ANNUAL REPORT
State Farm Balanced Fund, Inc.
ONE STATE FARM PLAZA - BLOOMINGTON, ILLINOIS 61710
For Account Information and Shareowner
Services: (309) 766-2029
(800) 447-0740
November 30, 1997
This report is not to be distributed unless preceded or accompanied by a
prospectus
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STATE FARM BALANCED FUND, INC.
Dear Shareowner:
The U.S. stock market has generated strong results over the past six
and twelve month periods. The S&P 500 Index produced total returns of 13.6%
and 28.5% for the six and twelve months ended November 30, 1997, respectively.
The Balanced Fund yielded total returns of 10.9% and 17.3% for the same
periods. Returns earned by U.S. common stocks have been extraordinary over
the past three years. In our opinion, returns of this magnitude are not
sustainable over long periods of time. As is to be expected in periods of
robust equity markets, the total return of the entire Fund is pulled down by
results of its fixed-income portfolio.
The following graph compares a $10,000 investment in the Balanced Fund
over the last ten years to theoretical investments of the same amount in the
S&P 500 Index and Lehman Brothers Intermediate Treasury Index:
BALANCED S & P LEHMAN
FUND 500* INTERMEDIATE
1987 10,000 10,000 10,000
1988 11,574 12,320 10,717
1989 14,478 16,113 12,052
1990 15,678 15,544 13,048
1991 20,552 18,710 14,728
1992 23,723 22,157 15,933
1993 24,413 24,390 17,397
1994 25,385 24,653 17,103
1995 32,119 33,750 19,435
1996 37,187 43,152 20,523
1997 43,633 55,468 21,804
* The S&P 500 Index is a capitalization-weighted measure of 500 widely held
common stocks listed on the New York and American Stock Exchanges and
traded in the Over-The-Counter Market.
** The Lehman Brothers Intermediate Treasury Index contains approximately 130
U.S. Treasury securities with maturities ranging from one to ten years.
The S&P 500 Index and the Lehman Brothers Intermediate Treasury Index
represent unmanaged groups of stocks and bonds that differ from the
composition of the Balanced Fund. Unlike an investment in the Balanced
Fund, theoretical investments in the indeces do not reflect expenses.
The Balanced Fund's common stock holdings of drug and medical device
firms, banks, consumer product firms and telecommunications companies
performed quite well over the past year. Results produced by the Fund's
investments in electric utilities, chemical companies, and mining and metals
firms were below those of the overall market.
2
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The general composition of your Fund's common stock portfolio has
changed some over the last twelve months. Most transactions during the year
were oriented towards either further diversifying the portfolio or adding
investments in certain areas. Holdings of four banks were partially reduced
with proceeds reinvested in a broad group of financial institutions. New or
expanded positions in common stocks of several companies added to the
investments of the Fund in the electric utility, electronic manufacturing and
computer software sectors.
U.S. Treasury bonds continue to dominate the fixed-income portfolio of
the Fund, and the overall maturity structure has not changed much over the
course of the year. The average weighted maturity of long-term U.S. Treasury
obligations stands at approximately 5.3 years with maturities or likely calls
spread mostly over the next ten years.
Common stock prices have experienced considerable volatility over the
past three months as a result of widespread turmoil in Asian equity, debt, and
currency markets. Increasingly, economic activity and financial markets are
linked globally. The U.S. stock market declined approximately 10% in October
of 1997 in reaction to the Asian weakness, but has recovered in subsequent
months.
The difficulties in Asian markets have received much attention from
investors and business commentators since the middle of the year. Leaders in
many parts of the world are struggling as they attempt to develop open
market-based economies with a global orientation. Flexibility and adaptability
are the strengths of market-based systems, so the efforts should be
worthwhile. However, we caution against paying much attention to those who
proclaim to know how the Asian difficulties will play out and adjusting the
composition of investment portfolios in response to a specific scenario.
Ultimate effects of the Asian situation on financial markets, financial
institutions and general economic conditions are probably not predictable. In
our opinion, the primary challenge for any investor is development of a
long-term investment program which makes one comfortable regardless of what
short-term direction markets might take.
