STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND
May 15, 1995
TO THE SHAREHOLDERS:
We are pleased to present the semi-annual report of the State Bond U.S.
Government and Agency Securities Fund ("Fund") as of and for the six months
ended April 30, 1995. We wish to welcome the new shareholders that joined us
during this six-month period of operations and thank all of our shareholders for
their investment in this Fund.
The Fund's total net assets were $13.9 million on April 30, 1995. The net asset
value per share was $4.93. The Fund, during this reporting period, paid monthly
dividends that totaled 16 cents per share; and also on December 30, 1994, paid a
capital gain distribution of 2 cents per share.
In this six-month period, the Federal Reserve increased short-term rates in
November and February as it continued its efforts to curb inflation. However,
interest rates, as measured by the long-term U.S. Government Bond exceeded the
8% level in November, and during the remainder of this reporting period reversed
and started on a downward trend, reaching a 7.34% level at the end of this
period. This decrease in long-term rates produced a very positive result in the
Fund's net asset value per share price as it increased from $4.73 at the
beginning of the period to $4.93.
The portfolio is composed of 70.4% in Government National Mortgage Association
(GNMA) Obligations, 24.8% in Federal National Mortgage Association (FNMA)
Obligations, and the remainder in cash equivalents.
We value your investment in the Fund, and would be pleased to respond to
inquiries you may have regarding the Fund or your investment in its shares.
Sincerely,
/s/ Charles A. Greer
President
PAGE 1
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS
APRIL 30, 1995
UNAUDITED
PRINCIPAL DUE INTEREST MARKET
AMOUNT DATE RATE VALUE (A)
--------- ---- ------- ---------
GOVERNMENT AGENCIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS
<S> <C> <C> <C>
$ 725,994 08-15-23 7.00% .................................... $ 664,004
969,013 07-15-23 7.00 .................................... 899,304
778,321 08-15-22 7.50 .................................... 758,815
407,029 10-15-22 7.50 .................................... 403,339
997,735 02-15-23 7.50 .................................... 940,846
462,335 04-15-23 7.50 .................................... 437,618
442,206 05-15-23 7.50 .................................... 418,606
954,385 01-15-23 7.50 .................................... 909,604
482,870 06-15-22 8.00 .................................... 477,585
491,280 07-15-24 8.00 .................................... 495,498
935,006 04-15-24 8.00 .................................... 934,641
247,608 09-15-21 8.50 .................................... 250,717
338,763 05-15-22 8.50 .................................... 339,856
816,779 03-15-22 8.50 .................................... 815,981
252,164 03-15-22 8.50 .................................... 253,560
273,120 03-15-22 8.50 .................................... 273,697
483,807 09-15-24 8.50 .................................... 500,974
-----------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS -- 70.4% ...................... 9,774,645
(Cost $10,058,415) -----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS
$2,431,949 10-15-23 7.00% .................................... 2,263,301
504,111 12-15-23 7.00 .................................... 473,553
463,055 11-15-23 7.00 .................................... 430,963
292,937 12-15-23 7.00 .................................... 275,178
-----------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS -- 24.8% ......................... 3,442,995
(Cost $3,692,052) -----------
TOTAL GOVERNMENT AGENCIES -- 95.2% ........................................................ 13,217,640
(Cost $13,750,467) -----------
REPURCHASE AGREEMENT -- 4.0%
Repurchase agreement with Norwest Investment Securities, Inc., dated
4-27-95 (Collateralized by U.S. Treasury Note, par value of $520,000, due
7-15-97, value of $550,000) (Cost $550,000)
$550,000 05-01-95 4.95% ..................................... 550,227
-----------
TOTAL INVESTMENTS -- 99.2% ................................................................ 13,767,867
(Cost $14,300,467)(b) -----------
OTHER ASSETS LESS LIABILITIES -- 0.8% ..................................................... 106,377
-----------
TOTAL NET ASSETS -- applicable to 2,813,231 shares outstanding,
at a net asset value of $4.93 per share -- 100.0% ...................................... $13,874,244
===========
</TABLE>
NOTES TO STATEMENT OF NET ASSETS:
(a) See accompanying notes to financial statements.
(b) Also represents cost for Federal income tax purposes.
