<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 SECURITES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<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............................................. 27
</TABLE>
2
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SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<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%
=====
</TABLE>
A $10.00 fee will be charged for certain redemptions by wire transfer. See "How
Can You 'Sell' Your Shares?"
<TABLE>
<CAPTION>
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
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 pemmitted 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% and total Fund operating
expenses would have been 1.25%. 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.
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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>
January 1, 1986
(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...... (.40)
(.32) (.31) (.33) (.37) (.41) (.41) (.41) (.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 year...... $ 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 year
(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
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% 55% 4% 5% 35% 10%
</TABLE>
*Annualized
**Total return does not consider the effects of the one time sales charge.
4
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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 buys GNMA Certificates at a premium,
however, payments of principal (including
5
<PAGE>
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 afffluent 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 prevent the interest rate borne by a
class from increasing beyond a specified level even if the related
8
<PAGE>
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
10
<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 in 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 (l) 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.
11
<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 profit, yield,
or both. No brokerage is allocated for the sale of Fund shares. The Fund will
not
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<PAGE>
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"), and ARM Transfer
Agency, Inc. (the "Shareholder Servicing Agent"), each a subsidiary of ARM, act
as distributor and transfer agent, respectively, ofthe Fund's shares. Their
address is l00 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 Fund directly to the Fund's
Shareholder Servicing Agent at 100 North Minnesota Street, P.O. Box
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<PAGE>
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 Servicing Agent by
telephone at (800) 328-4735 of your wire purchase order. If you are making an
initial investment, the Shareholder Servicing 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 valuations of its portfolio securities furnished by a pricing service
approved by the Board of
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<PAGE>
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>
Regular Dealer
Percentage of Percentage of Net Discount as % of
Offering Price Amount Invested 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
be sold to any investment advisory, custodial, trust or other fiduciary
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<PAGE>
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.
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
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<PAGE>
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. 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
17
<PAGE>
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 than $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 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.
18
<PAGE>
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 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
19
<PAGE>
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 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.
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<PAGE>
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.
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:
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<PAGE>
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
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.
22
<PAGE>
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 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
23
<PAGE>
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.
24
<PAGE>
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.
[GRAPH APPEARS HERE]
January 1,
(October 31 Fiscal Year) 1986 1995
Fund Performance................ $ 9,493 $20,409
Index Performance............... $10,000 $24,380
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 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 9 of the Form. BE SURE
TO SIGN THE CERTIFICATION IN SECTION 9.
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
PLEASE CHECK:
[_] STATE BOND COMMON STOCK FUND DATE _______________
[_] STATE BOND DIVERSIFIED FUND
THIS FORM MAY NOT BE USED TO ESTABLISH OR REVISE AN ACCOUNT OR SERVICE IN
STATE BOND CASH MANAGEMENT FUND, STATE BOND TAX EXEMPT FUND, STATE BOND
U.S. GOVERNMENT AND AGENCY SECURITIES FUND, OR STATE BOND MINNESOTA-TAX FREE
INCOME 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
1 REGISTRATION: AGE
-----------------------------------------------------------------------------------------------------------
PLEASE PRINT NAME(S) AGE
IN WHICH SHARES ARE -----------------------------------------------------------------------------------------------------------
TO BE REGISTERED STREET OR P.O. BOX
WITH TRUST NAME -----------------------------------------------------------------------------------------------------------
IF APPLICABLE. CITY State ZIP CODE
-----------------------------------------------------------------------------------------------------------
MAILING ADDRESS: HOME PHONE BUSINESS PHONE
-----------------------------------------------------------------------------------------------------------
BIRTHDATE
- ------------------------------------------------------------------------------------------------------------------------------------
Objective Suitability Information
2 LEGAL FORM OF OWNERSHIP (CHECK ONE)
1. [_] Individual ownership ____________ Conversation of Capital Approx. income $______________
2. [_] Joint tenants with right of survivorship
3. [_] Tenants in common ____________ Income Approx. Net Worth (exclusive
4. [_] Corporate ownership of property, home furnishings
5. [_] Partnership ownership ____________ Long term growth and automobiles) $_____________
6. [_] Uniform Gifts/Transfers to Minors
Act of State of _____________________ ____________ Speculative capital gains
7. [_] IRA/*/ Approx. Tax Bracket ___________%
8. [_] Tax-Qualified Retirement Plan/*/ ____________ Deferral of taxes
9. [_] Trust (date trust
established _____________________) ____________ Tax Exempt Income
/*/ Additional documentation Employer _________________________________________________________________
may be required.
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___
- -----------------------------------------------------------------------------------------------------------------------------------
3 I elect to receive: [_] 1. Dividends in shares, gain distributions in shares.
DIVIDENDS [_] 2. Dividends in cash, gain distributions in shares.
