As filed with the Securities and Exchange Commission on August 28, 1995
Registration Nos. 33-18934 and 811-5412
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 10
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 10
STATE BOND TAX-FREE INCOME FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
8400 Normandale Lake Boulevard, Suite 1150
Minneapolis, Minnesota 55473
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (612) 835-0097
Kevin L. Howard, Esq. Copies to:
239 S. Fifth Street, 12th floor Joel H. Goldberg, Esq.
Louisville, KY 40202-3271 Shereff, Friedman, Hoffman & Goodman, LLP
(Name and Address of Agent for Service) 919 Third Avenue
New York, New York 10022
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b)
on (date) pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
X ON NOVEMBER 1, 1995 PURSUANT TO PARAGRAPH (a)(1)
75 days after filing pursuant to paragraph (a)(2)
on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2(a)(1) under the Investment Company Act of 1940, the
Registrant has registered an indefinite number or amount of its securities under
the Securities Act of 1933. The Rule 24f-2 Notice of the Registrant for the
fiscal year ended June 30, 1995 was filed on August 24, 1995.
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
N-IA Item No. Caption in the Prospectus
PART A
Item 1. Cover Page................................................... Cover Page
Item 2. Synopsis............ Shareholder Transaction and Operating Expense Table
Item 3. Condensed Financial Information.................... Financial Highlights
Item 4. General Description of
Registrant......................... General Information About State Bond
Minnesota Tax-Free Fund; What Are the
Fund's Investment Objectives and Policies?
Item 5. Management of the Fund......................... How Is the Fund Managed?
Item 5A.Management's Discussion
of Fund Performance......... Management's Discussion Of Fund Performance
Item 6. Capital Stock
and Other Securities............... General Information About State Bond
Minnesota Tax-Free Fund; What is the Tax Status
of the Dividends and Distributions You Receive? Investment Performance
Item 7. Purchase of Securities
Being Offered...........................How Can You Invest in the Fund?
How is the Offering Price of the Fund's Shares Determined?
What is the Fund's Plan of Distribution?
How Does the Fund's Exchange Privilege Work?
What Services Does the Fund Offer?
Item 8. Redemption of Repurchase................ How Can You "Sell" Your Shares?
What Services Does the Fund Offer?
Item 9. Legal Proceedings........................................ Not Applicable
PART B CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page ..................................................Cover Page
Item 11. Table of Contents........................................... Cover Page
Item 12. General Information and History.................... General Information
Item 13. Investment Objectives and Policies...... What Are the Fund's Investment
Objectives, Policies and Risks?
What Are the Fund's Investment Limitations?
Item 14. Management of the Registrant......... Who Manages the Fund? The Manager
Item 15. Control Persons
and Principal Holders of Securities.. Who Manages the Fund? The Manager
Item 16. Investment Advisory
and Other Services.......... Who Manages the Fund? Management Agreement
and Expenses; Plan of Distribution; Transfer Agent; Custodian
Item 17. Brokerage Allocation.............. Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities.................. Purchase of Shares
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered...................................... Purchase of Shares;
Offering Price; How Can You "Sell" Your Shares?
How is the Net Asset Value Per Share Determined
Item 20. Tax Status..................................... Tax Status of the Fund;
Additional Tax Information; Will the Fund
Withhold Taxes on Distributions?
Item 21. Underwriters How are Shares Distributed?.......... Plan of Distribution
Item 22. Calculation of Performance Data........ Calculation of Performance Data
Item 23. Financial Statements.............................. Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment to the
Registration Statement.
PROSPECTUS
STATE BOND MINNESOTA TAX-FREE INCOME FUND
8400 Normandale Lake Blvd.
Suite 1150
Minneapolis, Minnesota 55437-3807
Phone (612) 835-0097
November 1, 1995
State Bond Minnesota Tax-Free Income Fund (the "Fund") is a mutual fund which
seeks to maximize current income exempt from both federal income tax and
Minnesota personal income tax to the extent consistent with preservation of
capital. The Fund is the only investment portfolio of State Bond Tax-Free Income
Funds, Inc.
This Prospectus concisely sets forth information about the Fund which investors
should know before investing. Please read it carefully before you invest and
keep it for future reference.
Additional information about the Fund is contained in a Statement of Additional
Information filed with the Securities and Exchange Commission and is available
upon request and without charge by calling or writing the Fund at 800-328-4735,
8400 Normandale Lake Boulevard, Suite 1150, Minneapolis, Minnesota 55437-3807.
The Statement of Additional Information is dated the same date as this
Prospectus and is incorporated herein by reference in its entirety.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER FEDERAL AGENCY. AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE
FINANCIAL HIGHLIGHTS
WHAT IS STATE BOND MINNESOTA TAX-FREE INCOME FUND?
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS
HOW IS THE FUND MANAGED?
WHAT ARE THE FUND'S BROKERAGE COMMISSIONS?
HOW CAN YOU INVEST IN THE FUND?
HOW IS THE OFFERING PRICE OF THE FUND'S SHARES DETERMINED?
HOW ARE THE FUND'S SALES CHARGES DETERMINED?
HOW CAN YOU "SELL" YOUR SHARES?
HOW DOES THE FUND'S EXCHANGE PRIVILEGE WORK?
HOW DOES THE FUND PAY DIVIDENDS AND DISTRIBUTIONS?
WHAT IS THE TAX STATUS OF DIVIDENDS AND DISTRIBUTIONS YOU RECEIVE?
WHAT IS THE FUND'S PLAN OF DISTRIBUTION?
WHO ARE THE FUND'S ACCOUNTING AGENT AND ITS CUSTODIAN?
WHAT SERVICES DOES THE FUND OFFER?
GENERAL INFORMATION ABOUT STATE BOND MINNESOTA TAX-FREE INCOME FUND
INVESTMENT PERFORMANCE
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases 4.50%
(as a percentage of offering price)
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average daily net assets)
Management Fee (After Expense Reimbursement) .36%
12b-1 Fee (After Expense Reimbursement) .25%
Other Expenses (After Expense Reimbursements) .39%
----
Total Fund Operating Expenses (After Expense Reimbursements) 1.00%
=====
A fee will be charged for certain redemptions by wire transfer. See "How Can You
'Sell' Your Shares?"
EXAMPLE:
You would pay the following aggregate expenses on a $1,000 investment, assuming:
(1) 5% annual return and (2) redemption at the end of each time period:
1 Year 3 Years 5 Years 10 Years
$55 $75 $98 $162
Note: This Example is not a representation of past or future expenses and actual
expenses may be more or less than those shown above.
The Fund's shares have an asset-based sales fee which may result in long-term
shareholders paying more than the economic equivalent of the maximum front-end
sales charge permitted by NASD regulations.
The purpose of the above table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly as an investor in
the Fund. The expense information in the above table is based upon expenses
incurred by the Fund during its fiscal year ended June 30, 1995. The above
operating expenses are net of expense reimbursements. Without such
reimbursements, the management fee would have been .60%, the 12b-1 fee would
have been .25% and the other expenses would have been .39%, for a total of
1.24%. For more information concerning fees and expenses, see "What Is The
Fund's Plan Of Distribution?" and "How Is The Fund Managed?" See "How Does The
Exchange Privilege Work?" for information on additional sales charges that may
be payable upon exchange into a fund in the State Bond Group which has a higher
sales charge.
FINANCIAL HIGHLIGHTS
The information presented below for the fiscal year ended June 30, 1995 has been
audited by Ernst & Young LLP, independent auditors for the Fund, and the
financial statements of the Fund, along with the report of Ernst & Young LLP
thereon, are set forth in the Statement of Additional Information. The
information presented below for each fiscal year in the four-year period ended
June 30, 1994 has been audited by Deloitte & Touche LLP, the previous auditors
for the Fund. Further information about the performance of the Fund is contained
in the Fund's most recent annual report to shareholders which may be obtained,
without charge, by calling or writing the Fund at the telephone number or
address on the front cover of this Prospectus.
PER SHARE INVESTMENT INCOME AND CAPITAL CHANGES
(For a share outstanding throughout the year)
YEAR ENDED JUNE 30
<TABLE>
<CAPTION>
January 6,
l988
(Commencement
of
Operations)
through
1995# 1994 1993 1992 1991 1990 1989 June 30,
1988
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.45 $10.94 $10.49 $10.18 $10.11 $10.23 $ 9.65 $10.00
Income from investment operations:
Net investment income .56 .56 .59 .61 .62 .64 .65 .29
Net realized and unrealized gain
(loss) on investments .16 (.47) .45 .33 .07 (.12) .58 (.35)
---- ----- ---- ---- ---- ----- ---- -----
Total from investment operations .72 .09 1.04 .94 .69 .52 1.23 (.06)
Less distributions:
From net investment income (.56) (.56) (.59) (.61) (.62) (.64) (.65) (.29)
From net realized gain - (.02) - (.02) - - - -
---- ----- ---- ---- ---- ----- ---- -----
Total distributions (.56) (.58) (.59) (.63) (.62) (.64) (.65) (.29)
----- ----- ----- ----- ----- ---- ----- -----
Net asset value, end of year $10.61 $10.45 $10.94 $10.49 $10.18 $10.11 $10.23 $ 9.65
===== ===== ===== ===== ===== ===== ===== ====
Total Return** 7.10% .79% 10.06% 9.47% 6.87% 5.48% 13.18% (1.03%)*
Ratios and Supplemental Data:
Net assets, end of year $18,178 $16,486 $15,318 $12,244 $9,238 $6,189 $4,997 $3,196
(in thousands)
Ratio of expenses to average
net assets*** 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%*
Ratio of net income to average
net assets 5.37% 5.14% 5.41% 5.86% 6.17% 6.34% 6.56% 6.47%*
Portfolio turnover
rate 6% 2% 15% 1% 8% 2% - -
</TABLE>
_______________________________
# ARM Capital Advisors, Inc. began managing the investment operations of the
Fund on June 14, 1995.
* Annualized
** Total return does not consider the effects of the one time sales charge.
*** The Fund's investment adviser voluntarily reimbursed the Fund on a monthly
basis for expenses incurred in excess of 1% of average daily net assets.
Without such voluntary reimbursement, the ratio of expenses to average net
assets in each of the respective fiscal years would have been as follows:
1995 -- 1.24 %; 1994--1.29%; 1993--1.38%; 1992--1.54%; 1991--1.65%;
1990--1.87%; 1989--2.19%; and 1988--3.10% (annualized).
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES AND RISKS?
The Fund seeks to maximize current income exempt from both Federal income tax
and Minnesota personal income tax to the extent consistent with preservation of
capital. In pursuing these goals, under normal circumstances the Fund invests at
least 80% of the value of its assets in debt obligations issued by or on behalf
of the State of Minnesota and its political subdivisions, the income from which
is exempt from federal income tax and Minnesota personal income tax (referred to
in this prospectus as "Minnesota Tax-Exempt Securities"). The Fund intends to
invest its assets such that at least 95% of its tax-exempt interest income is
derived from Minnesota Tax-Exempt Securities. Generally, the values of the
securities in which the Fund will invest, and accordingly the value of the
Fund's shares, will fall as interest rates rise and rise as interest rates fall.
There is no assurance that the Fund's goals will be achieved.
The Minnesota Tax-Exempt Securities in which the Fund invests consist of
securities rated within the following grades assigned by Moody's Investors
Service, Inc. ("Moody's"): Aaa, Aa, A, Baa, Ba and B for bonds; MIG-1, MIG-2,
MIG-3 for notes; and Prime-1 and Prime-2 for commercial paper, or within the
following grades assigned by Standard & Poor's Ratings Group ("S&P"): AAA, AA,
A, BBB, BB and B for bonds; SP-1 and SP-2 for notes; and A-1 and A-2 for
commercial paper. Currently the Fund does not invest in bonds rated below A, and
the Fund has no current intention of doing so. The risk of default, including of
nonpayment of principal or interest, on bonds and notes rated Baa or MIG-4 or
below by Moody's or BBB or SP-3 or below by S&P is higher than the risk on such
securities rated within the higher grades. Such securities are more speculative
and more sensitive to economic changes than higher rated bonds and notes. A
description of ratings of the Minnesota Tax-Exempt Securities in which the Fund
may invest is included as Appendix A to the Statement of Additional Information.
The Fund may invest in unrated Minnesota Tax-Exempt Securities, if, in the
judgment of ARM Capital Advisors, Inc. (the "Manager"), the financial condition
of the issuer of such securities at the time of purchase is comparable to and
the securities are otherwise similar in quality to those rated securities the
Fund would purchase. As a matter of fundamental policy, the Fund may not invest
more than 25% of its assets in unrated Minnesota Tax-Exempt Securities. Although
securities that are not rated are not necessarily of lower quality, the market
for them may not be as broad as for rated securities, since many investors rely
upon ratings agencies for credit appraisal.
As a matter of fundamental policy, the Fund may not purchase Minnesota
Tax-Exempt Securities that are not rated within the three highest grades by
either Moody's or S&P, or that are unrated, unless such securities are insured
as to the payment of all installments of principal and interest.
As a matter of fundamental policy, under normal circumstances at least 80% of
the value of the Fund's assets will be invested in Minnesota Tax-Exempt
Securities. Up to 20% of the assets of the Fund may generate interest that is an
item of tax preference for purposes of the Federal and Minnesota alternative
minimum tax ("AMT").
In addition, while the Fund attempts, under normal market conditions, to invest
all of its assets in Minnesota Tax-Exempt Securities, the Fund temporarily may
invest up to 20% of the value of its assets in taxable obligations (i) when the
Manager believes abnormal market conditions dictate a temporary defensive
posture in taxable obligations; (ii) pending investment of proceeds of sales of
shares or reinvestment of proceeds of sales of portfolio securities; or (iii) to
meet redemptions of shares by shareholders. Also, on a temporary defensive basis
due to market conditions, the Fund may invest up to 100% of its assets in
taxable obligations or may hold up to 100% of its assets in cash. The taxable
obligations in which the Fund may invest are obligations of the U.S. government,
its agencies or instrumentalities; other debt securities rated within the two
highest grades by either Moody's or S&P (or if unrated, of comparable quality in
the opinion of the Manager); commercial paper rated in the two highest grades by
either of such rating services (or of comparable quality); certificates of
deposit, letters of credit and bankers' acceptances of domestic banks and
savings institutions having total assets over one billion dollars or
certificates of deposit of other domestic banks or savings institutions which
are fully insured by the Federal Deposit Insurance Corporation; and repurchase
agreements with respect to any of the foregoing investments or Minnesota
Tax-Exempt Securities which qualify for investment by the Fund.
MINNESOTA TAX-EXEMPT SECURITIES
The Minnesota Tax-Exempt Securities in which the Fund invests consist of bonds,
notes, commercial paper and municipal leases issued by the State of Minnesota,
its political subdivisions (including municipalities), governmental agencies or
instrumentalities, or Indian tribal governments located in Minnesota.
Bonds are obligations issued to obtain funds for various public purposes, such
as the construction or improvement of public facilities including airports,
highways, hospitals, housing, nursing homes, parks, public buildings,
recreational facilities, school facilities, and sewer and water works. Other
public purposes for which bonds may be issued include the refunding of
outstanding obligations, the anticipation of taxes or state aids, the payment of
judgments, the funding of student loans, community redevelopment, district
heating, the purchase of street maintenance and fire fighting equipment, or any
authorized corporate purpose of the issuer, except the payment of current
expenses. Notes and commercial paper are generally used to provide for
short-term capital needs and ordinarily have a maturity of up to one year. Notes
are frequently issued in anticipation of tax revenue, revenue from other
government sources or revenue from bond offerings. Short-term, unsecured
commercial paper is often used to finance seasonal working capital needs or to
provide interim construction financing.
Municipal leases are obligations of state and local government units incurred to
lease or purchase equipment or other property utilized by such governments. The
Fund will not originate leases as a lessor, but will instead purchase a
participation interest in the regular payment stream of the underlying lease
from a bank, equipment lessor or other third party.
In addition, certain types of securities (generally referred to as "private
activity bonds") may be issued by or on behalf of public authorities to finance
privately operated pollution control facilities, certain local water supply,
gas, electricity or waste disposal facilities, and the construction or
improvement of certain other privately operated facilities.
Minnesota Tax-Exempt Securities may also be classified into two types of
obligations: general obligation and limited obligation (or revenue) securities.
General obligation securities involve the pledge of the full faith and credit of
an issuer possessing taxing power and are payable from the issuer's general
unrestricted revenues and not from any particular fund or revenue source. The
characteristics and methods of enforcement of general obligation securities vary
according to the law applicable to the particular issuer. Limited obligation
(revenue) securities are payable only from the revenues derived from a
particular facility or class of facilities, or a specific revenue source, such
as the user of the facility. Private activity bonds are in most cases limited
obligation bonds payable solely from specific revenues of the project to be
financed. The credit quality of private activity bonds is therefore usually
directly related to the credit standing of the user of the facility (or the
credit standing of a third-party guarantor or other credit enhancement
participant, if any).
Like all debt obligations, Minnesota Tax-Exempt Securities are subject to credit
risk and market risk. Credit risk relates to the issuer's ability to make timely
payments of principal and interest. Market risk relates to the changes in market
values that occur as a result of variations in the level of prevailing interest
rates, yield relationships and other factors in the tax-exempt securities
market. Generally, higher quality tax-exempt securities will provide a lower
yield than lower quality tax-exempt securities of similar maturity and are
subject to lesser credit risks than lower quality tax-exempt securities.
Furthermore, for any given change in the level of interest rates, prices tend to
fluctuate less for higher quality issues than for lower quality issues, and more
for longer maturity issues than for shorter maturity issues. It should be noted
that the creditworthiness of obligations issued by local Minnesota issuers may
be unrelated to the credit worthiness of obligations issued by the State of
Minnesota, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
RISK FACTORS REGARDING INVESTMENTS IN MINNESOTA
Because the Fund will normally invest at least 80% of its assets in Minnesota
Tax-Exempt Securities and because it seeks to maximize income derived from
Minnesota Tax-Exempt Securities, it is more susceptible to factors adversely
affecting the state of Minnesota and issuers of Minnesota Tax-Exempt Securities
than would be a municipal bond fund that is not so concentrated in such
obligations.
The State relies heavily on a progressive individual income tax and a retail
sales tax for revenue, which results in a fiscal system that is sensitive to
economic conditions. Frequently in recent years, legislation has been required
to eliminate projected budget deficits by raising additional revenue, reducing
expenditures, including aids to political subdivisions and higher education,
reducing the State's budget reserve, imposing a sales tax on purchases by local
governmental units, and making other budgetary adjustments. The Minnesota
Department of Finance projects that the current biennium will end June 30, 1997
with a $350 million cash flow account balance plus a $204 million budget
reserve. Total General Fund expenditures and transfers for the biennium are
projected to be $18.2 billion. State expenditures for education finance (K-12),
post-secondary education, and human services in the biennium ending June 30,
1997 are not anticipated to be sufficient to maintain current program levels.
Although it is not possible to anticipate economic performance four years into
the future, planning estimates (extrapolations) for the biennium ending June 30,
1999 show a substantial General Fund deficit of $812 million, after funding a
$350 million cash flow account plus a $204 million budget reserve, if current
law is not changed. This indicates the likelihood of additional revenue
increases or spending cuts relative to current law. The State is party to a
variety of civil actions that could adversely affect the State's General Fund.
In addition, substantial portions of State and local revenues are derived from
federal expenditures, and reductions in federal aid to the State and its
political subdivisions and other federal spending cuts may have substantial
adverse effects on the economic and fiscal condition of the State and its local
governmental units. Risks are inherent in making revenue and expenditure
forecasts. Economic or fiscal conditions less favorable than those reflected in
State budget forecasts and planning estimates may create additional budgetary
pressures.
State grants and aids represent a large percentage of the total revenues of
cities, towns, counties and school districts in Minnesota. Even with respect to
revenue obligations, no assurance can be given that economic or other fiscal
difficulties and the resultant impact on State and local government finances
will not adversely affect the value or marketability of Minnesota Tax-Exempt
Securities held by the Fund or the ability of the respective obligors to make
timely payment of the principal and interest on such obligations.
Diversity and a significant natural resource base are two important
characteristics of the Minnesota economy. Generally, the structure of the
State's economy parallels the structure of the United States economy as a whole.
There are, however, employment concentrations in durable goods and non-durable
goods manufacturing, particularly industrial machinery, instruments and
miscellaneous, food, paper and related industries, and printing and publishing.
During the period from 1980 to 1990, overall employment growth in Minnesota
lagged behind national employment growth, in large part due to declining
agricultural employment. The rate of non-farm employment growth in Minnesota
exceeded the rate of national growth, however, in the period of 1990 to 1994.
Since 1980, Minnesota per capita income generally has remained above the
national average. During 1993, 1994 and 1995, the State's monthly unemployment
rate generally has been less than the national unemployment rate. The Minnesota
Department of Finance February 1995 Forecast projects that the State's economy
will not grow as fast during the biennium ending June 30, 1997 as the national
aggregates, due to continued tightness in local labor markets. Although the
State's national economic forecasting consultant forecast a slowdown but no
recession during 1995, it recognized the substantial possibility of a recession.
Both possible future changes in federal and State income tax laws, including
rate reductions, and recent Minnesota tax legislation could adversely affect the
value and marketability of Minnesota Tax-Exempt Securities held by the Fund. See
"What Is the Tax Status of Dividends and Distributions You Receive?" below.
DIVERSIFICATION
The Fund is a "non-diversified" management investment company and as such is not
required to meet any diversification requirements under the Investment Company
Act of 1940, as amended (the "Act"). The Fund is required to meet certain
standards to qualify as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended (the "Code"). At the end of each
fiscal quarter with respect to at least 50% of its total assets: (1) the Fund
may not invest more than 5% of its total assets in the securities of any one
issuer (except U.S. Government obligations) and (2) the Fund may not own more
than 10% of the outstanding voting securities of any one issuer. (By comparison,
a "diversified" investment company must at all times satisfy those two
conditions with respect to 75% of the value of its total assets). As for the
other 50% of the Fund's total assets not subject to the limitations described
above, the sole limitation on concentration of these assets is that at the end
of each fiscal quarter not more than 25% of such assets may be invested in the
securities of any one issuer. Investment in a non-diversified investment company
such as the Fund may entail greater risks than investment in a "diversified"
fund. Because of the relatively small number of issuers of investment grade
Minnesota Tax-Exempt Securities, the Fund's non-diversified status permits it
from time to time to concentrate its assets in the securities of a few issuers
which the Fund's Manager deems to be attractive investments, rather than invest
in securities of a large number of issuers merely to satisfy the Act's
diversification requirements. Although the Fund's Manager believes that the
ability to concentrate the investments of the Fund in particular issuers is
advantageous when investing in Minnesota Tax-Exempt Securities, such
concentration involves an increased risk of loss to the Fund should any
particular issuer be unable to make interest or principal payments or should the
market value of particular securities decline.
The Fund reserves the right to invest more than 25% of its assets in private
activity revenue bonds. As a matter of fundamental policy, the Fund may not to
concentrate in any one industry. In addition, as a matter of fundamental policy,
the Fund may not invest more than 25% of its assets in private activity bonds
which are based, directly or indirectly, on the credit of private entities in
any one industry or in securities of private issuers in any one industry
(governmental issuers are not considered part of any "industry"). See
"Investment Restrictions" in the Statement of Additional Information.
INSURANCE
The Fund may purchase Minnesota Tax-Exempt Securities that are not rated within
the three highest grades by Moody's or S&P, or are unrated, only if such
securities are insured as to the payment of all installments of principal and
interest. Insurance is not a substitute for the basic credit of an issuer, but
supplements the credit and provides additional security therefor. While
insurance minimizes the credit risk associated with the default of a particular
security, it does not protect against market risk and therefore does not
guarantee the market value of the securities in the Fund's portfolio or the
value of the shares of the Fund. (The market value of an insured security may
differ from the face value due to fluctuations in interest rates.) In addition,
insurance of principal refers to insuring the payment of the face or par value
of the insured security, and not the purchase price paid for the security by the
Fund. To the extent that the Fund purchases insured securities, the Fund may be
dependent upon the credit of the insurance companies issuing the policies
insuring such securities, and subject to the risk that a particular insurer of
securities the Fund may hold may encounter financial difficulties. Municipal
bond insurance is a relatively new form of insurance, and the issuers of
municipal bond insurance are for the most part relatively new companies without
any long-term historical record of claims under their policies. The Fund cannot
predict the level of risk involved in purchasing insured Minnesota Tax-Exempt
Securities.
Insured Minnesota Tax-Exempt Securities held by the Fund may be insured by (i) a
"New Issue Policy" obtained by the issuer of the security or another party
(generally a dealer) at the time of issuance, for which all premiums are paid in
advance; (ii) a "Secondary Market Policy" which is obtained at a time other than
issuance, generally by a person other than the issuer (such as the Fund), and
provides insurance to the maturity of the security (regardless of whether the
purchaser of the insurance continues to hold the security), and for which all
premiums are paid in advance, or (iii) a mutual fund "Portfolio Insurance
Policy" that the Fund has obtained from Financial Guaranty Insurance Company
("Financial Guaranty") or may obtain from another insurance company approved by
the Board of Directors. From time to time Financial Guaranty also may be the
issuer of New Issue Policies or Secondary Market Policies insuring securities
purchased by the Fund. If a Minnesota Tax-Exempt Security purchased by the Fund
is covered by a New Issue Policy or a Secondary Market Policy providing
insurance to maturity and issued by an insurer that the Manager believes is
satisfactory, then such a security is not required to be additionally insured by
the Fund under its own Portfolio Insurance Policy.
Coverage under a New Issue Policy or Secondary Market Policy is noncancellable
and will continue in force so long as the security insured thereunder is
outstanding and the insurer remains in business. The existence of such insurance
for securities in the Fund's portfolio may have an effect on the resale value of
such securities. New Issue Policies and Secondary Market Policies may be
considered to represent an element of market values of securities insured
thereunder, but the exact effect, if any, of this insurance on such market
values generally cannot be estimated.
Under the Portfolio Insurance Policy issued by Financial Guaranty, insurance on
any particular security will be effective only so long as the Fund is in
existence and continues to pay the applicable premium, Financial Guaranty
remains in business and such security continues to be held by the Fund.
Financial Guaranty cannot cancel coverage already in force with respect to
securities owned by the Fund and covered by the Portfolio Insurance Policy,
except for nonpayment of premiums. Any security for which insurance is canceled
as provided herein will be sold by the Fund as promptly thereafter as reasonably
possible. In the event of a sale by the Fund of any security insured by the
Portfolio Insurance Policy, or payment of the principal of the security prior to
maturity, the insurance purchased from Financial Guaranty will terminate as to
such security.
Premium rates for each issue of Minnesota Tax-Exempt Securities covered by the
Portfolio Insurance Policy from Financial Guaranty will be fixed for the life of
the Fund. The premiums are payable monthly by the Fund and are adjusted for
purchases, sales and payments prior to maturity of covered securities during the
month. Premiums are paid from the Fund's assets and reduce its current yield by
the amount of such premiums. The Manager estimates that annual premiums for the
Portfolio Insurance Policy will range from approximately .1 of 1% to .2 of 1% of
average daily net assets.
