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State Bond
U.S. Government and Agency Securities Fund
[LOGO]
State Bond
U.S. Government and
Agency Securities
Fund
Semi-Annual
Report
April 30,1996
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State Bond U.S. Government and Agency Securities Fund
MAY 10, 1996
TO THE SHAREHOLDERS:
We are pleased to present the semi-annual report for State Bond U.S. Government
and Agency Securities Fund (the "Fund"). We wish to welcome the new
shareholders who joined us during this six month period of operations and thank
all of our shareholders for their investment in the Fund.
The Fund's total net assets were $13.5 million on April 30, 1996. During the
six months ended April 30, 1996, the Fund paid monthly dividends that totaled 16
cents per share.
Since our last report as of October 31, 1995, interest rates, as measured by the
30-year U.S. Treasury bond, have increased by just over 0.5%. This increase in
interest rates reduced the value of the investments held in the Fund's
portfolio, which resulted in the Fund's net asset value per share declining from
$5.10 on October 31, 1995 to $5.00 on April 30, 1996.
The portfolio is comprised of 73.8% in Government National Mortgage Association
(Ginnie Mae) Certificates, 22.3% in 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, 33.6%, having a 7.00% coupon followed by the 7.50%
level with 33.2% of the portfolio's market value.
We appreciate your investment in the Fund and look forward to continuing to help
you meet your investment goals. Should you desire additional information, we
would welcome your inquiries.
Sincerely,
/s/ Keith O. Martens
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Keith O. Martens
Vice President
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State Bond U.S. Government and Agency Securities Fund
Schedule of Investments
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
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<S> <C> <C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES (96.1%)
Government National Mortgage Association (73.8%)
8.50%, due 9/15/2021 $ 241,904 $ 251,730
8.50%, due 3/15/2022 741,219 771,328
8.50%, due 3/15/2022 233,007 242,471
8.50%, due 3/15/2022 202,876 211,117
7.50%, due 4/15/2022 104,567 103,617
8.50%, due 5/15/2022 261,678 272,307
8.00%, due 6/15/2022 414,160 420,754
7.50%, due 8/15/2022 667,600 661,538
7.50%, due 10/15/2022 310,211 307,394
7.50%, due 1/15/2023 833,971 826,398
7.50%, due 2/15/2023 874,912 866,968
7.50%, due 4/15/2023 384,747 381,254
7.50%, due 5/15/2023 356,957 353,716
7.50%, due 6/15/2023 480,611 475,045
7.00%, due 7/15/2023 890,988 860,083
7.00%, due 8/15/2023 675,628 652,184
8.00%, due 4/15/2024 838,896 850,154
8.00%, due 7/15/2024 455,138 461,246
8.50%, due 9/15/2024 439,700 455,085
7.50%, due 8/15/2025 488,583 482,925
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9,907,314
Federal National Mortgage Association (22.3%)
7.00%,due 11/01/2023 415,834 402,573
7.00%,due 11/01/2023 2,228,834 2,149,399
7.00%,due 12/01/2023 462,014 445,549
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2,997,521
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TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-
BACKED SECURITIES (Cost $13,223,191) $12,904,835
</TABLE>
2
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PRINCIPAL
AMOUNT VALUE
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REPURCHASE AGREEMENT (3.9%)
Repurchase agreement with State Street Bank and
Trust Company, Inc., 4.0%, dated 4/30/96, due
5/1/96, (Collateralized by U.S. Treasury Note,
due 9/26/96, value $533,654) (Cost $520,000) $ 520,000 $ 520,000
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TOTAL INVESTMENTS (100%) (Cost $13,743,191) $13,424,835
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See accompanying notes.
3
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State Bond U.S. Government and Agency Securities Fund
Statement of Assets and Liabilities
April 30, 1996 (Unaudited)
ASSETS
Investment in securities, at value (cost $13,743,191)
--See accompanying schedule $13,424,835
Interest and other receivables 86,336
Cash 31,871
Prepaid assets 1,225
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TOTAL ASSETS 13,544,267
LIABILITIES
Dividends payable 54,426
Payable to affiliates 8,042
Other payables and accrued expenses 14,131
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TOTAL LIABILITIES 76,599
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NET ASSETS $13,467,668
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Net Assets consist of:
Paid-in capital $13,833,501
Undistributed net realized loss (47,477)
Net unrealized depreciation on investment securities (318,356)
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NET ASSETS, for 2,693,677 shares outstanding $13,467,668
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NET ASSET VALUE, and redemption price per share $ 5.00
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Maximum offering price per share (includes maximum sales charge
of 5% - reduced on purchases of $25,000 or more) $ 5.26
===========
See accompanying notes.