AND GAIN [_] 3. Dividends in cash, gain distributions in cash.
DISTRIBUTIONS 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.
- -----------------------------------------------------------------------------------------------------------------------------------
4 [_] Please arrange with my bank to draw pre-authorized payments and invest $___________________ in my
PRE-AUTHORIZED Account.
PAYMENTS [_] 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 3 above)
- ----------------------------------------------------------------------------------------------------------------------------------
5 [_] Please send a check for $_______________ beginning on the 15th day
AUTOMATIC of __________________ 19__, and thereafter on the 15th day of every:
CASH [_] Month [__] 3rd Month [_] 6th Month [_] 12th Month
WITHDRAWAL
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.
- -----------------------------------------------------------------------------------------------------------------------------------
6 I intend to purchase, although I am not obligated to do so,
LETTER shares of the above-designated Fund, and one or more of the
OF INTENT 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___________________________
- -----------------------------------------------------------------------------------------------------------------------------------
7
QUANTITY PURCHASE [_] I own shares of more than one fund in the State Bond Group which may entitle me to a reduced sales
Optional. (Attach charge.
a separate sheet My account numbers are: ______________________________________________________________________________
if necessary.)
[_] The registration of some of my shares differs. Their account numbers are:_________________________
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <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. SIGNATURE Under penalties of perjury I certify that the number shown
AND on this form is my correct taxpayer identification number/
CERTIFICATION 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 Company 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.________
- ---------------------------------------------------------------------------------------------------------------------
10. DEALER Please establish the Account specified by the Investor
INFORMATION and purchase through SBM Financial Services., general
ONLY 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____________________________________________ Representative's Phone Number (___)__________
Authorized Signature of Broker/Dealer
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FOR INTERNAL USE ONLY Accepted By:
- ---------------------------------------------------------
| # OF SHARES | NET ASSET VALUE | VALUE AS OF | SBM Financial Services, Inc.
| OWNED | AS OF DATE OF LOI | DATE 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 COMPANY THE STATE BOND GROUP OF MUTUAL FUNDS
100 N. MINNESOTA ST. 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 COMPANY.
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 Company 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
Company and depository receive written notification from either of us to
the other and in such time and in such manner so as to afford SBM Company
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 COMPANY
100 N. MINNESOTA ST.
P.O. BOX 69
NEW ULM, MINNESOTA 56073-0069
19
<PAGE>
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
<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
INDEPENDENT AUDITORS' REPORT...................................... 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 6.12%. 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:
a-b
YIELD = 2[(---- +1)/6/-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 9.68% 7.10% 7.52%
Total Return at
end of period:
</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:
3
<PAGE>
P(l+T)/n/= ERV
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
------- \l00\
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
Chris L. Mahai (39) Director Senior Vice President, Strategic Integration 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.
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.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- --------------------- ---------------------- -----------------------------------------
<S> <C> <C>
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 Financial
100 North Minnesota Street Services, Inc., since June 1992; prior thereto, Vice
P.O. Box 69 President and Division Manager, SBM Financial
New Ulm, Minnesota Services, Inc., 1980 to June 1992. President of the
56073-0069 other mutual funds in the State Bond Group.
Keith O. Martens (56) Vice President Senior Portfolio Manager, ARM Capital Advisors,
200 Park Avenue, 20th Floor Inc. since June 14, 1995; Executive Vice President -
New York, New York 10166 Investments, SBM Company; Vice President State
Bond and Mortgage Life Insurance Company and
SBM Certificate Company. Vice President of the
other mutual funds in the State Bond Group.
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 Financial Group,
Secretary 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.
- --------
* Mr. Lindholm is an interested person, as defined in the 1940 Act, by virtue of his positions with ARM
Financial Group, Inc.
</TABLE>
8
<PAGE>
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
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
9
<PAGE>
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: $59,639, $94,390 and $101,582. The Manager received $30,036 from
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 $6,927 and $27,987, 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
10
<PAGE>
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.
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 October 31, 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
11
<PAGE>
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 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
ARM Transfer Agency, Inc. acts as the transfer and dividend disbursing
agent for the Fund pursuant to an agreement with the Fund dated February 1,
1996, 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,
12
<PAGE>
administers mailing and tabulation of Fund proxy solicitations, and administers
payment of distributions declared by the Fund. The Distributor acted as the
transfer and dividend disbursing agent for the Fund pursuant to an agreement
with the Fund dated June 14, 1995, and received $6,492 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: $6,608;
$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 financial
statements. Their address is One Kansas City Place, 1200 Main Street, Kansas
City, Missouri 64105-2143.
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
13
<PAGE>
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.
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
14
<PAGE>
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.
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
15
<PAGE>
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.
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.
16
<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
[INSERT FINANCIALS]
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