Financial Guaranty may not cancel the Portfolio Insurance Policy except for
failure to pay the premium. Nonpayment of premiums on the Portfolio Insurance
Policy will, under certain circumstances, result in the cancellation of the
Portfolio Insurance Policy and will also permit Financial Guaranty to take
action against the Fund to recover premium payments due it. The Portfolio
Insurance Policy is terminable by the Fund upon sixty days' prior written notice
to Financial Guaranty. If it becomes necessary or desirable to do so, the Fund
may terminate the Portfolio Insurance Policy with Financial Guaranty and obtain
portfolio insurance from another insurer.
Under the provisions of the Portfolio Insurance Policy, Financial Guaranty
unconditionally and irrevocably agrees to pay to an independent agent that
portion of the principal of and interest on a security insured thereunder which
shall become due for payment but shall be unpaid by reason of nonpayment by the
issuer. Financial Guaranty will make such payments to the agent on the date such
principal or interest becomes due for payment or on the business day next
following the day on which Financial Guaranty receives notice of non-payment,
whichever is later. The agent will disburse to the Fund the amount of such
unpaid principal and/or interest upon receipt of evidence of the Fund's right to
receive payment of unpaid principal and/or interest and evidence that all of the
rights to such payment shall, upon disbursement by the agent, vest in Financial
Guaranty. Upon such disbursement, Financial Guaranty shall become the owner of,
as applicable, the security, appurtenant coupon or right to principal thereof,
and shall be fully subrogated to the Fund's rights thereunder.
Under the Portfolio Insurance Policy, Financial Guaranty is not obligated to
insure all Minnesota Tax-Exempt Securities that the Fund may wish to purchase.
In determining whether to insure any Minnesota Tax-Exempt Security, Financial
Guaranty will apply its own standards, which are not necessarily the same as the
criteria used in regard to selection of investments by the Manager. Financial
Guaranty's decision to insure a security is made prior to the purchase of such
security by the Fund. Contracts to purchase Minnesota Tax-Exempt Securities are
not covered by the Portfolio Insurance Policy, although securities underlying
such contracts (once approved by Financial Guaranty) are covered by such
insurance upon delivery to the Fund or its Custodian.
The Fund may at any time purchase from Financial Guaranty or any other approved
insurer a Secondary Market Policy, including on any security purchased by the
Fund which is covered by the Portfolio Insurance Policy. The coverage, and the
obligation to pay monthly premiums, under the Portfolio Insurance Policy with
respect to a security would cease with the purchase by the Fund of a Secondary
Market Policy on such security. The Fund may purchase insurance under a
Secondary Market Policy in lieu of coverage under the Portfolio Insurance Policy
at any time if the Manager believes such insurance would best serve the Fund's
interest in meeting its objectives and policies.
One of the purposes of acquiring such a Secondary Market Policy would be to
enable the Fund to sell the portfolio security to a third party as an "AAA"
rated insured security at a market price higher than what otherwise might be
obtainable if the security were sold without the insurance coverage. (Such
rating is not automatic, however, and must specifically be requested from
Moody's or S&P for each security.) Such Secondary Market Policy would likely be
purchased if, in the opinion of the Manager, the market value or net proceeds of
a sale by the Fund would exceed the current value of the security (without
insurance) plus the cost of the policy. Any difference between the excess of a
security's market value as an "AAA" rated security over its market value without
such rating, including the single premium cost thereof, would inure to the Fund
in determining the net capital gain or loss realized by the Fund upon the sale
of the portfolio security. No assurance can be given that the purchase of a
Secondary Market Policy will enable the Fund to obtain a higher price upon sale
of the security.
If an issuer defaults on a security, the Fund may be required to take one of
several actions. One possibility is that the Fund may purchase a Secondary
Market Policy for the security. In that case, the Fund may have the ability to
sell such security without realizing a significant loss or continuing to hold
the security in its portfolio in order to continue in force the coverage of the
Portfolio Insurance Policy, if the security is covered thereby. However, no
assurance can be given that the purchase of such insurance will enable the Fund
to so sell the security.
Alternatively, if a defaulted security is covered by the Portfolio Insurance
Policy, the Fund might continue to hold it. While a defaulted security subject
to the Portfolio Insurance Policy is held by the Fund, the Fund continues to pay
the insurance premium thereon but also collects interest payments from the
insurer and retains the right to collect the full amount of principal from the
insurer when the security comes due. Because coverage under the Portfolio
Insurance Policy terminates upon sale of a security from the Fund's portfolio,
such insurance does not have an effect on the resale value of the securities. It
is the intention of the Fund to retain any securities insured under a Portfolio
Insurance Policy which are in default or in significant risk of default, and to
place a value on the insurance which will be equal to the difference between the
market value of the defaulted security and the market value of similar
securities which are not in default. (See "How is the Offering Price of the
Fund's Shares Determined?") To the extent that it holds defaulted securities,
the Fund may be unable under certain circumstances to purchase other Minnesota
Tax-Exempt Securities.
FINANCIAL GUARANTY INSURANCE COMPANY. Financial Guaranty is a New York stock
insurance company, with principal offices at 175 Water Street, New York, New
York 10038. As of June 30, 1995, Financial Guaranty's capital base (capital and
surplus plus contingency reserve) was approximately $1,336,300,000 as reported
to the New York State Insurance Department. For further information regarding
Financial Guaranty, see the Statement of Additional Information.
FLOATING RATE, VARIABLE RATE, AND INVERSE FLOATING RATE SECURITIES
The Fund may purchase floating and variable rate Minnesota Tax-Exempt
Securities, which are Minnesota Tax-Exempt Securities having a coupon (stated
interest rate paid by the issuer) that is adjusted or reset from time to time.
Certain of these securities ("floating or variable rate demand notes") have a
stated maturity in excess of one year, but permit the holder to demand payment
of principal plus accrued interest upon a specified number of days' notice. The
issuer of floating or variable rate demand notes normally has a corresponding
right, after a given period, to prepay at its discretion the outstanding
principal amount of the notes plus accrued interest upon a specified number of
days' notice to the noteholders. The interest rate on a floating rate demand
note is based on a known lending rate, such as a bank's prime rate and is
adjusted automatically each time such rate is adjusted. The interest rate on a
variable rate demand note is adjusted at specified intervals, based on a known
lending rate, generally the rate on 90-day U.S. Treasury bills. Frequently,
floating or variable rate demand notes are secured by letters of credit or other
credit support arrangements provided by banks. The Fund will invest in floating
or variable rate demand notes so long as the letters of credit or other credit
support arrangements do not adversely affect the tax exempt status of these
obligations. The Manager will rely upon the opinion of the issuer's bond counsel
to determine whether such obligations are exempt from federal income taxes.
The Fund also may invest in inverse or reverse floating rate Minnesota
Tax-Exempt Securities. Inverse or reverse floating rate Minnesota Tax-Exempt
Securities are securities with a coupon that moves in the reverse direction to
an applicable index, such as the London Interbank Offered Rate ("LIBOR").
Accordingly, the coupon thereon will increase as interest rates decrease.
Inverse or reverse floating rate securities are typically more volatile than
fixed rate or other types of floating rate securities. Investments in inverse or
reverse floating rate securities may be made by the Fund to attempt to protect
against a reduction in the income earned on the Fund's investments due to a
decline in interest rates. The Fund would be adversely affected by the purchase
of such securities in the event of an increase in interest rates since the
coupon thereon will decrease as interest rates increase, and the value of the
securities may decrease more than would other debt securities, in some cases to
zero.
The Manager will monitor the creditworthiness of the issuers of floating rate,
variable rate, and inverse or reverse floating rate Minnesota Tax-Exempt
Securities. Such obligations are not as liquid as many other types of Minnesota
Tax-Exempt Securities.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with broker-dealers and financial
institutions. A repurchase agreement is an agreement under which the Fund
acquires an instrument subject to resale to the seller at an agreed price and
date. The resale price reflects an agreed-upon return for the period the
instrument is held by the Fund and is unrelated to the coupon provided by the
instrument. Repurchase agreements are usually for periods of one week or less,
but may be for longer periods. As a fundamental policy the Fund will not enter
into repurchase agreements of more than seven days' duration if more than 10% of
its net assets would be invested collectively in such agreements and in other
securities deemed to be illiquid. Repurchase agreements will be fully
collateralized. If, however, the seller defaults on its obligation to repurchase
the underlying security, the Fund may experience delay or difficulty in
exercising its rights to realize upon the security and might incur a loss if the
value of the security has declined.
The Fund might also incur disposition costs in liquidating the security.
WHEN-ISSUED SECURITIES
The Fund may enter into commitments to purchase new issues of Minnesota
Tax-Exempt Securities on a when-issued basis. Delivery and payment for these
securities normally take place 15 to 45 days after the date of commitment. There
is a risk that due to changes in interest rates between the commitment date and
settlement date the market value of the security on the settlement date may be
less than its purchase price. With regard to each commitment agreement for
when-issued securities, the Fund will maintain in a segregated account with its
custodian commencing on the commitment date, cash or high-grade liquid debt
obligations equal in value to the purchase price due on the settlement date
under such agreement.
The Fund will only make commitments to purchase when-issued Minnesota Tax-Exempt
Securities with the intention of actually acquiring the securities, but if
deemed advisable the Fund may sell these securities before the settlement date
or may meet its payment obligations from proceeds of the sale of the when-issued
securities themselves (which may then have a market value greater or less than
the Fund's payment obligation).
INVESTMENT RESTRICTIONS
In addition to the policies and limitations set forth above, the Fund is subject
to certain other investment policies and limitations set forth more fully in the
Statement of Additional Information. As a matter of fundamental policy, the Fund
may not: (1) borrow money, except for temporary purposes in emergency situations
and in an aggregate amount not in excess of 20% of the value of the total assets
of the Fund; provided that borrowings in excess of 5% of such value are
permitted from banks only; (2) mortgage or pledge assets, except that up to 10%
of the Fund's assets can be used to secure borrowings; (3) purchase securities
of any issuer if immediately thereafter, with respect to 50% of the Fund's total
assets, more than 5% of such assets would be invested in the securities of any
one issuer, except that this limitation does not apply to obligations issued or
guaranteed as to principal and interest either by the U.S. government or its
agencies or instrumentalities; or (4) purchase private activity bonds if
immediately thereafter more than 25% of the Fund's assets would be invested in
private activity bonds which are based, directly or indirectly, on the credit of
private entities in any one industry or in securities of private issuers in any
one industry.
Except as specifically noted above, the investment policies described above are
not fundamental and the Board of Directors of the Fund may change them without
the vote of a majority of the Fund's outstanding voting securities. The Board
may not change the Fund's investment objective, nor any other fundamental
policy, without such a vote. Under the Investment Company Act of 1940, a "vote
of a majority of the outstanding voting securities" of the Fund means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
the Fund or (2) 67% or more of the shares present at a shareholders' meeting if
more than 50% of the outstanding shares are represented at the meeting in person
or by proxy.
HOW IS THE FUND MANAGED?
The Board of Directors provides broad supervision over the affairs of the Fund.
Pursuant to an Investment Advisory and Management Agreement approved by the
Board and the shareholders of the Fund, ARM Capital Advisors, Inc. (the
"Manager") manages the investments of the Fund and administers its business and
other affairs. The address of the Manager is 200 Park Avenue, 20th Floor, New
York, New York 10166.
The Manager is a wholly-owned subsidiary of ARM Financial Group, Inc. ("ARM"), a
Delaware corporation. ARM is a financial services company providing retail and
institutional products and services to the long-term savings and retirement
market. The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley
Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P. and MSCP III
892 Investors, L.P., investment funds sponsored by Morgan Stanley Group, Inc.
("Morgan Stanley"), own approximately 91% of the outstanding shares of voting
stock of ARM. The Manager currently provides investment management services to
institutional and individual clients, including ARM and its subsidiaries, with
combined assets in excess of $3 billion.
The Manager commenced investment advisory operations on January 5, 1995, on
which date it acquired the domestic fixed income unit of Kleinwort Benson
Investment Management Americas Inc. The Manager has managed the Fund since June
14, 1995 and since that date has also managed the other mutual funds in the
State Bond Group of mutual funds: State Bond Cash Management Fund, State Bond
Common Stock Fund, State Bond Diversified Fund, State Bond Tax Exempt Fund, and
State Bond U.S. Government and Agency Securities Fund.
Keith O. Martens, Executive Vice President-Investments of the Manager and Vice
President of the Fund, is responsible for selection of investments and
management of the Fund. Mr. Martens has managed the Fund since the Fund's
inception in December of 1987. Mr. Martens is also the principal manager of the
State Bond Common Stock Fund, State Bond Diversified Fund, State Bond U.S.
Government and Agency Securities Fund, State Bond Cash Management Fund and State
Bond Tax Exempt Fund.
The Fund pays the Manager a management fee, calculated daily and payable
monthly, equal to an annual fee of .85 of 1% of the first $100,000,000 of
average daily net assets of the Fund and .80 of 1% of the average daily net
assets of the Fund in excess of $100,000,000. A portion of this fee is paid to
SBM Financial Services, Inc. (the "Distributor") in connection with the Fund's
Plan of Distribution (the "Plan") (see "What About The Plan of Distribution?")
The gross management fee (before payment to the Distributor of the fee under the
Plan) is higher than the management fees paid by most other investment companies
principally because it includes the fee paid by the Manager under the Plan to
the Distributor. The Fund pays all its expenses other than those assumed by the
Manager. Total expenses for the Fund for its fiscal year ended June 30, 1995
amounted to 1.00% of average daily net assets.
WHAT ARE THE FUND'S BROKERAGE COMMISSIONS?
The Manager places orders for the Fund's portfolio securities transactions. As
the Fund's portfolio is exclusively composed of debt (rather than equity)
securities, most of the Fund's portfolio transactions are effected with dealers
without the payment of brokerage commissions, but at net prices which usually
include a spread or markup. Most Fund transactions are with the issuer, or with
major dealers acting for their own account and not as brokers. In effecting
portfolio transactions the Fund seeks the most favorable net price consistent
with the best execution. However, frequently the Fund selects a dealer to effect
a particular transaction without contacting all dealers who might be able to
effect such transaction, because of the volatility of the market and the desire
of the Fund to accept a particular price for a security because the price
offered by the dealer meets its guidelines for profit, yield, or both. No
brokerage is allocated for the sale of Fund shares. The Fund will not deal with
affiliates of the Manager and Distributor in any transaction in which such
affiliate acts as principal.
While it is not expected that the Fund will effect any transactions on an agency
basis, if it does so the Manager will seek to obtain the best price and
execution of orders. Commission rates, being a component of price, are
considered together with other relevant factors. When consistent with these
criteria, business may be placed with broker-dealers who furnish investment
research services to the Manager. Such research services include advice, both
directly and in writing, as to the value of securities, the advisability of
investing in, purchasing, or selling securities, and the availability of
securities or purchasers or sellers of securities, as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts. This allows the Manager to
supplement its own investment research activities and enables it to obtain the
views and information of individuals and research staffs of many different
securities research firms prior to making investment decisions for the Fund. To
the extent portfolio transactions are effected with broker-dealers who furnish
research services to the Manager, the Manager receives a benefit, not capable of
evaluation in dollar amounts.
The Manager has not entered into any formal or informal agreements with any
broker-dealers, and it does not maintain any "formula" which must be followed in
connection with the placement of Fund portfolio transactions in exchange for
research services provided the Manager, except as noted below. If it is believed
to be in the best interests of the Fund, the Manager may place portfolio
transactions with brokers who provide the types of services described above,
even if it means the Fund will have to pay a higher commission (or, if the
broker's profit is part of the cost of the security, will have to pay a higher
price for the security) than would be the case if no weight were given to the
broker's furnishing of those services. This will be done, however, only if, in
the opinion of the Manager, the amount of additional commission or increased
cost is reasonable in relation to the value of the services. The Manager also
serves as investment adviser for other mutual funds. To the extent that the Fund
may pay a somewhat higher brokerage commission or somewhat higher price on a
trade because such trade is executed by a broker-dealer which also provides
research and statistical services, it is possible that said research and
statistical services may also be of value to one of the other mutual funds.
However, it is felt that this possibility of mutual benefit is not capable of
measurement.
HOW CAN YOU INVEST IN THE FUND?
SBM Financial Services, Inc. (the "Distributor"), a subsidiary of ARM, acts as
distributor of the Fund's shares. Its address is 8400 Normandale Lake Blvd.,
Suite 1150, Minneapolis, Minnesota 55437-3807.
Shares of the Fund are offered for sale through the Distributor and through
certain broker-dealers under contract with the Distributor. After you become a
shareholder, you may buy additional shares by sending a check drawn to State
Bond Tax Exempt Fund directly to the Fund's Shareholder Servicing Agent, SBM
Financial Services, Inc. at 8400 Normandale Lake Blvd., Suite 1150, Minneapolis,
Minnesota 55437-3807. Orders for the purchase of shares will be executed at the
offering price based upon the net asset value next determined after receipt and
acceptance of the order by the Distributor or the Shareholder Servicing Agent.
Orders for shares placed through broker-dealers will be executed at the offering
price next determined after the receipt of the order by the broker-dealer,
provided that the broker-dealer promptly transmits the order to the Distributor
the same day. The broker-dealer is responsible for transmitting the purchase
order to the Distributor. Shares will begin to earn dividends on the day when
payment for such shares is received by the Fund or the Distributor. The Fund
reserves the right to reject any order for the purchase of its shares. The
minimum initial investment is $500 and subsequent investments must be in the
amount of at least $50. The Fund reserves the right to change these minimum
investments. The Fund will not be responsible for the consequences of delays in
the banking or Federal Reserve wire systems.
HOW IS THE OFFERING PRICE OF THE FUND'S SHARES DETERMINED?
The price you pay for shares of the Fund is the offering price, that is, the
next determined net asset value of the shares plus the applicable sales charge.
Net asset value per share is determined as of the time of close of the New York
Stock Exchange (generally 3:00 p.m. Central Time) on each day that the New York
Stock Exchange is open for business. Net asset value is determined by dividing
the value of the total assets of the Fund, less liabilities, by the number of
shares outstanding. In determining net asset value, the Fund utilizes the
valuations of its portfolio securities furnished by a pricing service approved
by the Board of Directors. The pricing service values portfolio securities which
have remaining maturities of more than sixty days from the date of valuation at
quoted bid prices or the yield equivalents when quotations are readily
available. Such securities for which quotations are not readily available (which
constitute a majority of the Fund's portfolio securities) are valued at fair
value as determined by the pricing service using methods which include
consideration of yields or prices of municipal bonds of comparable quality, type
of issue, coupon, maturity, and rating, indications as to value from dealers,
and general market conditions. The pricing service may employ electronic data
processing techniques and/or a matrix system to determine valuations. Short-term
holdings maturing in 60 days or less are valued at cost plus accrued interest
which approximates market value.
HOW ARE THE FUND'S SALES CHARGES DETERMINED?
Sales charges are determined in accordance with the following schedule:
<TABLE>
<CAPTION>
Regular Dealer Discount
% of Net Amount as % of
% of Offering Price Invested Offering Price
------------------- --------------- -----------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
$50,000 but less than $100,000 4.00% 4.17% 3.50%
$100,000 but less than $250,000 3.00% 3.09% 2.50%
$250,000 but less than $500,000 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 2.00% 2.04% 1.50%
$1,000,000 but less than $2,000,000 1.00% 1.01% 0.50%
$2,000,000 or more 0.50% 0.50% 0.25%
</TABLE>
The sales charge varies depending on the size of the purchase, the number of
shares of the mutual funds in the State Bond Group you already own, whether you
have entered into a Letter of Intent to purchase additional shares during a
13-month period, or any special purchase programs in effect. Complete details of
how you may purchase shares at reduced sales charges under Volume Discounts,
Rights of Accumulation or Letters of Intent are contained in the Statement of
Additional Information and are available from your investment agent or dealer,
or the Distributor.
Shares may be sold at net asset value without a sales charge to present and
retired directors, present and retired officers, and present and retired
employees (and their spouses and minor children) of the Fund, the other
investment companies in the State Bond Group, and ARM and its subsidiaries. Such
sales also may be made to employee benefit plans for such persons. Also, shares
may be sold at net asset value to sales representatives of the Distributor and
registered representatives of broker-dealers who have signed dealer agreements
with the Distributor for sale of the shares of the Fund (including employee
benefit plans for such persons and their spouses and minor children). Shares may
be sold to any investment advisory, custodial, trust or other fiduciary account
managed or advised by the Manager or any affiliate wherein such entity has
discretionary investment authority at a maximum sales charge of 3% or such
lesser sales charge as such account would otherwise qualify for under the Fund's
sales charge schedule and the Volume Discount, Right of Accumulation, and Letter
of Intent provisions. These sales may be made for investment purposes only, and
shares may be resold only to the Fund.
HOW CAN YOU "SELL" YOUR SHARES?
You may redeem your shares without charge at any time by writing to the
Shareholder Servicing Agent at 8400 Normandale Lake Blvd., Suite 1150,
Minneapolis, Minnesota 55437-3807. You will receive the net asset value per
share next determined after receipt of your request in proper form by the
Shareholder Servicing Agent. The written redemption request should identify the
account number and be signed by the shareholder(s) exactly as the shares are
registered. For share redemptions valued at $20,000 or more, your signature or
signatures must be guaranteed by a national securities exchange, a member firm
of a principal stock exchange, a registered securities association, a clearing
agency, a bank or trust company, a savings association, a credit union, a
broker, a dealer, a municipal securities broker or dealer, a government
securities broker or dealer, or a representative of the Distributor. Further
documentation may be required from corporations, executors, partnerships,
administrators, trustees or custodians. If stock certificates have been issued
for the shares that you wish to redeem, you must surrender the certificates in
proper form, endorsed for transfer or accompanied by an endorsed stock power.
For your protection, any certificates should be sent by registered mail.
Shares may also be redeemed through authorized dealers and through
representatives of the Distributor. Requests for redemption received by the
Shareholder Servicing Agent from authorized dealers or representatives of the
Distributor prior to the close of the New York Stock Exchange will be executed
at the net asset value per share determined at the close of the New York Stock
Exchange on that day. Dealers and representatives are responsible for promptly
submitting such redemption requests to the Shareholder Servicing Agent in order
to obtain that day's closing price. Requests for redemption received by the
Shareholder Servicing Agent from dealers or representatives of the Distributor
after the close of the New York Stock Exchange will be executed at the net asset
value determined at the close of the New York Stock Exchange on the next trading
day.
A check for the proceeds of the redemption of your shares ordinarily will be
mailed to you within seven calendar days after a redemption request is received
in proper form. However, where shares purchased by means of an uncertified check
are redeemed before the fifteenth day after purchase, proceeds will not be
mailed until fifteen days after purchase in order to allow the uncertified check
to clear. Proceeds of a redemption may be more or less than the cost of the
shares when purchased. You will not receive dividends on shares which are
redeemed from your account for the day that the redemption is effected.
Because of the relatively high cost of handling small accounts, the Fund
reserves the right to redeem, upon not less than 30 days' written notice, the
shares in an account which has a value of less than $500. You will be allowed to
make additional investments prior to the date fixed for such a redemption to
avoid liquidation of your account. Shares will not be involuntarily redeemed if
the value of the shares drops below $500 due to market value changes.
QUICK REDEMPTION BY WIRE TRANSFER
If you have elected the Quick Redemption service, you may request that the
proceeds of a redemption of shares having a value of $5,000 or more be wired to
your account at a commercial bank in the United States which is a member of the
Federal Reserve System. This service is available only if you have designated
such a bank in your Investment Application and no certificates have been issued
for the shares to be redeemed. Redemption proceeds of less than $5,000 will not
be wired, but instead will be mailed to the shareholder's address of record. A
request for Quick Redemption may be made to the Shareholder Servicing Agent by
mail at 8400 Normandale Lake Blvd., Suite 1150, Minneapolis, Minnesota
55437-3807 or by telephone at (800) 328-4735. Each request must include your
name and account number. There is currently a $10.00 charge for each wire
transfer, which is deducted from the redemption proceeds. The fee is waived for
banks for their fiduciary accounts. The Fund reserves the right to modify the
Quick Redemption service at any time.
Quick Redemption requests received before the close of the New York Stock
Exchange on a business day of the Fund will be effected at the net asset value
determined on that day. Quick Redemption requests received after the close of
the New York Stock Exchange will be effected at the net asset value determined
on the next business day of the Fund. Proceeds sent by wire will be transmitted
on the next business day after the day that the redemption is effected. Proceeds
sent by mail will be transmitted within seven days of receipt of your request.
If your bank is not a member of the Federal Reserve System, Quick Redemption
proceeds may be wired to a member bank which has a correspondent relationship
with your bank, provided you designate such a correspondent bank in the
Investment Application and note that your bank should be immediately advised of
the wire transfer. The failure of a correspondent bank to notify your bank of
the wire transfer immediately could delay the crediting of redemption proceeds
to your bank.
The Fund is not liable for any loss arising from telephone redemptions that the
Fund reasonably believes to be genuine. The Fund will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine;
if it does not, it may be liable for any losses due to unauthorized or
fraudulent instructions. The procedures used by the Fund will include requesting
several items of personal identification information prior to acting upon
telephone instructions and sending a written confirmation on all such
transactions.
If you are already a Fund shareholder you may elect the Quick Redemption service
or change a designation of a bank account for the Quick Redemption service by
writing to the Shareholder Servicing Agent at 8400 Normandale Lake Blvd., Suite
1150, Minneapolis, Minnesota 55437-3807. The designation must be signed by all
of the registered owners of the Fund account, with signature(s) guaranteed by a
national securities exchange, a member firm of a principal stock exchange, a
registered securities association, a clearing agency, a bank or trust company, a
savings association, a credit union, a broker, a dealer, a municipal securities
broker or dealer, a government securities broker or dealer, or a representative
of the Distributor.
CHECK REDEMPTIONS
You may elect to participate in the Fund's free Check Redemption service, which
permits you to write checks payable to any person in amounts of $250 or more
(but not more than $100,000), provided that you have an account balance of
$5,000 or more. You may elect this service on the Investment Application or by
later written request to the Shareholder Servicing Agent at 8400 Normandale Lake
Blvd., Suite 1150, Minneapolis, Minnesota 55437-3807. The Shareholder Servicing
Agent will supply you with blank checks which can be drawn on your account with
the Fund. The checks will be paid from the redemption of shares in your account.
When honoring a check presented for payment, the Shareholder Servicing Agent
will cause the Fund to redeem exactly enough full and fractional shares in your
account to cover the amount of the check. Shares for which certificates have
been issued may not be redeemed by check. Check redemption is subject to bank
rules and regulations governing checking accounts. Checks for less than $250 or
more than $100,000 will be returned and a fee may be charged. If there are
insufficient shares in your account to cover a check written under this service,
the check will be returned marked "insufficient funds" and a return fee may be
charged. Checks should not be used to close a Fund account because when the
check is written you will not know the exact total value of the account on the
day the check clears. Fund dividends and distributions continue to be earned
until a check clears for payment. The Fund reserves the right to terminate or
modify the Check Redemption service at any time upon written notice to the
Fund's shareholders.
HOW CAN YOU REINSTATE YOUR INVESTMENT?