When measured by virtually all general standards, U.S. common stocks
are selling at the high end of historical valuation levels. While expectations
for economic growth remain positive, we would like to remind shareowners that
unanticipated geopolitical and economic events can have a negative impact on
securities' prices. To cope with the inevitable uncertainties of financial
markets, we encourage a disciplined long-term program of periodic investments
in the Balanced Fund. Such an investment program should allow shareowners to
capture the benefits of dollar cost averaging and to participate in any long-
term appreciation of common stock prices. We strive to invest the Fund's
assets in high-quality bonds and common stocks of growing companies with fine
managements. Common stock risk is managed through broad diversification in
globally competitive firms in essential businesses. We are confident that
these investments will produce satisfactory long-term results.
The directors have declared a capital gains distribution of $.69 per
Balanced Fund share which will be paid on December 31, 1997. A semi-annual
income dividend of $.71 per share will be also paid on December 31, 1997. Both
will be used to purchase additional shares of your account unless you have
elected to receive payments directly by check.
Sincerely,
/s/ Kurt G. Moser /s/ Paul N. Eckley /s/ John S. Concklin
Kurt G. Moser Paul N. Eckley John S. Concklin
Vice President Vice President Vice President
December 19, 1997
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareowners
State Farm Balanced Fund, Inc.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of State Farm Balanced Fund, Inc. as
of November 30, 1997, the related statements of operations and changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the fiscal years since 1988. 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 investments
owned as of November 30, 1997, 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 Farm Balanced Fund, Inc. at November 30, 1997, the results of its
operations and changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the fiscal years
since 1988, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 12, 1997
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STATE FARM BALANCED FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
SHARES VALUE
COMMON STOCKS (63.9%)
AGRICULTURE & FOOD (6.3%)
773,804 Archer-Daniels-Midland Company $ 16,249,884
26,000 Campbell Soup Company 1,434,875
190,000 The Coca-Cola Company 11,851,250
310,000 Kellogg Company 14,066,250
27,000 Pioneer Hi-Bred International, Inc. 2,735,437
29,000 Sara Lee Corporation 1,529,750
------------
47,867,446
BANKS (7.3%)
48,000 ABN AMRO Holding N.V. 929,032
23,250 AmSouth Bancorporation 1,213,360
95,000 Banc One Corporation 4,868,750
35,000 First Chicago NBD Corporation 2,734,375
1,900 First Empire State Corporation 811,656
17,100 First Security Corporation 582,469
12,300 First Virginia Banks, Inc. 593,475
17,700 Golden West Financial Corporation 1,604,063
38,400 J.P. Morgan & Co. Incorporated 4,408,800
107,100 MBNA Corporation 2,838,150
20,500 Northern Trust Corporation 1,276,125
172,800 Norwest Corporation 6,328,800
90,480 Pacific Century Financial Corporation 4,597,515
83,462 Popular, Inc. 4,329,591
