STATE BOND TAX FREE INCOME FUNDS INC, DEFS14A, 1995-04-18

STATE BOND TAX FREE INCOME FUNDS INC
DEFS14A, 1995-04-18

Previous: STRONG DISCOVERY FUND INC, 485BPOS, 1995-04-18

Next: VENTURA ENTERTAINMENT GROUP LTD, 10-K, 1995-04-18

STATE BOND CASH MANAGEMENT FUND
STATE BOND COMMON STOCK FUND
STATE BOND DIVERSIFIED FUND
STATE BOND TAX EXEMPT FUND
STATE BOND MINNESOTA TAX-FREE INCOME FUND
STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND

8400 Normandale Lake Boulevard
Suite 1150
Minneapolis, MN 55437

NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 15, 1995

Dear Shareholder:

Notice is given that a special meeting of the shareholders of State
Bond Cash Management Fund ("Cash Management Fund"), State Bond Common Stock Fund
("Common Stock Fund"), State Bond Diversified Fund ("Diversified Fund"), State
Bond Tax Exempt Fund ("Tax Exempt Fund"), State Bond Minnesota Tax-Free Income
Fund ("Tax-Free Income Fund"), and State Bond U.S. Government and Agency
Securities Fund ("U.S. Government Securities Fund") (collectively, the "Funds"),
will be held at 3:00 p.m. (Minneapolis time) on Monday May 15, 1995, at 8400
Normandale Lake Boulevard, Suite 1150, Minneapolis, Minnesota, for the following
purposes:

1. To approve or reject (a) a new Investment Advisory and Management
Agreement (each an "Advisory Agreement") between each Fund and ARM
Capital Advisors, Inc. (the "Proposed Adviser") which contains
substantially the same material terms and conditions (including the
fees payable to the Proposed Adviser) as are contained in each Fund's
current Investment Advisory and Management Agreement with SBM Company
(the "Current Adviser") and (b) a new Underwriting Agreement (each an
"Underwriting Agreement") between each Fund and SBM Financial
Services, Inc. (the "Distributor") which contains the same material
terms and conditions (including fees payable to the Distributor) as
are contained in each Fund's current Underwriting Agreement with the
Distributor.

2. Subject to the approval by shareholders of Agenda Item 1, to elect the
Board of Directors for each Fund.

3. To transact such other business as may properly come before the
meeting.

Your consideration of the new Advisory Agreements, as provided in Item 1, is
necessitated by a proposed acquisition of substantially all of the assets and
business operations of the Current Adviser by ARM Financial Group, Inc. ("ARM")
(the "Proposed Transaction"). Pursuant to the terms of the Proposed Transaction,
the Proposed Adviser, a wholly-owned subsidiary of ARM and a registered
investment adviser under the Investment Advisers Act of 1940, will assume the
Current Adviser's management obligations with regard to the Funds and become the
new investment adviser for the Funds. To permit the Funds to receive investment
advisory services from the Proposed Adviser after the consummation of the
Proposed Transaction, it is necessary that new Advisory Agreements be approved
by the shareholders of the Funds. The new Underwriting Agreements have been
approved by the Board of Directors. Your consideration of the new Underwriting
Agreements, as provided in Item 1, is not required under the terms of the
Proposed Transaction; however, the Board of Directors has determined that it is
advisable to permit shareholders to vote on whether to approve or reject the new
Underwriting Agreements along with their consideration of whether to approve or
reject the new Advisory Agreements.

In considering whether to approve the new Advisory Agreements and
Underwriting Agreements, you may want to consider the following factors:

* There is no difference in the fees or expenses payable by the
Funds under the current Advisory Agreements and the proposed new
Advisory Agreements or under the current Underwriting Agreements
and the proposed new Underwriting Agreements.

* There are no other differences between the terms of the current
Advisory Agreements and the new Advisory Agreements or between the
terms of the current Underwriting Agreements and the new
Underwriting Agreements, other than their dates of execution and
effectiveness. (THE NEW ADVISORY AGREEMENTS AND UNDERWRITING
AGREEMENTS, IF APPROVED BY FUND SHAREHOLDERS, WILL BECOME
EFFECTIVE UPON THE LATER OF THE DATE OF APPROVAL BY FUND
SHAREHOLDERS AND THE DATE OF A CLOSING OF THE PROPOSED
TRANSACTION.)

* The terms of the Proposed Transaction do not contemplate any
substantial changes in any Fund's investment objectives or
policies.

* The Boards of Directors of the Funds believe that the Proposed
Transaction will not result in any material impact on services
rendered (or to be rendered) to the Funds, and therefore have
approved and recommends that you approve the new Advisory
Agreements and the new Underwriting Agreements.

* The Boards of Directors of the Funds believe that the Proposed
Transaction will result in substantial continuity in the
management of the Funds' portfolios; that significant additional
advisory resources will become available to the Funds through the
Proposed Adviser; and that the Proposed Transaction may provide
enhanced opportunities for distribution of the Funds' shares.

Shareholders also should carefully review and consider all of the information
contained in the accompanying Proxy Statement before casting their votes on this
and the other agenda items listed above.

Shareholders of record on March 31, 1995, are the only persons entitled
to notice of and to vote at the meeting. WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING, PLEASE SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER
SOLICITATION, WE RESPECTFULLY ASK FOR YOUR COOPERATION IN MAILING IN YOUR PROXY
MATERIAL. If you are present at the meeting, you may then revoke your proxy and
vote in person, as explained in the accompanying Proxy Statement.

Dated: April 17, 1995. By Order of the Board of Directors.

Richard M. Evjen, Chairman of the
Board

Charles A. Geer, President

PROXY STATEMENT

STATE BOND CASH MANAGEMENT FUND
(A Series of State Bond Money Funds, Inc.)
STATE BOND COMMON STOCK FUND
(A Series of State Bond Equity Funds, Inc.)
STATE BOND DIVERSIFIED FUND
(A Series of State Bond Investment Funds, Inc.)
STATE BOND TAX EXEMPT FUND
(A Series of State Bond Municipal Funds, Inc.)
STATE BOND MINNESOTA TAX-FREE INCOME FUND
(A Series of State Bond Tax-Free Income Funds, Inc.)
STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND
(A Series of State Bond Income Funds, Inc.)

8400 Normandale Lake Boulevard
Suite 1150
Minneapolis, MN 55437

JOINT SPECIAL MEETING OF SHAREHOLDERS -- MAY 15, 1995

The enclosed Proxy is solicited by the Boards of Directors of the State
Bond Group of Mutual Funds. The State Bond Group of Mutual Funds consists of
State Bond Cash Management Fund ("Cash Management Fund"), a separately managed
portfolio of State Bond Money Funds, Inc., State Bond Common Stock Fund ("Common
Stock Fund"), a separately managed portfolio of State Bond Equity Funds, Inc.,
State Bond Diversified Fund ("Diversified Fund"), a separately managed portfolio
of State Bond Investment Funds, Inc., State Bond Tax Exempt Fund ("Tax Exempt
Fund"), a separately managed portfolio of State Bond Municipal Funds, Inc.,
State Bond Minnesota Tax-Free Income Fund ("Tax-Free Income Fund"), a separately
managed portfolio of State Bond Tax-Free Income Funds, Inc., and State Bond U.S.
Government and Agency Securities Fund ("U.S. Government Securities Fund"), a
separately managed portfolio of State Bond Income Funds, Inc. (Cash Management
Fund, Common Stock Fund, Diversified Fund, Tax Exempt Fund, Tax-Free Income
Fund, and U.S. Government Securities Fund are referred to in this Proxy
Statement collectively as the "Funds"), in connection with the joint special
meeting of shareholders of the Funds to be held at 3:00 p.m. (Minneapolis time)
on Monday, May 15, 1995, at 8400 Normandale Lake Boulevard, Suite 1150,
Minneapolis, Minnesota, and at any adjournments thereof.

