<PAGE>
As filed with the Securities and Exchange Commission on March 24, 2000
Securities Act Registration No. 2-27769
Investment Company Act File No. 811-1520
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 40
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21
STATE FARM BALANCED FUND, INC.
--------------------------------------------------------------
(Exact name of Registrant as Specified in Charter)
One State Farm Plaza, Bloomington, Illinois 61710
- ---------------------------------------------------------- -------------
(Address of Principal Executive Offices (Zip Code)
Registrant's Telephone Number, including Area Code (309) 766-2029
Janet Olsen
Bell Boyd & Lloyd
Roger Joslin Three First National Plaza
One State Farm Plaza 70 West Madison St., Suite 3300
Bloomington, Illinois 61710 Chicago, Illinois 60602
- --------------------------------------------------------------------------------
(Names and addresses of agents for service)
-----------------------------------------------------------
Amending Parts A, B and C, and filing exhibits
------------------------------------------------------------
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to rule 485(b)
[X] on April 1, 2000 pursuant to rule 485(b)
[ ] 60 days after filing pursuant to rule 485(a)(1)
[ ] on _____________ pursuant to rule 485(a)(1)
[ ] 75 days after filing pursuant to rule 485(a)(2)
[ ] on ___________ pursuant to rule 485(a)(2)
<PAGE>
[LOGO]
STATE FARM GROWTH FUND, INC.
STATE FARM BALANCED FUND, INC.
STATE FARM INTERIM FUND, INC.
STATE FARM MUNICIPAL BOND FUND, INC.
ONE STATE FARM PLAZA
BLOOMINGTON, ILLINOIS 61710-0001
OFFERED TO THE AGENTS AND EMPLOYEES OF THE STATE FARM INSURANCE
COMPANIES AND THEIR FAMILIES
---------------------
The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
PROSPECTUS--APRIL 1, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
INVESTMENTS, RISKS AND PERFORMANCE.......................... 3
State Farm Growth Fund.............................. 3
State Farm Balanced Fund............................ 5
State Farm Interim Fund............................. 7
State Farm Municipal Bond Fund...................... 9
HOW THE FUNDS INVEST........................................ 11
Growth Fund......................................... 11
Balanced Fund....................................... 11
Interim Fund........................................ 12
Municipal Bond Fund................................. 13
RISKS....................................................... 13
HOW TO BUY FUND SHARES...................................... 15
Who May Invest...................................... 15
Minimum Investments................................. 15
How to Buy.......................................... 15
Share Price......................................... 17
HOW TO REDEEM FUND SHARES................................... 17
Signature Guarantee................................. 20
TAX-QUALIFIED ACCOUNTS...................................... 20
MANAGEMENT OF THE FUNDS..................................... 21
DIVIDENDS, DISTRIBUTIONS AND TAXES.......................... 22
FINANCIAL HIGHLIGHTS........................................ 24
</TABLE>
- -------
2
<PAGE>
INVESTMENTS, RISKS AND PERFORMANCE
- --------------------------------------------------------------------------------
STATE FARM GROWTH FUND
WHAT IS GROWTH FUND'S INVESTMENT OBJECTIVE AND WHAT ARE ITS PRINCIPAL INVESTMENT
STRATEGIES?
OBJECTIVE. Growth Fund seeks long-term growth of capital and income.
PRINCIPAL INVESTMENT STRATEGIES. Growth Fund invests most of its assets in
common stocks and other income-producing equity securities. State Farm
Investment Management Corp. (the "Manager"), investment adviser to the State
Farm Mutual Funds, chooses stocks for the Fund's portfolio for their long-term
potential to generate capital gains, or growth in income, or both. Although
there is no restriction on the size of the companies in which the Fund invests,
ordinarily most of the Fund's investments are in large companies.
The Fund generally keeps stocks as long as the Manager believes that they
still have the potential, over the long-term, to generate capital gain or growth
in income. In making investment decisions on specific securities, the Manager
analyzes long-term industry conditions, management capabilities, and financial
solvency.
The Fund may invest up to 25% of its assets in securities of foreign
companies.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN GROWTH FUND?
The Fund invests mostly in common stocks, which represent an equity interest
(ownership) in a business and are subject to MARKET RISK. Stock prices may
fluctuate widely over short or extended periods in response to company, market,
or economic news. Stock markets also tend to move in cycles, with periods of
rising stock prices and periods of falling stock prices. An investment in the
Fund is not a deposit of a bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. You can lose money
by investing in the Fund.
The Fund's investments in foreign securities present risks which in some
ways may be greater than in U.S. investments, including currency exchange rate
fluctuation; less available public information about issuers; less stringent
regulatory standards; lack of uniform accounting, auditing and financial
reporting standards; and country risks including less liquidity, high inflation
rates, unfavorable market practices and political instability.
IS GROWTH FUND AN APPROPRIATE INVESTMENT FOR ME?
Because of the variable nature of the stock market, Growth Fund should be
considered a long-term investment, designed to provide the best results when
held for several years or more. The Fund may not be suitable for you if you have
a short-term investment horizon or are unwilling to accept fluctuations in share
price, including significant declines over a given period.
HOW HAS GROWTH FUND PERFORMED?
The following bar chart and table illustrate certain risks of investing in
the Fund. The bar chart shows the changes in the Fund's returns year by year.
The table compares the Fund's average annual total returns for the periods
listed to a market index. This information is intended to help you assess the
variability of Fund returns over the periods listed (and consequently, the
potential rewards and risks of a Fund investment). The Fund's past performance
doesn't necessarily indicate how it will perform in the future.
-------
3
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 4.33%
1991 41.88%
1992 2.12%
1993 0.55%
1994 6.02%
1995 30.69%
1996 17.16%
1997 31.11%
1998 20.34%
1999 18.72%
TOTAL RETURN
</TABLE>
The Fund's best and worst quarters during the last 10 years were:
Best quarter: 19.82%,
during the fourth quarter of 1998.
Worst quarter: -11.90%,
during the third quarter of 1990.
The following table shows the Average Annual Total Return on an investment
in the Fund compared to changes in the Standard & Poor's 500 Stock Index for the
1-, 5- and 10-year periods ended December 31, 1999:
<TABLE>
<CAPTION>
GROWTH FUND S&P 500 INDEX*
----------- --------------
<S> <C> <C>
1 year 18.72 % 21.04 %
5 years 23.46 % 28.55 %
10 years 16.54 % 18.01 %
</TABLE>
- ------------------------
* The S&P 500 Index is a capitalization-weighted measure of the common stocks
of 500 large U.S. companies. The S&P 500 Index represents an unmanaged group
of stocks that differs from the composition of Growth Fund. Unlike an
investment in the Growth Fund, returns of the S&P 500 Index do not reflect
expenses of investing.
WHAT ARE THE COSTS OF INVESTING IN GROWTH FUND?
Below are the fees and expenses that you would pay if you buy and hold shares of
the Fund.
SHAREHOLDER TRANSACTION EXPENSES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge None
Redemption fee None
Exchange fee None
</TABLE>
FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<S> <C>
Management fees .11%
Distribution (12b-1) fees None
Other expenses .01%
----
Total Annual Fund Operating Expenses .12%
</TABLE>
EXAMPLE. This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
you invest $10,000 for the time periods indicated, earn a 5% return each year,
and that operating expenses remain constant. Your actual returns and costs may
be higher or lower than those shown, but based on these assumptions, your
expenses would be:
<TABLE>
<S> <C>
After 1 year $ 12
After 3 years $ 39
After 5 years $ 68
After 10 years $154
</TABLE>
- -------
4
<PAGE>
STATE FARM BALANCED FUND
WHAT IS BALANCED FUND'S INVESTMENT OBJECTIVE AND WHAT ARE ITS PRINCIPAL
INVESTMENT STRATEGIES?
OBJECTIVE. Balanced Fund seeks income and some long-term growth of both
principal and income.
PRINCIPAL INVESTMENT STRATEGIES. Balanced Fund invests in common stocks,
preferred stocks and bonds in varying proportions according to prevailing market
conditions and the judgment of the Manager.
The Balanced Fund invests approximately 60% of its assets in common stocks,
and ordinarily limits its common stock investments to no more than 75% of total
assets. The Fund invests in common stocks that the Manager believes have the
potential for long-term capital gain. The income provided by common stocks is
usually incidental to their selection. Although there is no restriction on the
size of companies in which the Fund may invest, ordinarily most of the Fund's
common stock investments are in large companies.
Balanced Fund ordinarily invests at least 25% of its total assets in fixed
income securities. The Fund invests in bonds and preferred stocks to provide
relative stability of principal and income. Under most circumstances, the Fund's
investments in bonds are primarily in intermediate or long term investment grade
securities. Although usually the majority of the Fund's assets are invested in
common stocks, the Fund may for a time choose to invest as much as 75% of its
total assets in fixed income securities, including short-term securities.
The Fund generally keeps its investments as long as the Manager believes
that they still are generating appropriate income (for bonds) or have the
potential, over the long-term, to generate capital gain or growth in income (for
common stocks). In making investment decisions on specific securities, the
Manager analyzes long-term industry conditions, management capabilities, and
financial solvency.
The Fund may invest up to 25% of its assets in the securities of foreign
companies.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN BALANCED FUND?
The Fund usually invests a majority of its assets in common stocks which are
subject to MARKET RISK. Stock prices may fluctuate widely over short or extended
periods in response to company, market, or economic news. Stock markets also
tend to move in cycles, with periods of rising stock prices and periods of
falling stock prices. An investment in the Fund is not a deposit of a bank and
is not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency. You can lose money by investing in the Fund.
The Fund's investments in bonds are subject to INTEREST RATE RISK and CREDIT
RISK. Interest rate risk is the risk that bonds will decline in value because of
changes in interest rates. Generally, bonds decrease in value when interest
rates rise and increase in value when interest rates fall. Credit risk is the
risk that an issuer of a bond may become unable to meet its obligation to pay
interest on the bond, or repay principal.
IS BALANCED FUND AN APPROPRIATE INVESTMENT FOR ME?
The Fund might be appropriate for you if you are seeking:
- - long-term growth potential;
- - a substantial measure of downside protection; and
- - the convenience of a balanced portfolio in a single investment.
-------
5
<PAGE>
Because the Fund usually invests the majority of its assets in common
stocks, the Fund should be considered a long-term investment. The Fund is not an
appropriate investment for you if you have a short-term investment horizon and
are unwilling to accept share price fluctuations.
HOW HAS BALANCED FUND PERFORMED?
The following bar chart and table illustrate certain risks of investing in
the Fund. The bar chart shows the changes in the Fund's returns year by year.
The table compares the Fund's average annual total returns for the periods
listed to market indices. This information is intended to help you assess the
variability of Fund returns over the periods listed (and consequently, the
potential rewards and risks of a Fund investment). The Fund's past performance
doesn't necessarily indicate how it will perform in the future.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 9.99%
1991 39.21%
1992 5.38%
1993 3.30%
1994 5.01%
1995 25.07%
1996 13.07%
1997 22.16%
1998 13.49%
1999 9.74%
TOTAL RETURN
</TABLE>
The Fund's best and worst quarters during the last 10 years were:
Best quarter: 14.66%,
during the first quarter of 1991.
Worst quarter: -7.71%,
during the third quarter of 1990.
The following table shows the Average Annual Total Return on an investment
in the Fund compared to market indices for the 1-, 5- and 10-year periods ended
December 31, 1999:
<TABLE>
<CAPTION>
LEHMAN
BALANCED S&P 500 INTERMED.
FUND INDEX* INDEX**
-------- -------- ---------
<S> <C> <C> <C>
1 year 9.74% 21.04% 0.41%
5 years 16.56% 28.55% 6.54%
10 years 14.18% 18.01% 6.90%
</TABLE>
- ------------------------
* The S&P 500 Index is a capitalization-weighted measure of 500 large U.S.
companies.
** The Lehman Brothers Intermediate Treasury Index contains approximately 99
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,
returns in the indices do not reflect expenses of investing.
WHAT ARE THE COSTS OF INVESTING IN BALANCED FUND?
Below are the fees and expenses that you would pay if you buy and hold shares of
the Fund.
SHAREHOLDER TRANSACTION EXPENSES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge None
Redemption fee None
Exchange fee None
</TABLE>
FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<S> <C>
Management fees .12%
Distribution (12b-1) fees None
Other expenses .01%
----
Total Annual Fund Operating Expenses .13%
</TABLE>
EXAMPLE. This example is intended to help you compare the cost of investing in
the Fund with that of investing in other mutual funds. The example assumes you
invest $10,000 for the time periods indicated, earn a 5% return each year, and
that operating expenses remain constant. Your actual returns and costs may be
higher or lower than those shown, but based on these assumptions, your expenses
would be:
<TABLE>
<S> <C>
After 1 year $ 13
After 3 years $ 42
After 5 years $ 73
After 10 years $166
</TABLE>
- -------
6
<PAGE>
STATE FARM INTERIM FUND
WHAT IS INTERIM FUND'S INVESTMENT OBJECTIVE AND WHAT ARE ITS PRINCIPAL
INVESTMENT STRATEGIES?
OBJECTIVE. Interim Fund seeks the realization over a period of years of the
highest yield consistent with relative price stability (relatively low
volatility).
PRINCIPAL INVESTMENT STRATEGIES. The Fund invests in high quality debt
securities with short-and intermediate-term maturities, including:
- - U.S. government obligations,
- - high quality corporate obligations, and
- - high quality commercial paper and other money market instruments.
The Manager typically distributes the Fund's investments in varying amounts
among securities maturing in up to six or seven years from the time of purchase,
but occasionally may extend to securities maturing in up to 15 years. The
Manager buys securities for the Fund with shorter maturities, even though they
tend to produce less income, because they generally also have less volatile
prices. The Manager will seek to hold the securities in which the Fund invests
until they mature, but it may sell them earlier. The Manager purchases bonds
after conducting thorough credit analyses of the issuers. The Manager seeks to
purchase bonds that offer yields that are commensurate with the credit quality
of the issuer. Generally, the Manager would sell securities in order to meet a
large volume of redemptions, to reposition the maturity structure of the
portfolio or to adjust credit risk of the portfolio. Usually, the Manager would
sell securities that produce the least amount of capital gains.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN INTERIM FUND?
The chief risks of investing in Interim Fund are INTEREST RATE RISK, CREDIT
RISK AND INFLATION RISK. The Fund is not a money market fund, and the Fund does
not attempt to maintain a stable net asset value like a money market fund.
Interest rate risk is the risk that the Fund's investments will decline in
value because of changes in interest rates. Generally, debt securities decrease
in value when interest rates rise and increase in value when interest rates
fall.
Credit risk is the risk that an issuer of a bond may become unable to meet
its obligation to pay interest on the bond, or repay principal. The Fund tries
to limit credit risk by investing in high quality securities.
Inflation risk is the risk that the value of assets or income from an
investment will be worth less in the future as inflation decreases the value of
money.
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You can lose money by investing in the Fund.
IS AN INVESTMENT IN INTERIM FUND APPROPRIATE FOR ME?
The Fund might be appropriate for you if you are seeking a fixed income
investment with more price stability than an investment in long-term bonds.
The Fund is not an appropriate investment for you if you are seeking long
term growth of capital.
HOW HAS INTERIM FUND PERFORMED?
The following bar chart and table illustrate certain risks of investing in
the Fund. The bar chart
-------
7
<PAGE>
shows the changes in the Fund's returns year by year. The table compares the
Fund's average annual total returns for the periods listed to a market index.
This information is intended to help you assess the variability of Fund returns
over the periods indicated (and consequently, the potential rewards and risks of
a Fund investment). The Fund's past performance doesn't necessarily indicate how
it will perform in the future.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 9.36%
1991 12.23%
1992 6.29%
1993 6.84%
1994 -0.78%
1995 12.51%
1996 4.17%
1997 7.08%
1998 7.84%
1999 0.85%
TOTAL RETURN
</TABLE>
The Fund's best and worst quarters during the last 10 years were:
Best quarter: 4.18%,
during the fourth quarter of 1991.
Worst quarter: -1.20%,
during the first quarter of 1994.
The table below shows the Average Annual Total Return on an investment in
the Fund compared to a market index for the 1-, 5- and 10-year periods ended
December 31, 1999:
<TABLE>
<CAPTION>
LEHMAN
1-5 YEAR
U.S. TREASURY
INTERIM FUND INDEX*
------------ --------------
<S> <C> <C>
1 year 0.85 % 1.89%
5 years 6.42 % 6.74%
10 years 6.56 % 6.76%
</TABLE>
- ------------------------
* The Lehman Brothers 1-5 Year U.S. Treasury Index presently contains
approximately 73 U.S. Treasury Securities with maturities ranging from one
to five years. The Lehman Brothers 1-5 Year U.S. Treasury Index represents
an unmanaged group of bonds that differs from the composition of the Interim
Fund. Unlike an investment in the Interim Fund, returns of the Lehman 1-5
Year U.S. Treasury Index do not reflect expenses of investing.
WHAT ARE THE COSTS OF INVESTING IN INTERIM FUND?
Below are the fees and expenses that you would pay if you buy and hold
shares of the Fund.
SHAREHOLDER TRANSACTION EXPENSES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge None
Redemption fee None
Exchange fee None
</TABLE>
FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<S> <C>
Management fees .15%
Distribution (12b-1) fees None
Other expenses .05%
----
Total Annual Fund Operating Expenses .20%
</TABLE>
EXAMPLE. This example is intended to help you compare the cost of investing in
the Fund with that of investing in other mutual funds. The example assumes you
invest $10,000 for the time periods indicated, earn a 5% return each year, and
that operating expenses remain constant. Your actual returns and costs may be
higher or lower than those shown, but based on these assumptions, your expenses
would be:
<TABLE>
<S> <C>
After 1 year $ 20
After 3 years $ 64
After 5 years $113
After 10 years $255
</TABLE>
- -------
8
<PAGE>
STATE FARM MUNICIPAL BOND FUND
WHAT IS MUNICIPAL BOND FUND'S INVESTMENT OBJECTIVE AND WHAT ARE ITS PRINCIPAL
INVESTMENT STRATEGIES?
OBJECTIVE. Municipal Bond Fund seeks as high a rate of income exempt from
federal income taxes as is consistent with prudent investment management.
PRINCIPAL INVESTMENT STRATEGIES. Municipal Bond Fund normally invests so
that either (1) at least 80% of the Fund's net investment income is exempt from
regular federal income tax or (2) at least 80% of the Fund's net assets are
invested in securities that produce income exempt from regular federal income
tax.
The Fund invests primarily in a diversified selection of municipal bonds
with maturities of one to seventeen years, although from time to time the
Manager may purchase issues with longer maturities. A majority of the Fund's
investments are in issues with maturities longer than five years.
The Fund normally invests at least 70% of its total assets in municipal
bonds rated A or better by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"), meaning that up to 30% of the Fund's
total assets may be invested in medium and lower-quality bonds.
The Manager usually will hold municipal bonds for the Fund until they mature
or are called. The Fund may sell a bond when the proportion of bonds with longer
maturities is reduced in anticipation of a bond market decline (a result of
rising interest rates), or increased in anticipation of a bond market rise
(resulting from a decline in interest rates). The Manager may also sell a bond
for the Fund if its credit risk increases significantly.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN MUNICIPAL BOND FUND?
The chief risks of investing in Municipal Bond Fund are INTEREST RATE RISK,
CREDIT RISK, and INFLATION RISK, and you can lose money by investing in the
Fund.
Interest rate risk is the risk that the Fund's investments will decline in
value because of changes in interest rates. Generally, debt securities decrease
in value when interest rates rise and increase in value when interest rates
fall.
Credit risk is the risk that an issuer of a bond may become unable to meet
its obligation to pay interest on the bond, or repay principal. The Fund tries
to limit credit risk by investing most of its assets in high grade municipal
bonds, but may invest up to 30% of its total assets in medium and lower-quality
bonds.
Inflation risk is the risk that the value of assets or income from an
investment will be worth less in the future as inflation decreases the value of
money.
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You can lose money by investing in the Fund.
IS AN INVESTMENT IN MUNICIPAL BOND FUND APPROPRIATE FOR ME?
The Fund may be an appropriate investment for you if you want regular
tax-free dividends, or to reduce taxes on your investment income.
The Fund is not an appropriate investment for you if you are seeking
long-term capital growth, or if you are investing through an IRA, 401(k) plan or
some other kind of tax-deferred account.
HOW HAS MUNICIPAL BOND FUND PERFORMED?
The following bar chart and table illustrate certain risks of investing in
the Fund. The bar chart shows the changes in the Fund's returns year by year.