If you redeem shares and then decide you should not have redeemed them, or that
you prefer to shift your investment to one of the other mutual funds in the
State Bond Group, you may, within 30 calendar days of the date of redemption,
use all or any part of the proceeds of the redemption to reinstate, free of
sales charge, your investment in shares of the Fund, or, if you held the shares
redeemed for seven calendar days or longer before redemption, invest in shares
of any of the other mutual funds (except the Cash Management Fund) in the State
Bond Group. To make such an investment free of sales charges in shares of the
State Bond Funds which have a higher sales charge than the Fund, you also must
have held the shares of the Fund for six months or longer before their
redemption. Your investment will be reinstated or made at the net asset value
per share next determined after your request is received. You may use this
privilege to reinstate an investment in the Fund only once.
Exercise of the Reinstatement Privilege does not alter the Federal income tax
status of any capital gain realized on a sale of Fund shares, but to the extent
that any shares are sold at a loss and the proceeds are reinvested in shares of
the same Fund, some or all of the loss will not be allowed as a deduction,
depending upon the percentage of the proceeds reinvested.
HOW DOES THE FUND'S EXCHANGE PRIVILEGE WORK?
If you have been a shareholder for seven calendar days or more, you may exchange
any or all of your investment for shares of the other mutual funds in the State
Bond Group. Any exchange for shares of other mutual funds in the State Bond
Group will be at the next determined respective net asset values after receipt
of the request for exchange. Exchanges generally will be made without any sales
charges; except that if, within six months of your investment in the Fund, you
exchange for shares of any fund in the State Bond Group which has a higher sales
charge, you must pay the difference in the sales charge applicable to the
purchase of shares of the Fund and the higher sales charge applicable to the
purchase of shares of such other fund. Exchanges of Fund shares are sales, and
may result in a gain or loss for Federal income tax purposes. Before making an
exchange, you should obtain and read the prospectus for the fund you are
considering. The Fund reserves the right to terminate or modify the terms of
this exchange privilege upon 60 days' notice to shareholders. The exchange
privilege is only available in states in which the shares of the fund to be
acquired are available for purchase.
Exchange requests may be made in writing, signed by all registered owners, to
the Shareholder Servicing Agent at 8400 Normandale Lake Blvd., Suite 1150,
Minneapolis, Minnesota 55437-3807. Shares also may be exchanged by telephone by
calling (800) 328-4735, provided you have on file an Agreement for Exchange of
Shares by Telephone (included on the Investment Application or available from
the Shareholder Servicing Agent). Shares held by trustees of retirement plans
may not be exchanged by telephone. During times of drastic economic or market
changes the telephone exchange privilege may be difficult to implement. In order
to implement an exchange, you will need to provide the name in which your
account is registered, your account number, such other personal identification
information as the Fund may request, the dollar amount or share amount you wish
to exchange, the name of the fund into which you wish to exchange and, if you
already have an account with the fund into which you wish to exchange, the
account registration and account number of such account.
The Fund is not liable for any loss arising from telephone exchanges that the
Fund reasonably believes to be genuine. The Fund will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine;
if it does not, it may be liable for any losses due to unauthorized or
fraudulent instructions. The procedures used by the Fund will include requesting
several items of personal identification information prior to acting upon
telephone instructions and sending a written confirmation on all such
transactions.
HOW DOES THE FUND PAY DIVIDENDS AND DISTRIBUTIONS?
The Fund declares daily dividends on all outstanding shares (dividends are
declared for the day on which shares are purchased but are not declared for
redeemed shares on the day of redemption). A shareholder who redeems all of his
of her Fund shares receives with the redemption proceeds the amount of all
dividends declared for the month to and including the date of redemption of
shares. Dividends in respect of all other redemptions are paid on the regular
dividend payment date. Distributions from taxable net realized investment gains,
if any, will generally be declared at least once each year.
WHAT ARE YOUR DIVIDEND AND GAIN DISTRIBUTION OPTIONS?
You may elect to:
1. Receive both dividends and gain distributions in additional shares of the
Fund.
2. Receive dividends in cash and gain distributions in additional shares of
the Fund.
3. Receive both dividends and gain distributions in cash.
If no election is made, dividends from investment income and gain distributions
will be reinvested and credited to your account as additional shares. Dividends
and gain distributions reinvestments are made at net asset value. To change your
election at any time, write to the Shareholder Servicing Agent at 8400
Normandale Lake Blvd., Suite 1150, Minneapolis, Minnesota 55437-3807.
WHAT IS THE TAX STATUS OF DIVIDENDS AND DISTRIBUTIONS YOU RECEIVE?
The Fund has fulfilled, and intends to continue to fulfill, the requirements of
the Internal Revenue Code of 1986, as amended (the "Code") which will enable it
to designate distributions from interest income generated by its investments in
Minnesota Tax-Exempt Securities as "Exempt Interest Dividends" excludable from
gross income for federal income tax purposes. The Fund also intends to invest
its assets so that at least 95% of its tax-exempt interest income is derived
from Minnesota Tax-Exempt Securities. Therefore, Exempt Interest Dividends paid
by the Fund will not be subject to federal income tax or Minnesota personal
income tax, except as indicated below.
Distributions by the Fund of net interest income received from certain temporary
taxable investments and net short-term capital gains realized by the Fund, if
any, will be taxable to shareholders as ordinary income whether received in cash
or additional shares. Any net long-term capital gains realized by the Fund,
whether received as cash or additional shares, will be taxable to shareholders
as long-term capital gains regardless of the length of time investors have held
their shares. Under federal law, long-term capital gains are currently subject
to a maximum tax rate of 28% while ordinary income is subject to a maximum
marginal rate equal to 39.6%. Under Minnesota law, long-term capital gains are
taxed at the same rates as ordinary income. Distributions to shareholders will
not qualify for the dividends received deduction for corporations. Market
discount recognized on Minnesota Tax-Exempt Securities is taxable as ordinary
income.
Up to 20% of the assets of the Fund may be invested in securities which generate
interest that is an item of tax preference for purposes of the federal and
Minnesota alternative minimum tax ("AMT"). Moreover, all exempt interest
dividends received by corporate shareholders will be a component of "adjusted
current earnings" for purposes of the corporate AMT. Individual and corporate
taxpayers whose taxable income plus certain tax preference items less an
exemption amount multiplied by the applicable alternative minimum tax rate
exceeds regular individual or corporate income tax liability (with certain
adjustments) are subject to AMT. Because AMT liability is dependent upon the
regular tax liability and tax preference items of a specific taxpayer, investors
should consult their tax advisers regarding the AMT consequences of an
investment in the Fund.
In addition, shareholders who are or may become recipients of Social Security
should be aware that exempt-interest dividends are includable in computing
"modified adjusted gross income" for purposes of determining the amount, if any,
of social security benefits required to be included in gross income for federal
and Minnesota personal income tax purposes.
The Tax Reform Act of 1986 imposed new requirements on certain tax-exempt bonds
which, if not satisfied, could result in loss of tax exemption for interest on
such bonds, even retroactively to the date of issuance of the bonds. Proposals
to further restrict or eliminate the federal tax exemption for Minnesota
Tax-Exempt Securities may be introduced before Congress in the future. The Fund
cannot predict what additional legislation may be enacted that may affect
shareholders. If a bond in the Fund's portfolio were to lose its exempt status,
the Fund would make every effort to dispose of such investment on terms not
detrimental to the Fund.
The portion of Exempt Interest Dividends derived from interest income on
Minnesota Tax-Exempt Securities is excluded from the Minnesota gross income of
individuals, estates and trusts, so long as at least 95% of the Exempt Interest
Dividends paid by the Fund are derived from Minnesota Tax-Exempt Securities. The
remaining portion of such dividends and dividends that are not Exempt Interest
Dividends or capital gain dividends (except for dividends, if any, derived from
interest paid on obligations of the U.S. Government, its territories and
possessions) are included in the Minnesota gross income of individuals, estates
and trusts. Exempt Interest Dividends are not excludable from the Minnesota
gross income of corporations and banks.
Upon a sale or exchange of his or her shares, a shareholder will realize a
taxable gain or loss depending on his or her basis in the shares. Such gains or
loss will be treated as a capital gain or loss if the shares are capital assets
in the shareholder's hands and will be a long-term capital gain or loss if the
shares have been held for more than one year. Generally, any loss realized on a
sale or exchange will be disallowed to the extent shares disposed of are
replaced within a period of sixty-one days beginning thirty days before and
ending thirty days after the shares are disposed of. Any loss realized by a
shareholder on the sale of shares of the Fund held by the shareholder for six
months or less will be disallowed to the extent of any Exempt Interest Dividends
received by the shareholder with respect to such shares, and will be treated for
tax purposes as a long-term capital loss to the extent of any distributions of
net capital gains received by the shareholder with respect to such shares.
In certain circumstances (such as the exercise of an exchange privilege), a load
charge may not be taken into account in determining the gain or loss on the sale
on redemption of shares in the Fund within 90 days of their acquisition. In such
case, the load charge is treated as incurred with respect to the shares
subsequently purchased.
Under the Internal Revenue Code, interest on indebtedness incurred or continued
to purchase or carry Fund shares which is deemed to relate to exempt-interest
dividends is not deductible.
Entities or persons who are "substantial users" (or related persons) of
facilities financed by "private activity" bonds (some of which were formerly
referred to as "industrial development" bonds) should consult their tax advisers
before purchasing shares of the Fund. "Substantial user" is defined generally as
including a "non-exempt person" who regularly uses in its trade or business a
part of a facility financed from the proceeds of industrial development bonds.
The 1995 Minnesota Legislature has enacted a statement of intent that interest
on obligations of Minnesota governmental units and Indian tribes be included in
net income of individuals, estates and trusts for Minnesota income tax purposes
if a court determines that Minnesota's exemption of such interest unlawfully
discriminates against interstate commerce because interest on obligations of
governmental issuers located in other states is so included. This provision
applies to taxable years that begin during or after the calendar year in which
any such court decision becomes final, irrespective of the date on which the
obligations were issued. The Fund is not aware of any decision in which a court
has held that a state's exemption of interest on its own bonds or those of its
political subdivisions or Indian tribes, but not of interest on the bonds of
other states or their political subdivisions or Indian tribes, unlawfully
discriminates against interstate commerce or otherwise contravenes the United
States Constitution. Nevertheless, the Fund cannot predict the likelihood that
interest on the Minnesota Tax-Exempt Securities held by the Fund would become
taxable under this Minnesota statutory provision.
Shareholders are sent a quarterly statement of account reflecting all
transactions in the prior quarter, including dividends and gain distributions.
Also, at year-end, all shareholders are sent a statement of account and
information on the aggregate amount and tax status of dividends and gain
distributions for the just-ended calendar year.
The foregoing discussion relates to federal and Minnesota income taxation as of
the date of the Prospectus Distributions from the Fund, including
exempt-interest dividends, may be taxable in states other than Minnesota.
Prospective investors should consult their tax advisers with regard to the tax
consequences of an investment in the Fund.
WHAT IS THE FUND'S PLAN OF DISTRIBUTION?
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act. Under the terms of the Plan and the Investment Advisory and
Management Agreement (the "Agreement"), a portion of the management fee paid to
the Manager is paid to the Distributor. Under the Plan and the Agreement, the
Fund pays the Distributor, indirectly through the Manager, a monthly fee
equivalent on an annual basis to .25 of 1% of the average daily net assets of
the Fund. The fee may be used by the Distributor to (i) provide initial and
ongoing sales compensation to its investment executives and to other
broker-dealers in connection with the sale of Fund shares and to pay for other
advertising and promotional expenses in connection with the sale of Fund
("distribution expenses"), and (ii) to provide compensation to entities
("Service Entities") in connection with the provision of certain personal and
account maintenance services to Fund shareholders including, but not limited to,
responding to shareholder inquiries and providing information on their
investments ("shareholder servicing expenses").
In the future, Service Entities may include banks and other depository
institutions which, under the Glass Steagall Act and other applicable laws and
regulations, are prohibited from engaging in the business of underwriting,
selling or distributing certain types of securities. Such institutions will only
be allowed to provide administration, shareholder service and distribution
assistance if the scope of the assistance is such that, in the opinion of the
Manager, it does not fall within the aforementioned prohibition.
WHO ARE THE FUND'S FUND ACCOUNTING AGENT AND ITS CUSTODIAN?
Investors Fiduciary Trust Company serves as the Fund's fund accounting agent,
and in that capacity, maintains certain books and records pursuant to an
agreement with the Fund. Its address is 127 West 10th Street, Kansas City,
Missouri 64105.
First Bank National Association, Minneapolis, Minnesota 55440, serves as
custodian for the Fund's portfolio securities and cash, and in that capacity,
maintains certain financial and accounting books and records pursuant to an
agreement with the Fund.
WHAT SERVICES DOES THE FUND OFFER?
Information about various shareholder services is included above under "How Can
You Sell' Your Shares?" In addition, the Fund also provides the following
services:
WHAT ABOUT SHAREHOLDER INFORMATION?
For general information about the Fund, call or write SBM Financial Services,
Inc., 8400 Normandale Lake Boulevard, Suite 1150, Minneapolis, Minnesota 55437.
Its telephone number is 800-328-4735. For information about your account, call
or write the Shareholder Servicing Agent at 8400 Normandale Lake Blvd., Suite
1150, Minneapolis, Minnesota 55437-3807, telephone number 800-328-4735.
WHAT REPORTS WILL YOU RECEIVE FROM THE FUND?
As a shareholder, you will receive the Fund's annual and semi-annual reports.
You also will receive quarterly account statements confirming dividends paid by
the Fund, transactions in your account and the current balance of shares you
own.
ARE CERTIFICATES ISSUED FOR SHARES?
All shares will be issued as book credits by the Shareholder Servicing Agent.
Certificates will not be issued. Any existing certificates may be sent to the
Shareholder Servicing Agent to be transferred in your account to book credits.
OTHER SERVICES
Pre-Authorized Payments enable you to purchase Fund shares by authorizing your
bank to make regular payments from your bank account in fixed amounts.
Payments at regular intervals can be made to you from your Fund account under
the Automatic Cash Withdrawal Plan if you own or purchase shares held as book
credits worth $5,000 or more.
Further information on these services and others is available by contacting the
Distributor.
GENERAL INFORMATION ABOUT STATE BOND MINNESOTA TAX-FREE INCOME FUND
State Bond Minnesota Tax-Free Income Fund is an investment portfolio of State
Bond Tax-Free Income Funds, Inc., a non-diversified, open-end management
investment company, or mutual fund, incorporated in Maryland on December 2,
1987. The Fund has only one class of capital stock, common shares, par value
$.00001 per share. Each outstanding share has one vote and an equal right to
dividends and distributions, if any. All shares have noncumulative voting rights
for the election of directors. Each share is fully paid and nonassessable, and
each is freely transferable.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Fund may refer to "yield,"
"tax equivalent yield," "average annual total return," "cumulative total return"
or data concerning the Fund's performance since its inception. When the Fund
advertises yield, it also will advertise its average annual total return for the
most recent one year, five year, and ten year periods, or the life of the Fund,
if less.
When the advertised yield of the Fund is characterized as the "SEC 30-day
yield", it will be based upon a 30-day period stated in the advertisement and
calculated in accordance with a standardized method promulgated by regulations
of the Securities and Exchange Commission. Such yield is calculated by dividing
the net investment income per share (as defined in such regulations) earned
during the period by the maximum offering price per share on the last day of the
period. Maximum offering price includes the maximum sales charge and any other
nonrecurring charges. The result is then annualized using a formula that
provides for semi-annual compounding of income. The tax-equivalent yield is
calculated based on the Fund's yield, except that the yield is increased by
using a stated income tax to demonstrate the taxable yield necessary to produce
an after-tax yield equivalent to the Fund's yield.
Average annual total return is calculated by finding the average annual
compounded rate of return over the period that would equate the initial
investment to the ending redeemable value. Cumulative total return is the
percentage change between the public offering price of one Fund share at the
beginning of a period and the net asset value of that share at the end of the
period with dividend and capital gain distributions treated as reinvested. In
calculating the average annual total return and cumulative total return, the
maximum sales charge is deducted from the hypothetical investment and all
dividends and distributions during the period are assumed to be reinvested.
The Fund may from time to time compare its investment results to various
unmanaged indices or other mutual funds in reports to shareholders, sales
literature, and advertisements. This may include comparisons of relative
performance based upon data provided by services such as Lipper Analytical
Services, Incorporated. The results may be calculated on a total return and/or
yield basis for various periods, with or without sales charges. Results without
a sales charge will be higher. Total returns assume the reinvestment of all
dividends and capital gain distributions. The Fund also may refer to
publications which have mentioned the Fund, its Manager, or their personnel.
For additional information regarding the calculation of the Fund's yield, and
total return, see "Calculation of Performance Data" in the Statement of
Additional Information.
TAX-FREE VS. TAXABLE YIELDS. The following table shows the approximate yields
which taxable securities must earn in various income brackets to equal
tax-exempt yields under combined federal and State of Minnesota individual
income tax rates. The table is based on federal and State of Minnesota income
tax rates for taxable years beginning in 1995. The table reflects the new
federal income tax rates for individuals imposed by the revenue provisions of
the Omnibus Budget Reconciliation Act of 1993, which are applied to bracket
amounts that have been adjusted for inflation in 1995: 36% on the taxable income
of single individuals in excess of $117,950 and of married couples filing joint
returns in excess of $143,600, and a surtax of 10%, equaling an effective rate
of 39.6%, on the taxable income of individuals filing both single and joint
returns in excess of $256,500. Combined tax rates take into account the
deductibility of state income taxes for federal income tax purposes. Tax rate
brackets are subject to annual adjustments based on changes in the Consumer
Price Index. Accordingly, tax rates and taxable equivalent yields for 1996 and
subsequent years may be lower at some income levels than indicated in the table.
The table does not take into consideration any federal or Minnesota alternative
minimum tax. Therefore, to the extent Fund distributions are, and a Fund
shareholder is, subject to the federal or Minnesota alternative minimum tax,
taxable equivalent yields will be less than those set forth in this table.
Use this table to find your 1995 combined federal
and Minnesota tax bracket based on your federal taxable income (000's omitted)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
21.8% 33.8% 34.1% 36.9% 41.4% 44.7%
------ ------ ------ ------- -------- ---------
Joint $21-39 $39-84 $84-94 $94-144 $144-256 over $256
Single $15-23 $23-48 $48-57 $57-118 $118-256 over $256
</TABLE>
For each of the following combined tax brackets your taxable equivalent
yield would have to be:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
If your tax exempt yield is: 21.8% 33.8% 34.1% 36.9% 41.4% 44.7%
---------------------------- ----- ----- ----- ----- ----- -----
3.0% 3.8% 4.5% 4.6% 4.8% 5.1% 5.4%
3.5% 4.5% 5.3% 5.3% 5.5% 6.0% 6.3%
4.0% 5.1% 6.0% 6.1% 6.3% 6.8% 7.2%
4.5% 5.8% 6.8% 6.8% 7.1% 7.7% 8.1%
5.0% 6.4% 7.6% 7.6% 7.9% 8.5% 9.0%
5.5% 7.0% 8.3% 8.3% 8.7% 9.4% 9.9%
6.0% 7.7% 9.1% 9.1% 9.5% 10.2% 10.8%
7.0% 9.0% 10.6% 10.6% 11.1% 11.9% 12.7%
</TABLE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The total return for the Fund's most recent fiscal year ended June 30, 1995 was
7.10%. This total return assumes the reinvestment of all distributions and does
not include the effects of the one time sales charge. The Fund's average annual
total return for its most recent one, five, and ten-year periods is shown in the
chart that follows.
The Fund's investment performance in its most recent fiscal year was primarily
affected by the changes in interest rates and investment decisions related to
these changes. During this fiscal year, 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
7.60%, increased to over 8% 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 6.60% level as weaker economic data suggested a slowing economy.
In an effort to take advantage of these higher rates, the Fund in December used
cash balances and some sales to purchase quality issues having maturities of 16
to 18 years and yields of 6.50% to 7.10%. This extension of duration aided the
Fund's total return for this reporting period as these bonds appreciated in
value as the interest rates declined, while also producing higher yields.
The Fund continued its practice of maintaining a conservative, high quality
investment portfolio by limiting its investments to A-rated securities or
better, and of selling any securities that receive a downgrade to a rating below
A quality. The Fund also continued its practice of not purchasing or holding
securities that are subject to the Alternative Minimum Tax.
The following chart compares the performance of a hypothetical $10,000
investment in the Fund over the life of the Fund (from February 1, 1988) to the
performance of an investment in the Lehman Brothers Municipal Bond Index (the
"Index"). The information in the chart assumes that the maximum current sales
charge was paid upon acquisition of the Fund shares and reflects all Fund
expenses during the period covered. The information in the chart regarding the
performance of the hypothetical investment in the Index assumes that no sales
charge was paid upon an investment in the Index and that there were no expenses
associated with an investment in the Index. The index that is used for
comparative purposes, the Lehman Brothers Municipal Bond Index is a national
index; consequently, its performance may not be directly comparable to the
performance of the Fund, which is a single-state municipal securities fund.
Funds average annual total return for the period ending June 30, 1995:
One Year.......................................... 2.30%
Five Years........................................ 5.82%
Life of Fund (since 1-28-88)...................... 6.33%
Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
GRAPHICAL PRESENTATION COMPARING FUND AND INDEX PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1988* 1989 1990 1991 1992 1993 1994 1995
Fund Performance $9,501 $10,753 $11,343 $12,122 $13,271 $14,605 $14,721 $15,767
Index Performance $10,182 $11,342 $12,114 $13,206 $14,760 $16,526 $16,554 $18,014
* From February 1, 1988
</TABLE>
All performance data and figures are based upon past performance. The investment
return on and principal value of an investment in the Fund will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than their
original cost.
The above performance data for the Fund assumes the applicability of the current
maximum sales charge and does not include adjustments for expenses which have
changed during the periods reflected. The Manager of the Fund historically has
paid a portion of the Fund's expenses. See "Financial Highlights" above.
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED TO ON THE
COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND,
THE MANAGER OR SBM FINANCIAL SERVICES, INC. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER OR SOLICITATION BY ANYONE IN A STATE IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
The State Bond Group of Mutual Funds
GENERAL AUTHORIZATION FORM
TO OPEN A NEW ACCOUNT BY MAIL:
1. Complete the General Authorization Form. Be sure to indicate the Fund
in which your Account should be opened. Also indicate the services you
will want to use. Special attention should be given to Section 11 of
the Form. Be sure to sign the certification in Section 11.
2. Send the completed Form and your check, payable to SBM Financial
Services, Inc. to: SBM Financial Services, Inc. - 100 N. Minnesota St.
- P.O. Box 69 New Ulm, MN 56073-0069 - (800) 328-4735
TO OPEN A NEW ACCOUNT BY BANK WIRE:
1. Call the fund at 800-328-4735 to obtain an Account Number in advance.
2. Instruct your bank to wire monies to:
The account of State Bank & Trust Company of New Ulm at the Federal
Reserve
Bank of Minneapolis, Account #091901202
For further credit to Account #780
(Name of Fund)
(Your name as your account is registered)
(Your new Account Number)
3. Complete the Investment Application, indicating the services you will
want to use. Special attention should be given to Section 3B of the
Form, where you should indicate appropriate wire information. Mail the
completed Form to: SBM Financial Services, Inc. - 100 N. Minnesota
Street - P.O. Box 69 - New Ulm, MN 56073-0069
PLEASE CHECK:
___ State Bond Tax Exempt Fund Date_______________
___ State Bond U.S. Government and Agency Securities Fund
___ State Bond Cash Management Fund
___ State Bond Minnesota Tax-Free Income Fund
THIS FORM MAY NOT BE USED TO ESTABLISH OR REVISE AN ACCOUNT OR SERVICE IN STATE
BOND COMMON STOCK FUND OR STATE BOND DIVERSIFIED FUND. FORMS FOR THOSE FUNDS ARE
INCLUDED IN THEIR PROSPECTUSES, COPIES OF WHICH MAY BE OBTAINED FROM SBM
FINANCIAL SERVICES, INC., 100 N. MINNESOTA ST., P.O. BOX 69, NEW ULM, MN
56073-0069.
--------------------------------------------------------------------------------
I wish to establish ___ or revise ___ an Account (No. _______________) ___ check
enclosed for $___________ in the mutual fund checked above in accordance with
these instructions, the terms and conditions of this Form and the current
prospectus of the Fund, a copy of which I have received.
--------------------------------------------------------------------------------
1. REGISTRATION:
PLEASE PRINT NAME(S) IN WHICH AGE SHARES ARE TO BE REGISTERED WITH TRUST NAME IF
APPLICABLE______________________________________________________________________
MAILING ADDRESS:________________________________________________________________
STREET OR P.O. BOX______________________________________________________________
CITY____________________________ STATE______ ZIP CODE_________
HOME PHONE______________________
BUSINESS PHONE__________________
AGE_____
BIRTHDATE_____
--------------------------------------------------------------------------------
2. LEGAL FORM OF OWNERSHIP (check one)
1. ___ Individual ownership
2. ___ Joint tenants with right of survivorship
3. ___ Tenants in common
4. ___ Corporate ownership
5. ___ Partnership ownership
6. ___ Uniform Gifts/Transfers to Minors Act of State of
7. ___ IRA*
8. ___ Tax-Qualified Retirement Plan*
9. ___ Trust (date trust established )
* Additional documentation may be required.
OBJECTIVE SUITABILITY INFORMATION
_______ Conservation of Capital Approx. income $______________
_______ Income Approx. Net Worth (exclusive
_______ Long term growth of property, home, furnishings
_______ Speculative capital gains and automobiles)$_____________
_______ Deferral of taxes Approx. Tax Bracket___________
Employer_________________________________________
Business Address_________________________________
_________________________________
Occupation_______________________________________
Is client of legal age? ___ Yes ___ No
Is client employed by or registered with another securities firm? ___ No
____ Yes with_________________________________________
Prior investment experience years_____
NOTE: if client refuses to provide information have client initial here_________
--------------------------------------------------------------------------------
3. INITIAL INVESTMENT
A. If purchase is by check: attach it to application and mail to the Fund.
Enclosed is my check payable to SBM Financial Services, Inc. for $__________
B. If purchase is by wire, instruct your bank to follow the wire instructions.
Wire sent in the amount of $________ through (NAME OF BANK)__________________
Fund Account Number_______________ Date of Wire__________ Branch_____________
--------------------------------------------------------------------------------
4. DIVIDENDS AND GAIN DISTRIBUTIONS
I elect to receive: ___ 1. Dividends in shares, gain distributions in
shares.
___ 2. Dividends in cash, gain distributions
in shares.
___ 3. Dividends in cash, gain distributions
in cash.
NOTE: IF NO ELECTION IS MADE, OPTION NO. 1 AUTOMATICALLY
WILL BE PUT INTO EFFECT.
Dividends and gain distributions will be invested at net asset value.
These options do not apply for Automatic Cash Withdrawal Service.
