<PAGE>
State Bond
Minnesota Tax-Free Income Fund
[LOGO]
A Member of the ARM Financial Group
State Bond
Minnesota Tax-Free
Income Fund
Annual
Report
June 30, 1995
<PAGE>
State Bond Minnesota Tax-Free Income Fund
TO THE SHAREHOLDERS:
This Annual Report marks the completion of eight years of operations for the
State Bond Minnesota Tax-Free Income Fund (the "Fund"). We welcome new
shareholders who joined us during the year and thank all of our shareholders for
their interest and support.
Income that is exempt from both state and federal taxes continues to be an
attraction for investors. A total of 56 cents per share for the fiscal year
was distributed through monthly dividends.
During this fiscal year ended June 30, 1995, the Federal Reserve continued its
efforts to curb future inflationary pressures by increasing short-term interest
rates in August, November, and February by a total of 1.75%. With these
increases, the 30 year Treasury Bond yield, which began the fiscal year at 7.6%,
increased to over 8.0% in November and held near that level through December.
However, even though the Federal Reserve increased short-term interest rates by
an additional 0.5% in February, the 30 year Treasury Bond yield began to
decrease in January and continued its downward trend, closing the fiscal year
near the 6.6% level as weaker economic data suggested a slowing economy. The
Fund's net asset value per share began the fiscal year at $10.45, and as
interest rates increased, its value decreased to $10.14 at the end of December.
Then as interest rates began to decrease, the net asset value per share
increased, and this brought the net asset value per share to $10.61 at the close
of the fiscal year.
The Fund continues to emphasize diversification and quality in its investments.
The "Schedule of Investments" of this report shows the Fund's ownership of 72
different tax-exempt issues. The portfolio's quality is reflected in the rating
of each security by Moody's Investors Service, Inc. and/or Standard & Poor's
Corporation. By selecting the higher rating awarded to each issuer by either
service, bonds comprising 28.9% of the total portfolio market value were triple
A rated, 32.0% were double A rated, and 32.6% were single A rated. The
remaining 6.5% of the portfolio was invested in quality rated short-term
securities.
Should you desire additional information, we would welcome your inquiries.
Sincerely,
/s/ Keith O. Martens
Keith O. Martens
Vice President
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Schedule of Investments
June 30, 1995
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
-----------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (93.5%)
Albany, MN Independent School District #745, G.O. Bonds,
6.000%, due 2009 Aa/NR $235,000 $ 240,840
Blaine Minnesota Economic Development Authority Bonds, Anoka and
Ramsey County, 7.250%, due 2006 A1/NR 150,000 162,299
Bloomington Port Authority, Series 1994 A, 5.250%, due 2003 Aaa/AAA 200,000 201,232
Burnsville, MN Multi-Family Housing Rev. Ref. Bonds, Coventry
Court Apartments Project, Series 1989, 7.500%, due 2027 NR/AAA 100,000 105,591
Centennial Minnesota Independent School District #12, G.O. Bonds,
Series 1991 A, 7.150%, due 2011 NR/AAA 250,000 276,075
City of Mora, MN, G.O. Refunding Revenue Bonds, 5.000%, due 2008 Aaa/AAA 200,000 195,786
Coon Rapids, MN, G.O. Tax Increment Bonds, Series 1986 B2,
7.750%, due 2006 A/NR 150,000 154,068
Dakota County, MN, G.O. Ref. Bonds, 6.450%, due 2010 Aaa/AAA 300,000 312,630
Dakota County, MN Housing and Rev. Authority, SFM Rev. Bonds,
