISTED BELOW FOR CREDIT TO
MY ACCOUNT. I UNDERSTAND THAT RECORDS OF SUCH
INSTRUCTIONS WILL BE BINDING.
PLEASE WIRE PROCEEDS TO
NAME OF COMMERCIAL BANK (SAVINGS BANK MAY NOT BE USED)
ACCOUNT NAME ACCOUNT NUMBER
ADDRESS OF BANK CITY
STATE ZIP CODE
DATE
SIGN HERE: SIGNATURE(S) OF INVESTOR(S) (X) (X)
- --------------------------------------------------------------------------------------------------------
11. SIGNATURE UNDER PENALTIES OF PERJURY I CERTIFY THAT THE NUMBER
SHOWN ON THIS FORM IS MY CORRECT TAXPAYER IDENTIFICATION
NUMBER/SOCIAL SECURITY NUMBER AND THAT I AM NOT SUBJECT
TO BACKUP WITHHOLDING EITHER BECAUSE I HAVE NOT BEEN
NOTIFIED THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A
RESULT OF A FAILURE TO REPORT ALL INTEREST OR DIVIDENDS,
OR THE INTERNAL REVENUE SERVICE HAS NOTIFIED ME THAT I
AM NO LONGER SUBJECT TO BACKUP WITHHOLDING. I (WE)
CERTIFY THAT I (WE) ARE OF LEGAL AGE AND THAT I (WE)
HAVE LEGAL CAPACITY TO PURCHASE OR REDEEM SHARES OF THE
FUND FOR MY (OUR) OWN ACCOUNT, OR FOR THE ACCOUNT OF THE
ORGANIZATION NAMED BELOW. I (WE) HAVE RECEIVED A
CURRENT PROSPECTUS OF THE FUND AND APPOINT SBM FINANCIAL
SERVICES, INC. AS MY (OUR) AGENT TO ACT IN ACCORDANCE
WITH MY (OUR) INSTRUCTIONS HEREIN.
SIGNATURE (X) SIGNATURE (X)
SOC. SEC. NO. OR TAXPAYER SOC. SEC. NO. OR TAXPAYER
IDENTIFICATION NO. IDENTIFICATION NO.
</TABLE>
30
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------
12. DEALER PLEASE ESTABLISH THE ACCOUNT SPECIFIED BY THE INVESTOR
INFORMATION AND PURCHASE THROUGH SBM FINANCIAL SERVICES, INC.,
ONLY GENERAL DISTRIBUTOR, AT THE PUBLIC OFFERING PRICE,
SHARES WHICH YOU ARE AUTHORIZED TO PURCHASE FROM US FOR
THE INVESTOR. THE INVESTOR IS AUTHORIZED TO SEND ANY
FUTURE PAYMENTS DIRECTLY TO YOU FOR INVESTMENT. CONFIRM
EACH TRANSACTION TO THE INVESTOR AND TO US. WE
GUARANTEE THE GENUINENESS OF THE INVESTOR'S SIGNATURE.
WE ARE A DULY REGISTERED AND LICENSED DEALER AND HAVE A
SALES AGREEMENT WITH SBM FINANCIAL SERVICES, INC.
DEALER NAME REPRESENTATIVE'S NAME NUMBER
ADDRESS ADDRESS
CITY STATE ZIP CODE CITY STATE ZIP CODE
X
AUTHORIZED SIGNATURE OF REPRESENTATIVE'S PHONE NUMBER
BROKER/DEALER DATE (______)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------
FOR INTERNAL USE ONLY ACCEPTED BY:
- ---------------------------------------------------------------
NET ASSET VALUE VALUE AS OF SBM FINANCIAL SERVICES, INC.
# OF SHARES OWNED AS OF DATE
DATE OF LOI OF LOI
- --------------------------------------------------------------- BY ________________________________________
AUTHORIZED SIGNATURE
- ---------------------------------------------------------------
ACCOUNTS ELIGIBLE FOR THE RIGHTS OF ACCUMULATION OR TO BE USED TOWARD COMPLETION OF A LETTER OF INTENT.
NAME FUND ACCOUNT NO.
NAME FUND ACCOUNT NO.
NAME FUND ACCOUNT NO.
NAME FUND ACCOUNT NO.
NAME FUND ACCOUNT NO.
TO: SBM FINANCIAL SERVICES, INC. THE STATE BOND GROUP OF MUTUAL FUNDS
100 NORTH MINNESOTA STREET REQUEST AND AUTHORIZATION FOR PRE-AUTHORIZED PAYMENTS
P.O. BOX 69
NEW ULM, MN 58073-0069
TO START YOUR PRE-AUTHORIZED PAYMENT SERVICE, FILL OUT SECTION A AND
THE "BANK AUTHORIZATION TO HONOR PRE-AUTHORIZED PAYMENTS" BELOW, AND
FORWARD IT WITH AN UNSIGNED BLANK CHECK FROM YOUR REGULAR CHECKING ACCOUNT
(MARKED "VOID").
A. PRE-AUTHORIZED PAYMENTS
[_] PLEASE ARRANGE WITH MY BANK TO DRAW PRE-AUTHORIZED PAYMENTS AND INVEST
$________________ IN MY ACCOUNT:
[_] MONTHLY [_] TWICE A MONTH [_] EVERY OTHER MONTH
[_] QUARTERLY ON THE [_] 1ST OF MONTH [_] 16TH OF MONTH I HAVE COMPLETED
THE "BANK AUTHORIZATION TO HONOR PRE-AUTHORIZED PAYMENTS" BELOW.
IF NOT COMPLETED, THE 1ST WILL BE ASSUMED.
STARTING MONTH
SIGNATURE(S) OF INVESTOR(S)
</TABLE>
BANK AUTHORIZATION TO HONOR PRE-AUTHORIZED PAYMENTS
AUTHORIZATION TO HONOR DEBITS (INCLUDING CHECKS, DRAFTS, AND OTHER ORDERS
WHETHER BY ELECTRONIC OR PAPER MEANS) BY SBM FINANCIAL SERVICES, INC.
DEPOSITOR'S NAME:
(PRINT NAME(S) EXACTLY AS SHOWN ON MY BANK, OR OTHER FINANCIAL INSTITUTION,
ACCOUNT)
DEPOSITORY NAME:
(PRINT NAME OF BANK OR FINANCIAL INSTITUTION AND BRANCH, IF ANY)
(PRINT ADDRESS OF BANK, FINANCIAL INSTITUTION OR BRANCH WHERE ACCOUNT IS
MAINTAINED)
I HEREBY AUTHORIZE SBM FINANCIAL SERVICES, INC. TO INITIATE DEBT ENTRIES TO
MY ACCOUNT AS LISTED BELOW AND THE DEPOSITORY NAMED ABOVE TO DEBIT THE SAME
TO SUCH ACCOUNT. THIS AUTHORIZATION WILL REMAIN IN FULL FORCE AND EFFECT
UNTIL SBM FINANCIAL SERVICES, INC. AND DEPOSITORY
32
<PAGE>
RECEIVE WRITTEN NOTIFICATION FROM EITHER OF THEM TO THE OTHER AND IN SUCH
TIME AND IN SUCH MANNER SO AS TO AFFORD SBM FINANCIAL SERVICES, INC. AND
DEPOSITORY A REASONABLE OPPORTUNITY TO ACT ON IT.
SIGNATURE OF DEPOSITOR X
IF REQUIRED BY THE FINANCIAL INSTITUTION,
SIGNATURE OF JOINT DEPOSITOR X
MY ACCOUNT NUMBER AT SAID FINANCIAL INSTITUTION IS DATE
SBM FINANCIAL SERVICES, INC.
100 NORTH MINNESOTA STREET
P.O. BOX 69
NEW ULM, MINNESOTA 56073-0069
TERMS AND CONDITIONS
Open Account
Investments will be made in as many shares of the Fund, including
fractions to the third decimal place, as can be purchased at the public
offering price at the close of business on the day the order is accepted.
Shareholders will receive dividends from investment income and any
distributions from long-term gain realized on investments in shares or in
cash according to the option elected. Dividend and gain options may be
changed at any time by notifying the Fund in writing. Stock certificates
will not be issued.
Pre-Authorized Payment Service
The Pre-Authorized Payment Service is available to all shareholders.
Your application is subject to acceptance by your bank and the Fund.
Payments in the amount specified will be drawn automatically on your bank
on the day of each month in which an investment is scheduled and invested
at the public offering price at the close of business on the same date. If
a payment is not honored by your bank, the Service will be suspended. It
will be reinstated upon written request indicating that the cause of
interruption has been corrected. This Service may be terminated by you or
the Fund at any time by written notice. You agree to hold the Fund and its
agents free from all liability which may result from acts done in good
faith and pursuant to these terms. Instructions for establishing Pre-
Authorized Payment Service are given on the following page.
Automatic Cash Withdrawal Service
All income and gain distributions on shares held in your account subject
to this withdrawal service will be reinvested in additional shares. A
sufficient number of full and fractional shares will be redeemed to provide
the amount requested. You may change the amount of scheduled payments or
you may suspend payments for not more than one year by written notice to
the Fund at least ten days prior to the effective date of such a change or
suspension. Your service may be terminated by you or the Fund at any time
by written notice. It will be terminated upon proper notification of the
death or legal incapacity of the shareholder. The Service may be
considered terminated in the event a withdrawal of shares, other than to
make scheduled withdrawal payments, reduces the value of shares remaining
on deposit to less than $5,000. Redeeming shares to make these payments
represents a return of capital and will result in tax consequences.
Withdrawals, concurrently with purchases of shares of this or any other
investment company will be disadvantageous to you because of the payment of
duplicative sales charges. For this reason, additional purchases of Fund
shares when the Withdrawal Service is in effect are discouraged.
Letter Of Intent
33
<PAGE>
SBM Financial Services, Inc. will hold in escrow shares equal to 5% of
the minimum purchase amount specified. Dividends and distributions on the
escrowed shares will be paid to you or credited to your Account. Upon
completion of the specified minimum purchase within the thirteen-month
period, all shares held in escrow will be deposited in your account or
delivered to you. You may include the total asset value of shares of the
State Bond Funds (except State Bond Cash Management Fund shares) owned as
of the date of a Letter of Intent toward the completion of the Letter. If
the total amount invested within the thirteen-month period does not equal
or exceed the specified minimum purchase, you will be requested to pay the
difference between the amount of the sales charge paid and the amount of
the sales charge applicable to the total purchase made. If, within 20 days
following the mailing of a written request, you have not paid this
additional sales charge to SBM Financial Services, Inc., sufficient
escrowed shares will be redeemed for payment of the additional sales
charge. Shares remaining in escrow after this payment will be released to
your Account. The Letter of Intent may be backdated by as much as 90 days
to change the purchase price for previous purchases. The thirteen-month
period begins on the date to which you have backdated.
Shares of the State Bond Cash Management Fund, which have been acquired
by an exchange may be taken into account in completing a Letter of Intent
or for Rights of Accumulation. However, shares of that Fund which have
been purchased directly may not be used for purposes of determining reduced
sales charges on additional purchases of the other Mutual Funds in the
State Bond Group.
Check Redemption Service
1. REDEMPTION AUTHORIZATION: The signatory(ies) whose signature(s)
appear on the general authorization form, intending to be legally bound,
hereby agree each with the other and with State Bank & Trust Company of New
Ulm, Minnesota ("Bank") that the Bank is appointed agent for such person(s)
and, as such agent, is directed to request the Transfer Agent of the "Fund"
to redeem shares of the Fund, registered in the name of such Signatory(ies)
upon receipt of, and in the amount of checks drawn upon his (their) Fund
account. The Fund or its Transfer Agent shall deposit the proceeds of such
redemptions in said account or otherwise arrange for application of such
proceeds to payments of said checks. The Bank is expressly authorized to
commingle such proceeds in this account with the proceeds of the redemption
of the shares of other stockholders of the Fund.
The Bank is expressly authorized to honor checks as redemption
instructions hereunder without requiring signature guarantees, and neither the
Fund's Transfer Agent nor the Bank shall be liable for any loss or liability
resulting from the absence of any such guarantee.
2. CHECK PAYMENT. The Signatory(ies) authorizes and directs the Bank to
pay each check presented hereunder, subject to all laws and Bank rules and
regulations pertaining to checking accounts. In addition, the
Signatory(ies) agree(s) that:
a. No check shall be issued or honored, or any redemption effected,
in an amount less than the minimum amount indicated in the Fund's
current Prospectus.
b. No check shall be issued or honored, or redemption effected, for
any amounts represented by shares for which certificates have
been issued.
c. No check shall be issued or honored, or redemption effected, for
any amounts represented by shares unless payment for such shares
has been made in full and any checks given in such payment have
been collected through normal banking channels.
d. No check shall be honored unless the Fund has provided the Bank,
from the proceeds of redemption or otherwise, collected funds for
the payment of such check.
34
<PAGE>
e. Checks issued hereunder cannot be cashed over the counter at
State Bank & Trust Company of New Ulm, Minnesota.
f. Check redemption of fund shares purchased within 15 days prior to
the redemption may be limited as further described in the
prospectus; and
g. Checks shall be subject to any further limitations set forth
in the prospectus issued by the Fund including without limitation
any additions, amendments and supplements thereto.
3. DUAL OWNERSHIP: If more than one person is indicated as a registered
owner of the shares of the Fund, as by joint ownership, ownership in
common, or tenants by the entireties, then (a) each registered owner must
sign this form, (b) all checks will require all signatures unless a lesser
number is indicated on the face of this form and (c) each signatory
guarantees to the Bank the genuineness and accuracy of the signature of the
other Signatory(ies).
4. CHARGES: Bank is authorized to redeem sufficient Fund shares each
month, or from time to time, to cover the prevailing applicable charges on
this account. You will be notified in advance of any changes in charges
for this service.
5. TERMINATION: The Bank or the Fund may at any time terminate this
account, related share redemption service and Bank's agency for the
Signatory(ies) hereto without prior notice by Bank to any of the
Signatory(ies).
6. HEIRS AND ASSIGNS: These terms and conditions shall bind the
respective heirs, executors, administrators and assigns of the
Signatory(ies).
35
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1996
STATE BOND U. S. GOVERNMENT AND AGENCY SECURITIES FUND
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
Telephone No. (507) 354-2144
This Statement of Additional Information supplements the information
contained in the current Prospectus of State Bond U.S. Government and Agency
Securities Fund (the "Fund") dated March 1, 1996. This Statement of Additional
Information is not a Prospectus, but should be read in conjunction with the
Fund's Prospectus, which may be obtained by contacting the Fund at the address
or telephone number noted above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?.. 2
CALCULATION OF PERFORMANCE DATA.................................. 3
WHAT ARE THE FUND'S INVESTMENT LIMITATIONS?...................... 5
WHO MANAGES THE FUND?............................................ 6
THE MANAGER...................................................... 10
MANAGEMENT AGREEMENT AND EXPENSES................................ 11
PLAN OF DISTRIBUTION............................................. 12
TRANSFER AGENT................................................... 13
CUSTODIAN........................................................ 14
INDEPENDENT AUDITORS............................................. 14
PORTFOLIO TRANSACTIONS AND BROKERAGE............................. 14
PURCHASE OF SHARES............................................... 15
HOW IS THE OFFERING PRICE DETERMINED?............................ 16
HOW ARE SHARES DISTRIBUTED?...................................... 16
HOW CAN YOU "SELL" YOUR SHARES?.................................. 17
HOW IS NET ASSET VALUE PER SHARE DETERMINED?..................... 17
TAX STATUS OF THE FUND........................................... 18
TAX STATUS OF PAYMENTS YOU RECEIVE............................... 18
WILL THE FUND WITHHOLD TAXES ON DISTRIBUTIONS?................... 18
GENERAL INFORMATION.............................................. 18
FINANCIAL STATEMENTS............................................. 18
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information or the Prospectus dated March 1, 1996, and, if given or made, such
information or representations may not be relied upon as having been authorized
by the Fund. This Statement of Additional Information does not
<PAGE>
constitute an offer to sell securities in any state or jurisdiction in which
such offering may not lawfully be made. The delivery of this Statement of
Additional Information at any time shall not imply that there has been no change
in the affairs of the Fund since the date hereof.
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?
As more fully set forth in the Prospectus under "What are the Fund's
Investment Objectives and Policies?", the Fund seeks to maximize current income
to the extent consistent with preservation of capital by investing in securities
issued or guaranteed by the United States Government or its agencies or
instrumentalities ("U.S. Government Securities"). In addition, as more fully
described in the Prospectus, the Fund may invest up to 25% of its total assets
in repurchase agreements relating to U.S. Government Securities, may purchase
securities on a when-issued basis, and may lend portfolio securities to brokers
or dealers.
Portfolio Turnover
- ------------------
Portfolio turnover rate for a fiscal year is the ratio of the lesser of
annual purchases or sales of portfolio securities to the average monthly value
of portfolio securities - excluding securities whose maturities at acquisition
were one year or less. The Fund cannot accurately predict its annual portfolio
turnover rate, but anticipates that it will not exceed 100%. The Fund's
portfolio turnover rate will not be a limiting factor when the Fund's Manager
deems it desirable to sell or purchase securities. The Fund's portfolio turnover
rate was 7% for the fiscal year ended October 31, 1995; 23% for the fiscal year
ended October 31, 1994; and 9% for the fiscal year ended October 31, 1993.
2
<PAGE>
CALCULATION OF PERFORMANCE DATA
SEC 30-Day Yield
- ----------------
Advertisements and other sales literature for the Fund may quote "SEC 30-
day yield" and "total return" data. Such performance data is computed on a
standardized basis pursuant to formulas established by the rules and regulations
of the Securities and Exchange Commission.
The Fund's SEC 30-day yield for the 30 day period ended October 31, 1995
was 6.02%. Such yield is computed by dividing the net investment income per
share (as defined under Securities and Exchange Commission rules and
regulations) earned during the computation period by the maximum offering price
per share on the last day of the period, according to the following formula:
6
YIELD = 2[(a-b+1) -1]
---
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the
period.
Average Annual Total Return
- ---------------------------
The Fund's average annual total return over the one year period, five year
period, and the life of the Fund (commencing December 13, 1985) ended October
31, 1995 were as follows:
<TABLE>
<CAPTION>
One year Five Years Life of Fund
--------- ----------- -------------
<S> <C> <C> <C>
Average Annual
Total Return at
end of period: 9.68% 7.10% 7.52%
</TABLE>
The average annual total return figures are computed by finding the average
annual compounded rates of return over the period indicated that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
n
P(1+T) = ERV
3
<PAGE>
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period.
This calculation deducts the maximum sales charge from the initial
hypothetical $1,000 investment, assumes all dividends and capital gains
distributions are reinvested at net asset value on the appropriate reinvestment
dates as described in the Prospectus, and includes all recurring fees, such as
investment advisory and management fees, charged to all shareholder accounts.
Cumulative Total Return
- -----------------------
Cumulative total return is computed by finding the cumulative compound rate
of return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeeming value, according to the
following formula:
CTR = ERV - P
------- 100
P
Where:
CTR = Cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of period.
P = initial payment of $1,000
This calculation assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
Other Yields
- ------------
Current and effective yields of the Fund, not calculated in accordance with
the guidelines of the SEC as explained above, may be quoted in reports and sales
literature. Non-SEC current yield is computed based upon a recent seven-
calendar-day period by determining the net change, exclusive of capital changes,
in the value of a hypothetical pre-existing account having a balance
4
<PAGE>
of one share at the beginning of the period, dividing the net change in account
value by the value of the account at the beginning of the period to obtain a
base period return, and multiplying the base period return by 365/7. Non-SEC
effective yield is computed by annualizing the seven-day return with all
dividends reinvested in additional Fund shares. The Fund's non-SEC yield
quotation may be inclusive or exclusive of taxable income, if any, as indicated
in such quotation.
The Fund's non-SEC yield may fluctuate daily depending upon such factors as
market conditions, the composition of the Fund's portfolio and operating
expenses. Therefore, the Fund's non-SEC yield in the future may be higher or
lower than its past non-SEC yields and there can be no assurance that historical
yields will continue. That the Fund's non-SEC current yield will fluctuate and
that shareholders' principal is not guaranteed or insured should be taken into
account when comparing the yield on an investment in Fund shares with yields on
fixed-yield investments, such as insured savings accounts. These factors and
possible differences in the methods used in calculating non-SEC yield should be
considered when comparing the Fund's non-SEC current yield to non-SEC yields
published for other investment companies and other investment vehicles. Yield
should also be considered relative to changes in the value of the Fund's shares
and the Fund's investment goals and policies. Any sales literature quoting a
non-standard SEC yield will also include the standard SEC yield.
WHAT ARE THE FUND'S INVESTMENT LIMITATIONS?