The table compares the Fund's average annual total returns for the periods
listed to a market index. This information is intended to help you assess the
-------
9
<PAGE>
variability of Fund returns over the periods listed (and consequently, the
potential rewards and risks of a Fund investment). The Fund's past performance
doesn't necessarily indicate how it will perform in the future.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 7.13%
1991 11.05%
1992 7.78%
1993 9.79%
1994 -2.54%
1995 13.37%
1996 4.24%
1997 7.27%
1998 6.05%
1999 -1.04%
TOTAL RETURN
</TABLE>
The Fund's best and worst quarters during the last 10 years were:
Best quarter: 5.18%,
during the second quarter of 1995.
Worst quarter: -3.23%,
during the first quarter of 1994.
The following table shows the Average Annual Total Return on an investment
in the Fund compared to a market index for the 1-, 5- and 10-year periods ended
December 31, 1999:
<TABLE>
<CAPTION>
MUNICIPAL LEHMAN MUNICIPAL
BOND FUND BOND INDEX*
--------- ----------------
<S> <C> <C>
1 year -1.04% -2.06%
5 years 5.87% 6.91%
10 years 6.20% 6.89%
</TABLE>
- ------------------------
* The Lehman Brothers Municipal Bond Index includes approximately 52,000
municipal bonds that have a minimum credit rating of Baa; have been issued
as part of an issue of at least $50 million; have an amount outstanding of
at least $3 million; have been issued within the last five years; and have a
maturity of at least one year. The Lehman Brothers Municipal Bond Index
represents an unmanaged group of bonds that differs from the composition of
the Municipal Bond Fund. Unlike an investment in the Municipal Bond Fund,
returns of the Lehman Brothers Municipal Bond Index do not reflect expenses
of investing.
WHAT ARE THE COSTS OF INVESTING IN MUNICIPAL BOND FUND?
Below are the fees and expenses that you would pay if you buy and hold shares of
the Fund.
SHAREHOLDER TRANSACTION EXPENSES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge None
Redemption fee None
Exchange fee None
</TABLE>
FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<S> <C>
Management fees .12%
Distribution (12b-1) fees None
Other expenses .04%
----
Total Annual Fund Operating Expenses .16%
</TABLE>
EXAMPLE. This example is intended to help you compare the cost of investing in
the Fund with that of investing in other mutual funds. The example assumes you
invest $10,000 for the time periods indicated, earn a 5% return each year, and
that operating expenses remain constant. Your actual returns and costs may be
higher or lower than those shown, but based on these assumptions, your expenses
would be:
<TABLE>
<S> <C>
After 1 year $ 16
After 3 years $ 52
After 5 years $ 90
After 10 years $205
</TABLE>
- -------
10
<PAGE>
HOW THE FUNDS INVEST
- --------------------------------------------------------------------------------
GROWTH FUND
COMMON STOCKS. Growth Fund invests most of its assets in common stock and
other income-producing equity securities. The Manager chooses stocks for the
Fund for their long-term potential to generate capital gains, or growth in
income, or both. Although there is no restriction on the size of the companies
in which Growth Fund may invest, ordinarily most of the Fund's investments are
in large companies.
SHORT-TERM INVESTMENTS. Under ordinary circumstances, the Fund is
substantially fully invested in common stocks. The Fund may take a temporary
defensive position in attempting to respond to adverse market, economic,
political or other conditions. If the Manager determines that market or economic
conditions warrant a temporary defensive position, the Fund may hold up to 100%
of its assets in cash, cash equivalents or other temporary investments such as
short-term government or corporate obligations. During those periods, the Fund's
assets may not be invested in accordance with its strategy and the Fund may not
achieve its investment objective.
FOREIGN STOCKS. Growth Fund may invest up to 25% of its assets in foreign
securities not publicly traded in the United States. Foreign investing provides
opportunities different from those available in the U.S. and risks which in some
ways may be greater than in U.S. investments.
BALANCED FUND
Balanced Fund invests in common stocks, preferred stocks and bonds in
varying proportions according to prevailing market conditions and the judgment
of the Manager.
COMMON STOCKS. The Fund invests approximately 60% of its assets in common
stocks, and ordinarily limits its common stock investments to no more than 75%
of total assets. The Fund invests in common stocks that the Manager believes
have the potential for long-term capital gain. The income provided by common
stocks is usually incidental to their selection. Although there is no
restriction on the size of companies in which the Fund may invest, ordinarily
most of the Fund's common stock investments are in large companies.
FIXED INCOME SECURITIES. The Fund invests in bonds and preferred stocks to
provide relative stability of principal and income. Under most circumstances,
the Fund's investments in bonds are primarily in intermediate or long term
investment grade securities. Although usually the majority of the Fund's assets
are invested in common stocks, the Fund may for a time choose to invest as much
as 75% of its total assets in fixed income securities, including short-term
securities.
In choosing bonds and preferred stocks for the portfolio, the Manager looks
for issuers that it believes will be able to meet their obligations promptly
even under adverse business conditions, and whose issues have an attractive
combination of yield, maturity and liquidity.
The Fund invests in debt securities rated within the four highest grades
(AAA/Aaa to BBB/Baa) assigned by S&P or Moody's or, if unrated, determined by
the Manager to be of comparable quality. Bonds rated below BBB by S&P or below
Baa by Moody's have speculative characteristics, and are commonly referred to as
"junk bonds" and present a higher degree of credit risk. For more information,
see "Description of Bond Ratings" in the Statement of Additional Information.
FOREIGN STOCKS. Like Growth Fund, Balanced Fund may invest up to 25% of its
assets in foreign securities not publicly traded in the United States. Foreign
investing provides opportunities different from those available in the U.S. and
risks which in some ways may be greater than in U.S. investments.
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<PAGE>
The Fund generally keeps its investments as long as the Manager believes
that they are generating appropriate income or meet credit standards (for bonds)
or have the potential, over the long-term, to generate capital gain or growth in
income (for common stocks).
The Fund may be a complete investment program in that the Fund's investments
are balanced among common stocks, convertible securities and both short-term and
long-term fixed income investments.
INTERIM FUND
Interim Fund invests in high grade debt securities with short- and
intermediate-term maturities.
QUALITY. The Fund invests in the following types of securities:
- - Obligations of or guaranteed by the U.S. government, its agencies or
instrumentalities that may be supported by the full faith and credit of the
U.S. Treasury or may be supported only by the credit of the particular agency
or instrumentality.
- - Corporate debt securities that Moody's or S&P rates high grade or better or,
if unrated, that the Manager considers to be of comparable quality.
- - Commercial paper and other money market instruments that Moody's rates
Prime-1, Prime-2 or Prime-3 or that the Manager considers to be of comparable
quality.
One of the risks of investing in an investment grade debt security is that
the security might lose its rating, or its rating might be reduced to below
investment grade. If either of those occurs, the Fund is not required to sell
the security, but the Manager considers the reasons for the loss or change of
the rating in determining whether or not to sell that security.
MATURITY. Interim Fund's investments are typically distributed in varying
amounts among securities maturing in up to six or seven years from the time of
purchase, but occasionally may extend to securities maturing in up to 15 years.
The Manager from time to time may change the average maturity of the Fund's
holdings, generally based on the prospective yields and price changes among
securities of different qualities, interest rates and maturities.
The yields on securities that are generally of the same quality are usually
higher for issues with longer maturities than those with shorter maturities. The
Fund often buys securities with shorter maturities, even though they tend to
produce less income, because they generally also have less volatile prices.
At certain times, yields available from securities with shorter maturities
may exceed those on securities of comparable quality with longer maturities.
When these bond market conditions prevail, the Manager may choose to forego the
higher yield and greater price stability of short-term securities if in its
judgment a higher average yield over time will result from investing in issues
with longer maturities.
The Manager will seek to hold the securities in which the Fund invests until
they mature, but it may sell them earlier. The Manager purchases bonds after
conducting thorough credit analyses of the issuers. The Manager seeks to
purchase bonds that offer yields which are commensurate with the credit quality
of the issuer. Generally, the Manager would sell securities in order to meet a
large volume of redemptions, to reposition the maturity structure of the
portfolio or to adjust credit risk of the portfolio. Usually, the Manager would
sell securities that produce the least amount of capital gains.
SHORT-TERM INVESTMENTS. Interim Fund may invest without limit in short-term
government or corporate obligations and hold cash on behalf of the Fund in an
interest-bearing demand bank savings account or mutual fund money market account
as a temporary measure pending investment in securities. The Fund may take a
temporary defensive position in attempting to respond to adverse market,
economic, political or other conditions. During those periods,
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<PAGE>
the Fund's assets may not be invested in accordance with its strategy and the
Fund might not achieve its investment objective.
MUNICIPAL BOND FUND
Municipal Bond Fund invests primarily in a diversified selection of
municipal bonds.
States, territories, local governments and municipalities issue municipal
bonds to raise money for various purposes (for example, to pay for a road
construction project, or to build an airport). Municipal Bond Fund may purchase
municipal bonds that represent lease obligations. These carry special risks
because the issuer of the bonds may not be obligated to appropriate money
annually to make payments under the lease. In order to reduce this risk, the
Fund will only purchase these bonds if the Manager believes the issuer has a
strong incentive to continue making appropriations until maturity. The interest
on a municipal bond is generally exempt from federal income tax, but may be
subject to the federal alternative minimum tax and state income taxes. The Fund
does not currently intend to purchase municipal obligations whose interest would
be subject to the alternative minimum tax.
Municipal Bond Fund normally invests so that either (1) at least 80% of the
Fund's net investment income is exempt from regular federal income tax or
(2) at least 80% of the Fund's net assets are invested in securities that
produce income exempt from regular federal income tax.
The Fund usually holds its municipal bonds until they mature or are called.
The Fund may sell a bond when the proportion of bonds with longer maturities is
reduced in anticipation of a bond market decline (a result of rising interest
rates), or increased in anticipation of a bond market rise (resulting from a
decline in interest rates). A bond may be sold if its credit risk increases
significantly.
QUALITY. Under ordinary circumstances at least 70% of the Fund's total
assets will consist of municipal bonds rated A or better by Moody's or S&P,
money market securities and cash. Up to 30% of the Fund's total assets may be
invested in municipal bonds that are unrated or rated less than A by Moody's or
by S&P.
Lower-rated municipal bonds and fixed income securities generally carry a
greater degree of risk than higher-rated municipal bonds. Bonds rated below BBB
by S&P or below Baa by Moody's have speculative characteristics, and are
commonly referred to as "junk bonds" and present a higher degree of credit risk.
MATURITY. The Fund invests primarily in a diversified selection of
municipal bonds with maturities of one to seventeen years, although from time to
time the Manager may purchase issues with longer maturities. A majority of the
Fund's investments are in issues with maturities longer than five years.
SHORT-TERM INVESTMENTS. The Fund will hold assets not invested in municipal
bonds as cash or invest in interest-bearing demand notes, bank savings accounts
and high grade money market securities or U.S. Treasury securities. In
attempting to respond to adverse market, economic, political or other
conditions, as a temporary defensive measure, the Fund may invest without limit
in cash or money market securities. During those periods, the Fund's assets may
not be invested in accordance with its strategy, and the Fund may not achieve
its investment objective.
RISKS
- --------------------------------------------------------------------------------
Risk is inherent in all investing. Investing in a mutual fund--even the most
conservative--involves risk, including the risk that you may receive little or
no return on your investment or even that you may lose some or all of the money
you invested. Before you invest, you should carefully consider the risks that
you assume when you invest in the Funds.
MARKET RISK. Growth Fund and Balanced Fund are subject to the market risk
that always comes with investments in common stocks. Stock prices may fluctuate
widely over short or even extended periods in response to company, market, or
economic news. Stock markets also tend to move in cycles, with periods of rising
stock prices and periods of falling stock prices.
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<PAGE>
FOREIGN INVESTING. Growth Fund and Balanced Fund have the ability to invest
up to 25% of their total assets in foreign securities. Some risks of investing
in foreign securities include: fluctuations in exchange rates of foreign
currencies; imposition of exchange control regulations or currency restrictions;
less public information with respect to issuers of securities; less governmental
supervision of stock exchanges, securities brokers, and issuers of securities;
lack of uniform accounting, auditing, and financial reporting standards,
settlement periods and trading practices; less liquidity, frequently greater
price volatility, and higher transaction costs; possible imposition of foreign
taxes; and sometimes less advantageous legal, operational, and financial
protections applicable to foreign sub-custodial arrangements.
Investing in countries outside the U.S. also involves political risk. A
foreign government might restrict investments by foreigners, expropriate assets,
seize or nationalize foreign bank deposits or other assets, establish exchange
controls, or enact other policies that could affect investment in these nations.
Economies in individual markets may differ favorably or unfavorably from the
U.S. economy in such respects as growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions.
INTEREST RATE RISK. An investment in Interim Fund or Municipal Bond Fund is
subject to interest rate risk, as is an investment in Balanced Fund to the
extent of its investments in bonds. Bond prices (of both taxable bonds and
municipal bonds) generally move in the opposite direction of interest rates.
Interest rate risk is the risk that the value of the Fund's portfolio will
decline because of rising market interest rates. The longer the average maturity
(duration) of a Fund's portfolio, the greater its interest rate risk.
CREDIT RISK. The bond investments of Interim Fund, Municipal Bond Fund and
Balanced Fund are subject to credit risk--the risk that an issuer of a bond is
unable to meet its obligation to make interest and principal payments when due.
Generally, lower rated bonds provide higher current income but involve
greater risk of issuer default or bankruptcy.
INCOME RISK. Income risk is the risk that the income from a Fund's bond
investments will decline because of falling market interest rates. This risk
applies to investments in Balanced Fund, Interim Fund and Municipal Bond Fund.
Income risk can result when a Fund invests the proceeds from new share sales, or
from matured or called bonds, at market interest rates that are below the
portfolio's current earnings rate.
INFLATION RISK. Inflation risk is the risk that the value of assets or
income from investments will be less in the future as inflation decreases the
value of money. As inflation increases, the value of a Fund's assets can decline
as can the value of the Fund's distributions. Inflation risk applies
particularly to fixed-income investments, like those of Interim Fund, Municipal
Bond Fund and the bond component of Balanced Fund.
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<PAGE>
HOW TO BUY FUND SHARES
- --------------------------------------------------------------------------------
WHO MAY INVEST
Shares of the Funds may be purchased by current and retired agents and
employees of the State Farm Insurance Companies and by their family members.
Effective January 1, 2001, a "family member" will be defined as:
- - Legally married spouse
- - Lineal ascendants (e.g., parents, grandparents, etc.) and spousal lineal
ascendants
- - Lineal descendants (e.g., children, grandchildren, etc.) including
stepchildren, court appointed foster children, and legally adopted children
If, after December 31, 2000, you are a Fund shareowner who is not eligible
to invest in the Funds, you may maintain and add to your current Fund
account(s), but you may not open any new Fund account.
Some State Farm agents purchase shares of the State Farm Funds as an
investment for a SEP-IRA plan. When this occurs, each participating employee
establishes a State Farm Funds IRA account to which the agent makes SEP
contributions. If you have a State Farm Funds IRA account to which SEP
contributions are made, you may also make traditional or rollover IRA
contributions to that account.
MINIMUM INVESTMENTS
<TABLE>
<CAPTION>
ALL FUNDS
EXCEPT
MUNICIPAL MUNICIPAL
BOND FUND BOND FUND
--------- ---------
<S> <C> <C>
To open an account by
check: $50 $1000
To open an account by
payroll deduction: $20 $1000
Subsequent investments by
check or EFT: $50 $ 500
Subsequent investments by
payroll deduction: $20 $ 100
</TABLE>
HOW TO BUY
You may buy shares of any of the State Farm Funds by sending a written
order, by exchanging from another of the State Farm Funds in writing or by
telephone, or by payroll deduction if you are a State Farm employee or agent.
You may make subsequent investments at any time by mailing a check to the
Manager along with the detachable investment slip found at the top of your
confirmation statement, by sending a letter of instruction indicating your
account registration, account number and the Fund name or by authorizing the
Manager to withdraw money from your bank account.
IN WRITING. To open a new account in writing, complete and sign the
Application and mail it to the Manager, together with a check made payable to
"State Farm Investment Management Corp.," an authorization for payroll
deduction, or both.
BY PAYROLL DEDUCTION. If you are a State Farm agent or an employee, you may
authorize a payroll deduction through the State Farm Insurance Companies by
completing the Compensation Deduction Authorization section of the Application.
You may authorize, change or cancel your payroll deduction by completing and
signing the reverse side of the detachable investment slip and
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<PAGE>
mailing it to the Manager. The Funds will also accept instructions to change a
payroll deduction by letter or fax as long as you provide clear instructions and
indicate your account registration, account number and the Fund name.
BY ELECTRONIC FUNDS TRANSFER (EFT). You may authorize the Manager to
withdraw money from your pre-designated bank account for purchase into an
existing Fund account. You may obtain a form from the Manager to establish this
arrangement.
BY EXCHANGE. You may buy shares of any of the State Farm Mutual Funds by
redeeming part or all of the shares in another State Farm Mutual Fund, without
charge. You have to meet the minimum investment requirements of the Fund into
which you are exchanging, and the written or telephone redemption requirements
described in this prospectus.
An exchange is a sale and purchase of shares for federal tax purposes, and
may result in capital gain or loss. Before making an exchange, please read the
description of the Fund to be purchased in this prospectus.
A written exchange request must be signed by all of the owners of the
account, must be sent to the Manager, and must clearly indicate your account
number, account registration and the Fund names.
BY TELEPHONE EXCHANGE. Before you can make an exchange by telephone, you
must sign up for the Telephone Exchange Privilege. To sign up, choose the
Telephone Exchange Privilege option on the account application or call the
Manager for a separate Authorization Form.
Once the Telephone Exchange Privilege has been established, you may call the
Manager and request an exchange for any amount that meets or exceeds the
applicable minimum investment of the Fund being purchased. You must identify the
existing account by giving the Fund's name, registration of the account and
account number, and must specify the dollar amount or number of shares to be
exchanged and the Fund to which the exchange should be made. The registration of
the Fund account to which an exchange is made must be exactly the same as that
of the Fund account from which an exchange is made.
The Manager and the Funds will employ reasonable procedures, including tape
recording of telephone instructions and providing written confirmation of each
resulting transaction, to confirm that telephonic instructions are genuine. If
the Manager and the Funds fail to employ such procedures, they may be liable for
any losses due to unauthorized or fraudulent instructions. However, the Funds,
the Manager, and their respective officers, directors, employees and agents will
not be liable for acting upon instructions given by any person under the
Telephone Exchange Privilege when reasonably believed to be genuine. In such
case, the shareowner will bear the risk of loss in the event of a fraudulent
telephone exchange transaction. To reduce the risk of loss, the registration of
the account into which shares are exchanged must be identical with the
registration of the originating account.
The Telephone Exchange Privilege is not available for shares represented by
a certificate or if good payment for shares being redeemed has not been
received.
During periods of volatile economic and market conditions, a shareowner may
have difficulty making an exchange request by telephone, in which case exchange
requests would have to be made in writing or by facsimile.
Each Fund reserves the right at any time to suspend, limit, modify or
terminate the telephone exchange privilege, but will not do so without giving
shareowners at least 30 days' prior written notice.
GENERAL POLICIES ON BUYING SHARES
- - Each Fund will invest the entire dollar amount of each purchase in full and
fractional shares at the Fund's net asset value next determined after the
Manager receives your purchase order.
- - Unless you instruct otherwise, all of your income dividends and capital gain
distributions will be reinvested in your account. You may, however, request in
writing at any time to have your income
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<PAGE>
dividends and capital gain distributions paid to you in cash.
- - Stock certificates will not be issued unless you so request in writing.
Certificates will be issued for full shares only.
- - The Manager will send to you by mail a confirmation of each transaction, other
than purchases by payroll deduction and by the EFT method. You will receive
confirmation of your purchases by payroll deduction and by the EFT method
promptly after the end of each calendar quarter.
- - Each Fund reserves the right, in its sole discretion, to reject purchases
when, in the judgment of the Manager, the purchase would not be in the best
interest of the Fund. No order to purchase shares is binding on a Fund until
it has been confirmed in writing and the Fund has received payment.
SHARE PRICE
Each Fund buys and sells its shares each day at the net asset value per
share. A Fund's net asset value per share is the value of a single share. It is
computed by totaling the Fund's investments, cash, and other assets, subtracting
its liabilities, then dividing the result by the number of shares outstanding.
The net asset value of each of Growth Fund, Balanced Fund and Interim Fund is
computed daily at the close of regular session trading on the New York Stock
Exchange ("NYSE"). The close of trading is usually 3:00 p.m. Central time.
Shares of Municipal Bond Fund are priced at 1:00 p.m. Central time. Shares will
not be priced on days when the NYSE is closed.
Fund securities and assets are valued chiefly by quotations from the primary
market in which they are traded. If quotations are not readily available, they
are valued by a method that the Board of Directors of the Fund believes reflects
a fair value.
Values of foreign securities are translated from local currencies into U.S.
dollars using current exchange rates. With respect to foreign securities--
traded primarily on foreign exchanges--a Fund's share price may change on days
when the Fund is not open for purchase or sale.