7.200%, due 2009 NR/AAA 205,000 219,100
Duluth, MN, G.O. Water Rev., Series 1992 A, 6.250%, due 2007 A/NR 285,000 295,280
Eden Prairie, MN Multi-Family Housing Preserve Place Apartments,
7.875%, due 2017 NR/AAA 100,000 106,895
Farmington Independent School District #192, G.O., 4.900%, due 2004 NR/AA 200,000 191,466
Foley, MN Independent School District #51 MBIA, 7.500%, due 2008 Aaa/AAA 100,000 106,367
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
-----------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
Hennepin County, MN Lease Rev. Certificate of Participation,
Series 1991, 6.800%, due 2017 Aa/AA $165,000 $ 175,662
Housing and Redevelopment Authority, St. Paul Parking,
6.450%, due 2007 NR/A- 300,000 328,512
Housing and Redevelopment Authority, Eden Prairie, 6.200%, due 2008 A/NR 300,000 308,373
Kandiyohi County, MN, G.O. Ref. Bonds, Series 1993, 5.650%, due 2011 A/NR 225,000 219,976
Minnesota Higher Education Fac. Auth. Rev. Bonds, Series Three J
(Macalaster College), 6.300%, due 2014 NR/AA- 300,000 305,187
Minnesota Higher Education Fac. Auth. Rev. Bonds, Series Two-O
(College of St. Thomas), 7.600%, due 2007 A/NR 100,000 109,460
Minnesota Higher Education Fac. Auth. Rev. Ref. Bonds, Series 3-R2,
5.600%, due 2014 A1/NR 315,000 297,984
Minnesota Higher Education Fac. Auth. Rev. Bonds, Series 3M1,
6.000%, due 2010 NR/AAA 200,000 201,514
Minnesota Housing Finance Agency, SFM Rev. Bonds, Series 1991 C,
7.100%, due 2011 NR/AA 195,000 206,601
Minnesota Housing Finance Agency, SFM Rev. Bonds, Series C,
7.650%, due 2008 Aa/AA 100,000 107,854
Minnesota Housing Finance Agency, SFM Rev. Bonds, Series 1989 B,
7.300%, due 2017 Aa/AA 315,000 333,087
Minnesota Housing Finance Authority, Series 1993, E,
6.000%, due 2014 NR/A+ 160,000 159,101
</TABLE>
3
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Schedule of Investments (continued)
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
-----------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
Minnesota Public Facilities Authority, Water Pollution Control,
Rev. Bonds, Series 1991 A, 6.950%, due 2013 NR/AA+ $250,000 $ 270,345
Minnesota Public Facilities Authority, Water Pollution Control,
Rev. Bonds, Series 1990 A, 7.100%, due 2012 NR/AA+ 300,000 325,068
Minnesota Public Facilities Authority, Water Pollution Control,
Rev. Bonds, Series 1992 A, 6.500%, due 2014 NR/AA+ 250,000 264,210
Minnesota State Housing Finance Agency, Rental Housing,
Series C Ref. Bonds, 6.150%, due 2014 NR/A+ 175,000 176,027
Minnesota State Housing Finance Agency, Single Family Mortgage,
5.850%, due 2011 Aa/AA 350,000 348,555
Minnesota State Housing Development Single Family Mortgage,
Series B, 7.250%, due 2016 Aa/AA 55,000 56,860
Minnetonka, MN Multi-Family Housing Rev. Bonds (Cedar Hills East
Project), 7.500%, due 2017 NR/AA 100,000 106,361
State of Minnesota, G.O. State Bonds, State Infrastructure
Development Bonds, 7.000%, due 2007 Aa/AA+ 150,000 166,152
Minnesota State University Board Rev. Bonds, Series 1993 A,
6.000%, due 2013 A/NR 300,000 295,458
Minneapolis-St. Paul Metro Area Council G.O. Bonds, 7.000%, due 2006 Aaa/AAA 100,000 101,328
Minneapolis Community Development Agency, Multi-Family Housing
Rev., Laurel #9, 7.500%, due 2031 NR/AAA 100,000 102,190
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
-----------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
Minneapolis, MN Hospital Facility Refunding Revenue Bonds,
7.875%, due 2014 A1/A+ $450,000 $ 497,655
Minneapolis, MN Multi-Family Housing Rev. Ref. Bonds, Series 1991,