The cost of solicitation, including the cost of preparing and mailing
the Notice of the Joint Special Meeting of Shareholders and this Proxy
Statement, will be paid by SBM Company (the "Current Adviser") and ARM Financial
Group, Inc. ("ARM"), and such mailing will take place on approximately April 17,
1995. Representatives of the Funds may, without cost to the Funds, solicit
Proxies for the management of the Funds by means of mail, telephone, or personal
calls.

A Proxy may be revoked before the meeting by giving written notice of
revocation to the Secretary of the applicable Fund, or at the meeting, prior to
voting. Unless revoked, properly executed Proxies will be voted as indicated in
this Proxy Statement. In instances where choices are specified by the
shareholders in properly executed Proxies, those Proxies will be voted or the
vote will be withheld in accordance with each shareholder's choice. In instances
where no choice is specified (with respect to one or more voting items) by the
shareholder in properly executed Proxies, those Proxies will be voted "for" each
item for which no choice is specified in accordance with the recommendations of
the applicable Fund's Board of Directors. Abstentions (including broker
non-votes) will be counted as shares present at the meeting for quorum purposes
but otherwise will count as a vote against the applicable proposal(s). Should
any other matters properly come before the meeting, it is the intention of the
proxies named in the enclosed Proxy to act upon such matters according to their
best judgment.

Only shareholders of record on March 31, 1995, may vote at the meeting
or any adjournment thereof. As of that date, the Funds had the following
approximate numbers of issued and outstanding common shares, the only class of
securities of each Fund:

Cash Management Fund 2,937,171
Common Stock Fund 6,765,445
Diversified Fund 4,513,272
Tax Exempt Fund 7,665,065
Tax-Free Income Fund 1,728,696
U.S. Government Securities Fund 2,791,871

Each shareholder of a Fund is entitled to one vote for each share held
with respect to matters being voted on by that Fund. None of the matters to be
presented at the meeting will entitle any shareholder to cumulative voting or
appraisal rights. In the event that sufficient proxy votes in favor of Proposals
1 and 2 (as set forth in the accompanying Notice of Joint Special Meeting of
Shareholders) are not received by May 15, 1995, the persons named as proxies may
propose one or more adjournments of the meeting with respect to one or more of
the Funds to permit further solicitation of proxies. With respect to any Fund,
an adjournment will require the affirmative vote of the holders of a majority of
the shares present in person or by proxy at the meeting. The persons named as
proxies will vote in favor of such adjournment with respect to said Proposals 1
and 2 if the proxies are instructed (by more than a majority of the shares
represented in person or by proxy) to vote "for" the proposal(s) for which the
adjournment is being proposed.

EACH FUND WILL FURNISH TO ANY OF ITS SHAREHOLDERS, UPON REQUEST AND
WITHOUT CHARGE, A COPY OF THE FUND'S MOST RECENT ANNUAL REPORT AND THE MOST
RECENT SEMI-ANNUAL REPORT SUCCEEDING THE ANNUAL REPORT, IF ANY. TO OBTAIN SUCH
REPORTS, SHAREHOLDERS SHOULD CONTACT SBM COMPANY, 8400 NORMANDALE LAKE
BOULEVARD, SUITE 1150, MINNEAPOLIS, MN 55437, OR CALL 1-800-328-4735.

SHARE OWNERSHIP

Except as set forth below, no person or entity, to the knowledge of
Fund management, beneficially owned more than 5% of the outstanding shares of
any Fund as of March 31, 1995. The following table sets forth, as of March 31,
1995, certain share ownership information (including the number of shares owned
and the percentage of total outstanding shares of the Funds such owned shares
represent) with respect to directors (and nominees for election as directors) of
the Funds, all officers and directors as a group, and persons and entities known
by the Funds to beneficially own more than 5% of any of the Funds' outstanding
shares as of March 31, 1995:

<TABLE>
<CAPTION>
Cash Common Tax Tax-Free U.S. Govt.
Management Stock Diversified Exempt Income Securities
Fund Fund Fund Fund Fund Fund
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>

Beneficial
Owner # % # % # % # % # % # %
- ----- - - - - - - - - - - - -

Directors and
Nominees:

Robert H. Baker, Jr. - (1) - (1) - (1) - (1) - (1) - (1)

Richard M. Evjen - (1) 6,255 (1) 547 (1) - (1) - (1) 374 (1)

William B. Faulkner - (1) 368 (1) 328 (1) 114 (1) 77 (1) 15,090 (1)

Patrick M. Finley - (1) 600 (1) 194 (1) - (1) - (1) - (1)

Alden M. Hanson - (1) 1,579 (1) - (1) 2,016 (1) 783 (1) - (1)

Chris L. Mahai - (1) - (1) - (1) - (1) - (1) - (1)

Keith O. Martens 29,171 (1) 224 (1) 298 (1) 971 (1) 847 (1) 205 (1)

Kennon V. Rothchild - (1) - (1) - (1) - (1) - (1) - (1)

John R. Lindholm - (1) - (1) - (1) - (1) - (1) - (1)

Authur J. Gartland, Jr.- (1) - (1) - (1) - (1) - (1) - (1)

John Katz - (1) - (1) - (1) - (1) - (1) - (1)

Theodore S. Rosky - (1) - (1) - (1) - (1) - (1) - (1)

All Officers and 34,737 1.18% 17,251 (1) 5,376 (1) 4,625 (1) 2,690 (1) 16,959 (1)
Directors as a Group

5% beneficial
Owners:

Bennett Brand, 158,382 5.41% - (1) - (1) - (1) - (1) - (1)
Trustee,
UDT DTD 2-12-95
418 South 56th Terrace
Hollywood, FL 33023

Lucille A. Altman, 171,425 5.86% - (1) - (1) - (1) - (1) - (1)
Trustee
UDT DTD 12-20-94
612 9th Street
New Ulm, MN 56073
___________________________
(1) Less than 1%.

</TABLE>

PROPOSAL 1
APPROVAL OF NEW INVESTMENT ADVISORY AND
MANAGEMENT AGREEMENT WITH ARM CAPITAL ADVISORS, INC. AND
APPROVAL OF NEW UNDERWRITING AGREEMENT WITH SBM FINANCIAL SERVICES, INC.

BACKGROUND AND GENERAL INFORMATION

SBM Company (the "Current Adviser") currently serves as each Fund's
investment adviser pursuant to an Investment Advisory and Management Agreement
(each, a "Current Advisory Agreement") with the Fund. The Current Adviser has
acted as adviser to the Funds since their respective dates of inception, SBM
Financial Services, Inc. (the "Distributor") currently serves as the distributor
of the shares of each Fund pursuant to an Underwriting Agreement (each, a
"Current Underwriting Agreement") with the Fund. The Distributor has acted as
distributor of the shares of each Fund since their respective dates of
inception.

Pursuant to a Stock and Asset Purchase Agreement dated February 16,
1995, between the Current Adviser and ARM Financial Group, Inc. ("ARM"), the
Current Adviser has agreed to sell substantially all of its assets and business
operations to ARM (the "Proposed Transaction"). As part of the Proposed
Transaction, a subsidiary of ARM, ARM Capital Advisors, Inc. (the "Proposed
Adviser"), will assume the responsibilities of the Current Adviser as investment
adviser to the State Bond Group of Mutual Funds. In addition, ARM will acquire
all of the outstanding stock of the Distributor. The completion of the Proposed
Transaction is subject to satisfaction of a number of conditions, including the
obtaining of regulatory and shareholder approvals. There is no assurance as to
whether or when such conditions will be satisfied, although the Funds have no
reason to believe that they will not be satisfied.