HOW TO REDEEM FUND SHARES
- --------------------------------------------------------------------------------
You may redeem shares of any of the State Farm Mutual Funds by sending a
written request, by telephone, by fax, by using our systematic withdrawal
program, or by exchanging into another State Farm Mutual Fund.
BY WRITTEN REQUEST. You may redeem all or any portion of your shares by
sending a written request to the Manager:
State Farm Investment Management Corp.
One State Farm Plaza
Bloomington, Illinois 61710-0001
Your redemption request must clearly identify the exact name(s) in which
your account is registered, your account number, the Fund name and the number of
shares or dollar amount you wish to redeem.
If you have any stock certificates representing the shares to be redeemed,
you must return them in proper form for cancellation, along with your redemption
request. For your protection, you should send your stock certificates by
certified mail, return receipt requested.
All shareowners of record must sign the redemption request, including each
joint holder of a joint account. The Fund reserves the right to require further
documentation in order to verify the authority of the person seeking to redeem.
If you request a redemption of more than $100,000, your signature, and the
signatures of any joint owners of your account, must be guaranteed as described
under "Signature Guarantee."
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<PAGE>
Redemption proceeds you request in writing normally will be sent by check to
your address of record. If you give specific instructions in your redemption
request, however, you may have the proceeds sent to another payee or to an
address other than the address of record. If you request expedited delivery of
the redemption proceeds, excluding IRA distributions, a fee of $15.00 will be
deducted from your redemption proceeds. For expedited requests of IRA
distributions, the shareowner will be responsible for reimbursing the Manager
for the $15.00 fee.
BY TELEPHONE. You can redeem shares by telephone by calling the Manager at
309-766-2029 or 1-800-447-0740. You may redeem shares by telephone up to and
including $100,000 if the proceeds are to be sent to the address of record, or
you may redeem up to the entire value of your account if the proceeds are to be
electronically transferred to a pre-designated bank account.
You cannot redeem shares by telephone if you hold stock certificates for
those shares. You generally may not use telephone redemption unless you have
elected this option on your account application or until you have completed an
Authorization Form for Telephone Redemption and Exchange Privileges. Your
signature on the Authorization Form must be guaranteed (see "Signature
Guarantee"). Further documentation may be required from corporations,
partnerships, trusts and other entities. Telephone redemption is not available
for IRA accounts.
During periods of volatile economic and market conditions, you may have
difficulty making a redemption request by telephone, in which case you should
consider sending in your request by letter or by fax.
Although the Authorization Form authorizes the Funds and the Manager to
tape-record all telephone instructions, the Funds may not honor telephone
instructions unless permission to record is confirmed by the caller.
By electing the Telephone Redemption Privilege, you authorize the Manager to
act upon an instruction by telephone to redeem shares from any account for which
such services have been elected. The Manager and the Funds will employ
reasonable procedures, including tape recording of telephone instructions and
providing written confirmation of each resulting transaction, to confirm that
telephone instructions are genuine. If the Manager and the Funds fail to employ
such procedures, they may be liable for any losses due to unauthorized or
fraudulent instructions. However, the Funds, the Manager and their respective
officers, directors, employees and agents will not be liable for acting upon
instructions given under the authorization when reasonably believed to be
genuine. In such case, the shareowner will bear the risk of loss in the event of
a fraudulent telephone redemption transaction. To reduce that risk, proceeds of
telephone redemptions will be sent only by check payable to the shareowner of
record to the shareowner's address of record or electronically transferred to a
pre-designated bank account.
BY FAX. You can also request a redemption by faxing your request to the
Manager at (309) 766-2579. You may request a redemption by fax of up to and
including $100,000 if the proceeds are to be sent to the address of record, or
you can redeem up to the entire value of your account if the proceeds are to be
electronically transferred to a pre-designated bank account.
A redemption request sent by fax must clearly identify the exact name(s) in
which the account is registered, the account number, the Fund name and the
number of shares or dollar amount to be redeemed, and must include the
signature(s) of the registered shareowner(s). You cannot redeem shares by fax if
you hold stock certificates for those shares.
Unless you request electronic transfer, redemption proceeds requested by fax
(up to and including $100,000) will be sent by check to the registered
shareowner(s) at the address of record. However, upon specific written
instruction (which may not be sent by fax) received at least one day prior to
the redemption, redemption proceeds may be sent to another payee or to another
address other than the address of record. If you request expedited delivery of
the redemption proceeds, excluding IRA distributions, a fee of $15.00 will be
deducted from
- -------
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<PAGE>
your redemption proceeds. For expedited requests of IRA distributions, the
shareowner will be responsible for reimbursing the Manager for the $15.00 fee.
SYSTEMATIC WITHDRAWAL PROGRAM. If you own $5,000 or more of a Fund's shares
at the current net asset value, you may have a specified dollar amount withdrawn
from your account, payable to you or to another designated payee on a monthly,
quarterly or annual basis.
You will not be permitted to purchase shares by payroll deduction if you are
participating in the systematic withdrawal program. The Funds reserve the right
to amend the systematic withdrawal program on 30 days' notice. The program may
be terminated at any time by a shareowner or by a Fund. For more information
contact the Manager at the address shown below.
GENERAL REDEMPTION POLICIES:
- - Each Fund will redeem shares at the Fund's net asset value next determined
after receipt by the Fund of a proper request for redemption.
- - The Fund generally will redeem shares in cash (by check or electronic
transfer). Redemptions of more than $500,000 during any 90-day period by one
shareowner will normally be paid in cash, but may be paid wholly or partly by
a distribution in kind of securities. If a redemption is paid in kind, the
redeeming shareowner may incur brokerage fees in selling the securities
received.
- - Payment for shares redeemed will be mailed or electronically transferred
within seven days after the Fund receives a redemption request, either in
writing, by facsimile, or by telephone, in proper form (including stock
certificates, if any). However, if the Fund is requested to redeem shares
within several days after they have been purchased, the Fund may delay sending
the redemption proceeds until it can verify that payment of the purchase price
for the shares has been, or will be, collected, which may take up to 15 days
from the date of purchase.
- - If you request, redemption proceeds will be sent electronically to your
pre-designated bank account. The electronic transfer will be completed either
through the EFT method or through the wire transfer method, whichever you
choose. With the EFT method, the redemption proceeds will usually be deposited
in your pre-designated bank account within one or two days after the
processing of the redemption request. With the wire transfer method, the
redemption proceeds will usually be deposited in your pre-designated bank
account on the next business day after receipt of the redemption request. If
you choose electronic deposit of your proceeds using the wire transfer method,
the Manager will charge you a $15.00 fee, and this fee will be subtracted from
your redemption proceeds. There currently is no charge for electronic transfer
of redemption proceeds using the EFT method. Your bank may charge additional
fees for electronic transfers you initiate. The wire transfer method is not
available to shareowners participating in the systematic withdrawal program.
To change the bank or account designated to receive your redemption proceeds,
send a written request (not by fax) signed by each shareowner with each
signature guaranteed as described in this prospectus under "Signature
Guarantee" to:
State Farm Investment Management Corp.
One State Farm Plaza
Bloomington, IL 61710-0001
- - Each Fund may suspend the right of redemption or postpone a redemption payment
more than seven days during any period when (a) the NYSE is closed for other
than customary weekend and holiday closings, (b) trading on the NYSE is
restricted, (c) an emergency exists making disposal of securities owned by the
Fund or valuation of its assets not reasonably practicable, or (d) the
Securities and Exchange Commission has by order permitted such suspension for
the protection of shareowners of the Fund; provided that applicable rules and
regulations of the Securities and Exchange Commission shall govern as to
whether any condition prescribed in (b) through (d) exists.
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<PAGE>
SIGNATURE GUARANTEE
A signature guarantee is a written representation, signed by an officer or
authorized employee of the guarantor, that the signature of the shareowner is
genuine. The guarantor must be an institution authorized to guarantee signatures
by applicable state law. Such institutions include banks, broker-dealers,
savings and loan associations and credit unions. A notary public cannot provide
a signature guarantee.
The signature guarantee must appear, together with the signature of each
registered owner, either:
- - on the written request for redemption that exceeds $100,000, which clearly
identifies the exact name(s) in which the account is registered, the account
number, the Fund name and the number of shares or the dollar amount to be
redeemed;
- - on a separate "stock power," an instrument of assignment which should specify
the total number of shares to be redeemed (this stock power may be obtained
from most banks and stockbrokers);
- - on the back of each stock certificate tendered for redemption; or
- - on the Authorization Form for Telephone Redemption and Exchange Privileges to
establish the original privileges and any subsequent forms completed to change
the pre-designated bank account into which redemption proceeds may be
deposited.
TAX-QUALIFIED ACCOUNTS
- --------------------------------------------------------------------------------
Tax-qualified accounts allow individuals to shelter investment income and
capital gains from current taxes. Contributions to these accounts may be
tax-deductible. MUNICIPAL BOND FUND DOES NOT ACCEPT INVESTMENTS BY TAX-QUALIFIED
PLANS.
- - TRADITIONAL IRAs allow most individuals under 70 1/2 years of age with taxable
compensation to save up to $2,000 per year ($4,000 for most married couples).
If your spouse has less than $2,000 in taxable compensation, he or she may
still contribute up to $2,000 to an IRA, as long as you and your spouse's
combined taxable compensation is at least $4,000.
- - ROLLOVER IRAs retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
- - ROTH IRAs allow single taxpayers with adjusted gross income up to $95,000 per
year, and married couples with adjusted gross income up to $150,000 per year,
to contribute up to $2,000 per person per year. Contributions to Roth IRAs are
not tax-deductible and earnings are not taxable upon withdrawal if the Roth
IRA has been held at least five years and you: (1) have attained age 59 1/2,
(2) have become disabled, (3) have become deceased, or (4) use the proceeds
(up to $10,000) to purchase a first home.
- - EDUCATION IRAs allow individuals, subject to certain income limitations, to
contribute up to $500 annually for a child under the age of 18. Although
contributions to an Education IRA are not deductible for federal income tax
purposes, the proceeds are generally not taxable provided withdrawals are used
to pay for qualified higher education expenses. If contributions are made to a
qualified state tuition program for a child, contributions may not be made to
an Education IRA during that tax year.
- - OTHER RETIREMENT PLANS--The Funds may be used as investments by other kinds of
retirement plans. All of these accounts need to be established by the trustee
of the plan. The Funds do not offer prototype retirement plans.
For more information about the tax advantages and consequences of investing
in any of these plans, please consult your tax adviser.
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<PAGE>
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
State Farm Investment Management Corp., One State Farm Plaza, Bloomington,
Illinois 61710-0001, is the investment adviser to the Funds and manages each
Fund's business and affairs, subject to the overall supervision of each Fund's
Board of Directors. Since 1967, the Manager's sole business has been to act as
investment adviser, principal underwriter, transfer agent and dividend
disbursing agent for the Funds. The Manager is wholly-owned by State Farm Mutual
Automobile Insurance Company.
For its services, the Manager receives a fee, calculated as a percentage of
each Fund's average daily net assets. For the fiscal year ended November 30,
1999, the management fees paid by the Funds were:
<TABLE>
<S> <C>
Growth Fund .11%
Balanced Fund .12%
Interim Fund .15%
Municipal Bond Fund .12%
</TABLE>
Each Fund employs a team approach to management. GROWTH FUND'S portfolio is
managed by a team consisting of Paul Eckley, Steve Miller and John Concklin.
BALANCED FUND is managed by a team consisting of Mr. Concklin, Mr. Eckley,
Mr. Miller, Kurt Moser and Donald Heltner. Mr. Moser and Mr. Heltner together
manage INTERIM FUND, and Mr. Moser manages MUNICIPAL BOND FUND along with Julian
Bucher.
JULIAN BUCHER is an Investment Officer of the Manager, and Vice President of
MUNICIPAL BOND FUND. In addition, he has held the following positions within the
last five years: Vice President--Municipal Securities and Assistant
Secretary-Treasurer, State Farm Mutual Automobile Insurance Company, State Farm
Fire and Casualty Company, State Farm Life Insurance Company, State Farm Life
and Accident Assurance Company, State Farm Annuity and Life Insurance Company,
and State Farm General Insurance Company, since 1997; Vice President--Municipal
Securities, State Farm Indemnity Company and State Farm Lloyds, Inc., since
1997; prior to 1997, Investment Officer.
JOHN CONCKLIN is an Investment Officer of the Manager, and is Vice President
of GROWTH FUND and BALANCED FUND. In addition to his office with the Manager,
Mr. Concklin has also held the following positions during the last five years:
Vice President--Common Stocks and Assistant Secretary-Treasurer, State Farm
Mutual Automobile Insurance Company, State Farm Fire and Casualty Company, State
Farm Life Insurance Company, State Farm Life and Accident Assurance Company,
State Farm Annuity and Life Insurance Company and State Farm General Insurance
Company, since 1997; Vice President--Common Stocks, State Farm Indemnity Company
and State Farm Lloyds, Inc., since 1997; 1995-1997, Vice President--Fixed
Income.
PAUL ECKLEY is a Senior Vice President of the Manager, and Senior Vice
President of GROWTH FUND and BALANCED FUND. During the last five years,
Mr. Eckley has also held the following positions: Senior Vice
President--Investments and Assistant Secretary-Treasurer, State Farm Mutual
Automobile Insurance Company, State Farm Fire and Casualty Company, State Farm
Life Insurance Company, State Farm Life and Accident Assurance Company, State
Farm Annuity and Life Insurance Company, and State Farm General Insurance
Company, since 1998; Senior Vice President--Investments, State Farm Indemnity
Company and State Farm Lloyds, Inc. since 1998; 1995-1998 Vice President--Common
Stocks.
DONALD HELTNER is an Investment Officer of the Manager and Vice President of
BALANCED FUND and INTERIM FUND. During the past five years, Mr. Heltner has also
held the following positions: Vice President--Fixed Income and Assistant
Secretary-Treasurer, State Farm Life Insurance Company, State Farm Life and
Accident Assurance Company, and State Farm Annuity and Life Insurance Company,
since 1998; Vice President--Fixed Income, State Farm Mutual Automobile Insurance
Company, State
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21
<PAGE>
Farm Fire and Casualty Company, State Farm General Insurance Company, State Farm
Indemnity Company, and State Farm Lloyds, Inc., since 1998; prior to 1998, Vice
President, Century Investment Management Co.
STEVE MILLER is an Investment Officer of the Manager and a member of the
portfolio management team for GROWTH FUND and BALANCED FUND. In addition to his
office with the Manager, Mr. Miller has also held the following positions during
the past five years: Senior Investment Officer of State Farm Mutual Automobile
Insurance Company, State Farm Fire and Casualty Company, State Farm Life
Insurance Company, State Farm Life and Accident Assurance Company, State Farm
Annuity and Life Insurance Company, State Farm General Insurance Company, State
Farm Indemnity Company and State Farm Lloyds, Inc. since 1997; prior to 1997,
Investment Officer.
KURT MOSER is a Director and Senior Vice President of the Manager and Senior
Vice President of all the State Farm Mutual Funds. During the last five years,
Mr. Moser has held the following positions: Senior Vice President-Investments
and Director, State Farm Life Insurance Company, State Farm Fire and Casualty
Company, State Farm Life and Accident Assurance Company, and State Farm Annuity
and Life Insurance Company, since 1998; Senior Vice President-Investments, State
Farm Mutual Automobile Insurance Company, State Farm General Insurance Company,
State Farm Indemnity Company, State Farm Lloyds, Inc., since 1998; prior to
1998, Vice President-Investments.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
Each Fund intends to distribute substantially all of its net investment
income and any net capital gain realized from sales of its portfolio securities.
Growth Fund and Balanced Fund ordinarily pay dividends semi-annually in June
and December, and capital gain distributions, if any, annually in December.
Interim Fund and Municipal Bond Fund declare dividends daily and pay them
quarterly. Shares of Interim Fund and Municipal Bond Fund begin to earn
dividends on the day after they are purchased. Interim Fund and Municipal Bond
Fund distribute net realized capital gain, if any, annually in December.
All dividends and capital gain distributions from a Fund are automatically
reinvested in shares of that Fund on the reinvestment date, unless you have
previously elected to receive dividends and distributions in cash.
TAXES ON DISTRIBUTIONS. Distributions are generally subject to federal
income tax, and may be subject to state or local taxes. If you are a U.S.
citizen residing outside the United States, your distributions may also be taxed
by the country in which you reside.
Your distributions are taxable when they are paid, whether you take them in
cash or reinvest them in additional shares. However, distributions declared in
October, November or December of the prior year and paid in January are taxable
as if you received them on December 31.
For federal tax purposes, a Fund's income and short-term capital gain
distributions are taxable to you as dividends; long-term capital gain
distributions are taxable to you as long-term capital gains. The determination
of a capital gain classification as short-term versus long-term depends on the
length of time that the Fund held the asset it sold.
Every January, each of your Funds will send you and the IRS a
statement--called Form 1099--showing the amount of every taxable distribution
you received in the previous calendar year.
TAXES ON TRANSACTIONS. When you redeem shares, you will experience a
capital gain or loss if there is a difference between the cost of your shares
- -------
22
<PAGE>
and the price you receive when you sell them. You may be subject to tax.
Whenever you sell shares of a Fund, you will receive a confirmation
statement showing how many shares you sold and at what price. You also will
receive a year-end statement every January. This will allow you or your tax
preparer to determine the tax consequences of each redemption. However, be sure
to keep your regular account statements; their information will be essential in
calculating the amount of your capital gains or losses.
A redemption is treated as a sale for federal income tax purposes. Your
redemption proceeds may be more or less than your cost depending upon the net
asset value at the time of the redemption and, as a result, you may realize a
capital gain or loss. Gain or loss is computed on the difference between the
fair market value of the shares redeemed and their cost basis.
To invest in any of the State Farm Mutual Funds, you must be a U.S. resident
with a social security or taxpayer identification number. When you sign your
account application, you must certify that your social security or taxpayer
identification number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you fail to comply with
this procedure, the IRS can require the Fund to withhold 31% of your taxable
distributions and redemptions.
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23
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the financial
performance of each Fund for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Ernst & Young, LLP, whose report, along with
each Fund's financial statements, is included in the November 30, 1999 annual
report. The annual report may be obtained from the Funds upon request without
charge.
PER SHARE INCOME AND CAPITAL CHANGES (FOR A SHARE OUTSTANDING THROUGHOUT
EACH YEAR):
GROWTH FUND
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 44.65 39.48 34.55 29.40 22.63
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.62 0.61 0.62 0.63 0.50
Net gain or (loss) on investments
(both realized and unrealized) 7.33 6.33 7.23 5.17 6.97
-------- ------- ------- ------- -------
Total from investment operations 7.95 6.94 7.85 5.80 7.47
-------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Net investment income (0.59) (0.64) (0.61) (0.53) (0.52)
Capital gains (0.05) (1.13) (2.31) (0.12) (0.18)
-------- ------- ------- ------- -------
Total distributions (0.64) (1.77) (2.92) (0.65) (0.70)
-------- ------- ------- ------- -------
Net asset value, end of year $ 51.96 44.65 39.48 34.55 29.40
======== ======= ======= ======= =======
TOTAL RETURN 17.93% 18.17% 24.80% 20.09% 33.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) $2,786.4 2,285.5 1,821.1 1,362.9 1,068.6
Ratio of expenses to average net assets 0.12% 0.12% 0.12% 0.13% 0.14%(a)
Ratio of net investment income to average net assets 1.27% 1.47% 1.78% 1.88% 1.95%
Portfolio turnover rate 2% 1% 6% 16% 3%
</TABLE>
(a) The ratio based on net custodian expenses would have been .13% in 1995.
- -------
24
<PAGE>
BALANCED FUND
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $49.54 46.09 42.04 37.76 31.12
INCOME FROM INVESTMENT OPERATIONS
Net investment income 1.51 1.54 1.40 1.39 1.25
Net gain or (loss) on investments
(both realized and unrealized) 3.23 4.14 5.45 4.38 6.77
------ ------ ------ ------ ------
Total from investment operations 4.74 5.68 6.85 5.77 8.02
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Net investment income (1.47) (1.54) (1.47) (1.30) (1.19)
Capital gains (0.02) (0.69) (1.33) (0.19) (0.19)
------ ------ ------ ------ ------
Total distributions (1.49) (2.23) (2.80) (1.49) (1.38)
------ ------ ------ ------ ------
Net asset value, end of year $52.79 49.54 46.09 42.04 37.76
====== ====== ====== ====== ======
TOTAL RETURN 9.72% 12.72% 17.33% 15.78% 26.53%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) $990.7 893.2 762.3 626.1 499.7
Ratio of expenses to average net assets 0.13% 0.14% 0.14% 0.15% 0.17%(a)
Ratio of net investment income to average net assets 2.96% 3.34% 3.42% 3.63% 3.66%
Portfolio turnover rate 5% 2% 6% 9% 6%
</TABLE>
(a) The ratio based on net custodian expenses would have been .16% in 1995.
