<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 29, 1996
Registration Nos. 2-19600 and 811-1138
- -------------------------------------------------------------------------------
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. 58 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 20 [X]
STATE BOND EQUITY FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (507) 354-2144
Kevin L. Howard, Esq.
239 S. Fifth Street, 12th floor
Louisville, KY 40202-3271
(Name and Address of Agent for Service)
Copies to:
Joel H. Goldberg, Esq.
Shereff, Friedman, Hoffman & Goodman, LLP
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 May 1, 1996 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 December 31, 1995 was filed on February 23, 1996.
<PAGE>
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(a) UNDER THE SECURITIES ACT OF 1933
Item # and Caption Heading in
Form N-lA Prospectus
------------------- ----------
Part A
Item a.Cover Page................................................COVER PAGE
Item b.Synopsis.....................................SHAREHOLDER TRANSACTION
AND OPERATING EXPENSE TABLE
Item c.Condensed Financial Information.................FINANCIAL HIGHLIGHTS
Item d.General Description of Registrant................GENERAL INFORMATION
ABOUT STATE BOND U.S. GOVERNMENT
AND AGENCY SECURITIES FUND;
WHAT ARE THE FUND'S INVESTMENT
OBJECTIVES, POLICIES AND RISKS?
Item e.Management of the Fund......................HOW IS THE FUND MANAGED?
Item 5A. Management's Discussion of
Fund Performance...............................................N/A
Item f.Capital Stock and other Securities...............GENERAL INFORMATION
ABOUT STATE BOND U.S. GOVERNMENT
AND AGENCY SECURITIES FUND
Item g.Purchase of Securities Being Offered..............HOW CAN YOU INVEST
IN THE FUND?
HOW ARE THE FUND'S SALES CHARGES
DETERMINED? WHAT IS THE FUND'S
PLAN OF DISTRIBUTION? HOW DOES THE
FUND'S EXCHANGE PRIVILEGE WORK?
WHAT SERVICES DOES THE FUND OFFER?
Item h.Redemption of Repurchase..........................HOW CAN YOU "SELL"
YOUR SHARES?
Item i.Legal Proceedings.....................................NOT APPLICABLE
Part B
Item j.Cover Page................................................COVER PAGE
Item k.Table of Contents.........................................COVER PAGE
Item l.General Information and History..................GENERAL INFORMATION
Item m.Investment Objectives and Policies...............WHAT ARE THE FUND'S
INVESTMENT OBJECTIVES,
POLICIES AND RISKS?
WHAT ARE FUND'S
INVESTMENT LIMITATIONS?
Item n.Management of the Registrant...................WHO MANAGES THE FUND?
THE MANAGER
Item o.Control Persons and Principal
Holders of Securities....................................WHO MANAGES
THE FUND?
THE MANAGER
Item p.Investment Advisory and Other Services........WHO MANAGES THE FUND?;
MANAGEMENT AGREEMENT AND
EXPENSES; TRANSFER AGENT;
CUSTODIAN; INDEPENDENT AUDITORS
Item q.Brokerage Allocation............PORTFOLIO TRANSACTIONS AND BROKERAGE
Item r.Capital Stock and Other Securities................PURCHASE OF SHARES
i
<PAGE>
Item s.Purchase, Redemption and Pricing of Securities
Being Offered....................................PURCHASE OF SHARES;
HOW IS THE OFFERING PRICE DETERMINED?
HOW CAN YOU "SELL" YOUR SHARES?
HOW IS NET ASSET VALUE
PER SHARE DETERMINED?
Item t.Tax Status...................................TAX STATUS OF THE FUND?
WILL THE FUND WITHHOLD
TAXES ON DISTRIBUTIONS?
Item u.Underwriters...................................PLAN OF DISTRIBUTION;
HOW ARE SHARES DISTRIBUTED?
Item v.Calculation of Performance Data.......................CALCULATION OF
PERFORMANCE DATA
Item w.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.
ii
<PAGE>
PROSPECTUS
STATE BOND COMMON STOCK FUND
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
Phone: (507) 354-2144
May 1, 1996
State Bond Common Stock Fund (the "Fund") is a mutual fund which seeks to
produce long-term capital appreciation with dividend income as fair and
reasonable as possible consistent with the Fund's primary objective of
investing in common stocks. The Fund is the only investment portfolio of
State Bond Equity Funds, Inc.
This Prospectus concisely sets forth information about the Fund which
investors should know before investing. Please read it carefully before
you invest and keep it for future reference.
Additional information about the Fund is contained in a Statement of
Additional Information filed with the Securities and Exchange Commission
and is available upon request and without charge by calling or writing the
Fund at (800) 328-4735, 100 North Minnesota Street, P.O. Box 69, New Ulm,
Minnesota 56073-0069. The Statement of Additional Information is dated the
same date as this Prospectus and is incorporated herein by reference in its
entirety.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK AND IS NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER FEDERAL AGENCY. AN INVESTMENT IN THE FUND INVOLVES
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE 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.
<PAGE>
TABLE OF CONTENTS
SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE..........................
FINANCIAL HIGHLIGHTS.........................................................
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?..............
HOW IS THE FUND MANAGED?.....................................................
WHAT ABOUT 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 Can You Reinstate Your Investment?...................................
HOW DOES THE FUND'S EXCHANGE PRIVILEGE WORK?.................................
HOW DOES THE FUND PAY DIVIDENDS AND DISTRIBUTIONS?...........................
What Are Your Dividend And Capital Gain Distribution Options?............
WHAT IS THE TAX STATUS OF DIVIDENDS AND DISTRIBUTIONS YOU RECEIVE?...........
WHAT IS THE FUND'S PLAN OF DISTRIBUTION?.....................................
WHO ARE THE FUND'S FUND ACCOUNTING AGENT AND ITS CUSTODIAN?..................
WHAT SERVICES DOES THE FUND OFFER?...........................................
What About Shareholder Information?......................................
What Reports Will You Receive From the Fund?.............................
Are Certificates Issued For Shares?......................................
Other Services...........................................................
What Tax Deferred Retirement Plans Are Available?........................
GENERAL INFORMATION ABOUT STATE BOND COMMON STOCK FUND.......................
INVESTMENT PERFORMANCE.......................................................
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE..................................
2
<PAGE>
SHAREHOLDER TRANSACTION AND OPERATING EXPENSE TABLE
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).......................... 4.75%
ANNUAL FUND EXPENSES (As a percentage of average daily net
assets)
Management Fee............................................... .65%
12b-1 Plan Fee............................................... .25%
Other Expenses............................................... .28%
-----
Total Fund Expenses 1.18%
=====
</TABLE>
A $10.00 fee will be charged for certain redemptions by wire transfer. See
"How Can You 'Sell' Your Shares?"
EXAMPLE:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following aggregate
expenses on a $1,000 investment,
assuming (1) 5% annual return and (2)
redemption at the end of each time period $59 $83 $109 $184
</TABLE>
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 December
31, 1995. For more information concerning fees and expenses, see "How Is
The Fund Managed?" and "What is the Fund's Plan of Distribution?"
3
<PAGE>
FINANCIAL HIGHLIGHTS
The information presented below for the fiscal year ended December 31, 1995
has been audited by Ernst & Young LLP, independent auditors for the Fund,
and the financial statements of the Fund, along with the report of Ernst &
Young LLP thereon, are set forth in the Statement of Additional
Information. The information presented below for each fiscal year in the
four-year period ended December 31, 1994 has been audited by Deloitte &
Touche LLP, the previous auditors for the Fund. Further information about
the performance of the Fund is contained in the Fund's most recent annual
report to shareholders which may be obtained, without charge, by calling or
writing the Fund at the telephone number or address on the front cover of
this Prospectus.
PER SHARE INVESTMENT INCOME AND CAPITAL CHANGES
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------------
1995* 1994 1993 1992 1991 1990 1989 1988 1987 1986
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period.................... $ 7.69 $ 7.91 $ 8.71 $ 9.23 $ 7.34 $ 8.10 $ 6.23 $ 6.11 $ 6.35 $ 6.30
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income....... .08 .09 .09 .10 .12 .16 .14 .12 .12 .09
Net realized and
unrealized gain (loss) on
investments................. 2.08 .25 .07 (.03) 2.31 (.08) 2.49 .48 .27 .77
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations.................. 2.16 .34 .16 .07 2.43 .08 2.63 .60 .39 .86
LESS DISTRIBUTIONS:
From net investment income.. (.08) (.09) (.09) (.10) (.12) (.16) (.16) (.12) (.12) (.10)
From net realized gain...... (.32) (.47) (.87) (.49) (.42) (.68) (.60) (.36) (.51) (.71)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions......... (.40) (.56) (.96) (.59) (.54) (.84) (.76) (.48) (.63) (.81)
Net asset value at end of
period....................... $ 9.45 $ 7.69 $ 7.91 $ 8.71 $ 9.23 $ 7.34 $ 8.10 $ 6.23 $ 6.11 $ 6.35
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return**............... 28.14% 4.32% 1.83% 0.74% 33.45% 0.92% 42.45% 9.86% 6.16% 13.94%
Ratios/Supplemental Data:
Net assets, end of period
(in thousands).............. $63,841 $52,703 $44,492 $46,331 $46,882 $36,554 $37,042 $28,357 $28,458 $30,098
Ratio of expenses to
average net assets.......... 1.18% 1.22% 1.22% 1.21% 1.22% 1.19% 1.06% 1.08% .94% .98%
Ratio of net investment
income to average net
assets...................... .87% 1.06% 1.05% 1.10% 1.45% 1.97% 1.77% 1.89% 1.46% 1.36%
Portfolio turnover rate
(excluding short-term
securities)................. .2% 16%*** 26% 8% 9% 9% 19% 5% 8% 7%
- -------------------------------------------
</TABLE>
* ARM Capital Advisors, Inc. began managing the investment operations of
the Fund on June 14, 1995.
** Total return does not contain the effects of sales load.
*** The portfolio turnover rate does not include the acquisition of the net
assets of the State Bond Progress Fund which were acquired by the
Fund on June 24, 1994.
4
<PAGE>
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?
The Fund seeks to produce long-term capital appreciation with dividend
income as fair and reasonable as possible consistent with the Fund's
primary objective by investing primarily in common stocks. Under normal
circumstances, sixty-five percent or more of the Fund's portfolio will be
invested in common stocks with the remainder being invested in government
securities, short-term securities rated within the top three ratings of
Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's") or securities convertible to common stocks. There can be no
assurance that the Fund's objectives will be attained.
The Fund's assets have been invested primarily in common stocks since
operations started. The Manager seeks to temper the inherent risks of
investment in common stocks by diversifying the Fund's investments. When
considered appropriate, the Fund's assets may be invested in stocks of
companies considered by the Manager to be less sensitive to changes in
economic or market conditions, or may be held in cash or invested in senior
securities.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend portfolio securities to
brokers or dealers, but as a fundamental policy will only make such loans
if the aggregate market value of securities loaned does not exceed 10% of
the market value of the Fund's total assets. The borrower must maintain
with the Fund cash or U.S. Government securities equal to at least 100% of
the market value of the securities loaned. Lending of portfolio securities
involves certain risks. As with other extensions of credit, there are
risks of delay in recovery of loaned securities, or even loss of rights in
collateral pledged by the borrower, should the borrower fail financially.
The Fund also may experience a loss if upon the failure of a borrower to
return loaned securities the collateral is not sufficient in value or
liquidity to cover the value of the loaned securities. During the time
portfolio securities are on loan, the borrower pays the Fund an amount
equivalent to any dividends or interest paid on the securities and the Fund
may invest the cash collateral and earn additional income or may receive an
agreed upon amount of interest income from the borrower. To the extent that
the Fund invests cash collateral, the Fund may incur additional risk
associated with the change in value of the invested collateral.
INVESTMENT RESTRICTIONS. In addition to the policies and limitations set
forth above, the Fund is subject to certain other investment policies and
limitations set forth more fully in the Statement of Additional
Information. As a matter of fundamental policy, the Fund may not: (1)
invest more than 5% of the market value of its total assets in the
securities of any one issuer, other than the U.S. Government or its
agencies, or purchase any security if, as a result, it would hold more than
10% of the outstanding voting securities of any issuer; (2) borrow money
except from banks as a temporary emergency measure and then not in excess
of 10% of the Fund's total assets at cost; (3) purchase the securities of
an issuer in continuous operation for less than three years if more than 5%
of the Fund's assets would be so invested; and (4) invest more than 25% of
its net asset value 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,
5
<PAGE>
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 (the "Board") provides broad supervision over the
affairs of the Fund. Pursuant to an Investment Advisory and Management
Agreement approved by the Board and the shareholders of the Fund, ARM
Capital Advisors, Inc. (the "Manager") manages the investments of the Fund
and administers its business and other affairs. The address of the Manager
is 200 Park Avenue, 20th Floor, New York, New York 10166.
The Manager is a wholly-owned subsidiary of ARM Financial Group, Inc.
("ARM"), a Delaware corporation. ARM is a financial services company
providing retail and institutional products and services to the long-term
savings and retirement market. The Morgan Stanley Leveraged Equity Fund
II, L.P., Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital
Investors, L.P. and MSCP III 892 Investors, L.P., investment funds
sponsored by Morgan Stanley Group, Inc. ("Morgan Stanley"), own
approximately 91% of the outstanding shares of voting stock of ARM. The
Manager currently provides investment management services to institutional
and individual clients, including ARM and its subsidiaries, with combined
assets in excess of $4 billion.
The Manager commenced investment advisory operations on January 5, 1995, on
which date it acquired the domestic fixed income unit of Kleinwort Benson
Investment Management Americas Inc. The Manager has managed the Fund since
June 14, 1995 and since that date has also managed the other mutual funds
in the State Bond Group of mutual funds: State Bond Cash Management Fund,
State Bond Diversified Fund, State Bond U.S. Government and Agency
Securities Fund, State Bond Tax Exempt Fund and State Bond Minnesota Tax-
Free Income Fund. The Manager is also the investment manager of The Legends
Fund, Inc.
Keith O. Martens, Senior Vice President and Senior Portfolio Manager of the
Manager and Vice President of the Fund, is responsible for the selection of
investments and management of the Fund. Mr. Martens has managed the Fund
since 1984. Mr. Martens is also the portfolio manager of the State Bond
Diversified Fund, State Bond Tax Exempt Fund, State Bond Minnesota Tax-Free
Income Fund, State Bond U.S. Government and Agency Securities Fund, and
State Bond Cash Management Fund.
The Fund pays the Manager a management fee, calculated daily and payable
monthly, equal to an annual fee of .65 of 1% on the first $100,000,000 of
average daily net assets of the Fund, .60 of 1% on the next $100,000,000 of
average daily net assets of the Fund and .55 of 1% of average daily net
assets of the Fund over $200,000,000. The Fund pays all its expenses other
than those assumed by the Manager. Total expenses of the Fund for its
fiscal year ended December 31, 1995, amounted to 1.18% of its average daily
net assets.
6
<PAGE>
WHAT ABOUT BROKERAGE COMMISSIONS?
In the purchase and sale of portfolio securities for the Fund, the Manager
will seek the most favorable price and execution and, consistent with that
policy, may give consideration to the research and statistical services
furnished by brokers to the Manager for its use. In addition, the Manager
is authorized to place orders with brokers who provide supplemental
investment and market research and security and economic analysis although
the use of such brokers may result in a higher brokerage charge to the Fund
and although such research and analysis received may be useful to the
Manager in connection with its services to other clients as well as to the
Fund.
HOW CAN YOU INVEST IN THE FUND?
SBM Financial Services, Inc. (the "Distributor"), and ARM Transfer Agency,
Inc. (the "Shareholder Servicing Agent"), each a subsidiary of ARM, act as
distributor and transfer agent, respectively, of the Fund's shares. Their
address is 100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota
56073-0069.