66,000 Southtrust Corporation 3,597,000
21,400 Suntrust Banks, Inc. 1,519,400
8,800 TCF Financial Corporation 518,100
6,417 U.S. Bancorp 687,020
75,700 Wachovia Corporation 5,814,706
16,500 Washington Federal, Inc. 523,875
20,100 Wells Fargo & Company 6,170,700
------------
55,946,962
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STATE FARM BALANCED FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
SHARES VALUE
CHEMICALS (5.1%)
115,000 Air Products and Chemicals, Inc. $ 8,768,750
23,000 The Dow Chemical Company 2,196,500
98,000 Great Lakes Chemical Corporation 4,367,125
120,000 International Flavors & Fragrances Inc. 5,775,000
110,000 Raychem Corporation 10,408,750
207,000 Sigma-Aldrich Corporation 7,477,875
------------
38,994,000
COMPUTERS AND SOFTWARE (4.7%)
8,800 Electronic Data Systems Corporation 336,050
377,000 Hewlett-Packard Company 22,879,187
68,600 International Business Machines
Corporation 7,533,138
31,500(a) Microsoft Corporation 4,459,219
10,625(a) NCR Corporation 317,422
------------
35,525,016
CONSUMERS & MARKETING (3.7%)
150,000 The Gillette Company 13,809,375
80,000 Hon Industries Inc. 4,290,000
27,100 Jostens, Inc. 650,400
16,900 McDonald's Corporation 820,706
47,700 Minnesota Mining and Manufacturing
Company 4,638,825
172,800 Rubbermaid Incorporated 4,190,400
------------
28,399,706
ELECTRONIC MANUFACTURING (1.9%)
31,200 Emerson Electric Co. 1,719,900
107,400 General Electric Company 7,887,187
62,000 Intel Corporation 4,750,750
------------
14,357,837
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STATE FARM BALANCED FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
SHARES VALUE
HEALTH CARE (9.9%)
38,700 Allergan, Inc. $ 1,320,638
427,751 Ballard Medical Products 9,865,007
405,000 Biomet, Inc. 9,669,375
31,025(a) Covance, Inc. 570,084
198,000 Johnson & Johnson 12,412,125
212,000 Eli Lilly and Company 13,197,000
10,800 Medtronic, Inc. 510,300
50,000 Merck & Co., Inc. 4,712,500
320,000 Pfizer Inc. 23,220,000
15,512(a) Quest Diagnostics Inc. 255,948
------------
75,732,977
MEDIA (6.2%)
42,000 Lee Enterprises, Incorporated 1,144,500
42,000 Lee Enterprises, Incorporated, Class B 1,144,500
200,000 Reuters Holdings PLC (ADR) 13,812,500
331,165 The Walt Disney Company 31,295,093
------------
47,396,593
MINING AND METALS (1.4%)
160,000 Nucor Corporation 7,930,000
50,000 Rio Tinto PLC (ADR) 2,475,000
18,750(a) Steel Dynamics, Inc. 341,016
------------
10,746,016
NON-ELECTRIC MANUFACTURING (.8%)
100,000 Caterpillar Inc. 4,731,250
20,000 Illinois Tool Works Inc. 1,080,000
------------
5,811,250
OIL AND GAS (5.3%)
34,000 Amoco Corporation 3,049,375
144,000 Chevron Corporation 11,493,000
152,000 Exxon Corporation 9,300,500
180,000 KN Energy, Inc. 8,336,250
65,220 Pennzoil Company 4,296,368
68,000 Royal Dutch Petroleum Company (ADR) 3,599,750
------------
40,075,243
RETAILING (.2%)
47,000 Wal-Mart Stores, Inc. 1,874,125
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STATE FARM BALANCED FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
SHARES VALUE
TELECOMMUNICATIONS & EQUIPMENT (8.0%)
258,200(a) ADC Telecommunications, Inc. $ 9,617,950
170,000 AT&T Corp. 9,509,375
24,000(a) Airtouch Communications, Inc. 936,000
32,000 Ameritech Corporation 2,432,000
83,000 Deutsche Telekom (ADR) 1,654,813