Under the Fund's fundamental policies, which cannot be changed except by
vote of a majority of its outstanding voting securities, the Fund may not:
1. Borrow money, except for temporary purposes in an aggregate amount not to
exceed 10% of the value of the total assets of the Fund; provided, that
borrowings in excess of 5% of such value will be only from banks, and the
Fund will not purchase additional portfolio securities while its borrowings
exceed 5%;
2. Underwrite the securities of other issuers, except insofar as it may
technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
3. Purchase securities of any issuer if immediately thereafter more than 5% of
total assets at market value would be invested in the securities of any one
issuer, except that this limitation does not apply to obligations issued or
guaranteed as to principal and interest either by the U.S. Government or
its agencies or instrumentalities;
4. Issue any senior securities (as defined in the Investment Company Act of
1940, as amended);
5. Buy or hold any real estate or real estate investment trust securities;
5
<PAGE>
6. Buy or hold any commodity or commodity futures contracts, or any oil, gas
or other mineral exploration or development program;
7. Make loans except to the extent that the purchase of bills, notes, bonds or
other debt obligations or the entry into repurchase agreements may be
considered loans; provided, however, that the Fund may lend portfolio
securities to brokers or dealers if the aggregate market value of the
securities loaned does not exceed 10% of the Fund's total assets;
8. Mortgage or pledge any of its assets, except to the extent, up to a maximum
of 10% of the value of its total assets, necessary to secure borrowings
permitted by paragraph 1;
9. Buy securities on "margin", except that it may obtain such short-term
credits as may be necessary for the clearance of purchases or sales of
securities;
10. Make "short" sales of securities;
11. Write or purchase put or call options;
12. Buy securities which have legal or contractual restrictions on resale,
except in connection with repurchase agreements;
13. Buy securities of any issuer for the purpose of exercising control or
management; or buy securities issued by any other investment company,
except in connection with a merger, consolidation, acquisition or
reorganization; or
14. Invest more than 10% of the Fund's net assets in any combination of
repurchase agreements maturing in more than seven days and other illiquid
securities.
If a percentage restriction described above is complied with at the time an
investment is made, a later increase or decrease in percentage resulting from a
change in values of portfolio securities or in the amount of net assets of the
Fund will not be considered a violation of the restriction.
Under the Investment Company Act of 1940, a "vote of a majority of the
outstanding voting securities" of the Fund means the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or
more of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
6
<PAGE>
WHO MANAGES THE FUND?
Directors and officers of the Fund, together with information as to their
principal business occupations during the past five years, are shown below.
Each Director who is an "interested person" of the Fund, as defined in the
Investment Company Act of 1940, is indicated by an asterisk. Unless otherwise
indicated, their addresses are 239 S. Fifth Street, Louisville, Kentucky.
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- -------------------------- ---------------------- ---------------------------------------------
<S> <C> <C>
William B. Faulkner (68) Director President, William Faulkner & Associates,
business and institutional adviser since
1986; Consultant to American Hoist &
Derrick Company, construction equipment
manufacturer, from 1986 to 1989; prior
thereto, Vice President and Assistant to the
President, American Hoist & Derrick
Company. Director of the other mutual
funds in the State Bond Group
Patrick M. Finley (57) Director President, Universal Cooperatives, Inc., a
farmers' cooperative. Director of the
other mutual funds in the State Bond
Group
Chris L. Mahai (39) Director Senior Vice President, Strategic Integra-
tion Unit, Star Tribune/Cowles Media
Company, since August 1995; Vice
President, Marketing Director, Star
Tribune, since September 1992; from
1990 to 1992, self-employed consultant,
marketing services; prior thereto, Senior
Vice President of Corporate Relations and
marketing, First Bank System, Inc.
Director of the other mutual funds in the
State Bond Group
John R. Lindholm (46)* Director President of Integrity Life Insurance
Company ("Integrity") and Vice President-
Chief Marketing Officer of National
Integrity Life Insurance Company
("National Integrity") since November 26,
1993; Executive Vice President-Chief
Marketing Officer of ARM Financial
Group, Inc. since July 27, 1993;
since March 1992 Chief Marketing Officer
of Analytical Risk Management, L.P.;
from June 1990 to February 1992, Chief
Marketing Officer and a Managing Director
of the ICH Capital Management Group,
ICH Corporation, Louisville, Kentucky;
prior thereto, Chief Marketing Officer
and Managing Director for Capital Holding
Corporation's Accumulation and
Investment Group. Director of the other
mutual funds in the State Bond Group and
of The Legends Fund, Inc.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- -------------------------- ---------------------- ---------------------------------------------
<S> <C> <C>
John Katz (56) Director Investment banker since January 1991;
Chairman and Chief Executive Officer,
Sam's Restaurant Group, Inc. (a restaurant
holding company), from June 1991 to
August 1992; Executive Vice President
(from January 1989 to January 1991) and
Senior Vice President (from December
1985 to January 1989), Equitable
Investment Corporation (an indirect
wholly-owned subsidiary of The Equitable
Life Assurance Society of the United
States, through which it owns and manages
its investment operations). Director of the
other mutual funds in the State Bond
Group and of The Legends Fund, Inc.
Theodore S. Rosky (57) Director Retired since April 1992; Executive Vice
President, Capital Holding Corporation
(from December 1991 to April 1992);
prior thereto, Executive Vice President
and Chief Financial Officer, Capital
Holding Corporation. Director of the
other mutual funds in the State Bond
Group and of The Legends Fund, Inc.
Dale C. Bauman (58) President Vice President and Sales Manager, SBM
100 North Minnesota Financial Services, Inc., since June 1992;
Street P.O. Box 69 prior thereto, Vice President and Division
New Ulm, Minnesota Manager, SBM Financial Services, Inc.,
56073-0069. 1980 to June 1992. President of the other
mutual funds in the State Bond Group.
Keith O. Martens (56 ) Vice President Senior Portfolio Manager, ARM Capital
200 Park Avenue, 20th Advisors, Inc. since June 14, 1995;
Floor Executive Vice President - Investments,
New York, New York SBM Company; Vice President State Bond
10166 and Mortgage Life Insurance Company
and SBM Certificate Company. Vice
President of the other mutual funds in the
State Bond Group.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- -------------------------- ---------------------- ---------------------------------------------
<S> <C> <C>
Don W. Cummings (32) Controller Controller of ARM Financial Group, Inc.
since July 15, 1993, and Integrity and
National Integrity since November 26,
1993. Prior to November 26, 1993 he
served as Controller of ARM, Ltd., a
position he held from July 1992. From
1985 to June 1992, Mr. Cummings served
in various positions within Ernst & Young
llp's Insurance Industry Accounting and
Auditing Practice, the last of which was
Manager. Controller of the other mutual
funds in the State Bond Group and of The
Legends Fund, Inc.
Kevin L. Howard (31) Vice President and Assistant General Counsel of ARM
Secretary Financial Group, Inc. since January 31,
1994; Assistant General Counsel of
Capital Holding Corporation from April
1992 to January 1994; Attorney,
Greenebaum Doll & McDonald, 1989 to
April 1992. Vice President and Secretary
of the other mutual funds in the State Bond
Group and Secretary of The Legends
Fund, Inc.
Peter S. Resnik (34) Treasurer Treasurer of ARM Financial Group, Inc.,
Integrity and National Integrity since
December 1993; employed in various
financial and operational capacities by
Analytical Risk Management Ltd. since
December 14, 1992; Assistant Vice
President of the Commonwealth Life
Insurance Company subsidiary of Capital
Holding Corporation from 1986 to
December 1992. Treasurer of the other
mutual funds in the State Bond Group and
of The Legends Fund, Inc.
Pam Freeman (28) Assistant Secretary Financial Analyst with ARM Financial
Group, Inc. since October 1993; Senior
Accountant and various other capacities
with Ernst & Young LLP from 1989 to
September 1993.
</TABLE>
9
<PAGE>
- ------------------
* Mr. Lindholm is an interested person, as defined in the 1940 Act, by
virtue of his positions with ARM Financial Group, Inc.
The Executive Committee of the Board acts on behalf of the Board between
meetings an has the authority to exercise most of the Board's powers. The
Investment Committee renders investment advice to the Board. Directors of the
Fund received aggregate remuneration of $3,897 during the fiscal year ended
October 31, 1995 from the Fund. Directors and officers of the Fund are also
directors and officers of some or all of the other investment companies in the
State Bond Group. Directors and officers of the Fund as a group owned directly
or indirectly 6,874.6 shares, or .25% of the Fund's capital stock at October 31,
1995.
The following table sets forth, for the fiscal year ended October 31, 1995,
compensation paid by the Fund to the non-interested Directors and, for the 1994
calendar year, the aggregate compensation paid to the non-interested Directors
by all of the funds in the fund complex including the six funds in the State
Bond Group of mutual funds. Directors who are interested persons, as defined in
the Investment Company Act of 1940, received no compensation from the Fund.
<TABLE>
<CAPTION>
Aggregate Total Compensation from fund
Compensation complex including the State Bond
Name of Director from Fund (a) Group of Mutual Funds (b)
---------------- ------------- --------------------------------
- -------------------------------------------------------------------------------
<S> <C> <C>
William B. Faulkner $588 $ 3,528
- -------------------------------------------------------------------------------
Patrick M. Finley $588 $ 3,528
- -------------------------------------------------------------------------------
Chris L. Mahai $588 $ 3,528
- -------------------------------------------------------------------------------
John Katz* $147 $10,000
- -------------------------------------------------------------------------------
Theodore S. Rosky* $147 $10,000
- -------------------------------------------------------------------------------
</TABLE>
(a) There were no pension or retirement benefits accrued for any of the named
persons by any of the funds.
(b) This includes the aggregate compensation paid to the named persons by all
of the mutual funds in the State Bond Group and also the amounts paid to
such persons in calendar year 1994 by the State Bond Progress Fund (the
"Progress Fund"). The Progress Fund formerly was a member of the State
Bond Group of mutual funds. All of the assets of the Progress Fund were
acquired by State Bond Common Stock Fund on June 24, 1994.
* Messrs. Katz and Rosky have been directors of the Fund, and the other
mutual funds in the State Bond Group, since June 1, 1995. In addition, they
are directors of The Legends Fund, Inc., a mutual fund which is advised by
Integrity Life Insurance Company, an affiliate of ARM, which may be deemed
to be a part of the same fund complex as the State Bond Group of Mutual
Funds. The amounts paid to such directors in 1994 were paid
10
<PAGE>
exclusively by The Legends Fund, Inc. From June 1, 1995 through October 31,
1995, these directors each received aggregate compensation from all of the
mutual funds in the State Bond Group in the amount of $882.
THE MANAGER
ARM Capital Advisors, Inc. (the "Manager") manages the investments of the
Fund and administers its business and other affairs. The address of the Manager
is 200 Park Avenue, 20th Floor, New York, New York 10166. The predecessor to
the Manager was SBM Company, which served as manager of the Fund from the Fund's
inception until June 13, 1995. The Manager assumed management of the Fund on
June 14, 1995, effective for accounting purposes as of June 1, 1995, following
the acquisition of substantially all of the business operations of SBM Company
by ARM.
The Manager is a wholly-owned subsidiary of ARM Financial Group, Inc.
("ARM"), a Delaware corporation. ARM is a financial services company providing
retail and institutional products and services to the long-term savings and
retirement market. The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan
Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P. and
MSCP III 892 Investors, L.P., investment funds sponsored by Morgan Stanley
Group, Inc. ("Morgan Stanley"), own approximately 91% of the outstanding shares
of voting stock of ARM. The Manager currently provides investment management
services to institutional and individual clients, including ARM and its
subsidiaries, with combined assets in excess of $4 billion.
The Manager is also manager of the other mutual funds in the State Bond
Group of mutual funds: State Bond Cash Management Fund, State Bond Common Stock
Fund, State Bond Diversified Fund, State Bond Minnesota Tax-Free Income Fund and
State Bond Tax Exempt Fund.
MANAGEMENT AGREEMENT AND EXPENSES
Under the Investment Advisory and Management Agreement (the "Agreement")
dated June 14, 1995, subject to the control of the Board of Directors, the
Manager manages the investment of the assets of the Fund, including making
purchases and sales of portfolio securities consistent with the Fund's
investment objectives and policies and administers its business and other
affairs. The Manager provides the Fund with such office space, administrative
services and executive personnel as are necessary for Fund operations. The
Manager also pays all the compensation of the directors of the Fund who are
employees of the Manager and of the officers and employees of the Fund. In
addition, the Manager pays distribution expenses pursuant to a 12b-1 plan.
The Fund pays the Manager a management fee for its services, calculated
daily and payable monthly, equal to an annual fee of .65 of 1% of the average
daily net assets of the Fund. The predecessor to the Manager, SBM Company, was
paid the following amounts by the Fund as a management fee (including 12b-1 plan
fees) during its fiscal years ended October 31, 1995, 1994 and 1993,
respectively: $51,455, $94,390 and $101,582. The Manager received $38,220 from
11
<PAGE>
the Fund as a management fee from June 1, 1995, the effective date for
accounting purposes on which the Manager commenced its duties as the Fund's
investment adviser, through October 31, 1995. The Manager has voluntarily
undertaken, and SBM Company previously voluntarily undertook, to reimburse the
Fund for any expenses incurred by it in excess of 1% of average daily net
assets, despite the fact that higher expenses may be permitted by state law.
For the fiscal years ended October 31, 1995, 1994, and 1993, the Fund incurred
management fees (excluding 12b-1 plan fees), accounting service fees and
transfer agent fees totaling $77,660; $86,786; and $91,812, respectively. The
Manager and SBM Company reimbursed the Fund $10,470 and $24,444, respectively,
for the fiscal year ended October 31, 1995. SBM Company reimbursed the Fund
$34,475 and $33,152 for the years ended 1994 and 1993.
The Fund pays all its expenses other than those assumed by the Manager,
including the investment advisory and management fee; outside legal, auditing,
and accounting expenses; bookkeeping, record keeping, and Fund portfolio and
Fund share pricing expenses; interest, taxes and governmental fees; expenses
incurred in connection with membership in investment company organizations;
brokerage commissions or charges, if any; fees of custodians, transfer agents,
registrars, accounting services agents, or other agents; expense of preparing
share certificates; expenses relating to the redemption or repurchase of the
Fund's shares; expenses of registering and qualifying Fund shares for sale under
applicable federal and state law; expenses of preparing, setting in print,
printing, and distributing prospectuses, statements of additional information,
reports, notices, and dividends to Fund shareholders; cost of stationery; costs
of shareholders' and other meetings of the Fund; traveling expenses of officers,
directors, and employees of the Fund, if any; fees of the Fund's independent
directors and salaries of any officers or employees who are not affiliated with
the Manager; the Fund's pro rata portion of premiums on any fidelity bond and
insurance covering the Fund; and general corporate fees and expenses.
Under the regulations of various states in which the Fund's shares are
qualified for sale, the amount of annual expenses which the Fund may receive are
limited to certain percentages of its average daily net assets. The most
stringent of such requirements limits such expenses, with certain limited
categories of expenses excepted, to 2 1/2% of the first $30 million of average
net assets, 2% of the next $70 million, and 1 1/2% of the remaining average net
assets.
The Agreement was approved by the directors of the Fund, including a
majority of the disinterested directors, at a meeting held March 24, 1995, and
by the shareholders of the Fund and a meeting held May 15, 1995. The Agreement
may be terminated at any time on 60 days' written notice by the Board of
Directors, or by vote of a majority of the outstanding shares or by the Manager.
The Agreement will terminate automatically upon assignment. The Agreement will
continue in effect for a period of more than two years from the date of its
execution only so long as such continuance is specifically approved at least
annually by either the Board of Directors or by a vote of the majority of the
outstanding voting shares of the Fund, provided that in either event such
continuance is also approved by the vote of a majority of the directors who are
not parties to such agreement or interested persons of such parties, cast in
person at a meeting called for the purpose of voting on such approval.
12
<PAGE>
Accounting Services Agreement
- -----------------------------
Prior to June 1, 1995 SBM Company also acted as the accounting services
agent for the Fund pursuant to a separate agreement. Under this agreement, SBM
Company was paid a fee for keeping the books, accounts, records, journals, and
other records of original entry current as relating to the business of the Fund.
The Manager received $625 from the Fund for accounting services the Manager
provided from June 1, 1995 to June 14, 1995. SBM Company, as the Fund's
previous accounting services agent, received the following amounts from the Fund
for its fiscal years ended October 31, 1995, 1994, and 1993, respectively:
$8,750; $15,000; and $15,000.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940 pursuant to which the Fund pays
certain expenses of distribution of the Fund's shares and shareholder servicing,
as described below.
SBM Financial Services, Inc. (the "Distributor"), a subsidiary ARM, acts as
distributor of the shares of the Fund and of the other mutual funds in the State
Bond Group. Under the Investment Advisory and Management Agreement (the
"Agreement"), a portion of the advisory fee the Fund pays the Manager is paid by
the Manager to the Distributor to be used to compensate those who provide
administration, shareholder service and distribution assistance (the Service
Entities), and to pay certain other expenses of selling Fund shares. As noted
above, the Manager will receive a monthly fee equivalent on an annual basis to
.65 of 1% of the average daily net assets of the Fund, of which .25 of 1% will
be paid to the Distributor. The Prospectus outlines the general uses to which
the Distributor is authorized to apply the fees received by it. During the
fiscal year ended October 31, 1995, the Distributor received $34,490 in such
fees. The Distributor used these fees to cover the following expenses:
compensation of sales personnel - $24,402; compensation of sales administration
personnel - $11,619; sales meetings and training - $62; marketing materials
$3,348; promotion and travel - $2,130; telephone and postage $100; and branch
office expenses - $30.
The arrangements under which the Fund compensates, indirectly, those who
provide administration, shareholder service, and distribution assistance, as
described above, are set forth in the Plan. The Plan provides:
(i) That it shall continue in effect for a period of more than one
year from the date of its execution or adoption only so long as such continuance
is specifically approved at least annually by the Board of Directors and by the
Directors who are not interested persons of the Fund and have no direct or
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan;
(ii) That any person authorized to direct the disposition of monies
paid or payable by the Fund pursuant to the Plan or any related agreement shall
provide to the Fund's
13
<PAGE>
Board of Directors, and the Directors shall review, at least quarterly, a
written report of the amounts so expended and the purposes for which such
expenditures were made; and
(iii) That it may be terminated at any time by vote of a majority
of the members of the Board of Directors of the Fund who are not interested
persons of the Fund and have no direct or indirect financial interest in the
operation of the Plan or in any agreements related to the Plan or by vote of a
majority of the outstanding voting shares of the Fund.
The Plan provides that it may not be amended to increase materially the
amount to be spent for distribution without shareholder approval and that all
material amendments of the Plan must be approved by the Fund's Board of
Directors and holders of a majority of the Fund's outstanding shares in the
manner described above for its original approval. The Fund may implement the
Plan only if the selection and nomination of the Fund's disinterested directors
are committed to the discretion of the Fund's existing disinterested directors.
Under the terms of Rule 12b-1, the Fund must preserve copies of any plan,
agreement or report made pursuant to the Rule for a period of not less than six
years from the date of such plan, agreement or report, the first two years in an
easily accessible place.
TRANSFER AGENT
The Distributor acts as the transfer and dividend disbursing agent for the
Fund pursuant to an agreement with the Fund dated June 14, 1995, and is
compensated on a transactional basis under a schedule approved by the Fund's
Board of Directors. Under this agreement, the transfer agent maintains
shareholders lists, processes requested account registration changes and stock
certificate issuance and redemption requests, administers withdrawal plans,
administers mailing and tabulation of Fund proxy solicitations, and administers
payment of distributions declared by the Fund. The Distributor received $8,153
for the period June 1, 1995 to October 31, 1995. SBM Company, as the Fund's
previous transfer and dividend disbursing agent, received the following amounts
from the Fund for the fiscal years ended October 31, 1995, 1994, and 1993,
respectively: $4,947; $13,700; and $14,300.
CUSTODIAN
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as portfolio securities custodian for the Fund.
INDEPENDENT AUDITORS
Ernst & Young LLP, independent certified public accountants, have been
selected as auditors of the Fund and issue a report on the Fund's annual
financial statements. Their address is One Kansas City Place, 1200 Main
Street, Kansas City, Missouri 64105-2143.
14
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
As the Fund's portfolio is exclusively composed of debt (rather than
equity) securities, most of the Fund's portfolio transactions are effected with
dealers without the payment of brokerage commissions, but at net prices which
usually include a spread or mark-up. Most Fund transactions are with the
issuer, or with major dealers acting for their own account and not as brokers.
In effecting such portfolio transactions, the Fund seeks the most favorable net
price consistent with the best execution. However, frequently the Fund selects
a dealer to effect a particular transaction without contacting all dealers who
might be able to effect such transaction, because of the volatility of the
market and the desire of the Fund to accept a particular price for a security
because the price offered by the dealer meets its guidelines for profit, yield,
or both. No brokerage is allocated for the sale of Fund shares.
While it is not expected that the Fund will effect any transactions on an
agency basis, if it does so the Manager will seek to obtain the best price and
execution of orders. Commission rates, being a component of price, are
considered together with other relevant factors. When consistent with these
criteria, business may be placed with brokers who furnish investment research
services to the Manager. Such research services include advice, both directly
and in writing, as to the value of securities, the advisability of investing in,
purchasing, or selling securities, and the availability of securities or
purchasers or sellers of securities, as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy,
and the performance of accounts. This allows the Manager to supplement its own
investment research activities and enables it to obtain the views and
information of individuals and research staffs of many different securities
research firms prior to making investment decisions for the Fund. To the extent
portfolio transactions are effected with brokers who furnish research services
to the Manager, the Manager receives a benefit, not capable of evaluation in
dollar amounts.