Shares of the Fund are offered for sale through the Distributor and through
certain broker-dealers under contract with the Distributor. After you
become a shareholder, you may buy additional shares by sending a check
drawn to State Bond Common Stock Fund directly to the Shareholder Servicing
Agent at 100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-
0069. Orders for the purchase of shares will be executed at the offering
price based upon the net asset value next determined after receipt and
acceptance of the order by the Distributor. Orders for shares placed
through broker-dealers will be executed at the offering price next
determined after the receipt of the order by the broker-dealer, provided
that the broker-dealer promptly transmits the order to the Distributor the
same day. The broker-dealer is responsible for transmitting the purchase
order to the Distributor. The Fund reserves the right to reject any order
for the purchase of its shares. The minimum initial investment is $250 and
subsequent investments must be in the amount of at least $50. The Fund
reserves the right to change these minimum investments. The Fund will not
be responsible for the consequences of delays in the banking or Federal
Reserve wire systems.
You may also purchase shares of the Fund by wiring the purchase price to
the Fund's account with State Bank & Trust Company of New Ulm, Minnesota.
Prior to wiring your money, you must notify the Shareholder Servicing Agent
by telephone at (800) 328-4735 of your wire purchase order. If you are
making an initial investment, the Shareholder Servicing Agent will also
require that you furnish some additional information (including your name,
address and social security number or tax identification number) and will
provide you with a Fund account number. Next, you should instruct your
bank to wire the specified amount, along with your account number and your
name, to:
7
<PAGE>
Credit account of State Bank & Trust Company of New Ulm
at Federal Reserve Bank of Minneapolis
Account #091901202
For further credit to Account #780
For benefit of Account Number (your Fund account number) of (your name).
If the wire transfer is for an initial investment, a completed investment
application must be sent to the Fund as soon as possible so the necessary
remaining information can be recorded in your account. Once your account is
established, you may automatically make additional investments (in minimum
amounts of $50) by authorizing monthly withdrawals directly from your
personal checking account. Further information on this service is
available by contacting a representative of the Distributor.
HOW IS THE OFFERING PRICE OF THE FUND'S SHARES DETERMINED?
The price you pay for shares of the Fund is the offering price, which 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 per share 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.
Securities are valued at current market prices based upon readily available
quotations or, in their absence, at fair value determined by the Board of
Directors. Short-term holdings maturing in 60 days or less are valued at
cost plus accrued interest, which approximates market value.
8
<PAGE>
HOW ARE THE FUND'S SALES CHARGES DETERMINED?
Sales charges are determined in accordance with the following schedule:
<TABLE>
<CAPTION>
REGULAR
DEALER
DISCOUNT
% OF % OF NET AS % OF
OFFERING AMOUNT OFFERING
PRICE INVESTED PRICE
------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.75% 4.99% 4.25%
$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% 2.20%
$500,000 but less than $1,000,000 2.00% 2.04% 1.75%
$1,000,000 but less than $2,000,000 1.00% 1.01% .80%
$2,000,000 or more .50% .50% .40%
</TABLE>
The sales charge varies depending on the size of the purchase, the number
of shares of 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.
9
<PAGE>
HOW CAN YOU "SELL" YOUR SHARES?
You may redeem your shares without charge at any time by writing to the
Shareholder Servicing Agent at 100 North Minnesota Street, P.O. Box 69, New
Ulm, Minnesota 56073-0069. You will receive the net asset value per share
next determined after receipt of your request in proper form by the
Shareholder Servicing Agent. The written redemption request should
identify the account number and be signed by the shareholder(s) exactly as
the shares are registered. For share redemptions valued at $20,000 or
more, your signature(s) must be guaranteed by a national securities
exchange, a member firm of a principal stock exchange, a registered
securities association, a clearing agency, a bank or trust company, a
savings association, a credit union, a broker, a dealer, a municipal
securities broker or dealer, a government securities broker or dealer, or a
representative of the Distributor. Further documentation may be required
from corporations, executors, partnerships, administrators, trustees or
custodians. If stock certificates have been issued for the shares that you
wish to redeem, you must surrender the certificates in proper form,
endorsed for transfer or accompanied by an endorsed stock power. For your
protection, any certificates should be sent by registered mail.
Shares may also be redeemed through authorized dealers and through
representatives of the Distributor. Requests for redemption received by the
Shareholder Servicing Agent from authorized dealers or representatives of
the Distributor prior to the close of the New York Stock Exchange will be
executed at the net asset value per share determined at the close of the
New York Stock Exchange on that day. Dealers and representatives are
responsible for promptly submitting such redemption requests to the
Shareholder Servicing Agent in order to obtain that day's closing price.
Requests for redemption received by the Shareholder Servicing Agent from
dealers or representatives of the Distributor after the close of the New
York Stock Exchange will be executed at the net asset value determined at
the close of the New York Stock Exchange on the next trading day.
A check for the proceeds of the redemption of your shares ordinarily will
be mailed to you within seven calendar days after a redemption request is
received in proper form. However, where shares purchased by means of an
uncertified check are redeemed before the fifteenth day after purchase,
proceeds will not be mailed until the check clears, which may be up to
fifteen days after purchase. Proceeds of a redemption may be more or less
than the cost of the shares when purchased.
Because of the relatively high cost of handling small accounts, the Fund
reserves the right to redeem, upon not less than 30 days' written notice,
the shares in an account which have a value of less than $250. 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 $250 due to
market value changes.
10
<PAGE>
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. 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 respective net asset values next
determined after receipt of the request for exchange. 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 which you are considering. The Fund reserves the
right to terminate or modify the terms of this exchange privilege upon 60
days' notice to shareholders. The exchange privilege is only available in
states in which the shares of the fund to be acquired are available for
purchase.
Exchange requests may be made in writing, signed by all registered owners,
to the Shareholder Servicing Agent at 100 North Minnesota Street, P.O. Box
69, New Ulm, Minnesota 56073-0069. Shares also may be exchanged by
telephone by calling (800) 328-4735, provided you have on file an
Agreement for Exchange of Shares by Telephone (included on the Investment
Application or available from the Shareholder Servicing Agent). Shares
held by trustees of retirement plans may not be exchanged by telephone.
During times of drastic economic or market changes the telephone exchange
privilege may be difficult to implement. In order to implement an exchange,
you will need to provide the name in which your account is registered, your
account number, such other personal identification information as the Fund
may request, the dollar amount or share amount you wish to exchange, the
name of the fund into which you wish to exchange and, if you already have
an account with the fund into which you wish to exchange, the account
registration and account number of such account.
The Fund is not liable for any loss arising from telephone exchanges that
the Fund reasonably believes to be genuine. The Fund will employ reasonable
procedures to confirm that instructions communicated by telephone are
genuine; if it does not, it may be liable for any losses due to
unauthorized or fraudulent instructions. The procedures used by the Fund
will include requesting
11
<PAGE>
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's net investment income, if any, is paid semi-annually (normally
in June and December) in the form of a dividend to shareholders of record.
Payments vary in amount depending on income received from portfolio
securities and costs of operation. The Fund distributes substantially all
of any taxable net gain realized on its investments to shareholders shortly
before the calendar year-end.
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 100 North Minnesota Street, P.O. Box 69, New Ulm,
Minnesota 56073-0069.
WHAT IS THE TAX STATUS OF DIVIDENDS AND DISTRIBUTIONS YOU RECEIVE?
The Fund has fulfilled, and intends to continue to fulfill, the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"),
so that it will not be subject to federal income tax on its net investment
income and capital gains, if any, that it distributes to shareholders.
Dividends paid from net investment income and any distributions from net
short-term capital gain are taxed to shareholders as ordinary income,
whether received in cash or invested in additional shares. Dividends are
eligible for the dividends received deduction available to corporations
subject to proportionate reduction if the aggregate dividends received by
the Fund from domestic corporations in any year are less than 100% of its
net income, exclusive of capital gains. Any distributions of net long term
capital gains will be taxed as such, regardless of how long you have held
your shares.
A dividend or distribution paid shortly after shares have been purchased,
although in effect a return of money invested, is subject to taxes. Gain
distributions are taxable, whether received in cash or shares, even if they
reduce the net asset value of your shares below your cost and result in a
return of a part of your investment.
12
<PAGE>
Statements as to the tax status of dividends and distributions will be
mailed semi-annually to shareholders. Shareholders should consult their
own tax advisers with respect to their own tax situations, including with
respect to any state taxes applicable to 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 Investment Company Act of 1940. Under the terms of the
Plan, the Fund pays the Distributor a monthly fee equivalent on an annual
basis to .25 of 1% of the average daily net assets of the Fund. The fee may
be used by the Distributor to (i) provide initial and ongoing sales
compensation to its investment executives and to other broker-dealers in
connection with the sale of Fund shares and to pay for other advertising
and promotional expenses in connection with the sale of Fund shares
("distribution expenses"), and (ii) to provide compensation to entities
("Service Entities") in connection with the provision of certain personal
and account maintenance services to Fund shareholders including, but not
limited to, responding to shareholder inquiries and providing information
on their investments ("shareholder servicing expenses").
In the future, Service Entities may include banks and other depository
institutions which, under the Glass Steagall Act and other applicable laws
and regulations, currently are prohibited from engaging in the business of
underwriting, selling or distributing certain types of securities. Such
institutions will only be allowed to provide administration, shareholder
and distribution assistance if the scope of such assistance is such that,
in the opinion of the Distributor, it does not fall within the
aforementioned prohibition.
WHO ARE THE FUND'S FUND ACCOUNTING AGENT AND ITS CUSTODIAN?
Investors Fiduciary Trust Company ("IFTC") serves as the Fund's fund
accounting agent, and in that capacity, maintains certain books and records
pursuant to an agreement with the Fund. Its address is 127 West 10th
Street, Kansas City, Missouri 64105. IFTC also serves as custodian for the
Fund's portfolio securities and cash, and in that capacity, maintains
certain financial and accounting books and records pursuant to a separate
agreement with the Fund.
WHAT SERVICES DOES THE FUND OFFER?
Information about various shareholder services is included above under "How
Can You 'Sell' Your Shares?" In addition, the Fund also provides the
following services:
What About Shareholder Information?
For general information about the Fund, call or write SBM Financial
Services, Inc., 100 North Minnesota Street, P.O. Box 69, New Ulm, Minnesota
56073-0069. Its telephone number is (800) 328-4735. For information about
your account, call or write the Shareholder Servicing Agent at 100 North
Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069, telephone
number (800) 328-4735.
13
<PAGE>
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 semi-annual account statements if dividends
are paid by the Fund confirming 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.
What Tax-Deferred Retirement Plans Are Available?
Shares of the Fund may be purchased by all types of tax-deferred retirement
plans. The Distributor makes available plans, plan forms, and custody
agreements for:
Individual Retirement Accounts (IRAs) for persons who are employed and wish
to make contributions to a tax-deferred account for retirement.
403(b)(7) Custodial Accounts.
Simplified Employee Pension Plans (SEPs).
Qualified Profit Sharing and Money Purchase Pension Plans.
Further information on these services and others is available by contacting
the Distributor.
GENERAL INFORMATION ABOUT STATE BOND COMMON STOCK FUND
State Bond Common Stock Fund is an investment portfolio of State Bond
Equity Funds, Inc., a diversified, open-end management investment company,
or mutual fund, incorporated in Maryland on December 6, 1961. The Fund has
only one class of capital stock, $.00001 par value. Each outstanding share
has one vote and an equal right to dividends and distributions, if any.
All shares have noncumulative voting rights for the election of directors.
Each is fully paid and nonassessable, and each is freely transferable.
14
<PAGE>
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Fund may refer to
"average annual total return," "cumulative total return," or data
concerning Fund's performance since its inception. 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. 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 capital gains distributions during the period are assumed
to be reinvested. All performance data and figures are based upon
historical information and are not intended to indicate future 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 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 calculation of the
Fund's total return see "Calculation of Performance Data" in the Statement
of Additional Information.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The total return for the Fund's most recent fiscal year ended December 31,
1995 was 28.14%. This total return figure assumes the reinvestment of all
distributions and does not include a sales charge. For a discussion of the
Fund's average annual return for its most recent one, five, and ten-year
periods, see the following chart.
The calendar year 1995 experienced economic conditions of moderate growth
and inflation, along with relatively low unemployment levels. The Federal
Reserve continued its inflation fighting efforts by increasing short-term
interest rates one more time in February of 1995, before reversing the
trend and reducing rates in both July and December of 1995. However, the
trend of interest rates, even at the beginning of the year, was toward
lower levels. Thus, interest rates declined throughout the year. These
favorable economic conditions coupled with very strong corporate earnings
produced an exceptionally strong year for the equity markets.
The Fund continued to hold stocks and take new positions in companies that
exhibit leadership in their industry and showed increases in revenues and
earnings. During the year, the Fund increased investments in the
electronic, financial services, and technology industries. Reductions in
investment positions were made in the communications, energy, insurance,
and tobacco industries.
15
<PAGE>
The following chart compares the performance of a hypothetical $10,000
investment in the Fund over the last ten years to the performance of an
investment in the Standard & Poor's 500 Index. Past performance is not
predictive of future performance. 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 hypothetical performance of the
Index assumes that no sales charge was paid upon an investment in the Index
and that there were no expenses associated with an investment in the Index.
[GRAPH APPEARS HERE]
COMMON INDEX
YEAR STOCK PERFORMANCE
---- ------ -----------
1985 $ 9,531 $10,000
1986 $10,860 $11,868
1987 $11,529 $12,492
1988 $12,666 $14,567
1989 $18,042 $19,182
1990 $18,208 $18,584
1991 $24,299 $24,248
1992 $24,478 $26,096
1993 $24,926 $28,721
1994 $26,001 $29,100
1995 $33,318 $40,021
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.
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 ADDITION 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 OR JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME SHALL
NOT IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE
THE DATE THEREOF.
16
<PAGE>
PROSPECTUS
MAY 1, 1996
STATE BOND
COMMON STOCK
FUND
- ------------------------------
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069.
STATE BOND
COMMON STOCK
FUND
INVESTMENT MANAGER:
ARM Capital Advisors, Inc.
200 Park Avenue
20th Floor
New York, New York 10166
[LOGO]
DISTRIBUTOR:
SBM Financial Services, Inc.
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069.
TRANSFER, REDEMPTION AND
OTHER SHAREHOLDER
ACCOUNT SERVICES:
SBM Financial Services, Inc.
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069.
PORTFOLIO SECURITIES
CUSTODIAN:
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
STATE BOND COMMON STOCK FUND
100 North Minnesota Street
P.O. Box 69
New Ulm, Minnesota 56073-0069
Telephone No. (612) 835-0097
This Statement of Additional Information supplements the information
contained in the current Prospectus of State Bond Common Stock Fund (the "Fund")
dated May 1, 1996. This Statement of Additional Information is not a Prospectus,
but should be read in conjunction with the Fund's Prospectus, which may be
obtained by contacting the Fund at the address or telephone number noted
above.
TABLE OF CONTENTS
Page
----
What Are The Fund's
Investment Objectives,
Policies, and Risks?..................
Calculation of Performance Data........
What Are the Fund's
Investment Limitations?...............
Who Manages The Fund?..................
(See In The Prospectus "How
Is The Fund Managed?")...............
The Manager............................
Management Agreement And Expenses
(See In The Prospectus "How
Is The Fund Managed")................
Plan Of Distribution...................
Transfer Agent.........................
Custodian..............................
Independent Auditors...................
Page
----
Portfolio Transactions.................
(See In The Prospectus "What
About Brokerage Commissions?")........
Purchase of Shares.....................
How Is The Offering Price
Determined?...........................
How Are Shares Distributed?............
How Can You "Sell" Your Shares?........
How Is Net Asset Value Per
Share Determined?.....................
What Is The Tax Status.................
Of The Fund?..........................
Will The Fund Withhold Taxes...........
On Distributions?.....................
General Information....................
Financial Statements...................
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 MAY 1, 1996, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT 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.
<PAGE>
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES, POLICIES, AND RISKS?