7.050%, due 2022 NR/AAA 300,000 312,798
Minneapolis, MN Multi-Family Rev. Bonds, 7.125%, due 2010 NR/AAA 200,000 211,660
Minneapolis, MN Refunding Laurel Village G.O. Bonds, 5.75%, due 2010 Aaa/AAA 275,000 274,420
Minneapolis-St. Paul, MN Metro Council Sewer Bonds, Series 1990 D,
7.250%, due 2007 Aaa/AAA 150,000 166,239
Minneapolis, MN Sales Tax Ref. G.O., 6.250%, due 2012 Aaa/AAA 250,000 258,650
Moorhead, MN Public Utility Rev. Bonds, Series 1992,
6.050%, due 2006 Aaa/AAA 300,000 315,549
Northern Municipal Power Agency, MN Electric Rev. Ref. Bonds,
Series A, 7.250%, due 2017 Aaa/AAA 285,000 315,897
Northern Municipal Power Agency, MN Electric Rev. Ref. Bonds,
6.000%, due 2020 A/A 530,000 512,844
Owatonna, MN Public Utility Ref. Bonds, Series 1990,
7.400%, due 2007 A1/NR 300,000 333,297
Ramsey & Washington Counties Resource Recovery Rev. Bonds, NSP
Project, 6.750%, due 2006 Aa2/AA- 100,000 106,899
Red Wing Independent School District #256, G.O. School Building,
Series 1998 A, 7.300%, due 2004 Aa/NR 150,000 159,657
Robbinsdale Hospital Ref. Rev. NMMCP, 1989, 7.200%, due 2005 Aaa/AAA 100,000 110,680
</TABLE>
5
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Schedule of Investments (continued)
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
-----------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
Robbinsdale Hospital Ref. Rev. NMMCP, Series A, 5.450%, due 2013 Aaa/AAA $370,000 $ 349,780
Rochester, MN Health Care Facility Rev. Bonds, Mayo Medical Center,
6.250%, due 2021 NR/AA+ 500,000 507,385
Scott County, MN, G.O. Capital Improvement Plan, Series 1988 A,
7.250%, due 2008 Aaa/AAA 100,000 107,347
Southern Minnesota Municipal Power Authority, Series A,
8.125%, due 2018 NR/A+ 300,000 332,952
St. Anthony-New Brighton Independent School District #282, G.O.
Bonds, 5.700%, due 2012 Aa/AA 300,000 297,447
St. Cloud, MN Hydro Electric Generator Facility Gross Rev. Bonds,
7.375%, due 2018 NR/A- 250,000 262,055
St. Louis County, MN, G.O. Revenue Bonds, 4.750%, due 2004 Aaa/AAA 300,000 288,519
St. Paul, MN, G.O. Street Improvement, Special Assessment Bonds,
Series 1988 D, 7.200%, due 2008 Aa/AA+ 100,000 102,072
St. Paul, MN Housing & Redevelopment Authority, Tax Increment Bonds,
7.400%, due 2005 Aaa/AAA 100,000 107,610
St. Paul, MN Housing and Redevelopment Authority Revenue Bonds,
5.400%, due 2008 Aaa/AAA 300,000 293,889
St. Paul, MN, Independent School District #625, Series C,
5.550%, due 2012 Aa/AA 300,000 292,059
St. Paul, MN, Independent School District #625, Series 1994 C,
6.050%, due 2012 Aa/AA 400,000 406,932
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
-----------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
St. Paul, MN, Independent School District #625 School Building
Bonds, Series 1990 D, 7.250%, due 2009 Aa/AA $150,000 $ 163,623
Stearns County, MN, G.O. Ref. Bonds, Series B, 6.000%, due 2007 A/NR 325,000 334,773
University of Minnesota, Ref. Series A, 7.750%, due 2010 A1/AA 200,000 208,390
Vadnais Heights, MN Housing Development Rev. Bonds, Riverwood
Housing Foundation, 7.500%, due 2009 NR/A+ 115,000 116,006
Wayzata, MN Tax Increment Bonds, 7.000%, due 2010 Aa/NR 200,000 220,538
Wayzata, MN Independent School District #284, G.O. Bonds,
Series 1994 B, 5.800%, due 2009 Aa/NR 250,000 251,325
Western Minnesota Municipal Power Agency, Power Supply Revenue Ref.
Bonds, 6.875%, due 2007 A/A 300,000 313,539
Western Minnesota Municipal Power, Series A, 6.125%, due 2016 A/A 250,000 250,518
Western Minnesota Municipal Power Agency, Transmission Project Rev.