Pursuant to the Investment Company Act of 1940 (the "1940 Act"), the
Proposed Transaction (if and when completed) will constitute an "assignment" (as
defined in the 1940 Act) of the Current Advisory Agreements, which will cause
the Current Advisory Agreements to automatically terminate. The 1940 Act further
provides that, if the Proposed Transaction results in the automatic termination
of the Current Advisory Agreements, the Proposed Adviser can serve as each
Fund's investment adviser following the completion of the Proposed Transaction
only pursuant to a written agreement that has been approved by the applicable
Fund's shareholders. Shareholders of each Fund, therefore, are being asked to
approve a new Investment Advisory and Management Agreement (each a "New Advisory
Agreement") with ARM Capital Advisors, Inc. to enable it to serve as such Fund's
investment adviser following the Proposed Transaction. The proposed New Advisory
Agreements contain substantially the same material terms and conditions,
including the compensation payable by the respective Funds thereunder, as are
contained in the Funds' respective Current Advisory Agreements with the Current
Adviser. If approved by Fund shareholders, it is proposed that each New Advisory
Agreement go into effect, and replace each Fund's Current Advisory Agreement, as
of the later of the date of such approval or the date of closing of the Proposed
Transaction.

The proposed transfer of ownership of the Distributor from the Current
Adviser to ARM also will constitute an "assignment" and automatic termination of
the Current Underwriting Agreement between each Fund and the Distributor. The
Board of Directors of each Fund, at a meeting held on March 24, 1995, approved a
New Underwriting Agreement (each, a "New Underwriting Agreement") between each
Fund and the Distributor, effective upon the effectiveness of the New Advisory
Agreements between the Funds and the Proposed Adviser. Although not required by
the terms of the Proposed Transaction or by the 1940 Act, the Board of Directors
of each Fund has determined that it is advisable to permit shareholders of each
Fund to consider whether to approve the new Underwriting Agreement between each
Fund and the Distributor along with shareholders' consideration of the each New
Advisory Agreement. The New Underwriting Agreements contain the same material
terms and conditions, including the compensation payable by the respective Funds
thereunder to the Distributor, as are contained in the Funds' Current
Underwriting Agreements with the Distributor.

The Funds have been advised as follows concerning the identity and
controlling persons of the Proposed Adviser:

ARM Capital Advisors, Inc., the proposed new investment adviser to the
Funds, is an investment adviser registered under the Investment Advisers Act of
1940. The Proposed Adviser is a wholly-owned subsidiary of ARM formed for the
purpose of acquiring the domestic fixed income unit of Kleinwort Benson
Investment Management Americas Inc. The acquisition was completed on January 5,
1995.

ARM is a holding company in the long term savings and retirement
business which it conducts through life insurance companies specializing in the
design, marketing, and management of accumulation products and the third party
money management business of the Proposed Adviser. The Morgan Stanley Leveraged
Equity Fund II, L.P. ("MSLEF II"), an investment fund sponsored by Morgan
Stanley Group, Inc. ("Morgan Stanley"), owns approximately 86% of the
outstanding shares of voting stock of ARM. Oldarm, L.P. ("Oldarm"), a Kentucky
limited partnership formed by John Franco and Martin H. Ruby, and certain
employees, management and independent directors of ARM and its subsidiaries own
in the aggregate approximately 14% of the voting stock of ARM.

The proposed consideration to be paid by ARM to acquire the Current
Adviser's business operations is $38.6 million, subject to adjustment. Of this
amount, $1.2 million has been allocated to the acquisition by ARM of the
advisory arrangements between the Current Adviser and the Funds.

Pursuant to the provisions of the 1940 Act, for three years following
the effectiveness of the proposed New Advisory Agreements, seventy-five percent
of the members of the Boards of Directors of the Funds must be persons who are
not "interested persons", as defined in the 1940 Act, of either the Current
Adviser or the Proposed Adviser.

The address of the Current Adviser and the Distributor is on the cover
of this Proxy Statement. The address of ARM and Oldarm is 239 South Fifth
Street, 12th Floor, Louisville, Kentucky 40202. MSLEF II's address is 1221
Avenue of the Americas, New York, NY 10020. The address of the Proposed Adviser
is 200 Park Avenue, 20th Floor, New York, NY 10166.

PORTFOLIO MANAGEMENT

The person who is primarily responsible for selection of investments
for and management of each of Common Stock Fund, Diversified Fund, Tax Exempt
Fund, Minnesota Tax-Free Income Fund, and U.S. Government and Agency Securities
Fund is Mr. Keith O. Martens. Mr. Martens is Executive Vice President --
Investments of the Current Adviser and Director and Vice President of each of
the Funds. He has been a member of the Investment Committee for the State Bond
Group of Mutual Funds since 1972. It currently is anticipated that, subsequent
to the transfer of investment advisory responsibilities from the Current Adviser
to the Proposed Adviser, Mr. Martens will remain as principal portfolio manager
for each of the foregoing Funds except U.S. Government Securities Fund.

The Proposed Adviser has indicated that Mr. Thomas Goepfert will be the
new principal portfolio manager for the U.S. Government Fund. Mr. Goepfert is
currently a senior portfolio manager with the Proposed Adviser. Prior to his
employment with the Proposed Advisor, Mr. Goepfert was a senior portfolio
manager and managing director of Kleinwort Benson Investment Management Americas
Inc. since 1993. Kleinwort Benson Investment Management Americas Inc. was
acquired by the Proposed Advisor in January 1995. Prior to 1993, Mr. Goepfert
was a portfolio manager with Mitchell Hutchins Institutional Investors, Inc.
from 1988 to 1993 and with Manufacturers Hanover Trust Company from 1972 to
1988.

The current executive officers of the Funds are listed elsewhere in
this Proxy Statement under the caption "Proposal 2 -- Election of Directors --
Executive Officers and Directors of the Funds".

REASONS FOR THE BOARDS' RECOMMENDATIONS

On March 24, 1995, the Boards of Directors of the respective Funds
(including a majority of each Fund's disinterested directors) voted to approve
the New Advisory Agreements between each Fund and the

Proposed Adviser and the New Underwriting Agreements between each Fund and the
Distributor and recommended that the New Advisory Agreements and the New
Underwriting Agreements be approved by the Funds' shareholders.

In recommending that each Fund's shareholders approve the proposed New
Advisory Agreements and the New Underwriting Agreements, the Funds' Boards of
Directors were cognizant of the following important factors:

* There is no difference in the fees or expenses payable by the
Funds under the Current Advisory Agreements and the proposed New
Advisory Agreements or under the Current Underwriting Agreements
and the proposed New Underwriting Agreements.

* There are no other differences between the terms of the Current
Advisory Agreements and the New Advisory Agreements, or between
the Current Underwriting Agreements and the proposed New
Underwriting Agreements, except their dates of execution and
effectiveness.

* The terms of the Proposed Transaction do not contemplate any
changes in any Fund's investment objectives or policies.

The Boards also considered the fact that if the New Advisory Agreements are
approved and take effect, Mr. Martens will continue to be primarily responsible
for selection of investments for and management of each of Common Stock Fund,
Diversified Fund, Tax Exempt Fund, and Minnesota Tax-Free Income Fund, and that
Mr. Goepfert will become the principal portfolio manager for the U.S. Government
Securities Fund. See "-- Portfolio Management" above.

In summary, the Boards of Directors believe that the Proposed
Transaction will not result in any material impact on the services rendered (or
to be rendered) to the Funds. On the basis of the foregoing, the Board of
Directors of each Fund, including a majority of the directors who are not
interested persons of the Funds or the Current Adviser or the Proposed Adviser,
concluded that it is in the best interest of each Fund and its shareholders to
approve the proposed New Advisory Agreement between such Fund and the Proposed
Adviser (which will enable the Proposed Adviser to serve as such Fund's
investment adviser following the Proposed Transaction) and the proposed New
Underwriting Agreement between such Fund and the Distributor.