As stated in the Prospectus, the Fund seeks to produce long-term capital
appreciation with dividend income as fair and reasonable as possible consistent
with the Fund's primary objective.
Lending of Portfolio Securities
- -------------------------------
As stated in the Prospectus, the Fund may lend portfolio securities to
certain institutional borrowers of securities and may invest the cash collateral
and obtain additional income or receive an agreed upon amount of interest from
the borrower. Any such loans generally will not exceed 90 days' duration.
Loans are subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection with a
loan and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The Fund does not have
the right to vote securities on loan, but would terminate the loan and regain
the right to vote if that were considered important with respect to the
investment. The Fund did not enter into any such loans in the last fiscal year.
Repurchase Agreements
- ---------------------
The Fund may enter into repurchase agreements with commercial banks and
with broker/dealers in order to invest cash for the short-term. A repurchase
agreement is an agreement under which the Fund acquires a fixed-income,
generally a U.S. Government obligation, subject to repurchase by the seller at
an agreed-upon price and date. The repurchase price reflects an agreed-upon
return for the period the instrument is held by the Fund and is unrelated to the
coupon provided by the instrument. Repurchase agreements are usually for
periods of one week or less, but may be for longer periods. However, as a
matter of fundamental policy, the Fund will not enter into repurchase agreements
if more than 10% of its net assets would be so invested. 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. The Fund to date has not
entered into any repurchase agreements and has no present intention of doing so
in the future.
Except as otherwise stated or as described under "What Are The Fund's
Investment Limitations?" below, the foregoing investment policies are not
fundamental and the Board of Directors of the Fund may change such policies
without the vote of a majority of its outstanding voting securities (as defined
below).
High-Yield Securities
- ---------------------
The Fund currently does not anticipate that it will invest any significant
portion of its assets in securities that are rated below BBB by Standard &
Poor's Ratings Group ("S&P") or Baa by Moody's Investors Service, Inc.
("Moody's"). All fixed-income securities other than convertible
2
<PAGE>
securities will be invested in securities rated in the top four rating
categories (generally considered to be investment grade) by S&P or Moody's or in
unrated securities considered by the Manager to be of comparable credit quality.
The Fund is not, however, prohibited by any Fund policy from investing in lower
rated convertible securities.
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 bonds 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 such 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.
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.
Portfolio Turnover
- ------------------
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average value of the portfolio securities owned during the fiscal year.
Securities with remaining maturities of one year or less at the date of
acquisition are excluded from the calculation.
The Fund's portfolio turnover rate was 2% for fiscal year 1995 and 16% for
fiscal year 1994. The turnover rate does not include the acquisition of the net
assets of the State Bond Progress Fund, which were acquired by the Fund on June
24, 1994.
3
<PAGE>
CALCULATION OF PERFORMANCE DATA
Average Annual Total Return
- ---------------------------
The Fund's average annual total return over the one, five, and ten year
periods ended December 31, 1995, were as follows:
One Year 22.11%
Five Years 11.74%
Ten Years 12.79%
The average annual total return quotations for the one, five, and ten year
periods ending on December 31, 1995 are computed by finding the average annual
compounded rates of return over the one, five, and ten year periods 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 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 such period.
This calculation deducts the maximum sales charge from the hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.
Cumulative Total Return
- -----------------------
Cumulative total return is computed by finding the cumulative compound rate
of return over the period indicated in the advertisement that would equate the
initial amount invested to the ending redeeming value, according to the
following formula:
4
<PAGE>
ERV - P
CTR = ------- 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 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.
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. Purchase securities on margin or sell securities short.
2. Participate on a joint or joint and several basis in any trading account in
securities.
3. Invest more than 5% of its total assets at market value in securities of any
one issuer, except United States Government securities or its agencies, or
purchase any security if, as a result, it would hold more than 10% of the
outstanding voting securities of any issuer.
4. Borrow money except from banks as a temporary emergency measure and then not
in excess of 10% of total assets at cost.
5. Lend any of its assets, except for portfolio securities, other than through
the purchase of bonds, debentures or notes and other evidences of
indebtedness.
6. Lend portfolio securities, except to brokers and dealers against not less
than 100% cash or cash equivalent collateral and only if immediately
thereafter the aggregate market value of securities loaned does not exceed
10% of the market value of its gross assets.
7. Purchase securities of other investment trusts or companies, except as part
of a plan of merger or consolidation.
8. Purchase securities of any issuer in continuous operation for less than
three years if more than 5% of its assets would be so invested.
5
<PAGE>
9. Hold the securities of any issuer if, to its knowledge, directors or
officers of the Fund or certain other related persons individually owning
beneficially more than 0.5% of the securities of that issuer, own in the
aggregate more than 5% of such securities.
10. Underwrite securities of other issuers, including the purchase of restricted
securities, except in cases where the Fund would be deemed a "statutory
underwriter" under the Securities Act of 1933.
11. Purchase interests in real estate, real estate investment trusts,
commodities or commodity contracts.
12. Make an investment which would concentrate more than 25% of its net asset
value in any one industry.
13. Mortgage or pledge any of its property, real or personal.
14. Purchase the securities of any person, firm, association, corporation,
syndicate, combination, organization, government or any subdivision thereof,
if upon such purchase, the Fund would own more than 10% of any class of the
outstanding securities of such person, firm, association, corporation,
syndicate, combination, organization, government, or subdivision. For the
purpose of this restriction, all kinds of securities of a company
representing debt shall be deemed to constitute a single class, regardless
of relative priorities, maturities, conversion rights and other differences,
and all kinds of stock of a company preferred over the common stock as to
dividends or in liquidation shall be deemed to constitute a single class
regardless of relative priorities, series designations, conversion rights,
and other differences.
Although not fundamental policies subject to shareholder vote, the Fund has
a policy not to invest in companies for the purpose of exercising control or
management; not to invest in equity securities of issuers which are not readily
marketable if more than 5% of its assets would be so invested; not to invest in
any oil, gas or mineral exploration or development programs; and not to invest
in puts, calls, spreads, straddles or combinations thereof. During the past
twelve months the Fund has not borrowed any money and has no current intention
of doing so in the foreseeable future.
Under the Investment Company Act of 1940, a "vote of a majority of the
outstanding voting securities" of the Fund means the affirmative vote of the
lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or
more of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
6
<PAGE>
WHO MANAGES THE FUND?
Directors and officers of the Fund, together with information as to their
principal business occupations during the past five years, are shown below.
Each Director who is an "interested person" of the Fund, as defined in the
Investment Company Act of 1940, is indicated by an asterisk. Unless otherwise
indicated, their addresses are 239 S. Fifth Street, Louisville, Kentucky 40202.
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- ------------------------------- ----------------------- ------------------------------------------------
<S> <C> <C>
William B. Faulkner (68) Director President, William Faulkner & Associates,
240 East Plato Blvd. business and institutional adviser since 1986;
St. Paul, Minnesota 55107 Consultant to American Hoist & Derrick
Company, construction equipment
manufacturer, from 1986 to 1989; prior
thereto, Vice President and Assistant to the
President, American Hoist & Derrick
Company. Director of the other mutual funds
in the State Bond Group
Chris L. Mahai (39) Director Senior Vice President, Strategic Integration
425 Portland Avenue Unit, Star Tribune/Cowles Media Company,
Minneapolis, Minnesota 55488 since August 1995; Vice President, Marketing
Director, Star Tribune, since September 1992;
from 1990 to 1992, self-employed consultant,
marketing services; prior thereto, Senior Vice
President of Corporate Relations and
marketing, First Bank System, Inc. Director
of the other mutual funds in the State Bond
Group
John R. Lindholm (46)* Director President of Integrity Life Insurance Company
("Integrity") and Vice President-Chief
Marketing Officer of National Integrity Life
Insurance Company ("National Integrity")
since November 26, 1993; Executive Vice
President-Chief Marketing Officer of ARM
Financial Group, Inc. since July 27, 1993;
since March 1992 Chief Marketing Officer of
Analytical Risk Management, L.P.; from June
1990 to February 1992, Chief Marketing
Officer and a Managing Director of the ICH
Capital Management Group, ICH
Corporation, Louisville, Kentucky; prior
thereto, Chief Marketing Officer and
Managing Director for Capital Holding
Corporation's Accumulation and Investment
Group. Director of the other mutual funds in
the State Bond Group and of The Legends
Fund, Inc.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- ------------------------------- ----------------------- ------------------------------------------------
<S> <C> <C>
John Katz (56) Director Investment banker since January 1991;
10 Hemlock Road Chairman and Chief Executive Officer, Sam's
Hartsdale, NY Restaurant Group, Inc. (a restaurant holding
company), from June 1991 to August 1992;
Executive Vice President (from January 1989
to January 1991) and Senior Vice President
(from December 1985 to January 1989),
Equitable Investment Corporation (an indirect
wholly-owned subsidiary of The Equitable
Life Assurance Society of the United States,
through which it owns and manages its
investment operations). Director of the other
mutual funds in the State Bond Group and of
The Legends Fund, Inc.
Theodore S. Rosky (57) Director Retired since April 1992; Executive Vice
2304 Speed Avenue President, Capital Holding Corporation (from
Louisville, KY December 1991 to April 1992); prior thereto,
Executive Vice President and Chief Financial
Officer, Capital Holding Corporation.
Director of the other mutual funds in the State
Bond Group and of The Legends Fund, Inc.
Dale C. Bauman (58) President Vice President and Sales Manager, SBM
8400 Normandale Lake Blvd. Financial Services, Inc., since June 1992;
Suite 1150 prior thereto, Vice President and Division
Minneapolis, Minnesota 55437 Manager, SBM Financial Services, Inc.,
1980 to June 1992. President of the other
mutual funds in the State Bond Group.
Keith O. Martens (56 ) Vice President Senior Portfolio Manager, ARM Capital
200 Park Avenue, 20th Floor Advisors, Inc. since June 14, 1995; Executive
New York, New York 10166 Vice President - Investments, SBM Company;
Vice President State Bond and Mortgage Life
Insurance Company and SBM Certificate
Company. Vice President of the other mutual
funds in the State Bond Group.
Don W. Cummings (32) Controller Controller of ARM Financial Group, Inc.
since July 15, 1993, and Integrity and
National Integrity since November 26, 1993.
Prior to November 26, 1993 he served as
Controller of ARM, Ltd., a position he held
from July 1992. From 1985 to June 1992,
Mr. Cummings served in various positions
within Ernst & Young LLP's Insurance
Industry Accounting and Auditing Practice,
the last of which was Manager. Controller of
the other mutual funds in the State Bond
Group and of The Legends Fund, Inc.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- ------------------------------- ----------------------- ------------------------------------------------
<S> <C> <C>
Kevin L. Howard (31) Vice President and Assistant General Counsel of ARM Financial
Secretary Group, Inc. since January 31, 1994; Assistant
General Counsel of Capital Holding
Corporation from April 1992 to January 1994;
Attorney, Greenebaum Doll & McDonald,
1989 to April 1992. Vice President and
Secretary of the other mutual funds in the
State Bond Group and Secretary of The
Legends Fund, Inc.
Peter S. Resnik (34) Treasurer Treasurer of ARM Financial Group, Inc.,
Integrity and National Integrity since
December 1993; employed in various financial
and operational capacities by Analytical Risk
Management Ltd. since December 14, 1992;
Assistant Vice President of the
Commonwealth Life Insurance Company
subsidiary of Capital Holding Corporation
from 1986 to December 1992. Treasurer of
the other mutual funds in the State Bond
Group and of The Legends Fund, Inc.
Pam Freeman (28) Assistant Secretary Financial Analyst with ARM Financial Group,
Inc. since October 1993; Senior Accountant
and various other capacities with Ernst &
Young LLP from 1989 to September 1993.
</TABLE>
- --------
* Mr. Lindholm is an interested person, as defined in the 1940 Act, by virtue
of his positions with ARM Financial Group, Inc.
Directors and officers of the Fund (including former Directors) received
aggregate remuneration of $3,606 during the Fund's fiscal year ended December
31, 1995. Directors and officers of the Fund as a group owned directly or
indirectly 4,265.688 shares, or .06% of the Fund's capital stock at December 31,
1995.
The following table sets forth, for the fiscal year ended December 31,
1995, compensation paid by the Fund to the non-interested Directors and, for the
1995 calendar year, the aggregate compensation paid to the non-interested
Directors by all of the funds in the State Bond Group of mutual funds.
Directors who are interested persons, as defined in the Investment Company Act
of 1940, received no compensation from the Fund.
9
<PAGE>
<TABLE>
<CAPTION>
Aggregate Total Compensation from fund complex
Compensation from including the State Bond Group of Mutual
Name of Director Fund (a) Funds
- ---------------------- ------------------ ----------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------------
William B. Faulkner $588 $5,778
- -------------------------------------------------------------------------------------
Patrick M. Finley $576 $3,096
- -------------------------------------------------------------------------------------
Chris L. Mahai $588 $3,528
- -------------------------------------------------------------------------------------
John Katz(b) $588 $9,264
- -------------------------------------------------------------------------------------
Theodore S. Rosky(b) $588 $9,264
- -------------------------------------------------------------------------------------
</TABLE>
(a) There were no pension or retirement benefits accrued for any of the named
persons by any of the funds.
(b) Messrs. Katz and Rosky have been directors of the Fund, and the other
mutual funds in the State Bond Group, since June 1, 1995. In addition,
they are directors of The Legends Fund, Inc., a mutual fund which is
advised by the Manager, which may be deemed to be a part of the same fund
complex as the State Bond Group of Mutual Funds. From June 1, 1995 through
December 31, 1995, these directors each received aggregate compensation
from all of the mutual funds in the State Bond Group in the amount of
$1,764.
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 $4 billion.
The Manager is also manager of The Legends Fund, Inc. and the other mutual
funds in the State Bond Group of mutual funds: State Bond Cash Management Fund,
State Bond U.S. Government and Agency Fund, State Bond Diversified Fund, State
Bond Minnesota Tax-Free Income Fund and State Bond Tax Exempt Fund.
10
<PAGE>
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
and other services, and executive and other personnel as are necessary for Fund
operations. The Manager 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.
The Fund pays the Manager a management fee for its services, calculated
daily and payable monthly, equal to an annual fee of .65 of 1% on the first
$100,000,000 of average daily net assets of the Fund, .60 of 1% on the next
$100,000,000 of average daily net assets of the Fund and .55 of 1% of average
daily net assets of the Fund over $200,000,000. The predecessor to the Manager,
SBM Company, was paid the following amounts by the Fund as a management fee
during its fiscal years ended December 31, 1995, 1994 and 1993, respectively:
$151,762; $314,793 and $290,564. The Manager received $232,899 from the Fund as
a management fee from June 1, 1995, the effective date for accounting purposes
on which the Manager commenced its duties as the Fund's investment adviser,
through December 31, 1995.
The Fund pays all its expenses other than those assumed by the Manager,
including fees and expenses of independent attorneys and auditors; interest,
taxes, governmental fees or membership dues; brokerage commissions or charges;
custodian, transfer agent or registrar fees; expenses of preparing share
certificates and other expenses of issue, sale, underwriting, distribution,
redemption or repurchase of Fund shares; expenses of registering and
distributing reports, notices and dividends to shareholders; cost of stationery;
costs of stockholder and other meetings; travel expenses of officers, directors
and employees; and other normal corporate expenses. However, under the
Agreement, the Manager will pay all corporate expenses which, in any one fiscal
year, exceed 1 1/2% of the first $30,000,000 of the average daily net assets of
the Fund, and 1% of any additional average daily net assets of the Fund,
exclusive of interest, taxes, brokerage commissions, extraordinary expenses and
fees paid pursuant to the Rule 12b-1 plan. Under the terms of the Agreement, if
the Agreement between the Fund and the Manager is terminated, the Fund will
eliminate from its corporate name any reference to the name "State Bond".