The Manager has not entered into any formal or informal agreements with any
brokers, and it does not maintain any "formula" which must be followed in
connection with the placement of Fund portfolio transactions in exchange for
research services provided the Manager, except as noted below. If it is
believed to be in the best interests of the Fund, the Manager may place
portfolio transactions with brokers who provide the types of service described
above, even if it means the Fund will have to pay a higher commission (or, if
the broker's profit is part of the cost of the security, will have to pay a
higher price for the security) than would be the case if no weight were given to
the broker's furnishing of those services. This will be done, however, only if,
in the opinion of the Manager, the amount of additional commission or increased
cost is reasonable in relation to the value of the services. The Manager also
serves as investment adviser for other mutual funds. To the extent that the
Fund may pay a somewhat higher brokerage commission or somewhat higher price on
a trade because such trade is executed by a broker which also provides research
and statistical services, it is possible that said brokerage commission or
somewhat higher price may also be of value to one of the other mutual funds.
However, it is felt that this possibility of mutual benefit is not capable of
measurement.
15
<PAGE>
No brokerage commissions were paid by the Fund in any of the fiscal years
ended June 30, 1995, 1994 and 1993.
PURCHASE OF SHARES
What Reductions Are Provided?
- -----------------------------
Volume Discounts are provided if the total amount being invested in shares
of the Fund alone, or in any combination of shares of the Fund and other funds
in the State Bond Group having a sales charge, reaches levels indicated in the
sales charge schedule set forth in the Prospectus.
The Right of Accumulation allows you to combine the amount being invested
in shares of the Fund and other mutual funds in the State Bond Group having a
sales charge with the total net asset value of shares of those mutual funds
already owned and the total net asset value of shares you own of State Bond Cash
Management Fund which were acquired through an exchange of shares of another
mutual fund in the State Bond Group, to determine reduced sales charges in
accordance with the schedule in the Prospectus. The value of the shares owned,
including the value of shares of State Bond Cash Management Fund acquired in an
exchange, will be taken into account in orders placed, however, only if the
Distributor is notified by you or your dealer of the amount owned at the time
your purchase is made and is furnished sufficient information to permit
confirmation.
The schedule of sales charges is also applicable to the aggregate amount of
purchases made by a single person within a period of 13 months pursuant to a
written Purchase Intention and Price Agreement (the "Letter of Intent"), a form
of which is available from the Distributor. The Letter of Intent provides for
a price adjustment applicable to the amount of intended purchases specified in
the Letter of Intent based upon the amount of purchases specified plus the total
net asset value of the shares of the other mutual funds in the State Bond Group
already owned that have a sales charge and the total net asset value of the
shares owned of State Bond U.S. Government and Agency Securities Fund which were
acquired through an exchange of shares. The investor considering the
possibility of signing a Letter of Intent should read it carefully. The
schedule of sales charges applicable to all amounts invested under the Letter of
Intent is computed as if the aggregate amount had been invested immediately.
Reduced sales charges also may apply to purchases made within a 13-month period
starting up to 90 days before the date of execution of the Letter of Intent.
Shares with a net asset value equal to 5% of the minimum purchase amount
specified are held in escrow to be applied toward any sales charge deficiency
that might result if the Letter of Intent is not completed. The shares so held
may be redeemed and proceeds thereof used as required to pay additional sales
charges which may be due if the amount of purchases by such person during the 13
month period aggregates less than the amount specified in the Letter of Intent.
Escrow shares not redeemed will be delivered to the investor upon completion of
purchases under the Letter of Intent.
16
<PAGE>
If the gross amount invested within the 13 month period covered by the
Letter of Intent exceeds the specified purchase amount and reaches a level
allowing a smaller sales charge, a price adjustment will be made on the day it
reaches the new level. The Letter of Intent is not a binding agreement upon the
investor to purchase, or the Fund to sell, the full indicated amount.
Who Is Entitled To Reductions?
- ------------------------------
Reductions in sales charges apply to purchases by a "single person,"
including an individual, members of a family unit comprising husband, wife and
minor children, or a trustee or other fiduciary purchasing for a single
fiduciary account, including employee benefit plans qualified under Section 401
of the Internal Revenue Code.
HOW IS THE OFFERING PRICE DETERMINED?
The public offering price is determined by adding to the Fund's current net
asset value per share (as described under "How is Net Asset Value Per Share
Determined?") the sales charge percentage applicable to the transaction. The
portfolio securities in which the Fund invests fluctuate in value, and hence the
net asset value per share of the Fund also fluctuates. The following sample
calculation is based upon the total net assets of the Fund on October 31, 1995,
of $13,998,708; and the total shares of the Fund outstanding as of that date of
2,742,371 and a transaction with an applicable sales charge of the maximum 5.0%,
as stated under "How Are Sales Charges Determined?" in the Prospectus.
Net Asset Value Per Share $5.10
-----
($13,998,708 divided by
2,742,371 shares outstanding)
Maximum Offering Price Per Share $5.37
-----
($5.10 divided by .95)
HOW ARE SHARES DISTRIBUTED?
SBM Financial Services, Inc., a subsidiary of ARM, acts as distributor of
the shares of the Fund and of the other mutual funds in the State Bond Group.
As distributor of the Fund's capital stock, SBM Financial Services, Inc. allows
concessions to all dealers up to 4.5% on purchases to which the 5% sales charge
applies. In the event that the dealer concession is 90% or more of the sales
charge, dealers taking advantage of such concession may be deemed to be
underwriters under the Securities Act of 1933. The Distributor also pays sales
commission to its own agents who sell Fund shares. The Distributor retains the
balance of sales charges paid by investors. The sales charges paid by investors
and received by the Distributor amounted to the following amounts during the
fiscal years ended October 31, 1995, 1994, and 1993, respectively: $45,868;
$55,143; and $96,574. The Distributor retained these entire amounts.
17
<PAGE>
The agreement between the Fund and the Distributor provides that the
Distributor will pay certain expenses such as printing costs of prospectuses and
statements of additional information used in offering shares to prospective
investors, applications and confirmations, and all other expenses in connection
with the issuance and sale of the Fund's shares. The Fund will pay the costs of
registering and qualifying shares for sale and of preparing, setting in print,
and printing and distributing prospectuses to existing shareholders.
HOW CAN YOU "SELL" YOUR SHARES?
The procedure for redemption of Fund shares under ordinary circumstances
is set forth in the Prospectus.
In unusual circumstances, payment may be postponed if the orderly
liquidation of portfolio securities is prevented by the closing of, or
restricted trading on, the New York Stock Exchange during periods of emergency,
or such other periods as ordered by the Securities and Exchange Commission.
HOW IS NET ASSET VALUE PER SHARE DETERMINED?
Net asset value per Fund share is determined as of the close of the New
York Stock Exchange on each day that the New York Stock Exchange is open for
business, except on (i) days on which changes in the value of the Fund's
portfolio securities will not materially affect the current net asset value of
the Fund's shares or (ii) days during which no Fund shares are tendered for
redemption and no order to purchase or sell Fund shares is received. The New
York Stock Exchange is closed on Saturdays and Sundays and is also closed in
observance of the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. Net asset value is determined by dividing the value of the total
assets of the Fund, less liabilities, by the number of shares outstanding.
In determining net asset value, the Fund utilizes the valuations of its
portfolio securities furnished by a pricing service approved by the Board of
Directors. The pricing service values portfolio securities which have remaining
maturities of more than 60 days from the date of valuation at the mean between
quoted bid and asked prices when quotations are readily available. Such
securities for which quotations are not readily available are valued at fair
value as determined by the pricing service using methods which include
consideration of yields or prices of securities of comparable quality, type of
issue, coupon, maturity, and rating, indications as to value from dealers, and
general market conditions. The pricing service may employ electronic data
processing techniques and/or a matrix system to determine valuations. Short-
term holdings maturing in 60 days or less are valued at cost plus accrued
interest, which approximates market value.
18
<PAGE>
TAX STATUS OF THE FUND
The Fund has satisfied and intends to continue to satisfy the requirements
to obtain the special tax treatment afforded to regulated investment companies
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and if so qualified the Fund (but not its shareholders) will not be
liable for federal income taxes to the extent it distributes all or
substantially all of its taxable income to shareholders.
To the extent the Fund invests in zero coupon securities, including zero
coupon classes of CMOs, the Fund is required to accrue income and is therefore
subject to the distribution requirements of the Code. Because this income
earned by the Fund in a taxable year may not be represented by cash income, the
Fund may have to dispose of other securities and use the proceeds of make
distributions to satisfy the Code's distribution requirements.
TAX STATUS OF PAYMENTS YOU RECEIVE
Information regarding the tax status of payments you will receive is set
forth in the Prospectus.
WILL THE FUND WITHHOLD TAXES ON DISTRIBUTIONS?
Under federal law, the Fund is required, subject to certain exceptions, to
withhold and remit to the U.S. Treasury 31% of distributions and redemption
proceeds paid on an account if the holder of the account provides the Fund with
either an incorrect tax identification number or no number at all, or fails to
certify to the Fund that he is not subject to such withholding.
GENERAL INFORMATION
State Bond U. S. Government and Agency Securities Fund is a diversified,
open-end management investment company, or mutual fund, incorporated in Maryland
in 1985. The Fund is currently the sole investment portfolio of State Bond
Income Funds, Inc.
FINANCIAL STATEMENTS
19
<PAGE>
State Bond U.S. Government and Agency Securities Fund
Schedule of Investments
October 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------------
<S> <C> <C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES (96.2%)
Government National Mortgage Association (73.3%)
8.50%, due 9/15/2021 $ 245,731 $ 254,101
8.50%, due 3/15/2022 1,316,851 1,346,612
8.50%, due 5/15/2022 306,595 314,228
8.00%, due 6/15/2022 479,849 488,810
7.50%, due 8/15/2022 718,128 727,095
7.50%, due 10/15/2022 338,751 349,871
7.50%, due 1/15/2023 921,448 914,717
7.50%, due 2/15/2023 986,370 969,387
7.50%, due 4/15/2023 416,310 408,522
7.50%, due 5/15/2023 417,011 409,888
7.00%, due 7/15/2023 950,365 925,644
7.00%, due 8/15/2023 704,210 675,426
8.00%, due 4/15/2024 894,245 920,014
7.50%, due 6/15/2024 485,932 489,908
8.00%, due 7/15/2024 479,480 497,833
8.50%, due 9/15/2024 481,968 509,065
----------------
10,201,121
Federal National Mortgage Association (22.9%)
7.00%, due 10/01/2023 2,354,708 2,283,361
7.00%, due 11/01/2023 433,627 420,193
7.00%, due 12/01/2023 485,777 475,502
----------------
3,179,056
----------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES (Cost $13,417,356) $ 13,380,177
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-----------------------------
<S> <C> <C>
REPURCHASE AGREEMENT (3.8%)
Repurchase agreement with Norwest Investment
Securities, Inc., 4.65%, dated
10/27/95, due 11/1/95, (Collateralized by
U.S. Treasury Note, due 11/15/97,
value $527,609) (Cost $525,000) $525,000 $ 525,000
-----------
TOTAL INVESTMENTS (100.0%) (Cost $13,942,356) $13,905,177
===========
</TABLE>
See accompanying notes.
3
<PAGE>
State Bond U.S. Government and Agency Securities Fund
Statement of Assets and Liabilities
October 31, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $13,942,356)
(Note l)-See accompanying schedule $ 13,905,177
Cash 141,229
Interest and other receivables 83,641
------------
TOTAL ASSETS 14,130,047
LIABILITIES
Payable for capital shares repurchased 28,458
Dividends payable 60,804
Payable to affiliates 11,922
Other payables and accrued expenses 30,155
------------
TOTAL LIABILITIES 131,339
------------
NET ASSETS $ 13,998,708
============
Net Assets consist of:
Paid-in capital $ 14,083,364
Undistributed net realized loss (47,477)
Net unrealized depreciation on investment securities (37,179)
------------
NET ASSETS, for 2,742,371 shares outstanding $ 13,998,708
============
NET ASSET VALUE, and redemption price per share $ 5.10
============
Maximum offering price per share (includes maximum sales
charge of 5%--reduced on purchases of $25,000 or more) $ 5.37
============
</TABLE>
See accompanying notes.
4
<PAGE>
State Bond U.S. Government and Agency Securities Fund
Statement of Operations
Year Ended October 31, 1995
INVESTMENT INCOME
Interest $1,028,789
EXPENSES (Note 2)
Investment advisory and management fees, net of
12b-1 plan fees 55,185
Rule 12b-1 plan fees 34,490
Professional fees 13,100
Shareholders' reports 10,000
Transfer agent fees 13,100
Custodian fees 9,800
Accounting and pricing service fees 14,200
Directors' fees and expenses 5,000
Registration fees 10,640
Other expenses 7,360
------------
Total expenses before reimbursement 172,875
Less: expense reimbursement (34,914)
------------
Net expenses 137,961
------------
Net investment income 890,828
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 1)
Net realized loss on investments (47,477)
Change in unrealized depreciation on investments 1,150,333
------------
Net realized and unrealized gain on investments 1,102,856
------------
Net increase in net assets resulting from operations $1,993,684
============
See accompanying notes.
5
<PAGE>
State Bond U.S. Government and Agency Securities Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1995 1994
-------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 890,828 $ 905,347
Net realized gain (loss) on investments (47,477) 59,296
Net unrealized appreciation (depreciation) 1,150,333 (1,618,125)
-------------------------------
Net increase (decrease) in net assets resulting
from operations 1,993,684 (653,482)
Distributions to shareholders from:
Net investment income (890,828) (905,347)
Net realized gain (58,624) (63,055)
-------------------------------
Total distributions to shareholders (949,452) (968,402)
Capital share transactions:
Proceeds from sales of shares 1,886,616 1,782,523
Proceeds from reinvested dividends 611,738 629,881
Cost of shares redeemed (3,067,671) (3,224,518)
-------------------------------
Net decrease in net assets resulting from share
transactions (569,317) (812,114)
-------------------------------
Total increase (decrease) in net assets 474,915 (2,433,998)
NET ASSETS
Beginning of year 13,523,793 15,957,791
-------------------------------
End of year $13,998,708 $13,523,793
===============================
OTHER INFORMATION
Shares:
Sold 385,235 357,050
Issued through reinvestment of dividends 124,760 124,962
Redeemed (625,368) (640,455)
-------------------------------
Net decrease (1l5,373) (l58,443)
===============================
</TABLE>
See accompanying notes.
6
<PAGE>
State Bond U.S. Government and Agency Securities Fund
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------
1995 1994 1993 1992 1991
--------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning
of year $ 4.73 $ 5.29 $ 5.24 $ 5.21 $ 4.90
Income from investment
operations:
Net investment income .32 .31 .33 .37 .41
Net realized and unrealized
gain (loss) on investments .39 (.54) .08 .03 .31
--------------------------------------------
Total from investment
operations .71 (.23) .41 .40 .72
Less distributions:
From net investment income (.32) (.31) (.33) (.37) (.41)
From realized gains (.02) (.02) (.03) - -
--------------------------------------------
Total distributions (.34) (.33) (.36) (.37) (.41)
--------------------------------------------
Net asset value, end of year $ 5.10 $ 4.73 $ 5.29 $ 5.24 $ 5.21
============================================
TOTAL RETURN* 15.48% (4.50%) 8.11% 7.93% 15.30%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in
thousands) $13,999 $13,524 $15,958 $14,713 $11,285
Ratio of expenses to average net
assets 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income
to average net assets 6.46% 7.22% 6.30% 7.01% 8.03%
Ratio of expenses to average net
assets before voluntary
expense reimbursements 1.25% 1.23% 1.21% 1.22% 1.37%
Ratio of net investment income
to average net assets before
voluntary expense
reimbursements 6.20% 6.00% 6.12% 6.77% 7.69%
Portfolio turnover rate 7% 23% 9% 47% 8%
</TABLE>
*Total returns do not consider the effects of the one time sales charge.
7
<PAGE>
State Bond U.S. Government and Agency Securities Fund
Notes to Financial Statements
October 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The State Bond U.S. Government and Agency Securities Fund (the "Fund") is the
only investment portfolio of the State Bond Income Funds, Inc., which is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end diversified management investment company. The primary
investment objective of the Fund is to maximize current income and preserve
capital.
On June 14, 1995, ARM Financial Group, Inc. ("ARM") completed the acquisition of
substantially all of the assets and business operations of SBM Company ("SBM").
As part of the acquisition, ARM Capital Advisors, Inc. ("ARM Capital Advisors"),
a subsidiary of ARM, assumed the responsibilities of SBM as manager of the Fund.
The Investment Advisory and Management Agreement between the Fund and ARM
Capital Advisors contains the same material terms and conditions (including the
fees payable to ARM Capital Advisors) as were contained in the Fund's prior
Investment Advisory and Management Agreement with SBM.
As part of the acquisition, ARM acquired all of the issued and outstanding
common stock of SBM Financial Services, Inc. ("SBM Financial Services"), the
Fund's distributor. Effective June 14, 1995, SBM Financial Services also became
the transfer agent for the Fund. Prior to the acquisition SBM functioned as the
transfer agent for the Fund.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for investment companies.
INVESTMENTS IN SECURITIES
Investment securities are stated at market values. Market valuations are
provided by a pricing service approved by the Board of Directors. The pricing
service values portfolio securities which have remaining maturities of more than
sixty days from the date of valuation at the mean between quoted bid and asked
prices when quotations are readily available. Securities for which quotations
are not readily available are valued at fair market value, as determined by the
pricing service. Short-term holdings maturing in sixty days or less are valued
at amortized cost, which approximates market value.
8
<PAGE>
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Security transactions are accounted for on the date the order to buy or sell is
executed. Interest income, which includes amortization of premium and accretion
of discount, is accrued as earned. Realized gains and losses on securities sold
are determined on the basis of specific identification.
At October 31, 1995, net unrealized depreciation of investment securities
aggregated $37,179, of which $150,007 related to appreciated investment
securities and $187,186 to depreciated investment securities. The aggregate cost
of securities is the same for book and tax purposes. At October 31, 1995, the
Fund had a capital loss carryforward of $47,477 which is available to offset
future taxable gains and will expire October 31, 2003.
INCOME TAXES
The Fund complied with the requirements of the Internal Revenue Code applicable
to regulated investment companies and distributed its taxable income. Therefore,
no provision for federal or state income tax is required.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared daily and distributed monthly.
Distributions from taxable net realized investment gains, if any, will be
declared at least once a year. Distributions are recorded on the ex-dividend
date.
2. INVESTMENT ADVISORY AGREEMENT AND PAYMENTS TO RELATED PARTIES
ARM Capital Advisors is the Fund's investment adviser. The investment advisory
fee is computed at the annual rate of .65% of average daily net assets of the
Fund. Included in the investment advisory fee is .25% of the average daily net
assets which ARM Capital Advisors pays to SBM Financial Services under a Rule
12b-1 plan of share distribution.
9
<PAGE>
State Bond U.S. Government and Agency Securities Fund
Notes to Financial Statements (continued)
2. INVESTMENT ADVISORY AGREEMENT AND PAYMENTS TO RELATED PARTIES (CONTINUED)
ARM Capital Advisors has voluntarily undertaken to reimburse the Fund for any
expenses in excess of 1.00% of the average daily net assets, despite the fact
that higher expenses may be permitted by state law.
Fees paid to SBM Financial Services for underwriting services in connection with
sales of the Fund's capital shares aggregated $45,868 for the fiscal year ended
October 31, 1995. Such fees are not an expense of the Fund and are excluded from
the proceeds received by the Fund for shares of its capital shares as shown in
the accompanying statements of changes in net assets.
Certain officers and directors of the Fund are also officers of ARM, ARM Capital
Advisors, and SBM Financial Services.
3. CAPITAL SHARES
At October 31, 1995, the Fund had authority to issue ten billion shares of
common stock, each with a par value of $.00001.
10
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
State Bond U.S. Government and Agency Securities Fund
We have audited the accompanying statement of assets and liabilities including
the schedule of investments of the State Bond U.S. Government and Agency
Securities Fund (the "Fund") as of October 31, 1995 and the related statements
of operations and changes in net assets and financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended October 31,
1994 and financial highlights for each of the four years in the period ended
October 31, 1994 of the State Bond U.S. Government and Agency Securities Fund
were audited by other auditors whose report dated November 29, 1994 expressed an
unqualified opinion.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at October 31, 1995, by
correspondence with the custodian. As to uncompleted securities transactions, we
performed other auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
State Bond U.S. Government and Agency Securities Fund at October 31, 1995, and
the results of its operations, changes in its net assets and financial
highlights for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
November 17, 1995
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of State Income Funds, Inc.
and Shareholders of State Bond U.S. Government
and Agency Securities Fund
We have audited the accompanying balance sheet and statement of net assets of
State Bond U.S. Government and Agency Securities Fund (the Fund) as of October
31, 1994 and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of State
Bond U.S. Government and Agency Securities Fund as of October 31, 1994, the
results of its operations for the year ended, the changes in its net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 29, 1994
<PAGE>
PART C
OTHER INFORMATION
STATE BOND U.S. GOVERNMENT AND AGENCY
SECURITIES FUND
Item 24. Financial Statements and Exhibits
- -------------------------------------------
(a) Financial Statements and Independent Auditors' Reports:
Included in Part A:
Financial Highlights for each year in the nine year
period ended October 31, 1995, and for the period
November 20, 1985 (commencement of operations) to
October 31, 1986.
Included in Part B:
Schedule of Investments - October 31, 1995
Statement of Assets and Liabilities - October 31, 1995
Statement of Operations - Year ended October 31, 1995
Statements of Changes in Net Assets - Years ended
October 31, 1995 and 1994
Financial Highlights for each year in the five years
ended October 31, 1995
Notes to Financial Statements
Independent Auditors' Reports
(b) Exhibits
(1) Articles of Incorporation - Filed as an Exhibit to Post-Effective
Amendment No. 9 Form N-1A Registration Statement of State Bond Income Funds,
Inc. on December 29, 1993, File Nos. 33-1176 and 811-4445 and incorporated
herein by reference.