-------
25
<PAGE>
INTERIM FUND
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.98 9.85 9.98 10.15 9.72
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.64 0.68 0.69 0.70 0.70
Net gain or (loss) on investments
(both realized and unrealized) (0.51) 0.13 (0.13) (0.17) 0.43
------ ----- ----- ----- -----
Total from investment operations 0.13 0.81 0.56 0.53 1.13
------ ----- ----- ----- -----
LESS DISTRIBUTIONS
Net investment income (0.64) (0.68) (0.69) (0.70) (0.70)
------ ----- ----- ----- -----
Total distributions (0.64) (0.68) (0.69) (0.70) (0.70)
------ ----- ----- ----- -----
Net asset value, end of year $ 9.47 9.98 9.85 9.98 10.15
====== ===== ===== ===== =====
TOTAL RETURN 1.35% 8.31% 5.87% 5.44% 11.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) $151.6 154.1 112.8 107.6 104.7
Ratio of expenses to average net assets 0.20% 0.21% 0.22% 0.23%(a) 0.25%(a)
Ratio of net investment income to average net assets 6.63% 6.80% 7.03% 7.03% 7.00%
Portfolio turnover rate 12% 14% 15% 17% 17%
</TABLE>
(a) The ratio based on net custodian expenses would have been .22% in 1996
and .24% in 1995.
- -------
26
<PAGE>
MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.55 8.43 8.44 8.50 7.88
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.43 0.45 0.47 0.48 0.48
Net gain or (loss) on investments
(both realized and unrealized) (0.43) 0.12 (0.01) (0.06) 0.62
------ ----- ----- ----- -----
Total from investment operations -- 0.57 0.46 0.42 1.10
------ ----- ----- ----- -----
LESS DISTRIBUTIONS
Net investment income (0.43) (0.45) (0.47) (0.48) (0.48)
Capital gain(a) -- -- -- -- --
------ ----- ----- ----- -----
Total distributions (0.43) (0.45) (0.47) (0.48) (0.48)
------ ----- ----- ----- -----
Net asset value, end of year $ 8.12 8.55 8.43 8.44 8.50
====== ===== ===== ===== =====
TOTAL RETURN 0.04% 6.82% 5.68% 5.21% 14.25%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) $358.6 363.1 336.4 321.1 307.4
Ratio of expenses to average net assets 0.16% 0.15% 0.15% 0.16% 0.17%(b)
Ratio of net investment income to average net assets 5.20% 5.29% 5.61% 5.76% 5.80%
Portfolio turnover rate 10% 6% 6% 6% 7%
</TABLE>
(a) Distributions representing less than $.01 per share were made in 1997
and 1996.
(b) The ratio based on net custodian expenses would have been .16% in 1995.
-------
27
<PAGE>
You can obtain more information about each Fund's investments and
performance in its semiannual and annual reports to shareowners. Those reports
discuss the market conditions and investment strategies that significantly
affected each Fund's performance during their last fiscal year.
You may wish to read the Statement of Additional Information (SAI) for more
information about the Funds. The SAI is incorporated into this prospectus, which
means that it is considered to be part of this prospectus.
You can obtain free copies of the Funds' semiannual and annual reports and
the SAI, request other information, and discuss your questions about the Funds
by writing or calling:
STATE FARM MUTUAL FUNDS
ONE STATE FARM PLAZA
BLOOMINGTON, ILLINOIS 61710-0001
309-766-2029
800-447-0740
Text-only versions of all Fund documents can be viewed online or downloaded
from the SEC at http://www.sec.gov. You can also obtain copies by visiting the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at 202-942-8090.
Copies of this information may be obtained, after paying a duplicating fee, by
sending your request to the SEC's Public Reference Section, 450 5th Street,
N.W., Washington, DC 20549-0102 or by electronic mail request at the following
e-mail address: [email protected].
<TABLE>
<S> <C>
STATE FARM GROWTH FUND, INC. 811-1519
STATE FARM BALANCED FUND, INC. 811-1520
STATE FARM INTERIM FUND, INC. 811-2726
STATE FARM MUNICIPAL BOND
FUND, INC. 811-2727
</TABLE>
- -------
28
<PAGE>
State Farm Mutual Funds BULK RATE
One State Farm Plaza, D-3 U.S. POSTAGE
Bloomington, IL 61710-0001 PAID
FORWARDING SERVICE REQUESTED PERMIT 439
ELK GROVE, IL
[LOGO] STATE FARM
MUTUAL FUNDS
(309) 766-2029 (800) 447-0740
190-4019.1-CH REV. 01-2000 Printed in U.S.A.
<PAGE>
STATE FARM MUTUAL FUNDS
STATE FARM GROWTH FUND, INC.
STATE FARM BALANCED FUND, INC.
STATE FARM INTERIM FUND, INC.
STATE FARM MUNICIPAL BOND FUND, INC.
ONE STATE FARM PLAZA, BLOOMINGTON, ILLINOIS 61710-0001
(309)766-2029 (800)477-0740
STATEMENT OF ADDITIONAL INFORMATION -- APRIL 1, 2000
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the prospectus of State Farm Growth Fund, Inc., State
Farm Balanced Fund, Inc., State Farm Interim Fund, Inc. and State Farm Municipal
Bond Fund, Inc. (each, a "Fund," and collectively, the "Funds") dated April 1,
2000. The prospectus contains information you should know before investing in a
Fund, and may be obtained without charge by contacting the Funds at the address
or telephone numbers shown above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Information About the Funds................................................................................ 2
Investment Techniques and Risks............................................................................ 2
Investment Policies and Restrictions....................................................................... 6
Purchase and Redemption of Fund Shares..................................................................... 9
Investment Advisory and Other Services..................................................................... 10
Management Services Agreement.............................................................................. 10
Service Agreement.......................................................................................... 11
Underwriting Agreement..................................................................................... 12
Transfer Agent Agreement................................................................................... 12
Performance Information.................................................................................... 12
Portfolio Transactions..................................................................................... 13
Additional Tax Considerations.............................................................................. 14
Directors and Officers..................................................................................... 16
General Information........................................................................................ 22
Description of Bond Ratings................................................................................ 23
Ratings by Moody's......................................................................................... 23
S&P Ratings................................................................................................ 24
Financial Statements....................................................................................... 26
</TABLE>
<PAGE>
INFORMATION ABOUT THE FUNDS
Each Fund is a diversified open-end management investment company
organized as a corporation under the laws of the State of Maryland. The dates
of each Fund's organization are: Growth Fund and Balanced Fund, December 9,
1966; Interim Fund, November 10, 1976; and Municipal Bond Fund, December 6,
1976. Each share of a Fund's capital stock is entitled to share pro rata in
any dividends and other distributions on shares declared by the Board of
Directors, to one vote per share in elections of directors and other matters
presented to shareowners, and to equal rights per share in the event of
liquidation. As separate legal entities, each Fund files a separate
registration statement with the Securities and Exchange Commission. There is
the possibility that one Fund may be liable for any statements, inaccuracy,
or incomplete disclosure in the prospectus concerning another Fund.
INVESTMENT TECHNIQUES AND RISKS
Equity Securities
Growth Fund and Balanced Fund invest in common stocks, which represent an
equity interest (ownership) in a business. This ownership interest often gives
the Funds the right to vote on measures affecting the company's organization and
operations. The Funds also invest in other types of equity securities,
including preferred stocks and securities convertible into common stocks.
Over time, common stocks have historically provided superior long-term
capital growth potential. However, stock prices may decline over short or
even extended periods. Stock markets tend to move in cycles, with periods of
rising stock prices and periods of falling stock prices. As a result, the
Funds should be considered long-term investments, designed to provide the
best results when held for several years or more. The Funds may not be
suitable investments if you have a short-term investment horizon or are
unwilling to accept fluctuations in share price, including significant
declines over a given period.
FOREIGN SECURITIES
Each of Growth Fund and Balanced Fund may invest up to 25% of its assets in
foreign securities not publicly traded in the United States. The Funds'
investments in foreign securities may include American Depositary Receipts
(ADRs), European Depositary Receipts (EDRs) or Global Depositary Receipts
(GDRs). ADRs are receipts typically issued by an American bank or trust company
evidencing ownership of the underlying securities. EDRs are European receipts
evidencing a similar arrangement. GDRs are receipts that may trade in U.S. or
non-U.S. markets. The Fund may invest in sponsored or unsponsored ADRs, EDRs or
GDRs. In the case of an unsponsored depositary receipt, a Fund is likely to bear
its proportionate share of the expenses of the depository and it may have
greater difficulty in receiving shareowner communications than it would have
with a sponsored depositary receipt. Neither Fund intends to invest more than 5%
of its net assets in unsponsored depositary receipts.
With respect to portfolio securities that are issued by foreign issuers or
denominated in foreign currencies, the Fund's investment performance is affected
by the strength or weakness of the U.S. dollar against those currencies. For
example, if the dollar falls in value relative to the Japanese yen, the dollar
value of a yen-denominated stock held in the portfolio will rise even though the
price of the stock remains unchanged. Conversely, if the dollar rises in value
relative to the yen, the dollar value of the yen-denominated stock will fall.
Shareowners should understand and consider carefully the risks involved in
foreign investing. Investments in foreign securities are generally denominated
in foreign currencies and involve certain considerations comprising both risk
and opportunity not typically associated with investing in U.S. securities.
These considerations include: fluctuations in exchange rates of foreign
currencies; possible imposition of exchange control regulation or currency
restrictions that would prevent cash from being brought back into the United
States; less public information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers, and issuers of
securities; lack of uniform accounting, auditing,
2
<PAGE>
and financial reporting standards; lack of uniform settlement periods and
trading practices; less liquidity and frequently greater price volatility in
foreign markets than in the United States; possible imposition of foreign taxes;
possible investment in securities of companies in developing as well as
developed countries; and sometimes less advantageous legal, operational, and
financial protections applicable to foreign sub-custodial arrangements.
Although Growth Fund and Balanced Fund try to invest in companies
domiciled and doing business in countries having stable political
environments, there is the possibility of expropriation or confiscatory
taxation, seizure or nationalization of foreign bank deposits or other
assets, establishment of exchange controls, the adoption of foreign
government restrictions, or other adverse political, social or diplomatic
developments that could affect investment in these nations.
EUROPEAN CURRENCY UNIFICATION. Effective January 1, 1999, eleven of the
fifteen member countries of the European Union adopted a single European
currency, the euro. The countries participating in the Economic and Monetary
Union ("EMU") are Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands, Portugal and Spain. The four European Union
countries not currently participating in the EMU are Great Britain, Denmark,
Sweden and Greece. A new European Central Bank manages the monetary policy of
the new unified region, and the exchange rates among the EMU member countries
are permanently fixed. National currencies will continue to circulate until they
are replaced by euro coins and bank notes by the middle of 2002.
DEBT SECURITIES
In pursuing its investment objective, a Fund may invest in debt securities
of corporate and governmental issuers. The risks inherent in debt securities
depend primarily on the term and quality of the obligations in a Fund's
portfolio as well as on market conditions. A decline in the prevailing levels of
interest rates generally increases the value of debt securities, while an
increase in rates usually reduces the value of those securities.
Growth Fund may invest in fixed income investments such as United States
government obligations, investment grade bonds and preferred stocks. Balanced
Fund invests in fixed income securities that are "investment grade"-- that
is, within the four highest grades assigned by Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") or, if unrated,
deemed to be of comparable quality by the Manager. Interim Fund usually
invests in U.S. government securities, but may also invest in corporate debt
securities rated in one of the three highest grades by S&P or Moody's or, if
unrated, considered by the Manager to be of comparable quality. Municipal
Bond Fund invests at least 70% of its total assets in municipal bonds rated
in one of the three highest grades by Moody's or S&P, and may invest up to
30% of its total assets in bonds that are unrated or rated less than A. If
the rating of a security held by the Fund is lost or reduced, the Fund is not
required to sell the security, but the Manager will consider that fact in
determining whether the Fund should continue to hold the security. See
"Description of Bond Ratings."
Debt securities in the fifth highest grade may possess speculative
characteristics, and changes in economic conditions are more likely to affect
the issuer's capacity to pay interest and repay principal. Securities that
are rated below investment grade (that is, BB or lower for S&P and Ba and
lower for Moody's) are considered predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal according to the terms of
the obligation and therefore carry greater investment risk, including the
possibility of issuer default and bankruptcy.
3
<PAGE>
CONVERTIBLE SECURITIES
Convertible securities include any corporate debt security or preferred
stock that may be converted into underlying shares of common stock. The common
stock underlying convertible securities may be issued by a different entity than
the issuer of the convertible securities. Convertible securities entitle the
holder to receive interest payments paid on corporate debt securities or the
dividend preference on a preferred stock until such time as the convertible
security matures or is redeemed or until the holder elects to exercise the
conversion privilege.
The value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers and by the value of a
convertible security viewed without regard to its conversion feature (i.e.,
strictly on the basis of its yield). The estimated price at which a convertible
security would be valued by the marketplace if it had no conversion feature is
sometimes referred to as its "investment value." The investment value of the
convertible security will typically fluctuate inversely with changes in
prevailing interest rates. However, at the same time, the convertible security
will be influenced by its "conversion value," which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock.
By investing in convertible securities, a Fund obtains the right to benefit
from the capital appreciation potential in the underlying stock upon exercise of
the conversion right, while earning higher current income than would be
available if the stock were purchased directly. In determining whether to
purchase a convertible security, the Manager will consider the same criteria
that would be considered in purchasing the underlying stock. Although
convertible securities purchased by a Fund are frequently rated investment
grade, the Fund also may purchase unrated securities or securities rated below
investment grade if the securities meet the Manager's other investment criteria.
Convertible securities rated below investment grade (a) tend to be more
sensitive to interest rate and economic changes, (b) may be obligations of
issuers who are less creditworthy than issuers of higher quality convertible
securities, and (c) may be more thinly traded due to such securities being less
well known to investors than either common stock or conventional debt
securities. As a result, the Manager's own investment research and analysis
tends to be more important in the purchase of such securities than other
factors.
MUNICIPAL BONDS
Municipal Bond Fund invests primarily in a diversified selection of
municipal bonds (as defined in the prospectus) with maturities of one to 17
years, although issues with longer maturities may be purchased from time to
time. A majority of the Fund's investments will usually be in issues with
maturities longer than five years. There can be no assurance that current income
will be sufficient to offset decreases in the net asset value per share that
will result if prevailing interest rates rise in relation to the rates of
interest on municipal bonds in the Fund's portfolio.
Assets not invested in municipal bonds will be held in cash or invested in
money market securities and U.S. treasury securities. Money market securities
include short-term obligations of the U.S. government and its agencies and
instrumentalities and other money market instruments such as domestic bank
certificates of deposit, bankers' acceptances and corporate commercial paper
rated in the highest grade. From time to time more than 20% of the Fund's assets
may be invested in money market securities or held as cash for defensive reasons
in anticipation of a decline in the market values of debt securities, or pending
the investment of proceeds from the sale of Fund shares or from the sale of
portfolio securities, or in order to have highly liquid securities available to
meet possible redemptions.
The obligations of municipal bond issuers are subject to the laws of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors. In addition, the obligations of such issuers may become subject to
the laws enacted in the future by Congress, state legislatures or referenda
extending the time of payment of principal and/or interest, or imposing other
constraints upon enforcement of such obligations
4
<PAGE>
or upon municipalities to levy taxes. There is also the possibility that, as a
result of legislation or other conditions, the power or ability of any issuer to
pay, when due, the principal and interest on its municipal obligations may be
materially affected.
DEFENSIVE INVESTMENTS
Under normal conditions, each Fund is substantially fully invested, although
each Fund may invest without limit in corporate or government obligations or
hold cash or cash equivalents if the Manager determines that a temporary
defensive position is advisable. During those periods, a Fund's assets may not
be invested in accordance with its strategy and the Fund may not achieve its
investment objective.
REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which a Fund purchases a security
from a bank or recognized securities dealer and simultaneously commits to resell
that security to the bank or dealer at an agreed-upon price, date, and market
rate of interest unrelated to the coupon rate or maturity of the purchased
security. Although repurchase agreements carry certain risks not associated with
direct investments in securities, a Fund will enter into repurchase agreements
only with banks and dealers the Manager believes present minimum credit risks in
accordance with guidelines approved by the Board of Directors. The Manager will
review and monitor the creditworthiness of such institutions, and will consider
the capitalization of the institution, the Manager's prior dealings with the
institution, any rating of the institution's senior long-term debt by
independent rating agencies, and other relevant factors.
A Fund will invest only in repurchase agreements collateralized at all times
in an amount at least equal to the repurchase price plus accrued interest. To
the extent that the proceeds from any sale of such collateral upon a default in
the obligation to repurchase were less than the repurchase price, the Fund would
suffer a loss. If the financial institution which is party to the repurchase
agreement petitions for bankruptcy or otherwise becomes subject to bankruptcy or
other liquidation proceedings there may be restrictions on a Fund's ability to
sell the collateral and the Fund could suffer a loss. However, with respect to
financial institutions whose bankruptcy or liquidation proceedings are subject
to the U.S. Bankruptcy Code, each Fund intends to comply with provisions under
such Code that would allow it immediately to resell such collateral. None of the
Funds intends to invest more than 5% of its total assets in repurchase
agreements.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES; REVERSE REPURCHASE AGREEMENTS
A Fund may purchase securities on a when-issued or delayed delivery basis.
Although the payment and interest terms of these securities are established at
the time the Fund enters into the commitment, the securities may be delivered
and paid for a month or more after the date of purchase, when their value may
have changed. A Fund makes such commitments only with the intention of actually
acquiring the securities, but may sell the securities before the settlement date
if the Manager deems it advisable for investment reasons.
A Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which the Fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
securities because it avoids certain market risks and transaction costs.
At the time a Fund enters into a binding obligation to purchase securities
on a when-issued basis or enters into a reverse repurchase agreement, assets of
the Fund having a value at least as great as the purchase price of the
securities to be purchased will be segregated on the books of the Fund and held
by the custodian throughout the period of the obligation. The use of these
investment strategies, as well as any borrowing by a Fund, may increase NAV
fluctuation. None of the Funds has any present intention of investing more than
5% of its total assets in reverse repurchase agreements.
5
<PAGE>
PORTFOLIO TURNOVER
None of the Funds intends to invest with the objective of obtaining
short-term trading profits. Accordingly, neither Growth Fund nor Balanced Fund
expect that its annual portfolio turnover rate will be higher than 50%. A 50%
turnover rate might occur, for example, if securities representing half of the
average value of the Fund's portfolio were replaced in a period of one year.
Interim Fund expects that its annual portfolio turnover rate will usually be
less than 100%, but the rate of turnover will not be a limiting factor when the
Manager considers it advisable to sell or purchase securities. The annual
portfolio turnover rate would be 100%, for example, if an amount of securities
equal to the average value of all portfolio securities during the year were sold
and reinvested, exclusive in both cases of all securities with maturities at
time of acquisition of one year or less.
In periods of relatively stable interest rate levels, Municipal Bond Fund
does not expect its annual portfolio turnover rate to exceed 50% for issues with
maturities longer than one year at the time of purchase. In years of sharp
fluctuations in interest rates, however, the annual portfolio turnover rate may
exceed 50%. Most of the sales in the Fund's portfolio will occur when the
proportion of securities owned with longer term maturities is reduced in
anticipation of a bond market decline (rise in interest rates), or increased in
anticipation of a bond market rise (decline in interest rates). The rate of
portfolio turnover will not be a limiting factor and, accordingly, will always
be incidental to transactions undertaken with the view of achieving the Fund's
investment objective.
Historical portfolio turnover rate information is set forth in the Funds'
prospectus in the Financial Highlights table.
DIVERSIFICATION AND CONCENTRATION
As diversified investment companies, it is the policy of each Fund to
diversify its investments among both issuers and industries. Accordingly, no
Fund will invest more than 5% of its assets (valued at the time of investment)
in the securities of any one issuer (other than obligations of the U.S.
Government), except that it may invest an aggregate of up to 25% of its assets
(valued at time of investment) without subjection to that restriction, nor will
it purchase more than 10% of the securities of any class of any issuer. Further,
no Fund will concentrate its investments in any particular industry and will not
purchase a security if, as a result of such purchase, more than 25% of its
assets taken at market value would be invested in a particular industry.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective and certain fundamental investment policies of each
Fund are described in the Funds' prospectus. The investment objective of each
Fund can only be changed with the approval of the shareholders of the Fund.