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 and a meeting held May 15, 1995. The Agreement
may be terminated at any time on 60 days'
11
<PAGE>
written notice by the Board of Directors, or by vote of a majority of the
outstanding shares or by the Manager. The Agreement will terminate
automatically upon assignment. The Agreement will continue in effect for a
period of more than two years from the date of its execution only so long as
such continuance is specifically approved at least annually by either the Board
of Directors or by a vote of the majority of the outstanding voting shares of
the Fund, provided that in either event such continuance is also approved by the
vote of a majority of the directors who are not parties to such agreement or
interested persons of such parties, cast in person at a meeting called for the
purpose of voting on such approval.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940 pursuant to which the Fund pays
certain expenses of distribution for the Fund's shares and shareholder
servicing, 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 Plan the Fund pays the Distributor a monthly fee
equivalent on an annual basis to .25 of 1% of the average daily net assets of
the Fund. The fee is used to compensate those who provide administration,
shareholder service, and distribution assistance, and to pay certain other
expenses of selling Fund shares. 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.
During the fiscal year ended December 31, 1995 the Distributor received
approximately $146,996 in such fees. It utilized these funds approximately as
follows: compensation of sales personnel - $96,524; compensation of marketing
and distribution-related administrative personnel -$44,086; marketing materials
- - $4,669; promotion and travel - $7,901; and miscellaneous -$784. Amounts
expended in excess of the $146,996 received by the Distributor were paid for
from the Distributor's general funds.
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
12
<PAGE>
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 moneys 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 from the date of such plan, the
first two years in an easily accessible place.
TRANSFER AGENT
ARM Transfer Agency, Inc. acts as the transfer and dividend disbursing
agent for the Fund pursuant to an agreement with the Fund dated February 1,
1996, and is compensated on a transactional basis under a schedule approved by
the Fund's Board of Directors. Under this agreement ARM Transfer Agency, Inc.
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. acted as the Fund's transfer agent pursuant to an agreement with
the Fund dated June 14, 1995, and received fees of $44,235 during the Fund's
fiscal year ended December 31, 1995. SBM Company, as the Fund's previous
transfer and dividend disbursing agent, received the following amounts from the
Fund for the fiscal years ended December 31, 1995, 1994, and 1993, respectively:
$32,693; $66,000 and $63,100.
CUSTODIAN
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City,
Missouri 64105, serves as portfolio securities custodian for the Fund.
13
<PAGE>
INDEPENDENT AUDITORS
Ernst & Young LLP, independent certified public accountants, have been
selected as auditors of the Fund and issue a report on the Fund's financial
statements. Their address is One Kansas City Place, 1200 Main Street, Kansas
City, Missouri 64105-2143.
PORTFOLIO TRANSACTIONS
The Fund paid brokerage commissions as follows for its fiscal years ended
December 31, 1995, 1994 and 1993, respectively: $6,366; $44,227 and
$66,329.
The Fund seeks to execute its portfolio security transactions on the most
favorable terms (including the price to be paid for the security) and in the
most effective manner possible, giving due consideration to various relevant
factors including, without limitation, the size and type of the transaction, the
nature and the character of the markets for the security, the confidentiality,
speed and certainty of effective execution required for the transaction, the
financial condition and executing and settlement capabilities of the broker, the
availability of research and statistical services, the value of such services to
the Fund, and the reasonableness of the brokerage commission. The
reasonableness of the brokerage commission, in relation to the other factors
enumerated, is determined based upon a knowledge of the brokerage community's
general rate structure.
While there is no understanding or agreement to do so, the Fund tries to
effect transactions through brokers who furnish the Manager with research or
statistical services, when not in conflict with the criteria enumerated above.
Typically these research and statistical services include such things as written
research reports, statistical computations and compilations, economic forecasts
and projections, security recommendations based upon research and analysis, and
conferences with the Fund management and Manager. Some of the Fund's brokerage
transactions during the fiscal year ended in 1995 were directed to certain
brokers as a part of understandings with these brokers to provide research and
statistical services. These transactions amounted to approximately $2,118,242
with resulting commissions of approximately $2,766. It is felt that these
transactions met the portfolio brokerage criteria enumerated above.
Where portfolio transactions are executed by brokers who provide research
and statistical services, it is possible that the Fund may incur a somewhat
higher brokerage commission expense under certain circumstances than if the same
portfolio transaction was executed by a broker who does not provide such
services. To the extent that this is the case, it is authorized by law where
the value of the brokerage and research services charged is reasonable in
relation to the commission charged, and it has been authorized by the Board of
Directors of the Fund.
The Manager also serves as investment adviser for [six] other mutual funds.
To the extent that the Fund may pay a somewhat higher brokerage commission on a
trade because it is executed by a broker which also provides research and
statistical services, it is possible that said brokerage commission may also be
of value to one of the other mutual funds. However, it is felt that this
14
<PAGE>
possibility of mutual benefit is not capable of measurement. The Manager deems
the availability of these research and statistical services to be of
considerable value to the Fund.
During the Fund's most recent fiscal year, the Fund did not purchase any
securities issued by the following categories of brokers, or their parent
companies: (1) the ten brokers who executed the largest dollar amounts of the
Fund's portfolio transactions; (2) the ten brokers who executed the largest
dollar amounts of principal transactions with the Fund; or (3) the ten brokers
who hold the largest dollar amounts of the Fund's shares.
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") provided
by 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 Cash Management Fund which were acquired through an exchange of
shares. The investor considering the possibility of signing such 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
15
<PAGE>
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 of 1986, as amended (the "Code").
HOW IS THE OFFERING PRICE DETERMINED?
The public offering price is determined by dividing the Fund's current net
asset value per share (as described under "How is Net Asset Value Per Share
Determined?") by the sales charge percentage applicable to the transaction. The
following sample calculation is based upon the total net assets of the Fund on
December 31, 1995 of $63,841,290 and the total shares of the Fund outstanding as
of that date of 6,756,913 and a transaction with an applicable sales charge of
the maximum 4.75%.
Net Asset Value Per Share
($63,841,290 divided by 6,756,913 $ 9.45
shares outstanding) ======
Maximum Offering Price Per Share
($9.45 divided by .9525) $ 9.92
======
HOW ARE SHARES DISTRIBUTED?
SBM Financial Services, Inc., a subsidiary of ARM, acts as distributor of
the shares of the Fund and of the other mutual funds in the State Bond Group.
As distributor of the Fund's capital stock, SBM Financial Services, Inc. allows
concessions to all dealers up to 4.25% on purchases to which the 4.75% sales
charge applies. The Distributor also pay sales commission to its own agents who
sell Fund shares. The Distributor retains the balance of sales charges paid by
investors. The sales charges paid by investors received by the Distributor
amounted to the following amounts for the Fund's fiscal years ended in 1995,
1994 and 1993, respectively: $47,941; $45,811 and $55,787.
16
<PAGE>
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.
The Fund has committed itself to pay in cash all requests for redemptions
by the shareholder of record limited in amount during any 90-day period to the
lesser of $250,000 or 1% of the net asset value of the Fund at the beginning of
such period. Such commitment is irrevocable without the prior approval of the
Securities and Exchange Commission. Requests for redemption in excess of the
above limits may be paid in whole or in part, in portfolio securities or in
cash, as the Board of Directors may deem advisable; however, payments will be
made wholly in cash unless the Board of Directors believes that economic
conditions exist which would make such a practice detrimental to the best
interests of the Fund. If requests for redemption are paid in portfolio
securities, such securities would be valued in accordance with the procedures
described under "How Is Net Asset Value Per Share Determined?". A shareholder
would likely incur brokerage expenses if he converted these securities to cash.
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,
Washington's Birthday (observed), 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.
Securities owned by the Fund for which market quotations are readily
available are valued at current market value, or, in their absence, at fair
value determined by the Board of Directors. Securities traded on an exchange are
valued at last sales prices or, in their absence and in the case of over-the-
counter securities, the mean of the latest closing bid and asked prices. Short-
term holdings are valued at cost plus accrued interest which approximates
current market value.
17
<PAGE>
WHAT IS THE 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 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.
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 dividends paid and other
reportable payments on an account if the holder of the account provides the Fund
with either an incorrect tax identification number or no number at all, or fails
to certify to the Fund that he is not subject to such withholding.
GENERAL INFORMATION
State Bond Common Stock Fund is a diversified, open-end management
investment company, or mutual fund, incorporated in Maryland in 1961. The Fund
is currently the sole investment portfolio of State Bond Equity Funds, Inc.
Under Maryland law, each director of State Bond Equity 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 interest 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 shareholder for monetary
damages for breach of the fiduciary duty of "care".
The Amended and Restated Articles of Incorporation of State Bond Equity
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 Equity 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 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,
18
<PAGE>
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.
FINANCIAL STATEMENTS
[Insert Financials and Auditor's Report]
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of State Bond Equity Funds, Inc.
and Shareholders of State Bond Common Stock Fund
We have audited the accompanying balance sheet and statement of net assets of
State Bond Common Stock Fund (the Fund) as of December 31, 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
December 31, 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 Common Stock Fund as of December 31, 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
January 23, 1995 (Except for Note E, dated February 16, 1995)
Minneapolis, Minnesota
<PAGE>
INVESTMENT RECORD
The chart below illustrates the annual changes in the value of an assumed
investment of $10,000 for the period from May 22, 1962 (inception date), to
December 31, 1995. This period was one of fluctuating common stock prices. The
results shown should not be considered as a representation of the distributions
from net investment income or net realized gain which may be realized from an
investment made in the Fund today.
[GRAPH APPEARS HERE]
All Dividends & Distributions from Value of
Date Distributions Net Realized Gain Original Shares
---- --------------- ------------------ ---------------
5/22/62 $ 9,523.81 $ 9,523.81 $ 9,523.81
12/31/62 10,866.67 10,819.05 10,819.05
12/31/63 13,152.61 12,935.94 12,742.86
12/31/64 15,441.41 15,027.71 14,514.29
12/31/65 18,637.87 17,949.00 16,800.00
12/31/66 18,409.74 17,527.66 15,847.62
12/31/67 24,533.18 23,136.01 20,190.48
12/31/68 28,923.25 27,050.55 21,523.81
12/31/69 26,943.11 24,858.32 19,200.00
12/31/70 25,719.03 23,181.37 17,904.76
12/31/71 30,859.22 27,423.07 21,180.95
12/31/72 34,781.93 30,674.76 22,895.24
12/31/73 27,528.31 23,326.92 16,914.29
12/31/74 18,753.89 15,983.26 11,276.19
12/31/75 25,087.16 20,951.03 14,780.95
12/31/76 30,598.02 25,108.84 17,714.29
12/31/77 27,104.35 21,707.00 15,314.29
12/31/78 29,815.46 23,110.93 16,304.76
12/31/79 35,294.97 26,674.77 18,819.05
12/31/80 45,388.45 33,370.46 23,542.86
12/31/81 42,414.96 29,939.74 20,685.72
12/31/82 50,446.94 34,289.75 21,638.10
12/31/83 53,962.94 35,782.14 22,171.43
12/31/84 50,749.01 32,978.19 19,390.48
12/31/85 65,334.86 41,669.16 24,000.00
12/31/86 74,443.51 46,816.84 24,190.48
12/31/87 79,028.14 48,863.69 23,276.19
12/31/88 86,822.51 52,706.52 23,733.33
12/31/89 123,674.40 73,672.93 30,857.14
12/31/90 124,816.82 72,944.62 27,961.91
12/31/91 166,569.01 96,010.03 35,161.91
12/31/92 167,792.73 95,652.77 33,180.95
12/31/93 170,866.80 96,354.86 30,133.33
12/31/94 178,236.74 99,435.50 29,295.24
12/31/95 228,396.00 126,372.00 36,000.00
- -Total value assuming reinvestment of all dividends and distributions--$228,396
- -Total value assuming reinvestment of distributions from net realized gain--
$126,372 (an additional $22,214 received in cash dividends)
- -Value of original shares--$36,000
The chart above and the table on the following page assume the applicability of
the current maximum sales charge of 4.75% throughout the life of the Fund,
although the maximum sales charge was higher prior to March 1, 1990. Future
performance of the Fund will be affected by the establishment of a Rule 12b-1
plan, effective May 1, 1990, under which Fund assets may be used to pay
distribution costs. Initial net asset value is the amount received by the Fund
after deducting from the cost of investment the 4.75% sales charge described in
the prospectus. There is no sales charge on distributions taken in shares. No
adjustment has been made for any income taxes payable by shareholders on
distributions received in shares.
THE AVERAGE ANNUAL TOTAL RETURN FOR THE ONE, FIVE, AND TEN YEAR PERIODS ENDED
DECEMBER 31, 1995, WAS 22.11%, 11.74%, AND 12.79%, RESPECTIVELY. The performance
data quoted represents only past performances which is not predictive of future
performance. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
2
<PAGE>
Investment Record (continued)
<TABLE>
<CAPTION>
RESULTS ASSUMING REINVESTMENT
OF NET REALIZED GAIN
PER SHARE DATA* DISTRIBUTIONS ONLY**
---------------------------------------- -----------------------------
YEAR NET NET REALIZED
ENDED ASSET GAIN DIVIDEND NET REALIZED CASH
DECEMBER 31 VALUE DISTRIBUTION INCOME GAIN*** DIVIDENDS
- -------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
1962 $2.84 $ - $.013 $ - $ 47.62
1963 3.35 .050 .040 190.48 152.38
1964 3.81 .075 .040 290.04 154.69
1965 4.41 .140 .045 552.20 177.49
1966 4.16 .150 .050 610.51 203.50
1967 5.30 .190 .050 800.54 210.67
1968 5.65 .569 .050 2,483.85 218.27
1969 5.04 .150 .070 718.16 335.14
1970 4.70 - .100 - 493.22
1971 5.56 - .075 - 369.92
1972 6.01 .195 .045 961.78 229.68
1973 4.44 .306 .055 1,561.81 296.98
1974 2.96 - .070 - 377.98
1975 3.88 - .080 - 431.98
1976 4.65 - .080 - 431.98
1977 4.02 - .100 - 539.97
1978 4.28 - .140 - 755.97
1979 4.94 - .120 - 647.97
1980 6.18 - .160 - 863.97
1981 5.43 .125 .230 674.97 1,268.17
1982 5.68 .445 .190 2,453.63 1,147.01
1983 5.82 .105 .150 633.88 922.22
1984 5.09 .296 .100 1,819.85 647.90
1985 6.30 .107 .110 693.25 727.56
1986 6.35 .707 .100 4,789.83 683.88
1987 6.11 .510 .122 3,760.09 899.48
1988 6.23 .355 .118 2,877.37 955.48
1989 8.10 .597 .155 5,050.69 1,311.32
1990 7.34 .679 .157 6,175.79 1,427.98
1991 9.23 .416 .123 4,134.19 1,222.37
1992 8.71 .489 .097 5,086.56 1,008.99
1993 7.91 .868 .093 9,535.63 1,021.32
1994 7.69 .474 .085 5,771.40 1,035.76
1995 9.45 .323 .077 4,179.14 995.65
----------------------------
$65,805.64 $22,214.47
============================
</TABLE>
* Per share amounts reflect a 2 for 1 stock split on March 11, 1966.
** Based upon an investment of $10,000 on May 22, 1962 (inception date).
*** This amount represents each years net realized gain distribution assuming
all previous capital gain distributions were reinvested.
If all dividends and distributions had been taken in cash, the value of the
account on December 31, 1995, would have been $36,000. A total of $12,532 in net
investment income and $31,699 in net realized gains would have been paid to the
shareholders.