(2) By-laws - Filed as an Exhibit to Post-Effective Amendment No. 9
Form N-1A Registration Statement of State Bond Income Funds, Inc.
on December 29, 1993, File Nos. 33-1176 and 811-4445 and
incorporated herein by reference.
(3) Not applicable.
(4) See generally Article IV of the Articles of Incorporation, and
Articles II and VII of the Bylaws, filed as an Exhibit to
Post-Effective Amendment No. 9 Form N-1A Registration Statement of
State Bond Income Funds, Inc. on December 29, 1993, File Nos.
33-1176 and 811-4445 and incorporated herein by reference.
(5) Investment Advisory Contract - filed as an exhibit hereto.
(6) (a) Underwriting Agreement - filed as an exhibit hereto.
(b) Form of Agreements between principal underwriter and dealers
filed as an exhibit to the Registration Statement on Form
N-1A of State Bond Securities Funds, Inc., on September 28,
1993, File No. 2-30162 and incorporated herein by reference.
(7) Not applicable.
(8) Custodian Agreement - filed as an exhibit hereto.
(9) Administration Agreement (Transfer Agent Agreement) - filed
as an exhibit hereto.
(10) Opinion of Counsel - filed as an exhibit hereto.
(11) Other opinions, appraisals, rulings and consents.
(i) Independent Auditors' Consent:
Ernst & Young LLP dated December 27, 1995
(ii) Independent Auditors' Consent:
Deloitte & Touche LLP dated December 27, 1995
(12) Not applicable.
<PAGE>
(13) Letter of Investment Intent - filed as an exhibit to Pre-
Effective Amendment #2 to Form N-1A on December 4, 1985,
File #33-1176, and incorporated herein by reference.
(14) Copy of prototype defined contribution plan - filed as an exhibit
to the Registration Statement on Form N-1A of State Bond
Securities Funds, Inc., on September 28, 1993, File No. 2-30162
and incorporated herein by reference.
(15) Plan of Distribution - Filed as an Exhibit to Post-Effective
Amendment No. 9 Form N-1A Registration Statement of State Bond
Income Funds, Inc. on December 29, 1993, File Nos.33-1176 and
811-4445 and incorporated herein by reference.
(16) Computation of Performance Quotations - filed as an exhibit
hereto.
(17) Other Exhibits - Power of Attorney dated July 31, 1995 - Filed as
an Exhibit hereto.
(18) Not applicable.
(27) Financial Data Schedule - filed as an exhibit hereto.
<TABLE>
<CAPTION>
Item 25. Persons Controlled by or under Common Control with Registrant
- -----------------------------------------------------------------------
None
Item 26. Number of Holders of Securities
- -----------------------------------------
Number of Record Holders
Title of Class (within last 90 days)
-------------- ------------------------
<S> <C>
Capital Stock--$.00001 par value 729 as of October 31, 1995
Item 27. Indemnification
- -------------------------
</TABLE>
Article VII, Section 1 of the Amended and Restated Articles of Incorporation
of the Registrant provides that the Registrant shall indemnify its directors and
officers, whether serving the Registrant or at its request any other entity, to
the full extent permitted by the laws of the State of Maryland. This
indemnification shall not protect any director or officer against liability to
the Registrant or its shareholders to which he otherwise would be subject by
reason of willful misfeasance, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
Section 6.01 of the By-Laws of the Registrant provides that the Registrant
shall indemnify any person who was or is a party or is threatened to be made a
party to any action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than a proceeding by or in the right of the Registrant
in which such person shall have been adjudged to be liable to the Registrant),
by reason of being or having been a director or officer of the Registrant, or
serving or having served at the request of the Registrant as a director,
officer, partner, trustee, employee or agent of another entity in which the
Registrant has an interest as a shareholder, creditor or otherwise (a "Covered
Person"), against all liabilities and penalties, and reasonable expenses
(including attorney's fees) actually incurred by the Covered Person in
connection with such action, suit or proceeding, except (i) liability in
connection with any proceeding in which it is determined that (A) the act or
omission of the Covered Person was material to the matter giving rise to the
proceeding, and was committed in
<PAGE>
bad faith or was the result of active and deliberate dishonesty, or (B) the
Covered Person actually received an improper personal benefit in money, property
or services, or (C) in the case of any criminal proceeding, the Covered Person
had reasonable cause to believe that the act or omission was unlawful and (ii)
liability to the Corporation or its security holders to which the Covered Person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Article VII, Section 2 of the Amended and Restated Articles of Incorporation
of the Registrant provides that no director or officer of the Registrant shall
be personally liable to the Registrant or its security holders for money
damages, to the full extent permitted by Maryland law and the Investment Company
Act of 1940.
Pursuant to the Registrant's agreement with its principal underwriter, the
Registrant has agreed to indemnify, defend and hold harmless the underwriter and
any person who controls the underwriter within the meaning of Section 15 of the
Securities Act of 1933, free and harmless from and against any and all claims,
demands, liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which it or any controlling person may incur, under the
Securities Act of 1933, or under common law or otherwise, arising out of or
based upon any alleged untrue statement of material fact contained in the
Registrant's registration statement, prospectus or statement of additional
information or arising out of or based upon any alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the indemnity agreement, to the
extent that it might require indemnity of any person who is a controlling person
and who is also a director of the Registrant, may not inure to the benefit of
such person unless a court of competent jurisdiction shall determine, or it
shall have been determined by controlling precedent, that such result would not
be against public policy as expressed in the Securities Act of 1933; and further
provided that in no event shall any thing contained in the indemnity agreement
be so construed as to protect the underwriter against any liability to the
Registrant or its security holders to which the underwriter would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence, in the
performance of its duties, or by reason of its reckless disregard of any
obligations and duties under the underwriting agreement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provision, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of 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
<PAGE>
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Registrant, its investment adviser, and its principal underwriter have
obtained directors and officers and errors and omissions liability insurance
insuring the activities of the Registrant, the investment advisory activities of
the investment adviser, and the activities of the principal underwriter as
distributor of investment company securities.
Item 28. Business and Other Connections of Investment Adviser
- --------------------------------------------------------------
ARM Capital Advisors, Inc., the Registrant's investment adviser, is a registered
investment adviser providing investment management services to investment
companies and institutional and individual companies.
The business, profession, vocation or employment of a substantial nature which
each director or officer of the investment adviser, is or has been, at any time
during the past two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner, or trustee is as follows:
Name and Principal Business Address* Position and Offices
- ----------------------------------- with Adviser
--------------------
John Franco Director and Co-Chief
Co-Chief Executive Officer Executive Officer
Martin H. Ruby Director and Co-Chief
Co-Chief Executive Officer Executive Officer
Emad A. Zikry Director and President
Since October 1994:
Executive Vice President-Chief
Investment Officer
200 Park Avenue, 20th Floor
New York NY 10166
1992-October 1994:
President-Chief Investment Officer
Klienwort Benson Investment Management
Americas Inc.
200 Park Avenue, 20th Floor
New York NY 10166
Keith O. Martens Senior Vice President
Since June 1995: and Senior Portfolio
200 Park Avenue, 20th Floor Manager
New York NY 10166
1969-June 1995:
Executive Vice President-Investments
SBM Company
8400 Normandale Lake Boulevard
Suite 1150
Minneapolis MN 55437
John R. McGeeney Secretary
Co-General Counsel and Secretary
<PAGE>
Peter S. Resnik Treasurer
Treasurer
Don W. Cummings Controller
Controller
Rose M. Culbertson Tax Officer
Tax Officer
Kevin Howard Assistant Secretary
Since January 1994: and Compliance Officer
Assistant General Counsel and
Compliance Officer
1992-January 1994:
Providian Corp.
Assistant General Counsel
400 West Market Street
Louisville KY 40202
*All addresses are ARM Financial Group, Inc., 239 S. Fifth Street, 12th Floor,
Louisville KY 40202. Unless otherwise indicated, each individual has been
employed by ARM Financial Group or its predecessor-in-interest, Analytical Risk
Management, Ltd., for the last two years.
Item 29. Principal Underwriters
- --------------------------------
(a) SBM Financial Services, Inc. acts as principal underwriter for the
Fund, and for each of the following investment companies:
State Bond Investment Funds, Inc.
(State Bond Diversified Fund Portfolio)
State Bond Equity Funds, Inc.
(State Bond Common Stock Fund Portfolio)
State Bond Money Funds, Inc.
(State Bond Cash Management Fund Portfolio)
State Bond Tax-Free Income Funds, Inc.
(State Bond Minnesota Tax-Free Income Fund Portfolio)
State Bond Municipal Funds, Inc.
(b) The following table sets forth information concerning each director,
officer or partner of the principal underwriter.
<TABLE>
<CAPTION>
Name and Principal Positions & Offices Positions & Offices
Business Address with Underwriter with Registrant
- ------------------ ------------------- -------------------
<S> <C> <C>
John R. McGeeney* Director, Secretary, None
General Counsel and
Compliance Officer
Edward J. Haines* Director and President None
Walter W. Balek*** Vice President None
</TABLE>
<PAGE>
Dale C. Bauman*** Vice President President
Robert Bryant Vice President None
1550 East Shaw, #120
Fresno CA 93710
Richard M. Carlblom*** Vice President None
Ronald Geiger*** Vice President None
Peter S. Resnik* Treasurer Treasurer
Don W. Cummings* Controller Controller
William H. Guth** Operations Officer None
David L. Anders** Marketing Officer None
Rose M. Culbertson* Tax Officer None
Patricia L. Mack* Assistant Secretary None
* Address is 239 S. Fifth Street, 12th Floor, Louisville KY 40202
** Address is 200 East Wilson Bridge Road, Worthington OH 43085
*** Address is 100 North Minnesota Street, New Ulm MN 56073
(c) Not applicable.
Item 30. Location of Accounts and Records
- ------------------------------------------
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105-1716
SBM Financial Services, Inc.
100 North Minnesota Street
New Ulm MN 56073
Item 31. Management Services
- -----------------------------
None
Item 32. Undertakings
- ----------------------
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(a) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Louisville and State of Kentucky, on the 29th day of December, 1995.
STATE BOND INCOME FUNDS, INC.
By: /s/Kevin Howard
------------------------
Kevin Howard, Vice President and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/Dale Bauman President December 29,
- ------------------- (Principal Executive 1995
Officer)
/s/Peter Resnik Treasurer December 29,
- ------------------- (Principal Financial 1995
Officer)
/s/Don Cummings Controller December 29,
- ------------------- (Principal Accounting 1995
Officer)
* Director
- -------------------
(William B. Faulkner)
* Director
- ------------------
(Patrick M. Finley)
* Director
- ------------------
(Chris L. Mahai)
* Director
- ------------------
(John R. Lindholm)
<PAGE>
* Director
- ------------------
(John Katz)
* Director
- ------------------
(Theodore S. Rosky)
* This Amendment has been signed
by each of the persons so indicated
by the undersigned as Attorney-in-Fact.
*By: /s/Kevin Howard December 29, 1995
------------------------------------
<PAGE>
Exhibit #5
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT, made this 14th day of
June, 1995, by and between State Bond Income Funds, Inc., a Maryland Corporation
(hereinafter called the "Fund"), and ARM Capital Advisors, Inc., a Delaware
Corporation (hereinafter called the "Manager").
WHEREAS, The Fund is registered as an open-ended, diversified investment
company under the Investment Company Act of 1940, and wishes to retain the
Manager to provide investment advisory services, and certain management and
administrative services to the Fund; and the Manager is willing to furnish such
services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed as follows:
1. The Fund shall at all times keep the Manager fully informed with regard
to the securities owned by it, its funds available, or to become available, for
investment, and generally as to the condition of its affairs. It shall furnish
the Manager with such other documents and information with regard to its affairs
as the Manager may from time to time reasonably request.
2. Subject to the direction and control of the Fund's Board of Directors,
the Manager shall regularly provide the Fund with investment research, advice,
management and supervision and shall furnish a continuous investment program for
the Fund's portfolio of securities consistent with the Fund's investment goals
and policies. The Manager will determine from time to time what securities will
be purchased, retained or sold by the Fund, and will implement those decisions,
all subject to the provisions of the Fund's Articles of Incorporation and By-
Laws, the Investment Company Act of 1940, applicable rules and regulations of
the Securities and Exchange Commission, and other applicable federal and state
law, and to the investment goals and policies of the Fund. The Manager shall
also provide advice and recommendations with respect to other aspects of the
business and affairs of the Fund, and shall perform such other functions of
management and supervision as may be directed by the Board of Directors of the
Fund.
3. (a) The Manager, at its expense, shall supply the Board of Directors and
officers of the Fund with all statistical information and reports reasonably
required by them and reasonably available to the Manager and shall furnish the
Fund with office facilities, including space, furniture and equipment and all
personnel reasonably necessary for the operation of the Fund to the extent of
services hereby undertaken by the Manager. The Manager shall authorize and
permit any of its directors, officers and employees, who may be elected as
directors or officers of the Fund, to serve in the capacities in which they are
elected.
(b) Other than are herein specifically indicated, the Manager will not
be responsible for the Fund's expenses. Specifically, the Manager will not be
responsible for any of the following expenses of the Fund, which expenses shall
be borne by the Fund: outside legal, auditing and accounting expenses;
bookkeeping, record keeping, and Fund portfolio and Fund shares pricing
expenses; interest, taxes, and governmental fees; expenses incurred in
connection with membership in investment company organizations; brokerage
commissions or charges, if any; fees of custodians, transfer agents, registrars,
accounting services agents, or other agents; expense of preparing share
certificates; expenses relating to the redemption or repurchase of the Fund's
shares; investor services expenses; expenses of registering and qualifying Fund
shares for sale under applicable federal and state law; expenses of preparing,
setting in print, printing and distributing prospectuses, statements of
additional information, reports, notices and dividends to Fund shareholders;
cost of stationery; costs of stockholders and other meetings of the Fund;
traveling expenses of officers, directors and employees of the Fund, if any;
fees of the Fund's independent directors and salaries of any officers or
employees who are not affiliated with the Manager; the Fund's pro rata portion
of premiums on any fidelity bond and insurance covering the Fund; and general
corporate fees and expenses.
4. No director, officer or employee of the Fund shall receive from the Fund
any salary or other compensation as such director, officer or employee while he
is at the same time a director, officer or employee of the Manager. This
<PAGE>
paragraph shall not apply to directors, executive committee members, consultants
and other persons who are not regular members of the Manager's staff.
5. As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Fund shall pay the Manager, as promptly as possible
after the last day of each month, a monthly fee, calculated daily, of 1/12th of
.65 of 1% (.65 of 1% annually) of the average daily net assets of the Fund. The
first payment of the fee shall be made as promptly as possible at the end of the
month next succeeding the effective date of this Agreement, and shall constitute
a full payment of the fee due the Manager for all services prior to that date.
If this Agreement is terminated as of any date not the last day of a month, such
fee shall be paid as promptly as possible after such date of termination, shall
be based on the average daily net assets of the Fund in that period from the
beginning of such month to such date of termination, and shall be that
proportion of such average daily net assets as the number of business days in
such period bears to the number of business days in such month. The average
daily net assets of the Fund shall in all cases be based only on business days
and be computed as of such time as may be determined by the Board of Directors
of the Fund. Each such payment shall be accompanied by a report of the Fund
prepared either by the Fund or by a reputable firm of independent accountants
which shall show the amount properly payable to the Manager under this Agreement
and the detailed computation thereof. Upon receipt of each such payment from the
Fund, the Manager shall pay to SBM Financial Services, Inc., the principal
underwriter for the Fund, a portion of the payment received by the Manager equal
to 1/12th of .25 of 1% of the average daily net assets of the Fund for the month
as SBM Financial Services, Inc.'s fee under the Fund's Plan of Distribution.
6. The Manager assumes no responsibility under this Agreement other than to
render the services called for hereunder, in good faith, and shall not be
responsible for any action of the Board of Directors of the fund in following or
declining to follow any advice or recommendations of the Manager; provided, that
nothing in this Agreement shall protect the Manager against any liability to the
Fund or its stockholders to which it would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and duties
hereunder.
7. Nothing in the Agreement shall limit or restrict the right of any
director, officer, or employee of the Manager who may also be a director,
officer, or employee of the Fund, to engage in any other business or to devote
his time and attention in part to the management or other aspects of any other
business, whether of a similar nature or a dissimilar nature, nor to limit or
restrict the right of the Manager to engage in any other business or to render
services of any kind, including investment advisory and management services, to
any other corporation, firm, individual or association.
8. As used in this Agreement, the terms "assignment", "interested person",
and "majority of the outstanding voting securities" shall have the meanings
given to them by Section 2(a) of the Investment Company Act of 1940, subject to
such exemptions as may be granted by the Securities and Exchange Commission by
any rule, regulation or order.
9. This Agreement shall terminate automatically in the event of its
assignment by the Manager and shall not be assignable by the Fund without the
consent of the Manager.
10. This Agreement may be terminated at any time, without the payment of
any penalty, (a) by the Board of Directors of the Fund or by vote of a majority
of the outstanding voting securities of the Fund by sixty days' written notice
addressed to the Manager at its principal place of business; and (b) by the
Manager by sixty days' written notice addressed to the Fund at its principal
place of business.
11. This Agreement shall be submitted for approval to the Board of
Directors of the Fund annually and shall continue in effect only so long as
specifically approved annually by vote of a majority of the directors of the
Fund who are not parties to the Agreement or interested persons of such parties,
cast in person at a meeting called for that purpose, and either by vote of the
holders of a majority of the outstanding voting securities of the Fund or by
majority vote of the Fund's Board of Directors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
<PAGE>
STATE BOND INCOME FUNDS, INC.
By: /s/ Stewart Gregg
-----------------------------------
Its: /s/ Vice President
---------------------------
ARM CAPITAL ADVISORS, INC.
By: /s/ Martin H. Ruby
-----------------------------------
Its: /s/ CEO
---------------------------
<PAGE>
Exhibit #6a
UNDERWRITING AGREEMENT
BETWEEN
STATE BOND INCOME FUNDS, INC.
AND
SBM FINANCIAL SERVICES, INC.
This Underwriting Agreement made this 14th day of June, 1995, by and
between State Bond Income Funds, Inc., a Maryland corporation (hereinafter
called the "Fund") and SBM Financial Services, Inc., a Minnesota corporation
(hereinafter called "Distributor").
WITNESSETH THAT:
1. The Fund hereby appoints Distributor as principal underwriter in
connection with the offering and sale of shares of the capital stock
of the Fund. The Fund authorizes Distributor, as agent for the Fund,
subject to applicable law and the Articles and By-laws of the Fund to
solicit orders for the purchase of its shares, satisfactory to the
Fund, and otherwise promote the Fund and, as agent for the Fund, to
accept orders from dealers with whom it has written agreements.
Distributor shall offer the Fund's shares only in states in which such
shares are qualified as a broker/dealer. Distributor shall distribute
the Fund's shares on an agency or "best efforts" basis under which the
Fund shall only issue such shares as are actually sold.
2. The public offering price of such shares shall be the net asset value
per share (as determined by the Fund) of the outstanding shares of the
Fund, plus the applicable sales charge as specified in the Fund's
Prospectus from time to time. Such net asset value shall be regularly
determined as set forth from time to time in the Fund's current
Prospectus and Statement of Additional Information. The Fund shall
promptly furnish Distributor a statement of each computation of net
asset value and of the details entering into such computation.
3. Distributor shall receive, as compensation for the services it
performs under this Agreement, a sales charge for each investment in
the Fund's shares, which sales charge shall be as set forth in
paragraph 2 of this Agreement. The sales charge may be deducted by
Distributor from the offering price when Distributor makes payment to
the Fund hereunder for sales of the Fund's shares. Distributor may in
its discretion allow concessions to dealers with whom Distributor has
made arrangements and agreements to sell shares of the Fund on its
behalf.
4. Distributor, at no expense to the Fund, shall print and distribute to
prospective investors Prospectuses and Statements of Additional
Information, and may print and distribute such other sales literature,
forms, and advertisements in connection with sale of the shares of the
Fund as comply with the applicable provisions of federal and state
law. Except as specifically provided herein, the Fund shall bear none
of the expenses of Distributor in connection with its offer and sale
of shares of the Fund. Distributor shall, as agent for the Fund, have
the right to sell Fund shares to dealers or to the public or both;
provided, however, that in connection with the sale or arranging for
the sale of Fund shares, Distributor shall give only such information
and make only such statements or representations as are contained in
the Prospectus or in the Statement of Additional Information, or in
such information as is furnished in writing to Distributor pursuant to
Paragraph 5 below, and the Fund shall not be responsible in any way
for any other information, statements or representations given or made
by Distributor or its representatives or agents.
5. The Fund shall keep Distributor fully informed with regard to its
affairs, and shall cooperate fully in the efforts of Distributor under
this Agreement.
6. The Fund agrees at its own expense to register its shares with the
Securities and Exchange Commission, State and other regulatory bodies
and to pay the related registration and filing fees therefor and to
file from time to time such amendments, reports and other documents as
may be necessary in order that there may
<PAGE>
be no untrue statements of a material fact in the Registration
Statement, Prospectus, or Statement of Additional Information, or
necessary in order that there may be no omission to state a material
fact therein , in the light of the circumstances under which they were
made, not misleading. As used in this Agreement, the term
"Registration Statement" shall mean from time to time the Registration
Statement most recently filed by the Fund with the Securities and
Exchange Commission and effective under the Securities Act of 1933, as
amended (hereinafter called the "Act"), as such Registration Statement
is amended by any amendments thereto at the time in effect, and the
term "Prospectus" and "Statement of Additional Information" shall mean
from time to time the form of prospectus and statement of additional
information filed by the Fund as part of the Registration Statement.