--------------------------------------------------------------------------------
5. PRE-AUTHORIZED PAYMENTS
___ Please arrange with my bank to draw pre-authorized
payments and invest $ __________________in my Account
___ Monthly ___ Twice a Month ___ Every Other Month ___
Quarterly on the: ___ 1st of Month ___ 16th of Month
I have completed the attached "Bank Authorization to Honor Pre-Authorized
Payments." (Also complete Section 4 above)
--------------------------------------------------------------------------------
6. AUTOMATIC CASH WITHDRAWAL
___ Please send a check for $________beginning on the 15th day of_____________
19____, and thereafter on the 15th day of every:
___ Month ___3rd Month___ 6th Month ___ 12th Month
Make payments to:
Name_________________________________________
Address _____________________________________
City___________________ State_______ Zip_____
Shares having a current value at offering price of $5,000 or more must be held
in the Account at initiation of Service, and all shares must be in "book credit"
form.
--------------------------------------------------------------------------------
7. LETTER OF INTENT
I intend to purchase, although I am not obligated to do so, shares of the
above-designated Fund, and one or more of the other mutual funds in the State
Bond Group which bear a sales charge as written in below, within a 13-month
period which, together with the present net total asset value of sharesnow
owned, by me, will aggregate at least:
___ $50,000 ___ $100,000 ___ $250,000
___ $500,000 ___ $1,000,000 ___ $2,000,000
I agree to the escrowprovisions contained in this application.
___ This Letter of Intent may bebackdated up to 90 days to include shares
previously purchased. Backdate to_________________.
--------------------------------------------------------------------------------
8. DIVIDEND DIRECTION OPTION
If you wish to have your dividend payments made to another party
please complete the following:
I hereby authorize and request that my dividend payments be made to:
Name____________________________________________________________________________
Address _______________________________________________________________________
City__________________________________ State______________________Zip___________
Signature Investor______________________________________________________________
Signature Co-Investor___________________________________________________________
--------------------------------------------------------------------------------
9. CHECK REDEMPTION SERVICE
All registered owners of your Fund Account (as listed in Section 1) must sign
below. I (we) understand if this Check Redemption Service is elected, that no
certificates for shares will be issued. By signing this section, I (we) agree to
all of the terms and conditions set forth in the prospectus and application.
1.____________________________ 2.___________________________
3.____________________________ 4.___________________________
___ Check here if only one signature is required on checks
___ Check here if a combination is required and specify number
ACCOUNTS IN THE NAMES OF CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC. MUST INDICATED
THE LEGAL TITLES OF ALL AUTHORIZED SIGNATORIES. SHAREHOLDERS ELECTING THIS
SERVICE ARE SUBJECT TO THE CONDITIONS CONTAINED IN THIS APPLICATION.
--------------------------------------------------------------------------------
10. QUICK REDEMPTION SERVICE
NO REDEMPTION OF SHARES PURCHASED BY CHECK WILL BE PERMITTED WITHIN 15 DAYS OF
THE CREDIT OF THOSE SHARES TO YOUR ACCOUNT.
I hereby authorize the Fund to honor telephone or written instructions received
from me for the redemption of Fund shares without a signature and believed by
the Fund to be genuine. To provide me with the proceeds of the redemption
quickly, proceeds in the minimum amount indicated in the Fund's current
Prospectus will be sent ONLY to the commercial bank listed below for credit to
my account. I understand that records of such instructions will be binding.
Please wire proceeds to______________________________________
Name of Commercial Bank
(Savings Bank May Not Be Used)
Account Name__________________________
Account Number________________________
Address of Bank_________________________________________
City_________________________State_____Zip Code_________
Date_________________
SIGN HERE: Signature(s) of Investor(s) (x)_______________(x)____________________
--------------------------------------------------------------------------------
11. SIGNATURE
Under penalties of perjury I certify that the number shown on this form is my
correct taxpayer identification number/social security number and that I am not
subject to backup withholding either because I have not been notified that I am
subject to backup withholding as a result of a failure to report all interest or
dividends, or the Internal Revenue Service has notified me that I am no longer
subject to backup withholding. I (we) certify that I (we) are of legal age and
that I (we) have legal capacity to purchase or redeem shares of the Fund for my
(our) own Account, or for the Account of the organization named below. I (we)
have received a current Prospectus of the Fund and appoint SBM Financial
Services, Inc. as my (our) agent to act in accordance with my (our) instructions
herein.
SIGNATURE (x)__________________________ SIGNATURE (x)___________________________
SOC. SEC. NO. OR TAXPAYER SOC. SEC. NO. OR TAXPAYER
IDENTIFICATION NO._____________________IDENTIFICATION NO._______________________
--------------------------------------------------------------------------------
12. DEALER INFORMATION ONLY
Please establish the Account specified by the investor and purchase through SBM
Financial Services, Inc., general distributor, at the public offering price,
shares which you are authorized to purchase from us for the investor. The
investor is authorized To send any future payments directly to you for
investment. Confirm each transaction to the investor and to us. We guarantee the
genuineness of the investor's signature. We are a duly registered and licensed
dealer and have a sales agreement with SBM Financial Services, Inc.
Dealer Name __________________________________________
Address_______________________________________________
City___________________State________Zip Code__________
Representative's Name__________________________________Number___________________
Address_______________________________________________
City___________________State________Zip Code__________
(x) Authorized Signature of Broker/Dealer________________________Date___________
Representative's Phone Number (____ )________
--------------------------------------------------------------------------------
FOR INTERNAL USE ONLY
Accepted by: SBM Financial Services, Inc.
# of shares owned:
Net asset value as of date of LOI:
Value as of date of LOI
By_________________________________________
Authorized Signature
Accounts eligible for the Rights of Accumulation or to be used toward completion
of a Letter of Intent.
Name Fund Account No.
Name Fund Account No.
Name Fund Account No.
Name Fund Account No.
Name Fund Account No.
The State Bond Group of Mutusl Funds
Request and Authorization for Pre-Authorization Payments
To: SBM Financial Services, Inc.
100 North Minnesota Street
P.O. Box 69
New Ulm, MN 58073-0069
To Start your Pre-Authorized Payment Service, fill out Section A and the
"Bank Authorization to Honor Pre-Authorized Payments" below, and forward it with
an unsigned blank check from your regular checking account (marked "void").
================================================================================
A. PRE-AUTHORIZED PAYMENTS
Please arrange with my bank to draw pre-authorized payments and invest
$________________ in my Account:
_____Monthly _____ Twice a Month _____ Every Other Month ______ Quarterly
On the ___1st of Month ___16th of Month
I have completed the "Bank Authorization To Honor Pre-Authorized Payments"
below.
If notcompleted, the 1st will be assumed.
Starting Month______________Signature(s) of Investor(s)_________________________
================================================================================
BANK AUTHORIZATION TO HONOR PRE-AUTHORIZED PAYMENTS
AUTHORIZATION TO HONOR DEBITS (INCLUDING CHECKS, DRAFTS, AND OTHER ORDERS
WHETHER BY ELECTRONIC OR PAPER MEANS) BY SBM Financial Services, Inc..
Depositor's Name:_______________________________________________________________
(Print name(s) exactly as shown on my Bank, or other Financial Institution,
Account)
Depository Name:_______________________________________________________________
(Print name of Bank or Financial Institution and Branch, if any)
________________________________________________________________________________
(Print address of Bank, Financial Institution or Branch where Account is
maintained)
I hereby authorize SBM Financial Services, Inc. to initiate debt entries to my
account as listed below and the depository named above to debit the same to such
account. This authorization will remain in full force and effect until SBM
Financial Services, Inc. and depository receive written notification from either
of them to the other and in such time and in such manner so as to afford SBM
Financial Services, Inc. and depository a reasonable opportunity to act on it.
Signature of Depositor X____________________________________________________
If required by the Financial Institution,
Signature of Joint Depositor X_________________________________________________
My Account Number at said Financial Institution is_______________Date___________
SBM Financial Services, Inc.
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
TERMS AND CONDITIONS
OPEN ACCOUNT
Investments will be made in as many shares of the Fund, including fractions
to the third decimal place, as can be purchased at the public offering price at
the close of business on the day the order is accepted. Shareholders will
receive dividends from investment income and any distributions from long-term
gain realized on investments in shares or in cash according to the option
elected. Dividend and gain options may be changed at any time by notifying the
Fund in writing. Stock certificates will not be issued.
PRE-AUTHORIZED PAYMENT SERVICE
The Pre-Authorized Payment Service is available to all shareholders. Your
application is subject to acceptance by your bank and the Fund. Payments in the
amount specified will be drawn automatically on your bank on the day of each
month in which an investment is scheduled and invested at the public offering
price at the close of business on the same date. If a payment is not honored by
your bank, the Service will be suspended. It will be reinstated upon written
request indicating that the cause of interruption has been corrected. This
Service may be terminated by you or the Fund at any time by written notice. You
agree to hold the Fund and its agents free from all liability which may result
from acts done in good faith and pursuant to these terms. Instructions for
establishing Pre-Authorized Payment Service are given on the following page.
AUTOMATIC CASH WITHDRAWAL SERVICE
All income and gain distributions on shares held in your account subject to
this withdrawal service will be reinvested in additional shares. A sufficient
number of full and fractional shares will be redeemed to provide the amount
requested. You may change the amount of scheduled payments or you may suspend
payments for not more than one year by written notice to the Fund at least ten
days prior to the effective date of such a change or suspension. Your service
may be terminated by you or the Fund at any time by written notice. It will be
terminated upon proper notification of the death or legal incapacity of the
shareholder. The Service may be considered terminated in the event a withdrawal
of shares, other than to make scheduled withdrawal payments, reduces the value
of shares remaining on deposit to less than $5,000. Redeeming shares to make
these payments represents a return of capital and will result in tax
consequences. Withdrawals, concurrently with purchases of shares of this or any
other investment company will be disadvantageous to you because of the payment
of duplicative sales charges. For this reason, additional purchases of Fund
shares when the Withdrawal Service is in effect are discouraged.
LETTER OF INTENT
SBM Financial Services, Inc. will hold in escrow shares equal to 5% of the
minimum purchase amount specified. Dividends and distributions on the escrowed
shares will be paid to you or credited to your Account. Upon completion of the
specified minimum purchase within the thirteen-month period, all shares held in
escrow will be deposited in your account or delivered to you. You may include
the total asset value of shares of the State Bond Funds (except State Bond Cash
Management Fund shares) owned as of the date of a Letter of Intent toward the
completion of the Letter. If the total amount invested within the thirteen-month
period does not equal or exceed the specified minimum purchase, you will be
requested to pay the difference between the amount of the sales charge paid and
the amount of the sales charge applicable to the total purchase made. If, within
20 days following the mailing of a written request, you have not paid this
additional sales charge to SBM Financial Services, Inc., sufficient escrowed
shares will be redeemed for payment of the additional sales charge. Shares
remaining in escrow after this payment will be released to your Account. The
Letter of Intent may be backdated by as much as 90 days to change the purchase
price for previous purchases. The thirteen-month period begins on the date to
which you have backdated.
Shares of the State Bond Cash Management Fund, which have been acquired by
an exchange may be taken into account in completing a Letter of Intent or for
Rights of Accumulation. However, shares of that Fund which have been purchased
directly may not be used for purposes of determining reduced sales charges on
additional purchases of the other Mutual Funds in the State Bond Group.
CHECK REDEMPTION SERVICE
1. REDEMPTION AUTHORIZATION: The signatory(ies) whose signature(s) appear
on the general authorization form, intending to be legally bound, hereby agree
each with the other and with State Bank & Trust Company of New Ulm, Minnesota
("Bank") that the Bank is appointed agent for such person(s) and, as such agent,
is directed to request the Transfer Agent of the "Fund" to redeem shares of the
Fund, registered in the name of such Signatory(ies) upon receipt of, and in the
amount of checks drawn upon his (their) Fund account. The Fund or its Transfer
Agent shall deposit the proceeds of such redemptions in said account or
otherwise arrange for application of such proceeds to payments of said checks.
The Bank is expressly authorized to commingle such proceeds in this account with
the proceeds of the redemption of the shares of other stockholders of the Fund.
The Bank is expressly authorized to honor checks as redemption instructions
hereunder without requiring signature guarantees, and neither the Fund's
Transfer Agent nor the Bank shall be liable for any loss or liability resulting
from the absence of any such guarantee.
2. CHECK PAYMENT. The Signatory(ies) authorizes and directs the Bank to pay
each check presented hereunder, subject to all laws and Bank rules and
regulations pertaining to checking accounts. In addition, the Signatory(ies)
agree(s) that:
(a) No check shall be issued or honored, or any redemption effected,
in an amount less than the minimum amount indicated in the Fund's
current Prospectus.
(b) No check shall be issued or honored, or redemption effected, for
any amounts represented by shares for which certificates have been
issued.
(c) No check shall be issued or honored, or redemption effected, for
any amounts represented by shares unless payment for such shares has
been made in full and any checks given in such payment have been
collected through normal banking channels.
(d) No check shall be honored unless the Fund has provided the Bank,
from the proceeds of redemption or otherwise, collected funds for the
payment of such check.
(e) Checks issued hereunder cannot be cashed over the counter at State
Bank & Trust Company of New Ulm, Minnesota.
(f) Check redemption of fund shares purchased within 15 days prior to
the redemption may be limited as further described in the prospectus;
and
(g) Checks shall be subject to any further limitations set forth in
the prospectus issued by the Fund including without limitation any
additions, amendments and supplements thereto.
3. DUAL OWNERSHIP: If more than one person is indicated as a registered
owner of the shares of the Fund, as by joint ownership, ownership in common, or
tenants by the entireties, then (a) each registered owner must sign this form,
(b) all checks will require all signatures unless a lesser number is indicated
on the face of this form and (c) each signatory guarantees to the Bank the
genuineness and accuracy of the signature of the other Signatory(ies).
4. CHARGES: Bank is authorized to redeem sufficient Fund shares each month,
or from time to time, to cover the prevailing applicable charges on this
account. You will be notified in advance of any changes in charges for this
service.
5. TERMINATION: The Bank or the Fund may at any time terminate this
account, related share redemption service and Bank's agency for the
Signatory(ies) hereto without prior notice by Bank to any of the Signatory(ies).
6. HEIRS AND ASSIGNS: These terms and conditions shall bind the respective
heirs, executors, administrators and assigns of the Signatory(ies).
PROSPECTUS
NOVEMBER 1, 1995
STATE BOND
MINNESOTA TAX-FREE
INCOME FUND 8400 Normandale Lake Blvd.
Suite 1150
Minneapolis, Minnesota 55437-3807 STATE BOND
MINNESOTA TAX-FREE
INCOME FUND
INVESTMENT MANAGER:
ARM Capital Advisors, Inc.
200 Park Avenue [LOGO]
20th Floor
New York, New York 10166
A MUTUAL FUND SEEKING
TO MAXIMIZE
CURRENT INCOME
EXEMPT FROM FEDERAL
AND MINNESOTA PERSONAL
INCOME TAXES TO THE
EXTENT CONSISTENT WITH
PRESERVATION OF CAPITAL
DISTRIBUTOR
SBM Financial Services, Inc.
8400 Normandale Lake Blvd.
Suite 1150
Minneapolis, Minnesota 55437-3807
TRANSFER, REDEMPTION AND
OTHER SHAREHOLDER
ACCOUNT SERVICES:
SBM Financial Services, Inc.
8400 Normandale Lake Blvd.
Suite 1150
Minneapolis, Minnesota 55437-3807
PORTFOLIO SECURITIES
CUSTODIAN:
First Bank National Association
Minneapolis, Minnesota 55440
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1995
STATE BOND MINNESOTA TAX-FREE INCOME FUND
8400 Normandale Lake Boulevard
Suite 1150
Minneapolis, Minnesota 55437-3807
Telephone No. (612) 835-0097
This Statement of Additional Information supplements the information
contained in the current Prospectus of State Bond Minnesota Tax-Free Income Fund
(the "Fund") dated November 1, 1995. This Statement of Additional Information is
not a Prospectus, but should be read in conjunction with the Fund's Prospectus,
which may be obtained by contacting the Fund at the address or telephone number
noted above.
TABLE OF CONTENTS
Page
What Are The Fund's Investment Objectives, Policies, and Risks?................
(See "What Are The Fund's Investment Objectives And Policies?"
in the Prospectus)
Calculation of Performance Data................................................
What Are The Fund's Investment Limitations?....................................
Who Manages The Fund?..........................................................
(See "How Is The Fund Managed?" in the Prospectus)
The Manager....................................................................
Management Agreement And Expenses..............................................
(See "How Is The Fund Managed?" in the Prospectus)
Transfer Agent.................................................................
Plan of Distribution...........................................................
(See "What About the Plan of Distribution?" in the Prospectus)
Custodian......................................................................
Independent Auditors...........................................................
Portfolio Transactions And Brokerage...........................................
(See "What Are the Fund's Brokerage Commissions?" in the Prospectus)
Purchase Of Shares.............................................................
Offering Price.................................................................
How Are Shares Distributed?....................................................
How Can You "Sell" Your Shares?................................................
How Is Net Asset Value Per Share Determined?...................................
Tax Status Of The Fund.........................................................
Additional Tax Information.....................................................
Will The Fund Withhold Taxes On Distributions?.................................
General Information............................................................
Financial Statements...........................................................
Appendix A - Description of Tax-Exempt Securities Ratings...................A-1
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS STATEMENT OF ADDITIONAL
INFORMATION OR THE PROSPECTUS DATED NOVEMBER 1, 1995, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT
CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE OR JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. THE DELIVERY OF THIS STATEMENT OF
ADDITIONAL INFORMATION AT ANY TIME SHALL NOT IMPLY THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF.
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?
The Fund's investment objective is to maximize current income exempt from
both federal income tax and Minnesota personal income tax to the extent
consistent with preservation of capital. In addition, as more fully described in
the Prospectus, the Fund may invest up to 20% of its assets in taxable
fixed-income securities, may invest up to 25% of its assets in unrated Minnesota
Tax-Exempt Securities (as defined in the Prospectus), may enter into repurchase
agreements and may purchase securities on a when-issued basis. The Fund may only
purchase Minnesota Tax-Exempt Securities that are not rated within the three
highest grades by either Moody's or Standard & Poor's or are unrated if such
securities are at all times fully insured as to the scheduled payment of all
installments of principal and interest. See "Insurance" in the Prospectus.
PORTFOLIO TURNOVER
Portfolio turnover rate for a fiscal year is the ratio of the lesser of
annual purchases or sales of portfolio securities to the average monthly value
of portfolio securities, excluding securities whose maturities at acquisition
were one year or less. The Fund cannot accurately predict its annual portfolio
turnover rate, but anticipates that it will not exceed 100%. The Fund's
portfolio turnover rate will not be a limiting factor when the Manager deems it
desirable to sell or purchase securities. The Fund's portfolio turnover rate was
6% for the fiscal year ended June 30, 1995.
FIXED-INCOME SECURITIES
Although the Manager seeks to manage the Fund with a view toward reducing
the price volatility of its portfolio, the net asset value of the Fund will
change with changes in the value of its portfolio securities. When interest
rates decline, the value of a fixed-income portfolio can be expected to rise.
Conversely, when interest rates rise, the value of a fixed-income portfolio can
be expected to decline.
Interest rate fluctuations may affect payment expectations on fixed-income
securities. For example, certain municipal obligations may contain redemption or
call provisions. If an issuer exercises these provisions in a declining interest
rate market, the Fund would likely have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition, a
municipal obligation's value will decrease in a rising interest rate market,
resulting in a decrease in the value of the Fund's assets. If the Fund
experiences unexpected net redemptions, this may force it to sell its portfolio
securities without regard to their investment merits, thereby decreasing the
asset base upon which the Fund's expenses can be spread and possibly reducing
the Fund's rate of return.
For a discussion of the risks associated with investing in fixed-income
securities of issuers located in the State of Minnesota, see the Prospectus.
HIGH-YIELD SECURITIES
The Fund currently does not invest in securities rated below A by Standard
& Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"),
and has no current intention of investing in such securities. In addition, as is
discussed in the next section, it is a fundamental policy of the Fund that the
Fund will not acquire securities that are not rated in the three highest grades
by S&P or Moody's unless those securities are covered by insurance guaranteeing
the scheduled payment of principal and interest thereon.
Securities rated BB or B by S&P or Ba or B by Moody's (or equivalently
rated by another nationally recognized statistical rating organization) are
below investment grade and generally will involve more credit risk than
securities in the higher rating categories. Such securities are commonly known
as "junk" bonds. In some cases such securities are subordinated to the prior
payment of senior indebtedness, thus potentially limiting the holder's ability
to receive payments or to recover full principal when senior securities are in
default. Also, during an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet projected business goals, and to obtain additional
financing. If the Fund did acquire any lower-rated securities, upon any default,
the Fund could incur additional expenses to the extent it is required to seek
recovery of the payment of principal or interest on the relevant portfolio
holding. The credit risks associated with lower-rated securities may be reduced
by the Fund's policy of not acquiring securities that are not rated in one of
the top three grades by S&P or Moody's unless those securities are covered by
insurance guaranteeing scheduled payments of principal and interest. See
"Insurance" in the Prospectus.
In addition, lower-rated securities may be thinly traded, which may have an
adverse impact on market price and the ability of the holder to dispose of
particular issues when necessary to meet its liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. A thinly traded market also may interfere with the ability of the holder
to accurately value high-yield securities and, consequently, value the Fund's
assets. Furthermore, adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the value and liquidity of
high-yield securities, especially in a thinly traded market.
Yields on high-yield securities will fluctuate over time. The prices of
high-yielding securities have been found to be less sensitive to interest rate
changes than higher-rated investments, but more sensitive to adverse economic
changes or developments affecting the issuer. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of high-yielding securities and, to the extent the Fund acquires
such securities, the Fund's asset value.
For more information covering the rating categories of debt securities and
commercial paper, see Appendix A to this Statement of Additional Information.
INSURANCE
Minnesota Tax-Exempt Securities that are not rated within the three highest
grades by either Moody's or S&P or are unrated will be purchased by the Fund
only if such securities are covered by insurance guaranteeing the scheduled
payment of principal and interest thereon.
As described in the Prospectus, the Fund will receive payments of insurance
for any installment of interest or principal due for payment but which shall be
unpaid by reason of nonpayment by the issuer. The term "due for payment" means,
when referring to the principal of a security, its stated maturity date or the
date on which it shall have been called for mandatory sinking fund redemption
and does not refer to any earlier date on which payment is due by reason of call
for redemption (other than by mandatory sinking fund redemption), acceleration
or other advancement of maturity, and means, when referring to interest on a
security, the stated date for payment of interest. However, when the interest on
the security shall have been determined, as provided in the underlying
documentation relating to such security, to be subject to federal income
taxation, "due for payment" also means, when referring to the principal of such
security, the date on which it has been called for mandatory redemption as a
result of such determination of taxability, and when referring to interest on
such security, the accrued interest at the rate provided in such documentation
to the date on which it has been called for such mandatory redemption, together
with any applicable redemption premium.
The insurance feature insures the scheduled payment of interest and
principal and does not guarantee the market value of the insured municipal
securities nor the value of the shares of the Fund.
FINANCIAL GUARANTY INSURANCE COMPANY. Financial Guaranty, domiciled in the
State of New York, commenced its business of providing insurance and financial
guarantees for a variety of investment instruments in January, 1984. Since 1989,
Financial Guaranty has been a wholly owned subsidiary of GE Capital Corporation.
Financial Guaranty, in addition to providing insurance for the payment of
interest on and principal of municipal bonds and notes held in unit investment
trust and mutual fund portfolios, provides insurance for new and secondary
market issues of municipal bonds and notes and for portfolios of new and
secondary market issues of municipal bonds and notes. Financial Guaranty expects
to provide other forms of financial guarantees in the future. It is also
authorized to write fire, property damage liability and fidelity and surety
insurance. As of June 30, 1995, the total capital base (capital and surplus plus
contingency reserve) of Financial Guaranty was approximately $1.136 billion.
Financial Guaranty is currently licensed to provide insurance in 50 states
and the District of Columbia, files reports with state insurance regulatory
agencies and is subject to audit and review by such authorities. Financial
Guaranty is also subject to regulation by the New York State Insurance
Department. Such regulation, however, is no guarantee that Financial Guaranty
will be able to perform on its contracts of insurance in the event a claim
should be made thereunder at some time in the future.
The information relating to Financial Guaranty contained above and in the
Prospectus has been furnished by such corporation. The financial information
about Financial Guaranty contained in the Registration Statement and Prospectus
is unaudited but appears in reports or other materials filed with and subject to
audit and review by state insurance regulatory authorities. No representation is
made as to the accuracy or adequacy of such or as to the absence of subsequent
material adverse changes in such information.
The policies of insurance obtained by the Fund from Financial Guaranty and
the agreements and negotiations in respect thereof represent the only
relationship between Financial Guaranty and the Fund. Otherwise, neither
Financial Guaranty nor any affiliate has any significant relationship, direct or
indirect, with the Fund or its Manager. The Portfolio Insurance Policy is
terminable by the Fund upon sixty days' prior written notice to Financial
Guaranty. If it becomes necessary or desirable to do so, the Fund may terminate
the Portfolio Insurance Policy with Financial Guaranty and obtain portfolio
insurance from a comparable carrier.
CALCULATION OF PERFORMANCE DATA
SEC 30-DAY YIELD
Advertisements and other sales literature for the Fund may quote "SEC
30-day yield," "tax equivalent yield,"and "total return" data. Such performance
data is computed on a standardized basis pursuant to formulas established by the
rules and regulations of the Securities and Exchange Commission.
The Fund's SEC 30-day yield for the 30-day period ended June 30, 1995 was
4.20%. Such yield is computed by dividing the net investment income per share
(as defined under Securities and Exchange Commission rules and regulations)
earned during the computation period by the maximum offering price per share on
the last day of the period, according to the following formula:
a-b 6
YIELD = 2[(----+1)-1]
cd
WHERE: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
TAX EQUIVALENT YIELD
The Fund's tax equivalent yield for the 30-day period ended June 30, 1995
was 6.73%. The Fund calculates its tax equivalent yield over a 30-day period.
The tax equivalent yield will be determined by first computing the yield as
discussed above. The Fund will then determine what portion of the yield is
attributable to securities, the income of which is exempt for federal tax
purposes. This portion of the yield will then be divided by one minus 39.6% (the
assumed maximum tax rate for individual taxpayers not subject to the Alternative
Minimum Tax) and then added to the portion of the yield that is attributable to
other securities.
Tax Fund's tax equivalent yield is calculated according to the
following formula:
Tax Equivalent Yield = Yield
--------
1-.396
AVERAGE ANNUAL TOTAL RETURN
The Fund's average annual total return over the one and five year periods
ended June 30, 1995 and the life of the Fund was as follows:
<TABLE>
<CAPTION>
Life of Fund
One Year Five Years (From January 28, 1988)
-------- ---------- -----------------------
<S> <C> <C> <C>
Average Annual
Total Return: 2.30% 5.82% 6.33%
</TABLE>
The average annual total return figures are computed by finding the average
annual compounded rates of return over the periods indicated that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
n
P(1+T) = ERV
WHERE: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period.
This calculation deducts the maximum sales charge from the initial
hypothetical $1,000 investment, assumes all dividends and capital gains
distributions are reinvested at net asset value on the appropriate reinvestment
dates as described in the Prospectus, and includes all recurring fees, such as
investment advisory and management fees, charged to all shareholder accounts.
CUMULATIVE TOTAL RETURN
Cumulative total return is computed by finding the cumulative compound rate
of return over the period indicated that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
CTR = ERV - P
------- X 100
P
WHERE:
CTR = cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of period.