3
<PAGE>
State Bond Common Stock Fund
Schedule of Investments
December 31, 1995
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCKS (91.2%)
CHEMICALS AND ALLIED PRODUCTS (3.3%)
International Flavors and Fragrances, Inc. 21,000 $ 1,008,000
Morton International, Inc. 30,000 1,076,250
-----------
2,084,250
COMMUNICATIONS (5.4%)
Lin Television Corporation (a) 7,000 210,000
MCI Communications Corporation 40,000 1,047,500
Nextel Communications, Inc. (a) 20,000 296,250
Sprint Corporation 20,550 819,431
Telefonos de Mexico, S.A. 10,000 318,750
Telephone & Data Systems, Inc. 10,000 395,000
Vodafone Group 10,000 352,500
-----------
3,439,431
CONSUMER PRODUCTS (4.0%)
American Greetings Corporation 20,000 553,750
Anheuser-Busch Companies, Inc. 30,000 2,006,250
-----------
2,560,000
DEPOSITORY INSTITUTIONS (2.0%)
Mellon Bank Corporation 15,000 806,250
Signet Bank Corporation 20,000 475,000
-----------
1,281,250
DRUGS AND PHARMACEUTICALS (3.7%)
Bristol-Meyers Squibb Company 15,000 1,288,125
Schering-Plough Corporation 20,000 1,095,000
-----------
2,383,125
ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT (11.3%)
Arrow Electronics, Inc. (a) 10,000 431,250
Cisco Systems, Inc. (a) 10,000 746,875
DSC Communications Corporation (a) 20,000 740,000
General Electric Company 40,000 2,880,000
General Instrument Corporation (a) 20,000 467,500
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT (11.3%)
(CONTINUED)
Hewlett-Packard Company 6,000 502,500
Motorola, Inc. 20,000 1,140,000
Newbridge Networks Corporation (a) 8,000 331,000
-----------
7,239,125
ENERGY (6.0%)
Burlington Resources, Inc. 15,000 588,750
El Paso Natural Gas Company 25,000 709,375
Phillips Petroleum Company 25,000 853,125
Royal Dutch Petroleum Company 12,000 1,693,500
-----------
3,844,750
FINANCIAL SERVICES (10.2%)
Capital One Financial 20,000 477,500
Federal National Mortgage Association 15,000 1,861,875
Green Tree Financial Corporation 60,000 1,582,500
MGIC Investment Corporation 20,000 1,085,000
Reuters Holding PLC 10,000 553,125
The Travelers Group, Inc. 15,000 943,125
-----------
6,503,125
FOOD AND KINDRED PRODUCTS (6.2%)
Archer-Daniels-Midland Company 26,045 468,810
CPC International 20,000 1,372,500
ConAgra, Inc. 12,000 495,000
Sara Lee Corporation 50,000 1,593,750
-----------
3,930,060
HOTELS (1.2%)
Marriott International, Inc. 20,000 765,000
HOUSEHOLD PRODUCTS (8.7%)
The Gillette Company 40,000 2,085,000
Procter & Gamble Company 30,000 2,490,000
Rubbermaid, Inc. 40,000 1,020,000
-----------
5,595,000
</TABLE>
5
<PAGE>
State Bond Common Stock Fund
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE CARRIERS (6.5%)
American International Group, Inc. 33,750 $ 3,121,875
MBIA Inc. 8,000 600,000
Providian Corporation 10,000 407,500
-----------
4,129,375
LEISURE TIME (4.2%)
Carnival Corporation 10,000 243,750
Tele Communications Inc. 15,000 299,063
Time Warner, Inc. 25,000 946,875
Walt Disney Company 20,000 1,180,000
-----------
2,669,688
MEDICAL PRODUCTS (5.4%)
Abbott Laboratories 30,000 1,252,500
Medtronic, Inc. 40,000 2,235,000
-----------
3,487,500
MISCELLANEOUS RETAIL (2.7%)
Dayton Hudson Corporation 11,000 825,000
Fingerhut Companies, Inc. 20,000 277,500
Home Depot, Inc. 10,000 478,766
Wal-Mart Stores, Inc. 8,000 179,000
-----------
1,760,266
OFFICE EQUIPMENT AND TECHNOLOGY (4.3%)
Autodesk, Inc. 8,000 274,000
EMC Corporation (a) 10,000 153,750
Microsoft Corporation (a) 12,000 1,053,750
Oracle Systems Corporation (a) 30,000 1,271,250
-----------
2,752,750
PRINTING AND PUBLISHING (0.5%)
Tribune Company 5,000 305,625
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES OR
PRINCIPAL
AMOUNT VALUE
--------- -----------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SERVICES (5.0%)
CUC International Inc. (a) 15,000 $ 511,875
Columbia HCA Healthcare Corporation 15,000 761,250
First Data Corporation 15,000 1,003,125
WMX Technologies Inc. 30,000 896,250
-----------
3,172,500
TRANSPORTATION (0.6%)
Goodyear Tire & Rubber Company 8,000 363,000
-----------
TOTAL COMMON STOCK
(Cost $26,844,522) 58,265,820
SHORT-TERM SECURITIES (8.8%)
American Express Credit Corporation, 5.60% due
01/03/96 $1,725,000 1,724,464
Ford Motor Credit Company, 5.92% due 01/05/96 1,500,000 1,499,013
Sears Roebuck Acceptance Corporation, 5.65% due
01/09/96 2,400,000 2,396,986
-----------
TOTAL SHORT-TERM SECURITIES
(Cost $5,620,463) 5,620,463
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $32,464,985)(b) $63,886,283
===========
</TABLE>
(a) Non-income producing.
(b) Also represents cost for federal income tax purposes.
See accompanying notes.
7
<PAGE>
State Bond Common Stock Fund
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at value (cost $32,464,985)
(Note 1)-See accompanying schedule $63,886,283
Dividends receivable 75,031
-----------
TOTAL ASSETS 63,961,314
LIABILITIES
Cash overdraft 56,229
Payable to affiliates 58,338
Other payables and accrued expenses 5,457
-----------
TOTAL LIABILITIES 120,024
-----------
NET ASSETS $63,841,290
===========
Net Assets consist of:
Paid-in capital $32,415,157
Undistributed net investment income 4,835
Net unrealized appreciation on investment securities 31,421,298
-----------
NET ASSETS, for 6,756,913 shares outstanding $63,841,290
===========
NET ASSET VALUE and redemption price per share $ 9.45
===========
Maximum offering per share (includes maximum sales
charge of 4.75%--reduced on purchases of $50,000
or more) $ 9.92
===========
</TABLE>
See accompanying notes.
8
<PAGE>
State Bond Common Stock Fund
Statement of Operations
Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends $ 897,942
Interest 311,032
-----------
Total investment income 1,208,974
EXPENSES (Note 2)
Investment advisory and management fees 384,661
Rule 12b-1 plan fees 146,996
Transfer agent fees 76,928
Shareholders' reports 10,389
Professional fees 26,607
Custodian fees 17,842
Other expenses 33,162
-----------
Total expenses 696,585
-----------
Net investment income 512,389
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 1)
Net realized gain on investments 2,106,098
Change in unrealized appreciation on investment
securities 11,820,148
-----------
Net realized and unrealized gain on investments 13,926,246
-----------
Net increase in net assets resulting from operations $14,438,635
===========
</TABLE>
See accompanying notes.
9
<PAGE>
State Bond Common Stock Fund
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 512,389 $ 512,647
Net realized gain on investments 2,106,098 3,051,234
Net unrealized appreciation (depreciation) 11,820,148 (974,788)
--------------------------
Net increase in net assets resulting from operations 14,438,635 2,589,093
Distributions to shareholders from:
Net investment income (507,344) (509,988)
Net realized gain (2,106,757) (3,054,183)
--------------------------
Total distributions to shareholders (2,614,101) (3,564,171)
Capital share transactions:
Proceeds from sales of shares 1,624,108 1,409,259
Proceeds from reinvested dividends 2,521,416 3,419,979
Net proceeds from 1,135,278 shares issued in exchange
for net assets of State Bond Progress Fund (Note 5) - 8,605,437
Cost of shares redeemed (4,832,123) (4,248,413)
--------------------------
Net increase (decrease) in net assets resulting from
share transactions (686,599) 9,186,262
--------------------------
Total increase in net assets 11,137,935 8,211,184
NET ASSETS
Beginning of period 52,703,355 44,492,171
--------------------------
End of period (including undistributed net investment
income of $4,835 and overdistributed net investment
income of $425, respectively) $63,841,290 $52,703,355
==========================
OTHER INFORMATION
Shares:
Sold 186,971 177,547
Issued through reinvestment of dividends 266,744 444,355
Net shares from State Bond Progress Fund acquisition - 1,135,278
Redeemed (549,831) (531,348)
--------------------------
Net increase (decrease) (96,116) 1,225,832
==========================
</TABLE>
See accompanying notes.
10
<PAGE>
State Bond Common Stock Fund
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993 1992 1991
---------------------------------------------------
SELECTED PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 7.69 $ 7.91 $ 8.71 $ 9.23 $ 7.34
Income from investment
operations:
Net investment income .08 .09 .09 .10 .12
Net realized and unrealized
gain (loss) on investments 2.08 .25 .07 (.03) 2.31
---------------------------------------------------
Total from investment
operations 2.16 .34 .16 .07 2.43
Less distributions:
From net investment income (.08) (.09) (.09) (.10) (.12)
From net realized gain (.32) (.47) (.87) (.49) (.42)
---------------------------------------------------
Total distributions (.40) (.56) (.96) (.59) (.54)
---------------------------------------------------
Net asset value, end of period $ 9.45 $ 7.69 $ 7.91 $ 8.71 $ 9.23
===================================================
TOTAL RETURN* 28.14% 4.32% 1.83% 0.74% 33.45%
RATIOS AND SUPPLEMENTAL
DATA
Net assets, end of period (in
thousands) $63,841 $52,703 $44,492 $46,331 $46,882
Ratio of expenses to average net
assets 1.18% 1.22% 1.22% 1.21% 1.22%
Ratio of net investment income
to average net assets .87% 1.06% 1.05% 1.10% 1.45%
Portfolio turnover rate 2% 16%** 26% 8% 9%
</TABLE>
* Total returns do not consider the effects of the one time sales charge.
** Does not include the effects of the acquisition of the State Bond Progress
Fund (Note 5).
11
<PAGE>
State Bond Common Stock Fund
Notes to Financial Statements
December 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The State Bond Common Stock Fund (the "Fund") is the only investment portfolio
of State Bond Equity Funds, Inc. The Fund is registered under the Investment
Company Act of 1940, as amended, as a diversified open-end management investment
company. The Fund seeks to produce long-term capital appreciation by investing
primarily in common stocks.
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 are 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
Securities listed on national securities exchanges are valued at closing market
quotations at the end of each day. Unlisted securities are valued at the mean
between bid and asked prices as quoted in the over-the-counter market. Short-
term securities are valued at cost plus accrued interest, which approximates
market value. Security transactions are accounted for on the date the order to
buy or sell is executed, and dividends declared but not received are accrued on
the ex-dividend date. Realized gains or losses from security transactions are
determined on the basis of specific identification.
12
<PAGE>
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 1995, net unrealized appreciation on a Federal income tax basis
was $31,421,298, which is comprised of unrealized appreciation of $32,119,813
and unrealized depreciation of $698,515.
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 taxes is required.
Dividends paid by the Fund from net investment income are taxable as ordinary
income on the shareholder's tax return. The portion of the ordinary income
dividends (including net short-term capital gains) attributable to the fiscal
year ended December 31, 1995, that qualified for the dividends received
deduction for corporate shareholders was 100%. The Fund has designated
$2,106,098 as a capital gain dividend for the purpose of the dividends paid
deduction.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders from net investment income, if any, are paid semi-
annually. The Fund distributes substantially all of its taxable net realized
gain on investment securities annually. 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 .65% on the first $100 million of average
daily net assets of the Fund, .60% on the next $100 million of average daily net
assets of the Fund and .55% of the average daily net assets of the Fund in
excess of $200 million. In addition, the Fund pays .25% of the average daily net
assets to SBM Financial Services under a Rule 12b-1 plan of share distribution.
ARM Capital Advisors has voluntarily agreed to reimburse the Fund for expenses
(including the advisory fee but excluding taxes) in excess of 1.5% of the first
$30 million of the average daily net assets of the Fund and 1.0% of the average
daily net assets in excess of $30 million. No such reimbursements were required
during the year ended December 31, 1995.
13
<PAGE>
State Bond Common Stock Fund
Notes to Financial Statements (continued)
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES (CONTINUED)
Fees paid to SBM Financial Services for underwriting services in connection with
sales of the Fund's capital shares aggregated $47,941 for the fiscal year 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 fiscal year ended December 31, 1995, amounted to
$1,042,989 and $4,160,414, respectively.
4. CAPITAL SHARES
At December 31, 1995, the Fund had authority to issue ten billion shares of
common stock, with a par value of $.00001 each.
5. ACQUISITION OF STATE BOND PROGRESS FUND
On June 24, 1994, the State Bond Common Stock Fund acquired all the net assets
of the State Bond Progress Fund pursuant to a plan of reorganization approved by
the State Bond Progress Fund shareholders on June 24, 1994. The acquisition was
accomplished by a tax-free exchange of 1,135,278 shares of the State Bond Common
Stock Fund (valued at $8,605,437) for the 759,974 shares of the State Bond
Progress Fund outstanding on June 24, 1994. The State Bond Progress Fund's net
assets at that date ($8,605,437), including $3,146,451 of unrealized
appreciation on investment securities, were combined with those of the State
Bond Common Stock Fund. The aggregate net assets of the State Bond Common Stock
Fund and the State Bond Progress Fund immediately before the acquisition were
$41,858,580 and $8,605,437, respectively.
14
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
State Bond Common Stock Fund
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments of the State Bond Common Stock Fund (the "Fund") as
of December 31, 1995, and the related statements of operations and changes in
net assets and financial highlights for the year 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 audit. The statement of changes
in net assets for the year ended December 31, 1994 and financial highlights for
each of the four years in the period ended December 31, 1994 of the State Bond
Common Stock Fund were audited by other auditors whose report dated January 23,
1995 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 December 31, 1995, by
correspondence with the custodian. 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 Common Stock Fund at December 31, 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
January 26, 1996
15
<PAGE>
PART C
OTHER INFORMATION
STATE BOND EQUITY FUNDS, INC.
Item 24. Financial Statements and Exhibits
- -------------------------------------------
(a) Financial Statements and Independent Auditors' Reports:
Included in Part A:
Financial Highlights for each year in the ten
year period ended December 31, 1995
Included in Part B:
Schedule of Investments - December 31, 1995
Statement of Assets and Liabilities -
December 31, 1995
Statement of Operations - Year ended December 31,
1995
Statements of Changes in Net Assets - Years ended
December 31, 1995 and 1994
Financial Highlights for each period in the five years
ended December 31, 1995
Notes to Financial Statements
Independent Auditors' Reports
(b) Exhibits
(1) Articles of Incorporation - filed as an exhibit to
Post-Effective Amendments Nos. 56 and 18 to Form N-1A Registration
Statement of State Bond Equity Funds, Inc. on February 24, 1994, File
Nos. 2-19600 and 811-1138 respectively, and incorporated herein by
reference.
(2) Bylaws - filed as an exhibit to Post-Effective
Amendments Nos. 56 and 18 to Form N-1A Registration Statement of
State Bond Equity Funds, Inc. on February 24, 1994, File Nos. 2-19600
and 811-1138 respectively, and incorporated herein by reference.
(3) Not applicable.
(4) See generally Article IV of the Articles of Incorporation and Articles
II and VII of the Bylaws filed as exhibits to Post-Effective
Amendments Nos. 56 and 18 to Form N-1A Registration Statement of
State Bond Equity Funds, Inc. on February 24, 1994, File Nos. 2-19600
and 811-1138 respectively, and incorporated herein by reference.
(5) Investment Advisory Contract - filed as an exhibit hereto.
(6) (a) Underwriting Agreement - filed as an exhibit hereto.
<PAGE>
(b) Form of Agreements between principal underwriter and dealers filed
as an exhibit to the Registration Statement on Form N-1A of
State Bond Securities Funds, Inc., on September 27, 1993, File No.
2-30162 and incorporated herein by reference.
(7) Not applicable.