7. The Fund agrees to prepare, set in print, print and distribute
Prospectuses to shareholders of the Fund, and furnish Distributor from
time to time a copy of the Prospectus and Statement of Additional
Information in connection with the sale of the Fund's shares. The Fund
agrees to indemnify, defend and hold Distributor, and any person who
controls Distributor within the meaning of Section 15 of the Act, free
and harmless from and against any and all claims, demands, liabilities
and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any counsel fees incurred in
connection therewith) which Distributor or any such controlling person
may incur, under the Act, or under common law or otherwise, arising
out of or based upon any alleged untrue statement of a material fact
contained in the Registration Statement or Prospectus or arising out
of or based upon any alleged omission to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this indemnity
agreement of any person who is such a controlling person and who is
also a director of the Fund, shall not inure to the benefit of such
person unless a court of competent jurisdiction shall determine, or it
shall have been determined by controlling precedent, that such result
would not be against public policy as expressed in the Act; and
further provided that in no event shall anything herein contained be
so construed as to protect Distributor against any liability to the
Fund or its security holders to which Distributor would otherwise be
subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations and duties under this Agreement.
The Fund's agreement to indemnify Distributor and any such controlling
person as aforesaid is expressly conditioned upon the Fund being
notified of any action brought against Distributor or any such
controlling person, such notification to be given by letter or by
telegram addressed to the Fund at its principal office in Minneapolis,
Minnesota, and sent to the Fund by the person against whom such action
is brought, within ten days after the summons or other first legal
process shall have been served. The failure so to notify the Fund of
any such action shall not relieve the Fund from any liability which
the Fund may have to the person against whom such action is brought by
reason of any such alleged untrue statement or omission otherwise than
on account of the indemnity agreement contained in this Paragraph 7.
The Fund will be entitled to assume the defense of any suit brought to
enforce any such claim, demand or liability, but in such case, such
defense shall be conducted by counsel of good standing chosen by the
Fund and approved by Distributor. In the event the Fund does elect to
assume the defense of any such suit and retain counsel of good
standing approved by Distributor, the defendant or defendants in such
suit shall bear the fees and expenses of any additional counsel
retained by any of them; but in case the Fund does not elect to assume
the defense of any such suit, or in case Distributor does not approve
of counsel chosen by the Fund, the Fund will reimburse Distributor or
the controlling person or persons named as defendant or defendants in
such suit, for the fees and expenses of any counsel retained by
Distributor or them.
The indemnification agreement contained in this Paragraph 7 and the
Fund's representations and warranties in this Agreement shall remain
operative and in full force and effect regardless of any investigation
made by or on behalf of Distributor or any controlling person. This
agreement of indemnity will inure exclusively to the benefit of
Distributor and its successors and their respective estates, and to
the benefit of any controlling persons and their successors. The Fund
agrees promptly to notify Distributor of the commencement of any
litigation or proceedings against the Fund in connection with the
issue and sale of any of its capital stock.
8. Distributor agrees to indemnify, defend and hold the Fund, its several
officers and directors, and any
<PAGE>
person who controls within the meaning of Section 15 of the Act, free
and harmless from and against any and all claims, demands, liabilities
and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any counsel fees incurred in
connection therewith) which the Fund, its officers or directors, or
any such controlling person may incur under the Act or under common
law or otherwise; but only to the extent that such liability or
expense incurred by the Fund, its officers or directors or such
controlling person resulting from such claims or demands shall arise
out of or be based upon any alleged untrue statement of a material
fact contained in information furnished in writing by Distributor to
the Fund for use in the Registration Statement, Prospectus or
Statement of Additional Information, or shall arise out of or be based
upon any alleged omission to state a material fact in connection with
such information required to be stated in the Registration Statement
or Prospectus or necessary to make such information not misleading.
Distributor's agreement to indemnify the Fund, its officers and
directors, and any such controlling person as aforesaid is expressly
conditioned upon Distributor being notified of any action brought
against the Fund, its officers or directors or any such controlling
person, such notification to be given by letter or telegram addressed
to Distributor at its principal office in Minneapolis, Minnesota, and
sent to Distributor by the person against whom such action is brought,
within ten days after the summons or other first legal process shall
have been served. Distributor shall have a right to control the
defense of such action, with counsel of its own choosing, satisfactory
to the Fund, if such action is based solely upon such alleged
misstatement or omission on Distributor's part, and in any other event
Distributor or such controlling person shall each have the right to
participate in the defense or preparation of the defense of any such
action. The failure so to notify Distributor of any such action shall
not relieve Distributor from any liability which Distributor may have
to the Fund, its officers or directors or to such controlling person
by reason of any such untrue statement or omission on Distributor's
part otherwise that on account of the indemnity agreement contained in
this Paragraph 8.
9. This Agreement may be terminated by either party upon sixty days'
written notice to the other party and shall terminate automatically in
the event of its assignment. The term "assignment" for this purpose
shall have the meaning defined in Section 2(a)(4) of the Investment
Company Act of 1940.
10. This Agreement shall continue for successive annual periods, provided
that such continuance is specifically approved annually by the vote of
a majority of the Fund's Directors who are not "interested persons" of
the parties hereto as defined in the Investment Company Act of 1940,
cast in person at a meeting called for that purpose, and by either the
vote of a majority of the Board of Directors of the Fund or by the
vote of a majority of the outstanding voting securities of the Fund,
as defined in the Investment Company Act of 1940.
11. As additional compensation to Distributor for its services hereunder,
Distributor will receive after the end of each month from ARM Capital
Advisors, Inc., pursuant to the terms of the Investment Advisory and
Management Agreement between ARM Capital Advisors, Inc. and the Fund,
a payment equal to 1/12th of .25 of 1% of the average daily net assets
of the Fund for the month (the "12b-1 Fee"). Distributor shall use the
12b-1 Fee in the following manner:
a.) Broker/dealers other than Distributor shall be paid a portion of
the 12b-1 Fee based upon the percentage of Fund shares
attributable to shares sold by registered representatives of such
broker/dealers and still owned by such broker/dealers' clients
during the month.
b.) registered representatives of Distributor and their field
supervisors shall be paid a portion of such 12b-1 Fee based upon
the percentage of fund shares attributable to shares sold by such
registered representatives and still owned by such registered
representatives' clients during the month. Such amount shall be
paid to the registered representatives and their field
supervisors in such proportions as may be determined from time to
time, as set forth in written agreements.
c.) Other Service Entities (as defined in the Administration,
Shareholder Service and Plan of Distribution of the Fund) shall
be paid a portion of the 12b-1 Fee based upon the percentage for
<PAGE>
Fund shares the holders of which were provided administrative or
shareholder assistance by such Service Entities during the month.
d.) The balance of the 12b-1 Fee shall be retained by Distributor and
shall be expanded by it on any activities primarily intended to
result in the sale of Fund shares, including, by way of example
but not by way of limitation, the printing of prospectuses and
reports for other than existing shareholders, preparation and
distribution of sales literature, advertising of any type,
expenses incurred by officers, employees or registered
representatives of Distributor, including travel, entertainment
and telephone expenses.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
STATE BOND MONEY FUNDS, INC.
By: /s/ Stewart Gregg
-------------------------------------
Its: /s/ Vice President
--------------------------------
SBM FINANCIAL SERVICES, INC.
By: /s/ John R. McGeeney
-------------------------------------
Its: /s/ Secretary, General Counsel
-------------------------------
& Compliance Officer
-------------------------------
<PAGE>
Exhibit 8
CUSTODY AND INVESTMENT ACCOUNTING AGREEMENT
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THIS AGREEMENT made the _____ day of December, 1995, by and between
INVESTORS FIDUCIARY TRUST COMPANY, a trust company chartered under the laws of
the state of Missouri, having its trust office located at 127 West 10th Street,
Kansas City, Missouri 64105 ("Custodian"), and STATE BOND INVESTMENT FUNDS,
INC., a Maryland corporation, having its principal office and place of business
at 8400 Normandale Lake Blvd., Suite 1150, Minneapolis, Minnesota (55437-3807
("Fund").
WITNESSETH:
WHEREAS, Fund desires to appoint Investors Fiduciary Trust Company as
custodian of the securities and monies of Fund's investment portfolio and as its
agent to perform certain investment accounting and recordkeeping functions; and
WHEREAS, Investors Fiduciary Trust Company is willing to accept such
appointment;
NOW, THEREFORE, for and in consideration of the mutual promises contained
herein, the parties hereto, intending to be legally bound, mutually covenant and
agree as follows:
1. APPOINTMENT OF CUSTODIAN. Fund hereby constitutes and appoints Custodian
as:
A. Custodian of the securities and monies at any time owned by the Fund;
and
B. Agent to perform certain accounting and recordkeeping functions
relating to portfolio transactions required of a duly registered
investment company under Rule 31a of the Investment Company Act of 1940
(the "1940 Act") and to calculate the net asset value of the Fund.
2. REPRESENTATIONS AND WARRANTIES.
A. Fund hereby represents, warrants and acknowledges to Custodian:
1. That it is a corporation or trust (as specified above) duly
organized and existing and in good standing under the laws of its
state of organization, and that it is registered under the 1940
Act; and
<PAGE>
2. That it has the requisite power and authority under applicable law,
its articles of incorporation and its bylaws to enter into this
Agreement; that it has taken all requisite action necessary to
appoint Custodian as custodian and investment accounting and
recordkeeping agent for the Fund; and that this Agreement
constitutes a legal, valid and binding obligation of Fund,
enforceable in accordance with its terms.
B. Custodian hereby represents, warrants and acknowledges to Fund:
1. That it is a trust company duly organized and existing and in good
standing under the laws of the State of Missouri; and
2. That it has the requisite power and authority under applicable law,
its charter and its bylaws to enter into and perform this Agreement;
that this Agreement has been duly executed and delivered by
Custodian; and that this Agreement constitutes a legal, valid and
binding obligation of Custodian, enforceable in accordance with its
terms.
3. DUTIES AND RESPONSIBILITIES OF CUSTODIAN.
A. Delivery of Assets
Except as permitted by the 1940 Act, Fund will deliver or cause to be
delivered to Custodian on the effective date of this Agreement, or as
soon thereafter as practicable, and from time to time thereafter, all
portfolio securities acquired by it and monies then owned by it or from
time to time coming into its possession during the time this Agreement
shall continue in effect. Custodian shall have no responsibility or
liability whatsoever for or on account of securities or monies not so
delivered.
B. Delivery of Accounts and Records
Fund shall turn over or cause to be turned over to Custodian all of the
Fund's relevant accounts and records previously maintained. Custodian
shall be entitled to rely conclusively on the completeness and
correctness of the accounts and records turned
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<PAGE>
over to it, and Fund shall indemnify and hold Custodian harmless of and from
any and all expenses, damages and losses whatsoever arising out of or in
connection with any error, omission, inaccuracy or other deficiency of such
accounts and records or in the failure of Fund to provide, or to provide in
a timely manner, any accounts, records or information needed by the
Custodian to perform its functions hereunder.
C. Delivery of Assets to Third Parties
Custodian will receive delivery of and keep safely the assets of Fund
delivered to it from time to time segregated in a separate account, and if
Fund is comprised of more than one portfolio of investment securities (each
a "Portfolio") Custodian shall keep the assets of each Portfolio segregated
in a separate account. Custodian will not deliver, assign, pledge or
hypothecate any such assets to any person except as permitted by the
provisions of this Agreement or any agreement executed by it according to
the terms of Section 3.S. of this Agreement. Upon delivery of any such
assets to a subcustodian pursuant to Section 3.S. of this Agreement,
Custodian will create and maintain records identifying those assets which
have been delivered to the subcustodian as belonging to the Fund, by
Portfolio if applicable. The Custodian is responsible for the safekeeping of
the securities and monies of Fund only until they have been transmitted to
and received by other persons as permitted under the terms of this
Agreement, except for securities and monies transmitted to subcustodians
appointed under Section 3.S. of this Agreement, for which Custodian remains
responsible to the extent provided in Section 3.S. hereof. Custodian may
participate directly or indirectly through a subcustodian in the Depository
Trust Company (DTC), Treasury/Federal Reserve Book Entry System (Fed
System), Participant Trust Company (PTC) or other depository approved by the
Fund (as such entities are defined at 17 CFR Section 270.17f-4(b)) (each a
"Depository" and collectively, the "Depositories").
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<PAGE>
D. Registration of Securities
The Custodian shall at all times hold registered securities of the Fund
in the name of the Custodian, the Fund, or a nominee of either of them,
unless specifically directed by instructions to hold such registered
securities in so-called "street name," provided that, in any event, all
such securities and other assets shall be held in an account of the
Custodian containing only assets of the Fund, or only assets held by
the Custodian as a fiduciary or custodian for customers, and provided
further, that the records of the Custodian at all times shall indicate
the Fund or other customer for which such securities and other assets
are held in such account and the respective interests therein. If,
however, the Fund directs the Custodian to maintain securities in
"street name", notwithstanding anything contained herein to the
contrary, the Custodian shall be obligated only to utilize its best
efforts to timely collect income due the Fund on such securities and to
notify the Fund of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
All securities, and the ownership thereof by Fund, which are held by
Custodian hereunder, however, shall at all times be identifiable on the
records of the Custodian. The Fund agrees to hold Custodian and its
nominee harmless for any liability as a shareholder of record of
securities held in custody.
E. Exchange of Securities
Upon receipt of instructions as defined herein in Section 4.A.,
Custodian will exchange, or cause to be exchanged, portfolio securities
held by it for the account of Fund for other securities or cash issued
or paid in connection with any reorganization, recapitalization,
merger, consolidation, split-up of share, change of par value,
conversion or otherwise, and will deposit any such securities in
accordance with the terms of any reorganization or protective plan.
Without instructions, Custodian is authorized to exchange securities
held by it in temporary form for securities in
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<PAGE>
definitive form, to effect an exchange of shares when the par value of the
stock is changed, and, upon receiving payment therefor, to surrender bonds
or other securities held by it at maturity or when advised of earlier call
for redemption, except that Custodian shall receive instructions prior to
surrendering any convertible security.
F. Purchases of Investments of the Fund -- Other Than Options and Futures
Fund will, on each business day on which a purchase of securities (other
than options and futures) shall be made by it, deliver to Custodian
instructions which shall specify with respect to each such purchase:
1. If applicable, the name of the Portfolio making such purchase;
2. The name of the issuer and description of the security;
3. The number of shares and the principal amount purchased, and accrued
interest, if any;
4. The trade date;
5. The settlement date;
6. The purchase price per unit and the brokerage commission, taxes and
other expenses payable in connection with the purchase;
7. The total amount payable upon such purchase;
8. The name of the person from whom or the broker or dealer through whom
the purchase was made; and
9. Whether the security is to be received in certificated form or via a
specified Depository.
In accordance with such instructions, Custodian will pay for out of monies
held for the account of Fund, but only insofar as such monies are available
for such purpose, and receive the portfolio securities so purchased by or
for the account of Fund, except that Custodian may in its sole discretion
advance funds to the Fund which may result in an overdraft because the
monies held by the Custodian on behalf of the Fund are
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<PAGE>
insufficient to pay the total amount payable upon such purchase. Except as
otherwise instructed by Fund, such payment shall be made by the Custodian
only upon receipt of securities: (a) by the Custodian; (b) by a clearing
corporation of a national exchange of which the Custodian is a member; or
(c) by a Depository. Notwith standing the foregoing, (i) in the case of a
repurchase agreement, the Custodian may release funds to a Depository prior
to the receipt of advice from the Depository that the securities underlying
such repurchase agreement have been transferred by book-entry into the
account maintained with such Depository by the Custodian, on behalf of its
customers, provided that the Custodian's instructions to the Depository
require that the Depository make payment of such finds only upon transfer by
book-entry of the securities underlying the repurchase agreement in such
account; (ii) in the case of time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions, futures
contracts or options, the Custodian may make payment therefor before receipt
of an advice or confirmation evidencing said deposit or entry into such
transaction; and (iii) in the case of the purchase of securities, the
settlement of which occurs outside of the United States of America, the
Custodian may make, or cause a subcustodian appointed pursuant to Section
3.S.2. of this Agreement to make, payment therefor in accordance with
generally accepted local custom and market price.
G. Sales and Deliveries of Investments of the Fund -- Other than Options and
Futures
Fund will, on each business day on which a sale of investment securities
(other than options and futures) of Fund has been made, deliver to Custodian
instructions specifying with respect to each such sale:
1. If applicable, the name of the Portfolio making such sale;
2. The name of the issuer and description of the securities;
3. The number of shares and principal amount sold, and accrued interest, if
any;
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<PAGE>
4. The date on which the securities sold were purchased or other
information identifying the securities sold and to be delivered;
5. The trade date;
6. The settlement date;
7. The sale price per unit and the brokerage commission, taxes or other
expenses payable in connection with such sale;
8. The total amount to be received by Fund upon such sale; and
9. The name and address of the broker or dealer through whom or person to
whom the sale was made.
In accordance with such instructions, Custodian will deliver or cause to be
delivered the securities thus designated as sold for the account of Fund to
the broker or other person specified in the instructions relating to such
sale. Except as otherwise instructed by Fund, such delivery shall be made
upon receipt of payment therefor: (a) in such form as is satisfactory to
the Custodian; (b) credit to the account of the Custodian with a clearing
corporation of a national securities exchange of which the Custodian is a
member; or (c) credit to the account of the Custodian, on behalf of its
customers, with a Depository. Notwithstanding the foregoing: (i) in the
case of securities held in physical form, such securities shall be
delivered in accordance with "street delivery custom" to a broker or its
clearing agent; or (ii) in the case of the sale of securities, the
settlement of which occurs outside of the United States of America, the
Custodian may make, or cause a subcustodian appointed pursuant to Section
3.S.2. of this Agreement to make, payment therefor in accordance with
generally accepted local custom and market practice.
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<PAGE>
H. Purchases or Sales of Options and Futures
Fund will, on each business day on which a purchase or sale of the following
options and/or futures shall be made by it, deliver to Custodian
instructions which shall specify with respect to each such purchase or sale:
1. If applicable, the name of the Portfolio making such purchase or sale;
2. Security Options
a. The underlying security;
b. The price at which purchased or sold;
c. The expiration date;
d. The number of contracts;
e. The exercise price;
f. Whether the transaction is an opening, exercising, expiring or
closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased;
i. Market on which option traded; and
j. Name and address of the broker or dealer through whom the sale or
purchase was made.
3. Options on Indices
a. The index;
b. The price at which purchased or sold;
c. The exercise price;
d. The premium;
e. The multiple;
f. The expiration date;
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<PAGE>
g. Whether the transaction is an opening, exercising, expiring or
closing transaction;
h. Whether the transaction involves a put or call;
i. Whether the option is written or purchased; and
j. The name and address of the broker or dealer through whom the sale
or purchase was made, or other applicable settlement instructions.
4. Security Index Futures Contracts
a. The last trading date specified in the contract and, when available,
the closing level, thereof;
b. The index level on the date the contract is entered into;
c. The multiple;
d. Any margin requirements;
e. The need for a segregated margin account (in addition to
instructions, and if not already in the possession of Custodian,
Fund shall deliver a substantially complete and executed custodial
safekeeping account and procedural agreement which shall be
incorporated by reference into this Custody Agreement); and
f. The name and address of the futures commission merchant through whom
the sale or purchase was made, or other applicable settlement
instructions.
5. Options on Index Future Contracts
a. The underlying index future contract;
b. The premium;
c. The expiration date;
d. The number of options;
e. The exercise price;
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<PAGE>
f. Whether the transaction involves an opening, exercising, expiring or
closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased; and
i. The market on which the option is traded.
I. Securities Pledged or Loaned
If specifically allowed for in the prospectus of Fund, and subject to such
additional terms and conditions as Custodian may require:
1. Upon receipt of instructions, Custodian will release or cause to be
released securities held in custody to the pledgee designated in such
instructions by way of pledge or hypothecation to secure any loan
incurred by Fund; provided, however, that the securities shall be
released only upon payment to Custodian of the monies borrowed, except
that in cases where additional collateral is required to secure a
borrowing already made, further securities may be released or caused to
be released for that purpose upon receipt of instructions. Upon receipt
of instructions, Custodian will pay, but only from funds available for
such purpose, any such loan upon redelivery to it of the securities
pledged or hypothecated therefor and upon surrender of the note or notes
evidencing such loan.
2. Upon receipt of instructions, Custodian will release securities held in
custody to the borrower designated in such instructions; provided,
however, that the securities will be released only upon deposit with
Custodian of full cash collateral as specified in such instructions, and
that Fund will retain the right to any dividends, interest or
distribution on such loaned securities. Upon receipt of instructions and
the loaned securities, Custodian will release the cash collateral to the
borrower.
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<PAGE>
J. Routine Matters
Custodian will, in general, attend to all routine and mechanical matters in
connection with the sale, exchange, substitution, purchase, transfer, or
other dealings with securities or other property of Fund except as may be
otherwise provided in this Agreement or directed from time to time by the
Fund in writing.