THE INVESTMENT ADVISORY AND MANAGEMENT AGREEMENTS

Under each Fund's Current Advisory Agreement and under such Fund's
proposed New Advisory Agreement, the adviser is responsible for regularly
providing the Fund with investment research, advice, management, and supervision
and furnishing a continuous investment program for the Fund, consistent with the
investment objectives and policies of the Fund (as set forth in the Fund's
Registration Statement, Prospectus, and Statement of Additional Information,
each as updated from time to time and as interpreted from time to time by the
Fund's Board of Directors). The adviser is responsible for determining from time
to time what securities will be purchased, retained or sold by the Fund and will
implement those decisions, all subject to the provisions of the Fund's Articles
of Incorporation and By-Laws, the 1940 Act, and applicable SEC rules and
regulations, and subject to the investment objectives and policies of the Fund.
The adviser also is responsible for providing the Fund with advice and
recommendations with respect to other aspects of the business and affairs of the
Fund and shall perform such other functions of management and supervision as may
be directed by the Fund's Board of Directors.

Under the Current Advisory Agreements and the proposed New Advisory
Agreements, the adviser, at its own expense, is responsible for supplying each
Fund's Board of Directors and officers with all statistical information and
reports reasonably required by them and reasonably available to the adviser and
for furnishing each Fund with office facilities, including space, furniture, and
equipment, and all personnel reasonably necessary for the operation of the Fund.
No director, officer, or employee of any Fund who is also an officer or employee
of the adviser is entitled to receive any salary, other compensation, or expense
reimbursements from the Fund.

Each Current Advisory Agreement and each proposed New Advisory
Agreement provides that the adviser assumes no responsibility thereunder other
than to render in good faith the services to the Funds called for thereunder and
further provides that the adviser shall not be responsible for any action of the
Fund's Board of

Directors in following or declining to follow any of the adviser's advice or
recommendations. However, the 1940 Act provides that the adviser may not be
contractually protected against any liability to the Funds or their shareholders
to which the adviser would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its
obligations and duties under the Current Advisory Agreements or the proposed New
Advisory Agreements.

Each Fund's Current Advisory Agreement is dated September 21, 1993.
Each such agreement was last approved by the applicable Fund's shareholders on
March 17, 1993. Such approval by shareholders was obtained because of a change
of control of the Current Adviser that occurred in 1993. Each such agreement was
last approved by the applicable Fund's Board of Directors on January 28, 1994
(in the case of Common Stock Fund, Diversified Fund, and U.S. Government
Securities Fund) or September 23, 1994 (in the case of each of the other Funds).

In consideration for its services under the Current Advisory Agreements
and the proposed New Advisory Agreements, the Funds are and will be obligated to
pay monthly advisory fees to the adviser at the following annual rates:

ANNUAL FEE
FUND (as a percentage of average daily net assets)
- ---- ---------------------------------------------

Cash Management Fund .60% of the first $500 million of average daily net
assets
.55% of the next $250 million of average daily net assets
.45% of the next $250 million of average daily net assets

(Out of this fee, an amount equal to .20% per year of
the Fund's average daily net assets is paid by the
adviser to the Distributor, the Fund's principal
underwriter, pursuant to the Fund's Rule 12b-1 plan of
distribution and the Fund's Current Underwriting
Agreement and proposed New Underwriting Agreement. This
arrangement will continue in effect following
completion of the Proposed Transaction.
See "--Underwriting Agreements" below.)

Tax Exempt Fund .50% of average daily net assets

Tax-Free Income Fund .85% of the first $100 million of average daily net
assets
.80% of average daily net assets in excess of$100 million

(This fee is higher than that paid by most other
investment companies. However, unlike the fees paid by
most other investment companies, the adviser is obligated
to pay, out of its fee from the Fund, an amount equal
to .25% per year of the Fund's average daily net assets
to the Distributor, the Fund's principal underwriter,
pursuant to the Fund's Rule 12b-1 plan of distribution
and the Fund's Current Underwriting Agreement and
proposed New Underwriting Agreement. This arrangement
will continue in effect following completion of the
Proposed Transaction. See "--Underwriting Agreements"
below.)

U.S. Government .65% of average daily net assets
Securities Fund
(Out of this fee, an amount equal to .25% per year of
the Fund's average daily net assets is paid by the
adviser to the Distributor, the Fund's principal
underwriter, pursuant to the Fund's Rule 12b-1 plan of
distribution and the Fund's Current Underwriting
Agreement and proposed New Underwriting Agreement. This
arrangement will continue in effect following completion
of the Proposed Transaction.)

Common Stock Fund .65% of the first $100 million of average daily net
and Diversified Fund assets
.60% of the next $100 million of average daily net assets
.55% of average daily net assets in excess of
$200 million

(Subject to reduction to the extent of the "net profits"
of SBM Financial Services, Inc.from certain Fund
portfolio transactions executed through SBM Financial
Services, Inc. "Net profits" generally means gross
commissions from brokerage transactions with the
applicable Fund less the sum of direct transaction
expenses, 20% of gross commissions revenues to cover
general overhead and administration expenses,and a
provision for income taxes. Advisory fees are also
subject to reduction to the extent that annual Fund
expenses, including the advisory fees but excluding
Rule 12b-1 fees, interest, taxes, brokerage commissions,
and extraordinary charges, exceed an amount equal to 1.5%
per year of the first $30 million of the Fund's average
daily net assets and 1.0% per year of average daily net
assets in excess of $30 million. These arrangements will
continue in effect following completion of the Proposed
Transaction.)

The following table sets forth the gross advisory fees paid by each
Fund to the Current Adviser during the Fund's last fiscal year, transfer agent
and accounting services fees paid by the Fund to the Current Adviser, advisory
fees (if any) voluntarily reimbursed by the Current Adviser to the Fund, and the
amount paid by the Current Adviser or the Fund to SBM Financial Services, Inc.
(a wholly-owned subsidiary of the Current Adviser) pursuant to the Fund's Rule
12b-1 Plan:

<TABLE>
<CAPTION>
Gross Transfer Accounting
Fund (fiscal Advisory Agent Services Fees 12b-1
year end) Fees Fees Fees Reimbursed Fee
- --------- ---- ---- ---- ---------- ---
<S> <C> <C> <C> <C> <C>
Cash Management Fund $10,334 $21,600 $ 0 $64,232 $ 5,167*
(July 31, 1994)
Common Stock Fund 314,793 66,000 0 0 120,900
(December 31, 1994)
Diversified Fund 248,964 37,500 0 0 95,800
(December 31, 1994)
Tax Exempt Fund 408,475 32,300 27,000 0 204,600
(June 30, 1994)
Tax-Free Income Fund 96,758 6,200 15,000 43,311 40,316*
(June 30, 1994)
U.S. Government Securities 58,086 13,700 15,000 34,475 36,304*
Fund (October 31, 1994)

__________________________________
* These fees were paid by the Current Adviser out of its Advisory Fee in
accordance with the terms of the Current Advisory Agreements.
</TABLE>

It is anticipated that, subsequent to the effectiveness of the proposed New
Advisory Agreements, the Proposed Adviser (or an affiliate) will provide all of
the services described above. ARM has represented that, at least until December
31, 1995, the fees charged for providing such services will not exceed the fees
now being paid to the Current Adviser and its affiliates.

Other than fees and expenses expressly assumed by the adviser under
each Fund's Current Advisory Agreement and proposed New Advisory Agreement (as
set forth above), the Fund is responsible for paying all of its other expenses.
Such expenses (to the extent not paid or assumed by the adviser, as set forth
above) include, but are not limited to, Rule 12b-1 distribution fees (see
"Underwriting Agreements" below); legal, auditing, and accounting expenses;
interest, taxes, governmental fees, or membership dues; brokerage commissions or
charges; custodian, transfer agent, or registrar fees; expenses of issue, sale,
underwriting, and distribution of its shares; expenses of redemption or
repurchase of the Fund's shares; expenses of registering and distributing
reports, notices, and dividends to Fund shareholders; costs of stationery; costs
of stockholder and other meetings; traveling expenses of officers, directors,
and employees, if any; and fees of Fund directors who are not interested persons
of the Adviser.