(8) Custodian Agreement - filed as an exhibit hereto.
(9) Administration Agreement (Transfer Agent Agreement)
- filed as an exhibit hereto.
(10) Opinion of Counsel - filed as an exhibit hereto.
(11) Other opinions, appraisals or rulings, and consents.
(i) Independent Auditors' Consent:
Ernst & Young LLP dated February 26, 1996
(ii) Independent Auditors' Consent: Deloitte & Touche LLP dated
February 26, 1996
(12) Not applicable.
(13) Purchase agreement form signed by initial stockholders - filed as
an exhibit to Amendment #39 to Form N-1 on November 12, 1979,
File #2-19600, and incorporated herein by reference.
(14) Copy of prototype defined contribution plan - filed as an exhibit to
Amendment #20 to Form N-1A of State Bond Securities Funds, Inc. on
September 27, 1993, File No. 2-30162 and incorporated herein by
reference.
(15) Plan pursuant to Rule 12b-1 - filed as an Exhibit to Post-Effective
Amendments Nos. 56 and 18 to Form N-1A Registration Statement of
State Bond Equity Funds, Inc. on February 24, 1994, File Nos.
2-19600 and 811-1138 respectively, and incorporated herein by
reference.
(16) Computation of Performance Quotations - filed as an exhibit hereto.
(17) Other Exhibits - Power of Attorney dated July 31, 1995 - filed as an
exhibit hereto.
(18) Not applicable.
(27) Financial Data Schedule - filed as an exhibit hereto.
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 5,497 as of December 31, 1995
<PAGE>
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
<PAGE>
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 companies.
<PAGE>
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
<PAGE>
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, Inc. 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 Income Funds, Inc.
(State Bond U.S. Government and Agency Securities
Fund Portfolio)
State Bond Money Funds, Inc.
(State Bond Cash Management Fund Portfolio)
State Bond Tax-Free Income Funds, Inc.
(State Bond Minnesota Tax-Free Income Fund
Portfolio)
State Bond Municipal Funds, Inc.
(State Bond Tax-Free Fund Portfolio)
SBM Certificate Company
(b) The following table sets forth information concerning each director,
officer or partner of the principal underwriter.
<TABLE>
<CAPTION>
Name and Principal Positions & Offices Positions & Offices
Business Address with Underwriter with Registrant
- ------------------------ ---------------------- -------------------
<S> <C> <C>
John R. McGeeney* Director, Secretary, None
General Counsel and
Compliance Officer
Edward J. Haines* Director and President None
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
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
Ronald Geiger*** Vice President None
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
Sheri L. Bean* Assistant Secretary None
</TABLE>
* Address is 239 S. Fifth Street, 12th Floor, Louisville KY 40202
** Address is 200 East Wilson Bridge Road, Worthington OH 43085
*** Address is 100 North Minnesota Street, New Ulm MN 56073
(c) Not applicable.
Item 30. Location of Accounts and Records
- ------------------------------------------
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105-1716
SBM Financial Services, Inc.
100 North Minnesota Street
New Ulm MN 56073
Item 31. Management Services
- -----------------------------
None
Item 32. Undertakings
- ----------------------
None
<PAGE>
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 29th day of February, 1996.
STATE BOND EQUITY 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.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/Dale Bauman President February 29, 1996
- ------------------- (Principal Executive
Officer)
/s/Peter Resnik Treasurer February 29, 1996
- ------------------- (Principal Financial
Officer)
/s/Don Cummings Controller February 29, 1996
- ------------------- (Principal Accounting
Officer)
* Director
- -------------------
(William B. Faulkner)
* Director
- -------------------
(John R. Lindholm)
</TABLE>
<PAGE>
* 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
-------------------------- February 29, 1996
<PAGE>
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT, made this 14th day of June, 1995, by and between
State Bond Equity Funds, Inc., a Maryland corporation (hereinafter called the
"Investment Corporation"), and ARM Capital Advisors, Inc., a Delaware
corporation (hereinafter called the "Manager"),
WITNESSETH:
WHEREAS, the Investment Corporation has been organized for the purpose of
investing its funds in common stock and other securities, and wishes to make use
of the experience, sources of information, advice, assistance and facilities
available to the Manager, and to have the Manager perform for it various
management, statistical, accounting and clerical services; and the manager is
willing to furnish such advice, facilities and 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 Investment Corporation shall at all times keep the Manager fully
enforced with regard to the securities owned by it, its funds available, or to
become available, for investment, an generally as to the condition of its
affairs. It shall furnish the Manager with a certified copy of all financial
statements, and a signed copy of each report prepared by certified public
accountants, and with such other information with regard to its affairs as the
Manager may from time to time reasonably request.
2. The Manager shall furnish to the Board of Directors and officers of the
Investment Corporation advice and recommendations with respect to the
acquisition, by purchase, exchange, subscription or otherwise, the holding and
disposal, though sale, exchange or otherwise, securities, and advice and
recommendations with respect to other aspects of the business and affairs of the
Investment Corporation; and shall perform such functions of management and
supervision as may be directed by the board of Directors of the Investment
Corporation.
3. The Manager shall supply at its expense, the Board of Directors and
Officers of the Investment Corporation with all statistical information
reasonably required by them and reasonably available to the Manager; shall
furnish the Investment Corporation with office facilities, including space,
furniture and equipment and all personnel reasonably necessary for the operation
of the Investment Corporation; shall authorize and permit any of its directors,
officers and employees, who may be elected as directors or officers of the
Investment Corporation, to serve in the capacities in which they are elected.
Other than as herein specifically indicated, the Manager will not be responsible
for Investment Corporation expenses. Such Investment Corporation expenses
include, by way of example but not by way of limitation, all expenses incurred
in the operation of the Investment Corporation and any public offering of its
shares including, among others, distribution fees payable pursuant to any plan
of distribution pursuant to Rule 12b-1 under the Investment Company Act of 1940,
as amended ("Rule 12b-1 Plan of Distribution"); legal, auditing and accounting
expenses; interest, taxes, governmental fees or membership dues; brokerage
commissions or charges; custodian, transfer agent or registrar fees; expenses of
redemption or repurchase of Investment Corporation shares; expenses of
registering and distributing reports, notices and dividends to shareholders;
costs of stationery; costs of stockholders and other meetings; and traveling
expenses of officers, directors and employees, if any.
4. No director, officer or employee of the Investment Corporation shall
receive from the Investment Corporation 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, 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
by the Manager, including the services of any consultants retained by the
Manager, the Investment Corporation shall pay the Manager subject to the
provisions of Paragraph 6 hereof, as promptly as possible after the last day of
each month, a monthly fee of 1/12th of
<PAGE>
.65 of 1% on the first $100,000,000 of average net assets of the Investment
Corporation, 1/12th of the .60 of 1% on the next $100,000,000 of average daily
net assets and 1/12th of .55 of 1% on average daily net assets over
$200,000,000. The first payment shall be made as promptly as possible at the end
of the monthly next succeeding the effective ate of this contract, and shall
constitute a full payment of the fee due the Manager for all services prior to
that date. If this Agreement is terminated 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 the Investment
Corporation in the 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 Investment Corporation shall in
all cases be based only on business days and shall be completed as of the time
of closing of the New York Stock Exchange. Each such payment shall be
accompanied by a report of the Investment Corporation prepared with by the
Investment Corporation 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.
The parties agree that from time to time, the Manager may recommend that
the Investment Corporation execute all or a portion of its portfolio
transactions through SBM Financial Services, Inc., or some other subsidiary or
affiliate of the Manager; provided the execution of such portfolio transactions
is consistent with the Fund's obligations under the Investment Company Act of
1940, as amended. When such recommendations are accepted by the officers of the
Investment Corporation, and brokerage commissions are paid to SBM Financial
Services, Inc., or any other subsidiary of the Manager, the management fee
payable as above described will be reduced to the extent of the "net profits" of
such brokerage operation as hereinafter defined. This offset will be credited
after the close of the calendar year against the management fee due to the
Manager for the next succeeding month or months.
"Net profits" of the brokerage operations shall be determined in the
following manner:
Gross revenues of SBM Financial Services, Inc. (or other subsidiaries or
affiliates) from brokerage transactions for the portfolio of the Investment
Corporation will be credited to an "offset account" for the Investment
Corporation.
It is understood that brokerage services may also be rendered to other,
including other funds and institutions, and revenues attributable to such other
broker transactions will not be credited to the Investment Corporation's offset
account. Those revenues which cannot be specifically attributed to a particular
person or fund will be apportioned quarterly, on the basis of the volume of
portfolio transactions of the Investment Corporation (whether transacted by the
subsidiary or not), relative to the dollar volume of transactions of other funds
(whether transacted by the subsidiary or not), for which the Manager (or a
subsidiary) is the advisor, and a brokerage account is maintained with the
Manager or its subsidiaries. Such dollar volume of portfolio transactions shall
not include transactions in government securities, commercial paper, cash
equivalents, net trades, or principal transactions of the Investment
Corporation. This prorated amount will be credited to the offset account for
the Investment Corporation. Revenues to be so apportioned shall include
commissions received by the subsidiary from reciprocal transactions, including
those participations in commissions generally known as "give ups."
The offset account will be charged with all the direct expense of each
transaction, such as clearing broker fees, flow broker fees, transfer taxes,
exchange fees or other fees; and a share of the expense of the subsidiary
brokerage operations. The share of expenses to be charged to the offset account
shall be prorated on the basis of the subsidiary's gross brokerage revenues
attributable to the Investment Corporation, compared to the subsidiary's gross
brokerage revenue from all sources. Such prorated expenses shall include
salaries for all personnel regularly engaged in the brokerage operations,
including record keeping, accounting and administration. If any employee who is
regularly engaged in operation, the proportion of his salary that shall be
deemed an expense that is to be prorated shall be determined according to
generally accepted accounting principles. Other costs and expenses such as
rent, telephone, stock quotation services and other expenses and adjustments
customary to a brokerage operation which are made to the offset account shall be
determined according to generally accepted accounting principles.
In addition, there shall be a deduction for the expenses of general
overhead, executive supervision, and general administration in an amount equal
to 20% of the gross revenues allocated to the offset account. The net amount,
determined as set forth above, shall be subject to a deduction for income taxes,
the sum to be deducted for this purpose
<PAGE>
is to be computed as if the offset account were to file a separate income tax
return. The balance of the account after all the above deductions will be
considered "net profits."
6. The maximum charges per annum incurred by the Investment Corporation,
inclusive of management fee computed without regard to the offset described
above, but exclusive of Rule 12b-1 Plan of Distribution fees, interest, taxes,
brokerage fees, and extraordinary expenses, shall not exceed one and one-half
percent (1 1/2%) of the first $30,000,000 of the average annual value of the net
assets of the Investment Corporation and one percent (1%) of the average annual
value of any additional net assets of the Investment Corporation, exclusive of
the amount, if any, of funds borrowed for investment purposes, computed at least
quarterly. The Manager will assume and pay all expenses of the Investment
Corporation in excess of the expense limitations provided for herein, up to an
amount not exceeding its management and advisory fees for the period for which
reimbursement is made, such reimbursement to be made not less frequently than
annually.
7. Appropriate officers of the Manager shall provide the directors of the
Investment Corporation with such information as is required by any plan of
distribution adopted by the Investment Corporation pursuant to Rule 12b-1 under
the Investment Company Act of 1940, as amended.
8. 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 Investment
Corporation in following or declining to follow any advance or recommendations
of the Manager.
9. 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 Investment Corporation 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 a 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 to any other corporation, firm,
individual or association.
10. As used in this Agreement, the terms "assignment" 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.
11. This Agreement shall terminate automatically in the event of its
assignment by the Manager and shall not be assignable by the Investment
Corporation without the consent of the Manager.
12. This Agreement may be terminated at any time, without the payment of
any penalty, (a) by the Board of Directors of the Investment Corporation or by
vote of a majority of the outstanding voting securities of the Investment
Corporation by sixty days' written notice addressed to the Manager at its
principal place of business; and (b) by the Manager by sixty days' written
notice addressed to the Investment Corporation at its principal place of
business.
13. This Agreement shall be submitted for approval to the Board of
Directors of the Investment Corporation annually and shall continue in effect
only so long as specifically approved annually by the Board of Directors or by a
majority of the outstanding voting securities, and in either event by the vote
of a majority of the directors who are not parties to such contract or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
STATE BOND EQUITY FUNDS, INC.
By /s/ Eward L. Zeman
--------------------------
Its Vice-President
--------------------------
ARM CAPITAL ADVISORS, INC.
By /s/ John R. McGeeney
--------------------------
Its Secretary
--------------------------
<PAGE>
STATE BOND EQUITY FUNDS, INC.
SBM Financial Services, Inc.
8400 Normandale Lake Boulevard
Suite 1150
Minneapolis, Minnesota 55437
Dear Sirs:
This is to confirm that, in consideration of the agreements on your part
herein contained, we have agreed that you shall be, for the period of this
agreement, the exclusive distributor for the unsold portion of such number of
shares of our capital stock as may from time to time be effectively registered
under the Securities Act of 1933, as amended (hereinafter referred to as the
"Act"): provided, however, that nothing contained herein shall prevent us from
selling, at asset value, if we so elect, shares of our Capital Stock directly to
permit, e.g., acquisition of other companies.
1. We agree to sell and deliver from time to time, upon the terms
hereinafter set forth, such of the remaining unsold balance of our fully-paid
and nonassessable shares of capital stock as are then effectively registered
under the Act as you shall order from us, but only to the extent that you shall
have received purchase orders therefor. All orders from you hereunder shall be
subject to confirmation by us. We shall have the right at our election to
deliver hereunder either shares issued upon original issue or treasury shares.
2. You may sell as principal and distribute any shares so purchased by
you, through dealers or otherwise, in such manner and on such terms not
inconsistent with the provisions hereof, or of our prospectus under the Act, as
you may determine from time to time, and you agree to use your best efforts to
effect such sale and distribution. You shall not make (a) any short sale of our
shares and you shall not make, unless otherwise notified by us in writing, (b)
any sale of such shares to any officer, director, or employee of the Fund, any
person or organization furnishing managerial, supervisory or distributing
services to the Fund or any officer, director, partner, stockholder, employee or
trustee of any such person or organization furnishing managerial, supervisory or
distributing services to the Fund, unless you are advised in writing that the
purchase is for investment purpose and that the purchaser will advise the Fund
of any sale of shares so purchased. You shall promptly advise us of all such
sales of shares known to you. You shall in addition, insofar as they concern
you, comply with all applicable laws, rules and regulations including, without
limiting the generality of the foregoing, all rules and regulations made or
adopted pursuant to Section 22 of the Investment Company Act of 1940 by the
Securities and Exchange Commission or any securities association registered
under the Securities and Exchange Act of 1934.