K. Deposit Accounts
Custodian will open and maintain one or more special purpose deposit
accounts in the name of Custodian ("Accounts"), subject only to draft or
order by Custodian upon receipt of instructions. All monies received by
Custodian from or for the account of Fund shall be deposited in said
Accounts. Barring events not in the control of the Custodian such as
strikes, lockouts or labor disputes, riots, war or equipment or transmission
failure or damage, fire, flood, earthquake or other natural disaster, action
or inaction of governmental authority or other causes beyond its control, at
9:00 a.m., Kansas City time, on the second business day after deposit of any
check into an Account, Custodian agrees to make Fed Funds available to the
Fund in the amount of the check. Deposits made by Federal Reserve wire will
be available to the Fund immediately and ACH wires will be available to the
Fund on the next business day. Income earned on the portfolio securities
will be credited to the Fund based on the schedule attached as Exhibit A.
The Custodian will be entitled to reverse any credited amounts where credits
have been made and monies are not finally collected. If monies are collected
after such reversal, the Custodian will credit the Fund in that amount.
Custodian may open and maintain Accounts in its own banking department, or
in such other banks or trust companies as may be designated by it or by Fund
in writing, all such Accounts, however, to be in the name of Custodian and
subject only to its draft or order. Funds received and held for the account
of different Portfolios shall be maintained in separate Accounts established
for each Portfolio.
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<PAGE>
L. Income and Other Payments to Fund
Custodian will:
1. Collect, claim and receive and deposit for the account of Fund all
income and other payments which become due and payable on or after the
effective date of this Agreement with respect to the securities
deposited under this Agreement, and credit the account of Fund in
accordance with the schedule attached hereto as Exhibit A. If, for any
reason, the Fund is credited with income that is not subsequently
collected, Custodian may reverse that credited amount.
2. Execute ownership and other certificates and affidavits for all federal,
state and local tax purposes in connection with the collection of bond
and note coupons; and
3. Take such other action as may be necessary or proper in connection with:
a. the collection, receipt and deposit of such income and other
payments, including but not limited to the presentation for payment
of:
1. all coupons and other income items requiring presentation; and
2. all other securities which may mature or be called, redeemed,
retired or otherwise become payable and regarding which the
Custodian has actual knowledge, or should reasonably be expected
to have knowledge; and
b. the endorsement for collection, in the name of the Fund, of all
checks, drafts or other negotiable instruments.
Custodian, however, will not be required to institute suit or take other
extraordinary action to enforce collection except upon receipt of
instructions and upon being indemnified to its satisfaction against the
costs and expenses of such suit or other actions. Custodian will receive,
claim and collect all stock dividends, rights and other
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similar items and will deal with the same pursuant to instructions. Unless
prior instructions have been received to the contrary, Custodian will,
without further instructions, sell any rights held for the account of Fund
on the last trade date prior to the date of expiration of such rights.
M. Payment of Dividends and other Distributions
On the declaration of any dividend or other distribution on the shares of
capital stock of Fund ("Fund Shares") by the Board of Directors of Fund,
Fund shall deliver to Custodian instructions with respect thereto. On the
date specified in such instructions for the payment of such dividend or
other distribution, Custodian will pay out of the monies held for the
account of Fund, insofar as the same shall be available for such purposes,
and credit to the account of the Dividend Disbursing Agent for Fund, such
amount as may be specified in such instructions.
N. Shares of Fund Purchased by Fund
Whenever any Fund Shares are repurchased or redeemed by Fund, Fund or its
agent shall advise Custodian of the aggregate dollar amount to be paid for
such shares and shall confirm such advice in writing. Upon receipt of such
advice, Custodian shall charge such aggregate dollar amount to the account
of Fund and either deposit the same in the account maintained for the
purpose of paying for the repurchase or redemption of Fund Shares or deliver
the same in accordance with such advice. Custodian shall not have any duty
or responsibility to determine that Fund Shares have been removed from the
proper shareholder account or accounts or that the proper number of Fund
Shares have been cancelled and removed from the shareholder records.
O. Shares of Fund Purchased from Fund
Whenever Fund Shares are purchased from Fund, Fund will deposit or cause to
be deposited with Custodian the amount received for such shares. Custodian
shall not
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have any duty or responsibility to determine that Fund Shares purchased from
Fund have been added to the proper shareholder account or accounts or that
the proper number of such shares have been added to the shareholder records.
P. Proxies and Notices
Custodian will promptly deliver or mail or have delivered or mailed to Fund
all proxies properly signed, all notices of meetings, all proxy statements
and other notices, requests or announcements affecting or relating to
securities held by Custodian for Fund and will, upon receipt of
instructions, execute and deliver or cause its nominee to execute and
deliver or mail or have delivered or mailed such proxies or other
authorizations as may be required. Except as provided by this Agreement or
pursuant to instructions hereafter received by Custodian, neither it nor its
nominee will exercise any power inherent in any such securities, including
any power to vote the same, or execute any proxy, power of attorney, or
other similar instrument voting any of such securities, or give any consent,
approval or waiver with respect thereto, or take any other similar action.
Q. Disbursements
Custodian will pay or cause to be paid, insofar as funds are available for
the purpose, bills, statements and other obligations of Fund (including but
not limited to obligations in connection with the conversion, exchange or
surrender of securities owned by Fund, interest charges, dividend
disbursements, taxes, management fees, custodian fees, legal fees, auditors'
fees, transfer agents' fees, brokerage commissions, compensation to
personnel, and other operating expenses of Funds pursuant to instructions of
Fund setting forth the name of the person to whom payment is to be made, the
amount of the payment, and the purpose of the payment.
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R. Daily Statement of Accounts
Custodian will, within a reasonable time, render to Fund a detailed
statement of the amounts received or paid and of securities received or
delivered for the account of Fund during each business day. Custodian will,
from time to time, upon request by Fund, render a detailed statement of the
securities and monies held for Fund under this Agreement, and Custodian will
maintain such books and records as are necessary to enable it to do so.
Custodian will permit such persons as are authorized by Fund, including
Fund's independent public accountants, reasonable access to such records or
will provide reasonable confirmation of the contents of such records, and if
demanded, Custodian will permit federal and state regulatory agencies to
examine the securities, books and records. Upon the written instructions of
Fund or as demanded by federal or state regulatory agencies, Custodian will
instruct any subcustodian to permit such persons as are authorized by Fund,
including Fund's independent public accountants, reasonable access to such
records or to provide reasonable confirmation of the contents of such
records, and to permit such agencies to examine the books, records and
securities held by such subcustodian which relate to the Fund.
S. Appointment of Subcustodian
1. Notwithstanding any other provisions of this Agreement, all or any of
the monies or securities of Fund may be held in Custodian's own custody
or in the custody of one or more other banks or trust companies acting
as sub custodians as may be selected by Custodian. Any such subcustodian
selected by the Custodian must have the qualifications required for a
custodian under the 1940 Act, as amended. Custodian shall be responsible
to the Fund for any loss, damage or expense suffered or incurred by the
Fund resulting from the actions or omissions of any subcustodians
selected and appointed by Custodian (except subcustodians appointed at
the request of Fund and as
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provided in Subsection 2 below) to the same extent Custodian would be
responsible to the Fund under Section 5. of this Agreement if it committed
the act or omission itself. Upon request of the Fund, Custodian shall be
willing to contract with other subcustodians reasonably acceptable to the
Custodian for purposes of (i) effecting third-party repurchase transactions
with banks, brokers, dealers, or other entities through the use of a common
custodian or subcustodian, or (ii) providing depository and clearing agency
services with respect to certain variable rate demand note securities, or
(iii) for other reasonable purposes specified by Fund; provided, however,
that the Custodian shall be responsible to the Fund for any loss, damage or
expense suffered or incurred by the Fund resulting from the actions or
omissions of any such subcustodian only to the same extent such subcustodian
is responsible to the Custodian. The Fund shall be entitled to review the
Custodian's contracts with any such subcustodians appointed at the request
of Fund. Custodian shall be responsible to the Fund for any loss, damage or
expense suffered or incurred by the Fund resulting from the actions or
omissions of any Depository only to the same extent such Depository is
responsible to Custodian.
2. Notwithstanding any other provisions of this Agreement, Fund's foreign
securities (as defined in Rule 17f-5(c)(1) under the 1940 Act) and Fund's
cash or cash equivalents, in amounts deemed by the Fund to be reasonably
necessary to effect Fund's foreign securities transactions, may be held in
the custody of one or more banks or trust companies acting as subcustodians,
and thereafter, pursuant to a written contract or contracts as approved by
Fund's Board of Directors, may be transferred to accounts maintained by any
such subcustodian with eligible foreign custodians, as defined in Rule
17f-5(c)(2).
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Custodian shall be responsible to the Fund for any loss, damage or expense
suffered or incurred by the Fund resulting from the actions or omissions of
any foreign subcustodian only to the same extent the foreign subcustodian is
liable to the domestic subcustodian with which the Custodian contracts for
foreign subcustody purposes.
T. Accounts and Records
Custodian will prepare and maintain, with the direction and as interpreted
by the Fund, Fund's accountants and/or other advisors, in complete, accurate
and current form all accounts and records (i) required to be maintained by
Fund with respect to portfolio transactions under Rule 31a of the 1940 Act,
(ii) required to be maintained as a basis for calculation of the Fund's net
asset value, and (iii) as otherwise agreed upon between the parties.
Custodian relies upon Fund to furnish, in writing or its electronic digital
equivalent, accurate and timely information needed by Custodian to complete
Fund's records and perform daily calculation of the Fund's net asset value.
Custodian shall incur no liability and Fund shall indemnify and hold
harmless Custodian from and against any liability arising from any failure
of Fund to furnish such information in a timely and accurate manner, even if
Fund subsequently provides accurate but untimely information. It shall be
the responsibility of Fund to furnish Custodian with the declaration, record
and payment dates and amounts of any dividends or income and any other
special actions required concerning each of its securities when such
information is not readily available from generally accepted securities
industry services or publications.
U. Accounts and Records Property of Fund
Custodian acknowledges that all of the accounts and records maintained by
Custodian pursuant to this Agreement are the property of Fund, and will be
made available to Fund for inspection or reproduction within a reasonable
period of time, upon demand.
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Custodian will assist Fund's independent auditors, or upon approval of Fund,
or upon demand, any regulatory body, in any requested review of Fund's
accounts and records but shall be reimbursed by Fund for all expenses and
employee time invested in any such review outside of routine and normal
periodic reviews. Upon receipt from Fund of the necessary information or
instructions, Custodian will supply information from the books and records
it maintains for Fund that Fund needs for tax returns, questionnaires,
period reports to shareholder and such other reports and information
requests as Fund and Custodian shall agree upon from time to time.
V. Adoption of Procedures
Custodian and Fund may from time to time adopt procedures as they agree
upon, and Custodian may conclusively assume that no procedure approved or
directed by Fund or its accountants or other advisors conflicts with or
violates any requirements of its prospectus, articles of incorporation,
bylaws, any applicable law, rule or regulation, or any order, decree or
agreement by which Fund may be bound. Fund will be responsible to notify
Custodian of any changes in statutes, regulations, rules, require ments or
policies which might necessitate changes in Custodian's responsibilities or
procedures.
W. Calculation of Net Asset Value
Custodian will calculate Fund's net asset value, in accordance with Fund's
prospectus. Custodian will price the securities and foreign currency
holdings of Fund for which market quotations are available by the use of
outside services designated by Fund which are normally used and contracted
with for this purpose; all other securities and foreign currency holdings
will be priced in accordance with Fund's instructions. Custodian will have
no responsibility for the accuracy of the prices quoted by these outside
services or for the information supplied by Fund or for acting upon such
instructions.
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X. Advances
In the event Custodian or any subcustodian shall, in its sole
discretion, advance cash or securities for any purpose (including but
not limited to securities settlements, purchase or sale of foreign
exchange or foreign exchange contracts and assumed settlement) for the
benefit of any Portfolio, the advance shall be payable by the Fund on
demand. Any such cash advance shall be subject to an overdraft charge at
the rate set forth in the then-current fee schedule from the date
advanced until the date repaid. As security for each such advance, Fund
hereby grants Custodian and such sub custodian a lien on and security
interests in all property at any time held for the account of the
applicable Portfolio, including without limitation all assets acquired
with the amount advanced. Should the Fund fail to promptly repay the
advance, the Custodian and each subcustodian shall be entitled to
utilize available cash and to dispose of such Portfolio's assets
pursuant to applicable law to the extent necessary to obtain
reimbursement of the amount advanced and any related overdraft charges.
Y. Exercise of Rights; Tender Offers
Upon receipt of instructions, the Custodian shall: (a) deliver warrants,
puts, calls, rights or similar securities to the issuer or trustee
thereof, or to the agent of such issuer or trustee, for the purpose of
exercise or sale, provided that the new securities, cash or other
assets, if any, are to be delivered to the Custodian; and (b) deposit
securities upon invitations for tenders thereof, provided that the
consideration for such securities is to be paid or delivered to the
Custodian or the tendered securities are to be returned to the
Custodian.
4. INSTRUCTIONS.
A. The term "instructions," as used herein, means written (including
telecopied or telexed) or oral instructions which Custodian reasonably
believes were given by a designated representative of Fund. Fund shall
deliver to Custodian, prior to delivery
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<PAGE>
of any assets to Custodian and thereafter from time to time as changes
therein are necessary, written instructions naming one or more
designated representatives to give instructions in the name and on
behalf of the Fund, which instructions may be received and accepted by
Custodian as conclusive evidence of the authority of any designated
representative to act for Fund and may be considered to be in full force
and effect (and Custodian will be fully protected in acting in reliance
thereon) until receipt by Custodian of notice to the contrary. Unless
such written instructions delegating authority to any person to give
instructions specifically limit such authority to specific matters or
require that the approval of anyone else will first have been obtained,
Custodian will be under no obligation to inquire into the right of such
person, acting alone, to give any instructions whatsoever which
Custodian may receive from such person. If Fund fails to provide
Custodian any such instructions naming designated representatives, any
instructions received by Custodian from a person reasonably believed to
be an appropriate representative of Fund shall constitute valid and
proper instructions hereunder.
B. No later than the next business day immediately following each oral
instruction, Fund will send Custodian written confirmation of such oral
instruction. At Custodian's sole discretion, Custodian may record on
tape, or otherwise, any oral instruction whether given in person or via
telephone, each such recording identifying the parties, the date and the
time of the beginning and ending of such oral instruction.
C. If Custodian shall provide Fund direct access to any computerized
recordkeeping and reporting system used hereunder or if Custodian and
Fund shall agree to utilize any electronic system of communication, Fund
shall be fully responsible for any and all consequences of the use or
misuse of the terminal device, passwords, access instructions and other
means of access to such system(s) which are utilized by, assigned to or
otherwise made available to the Fund. Fund agrees to implement and
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enforce appropriate security policies and procedures to prevent
unauthorized or improper access to or use of such system(s). Custodian
shall be fully protected in acting hereunder upon any instructions,
communications, data or other information received by Custodian by
such means as fully and to the same effect as if delivered to
Custodian by written instrument signed by the requisite authorized
representative(s) of Fund. Fund shall indemnify and hold Custodian
harmless from and against any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liability which may be suffered
or incurred by Custodian as a result of the use or misuse, whether
authorized or unauthorized, of any such system(s) by Fund or by any
person who acquires access to such system(s) through the terminal
device, passwords, access instructions or other means of access to
such system(s) which are utilized by, assigned to or otherwise made
available to the Fund, except to the extent attributable to any
negligence or willful misconduct by Custodian.
5. LIMITATION OF LIABILITY OF CUSTODIAN.
A. Custodian shall at all times use reasonable care and due diligence and
act in good faith in performing its duties under this Agreement.
Custodian shall not be responsible for, and the Fund shall indemnify
and hold Custodian harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and
liability which may be asserted against Custodian, incurred by
Custodian or for which Custodian may be held to be liable, arising out
of or attributable to:
1. All actions taken by Custodian pursuant to this Agreement or any
instructions provided to it hereunder, provided that Custodian has
acted in good faith and with due diligence and reasonable care;
and
2. The Fund's refusal or failure to comply with the terms of this
Agreement (including without limitation the Fund's failure to pay
or reimburse Custodian under this indemnification provision), the
Fund's negligence or willful
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misconduct, or the failure of any representation or warranty of
the Fund hereunder to be and remain true and correct in all
respects at all times.
B. Custodian may request and obtain at the expense of Fund the advice and
opinion of counsel for Fund or of its own counsel with respect to
questions or matters of law, and it shall be without liability to Fund
for any action taken or omitted by it in good faith, in conformity
with such advice or opinion. If Custodian reasonably believes that it
could not prudently act according to the instructions of the Fund or
the Fund's accountants or counsel, it may in its discretion, with
notice to the Fund, not act according to such instructions.
C. Custodian may rely upon the advice and statements of Fund, Fund's
accountants and officers or other authorized individuals, and other
persons believed by it in good faith to be expert in matters upon
which they are consulted, and Custodian shall not be liable for any
actions taken, in good faith, upon such advice and statements.
D. If Fund requests Custodian in any capacity to take any action which
involves the payment of money by Custodian, or which might make it or
its nominee liable for payment of monies or in any other way,
Custodian shall be indemnified and held harmless by Fund against any
liability on account of such action; provided, however, that nothing
herein shall obligate Custodian to take any such action except in its
sole discretion.
E. Custodian shall be protected in acting as custodian hereunder upon any
instructions, advice, notice, request, consent, certificate or other
instrument or paper appearing to it to be genuine and to have been
properly executed. Custodian shall be entitled to receive upon request
as conclusive proof of any fact or matter required to be ascertained
from Fund hereunder a certificate signed by an officer or designated
representative of Fund. Fund shall also provide Custodian instructions
with respect to any matter concerning this Agreement requested by
Custodian.
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F. Custodian shall be under no duty or obligation to inquire into, and
shall not be liable for:
1. The validity of the issue of any securities purchased by or for
Fund, the legality of the purchase of any securities or foreign
currency positions or evidence of ownership required by Fund to be
received by Custodian, or the propriety of the decision to
purchase or amount paid therefor;
2. The legality of the sale of any securities or foreign currency
positions by or for Fund, or the propriety of the amount for which
the same are sold;
3. The legality of the issue or sale of any Fund Shares, or the
sufficiency of the amount to be received therefor;
4. The legality of the repurchase or redemption of any Fund Shares,
or the propriety of the amount to be paid therefor; or
5. The legality of the declaration of any dividend by Fund, or the
legality of the issue of any Fund Shares in payment of any stock
dividend.
G. Custodian shall not be liable for, or considered to be Custodian of,
any money represented by any check, draft, wire transfer,
clearinghouse funds, uncollected funds, or instrument for the payment
of money to be received by it on behalf of Fund until Custodian
actually receives such money; provided, however, that it shall advise
Fund promptly if it fails to receive any such money in the ordinary
course of business and shall cooperate with Fund toward the end that
such money shall be received.
H. Except as provided in Section 3.S., Custodian shall not be responsible
for loss occasioned by the acts, neglects, defaults or insolvency of
any broker, bank, trust company, or any other person with whom
Custodian may deal.
I. Custodian shall not be responsible or liable for the failure or delay
in performance of its obligations under this Agreement, or those of
any entity for which it is responsible hereunder, arising out of or
caused, directly or indirectly, by circumstances beyond
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the affected entity's reasonable control, including, without
limitation: any interruption, loss or malfunction of any utility,
transportation, computer (hardware or software) or communication
service; inability to obtain labor, material, equipment or
transportation, or a delay in mails; governmental or exchange action,
statute, ordinance, rulings, regulations or direction; war, strike,
riot, emergency, civil disturbance, terrorism, vandalism, explosions,
labor disputes, freezes, floods, fires, tornados, acts of God or
public enemy, revolutions, or insurrection.
J. EXCEPT FOR VIOLATIONS OF SECTION 9, IN NO EVENT AND UNDER NO
CIRCUMSTANCES SHALL EITHER PARTY TO THIS AGREEMENT BE LIABLE TO
ANYONE, INCLUDING, WITHOUT LIMITATION TO THE OTHER PARTY, FOR
CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES FOR ANY ACT OR FAILURE TO
ACT UNDER ANY PROVISION OF THIS AGREEMENT EVEN IF ADVISED OF THIS
POSSIBILITY THEREOF.
6. COMPENSATION. In consideration for its services hereunder as Custodian and
investment accounting and recordkeeping agent, Fund will pay to Custodian
such compensation as shall be set forth in a separate fee schedule to be
agreed to by Fund and Custodian from time to time. A copy of the initial
fee schedule is attached hereto and incorporated herein by reference.