68,000 LM Ericsson Telephone Company (ADR) 2,724,250
55,094 Lucent Technologies Inc. 4,466,057
261,000 MCI Communications Corporation 11,353,500
64,000 Motorola, Inc. 4,060,000
192,900 SBC Communications Inc. 14,105,812
------------
60,859,757
UTILITIES - ELECTRIC (1.5%)
69,000 Central and South West Corporation 1,677,563
36,000 Duke Energy Corporation 1,887,750
25,200 FPL Group, Inc. 1,409,625
85,000 Pacificorp 1,955,000
80,000 Southern Company 1,900,000
47,300 Teco Energy, Inc. 1,209,106
28,000 Texas Utilities Company 1,120,000
------------
11,159,044
MISCELLANEOUS (1.6%)
124,100 Corning Incorporated 5,204,444
10,100 Diebold, Inc. 462,075
84,375(a) Osmonics, Inc. 1,207,617
53,400 Vulcan Materials Company 5,460,150
------------
12,334,286
------------
Total common stocks
(cost: $210,165,102) 487,080,258
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STATE FARM BALANCED FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
PRINCIPAL
AMOUNT VALUE
LONG-TERM U.S. TREASURY OBLIGATIONS (27.1%)
$4,000,0000 U.S. Treasury notes, 8.125%, 02/15/1998 $ 4,020,960
2,000,000 U.S. Treasury notes, 7.875%, 04/15/1998 2,017,420
2,500,000 U.S. Treasury notes, 9.000%, 05/15/1998 2,539,700
3,000,000 U.S. Treasury notes, 9.250%, 08/15/1998 3,073,410
2,500,000 U.S. Treasury notes, 7.125%, 10/15/1998 2,531,125
3,000,000 U.S. Treasury notes, 8.875%, 02/15/1999 3,108,900
2,000,000 U.S. Treasury notes, 7.000%, 04/15/1999 2,033,080
2,000,000 U.S. Treasury notes, 9.125%, 05/15/1999 2,093,400
3,000,000 U.S. Treasury notes, 6.375%, 07/15/1999 3,028,590
3,000,000 U.S. Treasury notes, 7.125%, 09/30/1999 3,070,710
1,500,000 U.S. Treasury notes, 6.000%, 10/15/1999 1,507,740
2,500,000 U.S. Treasury notes, 7.875%, 11/15/1999 2,597,075
3,000,000 U.S. Treasury notes, 6.375%, 01/15/2000 3,037,020
2,000,000 U.S. Treasury notes, 8.500%, 02/15/2000 2,111,520
3,000,000 U.S. Treasury notes, 6.875%, 03/31/2000 3,070,830
3,000,000 U.S. Treasury notes, 5.500%, 04/15/2000 2,982,300
5,000,000 U.S. Treasury notes, 6.250%, 05/31/2000 5,054,150
3,000,000 U.S. Treasury notes, 8.750%, 08/15/2000 3,219,360
3,000,000 U.S. Treasury notes, 8.500%, 11/15/2000 3,217,650
4,200,000 U.S. Treasury notes, 7.750%, 02/15/2001 4,433,772
5,000,000 U.S. Treasury notes, 6.375%, 03/31/2001 5,081,200
625,000 U.S. Treasury bonds, 13.125%, 05/15/2001 767,231
2,000,000 U.S. Treasury notes, 8.000%, 05/15/2001 2,134,200
680,000 U.S. Treasury bonds, 13.375%, 08/15/2001 849,810
4,000,000 U.S. Treasury notes, 7.875%, 08/15/2001 4,266,760
5,500,000 U.S. Treasury notes, 7.500%, 11/15/2001 5,816,580
5,000,000 U.S. Treasury bonds, 14.250%, 02/15/2002 6,563,700
2,000,000 U.S. Treasury notes, 7.500%, 05/15/2002 2,128,600
5,000,000 U.S. Treasury notes, 6.000%, 07/31/2002 5,033,100
7,500,000 U.S. Treasury notes, 6.375%, 08/15/2002 7,662,300
2,570,000 U.S. Treasury bonds, 11.625%, 11/15/2002 3,199,701
5,000,000 U.S. Treasury notes, 6.250%, 02/15/2003 5,089,850
3,000,000 U.S. Treasury bonds, 10.750%, 05/15/2003 3,674,970
3,500,000 U.S. Treasury notes, 5.750%, 08/15/2003 3,482,535
5,500,000 U.S. Treasury bonds, 11.875%, 11/15/2003 7,135,480
5,000,000 U.S. Treasury notes, 5.875%, 02/15/2004 5,008,350
5,000,000 U.S. Treasury notes, 7.250%, 05/15/2004 5,367,300
6,000,000 U.S. Treasury notes, 7.250%, 08/15/2004 6,452,640
