<PAGE>
STATE BOND
Minnesota Tax-Free Income Fund
[LOGO APPEARS HERE]
State Bond
Minnesota Tax-Free
Income Fund
Semi-Annual
Report
December 31, 1995
<PAGE>
State Bond Minnesota Tax-Free Income Fund
JANUARY 12, 1996
TO THE SHAREHOLDERS:
The State Bond Minnesota Tax-Free Income Fund (the "Fund") had total net assets
at December 31, 1995 of $19.2 million, representing its highest level and
continued growth of the Fund. An attraction for the Fund is the income which is
exempt from both state and federal income taxes. The Fund paid dividends
totaling 27 cents per share for this six month period, along with a capital gain
distribution in December 1995 of 2 cents per share.
Net asset value per share increased from $10.61 to $10.84 per share during the
six month period. Bond valuations increased as interest rates trended lower. In
July 1995, the Federal Reserve announced a decrease in the Fed Funds rate and
continued a moderating policy with another decrease in December 1995. These
decreases, totaling .5%, coupled with a slowing economy resulted in lower
interest rates. This was evident by the 30-year Treasury bond which began the
period at 6.6% and closed the year just below 6.0%.
The portfolio continues to emphasize quality and diversification. The Schedule
of Investments in this report shows that the Fund owns 73 issues. The
portfolio's top five holdings include Robbinsdale Hospital, Northern Municipal
Power Agency, Rochester Health Care Facility, Rosemont Independent School
District, and Minneapolis Hospital Facility. Evidence of the Fund's quality may
be ascertained from the rating of each security by Moody's Investor Services,
Inc. and/or Standard and Poor's Corporation. By selecting the higher rating from
either service, tax exempt bonds comprising 32.0% of the total portfolio are A
rated, 28.1% are AA rated, and 36.4% are AAA rated. The remaining portion of the
portfolio is invested in short-term securities.
We appreciate your investment in the Fund and look forward to continuing to help
you meet your investment goals. Should you desire additional information, we
would welcome your inquiries.
Sincerely,
/s/ Keith O. Martens
Keith O. Martens
Vice President
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<TABLE>
<CAPTION>
State Bond Minnesota Tax-Free Income Fund
Schedule of Investments (Unaudited)
December 31, 1995
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
----------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (96.5%)
Albany, MN Independent School District
#745, G.O. Bonds, 6.00% due 2/1/2009 Aa/NR $ 235,000 $ 252,569
Blaine, MN Economic Development
Authority Bonds, Anoka and Ramsey
County, 7.25% due 12/1/2006 A1/NR 150,000 162,323
Bloomington, MN Port Authority Series
1994 A, 5.25% due 2/1/2003 Aaa/AAA 200,000 206,194
Burnsville, MN Multi-Family Housing Rev.
Ref. Bonds, Coventry Court Apartments
Project Series 1989, 7.50% due 9/1/2027 NR/AAA 100,000 106,272
Centennial, MN Independent School District
#12, G.O. Bonds, Series 1991 A, 7.15%
due 2/1/2011 Aaa/AAA 250,000 277,630
Coon Rapids, MN G.O. Tax Increment
Bonds Series 1986 B2, 7.75% due
2/1/2006 A/NR 150,000 150,462
Dakota County, MN G.O. Ref. Bonds,
6.45% due 2/1/2010 Aaa/AAA 300,000 327,459
Dakota County, MN Housing and Rev.
Authority, SFM Rev. Bonds, 7.20% due
12/1/2009 NR/AAA 180,000 189,382
Duluth, MN, G.O. Water Rev. Series 1992
A, 6.25% due 2/1/2007 A/NR 285,000 301,473
Duluth, MN Economic Development Rev.
Bonds, Health Care Facility, the Duluth
Clinic Ltd., 6.20% due 11/1/2012 Aaa/AAA 200,000 212,556
Eden Prairie, MN Housing and
Redevelopment Authority, 6.20% due
2/1/2008 A/NR 300,000 319,959
Eden Prairie, MN Multi-Family Housing
Preserve Place Apartments, 7.875% due
7/1/2017 NR/AAA 100,000 105,837
</TABLE>
2
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<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
----------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
Farmington Independent School District
#192, G.O. Bonds, 4.90% due 2/1/2004 NR/AA $ 200,000 $ 203,828
Foley, MN Independent School District #51
MBIA, 7.50% due 2/1/2008 Aaa/AAA 100,000 106,528
Hennepin County, MN Lease Rev.