Custodian shall also be entitled to receive, and Fund agrees to pay to
Custodian, on demand, reimbursement for Custodian's cash disbursements and
reasonable out-of-pocket costs and expenses, including attorney's fees,
incurred by Custodian in connection with the performance of services
hereunder. Custodian will also be entitled to charge against any monies
held by it for the account of Fund the amount of any loss,
7. TERM AND TERMINATION. The initial term of this Agreement shall be for a
period of one (1) year. Thereafter, either party to this Agreement may
terminate the same by notice in writing, delivered or mailed, postage
prepaid, to the other party hereto and received not less
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than ninety (90) days prior to the date upon which such termination will
take effect. Upon termination of this Agreement, Fund will pay Custodian
its fees and compensation due here under and its reimbursable
disbursements, costs and expenses paid or incurred to such date and Fund
shall designate a successor custodian by notice in writing to Custodian by
the termination date. In the event no written order designating a successor
custodian has been delivered to Custodian on or before the date when such
termination becomes effective, then Custodian may, at its option, deliver
the securities, funds and properties of Fund to a bank or trust company at
the selection of Custodian, and meeting the qualifications for custodian
set forth in the 1940 Act and having not less than Two Million Dollars
($2,000,000) aggregate capital, surplus and undivided profits, as shown by
its last published report, or apply to a court of competent jurisdiction
for the appointment of a successor custodian or other proper relief, or
take any other lawful action under the circumstances; provided, however,
that Fund shall reimburse Custodian for its costs and expenses, including
reasonable attorney's fees, incurred in connection therewith. Custodian
will, upon termination of this Agreement and payment of all sums due to
Custodian from Fund hereunder or otherwise, deliver to the successor
custodian so specified or appointed, or as specified by the court, at
Custodian's office, all securities then held by Custodian hereunder, duly
endorsed and in form for transfer, and all funds and other properties of
Fund deposited with or held by Custodian hereunder, and Custodian will co-
operate in effecting changes in book-entries at all Depositories. Upon
delivery to a successor custodian or as specified by the court, Custodian
will have no further obligations or liabilities under this Agreement.
Thereafter such successor will be the successor custodian under this
Agreement and will be entitled to reasonable compensation for its services.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to appoint a successor custodian, the Custodian shall
be entitled to compensation as provided in the then-current fee schedule
hereunder for its services during such period as the Custodian
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retains possession of such securities, funds and other properties, and the
provisions of this Agreement relating to the duties and obligations of the
Custodian shall remain in full force and effect.
8. NOTICES. Notices, requests, instructions and other writings addressed to
Fund at 8400 Normandale Lake Blvd., Suite 1150, Minneapolis, Minnesota
55437-3807, or at such other address as Fund may have designated to
Custodian in writing, will be deemed to have been properly given to Fund
hereunder; and notices, requests, instructions and other writings addressed
to Custodian at its offices at 127 West 10th Street, Kansas City, Missouri
64105, Attention: Custody Department, or to such other address as it may
have designated to Fund in writing, will be deemed to have been properly
given to Custodian hereunder.
9. CONFIDENTIALITY.
A. Fund shall preserve the confidentiality of the computerized investment
portfolio recordkeeping and accounting system used by Custodian (the
"Portfolio Accounting System") and the tapes, books, reference
manuals, instructions, records, programs, documentation and
information of, and other materials relevant to, the Portfolio
Accounting System and the business of Custodian ("Confidential
Information"). Fund shall not voluntarily disclose any such
Confidential Information to any other person other than its own
employees who reasonably have a need to know such information pursuant
to this Agreement. Fund shall return all such Confidential Information
to Custodian upon termination or expiration of this Agreement.
B. Fund has been informed that the Portfolio Accounting System is
licensed for use by Custodian from DST Systems, Inc. ("Licensor"), and
Fund acknowledges that Custodian and Licensor have proprietary rights
in and to the Portfolio Accounting System and all other Custodian or
Licensor programs, code, techniques, know-how, databases, supporting
documentation, data formats, and procedures, including without
limitation any changes or modifications made at the request or expense
or both of
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Fund (collectively, the "Protected Information"). Fund acknowledges
that the Protected Information constitutes confidential material and
trade secrets of Custodian and Licensor. Fund shall preserve the
confidentiality of the Protected Information, and Fund hereby
acknowledges that any unauthorized use, misuse, disclosure or taking
of Protected Information, residing or existing internal or external to
a computer, computer system, or computer network, or the knowing and
unauthorized accessing or causing to be accessed of any computer,
computer system, or computer network, may be subject to civil
liabilities and criminal penalties under applicable law. Fund shall so
inform employees and agents who have access to the Protected
Information or to any computer equipment capable of accessing the
same. Licensor is intended to be and shall be a third party
beneficiary of the Fund's obligations and undertakings contained in
this paragraph.
10. MULTIPLE PORTFOLIOS. If Fund is comprised of more than one Portfolio:
A. Each Portfolio shall be regarded for all purposes hereunder as a
separate party apart from each other Portfolio. Unless the context
otherwise requires, with respect to every transaction covered by this
Agreement, every reference herein to the Fund shall be deemed to
relate solely to the particular Portfolio to which such transaction
relates. Under no circumstances shall the rights, obligations or
remedies with respect to a particular Portfolio constitute a right,
obligation or remedy applicable to any other Portfolio. The use of
this single document to memorialize the separate agreement of each
Portfolio is understood to be for clerical convenience only and shall
not constitute any basis for joining the Portfolios for any reason.
B. Additional Portfolios may be added to this Agreement, provided that
Custodian consents to such addition. Rates or charges for each
additional Portfolio shall be as agreed upon by Custodian and Fund in
writing.
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11. MISCELLANEOUS.
A. This Agreement shall be construed according to, and the rights and
liabilities of the parties hereto shall be governed by, the laws of
the State of Missouri, without reference to the choice of laws
principles thereof.
B. All terms and provisions of this Agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties hereto and
their respective successors and permitted assigns.
C. The representations and warranties, the indemnifications extended
hereunder, and the provisions of Section 9. hereof are intended to and
shall continue after and survive the expiration, termination or
cancellation of this Agreement.
D. No provisions of the Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed
by each party hereto.
E. The failure of either party to insist upon the performance of any
terms or conditions of this Agreement or to enforce any rights
resulting from any breach of any of the terms or conditions of this
Agreement, including the payment of damages, shall not be construed as
a continuing or permanent waiver of any such terms, conditions, rights
or privileges, but the same shall continue and remain in full force
and effect and if no such forbearance or waiver had occurred. No
waiver, release or discharge of any party's rights hereunder shall be
effective unless contained in a written instrument signed by the party
sought to be charged.
F. The captions in the Agreement are included for convenience of
reference only, and in no way define or limit any of the provisions
hereof or otherwise affect their construction or effect.
G. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall
constitute one and the same instrument.
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H. If any provision of this Agreement shall be determined to be invalid
or unenforceable, the remaining provisions of this Agreement shall not
be affected thereby, and every provision of this Agreement shall
remain in full force and effect and shall remain enforceable to the
fullest extent permitted by applicable law.
I. This Agreement may not be assigned by either party hereto without the
prior written consent of the other party.
J. Neither the execution nor performance of this Agreement shall be
deemed to create a partnership or joint venture by and between
Custodian and Fund.
K. Except as specifically provided herein, this Agreement does not in any
way affect any other agreements entered into among the parties hereto
and any actions taken or omitted by either party hereunder shall not
affect any rights or obligations of the other party hereunder.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective duly authorized officers.
INVESTORS FIDUCIARY TRUST COMPANY
By:
----------------------------------
Title:-------------------------------
STATE BOND INVESTMENT FUNDS, INC.
By:
----------------------------------
Title:
-------------------------------
-29-
<PAGE>
EXHIBIT A
---------
INVESTORS FIDUCIARY TRUST COMPANY
AVAILABILITY SCHEDULE BY TRANSACTION TYPE
<TABLE>
<CAPTION>
====================================================================================================
TRANSACTION DTC PHYSICAL FED
----------- --- -------- ---
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE
====================================================================================================
Calls Puts As Received C or F* As Received C or F*
- ----------------------------------------------------------------------------------------------------
Maturities As Received C or F* Mat. Date C or F* Mat. Date F
- ----------------------------------------------------------------------------------------------------
Tender Reorgs. As Received C As Received C N/A
- ----------------------------------------------------------------------------------------------------
Dividends Paydate C Paydate C N/A
- ----------------------------------------------------------------------------------------------------
Floating Rate Int. Paydate C Paydate C N/A
- ----------------------------------------------------------------------------------------------------
Floating Rate Int. N/A As Rate Received C N/A
(No Rate)
- ----------------------------------------------------------------------------------------------------
Mtg. Backed P&I Paydate C Paydate + 1 C Paydate F
Bus.
Day
- ----------------------------------------------------------------------------------------------------
Fixed Rate Int. Paydate C Paydate C Paydate F
- ----------------------------------------------------------------------------------------------------
Euroclear N/A C Paydate c
====================================================================================================
</TABLE>
Legend
- ------
C = Clearinghouse Funds
F = Fed Funds
N/A = Not Applicable
* Availability based on how received.
<PAGE>
Exhibit 9
ADMINISTRATION AGREEMENT
This Agreement, dated as of the 14th day of June, 1995, made by and between
State Bond Income Funds, Inc. (the "Fund"), a corporation operating as an open-
end investment company, duly organized and existing under the laws of the State
of Maryland, and SBM Financial Services, Inc. (the "Agent"), a Minnesota
corporation;
WITNESSETH THAT:
WHEREAS, the Agent has agreed to act as Transfer Agent and Dividend Disbursing
Agent of the Fund, as Administrator of Plans, and to perform certain check
redemption procedures.
NOW, THEREFORE, in consideration of the premises and mutual covenants contained
herein, the parties hereto, intending to be legally bound, do hereby agree as
follows:
Section 1. The terms as defined in this Section wherever used in this
Agreement, or in any amendment or supplement hereto, shall have the meanings
herein specified, unless the context otherwise requires.
Bank: The term Bank shall mean the entity that maintains the Fund's check
redemption account.
Custodian: The term Custodian shall mean that entity which is acting as
Custodian of the Fund's assets from time to time.
Share Certificates: The term Share Certificates shall mean the stock
certificates for the Shares of the Fund.
Shareholders: The term Shareholders shall mean the registered owners from
time to time of the Shares of the Fund in accordance with the stock registry
records of the Fund.
Shares: The term Shares shall mean the issued and outstanding shares of
common stock of the Fund.
Plan: The term Plan shall include such investment plans, dividend or
capital gains reinvestment plans, systematic withdrawal plans or other types of
plans set forth in the prospectus of the Fund, in form acceptable to the Agent,
which the Fund may from time to time adopt and made available to its
Shareholders, including plans or accounts established for pension and profit-
sharing plans established by self-employed individuals and partnerships.
Planholder: The term Planholder shall mean a Shareholder who, at the time
of reference, is participating in a Plan, and shall include any underwriter,
representative or broker-dealer.
Section 2. The Fund hereby appoints the Agent as its Transfer, Redemption
and Dividend Disbursing Agent and as Administrator of its Plans, and the Agent
accepts such appointment and agrees to act in such capacities upon the terms set
forth in this Agreement.
TRANSFER AGENCY
Section 3. The Fund shall furnish to the Agent, as Transfer Agent, a
sufficient supply of blank Share Certificates and from time to time will renew
such supply upon the request of the Agent. Such blank Share Certificates shall
be signed manually or by facsimile signatures of officers of the Fund authorized
by law or the bylaws of the Fund to sign Share Certificates and, if required,
shall bear the corporate seal or a facsimile thereof.
Section 4. The Agent, as Transfer Agent, shall make original issues of
Shares in accordance with the provisions of Sections 14 and 15 below and the
Fund's prospectus.
Section 5. Transfers of Shares shall be registered and new shares issued
by the Agent upon surrender of outstanding shares (a) in form deemed by the
Agent to be properly endorsed for transfer, (b) with all necessary endorsers'
signatures guaranteed in such manner and form as the Agent may require by a
guarantor reasonably believed by the Agent to be responsible, accompanied by (c)
such assurances as the Agent shall deem necessary or appropriate to evidence the
genuineness and effectiveness of each necessary endorsement, and (d)
satisfactory evidence of compliance with all applicable laws relating to the
payment or collection of taxes.
<PAGE>
Section 6. When mail is used for delivery of Share Certificates, the Agent
shall forward Share Certificates in "non-negotiable" form by first-class mail,
and Share Certificates in "negotiable" form by registered mail, all mail
deliveries to be covered while in transit to the addressee by insurance arranged
for by the Agent.
Section 7. In registering transfers, the Agent, as Transfer Agent, may
rely upon the Uniform Commercial Code or any other statutes which in the opinion
of counsel protect the Agent and the Fund in not requiring complete
documentation, in registering transfer without inquiry into adverse claims, in
delaying registration for purposes of such inquiry, or in refusing registration
where in its judgment an adverse claim requires such refusal.
Section 8. The Agent, as Transfer Agent, may issue new Share Certificates
in place of Share Certificates represented to have been lost, destroyed or
stolen, upon receiving indemnity satisfactory to the Agent and may issue new
Share Certificates in exchange for, and upon surrender of, mutilated Share
Certificates.
Section 9. In case any officer of the Fund who shall have signed manually
or whose facsimile signature shall have been affixed to blank Share Certificates
shall die, resign or be removed prior to the issuance of such Share
Certificates, the Agent, as Transfer Agent, may issue or register such Share
Certificates as the Share Certificates of the Fund notwithstanding such death,
resignation or removal; and the Fund shall file promptly with the Agent such
approval, adoption or ratification as may be required by law.
Section 10. The Agent will maintain stock registry records in the usual
form in which it will note the issuance and redemption of Shares and the
issuance and transfer of Share Certificates, and is also authorized to maintain
an account entitled Unissued Certificate Account in which it will record the
Shares and fractions issued and outstanding from time to time for which issuance
of Share Certificates is deferred. The Agent is authorized to keep records,
which will be part of the stock transfer records, as well as its records of the
Plans, in which it will note the names and registered addresses of Planholders,
and the number of Shares and fractions from time to time owned by them for which
no Share Certificates are outstanding. Each Shareholder or Planholder, whether
he holds one or more Share Certificates or owns Shares held under one or more
Plans, or whether he holds or owns Shares by both methods, will be assigned a
single account number. Whenever a Shareholder deposits Shares represented by
Share Certificates in a Plan permitting the deposit of Shares thereunder, the
Agent, as Transfer Agent, upon receipt of the Share Certificates registered in
the name of the Shareholder (or, if not so registered, in proper form for
transfer), shall cancel such Share Certificates, debit the Shareholder's
individual stock account and credit the Shares to the Unissued Certificate
Account. The Agent, as Plan Administrator, shall credit the Shares so deposited
to the proper Plan account.
Section 11. The Agent will issue Share Certificates for Shares of the Fund
only upon receipt of a written request from a Shareholder. In all other cases,
the Fund authorizes the Agent to dispense with the issuance and countersignature
of Share Certificates whenever Shares are purchased. In such case, the Agent,
as Transfer Agent, shall merely note on its stock registry records the issuance
of the Shares and fractions (if any), shall credit the Unissued Certificate
Account with the Shares and fractions issued and shall credit the proper number
of Shares and fractions to the respective Shareholders. Likewise, whenever a
Shareholder requests the redemption of Shares for which the Agent's records
indicate that no Share Certificates have been issued, the Agent may cause said
Shares to be redeemed without tender of Share Certificates for same. The Fund
authorizes the Agent in such cases to process the transactions by appropriate
entries in its stock transfer records, and debiting of the Unissued Certificate
Account and the records of issued Shares outstanding.
Section 12. The Agent in its capacity as Transfer Agent will, in addition
to the duties and functions above-mentioned, perform the usual duties and
functions of a stock transfer agent for a corporation. It will countersign for
issuance or reissuance Share Certificates representing original issue or
reissued treasury shares, and will transfer Share Certificates, and Shareholder
account registrations where no Share Certificates are outstanding, registered in
the name of Shareholders from one Shareholder to another in the usual manner.
The Agent may rely conclusively and act without further investigation upon any
list, instruction, certification, authorization, Share Certificate or other
instrument or paper believed by it in good faith to be genuine and unaltered,
and to have been signed, countersigned or executed by duly authorized person or
persons, or upon the instructions of any officer of the Fund, or upon the advice
of counsel for the Fund or for the Agent. The Agent may record any transfer of
Share Certificates which is reasonably believed by it in good faith to have been
duly authorized or may refuse to record any transfer of Share Certificates if in
good faith the Agent in its capacity as Transfer Agent reasonable deems such
refusal necessary in order to avoid any liability either to the Fund or to the
Agent. The Fund agrees to indemnify and hold harmless the Agent from and
against any and all losses, costs, claims and liability which it may suffer or
incur by reason of so relying or acting or refusing to act.
Section 13. In case of any request or demand for the inspection of the
share records of the Fund, the Agent, as Transfer Agent, shall endeavor to
notify the Fund and to secure instructions as to permitting or refusing such
inspection. However, the Agent may exhibit such records to any person in any
case where it is advised by its counsel that it may be held liable for failure
to do so.
ISSUANCE OF SHARES
<PAGE>
Section 14. Prior to the daily determination of net asset value in
accordance with the Fund's prospectus, the Agent shall process all payments by
Shareholders and Planholders received in Federal Funds since the last
determination of the Fund's net asset value for which the Agent has sufficient
information to establish a new Shareholder account or purchase Shares for an
existing account. Immediately after the Fund's calculation of its net asset
value on each day that both the Fund and the Agent are open for business, the
Agent shall obtain from the Fund a quotation (on which it may conclusively rely)
of the net asset value per Share determined on that day. The Agent shall
proceed to calculate the amount available for investment in Shares at the quoted
net asset value and the number of Shares and fractional Shares to be purchased.
The Agent, as agent for the Shareholder and Planholders, shall place a purchase
order on each day that both the Fund and Agent are open for business with the
Fund for the proper number of Shares and fractional Shares to be purchased and
confirm such number to the Fund.
Section 15. The proper number of Shares and fractional Shares shall then
be issued daily and credited by the Agent to the Unissued Certificate Account.
The Shares and fractional Shares purchased for each Shareholder and Planholder
will be credited by the Agent to such Shareholder's or Planholder's separate
account. The Agent shall then cause to be mailed to each Shareholder and
Planholder a confirmation of each purchase, with copies to the Fund if
requested. Such confirmations will show the prior Share balance, the new Share
balance, the Shares held under a Plan (if any), the Shares for which Stock
Certificates are outstanding (if any), the amount invested and the price paid
for the newly purchased Shares.
REDEMPTIONS
Section 16. Except for check redemptions, which all shall be governed by
the check redemption procedures provided for in Sections 18 through 24, the
Agent shall, prior to the daily determination of net asset value in accordance
with the Fund's prospectus, process all requests from Shareholders to redeem
Shares received in accordance with the procedures set forth in the Fund's
prospectus. The Fund shall then quote to the Agent the applicable net asset
value, whereupon the Agent shall determine the number of Shares required to be
redeemed to make monthly payments, automatic payments or the like. The Agent
shall then advise the Fund of the number of Shares and fractional Shares
requested to be redeemed and shall process the redemption by filing with the
Custodian an appropriate statement and making the proper distribution and
application of the redemption proceeds in accordance with the Fund's prospectus.
The stock registry books recording outstanding Shares, the Unissued Certificate
Account and the individual account of the Shareholder or Planholder shall be
properly debited.
Section 17. The proceeds of redemption shall be remitted by the Agent in
accordance with the Fund's prospectus as follows:
(a) By check mailed to the Shareholder or Planholder at his registered
address. If a request for redemption of Shares is valued at $20,000 or more, or
the proceeds of the redemption are to be paid to someone other than the
Shareholder, a signature guarantee of a of a national securities exchange, a
member firm of a principal stock exchange, a registered securities association,
a clearing agency, a bank or trust company, a savings association, a credit
union, a broker, a dealer, a municipal securities broker or dealer, a government
securities broker or dealer, or a representative of the Distributor, SBM
Financial Services, Inc. shall accompany the redemption request.
(b) By wire to the Fund's Custodian to wire redemption proceeds on the next
business day to a designated bank upon telephone request, without signature
guarantee, if such redemption procedure has been requested by the Shareholder or
Planholder's on an authorized form filed with the Agent and the redemption
proceeds are $20,000 or more. Any change in the designated bank account will be
accepted by the Agent only if made in writing by the Planholder or Shareholder
with signature guaranteed as required by paragraph (a) of this Section 17.
(c) By check redemption procedures as provided for in Sections 18 through
24.
(d) By other procedures commonly followed by mutual funds and mutually
agreed upon by the Fund and the Agent.
For the purposes of redemption of Shares which have been purchased by
uncertified check, such Shares may not be redeemed within 14 days after
purchase.
CHECK REDEMPTION
Section 18. The Agent shall perform check redemption services for the Fund
subject to the terms and conditions set forth in the Fund's prospectus. The
duties and obligations of the Agent with respect to check redemptions are
limited to those specifically set forth in Sections 18 through 24 of this
Agreement.
<PAGE>
Section 19. The Fund shall maintain balances in a check redemption account
with the Bank which shall be sufficient to pay all checks received by the Bank
drawn against the check redemption account. The balance to be maintained in the
check redemption account shall be estimated from time to time by the Fund and
the Agent, based on redemption experience.
Section 20. The Agent shall provide, at the Fund's expense, check blank
forms for the check redemption account to Shareholders of the Fund who
appropriately request the same on the Fund's investment application form and
shall process checks drawn by said Shareholders on the check redemption account
in accordance with applicable laws and rules governing checks; provided,
however, that the Agent shall be required, in verifying the drawer's signature,
only to ascertain whether the signature(s) on the check reasonably appear to be
the signature(s) on the Shareholder's signature card, but shall not be required,
either as drawee or as redemption agent for any Shareholder, to obtain any
guarantee of any Shareholder signature.
Section 21. If there are not sufficient Shares in the drawer's Share
account which have been held for 15 days or more which are not represented by
issued Share Certificates to cover the check, the Agent shall direct the Bank
not to pay the check and shall immediately notify the Fund of such fact.