1,500,000 U.S. Treasury bonds, 11.625%, 11/15/2004 1,983,450
9
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STATE FARM BALANCED FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1997
PRINCIPAL
AMOUNT VALUE
LONG-TERM U.S. TREASURY OBLIGATIONS (27.1 %) (Continued)
$ 5,000,000 U.S. Treasury notes, 7.500%, 02/15/2005 $ 5,465,000
1,785,000 U.S. Treasury bonds, 8.250%, 05/15/2005 1,885,781
3,500,000 U.S. Treasury notes, 6.500%, 05/15/2005 3,626,035
4,800,0000 U.S. Treasury bonds, 10.750%, 08/15/2005 6,213,504
2,000,000 U.S. Treasury notes, 5.875%, 11/15/2005 1,995,320
11,500,000 U.S. Treasury bonds, 9.375%, 02/15/2006 14,071,745
2,000,000 U.S. Treasury notes, 6.875%, 05/15/2006 2,126,220
3,000,000 U.S. Treasury notes, 7.000%, 07/15/2006 3,216,990
10,000,000 U.S. Treasury notes, 6.250%, 02/15/2007 10,237,600
7,000,000 U.S. Treasury notes, 6.625%, 05/15/2007 7,360,640
1,000,000 U.S. Treasury bonds, 10.375%, 11/15/2009 1,245,510
7,000,000 U.S. Treasury bonds, 10.000%, 05/15/2010 8,662,010
------------
Total long-term U.S. Treasury obligations
(cost: $203,572,279) 206,552,824
SHORT-TERM INVESTMENTS (8.7%)
$28,000,000 U.S. Treasury bills, 4.88% to 4.96% effective
yield, due December, 1997 to January, 1998 27,853,200
10,000,000 General Electric Capital Corp., 5.56% to 5.62%,
due December, 1997 10,002,983
28,200,000 General Motors Acceptance Corp., 5.54%,
due December, 1997 28,239,464
------------
Total short-term investments
(cost: $66,096,722) 66,095,647
------------
TOTAL INVESTMENTS (99.7%) (cost: $479,834,103) 759,728,729
CASH AND OTHER ASSETS, LESS LIABILITIES (.3%) 2,550,468
------------
NET ASSETS (100.0%) $762,279,197
============
Notes: (a) Non-income producing security.
(b) At November 30, 1997, net unrealized appreciation of $279,894,626
consisted of gross unrealized appreciation of $283,729,023 and
gross unrealized depreciation of $3,834,397 based on cost of
$479,834,103 for federal income tax purposes.
10
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STATE FARM BALANCED FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1997
ASSETS
Investments, at value (cost $479,834,103) $759,728,729
Cash 651,009
Receivable for:
Dividends and interest $3,730,116
Shares of the Fund sold 105,154
Sundry 4,725 3,839,995
----------
Prepaid expenses 22,551
------------
Total assets 764,242,284
LIABILITIES AND NET ASSETS
Payable for:
Shares of the Fund redeemed 1,007,625
Securities purchased 700,000
Other accounts payable (including
$227,563 to Manager) 255,462
----------
Total liabilities 1,963,087
------------
Net assets applicable to 16,538,194 shares outstanding
of $1.00 par value common stock (40,000,000
shares authorized) $762,279,197
============
Net asset value, offering price and redemption
price per share $ 46.09
============
ANALYSIS OF NET ASSETS
Excess of amounts received from sales of shares
over amounts paid on redemptions of shares
on account of capital $448,387,440
Undistributed net realized gain on sales of investments 11,354,841
Net unrealized appreciation of investments 279,894,626
Undistributed net investment income 22,642,290
------------
Net assets applicable to shares outstanding $762,279,197
============
See accompanying notes to financial statements
11
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STATE FARM BALANCED FUND, INC.