PAGE 2
<PAGE>
BALANCE SHEET
APRIL 30, 1995
UNAUDITED
ASSETS:
Investments, at market value (Note A).... $13,767,867
Cash..................................... 97,422
Interest receivable...................... 85,158
Receivable for
reimbursable expenses.................. 3,555
Prepaid expenses......................... 500
-----------
Total assets.......................... 13,954,502
-----------
LIABILITIES:
Dividends payable........................ 58,479
Payable for capital
shares repurchased..................... 471
Payable to SBM Company (Note B).......... 10,412
Accrued expenses......................... 10,896
-----------
Total liabilities..................... 80,258
-----------
NET ASSETS APPLICABLE TO
OUTSTANDING CAPITAL STOCK................ $13,874,244
===========
REPRESENTED BY:
Capital stock -- 10,000,000,000 shares
of $.00001 par value authorized;
2,813,231 shares outstanding........... $ 28
Additional paid-in capital............... 14,442,593
Unrealized depreciation
of investments......................... (532,827)
Accumulated net realized loss
from investment transactions........... (35,550)
-----------
Total net assets...................... $13,874,244
===========
NET ASSET VALUE PER SHARE.................. $4.93
=====
MAXIMUM OFFERING PRICE PER SHARE (INCLUDES
MAXIMUM SALES CHARGE OF 5%):
(reduced on purchases of
$25,000 or more)....................... $5.19
=====
See accompanying notes to financial statements.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED
APRIL 30, 1995
UNAUDITED
INVESTMENT INCOME:
Interest.......................... $ 519,631
EXPENSES:
Investment advisory and
management fee (Note B)......... $26,876
12b-1 plan fees (Note B).......... 16,797
Accounting and pricing
service fees (Notes A and B)..... 10,000
Registration fees ................ 7,900
Transfer agent fees (Note B)...... 7,200
Audit and legal fees.............. 6,100
Shareholder reports............... 5,200
Custodian fees.................... 4,800
Director fees..................... 2,600
Other expenses.................... 900
------
Total expenses................. 88,373
Reimbursement of expenses
(Note B)....................... (21,183) 67,190
------- -------
Net investment income............. 452,441
-------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS:
Net realized loss from
investment transactions.......... (36,001)
Net increase in unrealized
appreciation of investments..... 654,685
-------
NET GAIN ON INVESTMENTS......... 618,684
-------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS..... $1,071,125
==========
See accompanying notes to financial statements.
PAGE 3
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1995 OCTOBER 31,
UNAUDITED 1994
---------------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income............................................................. $ 452,441 $ 905,347
Net realized gain (loss) from investment transactions............................. (36,001) 59,296
Net increase (decrease) in unrealized appreciation of investments................. 654,685 (1,618,125)
----------- -----------
Net increase (decrease) in net assets resulting from operations................. 1,071,125 (653,482)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ($.16 and $.31 per share, respectively)..................... (452,441) (905,347)
Net realized gain from investments transactions
($.02 and $.02 per share, respectively).......................................... (58,624) (63,055)
----------- -----------
Total distributions to shareholders............................................. (511,065) (968,402)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of 216,776 and 357,050 shares,
respectively (Note B)........................................................... 1,034,922 1,782,523
Net asset value of 70,736 and 124,962 shares, respectively, issued
in reinvestment of distributions................................................ 337,460 629,881
----------- -----------
1,372,382 2,412,404
Payments for repurchase of 332,025 and 640,455 shares,
respectively.................................................................... (1,581,991) (3,224,518)
----------- -----------
Decrease in net assets from capital share
decrease of 44,513 and 158,443 shares, respectively............................. (209,609) (812,114)
----------- -----------
Total increase (decrease) in net assets...................................... 350,451 (2,433,998)
NET ASSETS:
Beginning of period............................................................... 13,523,793 15,957,791
----------- -----------
End of period..................................................................... $13,874,244 $13,523,793
=========== ===========
</TABLE>
See accompanying notes to financial statements.
PAGE 4
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
PER SHARE INVESTMENT INCOME AND CAPITAL CHANGES
(FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR)
NOVEMBER 20,
SIX 1985
MONTHS (COMMENCEMENT
ENDED OF
APRIL 30, YEAR ENDED OCTOBER 31 OPERATIONS) TO
1995 ------------------------------------------------------------------- OCTOBER 31,
UNAUDITED 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 ................ .16 .31 .33 .37 .41 .41 .41 .40 .40 .41
Net realized and
unrealized gain (loss)
on investment
transactions ....................... .22 (.54) .08 .03 .31 (.05) .04 .18 (.31) .04
------ ------- ------ ------- ------- ------ ------ ------- ------- ------
Total from investment
operations ....................... .38 (.23) .41 .40 .72 .36 .45 .58 .09 .45
LESS DISTRIBUTIONS:
Dividends from net
investment income ................. (.16) (.31) (.33) (.37) (.41) (.41) (.41) (.40) (.40) (.41)
Distributions from
capital gains ..................... (.02) (.02) (.03) -- -- -- -- -- -- --
------ ------- ------ ------- ------- ------ ------ ------- ------- ------
Total distributions .............. (.18) (.33) (.36) (.37) (.41) (.41) (.41) (.40) (.40) (.41)
NET ASSET VALUE,
END OF PERIOD ....................... $ 4.93 $ 4.73 $ 5.29 $ 5.24 $ 5.21 $ 4.90 $ 4.95 $ 4.91 $ 4.73 $ 5.04
====== ======= ====== ======= ======= ====== ====== ======= ======= ======
TOTAL RETURN** ....................... 8.25% (4.50%) 8.11% 7.93% 15.30% 7.61% 9.68% 12.78% 1.77% 7.96%*
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000) ............................. $13,874 $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 ................ 6.66%* 7.22% 6.30% 7.01% 8.03% 8.33% 8.51% 8.32% 8.13% 8.58%
Portfolio turnover rate
(excluding
short-term securities) ............ 7.32%* 22.75% 8.71% 47.46% 7.88% 51.61% 4.24% 4.51% 34.86% 9.69%