Ref. Bonds, Series 1991, 6.750%, due 2016 Aaa/AAA 200,000 215,196
Worthington, MN, G.O., Water Rev. Bonds, Series 1990 A,
7.000%, due 2010 A/NR 100,000 108,231
Wright County, MN, G.O. Jail Ref. Bonds, Series 1992 B,
6.000%, due 2007 A/NR 350,000 360,059
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TOTAL MUNICIPAL BONDS (Cost $16,386,816) 16,999,984
</TABLE>
7
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-------------------------
<S> <C> <C>
SHORT-TERM SECURITIES (6.5%)
Ford Motor Credit Corp., 5.930%, due 07/03/95 $650,000 $ 649,250
Sears Roebuck Acceptance Corp., 6.000%, due 07/07/95 525,000 524,388
-----------
TOTAL SHORT-TERM SECURITIES
(Cost $1,173,638) 1,173,638
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $17,560,454*) $18,173,622
===========
</TABLE>
* Also represents cost for federal income tax purposes.
Ratings were provided by Moody's Investors Service, Inc. and Standard & Poor's
Corporation and are not covered by the report of Ernst & Young LLP.
See accompanying notes.
8
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $17,560,454)
(Note 1)--See accompanying schedule $18,173,622
Cash 47,344
Receivable for capital shares sold 4,501
Receivable for reimbursable expenses (Note 2) 2,738
Interest receivable 364,344
Prepaid expenses 1,740
-----------
TOTAL ASSETS 18,594,289
LIABILITIES
Payable for securities purchased 300,000
Dividends payable 82,200
Payable to affiliates 14,357
Accrued expenses 19,779
-----------
TOTAL LIABILITIES 416,336
-----------
NET ASSETS $18,177,953
===========
Net Assets consist of:
Paid-in capital $17,537,193
Undistributed net realized gain on investments 27,592
Net unrealized appreciation on investment securities 613,168
-----------
NET ASSETS, for 1,713,138 shares outstanding $18,177,953
===========
NET ASSET VALUE and redemption price per share $ 10.61
===========
Maximum offering price per share (includes maximum sales
charge of 4.5%--reduced on purchases of $50,000 or more) $ 11.11
===========
</TABLE>
See accompanying notes.
9
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Statement of Operations
Year Ended June 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $1,122,971
EXPENSES (NOTE 2)
Investment advisory and management fees, net of 12b-1 plan fees 106,246
12b-1 plan fees 44,269
Accounting and pricing service fees 23,600
Professional fees 12,300
Shareholders' reports 5,900
Transfer agent fees 7,500
Custodian fees 7,200
Directors' fees and expenses 5,000
Other expenses 7,900
----------
Total expenses before reimbursement 219,915
Less: expense reimbursement (42,839)
----------
Net expenses 177,076
----------
Net investment income 945,895
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 1)
Net realized gain on investments 27,592
Change in unrealized appreciation on investment securities 268,408
----------
Net realized and unrealized gain on investments 296,000
----------
Net increase in net assets resulting from operations $1,241,895
==========
</TABLE>
See accompanying notes.
10
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1995 1994
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 945,895 $ 831,864
Net realized gain on investments 27,592 400
Net unrealized appreciation (depreciation) 268,408 (730,910)
---------------------------
Net increase in net assets resulting
from operations 1,241,895 101,354
Distributions to shareholders from:
Net investment income (945,895) (831,864)
Net realized gain -- (29,684)
---------------------------
Total distributions to shareholders (945,895) (861,548)
Capital share transactions:
Proceeds from sales of shares 3,233,318 2,730,892
Proceeds from reinvested dividends 675,610 624,970
Cost of shares redeemed (2,512,546) (1,428,523)
---------------------------
Net increase in net assets resulting from
share transactions 1,396,382 1,927,339
---------------------------
Total increase in net assets 1,692,382 1,167,145
NET ASSETS
Beginning of year 16,485,571 15,318,426
---------------------------
End of year $18,177,953 $16,485,571
===========================
OTHER INFORMATION
Shares:
Sold 311,971 251,856
Issued through reinvestment of dividends 65,014 57,461
Redeemed (241,814) (131,433)
---------------------------
Net increase 135,171 177,884
===========================
</TABLE>
See accompanying notes.