P = initial payment of $1,000
This calculation assumes all dividends and capital gains distributions are
reinvested at net assets value on the appropriate reinvestment dates as
described in the prospectus and includes all recurring fees, such as investment
advisory and management fees, charged to all shareholder accounts.
OTHER YIELDS
Current and effective yields of the Fund, not calculated in accordance with
the guidelines of the SEC as explained above, may be quoted in reports and sales
literature. Non-SEC current yield is computed based upon a recent
seven-calendar-day period by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, dividing the net change in account
value by the value of the account at the beginning of the period to obtain a
base period return, and multiplying the base period return by 365/7. Non-SEC
effective yield is computed by annualizing the seven-day return with all
dividends reinvested in additional Fund shares. The Fund's non-SEC yield
quotation may be inclusive or exclusive of taxable income, if any, as indicated
in such quotation. The Fund's non-SEC yield may fluctuate daily depending upon
such factors as market conditions, the composition of the Fund's portfolio and
operating expenses. Therefore, the Fund's non-SEC yield in the future may be
higher or lower than its past non-SEC yields and there can be no assurance that
historical yields will continue. That the Fund's non-SEC current yield will
fluctuate and that shareholders' principal is not guaranteed or insured should
be taken into account when comparing the yield on an investment in Fund shares
with yields on fixed-yield investments, such as insured savings accounts. These
factors and possible differences in the methods used in calculating non-SEC
yield should be considered when comparing the Fund's non-SEC current yield to
non-SEC yields published for other investment companies and other investment
vehicles. Yield should also be considered relative to changes in the value of
the Fund's shares and the Fund's investment goals and policies.
WHAT ARE THE FUND'S INVESTMENT LIMITATIONS?
Under the Fund's fundamental policies, which cannot be changed except by
vote of a majority of its outstanding voting securities, the Fund may not:
1. Borrow money, except for temporary purposes in emergency situations in
an aggregate amount not to exceed 20% of the value of the total assets
of the Fund; provided, that borrowings in excess of 5% of such value
will be only from banks, and the Fund will not purchase additional
portfolio securities while its borrowings exceed 5%;
2. Underwrite the securities of other issuers, except insofar as it may
technically be deemed an underwriter under the Securities Act of 1933
in selling a portfolio security;
3. Purchase securities of any issuer if immediately thereafter, with
respect to 50% of the Fund's total assets, more than 5% of such assets
would be invested in the securities of any one issuer, except that
this limitation does not apply to obligations issued or guaranteed as
to principal and interest either by the U.S. government or its
agencies or instrumentalities;
4. Purchase industrial development revenue bonds (which shall be
interpreted to include private activity bonds) if immediately
thereafter more than 25% of the Fund's assets would be invested in
revenue bonds which are based, directly or indirectly, on the credit
of private entities in any one industry or in securities of private
issuers in any one industry;
5. Issue any senior securities (as defined in the Investment Company Act
of 1940, as amended);
6. Buy or hold any real estate or real estate investment trust
securities;
7. Buy or hold any commodity or commodity futures contracts, or any oil,
gas or other mineral exploration or development program;
8. Make loans, except to the extent that the purchase of bills, notes,
bonds or other debt obligations or the entry into repurchase
agreements may be considered loans;
9. Mortgage or pledge any of its assets, except to the extent that up to
a maximum of 10% of the value of its total assets may be mortgaged or
pledged if necessary to secure borrowings permitted by paragraph 1;
10. Buy securities on "margin," except that it may obtain such short-term
credits as may be necessary for the clearance of purchases or sales of
securities;
11. Make "short" sales of securities;
12. Write or purchase put or call options;
13. Buy securities which have legal or contractual restrictions on resale,
except in connection with repurchase agreements;
14. Buy securities of any issuer for the purpose of exercising control or
management; or buy securities issued by any other investment company,
except in connection with a merger, consolidation, acquisition or
reorganization;
15. Invest more than 10% of the Fund's net assets in any combination of
repurchase agreements maturing in more than seven days and other
illiquid securities;
16. Purchase Minnesota Tax-Exempt Securities (as defined in the
Prospectus) that are either not rated within the three highest grades
by either Moody's or S&P or are unrated unless such securities are
insured as to the payment of all installments of principal and
interest;
17. Invest more than 25% of its assets in Minnesota Tax-Exempt Securities
that are unrated;
18. Invest more than 20% of the value of the Fund's assets in securities
other than Minnesota Tax-Exempt Securities, except that, on a
temporary defensive basis due to market conditions, the Fund may
invest up to 100% of its assets in cash or in taxable fixed-income
securities.
If a percentage restriction described above is complied with at the time an
investment is made, a later increase or decrease in percentage resulting from a
change in values of portfolio securities or in the amount of net assets of the
Fund will not be considered a violation of the restriction.
Under the Investment Company Act of 1940, a "vote of a majority of the
outstanding voting securities" of the Fund means the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or
more of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
WHO MANAGES THE FUND?
Directors and officers of the Fund, together with information as to their
principal business occupations during the past five years, are shown below. Each
Director who is an "interested person" of the Fund, as defined in the Investment
Company Act of 1940, is indicated by an asterisk. Unless otherwise indicated,
their addresses are 239 S. Fifth Street, Louisville, Kentucky.
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS POSITION WITH THE FUND OTHER BUSINESS ACTIVITIES IN
PAST 5 YEARS
<S> <C> <C>
William B. Faulkner ( ) Director President, William Faulkner &
240 East Plato Blvd. Associates, business and institutional
St. Paul, Minnesota 55107 adviser since 1986; Consultant to
American Hoist & Derrick Company,
construction equipment manufacturer,
from 1986 to 1989; prior thereto, Vice
President and Assistant to the President
American Hoist & Derrick Company.
Director of the other mutual funds in
the State Bond Group
Patrick M. Finley (57) Director President, Universal Cooperatives, Inc.
5603 Bernard Place a farmers' cooperative, Director of the
Edina, Minnesota 55436 other mutual funds in the State Bond Group
Chris L. Mahai (39) Director Senior Vice President, Strategic Integration
425 Portland Avenue Unit, Star Tribune/Cowles Media Company,
Minneapolis, Minnesota since August 1995; Vice President, Marketing
Director, Star Tribune, since September 1992;
from 1990 to 1992, self-employed consultant
marketing services; prior thereto, Senior Vice
President of Corporate Relations and marketing
First Bank System, Inc. Direcotr of the other
Mutual funds in the State Bond Group
John R. Lindholm (46)* Director President Integrity Life Insurance Company
("Integrity") and Vice President-Chief Marketing
Officer of National Integrity Life Insurance
Company ("National Integrity") since November 26,
1993; Executive Vice President-Chief Marketing
Officer of ARM Financial Group, Inc. since July 27,
1993; since March 1992 Chief Marketing Officer of
Analytical Risk Management, L.P.; from June 1990 to
February 1992, Chief Marketing Officer and a Managing
Director of the ICH Capital Management Group, ICH
Corporation, Louisville, Kentucky; prior thereto,
Chief Marketing Officer and Managing Director for
Capital Holding Corporation's Accumulation and
Investment Group. director of the other mutual
funds in the State Bond Group and of The Legends
Funds, Inc.
Arthur J. Gartland, Jr. (48) Director President and a founder of Benedetto, Gartland &
1330 Avenue of the Americas Greene, Inc. (an investment banking firm). Director
New York, NY of the other mutual funds in the State Bond Group
and The Legends Fund, Inc.
John Katz (56) Director Investment banker since January 1991; Chairman, and
10 Hemlock Road Chief Executive Officer, Sam's Restaurant Group, Inc.
Hartsdale, NY (a restaurant holding company), from June 1991 to
August 1992; Executive Vice President (from January
1989 to January 1991) and Senior Vice President
(from December 1985 to January 1989), Equitable Investment
Corporation (an indirect wholly-owned subsidiary of The
Equitable Life Assurance Society of the United States,
through which it owns and manages its investment
operations). Director of the other mutual funds in the
State Bond Group and of The Legends Fund, Inc.
Theodore S. Rosky (57) Director Retired since 1992; Executive Vice President, Capital
2304 Speed Avenue Holding Corporation (from December 1991 to April 1992);
Louisville, KY prior thereto, Executive Vice President and Chief
Financial Officer, Capital Holding Corporation. Director
of the other mutual funds in the State Bond Group and of
The Legends Fund, Inc.
Dale C. Bauman (58) President Vice President and Sales Manager, SBM Financial Services,
8400 Normandale Lake Blvd. Inc., since June 1992; prior thereto, Vice President and
Suite 1150 Division Manager, SBM Financial Services, Inc., 1980 to June 1992.
Minneapolis, Minnesota 55437 President of the other mutual funds in the State Bond Group.
Keith O. Martens (56) Vice President Senior Portfolio Manager, ARM Capital Advisors, Inc., since
200 Park Avenue, 20th Floor June 14, 1995, Executive Vice President-Investments, SBM Company;
New York, New York 10166 Vice President State Bond and Mortgage Life Insurance Company
and SBM Certificate Company. Vice President of the other mutual
funds in the State Bond Group.
Don W. Cummings (32) Controller Controller of ARM Financial Gorup, Inc. since July 15, 1993,
and Integrity and National Integrity since November 26, 1993.
Prior to November 26, 1993 he served as Controller of ARM, Ltd,
a position he held from July 1992. Form 1985 to June 1992, Mr.
Cummings served in various positions within Ernst & Young's
Insurance Industry Accounting and Auditing Practice, the last
of which was Manager. Controller of the other mutual funds
in the State Bond Gorup and of The Legends Fund, Inc.
Kevin L. Howard (31) Vice President and Assistant General Counsel of ARM Financial Group, Inc. since
Secretary January 31, 1994; Assistant General Counsel of Capital Holding
Corporation from April 1992 to January 1994; Attorney, Greenebaum
Doll & McDonald, 1989 to April 1992. Vice President and Secretary
of the other mutual funds in the State Bond Group and Secretary of
The Legends Fund, Inc.
Peter S. Resnik (34) Treasurer Treasurer of ARM Financial Group, Inc., Integrity and National
Integrity since December 1993; employed in various financial and
operational capacities by Analytical Risk Managment Litd. since
December 14, 1992; Assistant Vice President of the Commonwealth
Life Insurance Company subsidiary of Capital Holding Corporation
from 1986 to December 1992. Treasurer of the other mutual funds
in the State Bond Group and of The Legends Fund, Inc.
Pam Freeman (28) Assistant Secretary Financial Analyst with ARM Financial Group, Inc. since October 1993;
Senior Accountant and various other capacities with Ernst & Young LLP
from 1989 to September 1993.
</TABLE>
* Mr. Lindholm is an INTERESTED PERSON, as defined in the 1940 Act, by virtue
of his positions with ARM Financial Group, Inc.
Directors of the Fund (including former Directors) received aggregate
remuneration of $5,000 during the Fund's fiscal year ended June 30, 1995.
Directors and officers of the Fund as a group owned directly or indirectly 936
shares, or 0.055% of the Fund's capital stock at June 30, 1995.
The following table sets forth, for the fiscal year ended June 30, 1995,
compensation paid by the Fund to the non-interested Directors and, for the 1994
calendar year, the aggregate compensation paid by the six funds in the State
Bond Group of mutual funds to the non-interested Directors.
<TABLE>
<CAPTION>
Total Compensation from
Aggregate State Bond Group of
Compensation Mutual Funds
Name of Director from Fund (a) (b)
--------------- ------------- ------------------------
<S> <C> <C>
William B. Faulkner $588.00 $3,528.00
Patrick M. Finley $516.00 $2,232.00
Chris L. Mahai $588.00 $3,528.00
</TABLE>
_________________________
(a) There were no pension or retirement benefits accrued for any of the named
persons by any of the funds.
(b) This includes the aggregate compensation paid to the named persons by all
of the 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 State Bond Common Stock Fund on June 24,
1994.
THE MANAGER
ARM Capital Advisors, Inc. (the "Manager") manages the investments of the
Fund and administers its business and other affairs. The address of the Manager
is 200 Park Avenue, 20th Floor, New York, New York 10166. The predecessor to the
Manager was SBM Company, which served as manager of the Fund from the Fund's
inception until June 13, 1995. The Manager assumed management of the Fund on
June 14, 1995, effective for accounting purposes as of June 1, 1995, following
the acquisition of substantially all of the business operations of SBM Company
by ARM.
The Manager is a wholly-owned subsidiary of ARM Financial Group, Inc.
("ARM"), a Delaware corporation. ARM is a financial services company providing
retail and institutional products and services to the long-term savings and
retirement market. The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan
Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P. and
MSCP III 892 Investors, L.P., investment funds sponsored by Morgan Stanley
Group, Inc. ("Morgan Stanley"), own approximately 91% of the outstanding shares
of voting stock of ARM. The Manager currently provides investment management
services to institutional and individual clients, including ARM and its
subsidiaries, with combined assets in excess of $3 billion.
The Manager is also manager of the other mutual funds in the State Bond
Group of mutual funds: State Bond Cash Management Fund, State Bond Common Stock
Fund, State Bond Diversified Fund, State Bond Tax Exempt Fund, and State Bond
U.S. Government and Agency Securities Fund.
MANAGEMENT AGREEMENT AND EXPENSES
Under the Investment Advisory and Management Agreement (the "Agreement"),
dated June 14, 1995, subject to the control of the Board of Directors, the
Manager manages the investment of the assets of the Fund, including making
purchases and sales of portfolio securities consistent with the Fund's
investment objectives and policies and administers its business and other
affairs. The Manager provides the Fund with such office space, administrative
services and executive personnel as are necessary for Fund operations. The
Manager also pays all the compensation of the directors of the Fund who are
employees of the Manager and of the officers and employees of the Fund. In
addition, the Manager pays distribution expenses pursuant to the Fund's 12b-1
Plan.
The Fund pays the Manager a management fee for its services, calculated
daily and payable monthly, equal to an annual fee of .85 of 1% of the first
$100,000,000 of average daily net assets of the Fund and .80% of 1% of the
average daily net assets of the Fund in excess of $100,000,000. A portion of
this fee is paid to SBM Financial Services, Inc. (the "Distributor") in
connection with the Fund's 12b-1 Plan (see Plan of Distribution). SBM Company,
the previous investment manager of the Fund received the following amounts from
the Fund as a management fee (excluding 12b-1 plan fees) during the periods
ended June 30, 1995, 1994, and 1993, respectively: $96,640; $96,758; and
$83,012. For the period from June 1, 1995, the effective date for accounting
purposes on which the Manager assumed its duties with respect to the Fund,
through June 30, 1995, the Manager received a management fee (excluding 12b-1
plan fees) of $9,606. The Manager has voluntary undertaken, and SBM Company
previously voluntarily undertook, to reimburse the Fund for any expenses
incurred by the Fund to the extent the Fund's total expenses exceeded 1% of
average daily net assets, despite the fact that higher expenses may be permitted
by state law. For the period June 1, 1995 to June 30, 1995, the Manager
reimbursed the Fund in the amount of $2,378. SBM Company reimbursed the Fund
during the periods ended June 30, 1995, 1994, and 1993 in the following amounts:
$40,101; $46,311; and $53,504.
The Fund pays all its expenses other than those assumed by the Manager,
including the investment advisory and management fee; outside legal, auditing
and accounting expenses; bookkeeping, record keeping, and Fund portfolio and
Fund shares pricing expenses; interest, taxes and governmental fees; expenses
incurred in connection with membership in investment company organizations;
brokerage commissions or charges, if any; fees of custodians, transfer agents,
registrars, accounting services agents, or other agents; expense of preparing
share certificates; expenses relating to the redemption or repurchase of the
Fund's shares; investor services expenses; expenses of registering and
qualifying Fund shares for sale under applicable federal and state law; expenses
of preparing, setting in print, printing and distributing prospectuses,
statements of additional information, reports, notices and dividends to Fund
shareholders; cost of stationery; costs of stockholder and other meetings of the
Fund; traveling expenses of officers, directors, and employees of the Fund, if
any; fees of the Fund's independent directors and salaries of any officers or
employees who are not affiliated with the Manager; the Fund's pro rata portion
of premiums on any fidelity bond and insurance covering the Fund; and general
corporate fees and expenses. Under the regulations of various states in which
the Fund's shares are qualified for sale, the amount of annual expenses which
the Fund may pay are limited to certain percentages of its average net assets.
The most stringent of such requirements limits such expenses, with certain
limited categories of expenses excepted, to 2 1/2% of the first $30 million of
average net assets, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets.
The Agreement was approved by the directors of the Fund, including a
majority of the disinterested directors, at a meeting held March 24, 1995, and
by the shareholders of the Fund at a meeting held May 15, 1995. The Agreement
may be terminated at any time on 60 days' written notice by the Board of
Directors, or by vote of a majority of the outstanding shares or by the Manager.
The Agreement will terminate automatically upon assignment. The Agreement will
continue in effect from year to year so long as continuance is approved annually
by either the Board of Directors of the Fund or by a vote of a majority of the
outstanding voting shares, provided that in either event such continuance is
also approved by the vote of a majority of the directors who are not parties to
such Agreement, or interested persons of such parties, cast in person at a
meeting called for the purpose of voting on such approval.
Accounting Services Agreement. Prior to June 1, 1995, SBM Company also
acted as the accounting services agent for the Fund pursuant to a separate
agreement. Under this agreement, SBM Company was paid a fee for keeping current
the books, accounts, records, journals and other records of original entry
relating to the business of the Fund. It also performed certain daily functions
in connection with the Fund's accounts and records. The Manager received $625
from the Fund for accounting services provided by the Manager during the period
June 1, 1995 through June 14, 1995. SBM Company, as the previous accounting
services agent, received the following amounts from the Fund for the periods
ended June 30, 1995, 1994, and 1993, respectively; $13,750; $15,000; and
$15,000.
TRANSFER AGENT
SBM Financial Services, Inc. acts as the transfer and dividend disbursing
agent for the Fund pursuant to an agreement with the Fund and is compensated on
a transactional basis under a schedule approved by the Fund's Board of
Directors. The transfer agent maintains shareholders lists, processes requested
account registration changes and stock certificate issuance and redemption
requests, administers withdrawal plans, administers mailing and tabulation of
Fund proxy solicitations, and administers payment of distributions declared by
the Fund. SBM Financial Services, Inc. received $610 in transfer agency fees
from the Fund for the period June 1, 1995 to June 30, 1995. SBM Company, the
Fund's previous transfer and dividend disbursing agent, received the following
amounts from the Fund for the periods ended June 30, 1995, 1994, and 1993,
respectively; $6,890; $6,200; and $5,600.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940 pursuant to which a portion of
the fees paid to the Manager is paid by the Manager to the Distributor, as
described below.
SBM Financial Services, Inc. (the "Distributor"), a subsidiary of ARM, acts
as distributor of the shares of the Fund and of the other mutual funds in the
State Bond Group. Under the Investment Advisory and Management Agreement (the
"Agreement"), a portion of the advisory fee the Fund pays the Manager is paid by
the Manager to the Distributor to be used to pay for account servicing, to
compensate those who provide administration, shareholder service and
distribution assistance (the Service Entities), and to pay certain other
expenses of selling Fund shares. As noted above, the Manager will receive a
monthly fee equivalent on an annual basis to .85 of 1% of the first $100,000,000
of average daily net assets of the Fund and .80 of 1% of the average daily net
assets in excess of $100,000,000. From this amount, .25 of 1% of the average
daily net assets of the Fund will be paid to the Distributor under the Plan. A
portion of the fee may be used for advertising and promotional expenses
including, by way of example but not by way of limitation, costs of printing and
mailing prospectuses, statements of additional information and shareholder
reports to prospective investors; preparation and distribution of sales
literature; advertising of any type; an allocation of overhead and other
expenses of the Distributor related to the distribution of Fund shares; and
payments to, and expenses of, officers, employees or representatives of the
Distributor, of other broker-dealers, banks or other financial institutions, and
of any other person who provides support services in connection with the
distribution of Fund shares, including travel, entertainment, and telephone
expenses.
The Prospectus outlines the general uses to which the Distributor is
authorized to apply the fees received by it. During the fiscal year ended June
30, 1995, the Distributor received $44,269 in such fees. The Distributor used
these fees to cover the following expenses: compensation of sales personnel -
$32,404; compensation of sales administration personnel - $16,587; sales
meetings and training - $112; marketing materials $5,241; promotion and travel -
$3,276; telephone and postage $159; and branch office expenses - $72.
The arrangements under which the Fund compensates, indirectly, those who
provide administration, shareholder service, and distribution assistance, as
described above, are set forth in the Plan. The Plan provides:
(i) That it shall continue in effect for a period of more than one year from
the date of its execution or adoption only so long as such continuance is
specifically approved at least annually by the Board of Directors and by
the Directors who are not interested persons of the Fund and have no direct
or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan;
(ii) That any person authorized to direct the disposition of monies paid or
payable by the Fund pursuant to the Plan or any related agreement shall
provide to the Fund's Board of Directors, and the Directors shall review,
at least quarterly, a written report of the amounts so expended and the
purposes for which such expenditures were made; and
(iii)That it may be terminated at any time by vote of a majority of the members
of the Board of Directors of the Fund who are not interested persons of the
Fund and have no direct or indirect financial interest in the operation of
the Plan or in any agreements related to the Plan or by vote of a majority
of the outstanding voting shares of the Fund.
The Plan provides that it may not be amended to increase materially the
amount to be spent for distribution without shareholder approval and that all
material amendments of the Plan must be approved by the Fund's Board of
Directors, including a majority of the Directors who are not interested persons
of the Fund and have no financial interest in the operation of the Plan or any
related agreements. The Fund may implement the Plan only if the selection and
nomination of the Fund's disinterested Directors are committed to the discretion
of the Fund's existing disinterested Directors. Under the terms of Rule 12b-1,
the Fund must preserve copies of any plan, agreement or report made pursuant to
the Rule for a period of not less than six years in an easily accessible place.
CUSTODIAN
First Bank National Association, Minneapolis, Minnesota 55440 serves as the
custodian for the Fund.
INDEPENDENT AUDITORS
Ernst & Young LLP, One Kansas City Place, 1200 Main Street, Kansas City,
Missouri 64105-2143, independent certified public accountants, have been
selected as auditors of the Fund and issue a report on the Fund's financial
statements.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As the Fund's portfolio is exclusively composed of debt (rather than
equity) securities, most of the Fund's portfolio transactions are effected with
dealers without the payment of brokerage commissions, but at net prices which
usually include a spread or markup. Most Fund transactions are with the issuer,
or with major dealers acting for their own account and not as brokers. In
effecting portfolio transactions the Fund seeks the most favorable net price
consistent with the best execution. However, frequently the Fund selects a
dealer to effect a particular transaction without contacting all dealers who
might be able to effect such transaction, because of the volatility of the
market and the desire of the Fund to accept a particular price for a security
because the price offered by the dealer meets its guidelines for profit, yield,
or both. No brokerage is allocated for the sale of Fund shares.
While it is not expected that the Fund will effect any transactions on an
agency basis, if it does so the Manager will seek to obtain the best price and
execution of orders. Commission rates, being a component of price, are
considered together with other relevant factors. When consistent with these
criteria, business may be placed with broker-dealers who furnish investment
research services to the Manager. Such research services include advice, both
directly and in writing, as to the value of securities, the advisability of
investing in, purchasing, or selling securities, and the availability of
securities or purchasers or sellers of securities, as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts. This allows the Manager to
supplement its own investment research activities and enables it to obtain the
views and information of individuals and research staffs of many different
securities research firms prior to making investment decisions for the Fund. To
the extent portfolio transactions are effected with broker-dealers who furnish
research services to the Manager, the Manager receives a benefit, not capable of
evaluation in dollar amounts.
The Manager has not entered into any formal or informal agreements with any
broker-dealers, and it does not maintain any "formula" which must be followed in
connection with the placement of Fund portfolio transactions in exchange for
research services provided the Manager, except as noted below. If it is believed
to be in the best interests of the Fund, the Manager may place portfolio
transactions with brokers who provide the types of services described above,
even if it means the Fund will have to pay a higher commission (or, if the
broker's profit is part of the cost of the security, will have to pay a higher
price for the security) than would be the case if no weight were given to the
broker's furnishing of those services. This will be done, however, only if, in
the opinion of the Manager, the amount of additional commission or increased
cost is reasonable in relation to the value of the services. The Manager also
serves as investment adviser for other mutual funds. To the extent that the Fund
may pay a somewhat higher brokerage commission or somewhat higher price on a
trade because such trade is executed by a broker-dealer which also provides
research and statistical services, it is possible that said research and
statistical services may also be of value to one of the other mutual funds.
However, it is felt that this possibility of mutual benefit is not capable of
measurement.
No brokerage commissions were paid by the Fund in any of the fiscal years
ended June 30, 1995, 1994 and 1993.
PURCHASE OF SHARES
WHAT REDUCTIONS ARE PROVIDED?
Volume Discounts are provided if the total amount being invested in shares
of the Fund alone, or in any combination of shares of the Fund and the other
funds in the State Bond Group having a sales charge, reaches levels indicated in
the sales charge schedule set forth in the Prospectus.
The Right of Accumulation allows you to combine the amount being invested
in shares of the Fund and the other mutual funds in the State Bond Group having
a sales charge with the total net asset value of shares of those mutual funds
already owned and the total net asset value of shares you own of State Bond Cash
Management Fund which were acquired through an exchange of shares of another
mutual fund in the State Bond Group, to determine reduced sales charges in
accordance with the schedule in the Prospectus. The value of the shares owned,
including the value of shares of State Bond Cash Management Fund acquired in an
exchange, will be taken into account in orders placed, however, only if the
Distributor is notified by you or your dealer of the amount owned at the time
your purchase is made and is furnished sufficient information to permit
confirmation.
The schedule of sales charges is also applicable to the aggregate amount of
purchases made by a single person within a period of 13 months pursuant to a
written Purchase Intention and Price Agreement (the "Letter of Intent"), a form
of which is available from the Distributor. The Letter of Intent provides for a
price adjustment applicable to the amount of intended purchases specified in the
Letter of Intent based upon the amount of purchases specified plus the total net
asset value of the shares of the other mutual funds in the State Bond Group
already owned that have a sales charge and the total net asset value of the
shares owned of State Bond Tax Exempt Fund which were acquired through an
exchange of shares. The investor considering the possibility of signing a Letter
of Intent should read it carefully. The schedule of sales charges applicable to
all amounts invested under the Letter of Intent is computed as if the aggregate
amount had been invested immediately. Reduced sales charges also may apply to
purchases made within a 13-month period starting up to 90 days before the date
of execution of the Letter of Intent. Shares with a net asset value equal to 5%
of the minimum purchase amount specified are held in escrow to be applied toward
any sales charge deficiency that might result if the Letter of Intent is not
completed. The shares so held may be redeemed and proceeds thereof used as
required to pay additional sales charges which may be due if the amount of
purchases by such person during the 13 month period aggregates less than the
amount specified in the Letter of Intent. Escrow shares not redeemed will be
delivered to the investor upon completion of purchases under the Letter of
Intent.