</TABLE>
* Annualized
** Total return does not consider the effects of sales loads.
*** During each of the periods indicated the Manager voluntarily reimbursed the
Fund on a monthly basis for expenses incurred by it in excess of 1% of
average daily net assets. Without such voluntary reimbursement, the ratio of
expenses to average net assets in each of the respective fiscal years would
have been as follows: 1995 (annualized) 1.30%, 1994-1.23%, 1993-1.21%,
1992-1.22%, 1991-1.37%, 1990-1.51%, 1989-1.43%, 1988-1.26%, 1987-1.29%, and
1986 (annualized) 1.74%.
See accompanying notes to financial statements.
PAGE 5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1995
UNAUDITED
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The State Bond U.S. Government and Agency Securities Fund ("Fund") is the only
current investment portfolio of the State Bond Income Funds, Inc., which is an
open-end diversified management investment company. The primary investment
objective of the Fund is to maximize current income to the extent consistent
with preservation of capital.
Security Valuation
In determining net asset value, the Fund uses portfolio security valuations
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 market value, as
determined by the pricing service. Short-term holdings maturing in 60 days or
less are valued at cost plus accrued interest, which approximates market value.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian take possession of the underlying collateral, U.S.
Government and/or Agency securities, the value of which exceeds the principal
amount of the repurchase agreement including accrued interest. To the extent
that any repurchase agreement exceeds one business day, the value of the
collateral is marked to market on a daily basis to ensure the adequacy of the
collateral. Should the seller for any reason default, the Fund's recourse would
be to receive the collateral at its current market value.
At April 30, 1995, gross unrealized appreciation of investments aggregated
$27,558, and gross unrealized depreciation of investments aggregated $560,385.
Security Transactions, and Related Investment Income
Security transactions are accounted for on the date the order to buy or sell is
executed. Premiums are amortized and discounts are accreted for book and tax
purposes, and are included with interest in the statement of operations.
Realized gains or losses from investment transactions are determined on the
basis of specific identification. Interest income is recorded on the accrual
basis and dividends to shareholders are declared daily and paid once a month.
Income Taxes
No provision is made for income taxes since it is the policy of the Fund to
distribute all taxable net income and qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code.
(B) PAYMENTS TO RELATED PARTIES
SBM Company is the Fund's investment adviser and transfer agent. The investment
advisory fee is computed at the annual rate of .65% on the average daily net
assets of the Fund. SBM Company subsequently pays from its advisory fee .25% of
the average daily net assets to SBM Financial Services, Inc. (a wholly owned
subsidiary of SBM Company) under a 12b-1 plan of share distribution.
SBM Company has voluntarily undertaken to reimburse the Fund for any expenses in
excess of 1% of the average daily net assets, despite the fact that higher
expenses may be permitted by state law.
Transfer agent fees, as well as $7,500 in accounting fees for the period ended
April 30, 1995 were paid to SBM Company in accordance with agreements which were
previously approved by the Board of Directors. Certain officers and directors of
the Fund are officers and directors of SBM Company.
Fees paid to SBM Financial Services, Inc. for underwriting services in
connection with sales of the Fund's capital shares aggregated $29,152 for the
period ended April 30, 1995. Such fees are not an expense of the Fund and are
excluded from proceeds received by the Fund for sales of its capital shares as
shown in the accompanying statement of changes in net assets.
(C) SIGNIFICANT EVENT
Pursuant to an Amended and Restated Stock and Asset Purchase Agreement dated
February 16, 1995, between SBM Company, the Manager of the State Bond Group of
Mutual Funds (the "Manager") and ARM Financial Group, Inc., a Delaware
corporation ("ARM"), the Manager has agreed to sell substantially all of its
business operations to ARM (the "Proposed Transaction"). As part of the Proposed
Transaction, a subsidiary of ARM, ARM Capital Advisors, Inc. ("ARM Capital
Advisors"), will assume the responsibilities of the Manager as investment
adviser to the Fund under the Investment Advisory and Management Agreement
between the Manager and the Fund. In addition, ARM will acquire all of the
outstanding common stock of SBM Financial Services, Inc., the Distributor of the
Fund (the "Distributor"). On May 15, 1995, the shareholders of the Fund approved
a new Advisory Agreement with ARM Capital Advisors, effective upon closing of
the Proposed Transaction. The completion of the Proposed Transaction is expected
to occur on June 14, 1995.