Certificate of Participation Series 1991,
6.80% due 5/15/2017 Aa/AA 165,000 181,804
Kandiyohi County, MN, G.O. Ref. Bonds,
Series 1993, 5.65% due 2/1/2011 A/NR 225,000 230,168
Minnesota Higher Education Facilities
Authority Rev. Bonds Series Three J
(Macalaster College), 6.30% due 3/1/2014 Aa/AA- 300,000 318,831
Minnesota Higher Education Facilities
Authority Rev. Bonds Series Two-0
(College of St. Thomas), 7.60% due
10/1/2007 A/NR 100,000 108,534
Minnesota Higher Education Facilities
Authority Rev. Ref. Bonds Series 3-R2,
5.60% due 9/1/2014 A1/NR 315,000 318,018
Minnesota Higher Education Facilities
Authority Rev. Bonds Series 3M1, 6.00%
due 10/1/2010 NR/AAA 200,000 209,426
Minnesota Higher Education Facilities
Authority Rev. Bonds Series 3R1 (College
of St. Thomas), 5.45% due 10/1/2007 A1/NR 200,000 204,848
Minnesota Housing Finance Agency, SFM
Rev. Bonds Series 1991 C, 7.10% due
7/1/2011 Aa/AA+ 195,000 208,718
Minnesota Housing Finance Agency, SFM
Rev. Bonds Series C, 7.65% due 7/1/2008 Aa/AA 95,000 101,887
Minnesota Housing Finance Agency, SFM
Rev. Bonds Series 1989 B, 7.30% due
1/1/2017 Aa/AA 260,000 278,777
</TABLE>
3
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<TABLE>
<CAPTION>
State Bond Minnesota Tax-Free Income Fund
Schedule of Investments (Unaudited) (continued)
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
----------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
Minnesota Housing Finance Authority,
Series 1993 E, 6.00% due 2/1/2014 NR/AA $ 160,000 $ 162,789
Minnesota Public Facilities Authority Water
Pollution Control Rev. Bonds Series 1991
A, 6.95% due 3/1/2013 Aa/AAA 250,000 278,860
Minnesota Public Facilities Authority Water
Pollution Control Rev. Bonds Series 1990
A, 7.10% due 3/1/2012 Aa/AAA 300,000 333,843
Minnesota Public Facilities Authority Water
Pollution Control Rev. Bonds Series 1992
A, 6.50% due 3/1/2014 Aa/AAA 250,000 274,350
Minnesota State Housing Finance Agency
Rental Housing Series C Ref. Bonds,
6.15% due 2/1/2014 NR/AA 175,000 177,508
Minnesota State Housing Finance Agency
Single Family Mortgage 5.85% due
7/1/2011 Aa/AA+ 345,000 364,299
Minnesota State Housing Development
Single Family Mortgage Series B, 7.25%
due 7/1/2016 Aa/AA 50,000 51,695
Minnesota State G.O. Bonds Infrastructure
Development, 7.00% due 8/1/2007 Aaa/AAA 150,000 167,490
Minnesota State University Board Rev.
Bonds Series 1993 A, 6.00% due
6/30/2013 A/NR 300,000 311,256
Minneapolis, MN Hospital Facility Ref.
Rev. Bonds, 7.875% due 12/1/2014 Aaa/AAA 450,000 492,034
</TABLE>
4
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<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
----------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
Minneapolis, MN Multi-Family Housing
Rev. Ref. Bonds Series 1991, 7.05% due
10/1/2022 NR/AAA $ 300,000 $ 317,934
Minneapolis, MN Multi-Family Rev. Bonds,
7.125% due 12/20/2010 NR/AAA 200,000 214,856
Minneapolis, MN Refunding Laurel Village
G.O. Bonds, 5.75% due 9/1/2010 Aaa/AAA 275,000 285,791
Minneapolis-St. Paul, MN Metro Council
Sewer Bonds Series 1990 D, 7.25% due
12/1/2007 Aaa/AAA 150,000 166,951
Minneapolis, MN Sales Tax Ref. G.O.