4
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State Bond U.S. Government and Agency Securities Fund
Statement of Operations
Six Months Ended April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest $495,066
EXPENSES
Investment advisory and management fees, net of Rule 12b-1 plan fees 27,892
Rule 12b-1 plan fees 17,433
Professional fees 6,168
Shareholders' reports 5,206
Transfer agent fees 6,672
Accounting and custodian fees 12,671
Directors' fees and expenses 2,376
Registration fees and dues 4,490
Other expenses 3,671
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Total expenses before reimbursement 86,579
Less: expense reimbursement (16,841)
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Net expenses 69,738
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Net investment income 425,328
NET UNREALIZED LOSS ON INVESTMENTS (281,177)
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Net increase in net assets resulting from operations $144,151
========
</TABLE>
See accompanying notes.
5
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State Bond U.S. Government and Agency Securities Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED APRIL 30, OCTOBER 31,
1996 1995
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<S> <C> <C>
(UNAUDITED)
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $425,328 $ 890,828
Net realized loss on investments -- (47,477)
Net unrealized appreciation (depreciation) (281,177) 1,150,333
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Net increase in net assets resulting from
operations 144,151 1,993,684
Distributions to shareholders from:
Net investment income (425,328) (890,828)
Net realized gain -- (58,624)
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Total distributions to shareholders (425,328) (949,452)
Capital share transactions:
Proceeds from sales of shares 442,472 1,886,616
Proceeds from reinvested distributions 277,481 611,738
Cost of shares redeemed (969,816) (3,067,671)
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Net decrease in net assets resulting from share
transactions (249,863) (569,317)
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Total increase (decrease) in net assets (531,040) 474,915
NET ASSETS
Beginning of period 13,998,708 13,523,793
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End of period $13,467,668 $13,998,708
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OTHER INFORMATION
Shares:
Sold 86,499 385,235
Issued through reinvestment of distributions 53,972 124,760
Redeemed (189,165) (625,368)
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Net decrease (48,694) (115,373)
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</TABLE>
See accompanying notes.
6
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State Bond U.S. Government and Agency Securities Fund
Financial Highlights
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30,
1996 YEAR ENDED OCTOBER 31,
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(UNAUDITED) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
Period $ 5.10 $ 4.73 $ 5.29 $ 5.24 $ 5.21 $ 4.90
Income from investment
operations:
Net investment income .16 .32 .31 .33 .37 .41
Net realized and unrealized gain
(loss) on investments (.10) .39 (.54) .08 .03 .31
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Total from investment operations .06 .71 (.23) .41 .40 .72
Less distributions:
From net investment income (.16) (.32) (.31) (.33) (.37) (.41)
From realized gains - (.02) (.02) (.03) - -
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Total distributions (.16) (.34) (.33) (.36) (.37) (.41)
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Net asset value, end of period $ 5.00 $ 5.10 $ 4.73 $ 5.29 $ 5.24 $ 5.21
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TOTAL RETURN(a) 1.08% 15.48% (4.50%) 8.11% 7.93% 15.30%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period (in
thousands) $13,468 $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% 1.00%
Ratio of net investment income to
average net assets 6.10% 6.46% 7.22% 6.30% 7.01% 8.03%
Ratio of expenses to average net
assets before voluntary expense
reimbursements 1.24% 1.25% 1.23% 1.21% 1.22% 1.37%
Ratio of net investment income to
average net assets before
voluntary expense
reimbursements 5.86% 6.20% 6.00% 6.12% 6.77% 7.69%
Portfolio turnover rate - 7% 23% 9% 47% 8%
</TABLE>
(a) Total returns do not consider the effects of the one time sales charge and
periods of less than one year are not annualized.
(b) Data expressed as a percentage for the 1996 period are annualized.
7
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State Bond U.S. Government and Agency Securities Fund
Notes to Financial Statements
April 30, 1996
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 February 1, 1996, ARM Transfer Agency, Inc. ("ARM
Transfer Agency") replaced SBM Financial Services as transfer agent for the
Fund. ARM Transfer Agency assumed SBM Financial Services' responsibility
pursuant to a transfer agency agreement with the Fund. ARM Transfer Agency is a
wholly owned subsidiary of ARM.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for investment companies.
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
8
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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 April 30, 1996, net unrealized depreciation of investment securities
aggregated $318,356, of which $84,333 related to appreciated investment
securities and $402,689 to depreciated investment securities. The aggregate cost
of securities is the same for book and tax purposes. At April 30, 1996, 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 $13,597 for the six months ended
April 30, 1996. 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 statement of changes in net assets.
Certain officers and directors of the Fund are also officers of ARM, ARM Capital
Advisors, SBM Financial Services, and ARM Transfer Agency.
3. CAPITAL SHARES
At April 30, 1996, the Fund had authority to issue ten billion shares of common
stock, each with a par value of $.00001.
10
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BOARD OF DIRECTORS
William B. Faulkner
President, William Faulkner & Associates, 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.
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
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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
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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.