ADDITIONAL INFORMATION REGARDING THE PROPOSED ADVISER

The Proposed Adviser was organized on October 24, 1994 as a Delaware
corporation and is registered with the Securities and Exchange Commission as an
investment adviser. The Proposed Adviser was formed for the purpose of acquiring
the domestic fixed income unit of Kleinwort Benson Investment Management
Americas Inc. The acquisition was completed on January 5, 1995. The Adviser
currently provides investment management services to institutional and
individual clients, including ARM and its subsidiaries, with combined assets in
excess of $3 billion.

The Proposed Adviser uses an integrated risk management approach in
measuring assets and liabilities to develop and implement strategies for
maximizing investment spreads, protecting portfolios from adverse changes in
interest rates and assuring that sufficient levels of liquidity are maintained
to meet unexpected events. The hallmark of the Proposed Adviser's
asset/liability strategies is predicated on thorough analysis conducted on a
continual basis. Through highly sophisticated computer models and proprietary
software, the Proposed Adviser has the ability to test various investment
strategies and thereby optimize risk/reward tradeoffs as market conditions
change. In addition, every investment trade is screened for its impact on
investment spread and cash flow volatility. Investment strategies emphasize
earning targeted gross investment spreads, limiting spread volatility, providing
customer value, and following sound, financially-conservative management
practices.

Set forth below is the name of each director and executive officer of
the Proposed Adviser and a listing of other principal business occupations of
each such person. Except as noted below, the business address of each officer
and director is the same as that of ARM, located at 239 South Fifth Street, 12th
Floor, Louisville, Kentucky 40202.
<TABLE>
<CAPTION>

NAME AND BUSINESS ADDRESS POSITIONS WITH THE PROPOSED ADVISER OTHER PRINCIPAL OCCUPATIONS
- ------------------------- ----------------------------------- ---------------------------
<S> <C> <C>

John Franco Director and Co-Chief Executive Co-CEO and Co-Chairman, ARM
Officer

Martin H. Ruby Director and Co-Chief Executive Co-CEO and Co-Chairman, ARM
Officer

Emad A. Zikry 1 Director and President Chief Investment Officer and
Executive Vice President, ARM

Frank V. Sica 2 Director Managing Director, Morgan
Stanley & Co. Incorporated

David R. Ramsay 2 Director Vice President, Morgan
Stanley & Co. Incorporated

John R. McGeeney Secretary Co-Counsel and Secretary, ARM

Peter S. Resnik Treasurer Treasurer, ARM

Don W. Cummings Controller Controller, ARM

M. Lisa Cooper Assistant Secretary Legal Specialist, ARM

Kay L. Dieterlen Assistant Secretary Legal Specialist, ARM

Kevin L. Howard Assistant Secretary and Assistant General Counsel, ARM
Compliance Officer

Rose M. Culbertson Tax Officer Tax Officer, ARM
____________________
1 Business address is 200 Park Avenue, 20th Floor, New York, New York 10166.
2 Business address is 1221 Avenue of the Americas, New York, New York 10020.
</TABLE>

UNDERWRITING AGREEMENTS

In connection with the approval of a New Advisory Agreement,
shareholders of each Fund are also being asked to consider a proposal to approve
a New Underwriting Agreement with the Distributor. The New Underwriting
Agreements have been approved by the Board of Directors and reflect the terms of
each Fund's respective Plan of Distribution adopted by the Board of Directors
pursuant to Rule 12b-1 of the 1940 Act (each, a "Plan"). Although approval of
the New Underwriting Agreements by the shareholders of the Funds is not required
under the 1940 Act or pursuant to the terms of Proposed Transaction, the Board
of Directors of each Fund determined that it would be advisable for the each
Fund's shareholders to consider a proposal to approve a New Underwriting
Agreement with the Distributor at the same time the shareholders are considering
a proposal to approve a New Advisory Agreement. There are no differences between
the terms of the Current Underwriting Agreements and the New Underwriting
Agreements, other than their dates of execution and effectiveness.

Under each Fund's Plan and its Current Underwriting Agreement and New
Underwriting Agreement, the Distributor is paid a fee for its distribution
services to be used for (i) providing initial and ongoing sales

compensation to the Distributor's 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
and (ii) providing compensation in connection with the provision of certain
personal and account maintenance services to Fund shareholders including, but
not limited to, responding to shareholders inquiries and providing information
on their investments.

Under the terms of the Plan and the Current Underwriting Agreement and
New Underwriting Agreement for each of Cash Management Fund, Tax-Free Income
Fund and U.S. Government Securities Fund, the Distributor is paid a monthly fee
equivalent on an annual basis to .2 of 1%, .25 of 1% and .25 of 1%,
respectively, of such Fund's the average daily net assets. Each such Fund pays
the distribution fee to the Distributor indirectly as a portion of the
management fee. Under the Current Advisory Agreement and the Proposed Advisory
Agreement, the Current Adviser and the Proposed Adviser pay a portion of the
management fee received under such agreements to the Distributor in accordance
with the percentages set forth above. During the last fiscal year for each of
Cash Management Fund, Tax-Free Income Fund and U.S. Government Securities
Fund, such Funds paid distribution fees to the Distributor (through the Current
Advisor) in the amounts of $5,167, $40,316 and $36,304,respectively.Distribution
expenses for each such Fund have been in excess of the distribution fees
received by the Distributor. However, the Funds have not reimbursed and are not
required to reimburse the Distributor for any such excess distribution expenses.

Under the terms of the Plan and the Current Underwriting Agreement and
New Underwriting Agreement for each of Common Stock Fund, Diversified Fund and
Tax Exempt Fund, each such Fund pays a monthly distribution fee directly to the
Distributor equivalent on an annual basis to .25 of 1% of such Fund's the
average daily net assets. During the last fiscal year for each of Common Stock
Fund, Diversified Fund and Tax Exempt Fund, such Funds paid distribution fees to
the Distributor in the amounts of $120,900, $95,800 and $204,600, respectively.
Distribution expenses for each such Fund have been in excess of the distribution
fees received by the Distributor. However, the Funds have not reimbursed and are
not required to reimburse the Distributor for any such excess distribution
expenses.

Under the terms of the Current Underwriting Agreement and New
Underwriting Agreement for each Fund, except Cash Management Fund, the
Distributor is entitled to receive the sales charge applicable to a Fund's
shares for each share sold. Cash Management Fund has no charge applicable to
sales of its shares. The sales charge for each Fund and the amount paid to the
Distributor as compensation in the form of sales charge for the most recent
fiscal year is set forth below:
<TABLE>
<CAPTION>

AMOUNT RECEIVED IN
FUND'S MOST RECENT
FUND MAXIMUM SALES CHARGE FISCAL YEAR
---- -------------------- -----------
<S> <C> <C>

Cash Management Fund 0% $ 0
Common Stock Fund 4.75% 45,811
Diversified Fund 4.75% 141,150
Tax Exempt Fund 4.5% 191,037
Minnesota Tax-Free Income Fund 4.5% 84,012
U.S. Government and Agency Securities Fund 5.00% 55,143

</TABLE>

In addition to governing the fees payable to the Distributor for its
distribution services as described in the preceding paragraphs, the Current
Underwriting Agreement and New Underwriting Agreement set forth certain other
agreements between each Fund and the Distributor with respect to the
distribution of the Fund's shares. Such agreements include, the Fund's
appointment of the Distributor as an agent for the Fund to promote the Fund and
sell its shares on a non-exclusive agency or "best efforts" basis, pursuant to
which the Fund issues only such shares as are actually sold. The Distributor is
responsible for printing and distributing prospectuses and other sales
literature, forms and advertisements in connection with the sale of each Fund's
shares in compliance with applicable federal and state laws, for which the Fund
bears no expense other than as described above. Each Fund agrees to register its
shares with the Securities and Exchange Commission, state and other regulatory
bodies and to bear the expense of such registration and to update the
prospectuses relating to the shares. Under each Current Underwriting Agreement
and New Underwriting Agreement, the Fund agrees to indemnify and hold harmless
the Distributor against liability under federal and state law arising out of
claims based on any misstatements or omissions of material facts in the Fund's
prospectus. In addition, the Distributor agrees to indemnify and hold harmless
each Fund against liability under federal and state law arising out of claims
based on misstatements or omissions of material facts contained in the
information furnished by the Distributor to the Fund for use in its prospectus.