Bonds, 6.25% due 4/1/2012 Aaa/AAA 250,000 270,397
Minnetonka, MN Multi-Family Housing
Rev. Bonds (Cedar Hills East Project),
7.50% due 12/1/2017 NR/AA 100,000 107,291
Moorhead, MN Public Utility Rev. Bonds
Series 1992, 6.05% due 11/1/2006 Aaa/AAA 300,000 323,250
Mora, MN G.O. Refunding Rev. Bonds,
5.00% due 2/1/2008 Aaa/AAA 200,000 201,580
Northern Municipal Power Agency, MN
Electric Rev. Ref. Bonds Series A, 7.25%
due 1/1/2017 Aaa/AAA 285,000 315,703
Northern Municipal Power Agency, MN
Electric Rev. Ref. Bonds 6.00% due
1/1/2020 A/A 530,000 535,644
Owatonna, MN Public Utility Ref. Bonds
Series 1990, 7.40% due 1/1/2007 A1/NR 300,000 334,704
Ramsey & Washington Counties Resource
Recovery Rev. Bonds NSP Project, 6.75%
due 12/1/2006 A1/AA- 100,000 106,426
Red Wing Independent School District
#256, G.O., School Building Series 1998
A, 7.30% due 2/1/2004 A1/NR 150,000 159,107
</TABLE>
5
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
MOODY'S/S&P PRINCIPAL
RATING AMOUNT VALUE
----------------------------------------
<S> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
Robbinsdale, MN Hospital Ref. Rev.
NMMCP 1989, 7.20% due 1/1/2005 Aaa/AAA $ 100,000 $ 110,633
Robbinsdale, MN Hospital Ref. Rev.
NMMCP Series A, 5.45% due 5/15/2013 Aaa/AAA 670,000 681,269
Rochester, MN Health Care Facility Rev.
Bonds Mayo Medical Center, 6.25% due
11/15/2021 NR/AA+ 500,000 528,180
Rosemont Independent School District
Series A, 5.875% due 6/1/2014 Aa/AA 500,000 522,065
St. Anthony-New Brighton, MN
Independent School District #282, G.O.
Bonds 5.70% due 2/1/2012 Aa/NR 300,000 313,524
St. Cloud, MN Hydro Electric Generator
Facility Gross Rev., 7.375% due
12/16/2018 NR/A- 250,000 261,150
St. Paul, MN, G.O. Street Improvement,
Special Assessment Bonds Series 1988 D,
7.20% due 3/1/2008 Aa/AA+ 100,000 100,496
St. Paul, MN Housing & Redevelopment
Authority Tax Increment Bonds 7.40%
due 9/1/2005 Aaa/AAA 100,000 104,516
St. Paul, MN Housing and Redevelopment
Authority Revenue Bonds 5.40% due
9/1/2008 Aaa/AAA 300,000 306,855
St. Paul, MN Housing and Redevelopment
Authority Parking Rev. Bonds, 6.45% due
8/1/2007 NR/A- 300,000 331,788
St. Paul, MN, Independent School District
#625 Series C, 5.55% due 2/1/2012 Aa/AA 300,000 305,625
St. Paul, MN, Independent School District
#625 Series 1994 C, 6.05% due 2/1/2012 Aa/AA 400,000 424,092
</TABLE>
6
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<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, 7.25% due 2/1/2009 Aa/AA $ 150,000 $ 163,570
Scott County, MN G.O. Capital
Improvement Plan, Series 1988 A, 7.25%
due 12/1/2008 Aaa/AAA 100,000 106,333
Southern Minnesota Municipal Power
Authority Series A, 8.125% due 1/1/2018 Aaa/AAA 300,000 329,532
Stearns County, MN G.O. Ref. Bonds Series
B, 6.00% due 10/1/2007 A/NR 325,000 344,364
Vadnais Heights, MN Housing
Development Rev. Bonds, Riverwood
Housing Foundation, 7.50% due 8/1/2009 A/A+ 115,000 115,388
Wayzata, MN Tax Increment Bonds 7.00%
due 6/1/2010 Aa/NR 200,000 222,122
Wayzata, MN Independent School District
#284 G.O. Bonds Series 1994 B, 5.80%
due 2/1/2009 Aa/NR 250,000 262,650
Western Minnesota Municipal Power
Agency Power Supply Rev. Ref. Bonds
6.875% due 1/1/2007 A1/A 300,000 313,149
Western Minnesota Municipal Power, Series
A, 6.125% due 1/1/2016 A1/A 250,000 250,088
Western Minnesota Municipal Power
Agency Transmission Project Rev. Ref.