STATEMENTS OF OPERATIONS
NOVEMBER 30, 1997
YEAR ENDED NOVEMBER 30,
1997 1996
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of
$83,157 in 1997 and $50,782 in 1996) $ 6,930,199 5,482,441
Interest 17,286,259 15,309,121
---------------------------
Total investment income 24,216,458 20,791,562
EXPENSES:
Investment advisory and management fees 829,724 699,356
Professional fees 25,413 24,573
ICI dues 21,227 20,958
Registration fees 17,826 21,227
Fidelity bond expense 4,990 4,981
Directors' fees 4,950 4,500
Reports to shareowners 12,077 14,319
Franchise taxes 15,667 13,277
Custodian fees 22,820 31,864
Other 5,578 4,000
---------------------------
Total expenses 960,272 839,055
Less: custodian fees paid indirectly - 22,206
---------------------------
Net expenses 960,272 816,849
---------------------------
Net investment income 23,256,186 19,974,713
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on sales of investments 11,354,841 19,696,852
Change in net unrealized appreciation 77,000,826 44,174,789
---------------------------
Net realized and unrealized gain on investments 88,355,667 63,871,641
---------------------------
Net change in net assets resulting
from operations $111,611,853 83,846,354
===========================
See accompanying notes to financial statements
12
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STATE FARM BALANCED FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
NOVEMBER 30, 1997
YEAR ENDED NOVEMBER 30,
1997 1996
From operations:
Net investment income $ 23,256,186 19,974,713
Net realized gain on sales of investments 11,354,841 19,696,852
Change in net unrealized appreciation 77,000,826 44,174,789
---------------------------
Net change in net assets resulting from operations 111,611,853 83,846,354
Undistributed net investment income included in
price of shares issued and redeemed 728,764 1,103,905
Distributions to shareowners from:
Net investment income (per share $1.47
in 1997, and $1.30 in 1996) (22,824,265) (17,457,079)
Net realized gain (per share $1.33
in 1997, and $.19 in 1996) (19,696,852) (3,027,922)
---------------------------
Total distributions to shareowners (42,521,117) (20,485,001)
From Fund share transactions:
Proceeds from shares sold 107,496,503 101,714,529
Reinvestment of ordinary income dividends
and capital gain distributions 41,061,305 19,818,987
---------------------------
148,557,808 121,533,516
Less payments for shares redeemed 82,191,577 59,654,782
---------------------------
Net increase in net assets from Fund
share transactions 66,366,231 61,878,734
---------------------------
Total increase in net assets 136,185,731 126,343,992
Net assets:
Beginning of year 626,093,466 499,749,474
---------------------------
End of year (including undistributed
net investment income of $22,642,290
in 1997, and $21,481,605 in 1996) $762,279,197 626,093,466
===========================
See accompanying notes to financial statements
13
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STATE FARM BALANCED FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1997
1. OBJECTIVE
The investment objective of the State Farm Balanced Fund, Inc. (the
Fund) is to provide its shareowners income and some long-term growth of both
principal and income. The Fund seeks to achieve its objective by distributing
its investments among common stocks, preferred stocks and bonds in varying
proportions according to prevailing market conditions and the judgment of the
Manager.
2. SIGNIFICANT ACCOUNTING POLICIES
Security valuation - Investments are stated at value. Stocks traded on
securities exchanges, or in the over-the-counter market in which transaction
prices are reported, are valued at the last sales prices on the day of
valuation or, if there are no reported sales on that day, at the last reported
bid price for the day. Long-term debt securities and U.S. Treasury bills are
valued using quotations provided by an independent pricing service. Short-term
debt securities, other than U.S. Treasury bills, are valued at amortized cost
which approximates market value. Any securities not valued as described above
are valued at fair value as determined in good faith by the Board of Directors
or its delegate.
SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed) and dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. Realized gains and losses from
security transactions are reported on an identified cost basis.
FUND SHARE VALUATION - Fund shares are sold and redeemed on a
continuous basis at net asset value. Net asset value per share is determined
as of 3:00 p.m. Bloomington, Illinois time on each business day other than
weekend and holiday closings, except that the Fund need not compute a net
asset value on any day when no purchase or redemption order has been received
by the Fund. The net asset value per share is computed by dividing the total
value of the Fund's investments and other assets, less liabilities, by the
number of Fund shares outstanding.
FEDERAL INCOME TAXES, DIVIDENDS AND DISTRIBUTIONS TO SHAREOWNERS - It
is the Fund's policy to comply with the special provisions of the Internal
Revenue Code available to investment companies and, in the manner provided
therein, to distribute all of its taxable income, as well as any net realized
gain on sales of investments reportable for federal income tax purposes. The
Fund has complied with this policy and, accordingly, no provision for federal
income taxes is required.