11
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------
1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of year $ 10.45 $ 10.94 $ 10.49 $ 10.18 $10.11
Income from investment operations:
Net investment income .56 .56 .59 .61 .62
Net realized and unrealized gain (loss) on investments .16 (.47) .45 .33 .07
-------------------------------------------------------------
Total from investment operations .72 .09 1.04 .94 .69
Less distributions:
From net investment income (.56) (.56) (.59) (.61) (.62)
From net realized gain -- (.02) -- (.02) --
-------------------------------------------------------------
Total distributions (.56) (.58) (.59) (.63) (.62)
-------------------------------------------------------------
Net asset value, end of year $ 10.61 $ 10.45 $ 10.94 $ 10.49 $10.18
=============================================================
TOTAL RETURN(A) 7.10% 0.79% 10.06% 9.47% 6.87%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $18,178 $16,486 $15,318 $12,244 $9,238
Ratio of expenses to average net assets(B) 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net assets 5.37%(C) 5.14% 5.41% 5.86% 6.17%
Portfolio turnover rate 6% 2% 15% 1% 8%
</TABLE>
(A) Total returns do not consider the effects of the one time sales charge.
(B) The ratio of expenses to average net assets before voluntary expense
reimbursements from the investment adviser for the years ended June 30,
1995, 1994, 1993, 1992, and 1991 were 1.24%, 1.29%, 1.38%, 1.54%, and
1.65%, respectively.
(C) The ratio of net investment income to average net assets before voluntary
expense reimbursements from the investment adviser for the year ended
June 30, 1995 was 5.10%.
12
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Notes to Financial Statements
June 30, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The State Bond Minnesota Tax-Free Income Fund (the "Fund") is the only
investment portfolio of State Bond Tax-Free Income Funds, Inc., which is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The primary investment objective of the Fund is
to maximize current income exempt from both Federal income tax and Minnesota
personal income tax to the extent consistent with the preservation of capital,
with consideration given to the opportunity for capital gains by investing in
tax-exempt securities. The ability of the issuers of the securities held by the
Fund to meet their obligations may be affected by economic developments in
Minnesota or a specific industry or region.
On June 14, 1995, ARM Financial Group, Inc. ("ARM") completed the acquisition of
substantially all of the assets and business operations of SBM Company ("SBM").
As part of the acquisition, ARM Capital Advisors, Inc. ("ARM Capital Advisors"),
a subsidiary of ARM, assumed the responsibilities of SBM as manager of the Fund.
The Investment Advisory and Management Agreement between the Fund and ARM
Capital Advisors contains the same material terms and conditions (including the
fees payable to ARM Capital Advisors) as were contained in the Fund's prior
Investment Advisory and Management Agreement with SBM.
As part of the acquisition, ARM acquired all of the issued and outstanding
common stock of SBM Financial Services, Inc. ("SBM Financial Services"), the
Fund's distributor. Effective June 14, 1995, SBM Financial Services also became
the transfer agent for the Fund. Prior to the acquisition SBM functioned as the
transfer agent for the Fund.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for investment companies.
INVESTMENTS IN SECURITIES
Investment securities are stated at aggregate market values. Market valuations
are furnished by a pricing service approved by the Board of Directors. The
pricing service values portfolio securities which have remaining maturities of
more than sixty days from the date of valuation at quoted bid prices. Such
securities for which quotations are not readily available (which constitute a
majority of the Fund's portfolio securities) are valued at fair value as
determined by the pricing service. Securities which have remaining maturities
of sixty days or less and short-term securities are valued at amortized cost
which approximates market value. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Directors.
Security transactions are accounted for on trade date and interest income is
recorded on the accrual basis. Realized gains or losses from investment
transactions are determined on the basis of specific identification.
At June 30, 1995, unrealized appreciation of investments aggregated $735,435 and
unrealized depreciation of investments aggregated $122,267 for tax purposes.
13
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAX STATUS AND RELATED MATTERS
The Fund complied with the requirements of the Internal Revenue Code applicable
to regulated investment companies and distributed its taxable net investment
income and net realized gains. Therefore, no provision for federal or state
income tax is required.