Bonds Series 1991, 6.75% due 1/1/2016 Aaa/AAA 200,000 222,026
White Bear Lake Minnesota School District
Series C, 6.00% due 2/1/2012 Aa/NR 250,000 260,209
Worthington, MN G.O. Water Rev. Bonds
Series 1990 A, 7.00% due 2/1/2010 A/NR 100,000 109,130
</TABLE>
7
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State Bond Minnesota Tax-Free Income Fund
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------------
<S> <C> <C>
MUNICIPAL BONDS (continued)
Wright County, MN G.O. Jail Ref. Bonds
Series 1992 B, 6.00% due 2/1/2007 A/NR $350,000 $ 371,084
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TOTAL MUNICIPAL BONDS (Cost $17,046,097) 18,097,079
SHORT-TERM SECURITIES (3.5%)
Ford Motor Credit Corp., 5.92% due
1/03/96 325,000 324,920
Ford Motor Credit Corp., 5.65% due
1/04/96 325,000 324,871
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TOTAL SHORT-TERM SECURITIES
(Cost $649,791) 649,791
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TOTAL INVESTMENTS (100.0%) (Cost
$17,695,888*) $18,746,870
===========
</TABLE>
*Also represents cost for federal income tax purposes.
Ratings were provided by Moody's Investor Service, Inc. and Standard & Poor's
Corporation.
See accompanying notes.
8
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State Bond Minnesota Tax-Free Income Fund
Statement of Assets and Liabilities
December 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at value (cost $17,695,888)
(Note 1)-See accompanying schedule $18,746,870
Cash 46,881
Receivable for reimbursable expenses (Note 2) 3,181
Prepaid assets 11,722
Interest receivable 365,379
-----------
TOTAL ASSETS 19,174,033
Liabilities
Payable to affiliates 15,176
Accrued expenses 4,395
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TOTAL LIABILITIES 19,571
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NET ASSETS $19,154,462
===========
Net Assets consist of:
Paid-in capital $18,108,617
Undistributed net realized loss on investments (5,137)
Net unrealized appreciation on investment securities 1,050,982
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NET ASSETS, for 1,767,056 shares outstanding $19,154,462
===========
NET ASSET VALUE and redemption price per share $ 10.84
===========
Maximum offering price per share (includes maximum sales
charge of 4.5%-reduced on purchases of $50,000 or more) $ 11.35
===========
</TABLE>
See accompanying notes.
9
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State Bond Minnesota Tax-Free Income Fund
Statement of Operations
Six Months Ended December 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest $564,016
EXPENSES (Note 2)
Investment advisory and management fees, net of Rule 12b-1 plan fees 55,528
Rule 12b-1 plan fees 23,137
Accounting and custodian fees 8,762
Professional fees 8,436
Shareholders' reports 3,823
Transfer agent fees 3,887
Other expenses 5,801
--------
Total expenses before reimbursement 109,374
Less: expense reimbursement (17,210)
--------
Net expenses 92,164
--------
Net investment income 471,852
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 1)
Net realized gain on investments 2,090
Change in unrealized appreciation on investment securities 437,814
--------
Net realized and unrealized gain on investments 439,904
--------
Net increase in net assets resulting from operations $911,756
========
</TABLE>
See accompanying notes.
10
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, YEAR ENDED
1995 JUNE 30,
(UNAUDITED) 1995
-----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 471,852 $ 945,895
Net realized gain on investments 2,090 27,592
Net unrealized appreciation 437,814 268,408
-----------------------------
Net increase in net assets resulting
from operations 911,756 1,241,895
Distributions to shareholders from:
Net investment income (471,852) (945,895)
Net realized gain (34,819) -
-----------------------------
Total distributions to shareholders (506,671) (945,895)
Capital share transactions:
Proceeds from sales of shares 828,147 3,233,318
Proceeds from reinvested dividends 423,920 675,610
Cost of shares redeemed (680,643) (2,512,546)
-----------------------------
Net increase in net assets resulting
from share transactions 571,424 1,396,382
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Total increase in net assets 976,509 1,692,382
NET ASSETS
Beginning of period 18,177,953 16,485,571
-----------------------------
End of period $19,154,462 $18,177,953
=============================
OTHER INFORMATION
Shares:
Sold 78,141 311,971
Issued through reinvestment of dividends 38,642 65,014
Redeemed (62,865) (241,814)
-----------------------------
Net increase 53,918 135,171
=============================
</TABLE>
See accompanying notes.