Each Fund is also subject to certain restrictions upon its investments which
provide that, without the approval of a majority of the Fund's shareowners, the
Fund may not:
GROWTH FUND AND BALANCED FUND ONLY:
(1) Invest more than 5% of the market value of its assets (valued at the
time of investment) in the securities of any one issuer, except that it may
invest an aggregate of up to 25% of its assets (valued at time of investment)
without subjection to that restriction, and excluding from such restriction
investments in obligations of the U.S. government, and may not purchase more
than 10% of the voting securities, more than 10% of the aggregate long-term
debt, or more than 10% of any other class of security, of any issuer;
(2) Invest more than 5% of the market value of its total assets (at the time
of the investment) in securities of companies with records of less than three
years continuous operation, including that of predecessors;
(3) Make loans except by the purchase of bonds or other obligations of types
commonly distributed publicly or privately to financial institutions;
6
<PAGE>
(4) Borrow money from any source in excess of 10% of its gross assets (taken
at cost), and then only as a temporary measure for extraordinary or emergency
purposes; or mortgage, pledge or hypothecate in excess of 15% of its gross
assets (taken at cost). [Neither Fund has ever borrowed, and neither Fund has
any present intention to do so. However, if any such borrowings were made by
either Fund, the Fund would be required by the Investment Company Act of 1940 to
maintain 300% asset coverage.];
(5) Purchase or retain the securities of any issuer if those officers and
directors of the Fund or the investment adviser owning individually more than
1/2 of 1% of the securities of such issuer together own more than 5% of the
securities of such issuer;
(6) Purchase securities on margin, sell securities short, or engage in puts
or calls or any combination thereof;
(7) Act as a securities underwriter or invest in real estate, commodities or
commodity contracts;
(8) Purchase the securities of any other investment company or investment
trust, except by purchases in the open market involving no commission or profit
(other than the customary broker's commission) to a sponsor or dealer, or except
as a part of a plan of merger or consolidation;
(9) Invest in the securities of a company for the purpose of exercising
management or control; or
(10) Concentrate its investments in any one industry. [However, the
proportions of the Fund's assets invested in a particular industry or group of
industries may shift from time to time depending upon management's appraisal of
market and business conditions. Each Fund considers investment of 25% or more of
the value of its total assets in any one industry to be concentration.]
The preceding investment restrictions have been adopted by Growth Fund and
Balanced Fund and, except for the bracketed language, which is explanatory, may
not be changed as to a Fund without the consent of the shareowners holding a
majority of the Fund's shares. A majority of the shares, as used in this
Statement of Additional Information, means the vote of (i) 67% or more of the
shares present and entitled to vote at a meeting, if the owners of more than 50%
of the shares are present or represented by proxy, or (ii) more than 50% of the
shares, whichever is less.
Each of Growth Fund and Balanced Fund has also adopted the following
investment restrictions which, while there is no present intention to do so, may
be changed without approval of the shareowners. Under these restrictions each
Fund may not:
(a) Invest more than 15% of its net assets (taken at market value at the
time of each purchase) in illiquid securities, including repurchase
agreements maturing in more than seven days;
(b) Invest more than 25% of the market value of its total assets (at the
time of the investment) in foreign securities which are not publicly traded in
the United States; or
(c) Mortgage, pledge or hypothecate in excess of 10% of its net assets
(taken at market value).
If a percentage restriction is not violated at the time of investment or
borrowing, a change in the value of the Fund's net assets or in the
outstanding securities of an issuer will not result in a violation of the
restriction.
7
<PAGE>
INTERIM FUND AND MUNICIPAL BOND FUND ONLY:
(1) Invest more than 5% of the Fund's total assets in securities of any one
issuer except securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, which may be purchased without limitation;
(2) Borrow money, except from banks for temporary or emergency purposes
and not for investment purposes, and then only in an amount not exceeding 5% of
the value of the Fund's total assets at the time of borrowing;
(3) Pledge, mortgage or hypothecate the Fund's assets, except that, to
secure borrowings permitted by subparagraph (2) above, the Fund may pledge
securities having a market value not exceeding 10% of the Fund's net asset
value;
(4) Underwrite any securities issued by other persons;
(5) INTERIM FUND. Purchase or sell real estate, but the Fund may invest in
securities secured by real estate or interests therein;
MUNICIPAL BOND FUND. Purchase or sell real estate, but the Fund may
invest in municipal bonds or money market instruments secured by real estate or
interests therein;
(6) Purchase or sell commodities or commodities contracts, or interests in
oil, gas or other mineral exploration or development programs;
(7) INTERIM FUND. Make loans to others (except to the extent that the
purchase of debt securities may be deemed the making of a loan);
MUNICIPAL BOND FUND. Make loans to others (except to the extent that the
purchase of municipal bonds, money market instruments or U.S. treasury
securities may be deemed the making of a loan);
(8) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions, or purchase or sell any put or call options or combinations
thereof;
(9) Purchase or retain for the portfolio of the Fund the securities of any
issuer, if, to the Fund's knowledge, those directors and officers of the Fund
who individually own more than 1/2 of 1% of the outstanding securities of such
issuer together own more than 5% of such outstanding securities;
(10) Purchase more than 10% of any class of securities of any one issuer (for
this purpose all indebtedness of an issuer shall be deemed a single class)
except U.S. government obligations;
(11) Purchase securities subject to restrictions on disposition under the
Securities Act of 1933;
(12) Purchase securities of other investment companies or investment trusts,
except by purchases in the open market involving no commission or profit (other
than the customary broker's commission) to a sponsor or dealer, and then only in
an amount up to 5% of the value of the Fund's total assets, or except as a part
of a plan of merger or consolidation;
(13) Invest in the securities of a company for the purpose of exercising
management or control;
(14) Invest more than 5% of the market value of the Fund's total assets (at
the time of the investment) in securities of companies with records of less than
three years' continuous operation, including that of predecessors;
(15) Invest more than 25% of the value of the Fund's total assets in any one
industry except that the Fund may invest more than 25% of the value of the
Fund's total assets in certificates of deposit or bankers' acceptances of U.S.
commercial banks when deemed advisable in view of yield differentials and money
market conditions (this restriction is not applicable to municipal bonds and
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities).
For purposes of restriction number 15 above, Interim Fund and Municipal
Bond Fund may invest more than 25% of the value of its total assets in money
market instruments, including certificates of deposit, commercial paper,
treasury bills or banker's acceptances of U.S. commercial banks when higher
than normal redemptions are expected or it is anticipated that interest rates
will increase in the future. In addition, Municipal Bond Fund may invest
more than 25% of the value of its total assets in such investments in order
to take a temporary defensive position in response to adverse market,
economic, political or other conditions.
8
<PAGE>
For purposes of restriction number 15 above, Interim Fund and Municipal
Bond Fund may invest more than 25% of the value of its total assets in money
market instruments, including certificates of deposit, commercial paper,
treasury bills or bankers' acceptances of U.S. commercial banks when higher
than normal redemptions are expected or it is anticipated that interest rates
will increase in the future. In addition, Municipal Bond Fund may invest more
than 25% of the value of its total assets in such investments in order to
take a temporary defensive position in response to adverse market, economic,
political or other conditions.
For purposes of restrictions numbered 1, 9 and 10 above, the Funds will
classify the issuer or issuers of a security according to the entity or entities
which constitute the source of payment of interest and principal on the
security.
Other than for purposes of restriction number 3 above, if a percentage
restriction is not violated at the time of investment or borrowing, a change in
the value of the Fund's net assets or in the outstanding securities of an issuer
will not result in a violation of the restriction.
The preceding investment restrictions have been adopted by Interim Fund
and Municipal Bond Fund and may not be changed as to a Fund without the
consent of the shareowners holding a majority of the Fund's shares. A
majority of the shares, as used in this Statement of Additional Information,
means the vote of (i) 67% or more of the shares present and entitled to vote
at a meeting, if the owners of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares, whichever is less.
PURCHASE AND REDEMPTION OF FUND SHARES
Purchases and redemptions of Fund shares are discussed fully in the
prospectus under the headings "How to Buy Fund Shares" and "How to Redeem Fund
Shares." Determination of net asset value is set forth in the prospectus under
the heading "How to Buy Fund Shares -- Share Price."
Share purchase and redemption orders will be priced at a Fund's net asset
value ("NAV") next computed after such orders are received by the Fund's
transfer agent. The net asset value of each of Growth Fund, Balanced Fund and
Interim Fund is determined as of the time of the close of regular session
trading on the New York Stock Exchange ("NYSE"), (currently at 3:00 p.m.,
Central time) on each day when the NYSE is open. Shares of Municipal Bond
Fund are priced at 1:00 p.m. Central time. The NYSE is scheduled to be open
Monday through Friday throughout the year, except for certain federal and
other holidays. The net asset value per share of each Fund is computed by
dividing the difference between the value of the Fund's assets and
liabilities by the number of shares outstanding. Interest earned on portfolio
securities and expenses, including fees payable to the Manager, are accrued
daily.
Computation of NAV (and the sale and redemption of fund shares) may be
suspended or postponed during any period when (a) trading on the NYSE is
restricted, as determined by the Securities and Exchange Commission ("SEC"), or
the NYSE is closed for other than customary weekend and holiday closings, (b)
the SEC has by order permitted such suspension, or (c) an emergency, as
determined by the SEC, exists making disposal of portfolio securities or
valuation of the net assets of the funds not reasonably practicable.
Equity securities (including common stocks, preferred stocks, convertible
securities and warrants) and call options written on all portfolio securities,
listed or traded on a national exchange are valued at their last sale price on
that exchange prior to the time when assets are valued. In the absence of any
exchange sales on that day and for unlisted equity securities, such securities
are valued at the last sale price on the NASDAQ (National Association of
Securities Dealers Automated Quotations) National Market. In the absence of any
National Market sales on that day, equity securities are valued at the last
reported bid price.
Debt securities traded on a national exchange are valued at their last sale
price on that exchange prior to the time when assets are valued, or, lacking any
sales, at the last reported bid price. Debt securities other than money market
instruments traded in the over-the-counter market are valued at the last
reported bid price or at yield equivalent as obtained from one or more dealers
that make markets in the securities.
If the market quotations described above are not available, debt securities,
other than short-term debt securities, may be valued at fair value as determined
by one or more independent pricing services (each, a "Service"). The Service may
use available market quotations and employ electronic data processing
9
<PAGE>
techniques and/or a matrix system to determine valuations. Each Service's
procedures are reviewed by the officers of each Fund under the general
supervision of the Board of Directors.
Debt instruments held with a remaining maturity of 60 days or less (other
than U.S. Treasury bills) are generally valued on an amortized cost basis. Under
the amortized cost basis method of valuation, the security is initially valued
at its purchase price (or in the case of securities purchased with more than 60
days remaining to maturity, the market value on the 61st day prior to maturity),
and thereafter by amortizing any premium or discount uniformly to maturity. If
for any reason the Board of Directors believes the amortized cost method of
valuation does not fairly reflect the fair value of any security, fair value
will be determined in good faith by or under the direction of the Board of
Directors as in the case of securities having a maturity of more than 60 days.
Trading in the foreign securities of a Fund's portfolio may take place in
various foreign markets at certain times and on certain days (such as Saturday)
when the NYSE is not open for business and the Funds do not calculate their
NAVs. Conversely, trading in a Fund's foreign securities may not occur at times
and on days when the NYSE is open. Because of the different trading hours in
various foreign markets, the calculation of NAV does not take place
contemporaneously with the determinations of the prices of many of the foreign
securities in a Fund's portfolio. Those timing differences may have a
significant effect on the Fund's NAV.
INVESTMENT ADVISORY AND OTHER SERVICES
Each Fund has an Investment Advisory and Management Services Agreement, a
Transfer Agent Agreement and an Underwriting Agreement with State Farm
Investment Management Corp. (the "Manager"). There is a separate Service
Agreement among each Fund, the Manager and State Farm Mutual Automobile
Insurance Company ("Auto Company"). Each of these four agreements may be
continued beyond its current term only so long as such continuance is
specifically approved at least annually by the Board of Directors of each Fund
including a majority of the directors who are not interested persons of any
party to such agreement or by vote of a majority of the outstanding shares of
the Fund and, in either case, by vote of a majority of the directors who are not
interested persons of any party to such agreement, except in their capacity as
directors of the Fund, cast in person at a meeting called for the purpose of
voting on such approval. Each agreement may be terminated upon 60 days' written
notice by any of the parties to the agreement, or by a majority vote of the
outstanding shares, and will terminate automatically upon its assignment by any
party.
Since its inception in 1967, the Manager's sole business has been to act as
investment adviser, principal underwriter, transfer agent and dividend
disbursing agent for the State Farm Mutual Funds. The Manager is wholly-owned by
State Farm Mutual Automobile Insurance Company, which is an Illinois mutual
insurance company.
MANAGEMENT SERVICES AGREEMENT
Pursuant to the Investment Advisory and Management Services Agreements, the
Manager: (1) acts as each Fund's investment adviser; (2) manages each Fund's
investments; (3) administers each Fund's business affairs; (4) provides clerical
personnel, suitable office space, necessary facilities and equipment and
administrative services; and (5) permits its officers and employees to serve as
directors, officers and agents of a Fund, without compensation from the Fund, if
duly elected or appointed.
Each agreement requires a Fund to pay: (1) the fees and expenses of
independent auditors, legal counsel, the custodian, the transfer agent, the
registrar, the dividend disbursing agent and directors who are not affiliated
with the Manager; and (2) the cost of preparing and distributing stock
certificates, reports, notices and proxy materials to shareowners, brokerage
commissions, interest, taxes, federal securities registration fees and
membership dues in the Investment Company Institute or any similar organization.
The Manager is required to pay all other Fund expenses.
10
<PAGE>
As compensation for the services and facilities furnished, each Fund pays a
management fee (computed on a daily basis and paid quarterly) at the annual
rates shown below:
GROWTH FUND AND BALANCED FUND:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS RATE OF FEE
- -------------------------------------------------------------- -------------
<S> <C>
First $100 million............................................ 0.20%
$100 million to $200 million.................................. 0.15%
In excess of $200 million..................................... 0.10%
</TABLE>
INTERIM FUND AND MUNICIPAL BOND FUND:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS RATE OF FEE
- -------------------------------------------------------------- -------------
<S> <C>
First $50 million............................................. 0.20%
$50 million to $100 million................................... 0.15%
In excess of $100 million..................................... 0.10%
</TABLE>
The management fee will be reduced, or the Manager will reimburse a Fund, by
any amount necessary to prevent a Fund's total expenses (excluding taxes,
interest, extraordinary litigation expenses, brokerage commissions and other
portfolio transaction costs) from exceeding 0.40% of the average net assets of
the Fund on an annual basis.
For the fiscal years ended November 30, 1999, 1998 and 1997, the Manager
earned $2,740,037, $2,221,492 and $1,705,166, respectively, for its services
as investment adviser to Growth Fund. For its services to Balanced Fund, the
Manager earned $1,113,753, $980,972 and $829,724, respectively; for its
services to Interim Fund, the Manager earned $230,126, $199,209 and $184,551
respectively; and for its services to Municipal Bond Fund, the Manager earned
$442,211, $425,519 and $400,859, respectively. Neither the Manager nor any
affiliated company receives any brokerage commissions from the Fund as such
business is transacted with non-affiliated broker-dealers.
Some affiliated companies of the Manager (including Auto Company) and the
other State Farm funds managed by the Manager carry on extensive investment
programs. Securities considered as investments for a Fund may also be
appropriate for the accounts of one or more of such companies. Although
investment decisions for a particular Fund are made independently from those for
such other companies, securities of the same issuer may be acquired, held or
disposed of by the Fund and one or more of such other companies at or about the
same time, if consistent with the investment objectives and policies of the
respective parties. When both the Fund and one or more of such other companies
are concurrently engaged in the purchase or sale of the same securities, the
transactions are allocated as to amount and price in a manner considered
equitable to the Fund. In some cases this procedure may affect the price or
amount of the securities as far as each party is concerned. It is the opinion of
the Board of Directors of each Fund, however, that the benefits available to a
Fund outweigh any possible disadvantages that may arise from such concurrent
transactions.
The obligation of performance under the management agreement between the
Manager and a Fund is solely that of the Manager, for which the Auto Company
assumes no responsibility.
SERVICE AGREEMENT
Under the Service Agreement, the Auto Company makes available to the Manager
the services, on a part-time basis, of employees of the Auto Company engaged in
its investment operations, and also certain other personnel, services and
facilities to enable the Manager to perform its obligations to the Funds. The
Manager reimburses the Auto Company for such costs, direct and indirect, as are
fairly attributable to the
11
<PAGE>
services performed and the facilities provided by the Auto Company under the
Service Agreement. Accordingly, the Funds make no payment to the Auto Company
under the Service Agreement.
UNDERWRITING AGREEMENT
Pursuant to the Underwriting Agreements between each Fund and the Manager,
the Manager: (1) is the principal underwriter of the Fund's shares; (2) acts as
agent of the Fund in the continuous sale of its shares; (3) prepares and
distributes literature relating to the Fund and its investment performance; (4)
distributes and pays for the printing of the Funds' Prospectus; (5) circulates
advertising and public relations materials; and (6) pays the cost of qualifying
and maintaining the qualification of the Fund's shares for sale under the
securities laws of the various states. The Manager receives no discount,
commission or other compensation as underwriter.
TRANSFER AGENT AGREEMENT
The Transfer Agent Agreements between each Fund and the Manager appoint the
Manager as the Fund's transfer agent and dividend disbursing agent. Under the
terms of the agreement, the Manager: (1) maintains all shareowner account
records; (2) prepares and mails transaction confirmations, annual records of
investments and tax information statements; (3) effects transfers of Fund
shares; (4) arranges for the issuance and cancellation of stock certificates;
(5) prepares annual shareowner meeting lists; (6) prepares, mails and tabulates
proxies; (7) mails shareowner reports; and (8) disburses dividend and capital
gains distributions. These services are performed by the Manager at no charge to
the Funds.
PERFORMANCE INFORMATION
Each Fund provides information on its "Average Annual Total Return" in
its annual reports to shareowners and in advertising and sales literature.
"Average Annual Total Return" is the average annual compounded rate of change
in value represented by the percentage change in value during a period of an
investment in shares of the Fund, including the value of shares acquired
through reinvestment of all dividends and capital gains distributions for the
period. Average Annual Total Return is computed as follows:
P (1 + T)to the power of n = ERV
Where: P = the amount of an assumed initial
investment in shares of the Fund;
T = average annual total return;
n = number of years from initial investment
to the end of the period; and
ERV = ending redeemable value of shares held
at the end of the period.
For example, as of November 30, 1999 the Average Annual Total Return on a
$1,000 investment in each Fund for the following periods was:
<TABLE>
<CAPTION>
GROWTH FUND BALANCED FUND INTERIM FUND MUNICIPAL BOND FUND
-------------- --------------- --------------- -----------------------
<S> <C> <C> <C> <C>
1 Year........................................ 17.93% 9.72% 1.35% 0.04%
5 Years....................................... 22.79% 16.28% 6.54% 6.31%
10 Years...................................... 16.25% 14.06% 6.60% 6.36%
</TABLE>
Interim Fund and Municipal Bond Fund may also show their performance in the
form of "yield" or "taxable equivalent yield." In accordance with a standardized
method prescribed by rules of the SEC, yield is computed by dividing the net
investment income per share earned during the specified one month or
12
<PAGE>
30-day period by the maximum offering price per share on the last day of the
period, according to the following formula:
Yield = 2 [ ( a-b + 1 ) to the power of 6 - 1 ]
--
cd
Where: a = Dividends and interest earned during the
period;
b = Expenses accrued for the period (net of
reimbursements);
c = The average daily number of shares
outstanding during the period that were
entitled to receive dividends; and
d = The maximum offering price per share on
the last day of the period.
In computing yield, the Funds follow certain standardized accounting
practices specified by SEC rules. These practices are not necessarily consistent
with those that the Funds use to prepare their annual and interim financial
statements (in conformity with generally accepted accounting principles). Thus,
yield may not equal the income paid to shareholders or the income reported in a
Fund's financial statements.
Taxable equivalent yield is computed by dividing that portion of the yield
that is tax-exempt by the remainder of one minus the stated federal income tax
rate, taking into account the deductibility of state taxes for federal income
tax purposes, and adding the quotient to that portion, if any, of the yield that
is not tax exempt.
The Funds impose no sales charges and pay no distribution expenses. Income
taxes are not taken into account. Performance figures quoted by a Fund are not
necessarily indicative of future results. Each Fund's performance is a function
of conditions in the securities markets, portfolio management and operating
expenses. Although information about past performance is useful in reviewing a
Fund's performance and in providing some basis for comparison with other
investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods. The
performance of a Fund may be compared to mutual fund industry indexes or
averages, such as the S&P 500 Index.
A Fund may also cite its rating, recognition or other mention by
Morningstar, Inc. ("Morningstar"), Lipper, Inc. ("Lipper") or another entity.