The Current Underwriting Agreements and the New Underwriting Agreements
may be terminated by either the Fund or the Distributor upon sixty (60) days
written notice to the other party and terminate automatically in the event of an
"assignment" (as defined in the 1940 Act). The Current Underwriting Agreements
and the New Underwriting Agreements continue for successive annual periods,
provided that such continuance is specifically approved annually by the vote of
a majority of the Fund's Directors who are not "interested persons" of either
the Fund or the Distributor (as defined in the 1940 Act).

VOTE REQUIRED TO APPROVE AGREEMENTS

Approval of each Fund's proposed New Advisory Agreement and New
Underwriting Agreement will require a vote of a "majority of the outstanding
voting securities" (as defined in the 1940 Act) of the applicable Fund, which
means the lesser of (i) the vote of 67% or more of the shares of such Fund
present at the meeting, if the holders of more than 50% of the Fund's
outstanding shares are present or represented by proxy at the meeting; or (ii)
the vote of more than 50% of the Fund's outstanding shares. Each Fund's Board of
Directors recommends approval of the Investment Advisory and Management
Agreement with the Proposed Adviser and the Underwriting Agreement with the
Distributor.

PROPOSAL 2
ELECTION OF DIRECTORS

It is intended that, subject to approval by shareholders of Proposal 1
(as set forth in the accompanying Notice of Joint Special Meeting of
Shareholders), the enclosed Proxies will be voted for the election of the
persons named below as director nominees for each of the Funds unless such
authority has been withheld in the respective Proxy. The elections will be
effective upon the effectiveness of the New Advisory Agreements. Pursuant to an
arrangement between ARM and the Boards of Directors of the Funds, four of the
nominees have been designated by ARM and three of the nominees are currently
directors of the Funds. Five persons who are currently directors of the Funds
are expected to resign as directors effective upon the effectiveness of the
proposed new Advisory Agreements. The term of office of each person elected to
be a Fund Director will be until the next regular or special meeting of the
shareholders at which election of directors is an agenda item and until his
successor is duly elected and shall qualify. Pertinent information regarding
each nominee is set forth below:

Name (age) and Business
Address Principal Occupation During Past Five Years
Year First Became Director(1) (in addition to serving as a Fund Director)
- ---------------------------- -------------------------------------------

William B. Faulkner President, William Faulkner & Associates,
240 East Plato Boulevard business and institutional adviser since 1986;
St. Paul, MN 55107 Consultant to American Hoist & Derrick
DIRECTOR NOMINEE Company, construction equipment manufacturer,
DIRECTOR SINCE 1984 from 1986 to 1989; prior thereto, Vice President
and Assistant to the President, American Hoist &
Derrick Company.

Patrick M. Finley (57) President, Universal Cooperatives, Inc., a
7801 Metro Parkway farmers' cooperative.
Minneapolis, MN 55440
DIRECTOR NOMINEE
DIRECTOR SINCE 1976

Chris L. Mahai (39) Senior Vice President, Strategic Integration Unit,
425 Portland Avenue Star Tribune/Cowles Media Company, since August
Minneapolis, MN 55488 1995; Vice Presdient, Marketing Director, Star
DIRECTOR NOMINEE Tribune, since September 1992; from 1990 to 1992,
DIRECTOR SINCE 1992 self-employed consultant, marketing services;
prior thereto, Senior Vice President of Corporate
Relations and Marketing, First Bank System, Inc..

John R. Lindholm (46)* Executive Vice President -- Chief Marketing
2935 Rainbow Drive Officer of ARM Financial Group, Inc. since July
Louisville, KY 40206 27, 1993; President of Integrity and Vice
DIRECTORY NOMINEE President -- Chief Marketing Officer of National
Integrity since November 26, 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. Mr. Lindholm beneficially owns
less than one percent of the voting securities of
ARM.

Arthur J. Gartland (48) President and a founder of Benedetto, Gartland &
1330 Avenue of the Americas Greene, Inc. (an investment banking firm).
New York, NY 10019
DIRECTOR NOMINEE

John Katz (56) Investment banker since January of 1991; Chairman
10 Hemlock Road and Chief Executive Officer, Sam's Restaurant
Hartsdale, NY 10530 Group, Inc. (a restaurant holding company),
DIRECTOR NOMINEE 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).

Theodore S. Rosky (57) Retired since April 1992; Executive Vice
2304 Speed Avenue President, Capital Holding Corporation (from
Louisville, KY 40205 December 1991 to April 1992); prior thereto,
DIRECTOR NOMINEE Executive Vice President and Chief Financial
Officer, Capital Holding Corporation).

- --------------------

* Directors and director nominees who will become "interested persons" of
the Funds, as defined under the 1940 Act, subsequent to their election.
Said individuals are interested persons because they are officers, and
in certain instances directors, of ARM Capital Advisors, Inc. (the
Funds' proposed new investment adviser) and/or certain affiliates
thereof.

(1) Each current director serves as a director of all of the Funds. The
year listed as to when the director first became a director may precede
the inception of certain of the Funds. If so, such director has served
as a director of such Fund since its inception.

The Funds do not have standing audit or nominating committees of the
Boards of Directors, or committees performing similar functions. The Boards have
an Executive Committee that acts on behalf of the Boards between meetings and
has the authority to exercise most of the Boards' powers. No person who is a
nominee for director is a current member of the Executive Committee.

During the calendar year ended December 31, 1994, there were five
meetings of the Funds' Boards of Directors. Each of the nominees, except Mr.
Finley (who attended three of the five meetings in 1994), attended all of such
meetings.

COMPENSATION

The following table lists the aggregate compensation paid to directors
by the Funds in the 1994 calendar year.
<TABLE>
<CAPTION>

(1) (2) (3)
TOTAL COMPENSATION
NAME OF PERSON, AGGREGATE COMPENSATION FROM ALL FUNDS AND FUND
POSITION (a) FROM EACH FUND (b) COMPLEX PAID TO DIRECTORS (c)
-------- ------------------ -----------------------------
<S> <C> <C>

Robert H. Baker, Jr., Director $660.00 $4,326.00

Richard M. Evjen, Director $660.00 $4,326.00

William B. Faulkner, Director $660.00 $4,326.00

Patrick M. Finley, Director $444.00 $2,886.00

Alden M. Hanson, Director $660.00 $4,326.00

Chris L. Mahai, Director $660.00 $4,326.00

Keith O. Martens, Director, $ 0.00 $ 0.00
Vice President

Kennon V. Rothchild, Director $660.00 $4,326.00

(a) There was no executive officer of any of the Funds who received aggregate
compensation from any Fund in excess of $60,000.

(b) There were no pension or retirement benefits accrued for any of the named
persons by any of the Funds.