If the gross amount invested within the 13 month period covered by the
Letter of Intent exceeds the specified purchase amount and reaches a level
allowing a smaller sales charge, a price adjustment will be made on the day it
reaches the new level. The Letter of Intent is not a binding agreement upon the
investor to purchase, or the Fund to sell, the full indicated amount.
WHO IS ENTITLED TO REDUCTIONS?
Reductions in sales charges apply to purchases by a "single person,"
including an individual; members of a family unit comprising husband, wife and
minor children; or a trustee or other fiduciary purchasing for a single
fiduciary account, including employee benefit plans qualified under Section 401
of the Internal Revenue Code.
OFFERING PRICE
The public offering price is determined by adding to the Fund's current net
asset value per share (as described under "How is Net Asset Value Per Share
Determined?") the sales charge percentage applicable to the transaction. The
portfolio securities in which the Fund invests fluctuate in value, and hence the
net asset value per share of the Fund also fluctuates. The following sample
calculation is based upon the total net assets of the Fund on June 30, 1995 of
$18,177,953 and the total shares of the Fund outstanding as of that date of
1,713,138 and a transaction with an applicable sales charge of the maximum 4.5%:
Net Asset Value Per Share $10.61
($18,177,953 divided by 1,713,138 ======
shares outstanding)
Maximum Offering Price Per Share $11.11
($10.61 divided by .955) ======
HOW ARE SHARES DISTRIBUTED?
SBM Financial Services, Inc., a subsidiary of ARM, acts as distributor of
the shares of the Fund and of the other mutual funds in the State Bond Group. As
distributor of the Fund's capital stock, SBM Financial Services, Inc. allows
concessions to all dealers of up to 4.0% on purchases to which the 4.5% sales
charge applies. In the event that the dealer concession is 90% or more of the
sales charge, dealers taking advantage of such concession may be deemed to be
underwriters under the Securities Act of 1933. The Distributor also pays sales
commissions to its own agents who sell Fund shares. The Distributor retains the
balance of sales charges paid by investors. The sales charges paid by investors
and received by the Distributor amounted to the following amounts during the
periods ended June 30, 1995, 1994, and 1993, respectively: $90,322; $84,012; and
$92,978. The Distributor retained these entire amounts.
The agreement between the Fund and the Distributor provides that the
Distributor will pay certain expenses such as printing costs of prospectuses and
Statements of Additional Information used in offering shares to prospective
investors, applications and confirmations, and all other expenses in connection
with the issuance and sale of the Fund's shares. The Fund will pay the costs of
registering and qualifying shares for sale and of preparing, setting in print,
and printing and distributing prospectuses to existing shareholders.
HOW CAN YOU "SELL" YOUR SHARES?
The procedure for redemption of Fund shares under ordinary circumstances is
set forth in the Prospectus.
In unusual circumstances, payment may be postponed if the orderly
liquidation of portfolio securities is prevented by the closing of, or
restricted trading on, the New York Stock Exchange during periods of emergency,
or such other periods as ordered by the Securities and Exchange Commission.
HOW IS NET ASSET VALUE PER SHARE DETERMINED?
Net asset value per Fund share is determined as of the close of the New
York Stock Exchange on each day that the New York Stock Exchange is open for
business. The New York Stock Exchange is closed on Saturdays and Sundays and is
also closed in observance of the following holidays: New Year's Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Net asset value is determined by dividing the value of the
total assets of the Fund, less liabilities, by the number of shares outstanding.
In determining net asset value, the Fund utilizes the valuations of its
portfolio securities furnished by a pricing service approved by the Board of
Directors. The pricing service values portfolio securities which have remaining
maturities of more than 60 days from the date of valuation at quoted bid prices
or the yield equivalents when quotations are readily available. 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 using methods which include consideration of yields or prices of
municipal securities and other securities in the Fund's portfolio of comparable
quality, type of issue, coupon, maturity and rating; indications as to value
from dealers; and general market conditions. The pricing service may employ
electronic data processing techniques and/or a matrix system to determine
valuations. Short-term holdings maturing in 60 days or less are valued at cost
plus accrued interest, which approximates market value.
TAX STATUS OF THE FUND
The Fund has fulfilled during its most recent fiscal year, and intends to
continue to fulfill, the requirements of subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), to qualify as a regulated investment
company, and so long as it remains so qualified, it will not be liable for
Federal income tax to the extent that it distributes all of its net taxable and
non-taxable income to shareholders.
ADDITIONAL TAX INFORMATION
Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of an investment company paying exempt-interest dividends, such
as the Fund, will not be deductible by a shareholder in proportion to the ratio
of exempt-interest dividends to all dividends other than those treated as
long-term capital gains. Minnesota law also restricts the deductibility of
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund. Indebtedness may be allocated to shares of the Fund even though not
directly traceable to the purchase of such shares.
Any loss on the sale or exchange of shares held for six months or less
(although regulations may reduce this time period to 31 days) will be disallowed
for federal income tax purposes to the extent of the amount of any
exempt-interest dividend received with respect to such shares. Except to the
extent disallowed pursuant to the preceding sentence, any loss on the sale or
exchange of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of any dividend received from long-term
capital gains with respect to such shares. Similar rules apply in the case of
individuals, estates and trusts under Minnesota law.
For federal tax purposes, if a shareholder exchanges shares of the Fund for
shares of any other fund in the State Bond Fund Group pursuant to the exchange
privilege (see "How does the Fund's Exchange Privilege Work?" in the
Prospectus), such exchange will be considered a taxable sale of the shares in
the Fund. Furthermore, if a shareholder carries out the exchange within 90 days
of purchasing the shares in the Fund, the sales charge incurred on the purchase
of those shares cannot be taken into account for determining the shareholder's
gain or loss on the sale of those shares to the extent that the sales charge on
the purchase of the later-acquired shares is reduced because of the exchange
privilege. However, the amount of the sales charge that may not be taken into
account in determining the shareholder's gain or loss on the sale of the shares
in the Fund may be taken into account in determining his gain or loss on the
eventual sale or exchange of the later-acquired shares.
Pursuant to the Code, the Fund is subject to a non-deductible excise tax
equal to 4 percent of the excess, if any, of the amount required to be
distributed pursuant to the Code for each calendar year over the amount actually
distributed. In order to avoid the imposition of this excise tax, the Fund
generally must declare dividends by the end of a calendar year representing 98
percent of the Fund's ordinary income for the calendar year and 98 percent of
its capital gain net income (both long-term and short-term capital gains) for
the twelve-month period ending October 31 of the calendar year.
Certain deductions otherwise allowable to financial institutions and
property and casualty insurance companies will be eliminated or reduced by
reason of the receipt of certain exempt-interest dividends.
Information regarding the tax status of payments you receive is set forth
in the Prospectus.
WILL THE FUND WITHHOLD TAXES ON DISTRIBUTIONS?
Under Federal law, the Fund is required, subject to certain exceptions, to
withhold and remit to the U.S. Treasury 31% of distributions and redemption
proceeds paid on an account if the holder of the account provides the Fund with
either an incorrect tax identification number or no number at all, or fails to
certify to the Fund that he is not subject to such withholding.
GENERAL INFORMATION
As previously indicated, the Fund was incorporated in Maryland on December
12, 1987. In March 1993, the Fund was reorganized as an individual investment
portfolio of a series fund, "State Bond Tax-Free Income Funds, Inc."
Under Maryland law, each director of State Bond Tax-Free Income Funds, Inc.
owes certain duties to the Fund and its shareholders. Maryland law provides that
a director shall "perform his duties as a director in good faith, in a manner he
reasonably believes to be in the best interests of the corporation and with the
care that an ordinarily prudent person in a like position would use under
similar circumstances." Fiduciary duties of a director of a Maryland corporation
include, therefore, both a duty of "loyalty" (to act in good faith and in a
manner reasonably believed to be in the best interests of the corporation) and a
duty of "care" (to act with the care an ordinarily prudent person in a like
position would use under similar circumstances). Maryland law allows Maryland
corporations to eliminate or limit the personal liability of a director or an
officer to the corporation or its shareholders for monetary damages for breach
of the fiduciary duty of "care." The Amended and Restated Articles of
Incorporation of State Bond Tax-Free Income Funds, Inc. contain a provision
eliminating liability of directors and officers to the corporation or its
shareholders to the fullest extent permitted by Maryland law. Therefore,
directors and officers of State Bond Tax-Free Income Funds, Inc. will not be
liable for monetary damages to the Fund or its shareholders for breach of the
duty of care. However, such elimination of liability is subject to several
significant limitations. Applicable Maryland law regarding a director's duty of
care does not permit the elimination or limitation of liability (1) to the
extent that it is proved that the person actually received an improper benefit
or profit in money, property or services for the amount of the benefit or profit
in money, property or services actually received; (2) to the extent that a
judgment or other final adjudication adverse to the person is entered in a
proceeding based on a finding in the proceeding that the person's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding; or (3) for any
action or failure to act occurring prior to February 18, 1988. In addition, due
to the provisions of the Investment Company Act of 1940, shareholders would
still have a right to pursue monetary claims against directors or officers for
acts involving willful malfeasance, bad faith, gross negligence or reckless
disregard of their duties as directors or officers.
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>
<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>
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>
<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>
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>
<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
-----------
TOTAL MUNICIPAL BONDS (Cost $16,386,816) 16,999,984
</TABLE>
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.
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.
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.
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.
State Bond Minnesota Tax-Free Income Fund
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------
1995 1994 1993 1992 1991
-------------------------------------------------------------
<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%.
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.
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.
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
INDEPENDENT AUDITORS' REPORT
Board of Directors of State Bond Tax-Free Income Funds, Inc.
and Shareholders of State Bond Minnesota Tax-Free Income Fund:
We have audited the accompanying balance sheet and statement of net assets of
State Bond Minnesota Tax-Free Income fund (the Fund) as of June 30, 1994 and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights 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 audits.
We conducted our audits 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 the securities owned as of
June 30, 1994 by correspondence with the custodian and brokers. 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 audits provide 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 State
Bond Minnesota Tax-Free Income Fund as of June 30, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
/s/Deloitte & Touche LLP
Minneapolis, Minnesota
July 29, 1994
15
APPENDIX A
Description of Tax-Exempt Securities Ratings
TAX-EXEMPT BONDS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Tax-exempt bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Tax-exempt bonds which are rated Aa are judged to be a high quality by
all standards. Together with the Aaa group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Tax-exempt bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Tax-exempt bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Tax-exempt bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Tax-exempt bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from Aa through B in its bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category. The modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION
AAA: Tax-exempt bonds rated AAA are highest grade obligations. They possess
the ultimate degree of protection as to principal and interest. In the market
they move with interest rates, and hence provide the maximum safety on all
counts.
AA: Tax-exempt bonds rated AA also qualify as high-grade obligations, and
in the majority of instances differ from AAA issues only in small degree. Here,
too, prices move with the long-term money market.
A: Tax-exempt bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior, but
also to some extent, economic conditions.
BBB: Tax-exempt bonds rated BBB are regarded as having adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB or B: Tax-exempt bonds rated BB or B are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and B a higher degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
NOTE: The S&P ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
TAX-EXEMPT NOTES
MOODY'S
Moody's ratings for state, municipal and other short-term obligations are
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of primary importance in long-term
borrowing risk are of lesser importance in the short run. Symbols used are as
follows:
MIG-1: Notes are of the best quality enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both.
MIG-2: Notes are of high quality, with margins of protection ample,
although not so large as in the preceding group.
MIG-3: Notes are of favorable quality, with all security elements accounted
for, but lacking the undeniable strength of the preceding grades. Market access
for refinancing, in particular, is likely to be less well established. Standard
& Poor's
Until June 29, 1984, Standard & Poor's used the same rating symbols for
notes and bonds. After June 29, 1984, for new municipal note issues due in three
years or less the ratings below usually will be assigned. Notes maturing beyond
three years will most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong
capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
COMMERCIAL PAPER
MOODY'S
Moody's Commercial Paper ratings, which are also applicable to
municipal paper investments permitted to be made by the Fund, are opinions of
the ability of issuers to repay punctually their promissory obligations not
having an original maturity in excess of nine months. Moody's employs the
following designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated Issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
STANDARD & POOR'S
S&P's ratings are a current assessment of the likelihood of timely payment
of debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues with the "A" category are delineated with the numbers
1,2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely
payment is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
PART C
OTHER INFORMATION
STATE BOND TAX-FREE INCOME FUNDS, INC.
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements and Independent Auditors' Report
Contained in Part A:
Financial Highlights for each year in the seven year period ended June
30, 1995, and for the period January 6, 1988 (commencement of
operations) to June 30, 1988
Contained in Part B
Financial Statements:
Schedule of Investments - June 30, 1995
Statement of Assets and Liabilities - June 30, 1995
Statement of Operations - Year ended June 30, 1995
Statement of Changes in Net Assets - Years ended June 30, 1995 and
1994
Financial Highlights for each period in teh five year period ended
June 30, 1995
Note to Financial Statements
Independent Auditors' Report
(b) Exhibits
(1) Articles of Incorporation. -- incorporated by reference to
Registrant's Registration Statement on Form N-1A filed on August
31, 1993.
(2) Bylaws. -- incorporated by reference to Registrant's Registration
Statement on Form N-1A filed on August 31, 1993.
(3) Not applicable
(4) Instrument Defining Rights of Shareholders. See generally Article
IV of the Articles of Incorporation, and Articles II and VII of
the Bylaws, filed as exhibits to this Registration Statement.
(5) Investment Advisory and Management Agreement, filed as an Exhibit
hereto.
(6) (a) Underwriting Agreement filed as an Exhibit hereto.
(b) Agreements between principal underwriter and dealers
--incorporated by reference to Registration Statement on Form
N-1A of State Bond Securities Funds, Inc., File No. 2-30162,
filed on September 28, 1993.
(7) Not applicable
(8) (a) Custodian Agreement -- incorporated by reference to
Registrant's Registration Statement on Form N-1A filed on
December 7, 1987.
(b) First Amendment to Custodian Agreement -- incorporated by
reference to Registrant's Registration Statement on Form N-1A
filed on October 7, 1989.
(9) Transfer Agent Agreement, filed as an Exhibit hereto.
(10) Opinion and Consent of Counsel;, filed as an Exhibit hereto.
(11) (a) Consent of Ernst & Young LLP, dated August 24, 1995 and filed
as an Exhibit hereto.
(b) Consent of Deloitte & Touche LLP, dated August 24, 1995 and
filed as an Exhibit hereto.
(12) Not applicable.
(13) Agreement Regarding Initial Capital -- incorporated by reference
to Registrant's Registration Statement on Form N-1A filed on
January 15, 1988.
(14) Not applicable.
(15) Plan Pursuant to Rule 12b-1 -- incorporated by reference to
Registrant's Registration Statement on Form N-1A filed on August
31, 1993.
(16) Schedules for Computation of Performance Data, filed as an
Exhibit hereto.
(17) (a) Power of attorney dated July 31, 1995, filed as an Exhibit
hereto.
(b) Financial Data schedule - filed hereto electronically as
Exhibit 27 pursuant to Rule 401 of Regulation S-T
(18) Not Applicable
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Number of Record Holders
Title of Class (within last 90 days)
------------- -----------------------
Common - $.00001 par 400 as of July 31, 1995
ITEM 27. INDEMNIFICATION
Article VII, Section 1 of the Amended and Restated Articles of
Incorporation of the Registrant provides that the Registrant shall indemnify its
directors and officers, whether serving the Registrant or at its request any
other entity, to the full extent permitted by the laws of the State of Maryland.
This indemnification shall not protect any director or officer against liability
to the Registrant or its shareholders to which he otherwise would be subject by
reason of willful misfeasance, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
Section 6.01 of the By-Laws of the Registrant provides that the Registrant
shall indemnify any person who was or is a party or is threatened to be made a
party to any action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than a proceeding by or in the right of the Registrant
in which such person shall have been adjudged to be liable to the Registrant),
by reason of being or having been a director or officer of the Registrant, or
serving or having served at the request of the Registrant as a director,
officer, partner, trustee, employee or agent of another entity in which the
Registrant has an interest as a shareholder, creditor or otherwise (a "Covered
Person"), against all liabilities and penalties, and reasonable expenses
(including attorney's fees) actually incurred by the Covered Person in
connection with such action, suit or proceeding, except (i) liability in
connection with any proceeding in which it is determined that (A) the act or
omission of the Covered Person was material to the matter giving rise to the
proceeding, and was committed in bad faith or was the result of active and
deliberate dishonesty, or (B) the Covered Person actually received an improper
personal benefit in money, property or services, or (C) in the case of any
criminal proceeding, the Covered Person had reasonable cause to believe that the
act or omission was unlawful and (ii) liability to the Corporation or its
security holders to which the Covered Person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
Article VII, Section 2 of the Amended and Restated Articles of
Incorporation of the Registrant provides that no director or officer of the
Registrant shall be personally liable to the Registrant or its security holders
for money damages, to the full extent permitted by Maryland law and the
Investment Company Act of 1940.
Pursuant to the Registrant's agreement with its principal underwriter, the
Registrant has agreed to indemnify the underwriter from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending such claims, demands or liabilities and any counsel fees incurred
in connection therewith) which it or any controlling person may incur, under the
Investment Company Act of 1940, or under common law or otherwise, arising out of
or based upon any alleged untrue statement of a material fact contained in the
Registrant's registration statement or prospectus or arising out of or based
upon any alleged omission to state a material fact required to be stated in
either thereof or necessary to make the statements in either thereof not
misleading; provided, however, that the indemnity agreement, to the extent that
it might require indemnity of any person who is a controlling person and who is
also a director of the Registrant, may not inure to the benefit of such person
unless a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent, that such result would not be against
public policy as expressed in the Investment Company Act of 1940; and further
provided that in no event shall any thing contained in the indemnity agreement
be so construed as to protect the underwriter against any liability to the
Registrant or its security holders to which the underwriter would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence, in the
performance of its duties, or by reason of its reckless disregard of any
obligations and duties under the underwriting agreement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provision, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Registrant, its investment adviser, and its principal underwriter have
obtained directors and officers and errors and omissions liability insurance
insuring the activities of the Registrant, the investment advisory activities of
the investment adviser, and the activities of the principal underwriter as
distributor of investment company securities.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
ARM Capital Advisors, Inc., the Registrant's investment adviser, is a
registered investment adviser providing investment management services to
investment companies and institutional and individual clients.
The business, profession, vocation or employment of a substantial nature
which each director or officer of the investment adviser, is or has been, at any
time during the past two fiscal years, engaged for his own account or in the
capacity of director, officer, employee, partner, or trustee is as follows:
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION AND OFFICES
WITH ADVISER
John Franco Director and Co-Chief
Co-Chief Executive Officer Executive Officer
Martin H. Ruby Director and Co-Chief
Co-Chief Executive Officer Executive Officer
Emad A. Zikry Director and President
Since October 1994:
Executive Vice President-Chief
Investment Officer
200 Park Avenue, 20th Floor
New York NY 10166 1992-October 1994:
President-Chief Investment Officer
Klienwort Benson Investment Management
Americas Inc.
200 Park Avenue, 20th Floor
New York NY 10166
Keith O. Martens Senior Vice President
Since June 1995: and Senior Portfolio
200 Park Avenue, 20th Floor Manager
New York NY 10166 1969-June 1995:
Executive Vice President-Investments
SBM Company
8400 Normandale Lake Boulevard
Suite 1150
Minneapolis MN 55437
John R. McGeeney Secretary
Co-General Counsel and Secretary
Peter S. Resnik Treasurer
Treasurer
Don W. Cummings Controller
Controller
Rose M. Culbertson Tax Officer
Tax Officer
Kevin Howard Assistant Secretary
Since January 1994: and Compliance Officer
Assistant General Counsel and
Compliance Officer
1992-January 1994:
Providian Corp.
Assistant General Counsel
400 West Market Street
Louisville KY 40202
*All addresses are ARM Financial Group, Inc., 239 S. Fifth Street, 12th Floor,
Louisville KY 40202. Unless otherwise indicated, each individual has been
employed by ARM Financial Group or its predecessor-in-interest, Analytical Risk
Management, Ltd., for the last two years.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) SBM Financial Services acts as principal underwriter for the Fund, and
for each of the following investment companies:
State Bond Investment Funds, Inc.
(State Bond Diversified Fund Portfolio)
State Bond Money Funds, Inc.
(State Bond Cash Management Fund Portfolio)
State Bond Equity Funds, Inc.
(State Bond Common Stock Fund Portfolio)
State Bond Income Funds, Inc.
(State Bond U.S. Government and Agency Securities Fund Portfolio)
State Bond Tax-Free Income Funds, Inc.
(State Bond Minnesota Tax-Free Income Fund Portfolio)
SBM Certificate Company
(b) The following table sets forth information concerning each director,
officer or partner of the principal underwriter.
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS & OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
John R. McGeeney* Director,Secretary, None
General Counsel and
Compliance Officer
Edward J. Haines* Director and President None
Walter W. Balek*** Vice President None
Dale C. Bauman*** Vice President President
Robert Bryant Vice President None
1550 East Shaw, #120
Fresno CA 93710
Richard M. Carlblom*** Vice President None
Gregory A. Erickson*** Vice President None
Ronald Geiger*** Vice President None
100 North Minnesota Street
New Ulm MN 56073
Peter S. Resnik* Treasurer Treasurer
Don W. Cummings* Controller Controller
William H. Guth** Operations Officer None
David L. Anders** Marketing Officer None
Rose M. Culbertson* Tax Officer None
Patricia L. Mack* Assistant Secretary None
* Address is 239 S. Fifth Street, 12th Floor, Louisville KY 40202
** Address is 200 East Wilson Bridge Road, Worthington OH 43085
*** Address is 8400 Normandale Lake Boulevard, Suite 1150, Minneapolis
MN 55437
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
SBM Financial Services, Inc.
8400 Normandale Lake Boulevard, Suite 1150
Minneapolis, Minnesota 55437-3807
ITEM 31. MANAGEMENT SERVICES
None
ITEM 32. UNDERTAKINGS
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(a) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Louisville and State of Kentucky, on the 28th day of August, 1995.
STATE BOND TAX-FREE INCOME FUNDS, INC.
By: /s/Kevin Howard
---------------------------------
Kevin Howard, Vice President and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/Dale Bauman President August 28, 1995
--------------------- (Principal Executive
Officer)
/s/Peter Resnik Treasurer August 28, 1995
--------------------- (Principal Financial
Officer)
/s/Don Cummings Controller August 28, 1995
(Principal Accounting
Officer)
* Director
---------------------
(William B. Faulkner)
* Director
---------------------
(Patrick M. Finley)
* Director
---------------------
(Chris L. Mahai)
* Director
---------------------
(John R. Lindholm)
* Director
---------------------
(John Katz)
* Director
---------------------
(Theodore S. Rosky)
* This Amendment has been signed
by each of the persons so indicated
by the undersigned as Attorney-in-Fact.
*By: /s/Kevin Howard August 28, 1995
------------------
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT, made this 14th day of
June, 1995, by and between State Bond Tax-Free Income Funds, Inc., a Maryland
corporation (hereinafter called the "Fund"), and ARM Capital Advisors, Inc., a
Delaware corporation (hereinafter called the "Manager").
WHEREAS, The Fund is registered as an open-end, management investment
company under the Investment Company Act of 1940, and wishes to retain the
Manager to provide investment advisory services, and certain management and
administrative services to the Fund; and the Manager is willing to furnish such
services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed as follows:
1. The Fund shall at all times keep the Manager fully informed with regard
to the securities owned by it, its funds available, or to become available, for
investment, and generally as to the condition of its affairs. It shall furnish
the Manager with such other documents and information with regard to its affairs
as the Manager may from time to time reasonably request.
2.(a) The Fund hereby engages the Manager, and the Manager hereby agrees to
act as investment adviser for, and to manage the affairs, business and the
investment of the Fund's assets, which shall be segregated into Portfolios. Such
Portfolios shall consist of the State Bond Minnesota Tax-Free Income Fund
Portfolio and any further portfolios from time to time created by the Board of
Directors of the Fund. Such Portfolios are herein individually referred to as a
"Portfolio" and collectively referred to as the "Portfolios."
(b) Subject to the direction and control of the Fund's Board of Directors,
the Manager shall regularly provide the Fund and its Portfolios with investment
research, advice, management and supervision and shall furnish a continuous
investment program for the Fund's Portfolios consistent with the investment
objectives and policies of the Fund and each of its Portfolios as set forth in
the Registration Statement and Prospectus of the Fund and as interpreted from
time to time by the Board of Directors of the Fund. The Manager will determine
from time to time what securities will be purchased, retained or sold by the
Fund and its Portfolios, and will implement those decisions, all subject to the
provisions of the Fund's Articles of Incorporation and By-Laws, the Investment
Company Act of 1940, applicable rules and regulations of the Securities and
Exchange Commission, and other applicable federal and state law, and to the
investment objectives and policies of the Fund and its Portfolios. The Manager
shall also provide advice and recommendations with respect to other aspects of
the business and affairs of the Fund and its Portfolios, and shall perform such
other functions of management and supervision as may be directed by the Board of
Directors of the Fund.
3.(a) The Manager, at its expense, shall supply the Board of Directors and
officers of the Fund with all statistical information and reports reasonably
required by them and reasonably available to the Manager and shall furnish the
Fund with office facilities, including space, furniture and equipment and all
personnel reasonably necessary for the operation of the Fund to the extent of
services hereby undertaken by the Manager. The Manager shall authorize and
permit any of its directors, officers and employees, who may be elected as
directors or officers of the Fund, to serve in the capacities in which they are
elected.
(b) Other than are herein specifically indicated, the Manager will not be
responsible for the Fund's expenses. Specifically, the Manager will not be
responsible for any of the following expenses of the Fund, which expenses shall
be borne by the Fund: outside legal, auditing and accounting expenses;
bookkeeping, record keeping, and Fund portfolio and Fund shares pricing
expenses; interest, taxes and governmental fees; expenses incurred in connection
with membership in investment company organizations; brokerage commissions or
charges, if any; fees of custodians, transfer agents, registrars, accounting
services agents, or other agents; expense of preparing share certificates;
expenses relating to the redemption or repurchase of the Fund's shares; investor
services expenses; expenses of registering and qualifying Fund shares for sale
under applicable federal and state law; expenses of preparing, setting in print,
printing and distributing prospectuses, statements of additional information,
reports, notices and dividends to Fund shareholders; cost of stationery; costs
of stockholders and other meetings of the Fund; traveling expenses of officers,
directors and employees of the Fund, if any; fees of the Fund's independent
directors and salaries of any officers or employees who are not affiliated with
the Manager; the Fund's pro rata portion of premiums on any fidelity bond and
insurance covering the Fund; and general corporate fees and expenses.
4. No director, officer or employee of the Fund shall receive from the Fund
any salary or other compensation as such director, officer or employee while he
is at the same time a director, officer or employee of the Manager. This
paragraph shall not apply to directors, executive committee members, investment
committee members, consultants and other persons who are not regular members of
the Manager's staff.