PAGE 6
<PAGE>
SHAREHOLDER SERVICES
VOLUNTARY INVESTMENT PLAN
Additional investments of $50 or more can be made at any time. The funds may be
wired or mailed as per the instructions found in the prospectus. Distributions
to shareholders are automatically reinvested to further increase the number of
shares owned.
AUTOMATIC INVESTMENT PLAN
With the cooperation of your bank, the Fund's transfer agent will make a
withdrawal of $50 or more from your checking account each month for the amount
you specify to purchase shares for your mutual fund account.
VOLUME DISCOUNTS
You will qualify for a discount from the maximum offering price if the purchase
of State Bond U.S. Government and Agency Securities Fund shares totals $25,000
or more.
LETTER OF INTENT
Volume discounts will be applied on a series of purchases totaling $25,000 or
more within a period of thirteen months pursuant to a written "Purchase Intent
and Price Agreement."
RIGHT OF ACCUMULATION DISCOUNTS
Additional shares may be purchased at a discount from the maximum offering price
if the intended purchase plus the value of presently owned State Bond U.S.
Government and Agency Securities Fund, State Bond Common Stock Fund, State Bond
Diversified Fund, State Bond Tax Exempt Fund, and/or State Bond Minnesota
Tax-Free Income Fund shares total $25,000 or more.
AUTOMATIC CASH WITHDRAWAL PLAN
This feature provides for monthly, quarterly, semi-annual or annual payments of
designated amounts to investors holding shares of the Fund valued at $5,000 or
more ($2,500 for IRA accounts for which SBM Company acts as custodian).
FREE CHECKING
You may use free personalized checks to withdraw money from your account
(minimum of $250), if you have an account balance of $5,000 or more.
QUICK REDEMPTION BY TELEPHONE
Those who have selected this service may request telephone redemption
instructions. If your request is for $5,000 or more, your funds will be
wire-transferred the following business day to your bank account. If the request
is for under $5,000, a check will be mailed to you. In order to initiate a Quick
Redemption by telephone you must elect this option. 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 of all such transactions.
RETIREMENT PLANS
Prototype plans for individual retirement accounts (IRAs) and qualified pension
and profit sharing plans for corporate and non-corporate employers, as well as a
kit for the establishment of a 403(b) custodial account (TSA), are available.
BOARD OF DIRECTORS
ROBERT H. BAKER, JR.
President, Optima Resources, Inc.
Director, associated mutual funds
RICHARD M. EVJEN
President, The Evjen Associates, Inc.
Director, SBM Company
Chairman and Director, associated mutual funds
WILLIAM B. FAULKNER
President, William Faulkner & Associates, Inc.
Director, associated mutual funds
PATRICK M. FINLEY
President, Universal Cooperatives, Inc.
Director, associated mutual funds
ALDEN M. HANSON
Realtor, Edina Realty
Director, associated mutual funds
CHRIS L. MAHAI
Senior Vice President, Strategic Integration,
Star Tribune
Director, associated mutual funds
KEITH O. MARTENS
Executive Vice President-Investments,
SBM Company
Director and Vice President, associated mutual funds
KENNON V. ROTHCHILD
Chairman and Chief Executive Officer,
RCN Associates, Inc.
Director, SBM Company
Director, associated mutual funds
OFFICERS
Charles A. Geer President
Walter W. Balek Vice President
Stewart D. Gregg Vice President-Secretary
Keith O. Martens Vice President
Ann M. Schmid Vice President-Investments
Edward L. Zeman Vice President, Treasurer, and
Chief Financial Officer
Ronald H. Geiger Assistant Vice President
Lori L. Nuebel Assistant Vice President and
Assistant Secretary
INVESTMENT ADVISOR
SBM Company
Minneapolis, Minnesota
GENERAL DISTRIBUTOR
SBM Financial Services, Inc.
8400 Normandale Lake Blvd.
Suite 1150
Minneapolis, Minnesota 55437-3807
(612) 835-0097
CUSTODIAN
Norwest Bank Minnesota, N.A.
Minneapolis, Minnesota
PAGE 7
<PAGE>
This report is intended for the general information of 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.
STATE BOND
U.S. GOVERNMENT
AND AGENCY SECURITIES
FUND
SEMI-ANNUAL
REPORT
APRIL 30, 1995
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