3. All shares offered for sale and sold by you, whether purchased from us
or otherwise, shall be (except as may be otherwise provided in our Prospectus)
offered for sale and sold by you at a price per share (hereinafter called the
offering price) approximately equal to (a) the asset value per share (determined
as authorized from time to time by our Board of Directors pursuant to the
authority conferred upon it in our Articles of Incorporation) plus (b) a sales
commission as specified in our Prospectus, which price, if not an exact multiple
of one cent, shall be adjusted to the nearest full cent. We shall determine and
promptly thereupon furnish to you a statement of such offering price applicable
in single transactions of less than $5,000.00 as often and at such times as our
Board of Directors shall be resolution determine, provided, however, that
subject to the provisions hereinafter contained in this paragraph numbered 3, we
shall determine and furnish such offering price at least once on each business
day on which the New York Exchange is open for trading. Each such offering
price shall become effective at such time, and shall remain in effect during
such period, as may be stated in the statement thereof furnished to you as above
provided. Every statement of the offering price furnished to you as above
provided shall show the basis of its computation. We agree to accept and
confirm every order
<PAGE>
which you may present to us for the sale to you of shares of such stock,
provided that such order contemplates the sale of such shares by us to you at a
price to you equal to the offering price in effect at the time of confirmation
by us of such order, less the applicable sales commission. We shall also accept
and confirm at the offering price in effect before a price change less the
applicable sales commission, such order as are entered by your to fill orders
placed with you prior to such time of price change, but only if such orders are
received by us within a time deemed by us to be reasonable after the time at
which the then current offering price became effective and if such orders are
time-stamped or bear other evidence to show that they were filed for
transmission at the point of origin prior to the time at which the then current
offering price became effective. We shall not in any event sell to you more
than the unsold portion of the shares of our stock then effectively registered
under the Act. Anything to the contrary herein notwithstanding, however,
whenever in their judgment such action is warranted by market, economic or
political conditions or by abnormal circumstances of any kind, or officers may
suspend the offering price currently in effect, give you notice of such
suspension and thereafter may, without incurring any liability under any of the
provisions of this agreement, decline to accept or confirm any orders for or
make any shares of our capital stock to you under this agreement until such time
as they shall deem it advisable to accept and confirm such orders and to make
such sales, and during any period during which the offering price currently in
effect shall be suspended or during which our officers shall decline to accept
or confirm any such orders or make any such sales, we shall be under no
obligation to confirm or accept any such orders or make any such sales at any
price.
4. At or prior to the time of delivery by us to you, or for your account,
of any shares of our capital stock you will pay or cause to be paid to us or to
our order an amount equal to the offering price of such shares at which your
order has been confirmed by us, less the applicable sales commission, which
sales commission shall constitute your concession for selling and distributing
such shares and may be deducted by you from the offering price in making payment
to us hereunder. You may in your discretion allow concessions to dealers
accounting to your out of such concession.
In addition, the Company shall pay you a monthly distribution fee equal to
1/12 of .25% of the average daily net assets of the Company. You shall use the
distribution fee to compensate those who sell Company shares, including your
registered representatives, and to pay certain other expenses of selling Company
shares, as set forth the Fund's Plan of Distribution, as such may be amended
from time to time, and any related agreements which shall comply with Rule 12b-1
under the Investment Company Act of 1940, as such rule may be periodically
amended.
5. Delivery of certificates for shares of our capital stock shall be made
as promptly as practicable against payment therefor by you. The certificates
for such shares shall be registered in such names and amounts as you may specify
in writing to us or our agent designated for the purpose.
6. The Company will, at its own expense, register its shares with the
Securities and Exchange Commission, State and other regulatory bodies and pay
the related registration filing fees therefor.
During the period of this contract, you shall pay, cause to be paid, or
indemnify the Company against each and all of the following expenses, but no
others:
(a) All expenses and costs of printing prospectuses to be distributed to
prospective investors, application forms, confirmation forms, and any other
forms or sales literature used or to be used in connection with the offering and
sale of the Company's shares, including the costs of issuing and handling,
specifically excluding stock certificates. The Company will bear the expense of
preparing, setting in print, and printing and distributing prospectuses to
shareholders of the Company.
(b) Federal documentary stamp taxes payable on account of the transfer of
shares of the Company, but not of original issue of shares.
(c) All premiums required to be paid in connection with any bonds required
of you, your agents, salesmen and representatives, under the securities laws of
the various stated in which our securities may be registered or qualified for
sale.
<PAGE>
You will pay all expenses connected with your own qualification as a dealer
or broker under State or Federal laws and, except as otherwise specifically
provided in this agreement, all other expenses incurred by you in connection
with sale of our shares as contemplated in this agreement (including the expense
of qualifying us as a dealer or broker under the laws of such states as may be
designated by you, if deemed necessary or advisable by us, and the net
additional expense, if any, including State and local taxes, of our qualifying
as a foreign corporation and doing business in any jurisdiction should that be
deemed desirable for the purpose of facilitating sales of our shares).
7. We shall furnish you from time to time, for use in connection with the
sale of our shares, such information with respect to us and our shares as you
may reasonably request, all of which shall be signed by one or more of our duly
authorized officers; and we arrant that the statements contained in any such
information, when so signed by our officers, shall be true and correct. We
shall also furnish you with annual audits of our books and accounts made by
independent public accountants regularly retained by us, with a monthly itemized
list of the securities in our portfolio, with monthly balance sheets as soon as
practicable after the end of each month, and from time to time with such
additional information regarding our financial condition as you may reasonably
request.
8. If and to the extent that you at any time be authorized so to do by our
Board of Directors, you may act as our agent for the sale of our shares, upon
such conditions as our Board of Directors shall approve.
9. As used in this agreement, the term "registration statement" shall mean
and include the registration statement with respect to shares of our capital
stock will be filed under the Act, and also any other registration statement
filed by us under the Act which shall become effective in each case including
any amendment thereto filed after the effective date thereof which amendment
shall become effective. As used in this agreement, the term "prospectus" shall
mean and include the then current prospectus filed by us as a part of any such
registration statement or any such amendment thereto under the Act. We
represent to you that our registration statement and prospectus under the Act
have been or will be, as the case may be, carefully prepared in conformity with
the requirements of the Act and the rules and regulations of the Securities and
Exchange Commission thereunder. We represent and warrant to you that our
registration statement and prospectus contain or will contain all statements
required to be stated therein in accordance with the Act and the rules and
regulations of said Commission, and that all statements of fact contained or to
be contained therein are or will be true and correct at the time indicated or
the effective date as the case may be; that neither our registration statement
nor our prospectus, when it shall become effective or be authorized for use,
will include any untrue statement of material fact or omit to state a material
fact required to be stated therein or necessary to make the statement therein
not misleading to a purchaser of our shares. We will from time to time file
such amendment or amendments to our registration statement and prospectus as, in
the light of future developments, shall, in the opinion of our counsel, be
necessary in order to have our registration statement and prospectus at all
times contain all material facts required to be stated therein necessary to make
any statements therein not misleading to a purchaser of our shares, but, if we
shall not file such amendment or amendments within fifteen days after receipt by
us of a written request from you to do so, you may at your option, terminate
this agreement immediately. We shall not file any amendment to our registration
statement or prospectus without giving you reasonable notice thereof in advance;
provided, however, that nothing in this agreement contained shall in any way
limit our right to file at any time such amendments to our registration
statement and/or prospectus, of whatever character, as we may deem advisable,
such right being in all respects absolute and unconditional. We represent and
warrant to you that any amendment to our registration statement or prospectus
hereafter filed by us will, when it becomes effective, contain all statements
required to be stated therein accordance with the Act and rules and regulations
of said Commission, that all statements of fact contained therein will, when the
same shall become effective, be true and correct and that no such amendment,
when it becomes effective, will include an untrue statement of a material fact
or will omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading to a purchaser of our shares.
10. We agree to prepare and furnish you from time to time a copy of our
offering prospectus in form as then most recently filed with the Securities and
Exchange Commission. We authorize you and dealers to use such prospectus, in
the form furnished to you from time to time, in connection with the sales of our
shares. We agree to indemnify, defend and hold you, and any person who controls
you 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 you or any such controlling
person may incur, under the Act, or under common law or otherwise, arising out
of or based upon any
<PAGE>
alleged untrue statement of a material fact contained in our registration
statement or prospectus or arising out of or based upon any alleged omissions 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
this indemnity agreement, to the extent that it might require indemnity of any
person who is such controlling person and who is also a director of the Fund,
shall 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 Act; and further provided; that in no event shall anything herein contained
be so construed as to protect you against any liability to us or our security
holders to which you would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of your duties,
or by reason of your reckless disregard of your obligations and duties under
this agreement. Our agreement to indemnify you and any such controlling person
as aforesaid is expressly conditioned upon our being notified of any action
brought against you or nay such controlling person, such notification to be
given by letter or by telegram addressed to us at our principal office in
Minneapolis, Minnesota, and sent to us 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 us of any such action shall not
relieve us from any liability which we may have to the person against whom such
action is brought by reason of any such alleged untrue statement or omission
otherwise than on account of our indemnity agreement contained in this paragraph
numbered 10. We 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 us and approved by you.
In the event we do elect to assume the defense of any such suit and retain
counsel of good standing approved by you, the defendant of defendants in such
suit shall bear the fees and expenses of any additional counsel retained by any
of them; but in case we do not elect to assume the defense of any such suit, or
in case you do not approve of counsel chosen by us, we will reimburse you or the
controlling person or persons named as defendant or defendants in such suit, for
the fees and expenses of any counsel retained by you or them. Our
indemnification agreement contained in this paragraph number 10 and our
representations and warranties in this agreement shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
you or any controlling person and shall survive the delivery of any shares or
our capital stock hereunder. This agreement of indemnity will inure exclusively
to your benefit, to the benefit of your successors and their respective estates,
and to the benefit of any controlling persons and their successors. We agree
promptly to notify you of the commencement of any litigation or proceedings
against us in connection with the issue and sale of any of our capital stock.
11. You agree to indemnify, defend and hold us, our several officers and
directors, and any person who controls us 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 we, our 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 us, our 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 you to us for use in our registration
statement or prospectus 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. Your agreement to indemnify us, our officers
and directors, and any such controlling person as aforesaid is expressly
conditioned upon your being notified of any action brought against us, our
officers or directors or any such controlling person, such notification to be
given by letter or telegram addressed to you at your principal office in New
Ulm, Minnesota, and sent to you by the person against whom such action is
brought, within ten days after the summons or other first legal process shall
have been served. You shall have a right to control the defense of such action,
with counsel of your own choosing, satisfactory to us, if such action is based
solely upon such alleged misstatement or omission on your part, and in any other
event you or such controlling person shall have the right to participate in the
defense or preparation of the defense of any such action. The failure so to
notify you of any such action shall not relieve you from any liability which you
may have to us, our officers or directors or to such controlling person by
reason of any such untrue statement or omission on you part otherwise than on
account of your indemnity agreement contained in this paragraph numbered 11.
<PAGE>
12. No shares of our capital stock shall be bought or sold by either you
or us under the provisions of this agreement and no orders for the purchase or
sale of such stock hereunder shall be confirmed or accepted by us if and so long
as the effectiveness of our registration statement, or any necessary amendments
thereto, covering such stock, shall be suspended under any of the provisions of
the Act; provided, however, that nothing in this paragraph numbered 12 contained
shall in any way restrict or limit or have any application to or bearing upon
our obligation to redeem shares of our capital stock from any stockholder in
accordance with the provisions of our Articles of Incorporation. We will use
our best efforts at all times to have shares effectively registered under the
Act.
13. We agree to advise you immediately:
(a) of any request by the Securities and Exchange Commission for amendments
to our registration statement or prospectus or for additional information;
(b) in the event of the issuance by the Securities and Exchange Commission
of any stop order suspending the effectiveness of our registration statement or
prospectus or the initiation of any proceeding for that purpose.
(c) of the happening of any material event which makes untrue any statement
in our registration statement or prospectus of which requires the making of a
change in either thereof in order to make the statements therein not misleading,
and
(d) of all action of the Securities and Exchange Commission with respect to
any amendments to our registration statement or prospectus which may from time
to time be filed with the Securities and Exchange Commission under the Act.
14. You are authorized, as our agent, to accept offers for resale to us
and to repurchase shares of our capital stock upon such terms and conditions as
our Board of Directors by resolution shall determine. At least once on each
business day on which the New York Stock Exchange is open for trading we shall
determine and promptly thereupon furnish to you a statement of the price at
which such repurchases may be made during the period or periods specified in
such statement and, upon your request, we shall advise you of the price at which
such repurchase may be made at other times. Insofar as they concern us we agree
to comply with all applicable laws, rules and regulations, including without
limiting the generality of the foregoing, all rules or regulations made or
adopted pursuant to Section 22 of the Investment Company Act of 1940 by the
Securities and Exchange Commission or any securities association registered
under the Securities and Exchange Act of 1934.
15. You may, if you so desire, appoint or employ agents, at your own cost
and expense, to assist in the carrying out of your obligations hereunder, but no
such appointment or employment shall in any way relive you of any of your
responsibilities or obligations to us hereunder.
16. Subject to the provisions of paragraph numbered 9 hereof, this
agreement shall continue in effect until such time as there shall then remain no
unsold balance of our shares of capital stock effectively registered under the
Act; provided, however, that this agreement shall continue in effect for a
period of more than two years from the date hereof only so long as such
continuance is specifically approved at least annually by a majority of the
Directors who are not parties to the contract or interested persons of any such
party; and by approval of a majority of the entire Board or by vote of a
majority of our outstanding voting securities (as defined in the Investment
Company Act of 1940); provided further that this agreement shall automatically
terminate in the event of its assignment (as defined in said Investment Company
Act); and provided, in any event, that this agreement may be terminated at any
time by us or by you without penalty upon sixty days' written notice to the
other.
<PAGE>
Please confirm that the foregoing is in accordance with your understanding by
indicating your acceptance hereof at the place below indicated, whereupon it
shall become a binding agreement between us.
Very truly yours,
STATE BOND EQUITY FUNDS, INC.
By: /s/ Edward L. Zeman
-------------------------
Its: Vice President
--------------
SBM FINANCIAL SERVICES, INC.
By: /s/ John R. McGeeney
-------------------------
Its: Secretary
---------
<PAGE>
CUSTODY AND INVESTMENT ACCOUNTING AGREEMENT
-------------------------------------------
THIS AGREEMENT made the _____ day of December, 1995, by and between
INVESTORS FIDUCIARY TRUST COMPANY, a trust company chartered under the laws of
the state of Missouri, having its trust office located at 127 West 10th Street,
Kansas City, Missouri 64105 ("Custodian"), and STATE BOND EQUITY FUNDS, INC., a
Maryland corporation, having its principal office and place of business at 100
North Minnesota Street, New Ulm, Minnesota 56073 ("Fund").
WITNESSETH:
WHEREAS, Fund desires to appoint Investors Fiduciary Trust Company as
custodian of the securities and monies of Fund's investment portfolio and as its
agent to perform certain investment accounting and recordkeeping functions; and
WHEREAS, Investors Fiduciary Trust Company is willing to accept such
appointment;
NOW, THEREFORE, for and in consideration of the mutual promises contained
herein, the parties hereto, intending to be legally bound, mutually covenant and
agree as follows:
1. APPOINTMENT OF CUSTODIAN. Fund hereby constitutes and appoints Custodian
as:
A. Custodian of the securities and monies at any time owned by the Fund;
and
B. Agent to perform certain accounting and recordkeeping functions relating
to portfolio transactions required of a duly registered investment
company under Rule 31a of the Investment Company Act of 1940 (the "1940
Act") and to calculate the net asset value of the Fund.
2. REPRESENTATIONS AND WARRANTIES.
A. Fund hereby represents, warrants and acknowledges to Custodian:
1. That it is a corporation or trust (as specified above) duly
organized and existing and in good standing under the laws of its
state of organization, and that it is registered under the 1940 Act;
and
<PAGE>
2. That it has the requisite power and authority under applicable law,
its articles of incorporation and its bylaws to enter into this
Agreement; that it has taken all requisite action necessary to
appoint Custodian as custodian and investment accounting and
recordkeeping agent for the Fund; and that this Agreement
constitutes a legal, valid and binding obligation of Fund,
enforceable in accordance with its terms.
B. Custodian hereby represents, warrants and acknowledges to Fund:
1. That it is a trust company duly organized and existing and in good
standing under the laws of the State of Missouri; and
2. That it has the requisite power and authority under applicable law,
its charter and its bylaws to enter into and perform this Agreement;
that this Agreement has been duly executed and delivered by
Custodian; and that this Agreement constitutes a legal, valid and
binding obligation of Custodian, enforceable in accordance with its
terms.
3. DUTIES AND RESPONSIBILITIES OF CUSTODIAN.
A. Delivery of Assets
Except as permitted by the 1940 Act, Fund will deliver or cause to be
delivered to Custodian on the effective date of this Agreement, or as
soon thereafter as practicable, and from time to time thereafter, all
portfolio securities acquired by it and monies then owned by it or from
time to time coming into its possession during the time this Agreement
shall continue in effect. Custodian shall have no responsibility or
liability whatsoever for or on account of securities or monies not so
delivered.