5. As compensation for the services performed and the facilities furnished
and expenses assumed by the Manager, including the services of any consultants
retained by the Manager, the Fund shall pay the Manager, as promptly as possible
after the last day of each month, a monthly investment advisory fee for each
Portfolio. Such monthly fee shall be calculated daily. For the State Bond
Minnesota Tax-Fee Income Fund Portfolio, such monthly fee shall be 1/12th of .85
of 1% (.85 of 1% annually) of the first $100,000,000 of average daily net assets
of such Portfolio and 1/12 of .80 of 1% (.80 of 1% annually) of the average
daily net assets of such Portfolio in excess of $100,000,000. The monthly
investment advisory fee for any future Portfolios shall, unless otherwise
determined by the Board of Directors of the Fund and by the stockholders of any
such future Portfolios, be 1/12 of .85 of 1% (.85 of 1% annually) of the first
$100,000,000 of average daily net assets of any such Portfolio and 1/12 of .80
of 1% (.80 of 1% annually) of the average daily net assets of any such Portfolio
in excess of $100,000,000. The first payment of the fee shall be made as
promptly as possible at the end of the month next succeeding the effective date
of this Agreement, and shall constitute a full payment of the fee due the
manager for all services prior to that date. If this Agreement is terminated
with respect to a Portfolio or Portfolios as of any date not the last day of a
month, such fee shall be paid as promptly as possible after such date of
termination, shall be based on the average daily net assets of such Portfolio or
Portfolios in that period from the beginning of such month to such date of
termination, and shall be that proportion of such average daily net assets as
the number of business days in such period bears to the number of business days
in such month. The average daily net assets of the Fund and each Portfolio shall
in all cases be based only on business days and be computed as of such time as
may be determined by the Board of Directors of the Fund. Each such payment shall
be accompanied by a report of the Fund prepared either by the Fund or by a
reputable firm of independent accountants which shall show the amount properly
payable to the Manager under this Agreement and the detailed computation
thereof. Upon receipt of each such payment from the State Bond Minnesota
Tax-Free Income Fund Portfolio and upon receipt of any such payment from any
future Portfolio, the Manager shall pay to SBM Financial Services, Inc., the
principal underwriter for the Fund, a portion of the payment received by the
Manager equal to 1/12th of .25 of 1% (.25 of 1% annually) of the average daily
net assets of the State Bond Minnesota Tax-Free Income Fund Portfolio for the
month and, unless otherwise determined by the Board of Directors of the Fund and
by the stockholders of any future Portfolio, shall pay to SBM Financial
Services, Inc. a portion of the payment received by the Manager equal to 1/12 of
.25 of 1% (.25 of 1% annually) of the average daily net assets of any future
Portfolio as SBM Financial Services, Inc.'s fee under the Fund's Plan of
Distribution (the "Plan"). It is understood that the laws of certain states in
which shares of certain of the Fund's Portfolios may be offered for sale may
require that such Portfolios be reimbursed for excess Portfolio expenses, and
the Manager agrees to make such reimbursements.
6. The Manager assumes no responsibility under this Agreement other than to
render the services called for hereunder, in good faith, and shall not be
responsible for any action of the Board of Directors of the Fund in following or
declining to follow any advice or recommendations of the Manager; provided, that
nothing in this agreement shall protect the manager against any liability to the
Fund or its stockholders to which it would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and duties
hereunder.
7. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Manager who may also be a director,
officer, or employee of the Fund, to engage in any other business or to devote
his time and attention in part to the management or other aspects of any other
business, whether of a similar nature or dissimilar nature, nor to limit or
restrict the right of the Manager to engage in any other business or to render
services of any kind, including investment advisory and management services, to
any other corporation, firm, individual or association.
8. As used in this Agreement, the terms "assignment", "interested person",
and "majority of the outstanding voting securities" shall have the meanings
given to them by Section 2(a) of the Investment Company Act of 1940, subject to
such exemptions as may be granted by the Securities and Exchange Commission by
any rule, regulation or order.
9. This Agreement shall terminate automatically in the event of its
assignment by the Manager and shall not be assignable by the Fund without the
consent of the Manager.
10. This Agreement may be terminated at any time, without the payment of
any penalty, (a) by the Board of Directors of the Fund or by vote of a majority
of the outstanding voting securities of the Fund upon sixty days' written notice
and addressed to the Manager at its principal place of business; and (b) by the
Manager upon sixty days' written notice addressed to the Fund at its principal
place of business; provided that if a majority of the outstanding voting
securities of any Portfolio of the Fund votes to terminate this agreement, such
termination shall be effective with respect to such Portfolio whether or not the
stockholders of any other Portfolio of the Fund vote to terminate this
Agreement.
11. This Agreement shall be submitted for approval to the Board of
Directors of the Fund annually and shall continue in effect only so long as
specifically approved annually by vote of a majority of the directors of the
Fund who are not parties to the Agreement or interested persons of such parties,
cast in person at a meeting called for that purpose, and either by vote of the
holders of a majority of the outstanding voting securities of the fund or by
majority vote of the Fund's Board of Directors; provided that, if a majority of
the outstanding voting securities on any Portfolio approves this Agreement, this
Agreement shall continue in effect with respect to such approving Portfolio
whether or not the stockholders of any other Portfolio of the Fund approve this
agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their officers thereunto duly authorized.
STATE BOND TAX-FREE INCOME FUNDS, INC.
By:_________________________________
/s/Edward L. Zeman
Its_____________________________
Vice President
ARM CAPITAL ADVISORS, INC.
By:_________________________________
/s/Martin H. Ruby
Its_____________________________
/s/CEO
UNDERWRITING AGREEMENT
BETWEEN
STATE BOND TAX-FREE INCOME FUNDS, INC.
AND
SBM FINANCIAL SERVICES, INC.
This Underwriting Agreement made this 14th day of June, 1995, by and
between State Bond Tax-Free Income Funds, Inc., a Maryland corporation
(hereinafter called the "Fund") and SBM Financial Services, Inc., a Minnesota
corporation (hereinafter called "Distributor").
WITNESSETH THAT:
1. The Fund hereby appoints Distributor as principal underwriter in
connection with the offering, sale and distribution to the public of the shares
(the "Shares") of Common Stock, $.00001 par value, of the Fund's State Bond
Minnesota Tax-Free Income Fund Portfolio and any other Portfolios (individually
referred to herein as a "Portfolio" and collectively referred to herein as the
"Portfolios") which may hereafter be created by the Board of Directors of the
Fund. The Fund authorizes Distributor, as agent for the Fund, subject to
applicable law and the Articles and Bylaws of the Fund to solicit orders for the
purchase of the shares, satisfactory to the Fund, and otherwise promote the Fund
and, as agent for the Fund, to accept orders from dealers with whom it has
written agreements. Distributor shall offer the Shares only in states in which
the Shares are qualified and in which Distributor is qualified as a
broker/dealer. Distributor shall distribute the Shares on an agency or "best
efforts" basis under which the Fund shall only issue such Shares as are actually
sold.
2. The public offering price of the Shares shall be the net asset value per
share (as determined by the Fund) of the outstanding Shares of each Portfolio of
the Fun, plus the applicable sales charge with respect to each Portfolio as
specified in the Fund's currently effective Prospectus from time to time. Said
sales charge may be graduated on a scale based on the dollar amount of Shares
sold. Such net asset value shall be regularly determined as set forth from time
to time in the Fund's currently effective Prospectus and Statement of Additional
Information. The Fund shall promptly furnish Distributor a statement of each
computation of net asset value and of the details entering into such
compensation.
3. Distributor shall receive, as compensation for the services it performs
under this Agreement, a sales charge for each investment in the Fund's Shares,
which sales charge shall be as set forth in paragraph 2 of this Agreement. The
Distributor may exchange Shares of any Portfolio of the Fund at the net asset
value thereof, without a sales charge or at a reduced sales charge, to any
purchaser who shall pay for such Shares entirely with the proceeds of the
redemption of his redeemable Shares of any other Portfolio of the Fund or shares
of any other registered investment companies managed by ARM Capital Advisors,
Inc., provided such exchange is permitted by and effected in accordance with the
terms of the currently effective Prospectus of the Fund or such other investment
company. The sales charge may be deducted by Distributor from the offering price
when Distributor makes payment to the Fund hereunder for sales of the Shares.
Distributor may in its discretion allow concessions to dealers with whom
Distributor has made arrangements and agreements to sell Shares on its behalf.
4. Distributor, at no expense to the fund, shall print and distribute to
prospective investors Prospectuses and Statements of Additional Information, and
may print and distribute such other sales literature, forms, and advertisements
in connection with sale of the Shares of the Fund as comply with the applicable
provisions of federal and state law. Except as specifically provided herein, the
Fund shall bear none of the expense of Distributor in connection with its offer
and sale of the Shares. Distributor shall, as agent for the Fund, have the right
to sell Shares to dealers or to the public or both; provided, however, that in
connection with the sale or arranging for the sale of the Shares Distributor
shall give only such information and make only such statements or
representations as are contained in the Prospectus or in the Statement of
Additional Information, or in such information as a furnished in writing to
Distributor pursuant to paragraph 5 below, and the Fund shall not be responsible
in any way for any other information, statements or representations given or
made by Distributor or its representatives or agents.
5. The Fund shall keep Distributor fully informed with regard to its
affairs, and shall cooperate fully in the efforts of Distributor under this
Agreement.
6. The Fund agrees at its own expense to register the Shares with the
Securities and Exchange Commission and state and other regulatory bodies and to
pay the related registration and filing fees therefor and to file from time to
time such amendments, reports and other documents as may necessary in order that
were may be necessary in order that there may be no untrue statements for a
material fact in the Registration Statement, Prospectus, or Statement of
Additional Information, or necessary in order that there may be no omission to
state a material fact therein necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading. As
used in this Agreement, the term "Registration Statement" shall mean from time
to time the Registration Statement most recently filed by the Fund with the
Securities and Exchange Commission and effective under the Securities Act of
1933, as amended (hereinafter called the "Act"), as such Registration Statement
is amended by any amendments thereto at the time in effect, and the term
"Prospectus" and "Statement of Additional Information" shall mean from time to
time the form of prospectus and statement of additional information filed by the
Fund as part of the Registration Statement.
7. The Fund agrees to prepare, set in print, print and distribute
Prospectuses to stockholders of the Fund, and furnish Distributor from time to
time a copy of the Prospectus and Statement of Additional Information in form as
then most recently filed with the Securities and Exchange Commission. The Fund
authorized Distributor to print copies of the use such Prospectus and Statement
of Additional Information in connection with the sale of the Shares. The Fund
agrees to indemnify, defend and hold Distributor, and any person who controls
Distributor within the meaning of Section 15 of the Act, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which Distributor or any such
controlling person may incur, under the Act, or under common law or otherwise,
arising out of or based upon any alleged untrue statement of a material fact
contained in the Registration Statement, Prospectus, or Statement of Additional
Information or arising out of or base upon any alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this indemnity agreement, to the
extent that it might require indemnity of any person who is much a controlling
person and who is also a director of the Fund, shall not insure to the benefit
of such person unless a court of competent jurisdiction shall determine, or it
shall have been determined by controlling precedent, that such result would not
be against public policy as expressed in the Act; and further provided that in
no event shall anything herein contained be so construed as to protect
Distributor against any liability to the Fund or its security holders to which
Distributor would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of its
reckless disregard o its obligations and duties under this Agreement.
The Fund's agreement to indemnity Distributor and any such controlling
person as aforesaid is expressly conditioned upon the Fund being notified of any
action brought against Distributor or any such controlling person, such
notification to be given by letter or by telegram addressed to the Fund at its
principal office and sent to the Fund by the person against whom such action is
brought, within ten days after the summons or other first legal process shall
have been served. The failure so to notify the Fund of any such action shall not
relieve the Fund from any liability which the Fund may have to the person
against whom such action is brought by reason of any such alleged untrue
statement omission otherwise than on account of the indemnity agreement
contained in this paragraph.
7. The Fund will be entitled to assume the defense of any suit brought to
enforce any such claim, demand or liability, but in such case, such defense
shall be conducted by counsel of good standing chosen by the Fund and approved
by Distributor. In the event the Fund does elect to assume the defense of any
such suit and retain counsel of good standing approved by Distributor, the
defendant or defendants in such suit shall bear the fees and expense of any
additional counsel retained by any of them; but in case the Fund does not elect
to assume the defense of any such suit, or in case Distributor does not approve
of counsel chosen by the Fund, the Fund will reimburse Distributor or the
controlling person or persons named as defendant or defendants in such suit for
the fees and expenses of any counsel retained by Distributor or them.
The indemnification agreement contained in this paragraph 7 and the Fund's
representatives and warranties in this Agreement shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
Distributor or any controlling person. This agreement of indemnity will insure
exclusively to the benefit of Distributor and its successors and their
respective estates, and to the benefit of any controlling persons and their
successors. The Fund agrees promptly to notify Distributor of the commencement
of any litigation or proceedings against the Fund in connection with the issue
and sale of any of its capital stock.
8. Distributor agrees to indemnify, defend and hold the Fund, its several
officers and directors, and any person who controls within the meaning of
Section 15 of the Act, free and harmless from and against any and all claims,
demands, liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and nay counsel fees incurred in
connection therewith) which the Fund, its officers or directors, or any such
controlling person may incur under the Act or under common law or otherwise; but
only to the extent that such liability or expense incurred by the Fund, its
officers or directors or such controlling person resulting from such claims or
demands shall arise out of or be based upon any alleged untrue statement of a
material fact contained in information furnished in writing by Distributor to
the Fund for use in the registration Statement, Prospectus, or Statement of
Additional Information, or shall arise out of or be based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or Prospectus or necessary to make
such information not misleading.
Distributor's agreement to indemnify the Fund, its officers and directors,
any such controlling person as aforesaid is expressly conditioned upon
Distributor being notified of any action brought against the Fund, its officers
or directors or any such controlling person, such modification to be given by
letter or telegram addressed to Distributor at its principal office and sent to
Distributor or by the person against whom such action is brought, within ten
days after the summons or other first legal process shall have been served.
Distributor shall have a right to control the defense of such action, with
counsel of its own choosing, satisfactory to the Fund, if such action is based
solely upon such alleged misstatement or omission on Distributor's part, and in
any other event Distributor or such controlling person shall each have the right
to participate in the defense or preparation of the defense of any such action.
The failure so to notify Distributor of any such action shall not relieve
Distributor from any liability which Distributor may have to the Fund, its
officers or directors or to such controlling person by reason of any such untrue
statement or omission on Distributor's part otherwise than on account of the
indemnity agreement contained in this paragraph 8.
9. This Agreement may be terminated at any time, without the payment of any
penalty, by vote of a majority of the members of the Board of Directors of the
Fund who are not "interested persons" of the Fund, as defined in Section
2(a)(19) of the Investment Company Act of 1940, and who have no direct or
indirect financial interest in the operation of the Fund's Plan of Distribution
or this Agreement, or by the vote of a "majority of the outstanding voting
securities", as defined in Section 2(a)(42) of the Investment Company Act of
1940, of the Fund upon sixty days' written notice to the Distributor; provided
that if a majority of the outstanding voting securities of any Portfolio of the
Fund votes to terminate this Agreement, such termination shall be effective with
respect to such Portfolio of the Fund vote to terminate this Agreement. This
Agreement may be terminated by the Distributor upon sixty days' written notice
to the Fund. This Agreement shall terminate automatically in the event of its
"assignment", as defined in Section 2(a)(4) of the Investment Company Act of
1940.
10. This Agreement shall 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 the parties
hereto as defined in the Investment Company Act of 1940, cast in person at a
meeting called for that purpose, and by either the vote of a "majority of the
outstanding voting securities" of the Fund' provided that if a majority of the
outstanding voting securities of any Portfolio approves this Agreement, this
Agreement shall continue in effect with respect to such approving Portfolio
whether or not the stockholders of any other Portfolio of the Fund approve this
Agreement.
11. As additional compensation to Distributor for its services hereunder,
Distributor will receive after the end of each month from ARM Capital Advisors,
Inc., pursuant to the terms of the Investment Advisory and Management Agreement
between ARM Capital Advisors, Inc. and the Fund of even date herewith, a payment
equal to 1/12th of .25 of 1% of the average daily net assets of the State Bond
Minnesota Tax-Free Income Fund Portfolio for the month and, unless otherwise
determined by the Board of Directors of the Fund and the stockholders of any
future Portfolio, a payment equal to 1/12 of .25 of 1% of the average daily net
assets of any future Portfolio for the month (the "12b-1 Fee"). Distributor
shall use the 12b-1 Fee received from ARM Capital Advisors, Inc. with respect to
each Portfolio in the following manner:
(a) Broker/dealers other than Distributor shall be paid a portion of the
12b-1 Fee based upon the percentage of Shares of the Portfolio attributable to
Shares sold by registered representatives of such broker/dealers and still owned
by such broker/dealers' clients during the month.
(b) Registered representatives of Distributor and their filed supervisors
shall be paid a portion of such 12b-1 Fee based upon the percentage of Shares of
their Portfolio attributable to Shares sold by such registered representatives
and still owned by such registered representatives' clients during the month.
Such amount shall be paid to the registered representatives and their field
supervisors in such proportions as may be determined from time to time, as set
forth in written agreements.
(c) Other Service Entities (as defined in the Plan of Distribution of the
Fund) shall be paid a portion of the 12b-1 Fee based upon the percentage of
Shares of the Portfolio the holders of which were provided administrative or
shareholders assistance by such Service Entities during the month.
(d) The balance of the 12b-1 Fee shall be retained by Distributor and shall
be expended by it on any activities primarily intended to result in the sale of
Shares of the Portfolio, including, by way of example but not by way of
limitation, the printing of prospectuses and reports for other than existing
shareholders, preparation and distribution of sales literature, advertising of
any type, expenses of branch offices maintained by Distributor, and compensation
paid to and expense incurred by officers, employees or registered
representatives of Distributor, including travel, entertainment and telephone
expenses.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
STATE BOND TAX-FREE INCOME FUNDS, INC.
By: __________________________________
/s/Edward L. Zeman
Its: _____________________________
/s/Vice President
SBM FINANCIAL SERVICES, INC.
By:___________________________________
/s/John R. McGeeney
Its:______________________________
TRANSFER AGENCY AGREEMENT
This Agreement, dated as of the 14th day of June, 1995, made by and between
State Bond Tax-Free Income Funds, Inc. (the "Fund"), a corporation operating as
an open-end investment company, duly organized and existing under the laws of
the State of Maryland, and SBM Financial Services, Inc., (the "Agent"), a
Minnesota corporation;
WITNESSETH THAT:
WHEREAS, the Agent has agreed to act as Transfer Agent and Dividend
Disbursing Agent of the Fund, as Administrator of Plans, and to perform certain
check redemption procedures.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto, intending to be legally bound, do hereby
agree as follows:
Section 1. The terms as defined in this Section wherever used in this
Agreement, or in any amendment or supplement hereto, shall have the meanings
herein specified, unless the context otherwise requires.
Bank: The term Bank shall mean the entity that maintains the Fund's check
redemption account.
Custodian: The term Custodian shall mean that entity which is acting as
custodian of the Fund's assets from time to time.
Share Certificates: The term Share Certificates shall mean the stock
certificates for the Shares of the Fund.
Shareholders: The term Shareholders shall mean the registered owners from
time to time of the Shares of the Fund in accordance with the stock registry
records of the Fund.
Shares: The term Shares shall mean the issued and outstanding shares of
common stock of the Fund.
Plan: The term Plan shall include such investment plans, dividend or
capital gains reinvestment plans, systematic withdrawal plans or other types of
plans set forth in the prospectus of the Fund, in form acceptable to the Agent,
which the Fund may from time to time adopt and make available to its
Shareholders, including plans or accounts established for pension and
profit-sharing plans established by self-employed individuals or partnerships.
Planholder: The term Planholder shall mean a Shareholder who, at the time
of reference, is participating in a Plan, and shall include any underwriter,
representative or broker-dealer.
Section 2. The Fund hereby appoints the Agent as its Transfer, Redemption
and Dividend Disbursing Agent and as Administrator of its Plans, and the Agent
accepts such appointment and agrees to act in such capacities upon the terms set
forth in this Agreement.
TRANSFER AGENCY
Section 3. The Fund shall furnish to the Agent, as Transfer Agent, a
sufficient supply of blank Share Certificates and from time to time will renew
such supply upon the request of the Agent. Such blank Share Certificates shall
be signed manually or by facsimile signatures of officers of the Fund authorized
by law or the bylaws of the Fund to sign Share Certificates and, if required,
shall bear the corporate seal or a facsimile thereof.
Section 4. The Agent, as Transfer Agent, shall make original issues of
Shares in accordance with the provisions of Sections 14 and 15 below and the
Fund's prospectus.
Section 5. Transfers of Shares shall be registered and new Share
Certificates issued by the Agent upon surrender of outstanding Share
Certificates (a) in form deemed by the Agent to be properly endorsed for
transfer, (b) with all necessary endorsers' signatures guaranteed in such manner
and form as the Agent may require by a guarantor reasonably believed by the
Agent to be responsible, accompanied by (c) such assurances as the Agent shall
deem necessary or appropriate to evidence the genuineness and effectiveness of
each necessary endorsement, and (d) satisfactory evidence of compliance with all
applicable laws relating to the payment or collection of taxes.
Section 6. When mail is used for delivery of Share Certificates, the Agent
shall forward Share Certificates in "non-negotiable" form by first-class mail,
and Share Certificates in "negotiable" form by registered mail, all mail
deliveries to be covered while in transit to the addressee by insurance arranged
for by the Agent.
Section 7. In registering transfers, the Agent, as Transfer Agent, may rely
upon the Uniform Commercial Code or any other statutes which in the opinion of
counsel protect the Agent and the Fund in not requiring complete documentation,
in registering transfer without inquiry into adverse claims, in delaying
registration for purposes of such inquiry, or in refusing registration where in
its judgment an adverse claim requires such refusal.
Section 8. The Agent, as Transfer Agent, may issue new Share Certificates
in place of Share Certificates represented to have been lost, destroyed or
stolen, upon receiving indemnity satisfactory to the Agent and may issue new
Share Certificates in exchange for, and upon surrender of, mutilated Share
Certificates.
Section 9. In case any officer of the Fund who shall have signed manually
or whose facsimile signature shall have been affixed to blank Share Certificates
shall die, resign or be removed prior to the issuance of such Share
Certificates, the Agent, as Transfer Agent, may issue or register such Share
Certificates as the Share Certificates of the Fund notwithstanding such death,
resignation or removal; and the Fund shall file promptly with the Agent such
approval, adoption or ratification as may be required by law.
Section 10. The Agent will maintain stock registry records in the usual
form in which it will note the issuance and redemption of Shares and the
issuance and transfer of Share Certificates, and is also authorized to maintain
an account entitled Unissued Certificate Account in which it will record the
Shares and fractions issued and outstanding from time to time for which issuance
of Shares Certificates is deferred. The Agent is authorized to keep records,
which will be part of the stock transfer records, as well as its records of the
Plans, in which it will note the names and registered addresses of Planholders,
and the number of Shares and fractions from time to time owned by them for which
no Share Certificates are outstanding. Each Shareholder or Planholder, whether
he holds one or more Share Certificates or owns Shares held under one or more
Plans, or whether he holds or owns Shares by both methods, will be assigned a
single account number. Whenever a Shareholder deposits Shares represented by
Share Certificates in a Plan permitting the deposit of Shares thereunder, the
Agent, as Transfer Agent, upon receipt of the Share Certificates registered in
the name of the Shareholder (or, if not so registered, in proper form for
transfer), shall cancel such Share Certificates, debit the Shareholder's
individual stock account and credit the Shares to the unissued Certificate
Account. The Agent, as Plan Administrator, shall credit the Shares so deposited
to the proper Plan account.
Section 11. The Agent will issue Share Certificates for Shares of the Fund
only upon receipt of a written request from a Shareholder. In all other cases,
the Fund authorizes the Agent to dispense with the issuance and countersignature
of Share Certificates whenever Shares are purchased. In such case, the Agent, as
Transfer Agent, shall merely note on its stock registry records the issuance of
the Shares and fractions (if any), shall credit the Unissued Certificate Account
with the Shares and fractions issued and shall credit the proper number of
Shares and fractions to the respective Shareholders. Likewise, whenever a
Shareholder requests the redemption of Shares for which the Agent's records
indicate that no Share Certificates have been issued, the Agent may cause said
Shares to be redeemed without tender of Share Certificates for same. The Fund
authorizes the Agent in such cases to process the transactions by appropriated
entries in its stock transfer records, and debiting of the Unissued Certificate
Account and the records of issued Shares outstanding.
Section 12. The Agent in its capacity as Transfer Agent will, in addition
to the duties and functions above-mentioned, perform the usual duties and
functions of a stock transfer agent for a corporation. It will countersign for
issuance or reissuance Share Certificates representing original issue or
reissued treasury shares, and will transfer Share Certificates, and Shareholder
account registrations where no Share Certificates are outstanding, registered in
the name of Shareholders from one Shareholder to another in the usual manner.
The Agent may rely conclusively and act without further investigation upon any
list, instruction, certification, authorization, Share Certificate or other
instrument or paper believed by it in good faith to be genuine and unaltered,
and to have been signed, countersigned or executed by duly authorized person or
persons, or upon the instructions of any officer of the Fund, or upon the advice
of counsel for the Fund or for the Agent. The agent may record any transfer of
Share Certificates which is reasonably believed by it in good faith to have been
duly authorized or may refuse to record any transfer of Share Certificates if in
good faith the Agent in its capacity as Transfer Agent reasonably deems such
refusal necessary in order to avoid any liability either to the Fund or to the
Agent. The Fund agrees to indemnify and hold harmless the Agent from and against
any and all losses, costs, claims and liability which it may suffer or incur by
reason of so relying or acting or refusing to act.
Section 13. In case of any request or demand for the inspection of the
share records of the Fund, the Agent, as Transfer Agent, shall endeavor to
notify the Fund and to secure instructions as to permitting or refusing such
inspection. However, the Agent may exhibit such records to any person in any
case where it is advised by its counsel that it may be held liable for failure
to do so.
ISSUANCE OF SHARES
Section 14. Prior to the daily determination of net asset value in
accordance with the Fund's prospectus, the Agent shall process all payments by
Shareholders and Planholders received since the last determination of the Fund's
net asset value for which the Agent has sufficient information to establish a
new Shareholder account or purchase Shares for an existing account. Immediately
after the Fund's calculation of its net asset value on each day that both the
Fund and the Agent are open for business, the Agent shall obtain from the Fund a
quotation (on which it may conclusively rely) of the net asset value per Share
determined on that day. The Agent shall proceed to calculate the amount
available for investment in Shares at the quoted net asset value and the number
of Shares and fractional Shares to be purchased. The Agent, as agent for the
Shareholders and Planholders, shall place a purchase order on each day that both
the Fund and the Agent are open for business with the Fund for the proper number
of Shares and fractional Shares to be purchased and confirm such number to the
Fund.
Section 15. The proper number of Shares and fractional Shares shall then be
issued daily and credited by the Agent to the Unissued Certificate Account. The
Shares and fractional Shares purchased for each Shareholder and Planholder will
be credited by the Agent to such Shareholder's or Planholder's separate account.
The Agent shall then cause to be mailed to each Shareholder and Planholder a
confirmation of each purchase, with copies to the Fund if requested. Such
confirmations will show the prior Share balance, the new Share balance, the
Shares held under a Plan (if any), the Shares for which Stock Certificates are
outstanding (if any), the amount invested and the price paid for the newly
purchased Shares.