11
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State Bond Minnesota Tax-Free Income Fund
Financial Highlights
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,
(UNAUDITED) YEAR ENDED JUNE 30,
------------------------------------------------------------------------
1995 1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.61 $ 10.45 $ 10.94 $ 10.49 $ 10.18 $ 10.11
Income from investment operations:
Net investment income .27 .56 .56 .59 .61 .62
Net realized and unrealized gain
(loss) on investments .25 .16 (.47) .45 .33 .07
------------------------------------------------------------------------
Total from investment operations .52 .72 .09 1.04 .94 .69
Less distributions:
From net investment income (.27) (.56) (.56) (.59) (.61) (.62)
From net realized gain (.02) - (.02) - (.02) -
------------------------------------------------------------------------
Total distributions (.29) (.56) (.58) (.59) (.63) (.62)
------------------------------------------------------------------------
Net asset value, end of period $ 10.84 $ 10.61 $ 10.45 $ 10.94 $ 10.49 $ 10.18
========================================================================
TOTAL RETURN(A) 4.96% 7.10% 0.79% 10.06% 9.47% 6.87%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 19,154 $ 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% 1.00%
Ratio of net investment income to average
net assets(C) 5.10% 5.37% 5.14% 5.41% 5.86% 6.17%
Portfolio turnover rate 5% 6% 2% 15% 1% 8%
</TABLE>
(A) Total returns do not consider the effects of the one time sales charge and
periods less than one year are not annualized.
(B) The ratio of expenses to average net assets before voluntary expense
reimbursements from the investment adviser for the six months ended
December 31, 1995 and for the years ended June 30, 1995, 1994, 1993, 1992,
and 1991 were 1.18%, 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 reimbursement from the investment adviser for the six months ended
December 31, 1995 and for the years ended June 30, 1995, 1994, 1993, 1992,
and 1991 were 4.91%, 5.10%, 4.87%, 5.02%, 5.32%, and 5.53%, respectively.
12
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State Bond Minnesota Tax-Free Income Fund
Notes to Financial Statements
December 31, 1995 (Unaudited)
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
13
<PAGE>
State Bond Minnesota Tax-Free Income Fund
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 December 31, 1995, net unrealized appreciation on a Federal income tax basis
was $1,050,982, which is comprised of unrealized appreciation of $1,050,982.
INCOME TAX STATUS
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 taxes is required.
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
14
<PAGE>
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES (CONTINUED)
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 $27,877 for the six months ended
December 31, 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.
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 six months ended December 31, 1995, amounted to
$1,456,651 and $799,460, respectively.
4. CAPITAL SHARES
At December 31, 1995, the Fund had authority to issue ten billion shares of
common stock, each with a par value of $.00001 par value.
15
<PAGE>
BOARD OF DIRECTORS
William B. Faulkner
President, William Faulkner & Associates, Inc.
Director, State Bond mutual funds
Patrick M. Finley
President, Universal Cooperatives, Inc.
Director, State Bond mutual funds
John Katz
Executive Vice President, Equitable Investment Corporation, retired 1991
Director, State Bond mutual funds
John R. Lindholm
Executive Vice President, ARM Financial Group, Inc.
Chairman, State Bond mutual funds
Chris L. Mahai
Senior Vice President, Strategic Integration, Star Tribune
Director, State Bond mutual funds
Theodore S. Rosky
Executive Vice President and Chief Financial Officer,
Providian Corporation, retired 1992
Director, State Bond mutual funds
--------------------------------------
INVESTMENT ADVISER
ARM Capital Advisors, Inc.
GENERAL DISTRIBUTOR
SBM Financial Services, Inc.
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
1-800-328-4735
CUSTODIAN
Investors Fiduciary Trust Company
Kansas City, Missouri
--------------------------------------
This report is intended for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless
accompanied or preceded by the offering prospectus of the Fund, which contains
details of sales commissions and other information.
Catalog #001724