(c) This includes the aggregate compensation paid to the named persons by all
of the Funds and also the amounts paid to such persons in calendar year
1994 by the State Bond Progress Fund ("Progress Fund"). The Progress Fund
formerly was a member of the State Bond Group of Funds. All of the assets
of Progress Fund were acquired by Common Stock Fund on June 24, 1994.
</TABLE>

EXECUTIVE OFFICERS OF THE FUNDS

The following table lists the current Executive Officers of the Funds.
Each person's principal business address is 8400 Normandale Lake Boulevard,
Suite 1150, Minneapolis, MN 55437.

POSITIONS WITH PRINCIPAL OTHER OCCUPATIONS
NAME THE FUNDS DURING PAST FIVE YEARS
- ---- --------- ----------------------
<S> <C> <C>

Keith O. Martens * # @ Vice President and Director Executive Vice President -- Investments, SBM Company; Vice President
State Bond and Mortgage Life Insurance Company and SBM Certificate
Company.

Charles A. Geer #@ President and Chief President and Chief Executive Officer SBM Company and SBM Certificate
Executive Officer Company, President State Bond and Mortgage Life Insurance Company;
prior thereto, President and Chief Executive Officer of Norwood Capital
Company; Vice President S.J. Groves & Sons; General Counsel to Midwest
Medical Insurance Company and Private Attorney at Law.

Walter W. Balek Vice President Vice President and Director, SBM Financial Services, Inc.; Senior
Vice President, SBM Company; Vice President, State Bond and Mortgage
Life Insurance Company, and SBM Certificate Company.

Stewart D. Gregg Vice President and Vice President and Secretary, SBM Company. SBM Financial Services, Inc.,
Secretary State Bond and Mortgage Life Insurance Company, and SBM Certificate
Company; prior thereto, associate, Oppenheimer Wolff & Donnelly, private
law firm.

Ann M. Schmid Vice President -- Vice President -- Investments, SBM Company, State Bond and Mortgage
Investments Life Insurance Company, SBM Financial Services,Inc. and SBM Certificate
Company.

Edward L. Zeman #@ Vice President, Chief Vice President, Chief Operating Officer, Chief Financial Officer, and
Financial Officer, and Treasurer, SBM Company, State Bond and Mortgage Life Insurance Company,
Treasurer and SBM Certificate Company; Vice President, Chief Financial Officer,
Treasurer, and Director SBM Financial Services, Inc.; Director,
Dotronix, Inc.; prior thereto, Senior Manager, Deloitte & Touche LLP,
certified public accountants.

- -------------------------

* Director of the Funds who is an "interested person" as defined in the 1940 Act.
# Member of each Fund's Executive Committee.
@ Member of Current Adviser's Investment Committee.
</TABLE>

The Proposed Adviser has not announced any plans for changes in
management other than the change referred to in the preceding paragraphs. It can
be anticipated, however, that other changes may occur subsequent to the closing
of the Proposed Transaction.

In voting for directors, you must vote all of your shares
noncumulatively. This means that the owners of a majority of each Fund's
outstanding shares have the power to elect that Fund's entire Board of
Directors. The vote of a majority of shares of each Fund represented at the
meeting, provided at least a quorum (at least one-third of the issued and
outstanding shares of each of Cash Management Fund, Tax Exempt Fund, and U.S.
Government

Securities Fund and at least a majority of the issued and outstanding shares of
each of Common Stock Fund, Tax-Free Income Fund and Diversified Fund) is
represented in person or by proxy, is sufficient for the election of the above
nominees of each Fund's Board of Directors. By completing the Proxy, you give
the proxy the right to vote for the persons named in the table above. If you
elect to withhold authority for any individual nominee, you may do so by making
an "X" in the box marked "FOR", and by striking a line through such nominee's
name on the Proxy, as further explained on the Proxy itself.

All of the nominees have agreed to serve as Directors of each of the
Funds. If any unforeseen event prevents one or more of the nominees from serving
as a director, your votes will be cast for the election of a substitute or
substitutes selected by the Board. In no event, however, can the Proxies be
voted for a greater number of persons than the number of nominees named. Unless
otherwise instructed, the proxies will vote for the election of each nominee to
serve as director of the applicable Fund.

OTHER MATTERS

Fund management knows of no other matters that are likely to be brought
before the meeting other than referred to in this Proxy Statement. However, if
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed proxy, or their substitutes, to vote such proxy in
accordance with their judgment on such matters.

It is important that proxies be returned promptly. Shareholders who do
not expect to attend the meeting are urged to complete, date, sign, and mail the
enclosed form of Proxy in the enclosed envelope, which requires no postage if
mailed in the United States.

SHAREHOLDER PROPOSALS

The Funds do not hold regular annual shareholder meetings. Proposals of
shareholders which are intended to be presented at future shareholder meetings
must be received by the Funds within a reasonable amount of time prior to the
Funds' solicitation of proxies relating to such meeting.

PROXY
STATE BOND CASH MANAGEMENT FUND
A Separately Managed Series of State Bond Money Funds,
Inc.
8400 Normandale Lake Boulevard, Suite 1150, Minneapolis, Minnesota 55437
(612) 835-0097 (800) 328-4735

THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF STATE BOND
CASH MANAGEMENT FUND (the "Fund").
The undersigned hereby appoints Stewart D. Gregg and Edward L. Zeman,
and each of them, with power to act without the other and with the right of
substitution in each, as proxies of the undersigned and hereby authorizes each
of them to represent and to vote, as designated below, all the shares of common
stock of the Fund held of record by the undersigned on March 31, 1995, at the
special meeting of shareholders of the Fund to be held on May 15, 1995, or any
adjournments or postponements thereof, with all powers the undersigned would
possess if present in person. All previous proxies given with respect to the
meeting hereby are revoked.

THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS:

1. PROPOSAL TO APPROVE (A) A NEW INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
between the Fund and ARM Capital Advisors, Inc., which contains the same
material terms and conditions (including the compensation payable by the Fund
thereunder) as the Fund's current Investment Advisory and Management Agreement
AND (B) A NEW UNDERWRITING AGREEMENT between the Fund and SBM Financial
Services, Inc. which contains the same material terms and conditioned (including
the compensation payable thereunder) as the Fund's current Underwriting
Agreement. (If approved, the new Investment Advisory and Management Agreement
and the New Underwriting Agreement will become effective upon the occurrence of
the later of the obtaining of shareholder approval and a closing of the Proposed
Transaction, as defined in the accompanying Proxy Statement.)

________ FOR ________ AGAINST ________ ABSTAIN

2. ELECTION OF DIRECTORS (subject to approval by shareholders of Agenda Item 1).

___________ FOR all nominees listed below (except as marked
to the contrary below)

___________ WITHHOLD AUTHORITY to vote for all nominees
listed below

INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.

W.B. Faulkner P.M. Finley A.J. Gartland, Jr.

J.R. Lindholm J. Katz C.L. Mahai T.S. Rosky

(continued, and to be completed and signed on the reverse side)

3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournments or
postponements thereof.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL
BE VOTED FOR EACH OF THE PROPOSALS ABOVE. RECEIPT OF THE NOTICE OF SPECIAL JOINT
MEETING OF SHAREHOLDERS AND THE PROXY STATEMENT RELATING TO THE MEETING IS
ACKNOWLEDGED BY YOUR EXECUTION OF THIS PROXY.

PLEASE SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS BELOW. WHEN SHARES
ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A
CORPORATION, PLEASE SIGN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY PARTNER OR OTHER
AUTHORIZED PERSON.

Dated: __________________________, 1995

----------------------------------------
Signature

----------------------------------------
Signature if held jointly

TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE, AND
RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE.