B. Delivery of Accounts and Records
Fund shall turn over or cause to be turned over to Custodian all of the
Fund's relevant accounts and records previously maintained. Custodian
shall be entitled to rely
-2-
<PAGE>
conclusively on the completeness and correctness of the accounts and
records turned over to it, and Fund shall indemnify and hold Custodian
harmless of and from any and all expenses, damages and losses whatsoever
arising out of or in connection with any error, omission, inaccuracy or
other deficiency of such accounts and records or in the failure of Fund
to provide, or to provide in a timely manner, any accounts, records or
information needed by the Custodian to perform its functions hereunder.
C. Delivery of Assets to Third Parties
Custodian will receive delivery of and keep safely the assets of Fund
delivered to it from time to time segregated in a separate account, and
if Fund is comprised of more than one portfolio of investment securities
(each a "Portfolio") Custodian shall keep the assets of each Portfolio
segregated in a separate account. Custodian will not deliver, assign,
pledge or hypothecate any such assets to any person except as permitted
by the provisions of this Agreement or any agreement executed by it
according to the terms of Section 3.S. of this Agreement. Upon delivery
of any such assets to a subcustodian pursuant to Section 3.S. of this
Agreement, Custodian will create and maintain records identifying those
assets which have been delivered to the subcustodian as belonging to the
Fund, by Portfolio if applicable. The Custodian is responsible for the
safekeeping of the securities and monies of Fund only until they have
been transmitted to and received by other persons as permitted under the
terms of this Agreement, except for securities and monies transmitted to
subcustodians appointed under Section 3.S. of this Agreement, for which
Custodian remains responsible to the extent provided in Section 3.S.
hereof. Custodian may participate directly or indirectly through a
subcustodian in the Depository Trust Company (DTC), Treasury/Federal
Reserve Book Entry System (Fed System), Participant Trust Company (PTC)
or other depository approved by the Fund (as such entities are
-3-
<PAGE>
defined at 17 CFR Section 270.17f-4(b)) (each a "Depository" and
collectively, the "Depositories").
D. Registration of Securities
The Custodian shall at all times hold registered securities of the Fund
in the name of the Custodian, the Fund, or a nominee of either of them,
unless specifically directed by instructions to hold such registered
securities in so-called "street name," provided that, in any event, all
such securities and other assets shall be held in an account of the
Custodian containing only assets of the Fund, or only assets held by the
Custodian as a fiduciary or custodian for customers, and provided
further, that the records of the Custodian at all times shall indicate
the Fund or other customer for which such securities and other assets
are held in such account and the respective interests therein. If,
however, the Fund directs the Custodian to maintain securities in
"street name", notwithstanding anything contained herein to the
contrary, the Custodian shall be obligated only to utilize its best
efforts to timely collect income due the Fund on such securities and to
notify the Fund of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
All securities, and the ownership thereof by Fund, which are held by
Custodian hereunder, however, shall at all times be identifiable on the
records of the Custodian. The Fund agrees to hold Custodian and its
nominee harmless for any liability as a shareholder of record of
securities held in custody.
E. Exchange of Securities
Upon receipt of instructions as defined herein in Section 4.A.,
Custodian will exchange, or cause to be exchanged, portfolio securities
held by it for the account of Fund for other securities or cash issued
or paid in connection with any reorganization, recapitalization, merger,
consolidation, split-up of share, change of par value, conversion or
otherwise, and will deposit any such securities in
-4-
<PAGE>
AGENCY AGREEMENT
This is an agreement made this 1st day of February, 1996, by and between State
Bond Equity Funds, Inc., a Maryland corporation, (hereinafter called the "Fund")
and ARM Transfer Agency, Inc. a Delaware corporation, (hereinafter called
"ARM").
WITNESSETH THAT:
ARM is hereby appointed Transfer Agent for the Capital Stock, $.00001 par
value, of the Fund and Dividend Disbursing Agent for the Fund under the
following terms and conditions:
1. DOCUMENTS. In connection with the appointment of ARM as Transfer Agent,
the Fund shall file with ARM the following documents:
A. Certificate Copies of the Articles of Incorporation of the Fund and all
amendments thereto;
B. A certified copy of the By-Laws of the Fund as amended to date;
C. A copy of the resolution of the Fund authorizing this Agreement;
D. Specimens of all forms of outstanding and new stock certificates in the
forms approved by the Board of Directors of the Fund with a certificate of the
Secretary of the Fund as to such approval;
E. All account application forms and other documents relating to
shareholders' accounts;
F. A certified list of shareholders of the Fund with the name, address and
tax identification number of each shareholder, the number of shares held by
each, certificate numbers and denominations (if any have been issued), the plan
account number of each shareholder having a plan, lists of any accounts against
which stops have been placed, together with the reasons for said stops, and the
number of share redeemed by the Fund.
2. FURTHER DOCUMENTATION. The Fund will also furnish from time to time the
following documents.
A. Each resolution of the Board of Directors of the Fund authorizing the
original issue of its shares;
B. Each Registration Statement filed with the Securities and Exchange
Commission and amendment and orders thereto in effect with respect to the sale
of shares of the Fund;
C. A certified copy of each amendment to the Articles of Incorporation and
the By-Laws of the Fund;
D. Certified copies of each vote of the Board of Directors authorizing
officers to give instructions to the Transfer Agent;
E. Such other certificates, documents or opinions which ARM may, in its
discretion, deem necessary or appropriate in the proper performance of its
duties.
3. AUTHORIZED SHARES. The Fund certifies to ARM that as of the close of
business on the date of this Agreement, it has authorized 10 billion shares of
its Capital Stock, $.00001 par value of certifies that by virtue of its
Articles of Incorporation and the provisions of the law of the state of its
incorporation shares of its Capital Stock which are redeemed by the Fund from
their holders are restored to the status of authorized and unissued shares.
4. ARM TO RECORD TRANSFERS. ARM is authorized to transfer on the records of
the Fund maintained by it from time to time shares of the Fund's Capital Stock,
$.00001 par value.
<PAGE>
5. NOTICE OF DISTRIBUTION. The Fund will promptly inform ARM of the
declaration of any dividend or distribution on amount of its Capital Stock.
6. DIVIDEND DISBURSEMENTS. ARM shall act as Dividend Disbursing Agent for the
Fund, and, as such, shall prepare and mail or credit income and capital gain
payments to investors. The Dividend Disbursing Agent will, on or before the
payment date of nay such dividend or distribution, notify the Custodian of the
estimated amount required to pay any portion of said dividend or distribution
which is payable in cash, and the Fund agrees that on or before the payment date
of such distribution, it shall instruct the Custodian to make available to the
Dividend Disbursing Agent sufficient funds for the cash amount to be paid out.
If an investor in entitled to receive additional shares by virtue of any such
distribution or dividend, appropriate credits will be made to his account.
7. REDEMPTIONS. ARM shall receive and shall stamp with the date of receipt,
all certificate delivered to it for redemption or rephrase as well as all
requests for redemptions or repurchase of shares and shall process said
redemptions and repurchase request as follows:
A. If such certificate, redemption request or repurchase request complies
with the standards for redemption or repurchase as approved by the Fund, ARM
shall notify the Fund and Distributor of the total number of shares presented
and covered by such requests received by ARM and said date;
B. On or prior to the third business day succeeding any such request for
redemption or repurchase, ARM shall, from funds available in the account of the
Custodian, pay the applicable redemption or repurchase price, as the case may
be, to the investor as set forth in the current prospectus of the Fund;
C. If any such certificate or request for redemption or repurchase does
not comply with said standards, ARM shall promptly notify the investor of such
fact, together with the reason therefore, and shall effect such redemption or
repurchase at the price in effect at the time of receipt of documents comply
with said standards or, in the case of a repurchase, at such other time as the
Distributor, as agent for the Fund shall so direct.;
D. Unless otherwise notified by the Fund, ARM shall treat all request for
redemption or repurchase as request for repurchase.
8. WITHDRAWAL PLANS. ARM shall process withdrawal orders in accordance with
the terms of withdrawal plans duly executed by investors. Payments upon such
withdrawal orders and redemptions of shares held in withdrawal plan accounts for
the payment of the amounts required shall be made at such times as the Fund may
determine with the approval of ARM .
9. TAX RETURNS. ARM will prepare, file with the Internal Revenue Service and
with the appropriate State Agencies, and, if required, mail to investors such
returns for reporting income and capital gain dividend paid as are required to
be filed and mailed, and shall withhold such sums as are required to be withheld
under applicable Federal and State income tax laws, rules and regulations.
10. BOOKS AND RECORDS. ARM shall maintain records showing for each investor's
account the following:
A. Names, address and tax identification numbers;
B. Number of shares held;
C. Historical information regarding the account of each shareholder,
including dividends paid and date of price for all transactions on a
shareholder's account;
D. Any stop or restraining order placed against a shareholder's account;
E. Information with respect to withholdings on foreign accounts;
<PAGE>
F. Any dividend reinvestment order, plan application, dividend address and
correspondence relating to the current maintenance of a shareholder's account;
G. Certificate numbers and denominations for any shareholder holding
certificates;
H. Any information required in order for ARM to perform the calculations
contemplated under Sections 7, 8 and 9 hereof.
Any such records to be maintained. Rule 13a-1 under the Investment Company Act
of 1940 will be preserved for the period prescribed in Rule 31a-2 of said rules.
Such record retention shall be at the expense of the Fund. Such records may be
inspected by the Fund at reasonable times.
11. OTHER INFORMATION TO THE FUND. ARM will furnish to the Fund such other
information, including shareholder lists, and statistical information as may be
agreed upon from time to time between ARM , the Fund and the Distributor.
12. CORRESPONDENCE. ARM will answer that correspondence from shareholders
relating to their share accounts and such other correspondence as may from time
to time be mutually agreed upon.
13. PROXIES. ARM shall mail such proxy cards and other material supplied to
it by the Fund in connection with shareholder meetings of the Fund and shall
receive, examine and tabulate returned proxies and certify the vote of the Fund.
14. FEES AND CHARGES. ARM will receive such compensation from the fund for
its services as the Fund's Transfer Agent and Dividend Disbursing Agent and for
its other duties pursuant hereto as may be agreed from time to time, and shall
be reimbursed for the cost of any and all forms, including blank checks and
proxies, used by it in communicating with shareholders of the Fund, or
especially prepared for used in communicating with shareholders of the Fund, or
especially prepared for use in connection with its actions hereunder, as well as
the cost of postage, telephone and telegraph used in communicating with
shareholders of the Fund. All forms for which ARM has received reimbursement
from the Fund shall be and remain the property of the Fund until used. ARM
shall also receive from the Fund all counsel fees incurred by it in connection
with the performance of its duties under this Agreement, unless such fees are
incurred on a matter involving ARM 's willful misconduct or gross negligence.
15. REFERENCES TO ARM . The Fund shall not circulate any printed matter which
contains any reference to ARM without prior written approval of ARM , excepting
solely such printed matte as merely identifies ARM as Transfer Agent and
Dividend Disbursing Agent. The Fund will submit printed matter requiring
approval of Sate Bond in draft form, allowing sufficient time for review by ARM
and its counsel prior to any deadline for printing.
16. INDEMNIFICATION. The Fund will indemnify and hold ARM 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 the functions of Transfer and Disbursing
Agent, or as a result of acting upon any instruction believed by it to have been
executed by a duly authorized officer of the Fund, provided that his
indemnification shall not apply to actions or omissions of ARM in cases of its
own willful misconduct or negligence, and further provided, that prior to
confessing any claim against it which may be subject to this indemnification,
ARM shall give the Fund reasonable opportunity to defend against said claim in
its own name or in the name of ARM .
17. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate this purpose
hereof.
<PAGE>
18. AMENDMENT AND TERMINATION. This Agreement may be modified or amended from
time to time by mutual agreement between the parities hereto and may be
terminated by one hundred twenty (120) days' written notice give by one party to
the other. Upon termination hereof the Fund shall pay to ARM such compensation
as may be due as of the date of such termination, and shall likewise reimburse
ARM for its costs, expense and disbursements.
STATE BOND EQUITY FUNDS, INC.
By: /s/Kevin L. Howard
-------------------------
Its: Secretary
--------------------
ARM TRANSFER AGENCY, INC.
By: /s/John R. McGeeney
-------------------------
Its: Secretary
-------------------
<PAGE>
February 28, 1996
State Bond Equity Funds, Inc.
100 North Minnesota Street
New Ulm, Minnesota 56073-0069
Dear Sirs:
State Bond Equity 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. 2-19600).
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
<PAGE>
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
January 26, 1996, in the Post-Effective Amendment No. 20 to the Registration
Statement (Form N-1A) and related Prospectus of the State Bond Common Stock
Fund.
/s/ Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
February 26, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Board of Directors of State Bond Equity Funds, Inc.
and Shareholders of State Bond Common Stock Fund
We consent to the use in the Post-Effective Amendment No. 20 to the Registration
Statement on Form N-1A of State Bond Common Stock Fund, filed under the
Investment Company Act of 1940 and the Securities Act of 1933, of our report
dated January 23, 1995 (except for Note E, dated February 16, 1995) accompanying
the financial statements of State Bond Common Stock Fund for the year ended
December 31, 1994, as listed in Item 24(a) of such Registration Statement, and
to the reference to us under the heading "Financial Highlights" appearing in the
Prospectus which is part of such Registration Statement.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 26, 1996
<PAGE>
Exhibit (16)
Computation of Performance Quotations
Average annual total return figures for the current one year, five year, and
ten year periods ending December 31, 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:
22.11% = 1,221 -1
-----
1000
Five year period:
1/5
11.74% = 1,742 -1
-----
1000
Ten year period:
1/10
12.79% = 3,332 -1
-----
1000
Cumulative total return figures for the life of the fund, beginning May 22,
1962, and ending December 31, 1995 are 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
2,184% = $22,840 - $1,000
---------------- 100
$1,000
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond Common Stock 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
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond Common Stock 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
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond Common Stock 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
<PAGE>
POWER OF ATTORNEY
-----------------
The undersigned Director of the State Bond Common Stock 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>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE STATE BOND COMMON STOCK FUND AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000093704
<NAME> STATE BOND EQUITY FUNDS, INC.
<SERIES>
<NUMBER> 1
<NAME> STATE BOND COMMON STOCK FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 32,464,985
<INVESTMENTS-AT-VALUE> 63,886,283
<RECEIVABLES> 75,031
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 63,961,314
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 120,024
<TOTAL-LIABILITIES> 120,024
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,415,157
<SHARES-COMMON-STOCK> 6,756,913
<SHARES-COMMON-PRIOR> 6,853,029
<ACCUMULATED-NII-CURRENT> 4,835
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31,421,298
<NET-ASSETS> 63,841,290
<DIVIDEND-INCOME> 897,942
<INTEREST-INCOME> 311,032
<OTHER-INCOME> 0
<EXPENSES-NET> 696,585
<NET-INVESTMENT-INCOME> 512,389
<REALIZED-GAINS-CURRENT> 2,106,098
<APPREC-INCREASE-CURRENT> 11,820,148
<NET-CHANGE-FROM-OPS> 14,438,635
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 507,344
<DISTRIBUTIONS-OF-GAINS> 2,106,757
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 186,971
<NUMBER-OF-SHARES-REDEEMED> 549,831
<SHARES-REINVESTED> 266,744
<NET-CHANGE-IN-ASSETS> 11,137,935
<ACCUMULATED-NII-PRIOR> (425)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 384,661
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 696,585
<AVERAGE-NET-ASSETS> 59,178,615
<PER-SHARE-NAV-BEGIN> 7.69
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> 2.08
<PER-SHARE-DIVIDEND> .08
<PER-SHARE-DISTRIBUTIONS> .32
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.45
<EXPENSE-RATIO> 1.18
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