On December 12, 1997, an ordinary income dividend of $.71 per share
and a capital gain distribution of $.69 per share were declared, payable
December 31, 1997 (reinvestment date December 31, 1997) to shareowners of
record December 12, 1997.
Dividends and distributions payable to its shareowners are recorded by
the Fund on the ex-dividend date.
EQUALIZATION ACCOUNTING - A portion of proceeds from sales and
payments on redemptions of Fund shares is credited or charged to undistributed
net investment income. As a result, undistributed net investment income per
share is unaffected by sales or redemptions of Fund shares.
CUSTODIAN FEES - For the year ended November 30, 1997, the Fund no
longer receives fee reductions for balances maintained with the custodian, as
interest on cash balances ($14,700) is reflected as income rather than an
offset to custodian fees. Custodian fees for the year ended November 30, 1996
were reduced based on the Fund's cash balances maintained with the custodian.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
14
<PAGE>
STATE FARM BALANCED FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1997
3. TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory and management services agreement
with State Farm Investment Management Corp. (Manager) pursuant to which the
Fund pays the Manager an annual fee (computed on a daily basis and paid
quarterly) of .20% of the first $100 million of average net assets, .15% of
the next $100 million of average net assets and .10% of the average net assets
in excess of $200 million. The Manager guarantees that all expenses of the
Fund, including the compensation of the Manager but excluding franchise taxes,
interest, extraordinary litigation expenses, brokerage commissions and other
portfolio transaction costs, shall not exceed .40% of average net assets
annually.
Under the terms of this agreement, the Fund incurred fees of $829,724
for 1997 and $699,356 for 1996. The Fund pays no fees for transfer agent
services provided by the Manager. The Fund does not pay any discount,
commission or other compensation for underwriting services provided by the
Manager.
Certain officers and/or directors of the Fund are also officers and/or
directors of the Manager. The Fund made no payments to its officers or
directors during the two years ended November 30, 1997, except for directors'
fees of $4,950 for 1997 and $4,500 for 1996 paid to the Fund's independent
directors.
4. INVESTMENT TRANSACTIONS
Investment transactions (exclusive of short-term investments) for each
of the two years ended November 30 were as follows:
1997 1996
Purchases $ 69,819,614 124,248,498
Proceeds from sales 39,223,469 49,420,816
5. FUND SHARE TRANSACTIONS
Proceeds and payments on Fund shares as shown in the statement of
changes in net assets are in respect of the following number of shares:
YEAR ENDED NOVEMBER 30,
1997 1996
Shares sold 2,605,702 2,713,063
Shares issued in reinvestment of ordinary
income dividends and capital gain distributions 1,017,327 525,667
----------------------
3,623,029 3,238,730
Less shares redeemed 1,979,036 1,579,058
----------------------
Net increase in shares outstanding 1,643,993 1,659,672
======================
15
<PAGE>
STATE FARM BALANCED FUND, INC.
