<PAGE>
State Bond
U.S. Government and Agency Securities Fund
[LOGO APPEARS HERE]
State Bond
U.S. Government and
Agency Securities
Fund
Annual
Report
October 31, 1995
<PAGE>
State Bond U.S. Government and Agency Securities Fund
TO THE SHAREHOLDERS:
The State Bond U.S. Government and Agency Securities Fund (the "Fund") completed
its tenth year of operations on October 31, 1995. We wish to welcome the new
shareholders that joined us during the year and thank all of our shareholders
for their continued investment in the Fund.
Shareholders receive a flow of income from the Fund through its policy of
distributing dividends monthly. During this fiscal year, the Fund paid dividends
that totaled 32 cents per share and also paid a per share capital gain
distribution of 2 cents. The net asset value per share increased from $4.73 at
the beginning of the fiscal year to $5.10 on October 31, 1995. If your shares
were owned at the beginning of the year, and you elected to have all dividends
and the capital gain distribution reinvested, the value of your shares increased
15.48%.
During the fiscal year, long-term interest rates, while having periods of
fluctuation, produced an overall trend toward lower rates. This is illustrated
by the 30-year U.S. Treasury bond, which began the fiscal year in November 1994,
yielding nearly 8% and closed the year at a 6.33% yield, which in turn produced
higher values for the investments held in the Fund's portfolio.
The Schedule of Investments in this report shows that the Fund's portfolio
consists of 73.3% of Government National Mortgage Association (Ginnie Mae)
certificates, 22.9% of Federal National Mortgage Association (Fannie Mae)
certificates, and the remainder in cash equivalents. The investment securities
of the Fund have coupons ranging from 7.00% to 8.50%, with the largest
concentration, 34.4%, having a 7.00% coupon followed by the 7.50% level with
30.7% of the portfolio's market value. These investments represent the majority
of the Fund's portfolio and with their valuations near or less than par, a
scenario of lower rates in the future should result in appreciation for these
investments.
We would be pleased to respond to inquiries regarding the Fund or your
investment in its shares.
Sincerely,
/s/ Keith O. Martens
Keith O. Martens
Vice President
<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
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<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
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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
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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
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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)
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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
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Total expenses before reimbursement 172,875
Less: expense reimbursement (34,914)
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Net expenses 137,961
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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
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Net realized and unrealized gain on investments 1,102,856
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Net increase in net assets resulting from operations $1,993,684
============
See accompanying notes.
5
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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
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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
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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>
BOARD OF DIRECTORS
William B. Faulkner
President, William Faulkner & Associates, Inc.
Director, State Bond mutual funds
Patrick M. Finley
President, Universal Cooperatives, Inc.
Director, State Bond mutual funds
Arthur J. Gartland
Co-founder and President, Benedetto, Gartland & Greene, Inc.
Director, State Bond mutual funds
John Katz
Executive Vice President, Equitable Investment Corporation, retired 1991
Director, State Bond mutual funds
John R. Lindholm
Executive Vice President, ARM Financial Group, Inc.
President, State Bond and Mortgage Life Insurance Company
Chairman, State Bond mutual funds
Chris L. Mahai
Senior Vice President, Strategic Integration, Star Tribune
Director, State Bond mutual funds
Theodore S. Rosky
Executive Vice President and Chief Financial Officer,
Providian Corporation, retired 1992
Director, State Bond mutual funds
-----------------------------------
INVESTMENT ADVISER
ARM Capital Advisors, Inc.
GENERAL DISTRIBUTOR
SBM Financial Services, Inc.
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
1-800-328-4735
CUSTODIAN
Investors Fiduciary Trust Company
Kansas City, Missouri
-----------------------------------
This report is intended for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless
accompanied or preceded by the offering prospectus of the Fund, which contains
details of sales commissions and other information.