Morningstar's rating system is based on risk-adjusted total return performance
and is expressed in a star-rating format. The risk-adjusted number is computed
by subtracting a Fund's risk score (which is a function of the Fund's monthly
returns less the 90-day Treasury bill return) from the Fund's load-adjusted
total return score. This numerical score is then translated into rating
categories, with the top 10% labeled five star, the next 22.5% labeled four
star, the next 35% labeled three star, the next 22.5% labeled two star and the
bottom 10% one star. A high rating reflects either above-average returns or
below-average risk, or both.
The Lipper and Morningstar averages are unweighted averages of total return
performance of mutual funds as classified, calculated and published by these
independent services that monitor the performance of mutual funds. The Funds
also may use comparative performance as computed in a ranking by Lipper or
category averages and rankings provided by another independent service. Should
Lipper or another service reclassify a Fund to a different category or develop
(and place that Fund into) a new category, the Fund may compare its performance
or ranking against other funds in the newly assigned category, as published by
the service. A Fund may also compare its performance or ranking against all
funds tracked by Lipper or another independent service.
PORTFOLIO TRANSACTIONS
Each Fund's portfolio purchases and sales are placed by the Manager with
securities brokers and dealers that the Manager believes will provide the best
values to the Fund in transaction and information
13
<PAGE>
services. In evaluating the quality of transaction services, the dominant
consideration is a broker-dealer's skill in executing transactions, of which the
major determinant is the best price to the Fund (highest net proceeds of sale or
lowest overall cost of purchase) rather than the lowest commission or
transaction charge considered in isolation. Many of a Fund's transactions may be
fairly large, and may require special attention and careful timing and handling
to minimize the impact of the transactions upon market prices. The willingness
of a broker-dealer to devise a trading tactic for the transaction in
consultation with the Manager, to expend time and effort, to overcome
difficulties and to assume risks, are characteristics of high quality execution.
A broker-dealer's knowledge of particular companies, industries, regions and
markets is important in the skillful trading of many securities. The Manager is
convinced that the net prices obtainable in skillful executions by
broker-dealers justify the payment of higher transaction costs than those
charged by others. Other considerations are the breadth of the broker-dealer's
financially-related services that are useful to the Fund, the reliability of its
clearing, settlement and operational services, and its reputation and financial
condition. Selection of a broker-dealer for a particular transaction requires a
largely qualitative judgment by the Manager, including retrospective evaluation
of the quality of execution of past transactions by the broker-dealers under
consideration.
A wide variety of useful investment research and analysis, economic,
financial and statistical data, and other information, are available from many
brokers. The Manager gives recognition to the value of such information in
placing a Fund's portfolio transactions, and may cause the Fund to pay to a
broker commissions that are higher than those obtainable from other brokers.
When specific recommendations or information provided by a broker result in
securities transactions by a Fund, the Manager places the transactions through
that broker if the Manager believes that the broker can provide good execution.
The Manager increasingly is using electronic communication networks
(ECNs) to purchase and sell portfolio securities for the Funds. The Manager
uses ECNs to trade portfolio securities when it believes that doing so will
result in the best net price for a Fund.
The Manager and the Auto Company perform extensive investment research,
which is used in making investment decisions for the Funds and for other State
Farm companies. The availability of additional information from a diversity of
sources, some of which have in-depth knowledge of specialized subjects, and have
proven insight and acumen in economic, financial, political and investment
matters, may tend to reduce the Manager's costs by some indeterminable amount,
but more importantly is believed to provide a quantity and range of information
greater than could be generated solely within a single advisory organization,
even for a larger advisory fee. Each Fund benefits from information obtained for
the other Funds' transactions and for the transactions of other State Farm
companies. Adequate compensation of broker-dealers for their transaction and
information services is considered important to assure good execution of
transactions and the continuing receipt of information in the future.
When a Fund purchases or sells a security over-the-counter, the transaction
takes place directly with a principal market-maker, without the use of a broker,
except in those circumstances where, in the opinion of the Manager, better price
or execution can be achieved through the use of a broker.
During the fiscal years ended November 30, 1999, 1998 and 1997, brokerage
commissions paid by Growth Fund totaled $140,090, $241,371 and $195,621,
respectively, and for Balanced Fund, brokerage commissions totaled $46,566,
$36,881 and $57,525, respectively, in each case paid to brokers that provided
research and other information to the Funds. During those same periods, neither
Interim Fund nor Municipal Bond Fund paid any brokerage commissions.
ADDITIONAL TAX CONSIDERATIONS
Each Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code (the "Code"). A 4% excise tax is
imposed on the excess of the required distribution for a calendar year over the
distributed amount for such calendar year. Generally, the required distribution
is the sum of 98% of a Fund's net investment income for the calendar year plus
98% of its capital gain net income for the one year period ending November 30.
Each Fund intends to declare or distribute dividends during the calendar year in
an amount sufficient to prevent imposition of the 4% excise tax.
14
<PAGE>
A portion of each of Growth Fund's and Balanced Fund's ordinary dividends
may be eligible for the 70% corporate dividends received deduction.
Because capital gain distributions reduce net asset value, if you
purchase shares of a Fund shortly before a record date for such a
distribution you will, in effect, receive a return of a portion of your
investment although the distribution will be taxable to you. This is true
even if the net asset value of your shares was reduced below your cost.
However, for federal income tax purposes your original cost would continue as
your tax basis. Any loss recognized on the disposition of Fund shares
acquired which have been held by the shareowner for six months or less will
be treated as long-term capital loss to the extent the shareowner received a
long-term capital gain distribution with respect to those Fund shares.
Distributions of long-term capital gains are generally taxable to
shareowners as long-term capital gains, whether received in cash or additional
shares and regardless of the period of time the shares have been held. Dividends
and capital gains may be taxed to shareowners at different rates. Also, the
distinction between ordinary income or loss and capital gain or loss is
important for certain tax purposes, such as a taxpayer's ability to offset
losses against income.
Under the Code, interest on indebtedness incurred or continued to
purchase or carry Fund shares is not deductible for federal income tax
purposes. Even though borrowed funds are not directly traceable to the
purchase of shares, the IRS may determine, depending on circumstances, that
the indebtedness is incurred for such a purpose. Because of tax implications,
persons who are "substantial users" (or persons related thereto) of
facilities financed by industrial development bonds should consult their tax
advisors before purchasing shares of Municipal Bond Fund.
Pursuant to the Tax Reform Act of 1986, interest on certain municipal
obligations issued by "nonessential governmental issuers" are subject to federal
income taxation for those investors subject to the alternative minimum tax.
Municipal Bond Fund does not currently intend to purchase municipal obligations
whose interest is a tax preference item for purposes of the alternative minimum
tax. For its fiscal year ending November 30, 2000, Interim Fund has a capital
loss carry-forward of $4,007,631, and $22,669 of this carry-forward will expire
if there are no capital gains to offset the loss against during the fiscal year
ending November 30, 2000.
15
<PAGE>
DIRECTORS AND OFFICERS
The Board of Directors has overall responsibility for the conduct of the
Funds' affairs. The Funds are not required to hold annual meetings of
shareowners and do not intend to do so. Maryland law permits shareowners to
remove directors under certain circumstances and requires each Fund to assist in
shareowner communications.
The directors and officers of the Funds, their principal occupations for the
last five years and their affiliations, if any, with State Farm Investment
Management Corp., the Funds' investment adviser and principal underwriter, are
listed below. Unless otherwise noted, the address of each is One State Farm
Plaza, Bloomington, Illinois 61710-0001.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE
NAME, AGE AND ADDRESS FUNDS PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- --------------------------- ----------------------------- -----------------------------------------------------
<S> <C> <C>
Edward B. Rust, Jr.*, Age Director and President, State CHAIRMAN OF THE BOARD, PRESIDENT, CEO, AND DIRECTOR
49 Farm Growth Fund, Inc., -- State Farm Mutual Automobile Insurance Company;
State Farm Balanced Fund, PRESIDENT, CEO, AND DIRECTOR -- State Farm Life
Inc., State Farm Interim Insurance Company, State Farm Life and Accident
Fund, Inc., and State Farm Assurance Company, State Farm Annuity and Life
Municipal Bond Fund, Inc. Insurance Company, State Farm General Insurance
Company, State Farm Fire and Casualty Company, State
Farm Investment Management Corp.; CHAIRMAN OF THE
BOARD AND DIRECTOR (SINCE 1999), State Farm Federal
Savings Bank; TRUSTEE, CHAIRMAN OF THE BOARD AND
PRESIDENT, State Farm Variable Product Trust (since
1997); PRESIDENT, CEO, AND DIRECTOR (SINCE 1997) --
State Farm VP Management Corp.; PRESIDENT -- State
Farm County Mutual Insurance Company of Texas;
DIRECTOR -- State Farm Lloyds, Inc., State Farm
International Services, Inc.; CHAIRMAN OF THE BOARD,
PRESIDENT, AND TREASURER -- State Farm Companies
Foundation
Roger S. Joslin*, Director, Senior Vice VICE CHAIRMAN, CHIEF FINANCIAL OFFICER, SENIOR VICE
Age 63 President and Treasurer, PRESIDENT, TREASURER, AND DIRECTOR -- State Farm
State Farm Growth Fund, Mutual Automobile Insurance Company; DIRECTOR --
Inc., StateFarm Balanced State Farm Life Insurance Company, State Farm Life
Fund, Inc., State Farm and Accident Assurance Company, State Farm Annuity
Interim Fund, Inc., and and Life Insurance Company; DIRECTOR, VICE PRESIDENT,
State Farm Municipal AND TREASURER -- State Farm General Insurance
Bond Fund, Inc. Company, State Farm Lloyds, Inc., State Farm
Investment Management Corp., State Farm International
Services, Inc.; DIRECTOR, VICE PRESIDENT AND
TREASURER (SINCE 1999), State Farm Federal Savings
Bank; TRUSTEE, VICE PRESIDENT AND TREASURER (SINCE
1997), State Farm Variable Product Trust; DIRECTOR,
VICE PRESIDENT, AND TREASURER (SINCE 1997) -- State
Farm VP Management Corp.; CHAIRMAN OF THE BOARD,
TREASURER, AND DIRECTOR -- State Farm Fire and
Casualty Company; TREASURER -- State Farm County
Mutual Insurance Company of Texas; ASSISTANT
TREASURER -- State Farm Companies Foundation
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE
NAME, AGE AND ADDRESS FUNDS PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- --------------------------- ----------------------------- -----------------------------------------------------
<S> <C> <C>
Albert H. Hoopes, Director, State Farm Growth ATTORNEY; TRUSTEE -- State Farm Variable Product
Age 85 Fund, Inc., State Farm Trust (since 1997).
1001 North Main Street Balanced Fund, Inc., State
Bloomington, IL 61701 Farm Interim Fund, Inc.,
and State Farm Municipal
Bond Fund, Inc.
Thomas M. Mengler, Director, State Farm Growth DEAN, UNIVERSITY OF ILLINOIS COLLEGE OF LAW;
Age 46 Fund, Inc., State Farm TRUSTEE -- State Farm Variable Product Trust
Swanland Building Balanced Fund, Inc., State (since 1997).
601 E. John St. Farm Interim Fund, Inc.,
Champaign, IL 61820 and State Farm Municipal
Bond Fund, Inc.
Davis U. Merwin, Director, State Farm Growth INVESTOR; TRUSTEE -- State Farm Variable Product
Age 71 Fund, Inc., State Farm Trust (since 1997).
P.O. Box 1665 Balanced Fund, Inc., State
Bloomington, IL 61702 Farm Interim Fund, Inc.,
and State Farm Municipal
Bond Fund, Inc.
James A. Shirk, Director, State Farm Growth DIRECTOR AND PRESIDENT -- BEER NUTS, INC.; TRUSTEE --
Age 56 Fund, Inc., State Farm State Farm Variable Product Trust (since 1997).
103 North Robinson Balanced Fund, Inc., State
Bloomington, IL 61701 Farm Interim Fund, Inc.,
and State Farm Municipal
Bond Fund, Inc.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE
NAME, AGE AND ADDRESS FUNDS PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- --------------------------- ----------------------------- -----------------------------------------------------
<S> <C> <C>
Kurt G. Moser, Senior Vice President, State SENIOR VICE PRESIDENT -- INVESTMENTS (SINCE 1998),
Age 55 Farm Growth Fund, Inc., VICE PRESIDENT -- INVESTMENTS -- State Farm Mutual
State Farm Balanced Fund, Automobile Insurance Company, State Farm County
Inc.,State Farm Interim Mutual Insurance Company of Texas, State Farm Lloyds,
Fund, Inc., and State Farm Inc.; SENIOR VICE PRESIDENT -- INVESTMENTS (SINCE
Municipal Bond Fund, Inc. 1998), VICE PRESIDENT -- INVESTMENTS, AND DIRECTOR --
State Farm Life Insurance Company, State Farm Life
and Accident Assurance Company, State Farm Annuity
and Life Insurance Company, State Farm Fire and
Casualty Company, State Farm General Insurance
Company; SENIOR VICE PRESIDENT -- INVESTMENTS (SINCE
1998), INVESTMENT OFFICER -- State Farm Indemnity
Company; VICE PRESIDENT - INVESTMENTS (SINCE 1998),
State Farm Florida Insurance Company; SENIOR VICE
PRESIDENT (SINCE 1997), VICE PRESIDENT, AND DIRECTOR
(PRIOR TO 1997) -- State Farm Investment Management
Corp.; VICE PRESIDENT (SINCE 1997) -- State Farm
Variable Product Trust; DIRECTOR (SINCE 1997) --
State Farm VP Management Corp.; VICE PRESIDENT --
INVESTMENTS -- State Farm International Services,
Inc.; UNDERWRITER -- State Farm Lloyds, Inc.
Paul N. Eckley, Senior Vice President, State SENIOR VICE PRESIDENT -- INVESTMENTS AND ASSISTANT
Age 45 Farm Growth Fund, Inc. and SECRETARY-TREASURER (SINCE 1998), VICE PRESIDENT --
State Farm Balanced Fund, COMMON STOCKS -- State Farm Mutual Automobile
Inc. Insurance Company, State Farm Fire and Casualty
Company; SENIOR VICE PRESIDENT -- INVESTMENTS AND
ASSISTANT SECRETARY-TREASURER (SINCE 1998) -- State
Farm General Insurance Company, State Farm Life
Insurance Company, State Farm Life and Accident
Assurance Company, State Farm Annuity and Life
Insurance Company, State Farm Indemnity Company,
State Farm County Mutual Insurance Company of Texas,
State Farm Lloyds, Inc.; SENIOR VICE PRESIDENT (SINCE
1997), AND INVESTMENT OFFICER (PRIOR TO 1997) --
State Farm Investment Management Corp.; VICE
PRESIDENT (SINCE 1997) -- State Farm Variable Product
Trust
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE
NAME, AGE AND ADDRESS FUNDS PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- --------------------------- ----------------------------- -----------------------------------------------------
<S> <C> <C>
John S. Concklin, Vice President, State Farm VICE PRESIDENT -- COMMON STOCKS AND ASSISTANT
Age 53 Growth Fund, Inc. and State SECRETARY-TREASURER (SINCE 1997), VICE PRESIDENT --
Farm Balanced Fund, Inc. FIXED INCOME -- State Farm Mutual Automobile
Insurance Company, State Farm Life Insurance Company,
State Farm Fire and Casualty Company, State Farm Life
and Accident Assurance Company, State Farm Annuity
and Life Insurance Company, State Farm General
Insurance Company, VICE PRESIDENT -- COMMON STOCKS
(SINCE 1997), State Farm Indemnity Company, State
Farm Lloyds, Inc.; INVESTMENT OFFICER -- State Farm
Investment Management Corp.; VICE PRESIDENT (SINCE
1997) -- State Farm Variable Product Trust
David R. Grimes, Assistant Vice President and ASSISTANT VICE PRESIDENT OF ACCOUNTING -- State Farm
Age 57 Secretary, State Farm Mutual Automobile Insurance Company; ASSISTANT VICE
Growth Fund, Inc., State PRESIDENT AND SECRETARY -- State Farm Investment
Farm Balanced Fund, Inc., Management Corp., State Farm Variable Product Trust;
State Farm Interim Fund, ASSISTANT VICE PRESIDENT AND SECRETARY (SINCE 1997)
Inc., and State Farm -- State Farm VP Management Corp.
Municipal Bond Fund, Inc.
Jerel S. Chevalier, Assistant Secretary -- DIRECTOR OF MUTUAL FUNDS -- State Farm Mutual
Age 61 Treasurer, State Farm Automobile Insurance Company; ASSISTANT SECRETARY --
Growth Fund, Inc., State TREASURER -- State Farm Investment Management Corp.;
Farm Balanced Fund, Inc., ASSISTANT SECRETARY-TREASURER (SINCE 1997) -- State
State Farm Interim Fund, Farm Variable Product Trust
Inc., and State Farm
Municipal Bond Fund, Inc.
Howard A. Thomas, Assistant Secretary- DIRECTOR OF MUTUAL FUNDS (SINCE 1998) -- State Farm
Age 52 Treasurer, State Farm Mutual Automobile Insurance Company; MANAGER OF
Growth Fund, Inc., State ACCOUNTING BENEFITS (1988-1998) -- State Farm Mutual
Farm Balanced Fund, Inc., Automobile Insurance Company; ASSISTANT
State Farm Interim Fund, SECRETARY-TREASURER (SINCE 1998) -- State Farm
Inc., and State Farm Investment Management Corp., State Farm Variable
Municipal Bond Fund, Inc. Product Trust
Donald O. Jaynes, Assistant Secretary, State ASSOCIATE GENERAL COUNSEL, State Farm
Age 51 Farm Growth Fund, Inc., Mutual Automobile Insurance Company; ASSISTANT
State Farm Balanced Fund, SECRETARY (SINCE 1998) -- State Farm Investment
Inc., State Farm Interim Management Corp., State Farm Variable Product Trust
Fund, Inc., and State Farm
Municipal Bond Fund, Inc.
Stephen L. Horton, Assistant Secretary, State COUNSEL - State Farm Mutual Automobile Insurance
Age 42 Farm Growth Fund, Inc., Company; ASSISTANT SECRETARY (SINCE 2000) - State
State Farm Balanced Fund, Farm Investment Management Corp., State Farm Variable
Inc., State Farm Interim Product Trust; ASSISTANT SECRETARY (SINCE 1999) -
Fund, Inc., and State Farm State Farm VP Management Corp.
Municipal Bond Fund, Inc.
David M. Moore, Assistant Secretary, State COUNSEL (SINCE 1997), ASSISTANT TAX COUNSEL
Age 38 Farm Growth Fund, Inc., (1995-1997) - State Farm Mutual Automobile Insurance
State Farm Balanced Fund, Company; ASSISTANT SECRETARY (SINCE 2000) - State
Inc., State Farm Interim Farm Investment Management Corp., State Farm Variable
Fund, Inc., and State Farm Product Trust
Municipal Bond Fund, Inc.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE
NAME, AGE AND ADDRESS FUNDS PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- --------------------------- ----------------------------- -----------------------------------------------------
<S> <C> <C>
Michael L. Tipsord, Assistant Secretary, State VICE PRESIDENT AND ASSISTANT TREASURER (SINCE 1998),
Age 40 Farm Growth Fund, Inc., EXECUTIVE ASSISTANT -- OPERATIONS (SINCE 1997),
State Farm Balanced Fund, ASSISTANT CONTROLLER (1996-1997), DIRECTOR OF
Inc., State Farm Interim ACCOUNTING (1995-1996), -- State Farm Mutual
Fund, Inc., and State Farm Automobile Insurance Company; ASSISTANT SECRETARY --
Municipal Bond Fund, Inc. State Farm Investment Management Corp., ASSISTANT
SECRETARY (SINCE 1997) -- State Farm Variable Product
Trust; TREASURER (SINCE 1996) -- Insurance Placement
Services, Inc.
Donald E. Heltner, Vice President, State Farm VICE PRESIDENT -- FIXED INCOME AND ASSISTANT
Age 52 Balanced Fund, Inc. and SECRETARY-TREASURER, State Farm Life Insurance
State Farm Interim Fund, Company, State Farm Life and Accident Assurance
Inc. Company, and State Farm Annuity and Life Insurance
Company ; VICE PRESIDENT -- FIXED INCOME (since 1998),
State Farm Mutual Automobile Insurance Company, State
Farm Fire and Casualty Company, State Farm General
Insurance Company, State Farm Indemnity Company, and
State Farm Lloyds, Inc., and State Farm Variable
Product Trust; prior to 1998, VICE PRESIDENT, Century
Investment Management Co.