REDEMPTIONS
Section 16. Except for check redemptions, which shall be governed by the
check redemption procedures provided for in Sections 18 through 24, the Agent
shall, prior to the daily determination of net asset value in accordance with
the Fund's prospectus, process all requests from Shareholders to redeem Shares
received in accordance with the procedures set forth in the Fund's prospectus.
The Fund shall then quote to the Agent the applicable net asset value, whereupon
the Agent shall determine the number of Shares required to be redeemed to make
monthly payments, automatic payments or the like. The Agent shall then advise
the Fund of the number of Shares and fractional Shares requested to be redeemed
and shall process the redemption by filing with the Custodian an appropriate
statement and making the proper distribution and application of the redemption
proceeds in accordance with the Fund's prospectus. The stock registry books
recording outstanding Shares, the Unissued Certificate Account and the
individual account of the Shareholder or Planholder shall be properly debited.
Section 17. The proceeds of redemption shall be remitted by the Agent in
accordance with the Fund's prospectus as follows:
(a) By check mailed to the Shareholder or Planholder at his registered
address. If a request for redemption of Shares is valued at $20,000 or more, or
the proceeds of the redemption are to be paid to someone other than the
Shareholder, a signature guarantee of a national securities exchange, a member
firm of a principal stock exchange, a registered securities association, a
clearing agency, a bank or trust company, a savings association, a credit union,
a broker, a dealer, a municipal securities broker or dealer, a government
securities broker or dealer, or a representative of the Distributor, SBM
Financial Services, Inc. shall accompany the redemption request.
(b) By instructions to the Fund's Custodian to wire redemption proceeds on
the next business day to a designated bank upon telephone request, without
signature guarantee, if such redemption procedure has been requested by the
Shareholder or Planholder on an authorized form filed with the Agent and the
redemption proceeds are $5,000 or more. Any change in the designated bank
account will be accepted by the Agent only if made in writing by the Shareholder
or Planholder with signature guaranteed as required by paragraph (a) of this
Section 17.
(c) By check redemption procedures as provided for in Sections 18 through
24.
(d) By other procedures commonly followed by mutual funds and mutually
agreed upon by the Fund and the Agent.
For the purposes of redemption of Shares which have been purchased by
uncertified check, such Shares may not be redeemed within 14 days of purchase.
CHECK REDEMPTION
Section 18. The Agent shall perform check redemption services for the Fund
subject to the terms and conditions set forth in the Fund's prospectus. The
duties and obligations of the Agent with respect to check redemptions are
limited to those specifically set forth in Sections 18 through 24 of this
Agreement.
Section 19. The Fund shall maintain balances in a check redemption account
with the Bank which shall be sufficient to pay all checks received by the Bank
drawn against the check redemption account. The balance to be maintained in the
check redemption account shall be estimated from time to time by the Fund and
the Agent, based on redemption experience.
Section 20. The Agent shall provide, at the Fund's expense, check blank
forms for the check redemption account to Shareholders of the Fund who
appropriately request the same on the Fund's investment application form and
shall process checks drawn by said Shareholders on the check redemption account
in accordance with applicable laws and rules governing checks; provided,
however, that the Agent shall be required, in verifying the drawer's signature,
only to ascertain whether the signature(s) on the check reasonably appear to the
signature(s) on the Shareholder's signature card, but shall not be required,
either as drawee or as redemption agent for any Shareholder, to obtain any
guarantee of any Shareholder signature.
Section 21. If there are not sufficient Shares in the drawer's Share
account which have been held for 15 days or more which are not represented by
issued Share Certificates to cover the check, the Agent shall direct the Bank
not to pay the check and shall immediately notify the Fund of such fact.
Section 22. The Agent shall, from time to time as often as necessary for
the purpose of properly performing its check redemption duties hereunder,
determine whether the Fund has deposited in the check redemption account
sufficient balances to pay all checks received by the Bank drawn against the
check redemption account. If the Fund has not deposited sufficient balances to
pay all such checks, the Bank shall pay checks only to the extent balances are
in the check redemption account. The Agent may select those checks to be paid
and those to be returned arbitrarily by any method selected by the Agent. If
checks received by the Bank drawn against the check redemption account exceed
the balances in the check redemption account, the Agent shall immediately notify
the Fund of such fact and give the Fund reasonable time to provide sufficient
collected balances. In no event shall "reasonable time" for the Fund to provide
sufficient collected balances extend beyond 10:00 a.m. on the day of the Bank's
midnight deadline with respect to any check. In no event shall the Agent
authorize the Bank to honor or pay checks drawn on the check redemption account
for which balances are not on hand in the check redemption account, and the Fund
hereby agrees to indemnify, defend and hold the Bank and the Agent harmless from
any loss, claim or expense arising out of the return of redemption checks due to
any such insufficiency of collected balances of which the Agent gave the Fund
immediate notices as required below.
Section 23. The Agent shall notify the Fund, as of the morning of the next
business day, of the balances in the check redemption account and a list of all
redemptions paid the preceding day, by name of Shareholder and amount.
Section 24. The Fund may terminate the check redemption procedure at any
time upon 30 days' written notice to the Agent, and in the event of such
termination, the effect shall be to delete all references to check redemption
procedures in this Agreement.
DIVIDENDS AND DISTRIBUTIONS
Section 25. It is mutually understood by the parties that the Fund intends
to declare daily dividends payable to Shareholders and Planholders of record as
of the close of business each day, and that all dividends are to be payable and
automatically reinvested in additional Shares as of the last business day of the
Fund each month, except in cases where Shareholders have elected to receive
dividends in cash, in which case checks will be mailed within three business
days after the payable date. On each business day, the Fund shall notify the
Agent of the amount of net income of the Fund earned for that business day and
the amount of net income that will be earned for the ensuing days that will not
be business days. Based on the number of Shares outstanding as of the close of
business on each such business day, the Agent shall thereupon compute the
dividends per Share payable with respect to the account of each Shareholder and
Planholder and monthly the number of additional Shares and fractional Shares to
be issued with respect to such dividends. The Agent shall notify the Fund
monthly of the total number of additional Shares and fractional Shares issued
and the amount of dividends to be paid in cash. On or before the payment date
for each dividend, the Fund shall transfer, or cause the Custodian to transfer,
to the Bank sufficient cash to pay those dividends payable in cash on that
payment date. Dividend checks will be mailed by the Agent within three days
after the payment date. The Agent shall maintain records as to the additional
Shares and fractional Shares issued with respect to dividends which are
reinvested in additional Shares by crediting each Shareholder's or Planholder's
account for Shares purchased by them by means of reinvestment of dividends
payable on Shares in their account. The Agent shall cause to be mailed to each
Shareholder and Planholder a confirmation of each such purchase by reinvestment
of such dividend.
Section 26. In the event that the Fund changes its dividend policy or the
Fund orders the distribution of any extraordinary long-term gains, the Fund
shall notify the Agent of each resolution of the Fund's Board of Directors
declaring such distribution or change in its dividend policy, the amount payable
per share, the record date for determining Shareholders or Planholders entitled
to payment, the net asset value to be used for reinvestments of such other
distribution or dividends, and the payment date. The Agent shall, prior to the
designated payment date, calculate the amount of such dividend or other
distribution to be reinvested in Shares and fractional Shares of each
Shareholder and Planholder and the amount to be paid in cash. On or before each
payment date the Fund shall transfer, or cause the Custodian to transfer, to the
Bank sufficient cash to pay any such dividends or other distributions payable in
cash. Checks for such dividends or distributions payable in cash will be mailed
by the Agent within three business days after the payment date. The Agent shall
maintain records as to additional Shares and fractional Shares issued with
respect to such dividends or other distributions which are reinvested in
additional Shares by crediting each Shareholder's or Planholder's account for
Shares purchased by them by means of reinvestment of such dividends or
distributions payable on Shares in their account. The Agent shall cause to be
mailed to each Shareholder and Planholder a confirmation of each such purchase
by reinvestment of such dividend or distribution.
GENERAL PROVISIONS
Section 27. The Agent shall maintain records (which may be part of the
stock transfer records) in connection with the issuance and redemption of
Shares, the disbursement of dividends and the administration of the Plans and
dividend reinvestments, in which will be noted the transactions effected for
each Shareholder and Planholder and the number of Shares and fractional Shares
owned by each for which no Share Certificates are outstanding.
Section 28. In addition to the services provided for in this Agreement, the
Agent will perform other services for the Fund as agreed from time to time,
including but not limited to, preparation of and mailing Federal 1099 Forms,
mailing semi-annual reports of the Fund, preparation of an annual list of
Shareholders and Planholders, mailing notices of Shareholder's meetings, proxies
and proxy statements, and examination and tabulation of returned proxies and
certification of vote to the Fund.
Section 29. Nothing contained in this Agreement is intended to or shall
require the Agent, in any capacity hereunder, to perform any functions or duties
on any holiday or other day of special observance on which the Agent is closed.
Functions or duties normally scheduled to be performed on such days shall be
performed on, and as of, the next business day on which the Fund and the Agent
are open.
Section 30. The Fund agrees to pay the Agent compensation for its services
and to reimburse the Agent for its expenses as shall be agreed upon from time to
time.
Section 31. The Agent shall not be liable for any taxes, assessments or
governmental charges which may be levied or assessed on any basis whatsoever,
upon the securities held or processed hereunder, or otherwise in connection with
the Agent's activities or status under this Agreement.
Section 32. The Agent, at any time, may apply to the Fund for instructions
with respect to any matter in connection with the Agent's performance of its
duties under this Agreement, and the Agent shall be entitled to rely
conclusively on such instructions from the Fund.
The Fund will indemnify and hold the Agent harmless from all loss, cost,
damage and expense, including reasonable expenses for counsel, incurred by it
resulting from any claim, demand, action or omission by it in the performance of
its duties hereunder, or as a result of acting upon any instruction believed by
it to have been given by a duly authorized officer of the Fund; provided that
this indemnification shall not apply to actions or omissions of the Agent in
cases of its own willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties hereunder; and further provided that, prior to
confessing any claim against it which may be the subject of this
indemnification, the Agent shall give the Fund reasonable opportunity to defend
against said claim in its own name or in the name of the Agent.
The Agent will indemnify and hold the Fund harmless from all loss, cost,
damage and expense, including reasonable expenses for counsel, incurred or
sustained by it as a result of or in connection with the Agent's failure to give
the Bank instructions to refuse acceptance and payment of any check under the
Fund's check redemption service which is wrongfully paid either when a signature
on a particular check is not authentic according to the applicable authorized
signature card supplied by the Shareholder or when the number of Shares in a
Shareholder's account is insufficient to cover the amount of the check.
Section 33. The practices and procedures of the Agent and the Fund set
forth in this Agreement, or any other terms or conditions of this Agreement, may
be altered or modified from time to time as may be mutually agreed by the
parties to this Agreement without the consent of any Shareholder or Planholder,
so long as the intent and purposes of the Plans, as stated from time to time in
the prospectus of the Fund, or other applicable limitations of the prospectus,
are observed. In special cases the parties hereto may adopt such procedures as
may be appropriate or practical under the circumstances, and the Agent may
conclusively assume that any special procedure which has been approved by the
Fund does not conflict with or violate any requirements of its Articles of
Incorporation, Bylaws or prospectus, or any rule, regulation or requirement of
any regulatory body.
Section 34. The Fund currently has one class of stock issued and
outstanding, that being the "State Bond Minnesota Tax-Free Income Fund" class,
and one investment portfolio, the "State Bond Minnesota Tax-Free Income Fund"
portfolio. The Board of Directors of the Fund may from time to time create other
classes of stock and other corresponding investment portfolios. Should the
Fund's Board of Directors create such other classes of stock and other
portfolios, it is understood that the Agent shall carry out its duties and
responsibilities hereunder so as to treat such portfolios, the shares of such
classes of stock, and the dividends and distributions relating to such
portfolios and classes of stock separately and distinctly as if each class and
its corresponding portfolio were a separate fund for all purposes hereunder. In
doing so, the Agent shall maintain a separate set of records for each class of
stock and its corresponding portfolio.
Section 35. This Agreement may be amended from time to time by a
supplemental agreement executed by the Fund and the Agent.
Section 36. Either the Fund or the Agent may give 60 days' written notice
to the other of the termination of this Agreement, such termination to take
effect at the time specified in the notice.
Section 37. Any notice or other communication required by or permitted to
be given in connection with this Agreement shall be in writing, and shall be
delivered in person or sent by first-class mail, postage prepaid, to the
respective parties as follows:
If to the Fund:
State Bond Tax-Free Income Funds, Inc.
8400 Normandale Lake Boulevard
Suite 1150
Minneapolis, Minnesota 55437
If to the Agent:
SBM Financial Services, Inc.
8400 Normandale Lake Boulevard
Suite 1150
Minneapolis, MN 55402
Section 38. This Agreement may be executed in two or more counterparts,
each of which when so executed shall be deemed an original, but such
counterparts shall together constitute but one and the same instrument.
Section 39. This Agreement shall be governed by the laws of the State of
Minnesota.
Section 40. This Agreement shall extend to and shall be binding upon the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable by the Fund without the written
consent of the Agent or by the Agent without the written consent of the Fund,
authorized or approved by a resolution of its Board of Directors.
Section 41. The accounts and records, in the agreed upon format, specified
herein to be maintained by the Bank shall be preserved for the periods specified
by Rule 31a-2 under the Investment Company Act of 1940 and shall be the property
of the Fund and shall be made available to the Fund within a reasonable period
of time upon proper demand. The Agent shall assist the Fund's independent
auditors, or upon approval of the Fund or upon demand, any regulatory body, in
any requested review of the Fund's accounts and records, but shall be reimbursed
for all expenses and employee time invested in any such review outside of
routine and normal periodic reviews. Upon receipts from the Fund of the
necessary information, the Agent shall supply the necessary data for the Fund or
accountant's completion of any necessary tax returns, questionnaires, periodic
reports to Shareholders and such other reports and information requests as the
Fund and the Agent shall agree upon from time to time.
IN WITNESS WHEREOF, the Fund and the Agent have caused this Agreement to be
signed by their respective duly authorized officers as of the day and year first
above written.
STATE BOND TAX-FREE INCOME FUNDS, INC.
By:__________________________________
/s/Edward L. Zeman
Its:______________________________
/s/Vice President
SBM FINANCIAL SERVICES, INC.
By:__________________________________
/s/John R. McGeeney
Its:______________________________
August 24, 1995
State Bond Tax-Free Income Funds, Inc.
8400 Normandale Lake Blvd., Suite 1150
Minneapolis, Minnesota 55437-3807
Dear Sirs:
State Bond Tax-Free Income Funds, Inc. proposes to issue and sell an
indefinite number of shares (the "Shares") of its Common Stock par value $.00001
per share (the "Common Stock") in the manner and on the terms set forth in its
Registration Statement on Form N-1A filed with the Securities and Exchange
Commission (File No. 33-18934).
I have, as counsel, participated in various corporate and other proceedings
relating to the Fund and to the Shares. I have examined copies, either certified
or otherwise proved to my satisfaction to be genuine, of its Articles of
Incorporation and By-Laws, as currently in effect, a certificate of good
standing issued by the State Department of Assessments and Taxation of the State
of Maryland and other documents relating to its organization and operation. I
have also reviewed the above-mentioned Registration Statement and all amendments
filed as of the date of this opinion and the documents filed as exhibits
thereto. I am generally familiar with the corporate affairs of the Fund.
Based upon the foregoing, it is my opinion that:
1. The Fund has been duly organized and is validly existing under the laws
of the state of Maryland.
2. The Fund is authorized to issue ten billion (10,000,000,000) shares of
Common Stock. Under Maryland law, shares of Common Stock which are issued and
subsequently redeemed by the Fund will be, by virtue of such redemption,
restored to the status of authorized and unissued shares.
3. Subject to the effectiveness of the above-mentioned Registration
Statement and compliance with applicable state securities laws, upon the
issuance of the Shares for a consideration not less than the par value thereof
as required by the laws of Maryland, and not less than the net asset value
thereof as required by the Investment Company Act of 1940 and in accordance with
the terms of the Registration Statement, such Shares will be legally issued and
outstanding and fully paid and non-assessable.
I hereby consent to the filing of this opinion with the Securities and
Exchange Commission as part of the above-mentioned Registration Statement and
with any state securities commission where such filing is required. In giving
this consent I do not admit that I come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended.
I am a member of the Bar of the State of Kentucky and do not hold myself
out as being conversant with the laws of any jurisdiction other than those of
the United States of America and the State of Kentucky. I note that I am not
licensed to practice law in the State of Maryland, and to the extent that any
opinion expressed herein involves the law of Maryland, such opinion should be
understood to be based solely upon my review of the good standing certificate
referred to above, the published statues of that State and, where applicable,
published cases, rules or regulations or regulatory bodies of that State.
Very truly yours,
/s/Kevin L. Howard
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the use of our report dated August
4, 1995, in the Post-Effective Amendment No. 10 to the Registration Statement
(Form N-1A) and related Prospectus of the State Bond Minnesota Tax-Free Income
Fund.
/s/Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
August 24, 1995
INDEPENDENT AUDITORS' CONSENT
Board of Directors of State Bond Tax-Free Income Funds, Inc.
and Shareholders of State Bond Minnesota Tax-Free Income Fund:
We consent to the use in the Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A of State Bond Minnesota Tax Free Income Fund, filed under
the Investment Company Act of 1940 and Securities Act of 1933, of our report
dated July 29, 1994 accompanying the financial statements of State Bond
Minnesota Tax-Free Income Fund for the year ended June 30, 1994, as listed in
Item 24(a) of such Registration Statement, and to the reference to us under the
heading "Condensed Financial Information" appearing in the Prospectus which is
part of such Registration Statement.
/s/Deloitte & Touche LLP
Minneapolis, Minnesota
August 24, 1995
EXHIBIT (16)
Computation of Performance Quotations
The Fund's 30-DAY YIELD for the period ended June 30, 1995 is calculated as
follows:
Formula:
6
YIELD = 2[(a-b +1) -1]
---
cd
Where: a= dividends and interest earned during the period
b= expenses accrued for the period (net of reimbursements)
c= the average daily number of shares outstanding during the
period that were entitled to receive dividends d= the
maximum offering price per share on the last day of the
period
6
4.20% = 2x[((81,041.17-15,012)/(1,712,486.048x11.11)+1) -1]
AVERAGE ANNUAL TOTAL RETURN figures for the current one year and five year
periods and for the life of the fund (beginning January 28, 1988) to the period
ending June 30, 1995 are calculated as follows:
n 1/n
Formula: P(1+T) = ERV; or T = ERV/p -1
Where: P = hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period
One year period:
2.30%= 1,023.08 -1
--------
1000
Five year period:
1/5
5.82%= 1,327.14 -1
--------
1000
Life of Fund (from January 28, 1988)
1.742
6.33%= 1576.70 -1
-------
1000
TAX EQUIVALENT YIELD figure for the period ended June 30, 1995 is
calculated as follows:
Formula: Tax Equivalent Yield = Yield
-----
1-.396
6.73 = 4.20x.9681
----------
.604
CUMULATIVE TOTAL RETURN for the period beginning January 28, 1988
(commencement of operations) through June 30, 1995 is calculated as follows:
Formula: CTR = ERV - P 100 P
Where: CTR = cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of the
period
P = initial payment of $1,000
57.67% = $1,576.70-$1,000
----------------100
$1,000
POWER OF ATTORNEY
The undersigned Director of the State Bond Minnesota Tax-Free Income Fund,
a Maryland corporation, hereby constitutes and appointed Kevin L. Howard,
Richard M. Carlblom, Peter S. Resnik and Don W. Cummings and each of them (with
full power to each of them to act alone), his true and lawful attorney-in-fact
and agent, with full power of substitution to each, for him and on his behalf
and in his name, place and stead, to execute and file any of the documents
referred to below relating to registrations under the Securities Act of 1933 or
the Investment Company Act of 1940 (the "Acts"): registration statements on any
form or forms under the Acts, and any and all amendments and supplements thereto
(including post-effective amendments), with all exhibits and all agreements,
consents, exemptive applications and other documents and instruments necessary
or appropriate in connection therewith, each of said attorneys-in-fact and
agents being empowered to act with or without the others or other, to have full
power and authority to do or cause to be done in the name and on behalf of the
undersigned each and every act and thing requisite and necessary or appropriate
with respect thereto to be done in and about the premises in order to effectuate
the same, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/William Faulkner
POWER OF ATTORNEY
The undersigned Director of the State Bond Minnesota Tax-Free Income Fund,
a Maryland corporation, hereby constitutes and appointed Kevin L. Howard,
Richard M. Carlblom, Peter S. Resnik and Don W. Cummings and each of them (with
full power to each of them to act alone), his true and lawful attorney-in-fact
and agent, with full power of substitution to each, for him and on his behalf
and in his name, place and stead, to execute and file any of the documents
referred to below relating to registrations under the Securities Act of 1933 or
the Investment Company Act of 1940 (the "Acts"): registration statements on any
form or forms under the Acts, and any and all amendments and supplements thereto
(including post-effective amendments), with all exhibits and all agreements,
consents, exemptive applications and other documents and instruments necessary
or appropriate in connection therewith, each of said attorneys-in-fact and
agents being empowered to act with or without the others or other, to have full
power and authority to do or cause to be done in the name and on behalf of the
undersigned each and every act and thing requisite and necessary or appropriate
with respect thereto to be done in and about the premises in order to effectuate
the same, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/Patrick M. Finley
POWER OF ATTORNEY
The undersigned Director of the State Bond Minnesota Tax-Free Income Fund,
a Maryland corporation, hereby constitutes and appointed Kevin L. Howard,
Richard M. Carlblom, Peter S. Resnik and Don W. Cummings and each of them (with
full power to each of them to act alone), his true and lawful attorney-in-fact
and agent, with full power of substitution to each, for him and on his behalf
and in his name, place and stead, to execute and file any of the documents
referred to below relating to registrations under the Securities Act of 1933 or
the Investment Company Act of 1940 (the "Acts"): registration statements on any
form or forms under the Acts, and any and all amendments and supplements thereto
(including post-effective amendments), with all exhibits and all agreements,
consents, exemptive applications and other documents and instruments necessary
or appropriate in connection therewith, each of said attorneys-in-fact and
agents being empowered to act with or without the others or other, to have full
power and authority to do or cause to be done in the name and on behalf of the
undersigned each and every act and thing requisite and necessary or appropriate
with respect thereto to be done in and about the premises in order to effectuate
the same, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/Chris L. Mahai
POWER OF ATTORNEY
The undersigned Director of the State Bond Minnesota Tax-Free Income Fund,
a Maryland corporation, hereby constitutes and appointed Kevin L. Howard,
Richard M. Carlblom, Peter S. Resnik and Don W. Cummings and each of them (with
full power to each of them to act alone), his true and lawful attorney-in-fact
and agent, with full power of substitution to each, for him and on his behalf
and in his name, place and stead, to execute and file any of the documents
referred to below relating to registrations under the Securities Act of 1933 or
the Investment Company Act of 1940 (the "Acts"): registration statements on any
form or forms under the Acts, and any and all amendments and supplements thereto
(including post-effective amendments), with all exhibits and all agreements,
consents, exemptive applications and other documents and instruments necessary
or appropriate in connection therewith, each of said attorneys-in-fact and
agents being empowered to act with or without the others or other, to have full
power and authority to do or cause to be done in the name and on behalf of the
undersigned each and every act and thing requisite and necessary or appropriate
with respect thereto to be done in and about the premises in order to effectuate
the same, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/John R. Lindholm
POWER OF ATTORNEY
The undersigned Director of the State Bond Minnesota Tax-Free Income Fund,
a Maryland corporation, hereby constitutes and appointed Kevin L. Howard,
Richard M. Carlblom, Peter S. Resnik and Don W. Cummings and each of them (with
full power to each of them to act alone), his true and lawful attorney-in-fact
and agent, with full power of substitution to each, for him and on his behalf
and in his name, place and stead, to execute and file any of the documents
referred to below relating to registrations under the Securities Act of 1933 or
the Investment Company Act of 1940 (the "Acts"): registration statements on any
form or forms under the Acts, and any and all amendments and supplements thereto
(including post-effective amendments), with all exhibits and all agreements,
consents, exemptive applications and other documents and instruments necessary
or appropriate in connection therewith, each of said attorneys-in-fact and
agents being empowered to act with or without the others or other, to have full
power and authority to do or cause to be done in the name and on behalf of the
undersigned each and every act and thing requisite and necessary or appropriate
with respect thereto to be done in and about the premises in order to effectuate
the same, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/John Katz
POWER OF ATTORNEY
The undersigned Director of the State Bond Minnesota Tax-Free Income Fund,
a Maryland corporation, hereby constitutes and appointed Kevin L. Howard,
Richard M. Carlblom, Peter S. Resnik and Don W. Cummings and each of them (with
full power to each of them to act alone), his true and lawful attorney-in-fact
and agent, with full power of substitution to each, for him and on his behalf
and in his name, place and stead, to execute and file any of the documents
referred to below relating to registrations under the Securities Act of 1933 or
the Investment Company Act of 1940 (the "Acts"): registration statements on any
form or forms under the Acts, and any and all amendments and supplements thereto
(including post-effective amendments), with all exhibits and all agreements,
consents, exemptive applications and other documents and instruments necessary
or appropriate in connection therewith, each of said attorneys-in-fact and
agents being empowered to act with or without the others or other, to have full
power and authority to do or cause to be done in the name and on behalf of the
undersigned each and every act and thing requisite and necessary or appropriate
with respect thereto to be done in and about the premises in order to effectuate
the same, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, may do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 31st
day of July, 1995.
/s/Theodore S. Rosky
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE STATE BOND TAX-FREE INCOME FUND AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000826037
<NAME> STATE BOND TAX-FREE INCOME FUNDS, INC.
<SERIES>
<NUMBER> 1
<NAME> STATE BOND MINNESOTA TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 17,560,454
<INVESTMENTS-AT-VALUE> 18,173,622
<RECEIVABLES> 371,583
<ASSETS-OTHER> 49,084
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18594,289
<PAYABLE-FOR-SECURITIES> 300,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 116,336
<TOTAL-LIABILITIES> 416,336
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,537,193
<SHARES-COMMON-STOCK> 1,713,138
<SHARES-COMMON-PRIOR> 1,577,967
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 27,592
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 613,168
<NET-ASSETS> 18,177,953
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,122,971
<OTHER-INCOME> 0
<EXPENSES-NET> 177,076
<NET-INVESTMENT-INCOME> 945,895
<REALIZED-GAINS-CURRENT> 27,592
<APPREC-INCREASE-CURRENT> 268,408
<NET-CHANGE-FROM-OPS> 1,241,895
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 945,895
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 311,971
<NUMBER-OF-SHARES-REDEEMED> 241,814
<SHARES-REINVESTED> 65,014
<NET-CHANGE-IN-ASSETS> 1,692,382
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 797
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 106,246
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 219,915
<AVERAGE-NET-ASSETS> 17,707,667
<PER-SHARE-NAV-BEGIN> 10.45
<PER-SHARE-NII> .56
<PER-SHARE-GAIN-APPREC> .16
<PER-SHARE-DIVIDEND> .56
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.61
<EXPENSE-RATIO> 1.0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