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES (For a share outstanding throughout the
period)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $42.04 37.76 31.12 30.88 31.24 27.98 22.72 22.27 18.81 17.32
Income from Investment
----------------------
Operations
----------
Net investment Income 1.40 1.39 1.25 1.03 .98 .98 .94 1.06 .92 .89
Net gain or losses on
securities (both realized
and unrealized) 5.45 4.38 6.77 .17 (.09) 3.29 5.81 .74 3.61 1.76
------------------------------------------------------------------------------
Total from investment
operations 6.85 5.77 8.02 1.20 .89 4.27 6.75 1.80 4.53 2.65
Less Distributions
------------------
Net investment income (1.47) (1.30) (1.19) (.89) (1.01) (.89) (1.03) (.92) (.86) (.83)
Capital gain (1.33) (.19) (.19) (.07) (.24) (.12) (.46) (.43) (.21) (.33)
------------------------------------------------------------------------------
Total distributions (2.80) (1.49) (1.38) (.96) (1.25) (1.01) (1.49) (1.35) (1.07) (1.16)
Net asset value, end of year $46.09 42.04 37.76 31.12 30.88 31.24 27.98 22.72 22.27 18.81
==============================================================================
Total Return 17.33% 15.78% 26.53% 3.98% 2.91% 15.43% 31.09% 8.29% 25.09% 15.73%
- ------------
Ratios/Supplemental Data
- ------------------------
Net assets, end of year
(millions) $762.3 626.1 499.7 370.5 327.8 259.7 173.5 108.8 88.7 63.8
Ratio of expenses to
average net assets .14% .15% .17%(a) .17% .19% .22% .26% .27% .29% .31%
Ratio of net investment
income to average
net assets 3.42% 3.63% 3.66% 3.36% 3.20% 3.29% 3.66% 4.87% 4.50% 4.86%
Portfolio turnover rate 6% 9% 6% 4% 4% 4% 1% 10% 10% 7%
Number of shares
outstanding at end
of year (millions) 16.5 14.9 13.2 11.9 10.6 8.3 6.2 4.8 4.0 3.4
</TABLE>
Average commission rate paid per share on stock transactions for the year
ended November 30, 1997 was $.0470.
Note: (a) The ratio based on net custodian expenses would have been .16% in
1995.
--------------------
STATE FARM BALANCED FUND, INC.
TAX INFORMATION
The Fund paid ordinary income dividends of $.75 per share in June 1997
and $.71 per share in December 1997. Of these dividends, 27% qualifies for the
70% deduction for dividends received by corporations as provided by the
Internal Revenue Code.
In December 1997, the Fund made a capital gain distribution of $.69
per share, 100% of which was paid from long-term capital gain and is
designated as a capital gain dividend.
NOTE: Dividends and distributions paid to you must be included in your
federal income tax return and must be reported by the Fund to the
Internal Revenue Service in accordance with the provisions of the
Internal Revenue Code.
16
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000093716
<NAME> STATE FARM BALANCED FUND, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 479834103
<INVESTMENTS-AT-VALUE> 759728729
<RECEIVABLES> 3839995
<ASSETS-OTHER> 673560
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 764242284
<PAYABLE-FOR-SECURITIES> 700000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1263087
<TOTAL-LIABILITIES> 1963087
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 448387440
<SHARES-COMMON-STOCK> 16538194
<SHARES-COMMON-PRIOR> 14894201
<ACCUMULATED-NII-CURRENT> 22642290
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11354841
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 279894626
<NET-ASSETS> 762279197
<DIVIDEND-INCOME> 6930199<F1>
<INTEREST-INCOME> 17286259
<OTHER-INCOME> 0
<EXPENSES-NET> 960272
<NET-INVESTMENT-INCOME> 23256186
<REALIZED-GAINS-CURRENT> 11354841
<APPREC-INCREASE-CURRENT> 77000826
<NET-CHANGE-FROM-OPS> 111611853
<EQUALIZATION> 728764
<DISTRIBUTIONS-OF-INCOME> (22824265)<F2>
<DISTRIBUTIONS-OF-GAINS> (19696852)<F3>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2605702
<NUMBER-OF-SHARES-REDEEMED> 1979036
<SHARES-REINVESTED> 1017327
<NET-CHANGE-IN-ASSETS> 136185731
<ACCUMULATED-NII-PRIOR> 21481605
<ACCUMULATED-GAINS-PRIOR> 19696852
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 829724
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 960272
<AVERAGE-NET-ASSETS> 679951833
<PER-SHARE-NAV-BEGIN> 42.04
<PER-SHARE-NII> 1.40
<PER-SHARE-GAIN-APPREC> 5.45
<PER-SHARE-DIVIDEND> (1.47)
<PER-SHARE-DISTRIBUTIONS> (1.33)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 46.09
<EXPENSE-RATIO> .14
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Net of foreign withholding taxes of $83,157
<F2>Per share $1.47
<F3>Per share $1.33
</FN>
</TABLE>