Section 22. The Agent shall, from time to time as often as necessary for
the purpose of properly performing its check redemption duties hereunder,
determine whether the Fund has deposited in the check redemption account
sufficient balances to pay all checks received by the Bank drawn against the
check redemption account. If the Fund has not deposited sufficient balances to
pay all such checks, the Bank shall pay checks only to the extent balances are
in the check redemption account. The Agent may select those checks to be paid
and those to be returned arbitrarily by any method selected by the Agent. If
checks received by the Bank drawn against the check redemption account exceed
the balances in the check redemption account, the Agent shall immediately notify
the Fund of such fact and give the Fund reasonable time to provide sufficient
collected balances. In no event shall "reasonable time" for the Fund to provide
sufficient collected balances extend beyond 10:00 a.m. on the day of the Bank's
midnight deadline with respect to any check. In no event shall the Agent
authorize the Bank to honor or pay checks drawn on the check redemption account
for which balances are not on hand in the check redemption account, and the Fund
hereby agrees to indemnify, defend and hold the Bank and the Agent harmless from
any loss, claim or expense arising out of the return of redemption checks due to
any such insufficiency of collected balances of which the Agent gave the Fund
immediate notices as required below.
Section 23. The Agent shall notify the Fund, as of the morning of the next
business day, of the balances in the check redemption account and a list of all
redemptions paid the preceding day, by name of Shareholder and amount.
Section 24. The Fund may terminate the check redemption procedure at any
time upon 30 days' written notice to the Agent, and in the event of such
termination, the effect shall be to delete all references to check redemption
procedures in this Agreement.
DIVIDENDS AND DISTRIBUTIONS
Section 25. It is mutually understood by the parties that the Fund intends
to declare daily dividends payable to Shareholders and Planholders of record as
of the close of business each day, and that all dividends are to be payable and
automatically reinvested in additional Shares as of the last business day of the
Fund each month, except in cases where Shareholders have elected to receive
dividends in cash, in which case checks will be mailed within three business
days after the payable date. On each business day, the Fund shall notify the
Agent of the amount of net income of the Fund earned for that business day and
the amount of net income that will be earned for the ensuing days that will not
be business days. Based on the number of Shares outstanding as of the close of
business on each such business day, the Agent shall thereupon compute the
dividends per Share payable with respect to the account of each Shareholder and
Planholder and monthly the number of additional Shares and fractional Shares to
be issued with respect to such dividends. The Agent shall notify the Fund
monthly of the total number of additional Shares and fractional Share issued and
the amount of dividends to be paid in cash. On or before the payment date for
each dividend, the Fund shall transfer, or cause the Custodian to transfer, to
the Agent sufficient cash to pay those dividends payable in cash on that payment
date. Dividend checks will be mailed by the Agent within three days after the
payment date. The Agent shall maintain records as to the additional Shares and
fractional Shares issued with respect to dividends which are reinvested in
additional Shares by crediting each Shareholder's or Planholder's account for
Shares purchased by them by means of reinvestment of dividends payable on Shares
in their account. The Agent shall cause to be mailed to each Shareholder and
Planholder a confirmation of each such purchase by reinvestment of such
dividend.
Section 26. In the event that the Fund changes its dividend policy or the
Fund orders the distribution of any extraordinary long-term gains, the Fund
shall notify the Agent of each resolution of the Fund's Board of Directors
declaring such distribution or change in its dividend policy, the amount payable
per share, the record date for determining Shareholders or Planholders entitled
to payment, the net asset value to be used for reinvestments of such other
distribution or dividends, and the payment date. The Agent shall, prior to the
designated payment date, calculate the amount of such dividend or other
distribution to be reinvested in Shares and fractional Shares of each
Shareholder and Planholder and the amount to be paid
<PAGE>
in cash. On or before each payment date the Fund shall transfer, or cause the
Custodian to transfer, to the Agent sufficient cash to pay any such dividends or
other distributions payable in cash. Checks for such dividends or distributions
payable in cash will be mailed by the Agent within three business days after the
payment date. The Agent shall maintain records as to additional Shares and
fractional Shares issued with respect to such dividends or other distributions
which are reinvested in additional Shares by crediting each Shareholder's or
Planholder's account for Shares purchased by them by means of reinvestment of
such dividends or distributions payable on Shares in their account. The Agent
shall cause to be mailed to each Shareholder and Planholder a confirmation of
each such purchase by reinvestment of such dividend or distribution.
GENERAL PROVISIONS
Section 27. The Agent shall maintain records (which may be part of the
stock transfer records) in connection with the issuance and redemption of
Shares, the disbursement of dividends and the administration of the Plans and
dividend reinvestments, in which will be noted the transactions effected for
each Shareholder and Planholder and the number of Shares and fractional Shares
owned by each for which no Share Certificates are outstanding.
Section 28. In addition to the services provided for in this Agreement,
the Agent will perform other services for the Fund as agreed from time to time,
including but not limited to, preparation of and mailing Federal 1099 Forms,
mailing semi-annual reports of the Fund, preparation of an annual list of
Shareholders and Planholders, mailing notices of Shareholders' meetings, proxies
and proxy statements, and examination and tabulation of returned proxies and
certification of the vote to the Fund.
Section 29. Nothing contained in this Agreement is intended to or shall
require the Agent, in any capacity hereunder, to perform any functions or duties
on any holiday or other day of special observance on which the Agent is closed.
Functions or duties normally scheduled to be performed on such days shall be
performed on, and as of, the next business day on which the Fund and the Agent
are open.
Section 30. The Fund agrees to pay the Agent compensation for its services
and to reimburse the Agent for its expenses as shall be agreed upon from time to
time.
Section 31. The Agent shall not be liable for any taxes, assessments or
governmental charges which may be levied or assessed on any basis whatsoever,
upon the securities held or processed hereunder, or otherwise in connection with
the Agent's activities of status under this Agreement.
Section 32. The Agent, at any time, may apply to the Fund for instructions
with respect to any matter in connection with the Agent's performance of its
duties under this Agreement, and the Agent shall be entitled to rely
conclusively on such instructions from the Fund.
The Fund will indemnify and hold the Agent harmless from all loss, cost,
damage and expense, including reasonable expenses for counsel, incurred by it
resulting from any claim, demand, action or omission by it in the performance of
its duties hereunder, or as a result of acting upon any instruction believed by
it to have been given by a duly authorized officer of the Fund; provided that
this indemnification shall not apply to actions or omissions of the Agent in
cases of its own willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties hereunder; and further provided that, prior to
confessing any claim against it which may be the subject of this
indemnification, the Agent shall give the Fund reasonable opportunity to defend
against said claim in its own name or in the name of the Agent.
The Agent will indemnify and hold the Fund harmless from all loss, cost,
damage and expense, including reasonable expenses for counsel, incurred or
sustained by it as a result of or in connection with the Agent's failure to give
the Bank instructions to refuse acceptance and payment of any check under the
Fund's check redemption service which is wrongfully paid either when a signature
on a particular check is not authentic according to the applicable authorized
signature card supplied by the Shareholder or when the number of Shares in a
Shareholder's account is insufficient to cover the amount of the check.
Section 33. The practices and procedures of the Agent and the Fund set
forth in this Agreement, or any other terms or conditions of this Agreement, may
be altered or modified from time to time as may be mutually agreed by the
parties to this Agreement without the consent of any Shareholder or Planholder,
so long as the intent and purposes of the Plans, as stated from time to time in
the prospectus of the Fund, or other applicable limitations of the prospectus,
are observed. In special cases the parties hereto may adopt such procedures as
may be appropriate or practical under the circumstances, and the Agent may
conclusively assume that any special procedure which has been approved by the
Fund does not conflict with or violate any requirements of its Articles of
Incorporation, Bylaws or prospectus, or any rule, regulation or requirement of
any regulatory body.
Section 34. This Agreement may be amended from time to time by a
supplemental agreement executed by the Fund and the Agent.
<PAGE>
Section 35. Either the Fund or the Agent may give 60 days' written notice
to the other of the termination of this Agreement, such termination to take
effect at the time specified in the notice.
Section 36. Any notice or other communication required by or permitted to
be given in connection with this Agreement shall be in writing, and shall be
delivered in person or sent by first-class mail, postage prepaid, to the
respective parties as follows:
If to the Fund:
State Bond Income Funds, Inc.
8400 Normandale Lake Boulevard
Suite 1150
Minneapolis, Minnesota 55437
SBM Financial Services
8400 Normandale Lake Boulevard
Suite 1150
Minneapolis, Minnesota 55437
Section 37. This Agreement may be executed in two or more counterparts,
each of which when so executed shall be deemed an original, but such
counterparts shall together but one and the same instrument.
Section 38. This Agreement shall be governed by the laws of the State of
Minnesota.
Section 39. This Agreement shall extend and be binding upon the parties
hereto and their respective successor and assigns; provided, however, that this
Agreement shall not be assignable by the Fund without the written consent of the
Agent or by the Agent without the written consent of the Fund, authorized or
approved by a resolution of its Board of Directors.
Section 40. The accounts and records, in the agreed upon format, specified
herein to be maintained by the Bank shall be preserved for the period specified
by Rule 31a-2 under the Investment Company Act of 1940 and shall be the property
of the Fund and shall be made available to the Fund within a reasonable period
of time upon proper demand. The Agent shall assist the Fund's independent
auditors, or upon approval of the Fund or upon demand, any regulatory body, in
any requested review of the Fund's accounts and records, but shall be reimbursed
for all expenses and employee time invested in any such review outside of
routine and normal periodic reviews. Upon receipt from the Fund of the
necessary information, the Agent shall supply the necessary data for the Fund or
accountant's completion of any necessary tax returns, questionnaires, periodic
reports to Shareholders and such other reports and information requests as the
Fund and the Agent shall agree upon from time to time.
IN WITNESS WHEREOF, the Fund and the Agent have caused this Agreement to be
signed by their receptive duly authorized officers as of the day and year first
above written.
STATE BOND INCOME FUNDS, INC.
By: /s/ Stewart Gregg
------------------------------
Its: /s/ Vice President
------------------------
SBM FINANCIAL SERVICES, INC.
By: /s/ John R. McGeeney
------------------------------
Its: /s/ Secretary, General
------------------------
<PAGE>
Counsel & Compliance
--------------------
Officer
--------------------
<PAGE>
Exhibit #10
State Bond Income Funds, Inc.
100 North Minnesota Street
New Ulm, Minnesota 56073-0069
Dear Sirs:
State Bond Income Funds, Inc. proposes to issue and sell an indefinite
number of shares (the "Shares") of its Common Stock par value $.00001 per share
(the "Common Stock") in the manner and on the terms set forth in its
Registration Statement on Form N-1A filed with the Securities and Exchange
Commission (File No. 33-1176).
I have, as counsel, participated in various corporate and other proceedings
relating to the Fund and to the Shares. I have examined copies, either certified
or otherwise proved to my satisfaction to be genuine, of its Articles of
Incorporation and By-Laws, as currently in effect, a certificate of good
standing issued by the State Department of Assessments and Taxation of the State
of Maryland and other documents relating to its organization and operation. I
have also reviewed the above-mentioned Registration Statement and all amendments
filed as of the date of this opinion and the documents filed as exhibits
thereto. I am generally familiar with the corporate affairs of the Fund.
Based upon the foregoing, it is my opinion that:
1. The Fund has been duly organized and is validly existing under the
laws of the state of Maryland.
2. The Fund is authorized to issue ten billion (10,000,000,000) shares of
Common Stock. Under Maryland law, shares of Common Stock which are issued and
subsequently redeemed by the Fund will be, by virtue of such redemption,
restored to the status of authorized and unissued shares.
3. Subject to the effectiveness of the above-mentioned Registration
Statement and compliance with applicable state securities laws, upon the
issuance of the Shares for a consideration not less than the par value thereof
as required by the laws of Maryland, and not less than the net asset value
thereof as required by the Investment Company Act of 1940 and in accordance with
the terms of the Registration Statement, such Shares will be legally issued and
outstanding and fully paid and non-assessable.
I hereby consent to the filing of this opinion with the Securities and
Exchange Commission as part of the above-mentioned Registration Statement and
with any state securities commission where such filing is required. In giving
this consent I do not admit that I come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended.
I am a member of the Bar of the State of Kentucky and do not hold myself
out as being conversant with the laws of any jurisdiction other than those of
the United States of America and the State of Kentucky. I note that I am not
licensed to practice law in the State of Maryland, and to the extent that any
opinion expressed herein involves the law of Maryland, such opinion should be
understood to be based solely upon my review of the good standing certificate
referred to above, the published statues of that State and, where applicable,
published cases, rules or regulations or regulatory bodies of that State.
Very truly yours,
/s/Kevin L. Howard
<PAGE>
Exhibit 11(i)
Consent of Independent Auditors
We consent to the references to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the use of our report dated
November 17, 1995, in the Post-Effective Amendment No. 11 to the Registration
Statement (Form N-1A) and related Prospectus of the State Bond U.S. Government
and Agency Securities Fund.
/s/Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
December 27, 1995
<PAGE>
Exhibit 11(ii)
INDEPENDENT AUDITORS' CONSENT
Board of Directors of State Income Funds, Inc.
and Shareholders of State Bond U.S. Government
and Agency Securities Fund
We consent to the use in the Post-Effective Amendment No. 11 to the Registration
Statement on Form N-1A of State Bond U.S. Government and Agency Securities Fund
filed under the Investment Company Act of 1940 and the Securities Act of 1933 of
our report dated November 29, 1994 accompanying the financial statements of
State Bond U.S. Government and Agency Securities Fund for the year ended October
31, 1994, as listed in Item 24(a) of such Registration Statement, and to the
reference to us under the heading "Financial Highlights" appearing in the
Prospectus which is part of such Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
December 27, 1995
<PAGE>
Exhibit 16
Computation of Performance Quotations
-------------------------------------
Average annual total return figures for the current one year period, five
year period, and life of fund ending October 31, 1995, are calculated as
follows:
n 1/n
Formula: P(1+T) = ERV; or T = (ERV/p) - 1
Where P = hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the period.
One year period:
9.68% = (1,096.82/1,000) - 1
Five year period:
1/5
7.10% = (1,409/1,000) - 1
Life of Fund (from December 13, 1985)
1/9.8333
7.52% = (2,041/1,000) - 1
Cumulative total return figures for the period beginning December 13, 1985,
and ending October 31, 1995 are calculated as follows:
Formula: CTR = ERV - P x 100
-------
P
Where: CTR = cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of the
period
P = initial payment of $1,000
104.10% = [(2,041 - 1,000)/1000] x 100
<PAGE>
Exhibit #17
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond U.S. Government & Agency
Securities Fund, a Maryland corporation, hereby constitutes and appointed Kevin
L. Howard, Richard M. Carlblom, Peter S. Resnik and Don W. Cummings and each of
them (with full power to each of them to act alone), his true and lawful
attorney-in-fact and agent, with full power of substitution to each, for him and
on his behalf and in his name, place and stead, to execute and file any of the
documents referred to below relating to registrations under the Securities Act
of 1933 or the Investment Company Act of 1940 (the "Acts"): registration
statements on any form or forms under the Acts, and any and all amendments and
supplements thereto (including post-effective amendments), with all exhibits and
all agreements, consents, exemptive applications and other documents and
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents being empowered to act with or without the others
or other, to have full power and authority to do or cause to be done in the name
and on behalf of the undersigned each and every act and thing requisite and
necessary or appropriate with respect thereto to be done in and about the
premises in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/William Faulkner
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond U.S. Government & Agency
Securities Fund, a Maryland corporation, hereby constitutes and appointed Kevin
L. Howard, Richard M. Carlblom, Peter S. Resnik and Don W. Cummings and each of
them (with full power to each of them to act alone), his true and lawful
attorney-in-fact and agent, with full power of substitution to each, for him and
on his behalf and in his name, place and stead, to execute and file any of the
documents referred to below relating to registrations under the Securities Act
of 1933 or the Investment Company Act of 1940 (the "Acts"): registration
statements on any form or forms under the Acts, and any and all amendments and
supplements thereto (including post-effective amendments), with all exhibits and
all agreements, consents, exemptive applications and other documents and
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents being empowered to act with or without the others
or other, to have full power and authority to do or cause to be done in the name
and on behalf of the undersigned each and every act and thing requisite and
necessary or appropriate with respect thereto to be done in and about the
premises in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/Patrick M. Finley
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond U.S. Government & Agency
Securities Fund, a Maryland corporation, hereby constitutes and appointed Kevin
L. Howard, Richard M. Carlblom, Peter S. Resnik and Don W. Cummings and each of
them (with full power to each of them to act alone), his true and lawful
attorney-in-fact and agent, with full power of substitution to each, for him and
on his behalf and in his name, place and stead, to execute and file any of the
documents referred to below relating to registrations under the Securities Act
of 1933 or the Investment Company Act of 1940 (the "Acts"): registration
statements on any form or forms under the Acts, and any and all amendments and
supplements thereto (including post-effective amendments), with all exhibits and
all agreements, consents, exemptive applications and other documents and
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents being empowered to act with or without the others
or other, to have full power and authority to do or cause to be done in the name
and on behalf of the undersigned each and every act and thing requisite and
necessary or appropriate with respect thereto to be done in and about the
premises in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/Chris L. Mahai
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond U.S. Government & Agency
Securities Fund, a Maryland corporation, hereby constitutes and appointed Kevin
L. Howard, Richard M. Carlblom, Peter S. Resnik and Don W. Cummings and each of
them (with full power to each of them to act alone), his true and lawful
attorney-in-fact and agent, with full power of substitution to each, for him and
on his behalf and in his name, place and stead, to execute and file any of the
documents referred to below relating to registrations under the Securities Act
of 1933 or the Investment Company Act of 1940 (the "Acts"): registration
statements on any form or forms under the Acts, and any and all amendments and
supplements thereto (including post-effective amendments), with all exhibits and
all agreements, consents, exemptive applications and other documents and
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents being empowered to act with or without the others
or other, to have full power and authority to do or cause to be done in the name
and on behalf of the undersigned each and every act and thing requisite and
necessary or appropriate with respect thereto to be done in and about the
premises in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/John R. Lindholm
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond U.S. Government & Agency
Securities Fund, a Maryland corporation, hereby constitutes and appointed Kevin
L. Howard, Richard M. Carlblom, Peter S. Resnik and Don W. Cummings and each of
them (with full power to each of them to act alone), his true and lawful
attorney-in-fact and agent, with full power of substitution to each, for him and
on his behalf and in his name, place and stead, to execute and file any of the
documents referred to below relating to registrations under the Securities Act
of 1933 or the Investment Company Act of 1940 (the "Acts"): registration
statements on any form or forms under the Acts, and any and all amendments and
supplements thereto (including post-effective amendments), with all exhibits and
all agreements, consents, exemptive applications and other documents and
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents being empowered to act with or without the others
or other, to have full power and authority to do or cause to be done in the name
and on behalf of the undersigned each and every act and thing requisite and
necessary or appropriate with respect thereto to be done in and about the
premises in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/John Katz
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond U.S. Government & Agency
Securities Fund, a Maryland corporation, hereby constitutes and appointed Kevin
L. Howard, Richard M. Carlblom, Peter S. Resnik and Don W. Cummings and each of
them (with full power to each of them to act alone), his true and lawful
attorney-in-fact and agent, with full power of substitution to each, for him and
on his behalf and in his name, place and stead, to execute and file any of the
documents referred to below relating to registrations under the Securities Act
of 1933 or the Investment Company Act of 1940 (the "Acts"): registration
statements on any form or forms under the Acts, and any and all amendments and
supplements thereto (including post-effective amendments), with all exhibits and
all agreements, consents, exemptive applications and other documents and
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents being empowered to act with or without the others
or other, to have full power and authority to do or cause to be done in the name
and on behalf of the undersigned each and every act and thing requisite and
necessary or appropriate with respect thereto to be done in and about the
premises in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/Theodore S. Rosky
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ANNUAL REPORT TO SHAREHOLDERS FOR THE STATE BOND U.S. GOVERNMENT AND AGENCY
SECURITIES FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000780113
<NAME> STATE BOND INCOME FUNDS, INC.
<SERIES>
<NUMBER> 1
<NAME> STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 13,942,356
<INVESTMENTS-AT-VALUE> 13,905,177
<RECEIVABLES> 83,641
<ASSETS-OTHER> 141,229
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,130,047
<PAYABLE-FOR-SECURITIES> 28,458
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 102,881
<TOTAL-LIABILITIES> 131,339
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,083,364
<SHARES-COMMON-STOCK> 2,742,371
<SHARES-COMMON-PRIOR> 2,857,744
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (47,477)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (37,179)
<NET-ASSETS> 13,998,708
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,028,789
<OTHER-INCOME> 0
<EXPENSES-NET> 137,961
<NET-INVESTMENT-INCOME> 890,828
<REALIZED-GAINS-CURRENT> (47,477)
<APPREC-INCREASE-CURRENT> 1,150,333
<NET-CHANGE-FROM-OPS> 1,993,684
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 890,828
<DISTRIBUTIONS-OF-GAINS> 58,624
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 385,235
<NUMBER-OF-SHARES-REDEEMED> 124,760
<SHARES-REINVESTED> 625,368
<NET-CHANGE-IN-ASSETS> 474,915
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 59,075
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 55,185
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 172,875
<AVERAGE-NET-ASSETS> 13,796,250
<PER-SHARE-NAV-BEGIN> 4.73
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> .39
<PER-SHARE-DIVIDEND> .32
<PER-SHARE-DISTRIBUTIONS> .02
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.10
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