Julian R. Bucher, Vice President, State Farm VICE PRESIDENT -- MUNICIPAL SECURITIES AND ASSISTANT
Age 57 Municipal Bond Fund, Inc. SECRETARY-TREASURER, State Farm Mutual Automobile
Insurance Company, State Farm Fire and Casualty
Company, State Farm Life Insurance Company, State
Farm Life and Accident Assurance Company, and State
Farm General Insurance Company (since 1997); VICE
PRESIDENT -- MUNICIPAL SECURITIES, State Farm
Indemnity Company and State Farm Lloyds, Inc. (since
1997); prior to 1997, INVESTMENT OFFICER, State Farm
Investment Management Corp.
</TABLE>
20
<PAGE>
- ------------------------
* Director who is an "interested person" of a Fund or of the Manager, as
defined in the Investment Company Act of 1940.
As of December 31, 1999, the directors and officers as a group owned
1.68% of the Municipal Bond Fund's outstanding shares and owned less than one
percent of the other Funds' outstanding shares.
Directors or officers who are interested persons do not receive any
compensation from any Fund for their services to the Fund. The Directors who are
not interested persons of any Fund received a fee of $1,800 for each meeting of
the Board of Directors attended during the year ended November 30, 1999.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
MUNICIPAL FROM ALL FUNDS
GROWTH BALANCED INTERIM BOND AND FUND
NAME OF DIRECTOR FUND FUND FUND FUND COMPLEX(10)*
- ---------------------------------------- --------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Edward B. Rust, Jr...................... $ 0 $ 0 $ 0 $ 0 $ 0
Albert H. Hoopes........................ 3,600 1,800 600 1,200 14,400
Roger S. Joslin......................... 0 0 0 0 0
Thomas M. Mengler....................... 3,600 1,800 600 1,200 14,400
Davis U. Merwin......................... 3,600 1,800 600 1,200 14,400
James A. Shirk.......................... 3,600 1,800 600 1,200 14,400
</TABLE>
- ------------------------
* Includes State Farm Variable Product Trust.
Directors and officers of the Fund do not receive any benefits from the Fund
upon retirement nor does the Fund accrue any expenses for pension or retirement
benefits.
21
<PAGE>
GENERAL INFORMATION
OWNERSHIP OF SHARES
As of December 31, 1999, Continental Trust Company, 231 South LaSalle
Street, Chicago, Illinois 60692, as trustee of the Agents' Trustee Keogh Plan
and Custodian of IRAs which fund the Agents' Simplified Pension Plan, owned of
record in the aggregate the following number of shares, as to which it has sole
right to vote and shared right of disposition:
<TABLE>
<CAPTION>
PERCENTAGE OF
FUND SHARES
FUND SHARES OWNED OUTSTANDING
- ---------------------------------------- ------------- -----------------
<S> <C> <C>
Growth Fund............................. 3,696,985 6.83%
Balanced Fund........................... 1,378,629 7.21%
Interim Fund............................ 1,121,524 7.19%
</TABLE>
CUSTODY OF ASSETS
The securities and cash of the Funds are held by The Chase Manhattan Bank
("Chase"), 3 Chase Metro Tech Center, Brooklyn, New York 11245, as custodian.
Chase delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments and performs other
duties, all as directed by persons duly authorized by the Board of Directors.
INDEPENDENT AUDITORS
The Funds' independent auditors are Ernst & Young LLP, 233 South Wacker
Drive, Chicago, Illinois 60606. The firm audits each Fund's annual financial
statements, reviews certain regulatory reports and each Fund's federal income
tax returns, and performs other professional accounting, auditing, tax and
advisory services when engaged to do so by the Funds.
CODE OF ETHICS
The Manager intends that: all of its activities function exclusively for the
benefit of the owners or beneficiaries of the assets it manages; assets under
management or knowledge as to current or prospective transactions in managed
assets are not utilized for personal advantage or for the advantage of anyone
other than the owners or beneficiaries of those assets; persons associated with
the Manager and the Funds avoid situations involving actual or potential
conflicts of interest with the owners or beneficiaries of managed assets; and,
situations appearing to involve actual or potential conflicts of interest or
impairment of objectivity are avoided whenever doing so does not run counter to
the interests of the owners or beneficiaries of the managed assets.
The Board of Directors of the Manager and of each Fund has adopted a Code
of Ethics. The Code of Ethics imposes certain prohibitions, restrictions,
preclearance requirements and reporting rules on the personal securities
transactions of subscribers to the Code, who include each Fund's officers and
directors and employees of the Manager. The Boards of Directors believe that
the provisions of the Code are reasonably designed to prevent subscribers
from engaging in conduct that violates these principles. The Code of Ethics
permits subscribers subject to the Code to invest in securities, including
securities that may be purchased or held by a Fund.
22
<PAGE>
DESCRIPTION OF BOND RATINGS
A rating obtained from a rating service represents the service's opinion as
to the credit quality of the security being rated. However, the ratings are
general and are not absolute standards of quality or guarantees as to the
creditworthiness of an issuer. Consequently, the Manager believes that the
quality of debt securities in which a Fund invests should be continuously
re-viewed and that individual analysts give different weightings to the
various factors involved in credit analysis. A rating is not a recommendation
to purchase, sell or hold a security, because it does not take into account
market value or suitability for a particular investor. When a security has
received a rating from more than one service, each rating should be evaluated
inde-pendently. Ratings are based on current information furnished by the
issuer or obtained by the ratings services from other sources which they
consider reliable. Ratings may be changed, suspended or withdrawn as a result
of changes in or unavailability of such information, or for other reasons.
The following is a description of the characteristics of rating used by
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P").
RATINGS BY MOODY'S
Aaa--Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. Although the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such bonds.
Aa--Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long
term risk appear somewhat larger than in Aaa bonds.
A--Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba--Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa--Bonds rated Caa are of poor standing. Such bonds may be in default or
there may be present elements of danger with respect to principal or interest.
23
<PAGE>
Ca--Bonds rated Ca represent obligations which are speculative in a high
degree. Such bonds are often in default or have other marked shortcomings.
C--Bonds rated C are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Conditional Ratings. The designation "Con." followed by a rating indicates
bonds for which the security depends upon the completion of some act or the
fulfillment of some condition. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Parenthetical rating
denotes probable credit stature upon completion of construction or elimination
of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1, and B 1.
MUNICIPAL NOTES:
MIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less established.
COMMERCIAL PAPER:
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial paper obligations are
supported by the credit of another entity or entities, Moody's, in assigning
ratings to such issuers, evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments, or other entities, but only as one factor in the total rating
assessment.
S&P RATINGS
AAA--Bonds rated AAA have the highest rating. Capacity to pay principal and
interest is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay principal and interest
and differ from AAA bonds only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
24
<PAGE>
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in higher rated categories.
BB--B--CCC--CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation among such bonds and CC the highest degree of
speculation. Although such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C--The rating C is reserved for income bonds on which no interest is being
paid.
In order to provide more detailed indications of credit quality, S&P's bond
letter ratings described above (except for AAA category) may be modified by the
addition of a plus or a minus sign to show relative standing within the rating
category.
Provisional Ratings. The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, although addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon the failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
MUNICIPAL NOTES:
SP-1. Notes rated SP-1 have very strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are designated SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and
interest.
Notes due in three years or less normally receive a note rating. Notes
maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment:
- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue will be rated as a note).
- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be rated as a note).
COMMERCIAL PAPER:
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2 and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are designated A-1+.
25
<PAGE>
FINANCIAL STATEMENTS
26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareowners
State Farm Growth Fund, Inc.
State Farm Balanced Fund, Inc.
State Farm Interim Fund, Inc.
State Farm Municipal Bond Fund, Inc.
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of State Farm Growth Fund, Inc., State Farm
Balanced Fund, Inc., State Farm Interim Fund, Inc., and State Farm Municipal
Bond Fund, Inc. as of November 30, 1999, 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 1990. These
financial statements and financial highlights are the responsibility of the
Funds' 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, 1999, 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 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 Growth Fund, Inc., State Farm Balanced Fund, Inc., State Farm Interim Fund,
Inc., and State Farm Municipal Bond Fund, Inc. at November 30, 1999, the results
of their operations and changes in their net assets for each of the two years in
the period then ended, and the financial highlights for each of the fiscal years
since 1990, in conformity with generally accepted accounting principles.
[SIG]
Chicago, Illinois
December 17, 1999
- ---------
2
<PAGE>
STATE FARM GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- --------------
<C> <S> <C>
COMMON STOCKS (98.4%)
AGRICULTURE, FOODS, & BEVERAGE (4.7%)
3,154,196 Archer-Daniels-Midland Company $ 39,230,313
92,000 Campbell Soup Company 4,105,500
930,000 Kellogg Company 31,503,750
208,000 Sara Lee Corporation 5,044,000
81,600 Sysco Corporation 3,105,900
710,900 The Coca-Cola Company 47,852,456
--------------
130,841,919
--------------
BANKS (8.9%)
176,945 ABN Amro Holding NV 4,314,396
181,237 Amsouth Bancorporation 4,089,160
421,268 Bank of America Corporation 24,644,178
715,322 Bank One Corporation 25,215,100
90,000 First Security Corporation 2,531,250
43,500 First Virginia Banks Inc. 1,973,812
61,300 Golden West Financial Corporation 6,187,469
47,700 JP Morgan & Co. Incorporated 6,272,550
6,200 M&T Bank Corporation 2,914,000
809,800 National Commerce Bancorporation 20,447,450
72,000 Northern Trust Corporation 6,970,500
640,074 Pacific Century Financial Corporation 12,561,452
830,316 Popular Inc. 23,871,585
345,000 Southtrust Corporation 13,390,313
157,900 SunTrust Banks Inc. 11,033,262
62,000 TCF Financial Corporation 1,755,375
158,350 U.S. Bancorp 5,413,591
238,900 Wachovia Corporation 18,499,819
1,220,000 Wells Fargo & Company 56,730,000
--------------
248,815,262
--------------
BUILDING MATERIALS & CONSTRUCTION (1.5%)
1,039,200 Vulcan Materials Company 41,827,800
--------------
CHEMICALS (5.3%)
830,000 Air Products & Chemicals Inc. 26,871,250
496,104 E.I. du Pont de Nemours and Company 29,487,181
588,300 Great Lakes Chemical Corporation 19,524,206
561,000 International Flavors & Fragrances Inc. 20,651,812
45,200 Praxair Inc. 2,017,050
1,410,300 Sigma-Aldrich Corporation 40,369,837
81,000 The Dow Chemical Company 9,487,125
--------------
148,408,461
--------------
COMPUTER SOFTWARE AND SERVICES (7.4%)
61,100 AutoDesk Inc. 1,790,994
124,000 Automatic Data Processing Inc. 6,122,500
719,700 Cisco Systems Inc. (a) 64,188,244
30,800 Electronic Data Systems Corporation 1,980,825
1,197,500 Microsoft Corporation (a) 109,028,663
344,700 Oracle Corporation (a) 23,374,969
--------------
206,486,195
--------------
</TABLE>
5 -------
<PAGE>
STATE FARM GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- --------------
<C> <S> <C>
COMPUTERS (7.0%)
322,200 Compaq Computer Corporation $ 7,873,762
1,437,000 Hewlett-Packard Company 136,335,375
496,400 International Business Machines Corporation 51,160,225
--------------
195,369,362
--------------
CONSUMER & MARKETING (5.9%)
63,600 Clorox Co. 2,834,175
183,800 Colgate-Palmolive Company 10,086,025
1,439,200 Hon Industries Inc. 31,122,700
317,876 Kimberly Clark Corp. 20,304,330
413,700 McDonald's Corporation 18,616,500
464,308 Newell Rubbermaid Inc. 15,235,106
565,100 The Gillette Company 22,709,956
339,400 The Procter & Gamble Company 36,655,200
125,446 Unilever NV 6,828,967
--------------
164,392,959
--------------
ELECTRONIC/ELECTRICAL MFG. (8.2%)
46,043 ABB Ltd. (a) 4,563,957
82,300 Applied Materials Inc. (a) 8,019,106
91,900 Diebold Inc. 2,107,956
109,400 Emerson Electric Co. 6,235,800
771,200 General Electric Company 100,256,000
967,200 Intel Corporation 74,172,150
91,600 KLA Tencor Corporation (a) 7,745,925
351,600 Linear Technology Corp. 24,985,575
--------------
228,086,469
--------------
FINANCIAL SERVICES (2.7%)
537,200 Citigroup Inc. 28,941,650
167,400 Federal Home Loan Mortgage 8,265,375
250,800 Federal National Mortgage Association 16,709,550
124,600 First Union Corp. 4,820,462
558,450 MBNA Corporation 14,100,862
36,400 The Finova Group Inc. 1,353,625
--------------
74,191,524
--------------
HEALTH CARE (14.6%)
294,500 Abbott Laboratories 11,191,000
1,550,000 Biomet Inc. 49,115,625
59,600 Boston Scientific Corporation (a) 1,259,050
107,050 Covance Inc. (a) 1,164,169
947,200 Eli Lilly & Co. 67,961,600
1,240,800 Johnson & Johnson 128,733,000
80,000 Medtronic Inc. 3,110,000
523,400 Merck & Co. Inc. 41,086,900
2,880,000 Pfizer Inc. 104,220,000
--------------
407,841,344
--------------
</TABLE>
- ---------
6
<PAGE>
STATE FARM GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- --------------
<C> <S> <C>
MACHINERY & MANUFACTURING (3.8%)
175,300 AlliedSignal Inc. $ 10,485,131
190,800 AptarGroup Inc. 5,175,450
370,000 Caterpillar Inc. 17,158,750
428,200 Corning Incorporated 40,116,987
50,000 Cummins Engine Company Inc. 2,025,000
57,800 Deere & Company 2,481,787
70,000 Illinois Tool Works Inc. 4,532,500
173,200 Minnesota Mining & Manufacturing Co. 16,551,425
337,500 Osmonics Inc. (a) 3,037,500
171,100 Pall Corporation 4,010,156
--------------
105,574,686
--------------
MEDIA & BROADCASTING (3.5%)
155,433 Reuters Group PLC ADR 10,180,861
360,181 SBS Broadcasting SA (a) 14,587,330
2,619,540 The Walt Disney Company 73,019,678
--------------
97,787,869
--------------
MINING & METALS (.8%)
36,700 Newmont Mining Corporation 869,331
132,800 Nucor Corporation 6,698,100
185,000 Rio Tinto PLC ADR 14,383,750
81,250 Steel Dynamics Inc. (a) 1,117,188
--------------
23,068,369
--------------
OIL, GAS, & OTHER ENERGY (6.0%)
440,400 Barrett Resources Corporation (a) 11,698,125
322,892 BP Amoco PLC ADR 19,676,231
530,000 Chevron Corporation 46,938,125
106,102 Devon Energy Corporation 3,740,096
646,300 Exxon Corporation 51,259,669
237,100 Pennzoil-Quaker State Co. 2,459,913
516,300 Royal Dutch Petroleum Company ADR 29,945,400
--------------
165,717,559
--------------
RETAILERS (2.2%)
1,063,200 Wal-Mart Stores Inc. 61,266,900
--------------
TELECOM & TELECOM EQUIPMENT (14.5%)
450,000 ADC Telecommunications Inc. (a) 23,990,625
600,000 AT&T Corp. 33,525,000
575,000 LM Ericsson Telephone Company ADR 27,707,813
638,732 Lucent Technologies Inc. 46,667,357
1,023,729 MCI Worldcom Inc. (a) 84,649,592
264,000 Motorola Inc. 30,162,000
115,400 Nextlink Communications Inc. (Class A) (a) 5,770,000
129,800 Nokia Corporation ADR 17,936,738
346,600 Nortel Networks Corp. 25,648,400
1,497,512 SBC Communications Inc. 77,777,030
347,400 Tele Danmark AS ADR 11,095,088
136,200 U.S. West Inc. 8,452,913
215,000 Vodafone AirTouch Public Limited Co. ADR (a) 10,145,313
--------------
403,527,869
--------------
</TABLE>
7 -------
<PAGE>
STATE FARM GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- --------------
<C> <S> <C>
UTILITIES & ENERGY (1.4%)
74,900 CMS Energy Corporation $ 2,490,425
132,000 Duke Energy Corporation 6,690,750
88,500 FPL Group Inc. 3,871,875
188,674 Scottish Power PLC ADR (a) 6,591,798
288,000 Southern Company 6,732,000
166,000 Teco Energy Inc. 3,320,000
98,500 Texas Utilities Company (Holding Co.) 3,527,531
112,400 The AES Corporation (a) 6,512,175
--------------
39,736,554
--------------
TOTAL COMMON STOCKS
(cost $1,103,793,558) 2,742,941,101
--------------
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT
- ------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (1.5%)
<C> <S> <C>
30,000,000 Ford Motor Credit Company, 5.505% to 5.616%, December, 1999 30,008,883
10,000,000 U.S. Treasury Bills, 4.670%, January, 2000 9,951,900
3,063,268 Chase Vista Treasury Plus Money Market Fund 3,063,268
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $43,025,115) 43,024,051
--------------
TOTAL INVESTMENTS (99.9%)
(cost $1,146,818,673) 2,785,965,152
CASH AND OTHER ASSETS, NET OF LIABILITIES (0.1%) 474,279
--------------
NET ASSETS (100.0%) $2,786,439,431
==============
</TABLE>
Notes:
<TABLE>
<C> <S>
(a) Non-income producing security.
At November 30, 1999, net unrealized appreciation of $1,639,146,479 consisted of
gross unrealized appreciation of $1,666,509,427 and gross unrealized depreciation of
$27,362,948 based on cost of $1,146,818,673 for federal income tax purposes.
</TABLE>
See accompanying notes to financial statements.
- ---------
8
<PAGE>
STATE FARM GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1999
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (cost
$1,146,818,673) $2,785,965,152
Cash 2,946
Receivable for:
Dividends and interest $4,629,871
Shares of the Fund sold 714,812 5,344,683
----------
Prepaid expenses 47,942
--------------
Total assets 2,791,360,723
--------------
LIABILITIES AND NET ASSETS
Payable for:
Shares of the Fund redeemed 1,093,506
Securities purchased 3,000,000
Other (including $750,584 to
Manager) 827,786
----------
4,921,292
--------------
Total liabilities 4,921,292
--------------
Net assets applicable to 53,626,713
shares outstanding
of $0.50 par value common stock
(100,000,000 shares authorized) $2,786,439,431
==============
Net asset value, offering price and
redemption price per share $ 51.96
==============
ANALYSIS OF NET ASSETS
Excess of amounts received from sales
of shares over amounts paid on
redemptions of shares on account of
capital $1,111,497,452
Accumulated net realized gain on sales
of investments 13,478,727
Net unrealized appreciation of
investments 1,639,146,479
Undistributed net investment income 22,316,773
--------------
Net assets applicable to shares
outstanding $2,786,439,431
==============
</TABLE>
See accompanying notes to financial statements.
9 -------
<PAGE>
STATE FARM GROWTH FUND, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 33,916,255 29,997,754
Interest 2,390,006 3,413,231
------------ -----------
36,306,261 33,410,985
Less: foreign withholding taxes 547,592 297,805
------------ -----------
Total investment income 35,758,669 33,113,180
EXPENSES:
Investment advisory and management
fees 2,740,037 2,221,492
Professional fees 96,955 55,382
ICI dues 55,835 44,841
Registration fees 27,350 61,281
Fidelity bond expense 8,803 8,367
Directors' fees 14,400 16,259
Reports to shareowners 81,541 21,287
Security evaluation fees 3,128 3,237
Franchise taxes 18,148 17,495
Custodian fees 21,037 26,161
Proxy and related expense -- 31,777
Other 131 10,745
------------ -----------
Total expenses 3,067,365 2,518,324
------------ -----------
Net investment income 32,691,304 30,594,856
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Net realized gain on sales of
investments 13,478,727 2,197,936
Change in net unrealized appreciation 368,649,780 306,511,650
------------ -----------
Net realized and unrealized gain on
investments 382,128,507 308,709,586
------------ -----------
Net change in net assets resulting from
operations $414,819,811 339,304,442
============ ===========
</TABLE>
See accompanying notes to financial statements.
- ---------
10
<PAGE>
STATE FARM GROWTH FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------
1999 1998
-------------- -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 32,691,304 30,594,856
Net realized gain on sales of
investments 13,478,727 2,197,936
Change in net unrealized appreciation 368,649,780 306,511,650
-------------- -------------
Net change in net assets resulting from
operations 414,819,811 339,304,442
Undistributed net investment income
included in price of shares issued and
redeemed 666,112 789,317
DISTRIBUTION TO SHAREOWNERS FROM:
Net investment income (30,736,945) (31,134,862)
Net realized gain (2,197,936) (52,131,683)
-------------- -------------
Total distributions to shareowners (32,934,881) (83,266,545)
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 313,280,990 334,952,191
Reinvestment of ordinary income
dividends and capital gain
distributions 31,660,456 80,862,911
-------------- -------------
344,941,446 415,815,102
Less payments for shares redeemed 226,541,809 208,248,185
-------------- -------------
Net increase in net assets from Fund
share transactions 118,399,637 207,566,917
-------------- -------------
Total increase in net assets 500,950,679 464,394,131
NET ASSETS:
Beginning of year 2,285,488,752 1,821,094,621
-------------- -------------
End of year (including undistributed
net investment income of $22,316,773
in 1999, and $19,696,302 in 1998) $2,786,439,431 2,285,488,752
============== =============
</TABLE>
See accompanying notes to financial statements.