PROXY
STATE BOND COMMON STOCK FUND
A Separately Managed Series of State Bond Equity Funds,
Inc.
8400 Normandale Lake Boulevard, Suite 1150, Minneapolis, Minnesota 55437
(612) 835-0097 (800) 328-4735

THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF STATE BOND
COMMON STOCK FUND (the "Fund").
The undersigned hereby appoints Stewart D. Gregg and Edward L. Zeman,
and each of them, with power to act without the other and with the right of
substitution in each, as proxies of the undersigned and hereby authorizes each
of them to represent and to vote, as designated below, all the shares of common
stock of the Fund held of record by the undersigned on March 31, 1995, at the
special meeting of shareholders of the Fund to be held on May 15, 1995, or any
adjournments or postponements thereof, with all powers the undersigned would
possess if present in person. All previous proxies given with respect to the
meeting hereby are revoked.

THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS:

________ FOR ________ AGAINST ________ ABSTAIN

2. ELECTION OF DIRECTORS (subject to approval by shareholders of Agenda Item 1).

___________ FOR all nominees listed below (except as marked
to the contrary below)

___________ WITHHOLD AUTHORITY to vote for all nominees
listed below

INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.

W.B. Faulkner P.M. Finley A.J. Gartland, Jr.

J.R. Lindholm J. Katz C.L. Mahai T.S. Rosky

(continued, and to be completed and signed on the reverse side)

3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournments or
postponements thereof.

Dated: __________________________, 1995

----------------------------------------
Signature

----------------------------------------
Signature if held jointly

TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE, AND
RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE.

PROXY
STATE BOND DIVERSIFIED FUND
A Separately Managed Series of State Bond Investment
Funds, Inc.
8400 Normandale Lake Boulevard, Suite 1150, Minneapolis, Minnesota 55437
(612) 835-0097 (800) 328-4735

THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF STATE
BOND DIVERSIFIED FUND (the "Fund").
The undersigned hereby appoints Stewart D. Gregg and Edward L. Zeman,
and each of them, with power to act without the other and with the right of
substitution in each, as proxies of the undersigned and hereby authorizes each
of them to represent and to vote, as designated below, all the shares of common
stock of the Fund held of record by the undersigned on March 31, 1995, at the
special meeting of shareholders of the Fund to be held on May 15, 1995, or any
adjournments or postponements thereof, with all powers the undersigned would
possess if present in person. All previous proxies given with respect to the
meeting hereby are revoked.

THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS:

________ FOR ________ AGAINST ________ ABSTAIN

2. ELECTION OF DIRECTORS (subject to approval by shareholders of Agenda Item 1).

___________ FOR all nominees listed below (except as marked
to the contrary below)

___________ WITHHOLD AUTHORITY to vote for all nominees
listed below

INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.

W.B. Faulkner P.M. Finley A.J. Gartland, Jr.

J.R. Lindholm J. Katz C.L. Mahai T.S. Rosky

(continued, and to be completed and signed on the reverse side)

3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournments or
postponements thereof.

Dated: __________________________, 1995

----------------------------------------
Signature

----------------------------------------
Signature if held jointly

TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE, AND
RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE.

PROXY
STATE BOND TAX EXEMPT FUND
A Separately Managed Series of State Bond Municipal
Funds, Inc.
8400 Normandale Lake Boulevard, Suite 1150, Minneapolis, Minnesota 55437
(612) 835-0097 (800) 328-4735

THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF STATE
BOND TAX EXEMPT FUND (the "Fund").
The undersigned hereby appoints Stewart D. Gregg and Edward L. Zeman,
and each of them, with power to act without the other and with the right of
substitution in each, as proxies of the undersigned and hereby authorizes each
of them to represent and to vote, as designated below, all the shares of common
stock of the Fund held of record by the undersigned on March 31, 1995, at the
special meeting of shareholders of the Fund to be held on May 15, 1995, or any
adjournments or postponements thereof, with all powers the undersigned would
possess if present in person. All previous proxies given with respect to the
meeting hereby are revoked.

THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS:

________ FOR ________ AGAINST ________ ABSTAIN

2. ELECTION OF DIRECTORS (subject to approval by shareholders of Agenda Item 1).

___________ FOR all nominees listed below (except as marked
to the contrary below)

___________ WITHHOLD AUTHORITY to vote for all nominees
listed below

INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.

W.B. Faulkner P.M. Finley A.J. Gartland, Jr.

J.R. Lindholm J. Katz C.L. Mahai T.S. Rosky

(continued, and to be completed and signed on the reverse side)

3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournments or
postponements thereof.

Dated: __________________________, 1995

----------------------------------------
Signature

----------------------------------------
Signature if held jointly

TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE, AND
RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE.

PROXY
STATE BOND MINNESOTA TAX-FREE INCOME FUND
A Separately Managed Series of State Bond Tax-Free Income
Funds, Inc.
8400 Normandale Lake Boulevard, Suite 1150, Minneapolis, Minnesota 55437
(612) 835-0097 (800) 328-4735

THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF STATE BOND
MINNESOTA TAX-FREE INCOME FUND (the "Fund").
The undersigned hereby appoints Stewart D. Gregg and Edward L. Zeman,
and each of them, with power to act without the other and with the right of
substitution in each, as proxies of the undersigned and hereby authorizes each
of them to represent and to vote, as designated below, all the shares of common
stock of the Fund held of record by the undersigned on March 31, 1995, at the
special meeting of shareholders of the Fund to be held on May 15, 1995, or any
adjournments or postponements thereof, with all powers the undersigned would
possess if present in person. All previous proxies given with respect to the
meeting hereby are revoked.

THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS:

________ FOR ________ AGAINST ________ ABSTAIN

2. ELECTION OF DIRECTORS (subject to approval by shareholders of Agenda Item 1).

___________ FOR all nominees listed below (except as marked
to the contrary below)

___________ WITHHOLD AUTHORITY to vote for all nominees
listed below

INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.

W.B. Faulkner P.M. Finley A.J. Gartland, Jr.

J.R. Lindholm J. Katz C.L. Mahai T.S. Rosky

(continued, and to be completed and signed on the reverse side)

3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournments or
postponements thereof.

Dated: __________________________, 1995

----------------------------------------
Signature

----------------------------------------
Signature if held jointly

TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE, AND
RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE.

PROXY
STATE BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND
A Separately Managed Series of State Bond Income Funds, Inc.
8400 Normandale Lake Boulevard, Suite 1150, Minneapolis, Minnesota 55437
(612) 835-0097 (800) 328-4735

THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF STATE
BOND U.S. GOVERNMENT AND AGENCY SECURITIES FUND (the "Fund").
The undersigned hereby appoints Stewart D. Gregg and Edward L. Zeman,
and each of them, with power to act without the other and with the right of
substitution in each, as proxies of the undersigned and hereby authorizes each
of them to represent and to vote, as designated below, all the shares of common
stock of the Fund held of record by the undersigned on March 31, 1995, at the
special meeting of shareholders of the Fund to be held on May 15, 1995, or any
adjournments or postponements thereof, with all powers the undersigned would
possess if present in person. All previous proxies given with respect to the
meeting hereby are revoked.

THE PROXIES ARE INSTRUCTED TO VOTE AS FOLLOWS:

________ FOR ________ AGAINST ________ ABSTAIN

2. ELECTION OF DIRECTORS (subject to approval by shareholders of Agenda Item 1).

___________ FOR all nominees listed below (except as marked
to the contrary below)

___________ WITHHOLD AUTHORITY to vote for all nominees
listed below

INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.

W.B. Faulkner P.M. Finley A.J. Gartland, Jr.

J.R. Lindholm J. Katz C.L. Mahai T.S. Rosky

(continued, and to be completed and signed on the reverse side)

3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournments or
postponements thereof.

Dated: __________________________, 1995

----------------------------------------
Signature

----------------------------------------
Signature if held jointly

TO SAVE FURTHER SOLICITATION EXPENSE, PLEASE MARK, SIGN, DATE, AND
RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED POSTAGE-PREPAID ENVELOPE.