The Fund hereby designates $27,592 as capital gain dividends attributable to the
year ended June 30, 1995 for the purpose of the dividend paid deduction in the
Fund's federal income tax returns.
DISTRIBUTIONS TO SHAREHOLDERS
Exempt interest dividends from net investment income are declared daily and
distributed monthly. Distributions from net realized investment gains, if any,
are declared at least once a year. Dividends and distributions are recorded on
the ex-dividend date.
2. INVESTMENT ADVISORY AGREEMENT AND PAYMENTS TO RELATED PARTIES
ARM Capital Advisors is the Fund's investment adviser. The investment advisory
fee is computed at the annual rate of .85% on the first $100,000,000 of average
daily net assets of the Fund and .80% on the average daily net assets in excess
of $100,000,000. Included in the investment advisory fee is .25% of the average
daily net assets which ARM Capital Advisors pays to SBM Financial Services under
a Rule 12b-1 plan of share distribution. ARM Capital Advisors has voluntarily
undertaken to reimburse the Fund for any expenses in excess of 1% of the average
daily net assets despite the fact that higher expenses may be permitted by state
law.
Fees paid to SBM Financial Services for underwriting services in connection with
sales of the Fund's capital shares aggregated $90,322 for the fiscal year ended
June 30, 1995. Such fees are not an expense of the Fund and are excluded from
the proceeds received by the Fund for sales of its capital shares as shown in
the accompanying statements of changes in net assets. Fees paid to SBM for
accounting services for the fiscal year ended June 30, 1995 were $13,750.
Certain officers and directors of the Fund are also officers of ARM, ARM Capital
Advisors, and SBM Financial Services.
3. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and proceeds from sales of securities, excluding short-term
investments, during the fiscal year ended June 30, 1995, amounted to $1,771,797
and $932,167, respectively.
4. CAPITAL SHARES
At June 30, 1995, the Fund had authority to issue ten billion shares of common
stock, each with a par value of $.00001.
14
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
State Bond Minnesota Tax-Free Income Fund
We have audited the accompanying statement of assets and liabilities including
the schedule of investments of the State Bond Minnesota Tax-Free Income Fund
(the "Fund") as of June 30, 1995 and the related statements of operations and
changes in net assets and financial highlights for the year then ended. These
financial statements are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the year ended June 30, 1994 and financial highlights for the four years
ended June 30, 1994 of the State Bond Minnesota Tax-Free Income Fund were
audited by other auditors whose report dated July 29, 1994 expressed an
unqualified opinion.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at June 30, 1995, by
correspondence with the custodian. As to uncompleted securities transactions,
we performed other auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
State Bond Minnesota Tax-Free Income Fund at June 30, 1995, and the results of
its operations, changes in its net assets and financial highlights for the year
then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
August 4, 1995
15
<PAGE>
BOARD OF DIRECTORS
William B. Faulkner
President, William Faulkner & Associates, Inc.
Director, State Bond mutual funds
Patrick M. Finley
President, Universal Cooperatives, Inc.
Director, State Bond mutual funds
Arthur J. Gartland
Co-Founder and President, Benedetto, Gartland & Greene, Inc.
Director, State Bond mutual funds
John Katz
Executive Vice President, Equitable Investment Corporation,
retired 1991
Director, State Bond mutual funds
John R. Lindholm
Executive Vice President, ARM Financial Group, Inc.
President, State Bond and Mortgage Life Insurance Company
Chairman, State Bond mutual funds
Chris L. Mahai
Senior Vice President, Strategic Integration, Star Tribune
Director, State Bond mutual funds
Theodore S. Rosky
Executive Vice President and Chief Financial Officer,
Providian Corporation, retired 1992
Director, State Bond mutual funds
--------------------------------------
INVESTMENT ADVISER
ARM Capital Advisors, Inc.
GENERAL DISTRIBUTOR
SBM Financial Services, Inc.
8400 Normandale Lake Blvd., Suite 1150
Minneapolis, Minnesota 55437-3807
612/835/0097
CUSTODIAN
First Bank National Association
St. Paul, Minnesota
--------------------------------------
This report is intended for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless
accompanied or preceded by the offering prospectus of the Fund, which contains
details of sales commissions and other information.