11-------
<PAGE>
STATE FARM GROWTH FUND, INC.
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES (For a share outstanding throughout each
year)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 44.65 39.48 34.55 29.40 22.63 22.21 23.05 20.33 16.77 16.90
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income 0.62 0.61 0.62 0.63 0.50 0.44 0.45 0.43 0.42 0.47
Net gain or (loss)
on investments
(both realized
and unrealized) 7.33 6.33 7.23 5.17 6.97 0.43 (0.60) 2.70 4.32 0.26
-------- ------- ------- ------- ------- ----- ----- ----- ----- -----
Total from
investment
operations 7.95 6.94 7.85 5.80 7.47 0.87 (0.15) 3.13 4.74 0.73
-------- ------- ------- ------- ------- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Net investment
income (0.59) (0.64) (0.61) (0.53) (0.52) (0.45) (0.45) (0.41) (0.54) (0.40)
Capital gains (0.05) (1.13) (2.31) (0.12) (0.18) -- (0.24) -- (0.64) (0.46)
-------- ------- ------- ------- ------- ----- ----- ----- ----- -----
Total distributions (0.64) (1.77) (2.92) (0.65) (0.70) (0.45) (0.69) (0.41) (1.18) (0.86)
-------- ------- ------- ------- ------- ----- ----- ----- ----- -----
Net asset value, end
of year $ 51.96 44.65 39.48 34.55 29.40 22.63 22.21 23.05 20.33 16.77
======== ======= ======= ======= ======= ===== ===== ===== ===== =====
TOTAL RETURN 17.93% 18.17% 24.80% 20.09% 33.67% 4.02% (0.65)% 15.49% 29.79% 4.27%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
year (millions) $2,786.4 2,285.5 1,821.1 1,362.9 1,068.6 771.7 725.1 696.1 558.4 414.3
Ratio of expenses to
average net assets 0.12% 0.12% 0.12% 0.13% 0.14%(a) 0.14% 0.14% 0.16% 0.19% 0.21%
Ratio of net
investment income
to average net
assets 1.27% 1.47% 1.78% 1.88% 1.95% 2.00% 2.05% 1.99% 2.22% 2.84%
Portfolio turnover
rate 2% 1% 6% 16% 3% 3% 2% 2% 1% 16%
</TABLE>
- ----------
(a) The ratio based on net custodian expenses would have been .13% in 1995.
- ---------
12
<PAGE>
STATE FARM BALANCED FUND, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------
<C> <S> <C> <C> <C>
COMMON STOCKS (68.1%)
AGRICULTURE, FOODS, & BEVERAGE (3.7%)
853,118 Archer-Daniels-Midland Company $ 10,610,655
26,000 Campbell Soup Company 1,160,250
310,000 Kellogg Company 10,501,250
58,000 Sara Lee Corporation 1,406,500
190,000 The Coca-Cola Company 12,789,375
------------
36,468,030
------------
BANKS (5.7%)
49,960 ABN Amro Holding NV 1,218,159
52,312 Amsouth Bancorporation 1,180,290
36,700 Bank of America Corporation 2,146,950
184,100 Bank One Corporation 6,489,525
25,650 First Security Corporation 721,406
12,300 First Virginia Banks Inc. 558,112
17,700 Golden West Financial
Corporation 1,786,594
10,900 JP Morgan & Co. Incorporated 1,433,350
1,900 M&T Bank Corporation 893,000
20,500 Northern Trust Corporation 1,984,656
180,960 Pacific Century Financial
Corporation 3,551,340
166,924 Popular Inc. 4,799,065
99,000 Southtrust Corporation 3,842,438
21,400 SunTrust Banks Inc. 1,495,325
17,600 TCF Financial Corporation 498,300
19,251 U.S. Bancorp 658,144
75,700 Wachovia Corporation 5,862,019
373,800 Wells Fargo & Company 17,381,700
------------
56,500,373
------------
BUILDING MATERIALS & CONSTRUCTION (.6%)
160,200 Vulcan Materials Company 6,448,050
------------
CHEMICALS (3.4%)
230,000 Air Products & Chemicals Inc. 7,446,250
108,705 E.I. du Pont de Nemours and
Company 6,461,153
141,400 Great Lakes Chemical
Corporation 4,692,712
120,000 International Flavors &
Fragrances Inc. 4,417,500
11,800 Praxair Inc. 526,575
245,500 Sigma-Aldrich Corporation 7,027,437
23,000 The Dow Chemical Company 2,693,875
------------
33,265,502
------------
COMPUTER SOFTWARE AND SERVICES (2.3%)
15,500 AutoDesk Inc. 454,344
67,700 Cisco Systems Inc. (a) 6,037,994
8,800 Electronic Data Systems
Corporation 565,950
168,600 Microsoft Corporation (a) 15,350,507
------------
22,408,795
------------
COMPUTERS (5.0%)
377,000 Hewlett-Packard Company 35,767,875
137,200 International Business
Machines Corporation 14,140,175
------------
49,908,050
------------
</TABLE>
15-------
<PAGE>
STATE FARM BALANCED FUND, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------
<C> <S> <C> <C> <C>
CONSUMER & MARKETING (4.7%)
22,200 Clorox Co. $ 989,287
160,000 Hon Industries Inc. 3,460,000
177,937 Kimberly Clark Corp. 11,365,726
96,700 McDonald's Corporation 4,351,500
136,218 Newell Rubbermaid Inc. 4,469,653
300,000 The Gillette Company 12,056,250
81,600 The Procter & Gamble Company 8,812,800
22,857 Unilever NV 1,244,278
------------
46,749,494
------------
ELECTRONIC/ELECTRICAL MFG. (5.0%)
28,600 Applied Materials Inc. (a) 2,786,712
10,100 Diebold Inc. 231,669
31,200 Emerson Electric Co. 1,778,400
159,900 General Electric Company 20,787,000
251,400 Intel Corporation 19,279,237
18,700 KLA Tencor Corporation (a) 1,581,319
40,800 Linear Technology Corp. 2,899,350
------------
49,343,687
------------
FINANCIAL SERVICES (.8%)
66,750 Citigroup Inc. 3,596,156
160,650 MBNA Corporation 4,056,412
9,900 The Finova Group Inc. 368,156
------------
8,020,724
------------
HEALTH CARE (9.9%)
38,700 Allergan Inc. 3,807,112
405,000 Biomet Inc. 12,833,437
31,025 Covance Inc. (a) 337,397
212,000 Eli Lilly & Co. 15,211,000
198,000 Johnson & Johnson 20,542,500
21,600 Medtronic Inc. 839,700
123,400 Merck & Co. Inc. 9,686,900
960,000 Pfizer Inc. 34,740,000
------------
97,998,046
------------
MACHINERY & MANUFACTURING (2.8%)
44,600 AlliedSignal Inc. 2,667,637
45,900 AptarGroup Inc. 1,245,038
100,000 Caterpillar Inc. 4,637,500
124,100 Corning Incorporated 11,626,619
14,700 Deere & Company 631,181
20,000 Illinois Tool Works Inc. 1,295,000
47,700 Minnesota Mining &
Manufacturing Co. 4,558,331
84,375 Osmonics Inc. (a) 759,375
------------
27,420,681
------------
MEDIA & BROADCASTING (4.2%)
42,000 Lee Enterprises Incorporated 1,189,125
42,000 Lee Enterprises Incorporated
Class B 1,189,125
173,333 Reuters Group PLC ADR 11,353,312
993,495 The Walt Disney Company 27,693,673
------------
41,425,235
------------
</TABLE>
- ---------
16
<PAGE>
STATE FARM BALANCED FUND, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------
<C> <S> <C> <C> <C>
MINING & METALS (1.0%)
29,200 Newmont Mining Corporation $ 691,675
109,200 Nucor Corporation 5,507,775
50,000 Rio Tinto PLC ADR 3,887,500
18,750 Steel Dynamics Inc. (a) 257,813
------------
10,344,763
------------
OIL, GAS, & OTHER ENERGY (4.4%)
89,986 BP Amoco PLC ADR 5,483,522
144,000 Chevron Corporation 12,753,000
29,185 Devon Energy Corporation 1,028,771
164,500 Exxon Corporation 13,046,906
65,220 Pennzoil-Quaker State Co. 676,658
188,700 Royal Dutch Petroleum Company
ADR 10,944,600
------------
43,933,457
------------
RETAILERS (.9%)
149,600 Wal-Mart Stores Inc. 8,620,700
------------
TELECOM & TELECOM EQUIPMENT (12.6%)
258,200 ADC Telecommunications
Inc. (a) 13,765,288
255,000 AT&T Corp. 14,248,125
136,000 LM Ericsson Telephone Company
ADR 6,553,500
220,376 Lucent Technologies Inc. 16,101,222
324,657 MCI Worldcom Inc. (a) 26,845,076
64,000 Motorola Inc. 7,312,000
29,800 Nextlink Communications Inc.
(Class A) (a) 1,490,000
22,100 Nokia Corporation ADR 3,053,944
89,200 Nortel Networks Corp. 6,600,800
470,024 SBC Communications Inc. 24,411,872
23,100 U.S. West Inc. 1,433,644
60,000 Vodafone AirTouch Public
Limited Co. ADR (a) 2,831,250
------------
124,646,721
------------
UTILITIES & ENERGY (1.1%)
20,800 CMS Energy Corporation 691,600
36,000 Duke Energy Corporation 1,824,750
25,200 FPL Group Inc. 1,102,500
49,300 Scottish Power PLC ADR (a) 1,722,419
80,000 Southern Company 1,870,000
47,300 Teco Energy Inc. 946,000
28,000 Texas Utilities Company
(Holding Co.) 1,002,750
30,200 The AES Corporation (a) 1,749,713
------------
10,909,732
------------
TOTAL COMMON STOCKS
(cost $267,308,424) 674,412,040
------------
</TABLE>
17-------
<PAGE>
STATE FARM BALANCED FUND, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL COUPON MATURITY
AMOUNT RATE DATE VALUE
- --------------------------------------------------------------------------------------
CORPORATE BONDS (7.8%)
<C> <S> <C> <C> <C>
AGRICULTURE, FOODS, & BEVERAGE (.8%)
$ 3,000,000 Pioneer Hi-Bred International
Inc. 5.750% January 15, 2009 $ 2,732,430
3,000,000 Dean Foods Company 6.625% May 15, 2009 2,841,090
2,950,000 Archer-Daniels-Midland Company 5.870% November 15, 2010 2,937,669
------------
8,511,189
------------
AUTOMOTIVE (.6%)
3,000,000 Daimler Chrysler North America 6.900% September 1, 2004 2,993,250
3,000,000 Ford Motor Credit Company 5.800% January 12, 2009 2,703,420
------------
5,696,670
------------
BUILDING MATERIALS & CONSTRUCTION (.3%)
3,000,000 Vulcan Materials Company 6.000% April 1, 2009 2,734,590
------------
CHEMICALS (.6%)
3,000,000 PPG Industries Inc. 6.750% August 15, 2004 2,959,200
3,250,000 E.I. du Pont de Nemours and
Company 6.750% October 15, 2004 3,235,733
------------
6,194,933
------------
COMPUTERS (.3%)
3,000,000 International Business
Machines Corporation 5.375% February 1, 2009 2,675,220
------------
CONSUMER & MARKETING (.5%)
2,000,000 Hasbro Inc. 5.600% November 1, 2005 1,829,400
3,000,000 The Procter & Gamble Company 6.875% September 15, 2009 2,987,190
------------
4,816,590
------------
CONTAINERS & PACKAGING (.4%)
5,000,000 Avery Dennison Corp. 5.900% December 1, 2008 4,476,000
------------
ELECTRONIC/ELECTRICAL MFG. (.3%)
3,000,000 Emerson Electric Co. 5.850% March 15, 2009 2,762,400
------------
FINANCIAL SERVICES (.3%)
3,000,000 Household Finance 7.200% July 15, 2006 2,996,010
------------
HEALTH CARE (.6%)
3,000,000 Johnson & Johnson 6.625% September 1, 2009 2,947,200
3,000,000 Becton Dickinson & Co. 7.150% October 1, 2009 2,922,600
------------
5,869,800
------------
MACHINERY & MANUFACTURING (.9%)
3,000,000 United Technologies Corp. 7.000% September 15, 2006 2,977,470
3,000,000 Illinois Tool Works Inc. 5.750% March 1, 2009 2,737,260
3,000,000 Caterpillar Inc. 7.250% September 15, 2009 2,994,630
------------
8,709,360
------------
MEDIA & BROADCASTING (.3%)
3,000,000 The Washington Post Company 5.500% February 15, 2009 2,674,980
------------
</TABLE>
- ---------
18
<PAGE>
STATE FARM BALANCED FUND, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL COUPON MATURITY
AMOUNT RATE DATE VALUE
- ----------- ------ ------------------- ------------
<C> <S> <C> <C> <C>
OIL, GAS, & OTHER ENERGY (.2%)
$ 3,000,000 Texaco Capital 5.500% January 15, 2009 $ 2,662,410
------------
RETAILERS (.6%)
3,000,000 Albertsons Inc. 6.950% August 1, 2009 2,932,980
3,000,000 Wal-Mart Stores Inc. 6.875% August 10, 2009 2,976,900
------------
5,909,880
------------
TELECOM & TELECOM EQUIPMENT (.8%)
5,000,000 US West Communications 5.625% November 15, 2008 4,404,300
3,000,000 AT&T Corp. 6.000% March 15, 2009 2,765,790
1,000,000 New England Telephone &
Telegraph Co. 5.875% April 15, 2009 906,070
------------
8,076,160
------------
UTILITIES & ENERGY (.3%)
3,000,000 Alabama Power Company 7.125% August 15, 2004 2,990,070
------------
TOTAL CORPORATE BONDS
(cost $81,676,545) 77,756,262
------------
U.S. TREASURY OBLIGATIONS (21.7%)
3,000,000 U.S. Treasury Notes 6.375% January 15, 2000 3,002,160
2,000,000 U.S. Treasury Notes 8.500% February 15, 2000 2,012,220
3,000,000 U.S. Treasury Notes 6.875% March 31, 2000 3,013,650
3,000,000 U.S. Treasury Notes 5.500% April 15, 2000 2,999,340
5,000,000 U.S. Treasury Notes 6.250% May 31, 2000 5,015,200
3,000,000 U.S. Treasury Notes 8.750% August 15, 2000 3,061,290
3,000,000 U.S. Treasury Notes 8.500% November 15, 2000 3,074,100
4,200,000 U.S. Treasury Notes 7.750% February 15, 2001 4,287,696
5,000,000 U.S. Treasury Notes 6.375% March 31, 2001 5,026,250
625,000 U.S. Treasury Bonds 13.125% May 15, 2001 686,556
2,000,000 U.S. Treasury Notes 8.000% May 15, 2001 2,056,040
680,000 U.S. Treasury Bonds 13.375% August 15, 2001 760,131
4,000,000 U.S. Treasury Notes 7.875% August 15, 2001 4,119,120
5,500,000 U.S. Treasury Notes 7.500% November 15, 2001 5,648,445
5,000,000 U.S. Treasury Bonds 14.250% February 15, 2002 5,837,900
2,000,000 U.S. Treasury Notes 7.500% May 15, 2002 2,065,840
5,000,000 U.S. Treasury Notes 6.000% July 31, 2002 4,996,600
7,500,000 U.S. Treasury Notes 6.375% August 15, 2002 7,552,725
2,570,000 U.S. Treasury Bonds 11.625% November 15, 2002 2,945,477
5,000,000 U.S. Treasury Notes 6.250% February 15, 2003 5,020,450
3,000,000 U.S. Treasury Bonds 10.750% May 15, 2003 3,417,150
9,000,000 U.S. Treasury Notes 5.750% August 15, 2003 8,888,850
5,500,000 U.S. Treasury Bonds 11.875% November 15, 2003 6,564,800
9,000,000 U.S. Treasury Notes 5.875% February 15, 2004 8,927,460
9,000,000 U.S. Treasury Notes 7.250% May 15, 2004 9,367,740
6,000,000 U.S. Treasury Notes 7.250% August 15, 2004 6,256,740
1,500,000 U.S. Treasury Bonds 11.625% November 15, 2004 1,835,460
5,000,000 U.S. Treasury Notes 7.500% February 15, 2005 5,276,500
1,785,000 U.S. Treasury Bonds 8.250% May 15, 2005 1,804,403
7,500,000 U.S. Treasury Notes 6.500% May 15, 2005 7,593,750
4,800,000 U.S. Treasury Bonds 10.750% August 15, 2005 5,804,640
</TABLE>
19-------
<PAGE>
STATE FARM BALANCED FUND, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL COUPON MATURITY
AMOUNT RATE DATE VALUE
- ----------- ------ ------------------- ------------
$ 6,000,000 U.S. Treasury Notes %5.875 November 15, 2005 $ 5,902,020
<C> <S> <C> <C> <C>
11,500,000 U.S. Treasury Bonds 9.375% February 15, 2006 13,300,785
6,000,000 U.S. Treasury Notes 6.875% May 15, 2006 6,190,620
3,000,000 U.S. Treasury Notes 7.000% July 15, 2006 3,116,370
4,000,000 U.S. Treasury Notes 6.500% October 15, 2006 4,046,160
10,000,000 U.S. Treasury Notes 6.250% February 15, 2007 9,982,100
11,000,000 U.S. Treasury Notes 6.625% May 15, 2007 11,207,020
4,000,000 U.S. Treasury Notes 6.125% August 15, 2007 3,956,480
10,000,000 U.S. Treasury Notes 5.500% February 15, 2008 9,524,800
1,000,000 U.S. Treasury Bonds 10.375% November 15, 2009 1,165,080
7,000,000 U.S. Treasury Bonds 10.000% May 15, 2010 8,127,700
------------
TOTAL U.S. TREASURY OBLIGATIONS
(cost $220,390,521) 215,437,818
------------
GOVERNMENT AGENCY SECURITIES (1.0%)
10,000,000 Federal National Mortgage
Association
(cost $9,523,438) 6.000% May 15, 2008 9,501,500
------------
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT
- --------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (.9%)
<C> <S> <C> <C> <C>
1,700,000 Ford Motor Credit Company,
5.616%, December, 1999 1,700,530
5,000,000 U.S. Treasury Bills, 4.670%,
January, 2000 4,975,950
2,082,036 Chase Vista Treasury Plus
Money Market Fund 2,082,036
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $8,757,992) 8,758,516
------------
TOTAL INVESTMENTS (99.5%)
(cost $587,656,920) 985,866,136
CASH AND OTHER ASSETS, NET OF LIABILITIES (0.5%) 4,857,766
------------
NET ASSETS (100.0%) $990,723,902
============
</TABLE>
Notes:
(a) Non-income producing security.
At November 30, 1999, net unrealized appreciation of $398,209,216 consisted of
gross unrealized appreciation of $413,638,806 and gross unrealized depreciation
of $15,429,590 based on cost of $587,656,920 for federal income tax purposes.
See accompanying notes to financial statements.
- ---------
20
<PAGE>
STATE FARM BALANCED FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1999
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (cost
$587,656,920) $985,866,136
Cash 4,058
Receivable for:
Dividends and interest $5,548,228
Shares of the Fund sold 255,020 5,803,248
----------
Prepaid expenses 19,219
------------
Total assets 991,692,661
------------
LIABILITIES AND NET ASSETS
Payable for:
Shares of the Fund redeemed 626,768
Other (including $297,302 to
Manager) 341,991 968,759
---------- ------------
Total liabilities 968,759
------------
Net assets applicable to 18,766,813
shares outstanding of
$1.00 par value common stock
(40,000,000 shares authorized) $990,723,902
============
Net asset value, offering price and
redemption price per share $ 52.79
============
ANALYSIS OF NET ASSETS
Excess of amounts received from sales
of shares over amounts paid on
redemptions of shares on account of
capital $555,375,580
Accumulated net realized gain on sales
of investments 10,843,298
Net unrealized appreciation of
investments 398,209,216
Undistributed net investment income 26,295,808
------------
Net assets applicable to shares
outstanding $990,723,902
============
</TABLE>
See accompanying notes to financial statements.
21-------
<PAGE>
STATE FARM BALANCED FUND, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 8,844,759 9,838,359
Interest 21,001,785 19,172,814
----------- -----------
29,846,544 29,011,173
Less: foreign withholding taxes 144,691 113,470
----------- -----------
Total investment income 29,701,853 28,897,703
EXPENSES:
Investment advisory and management
fees 1,113,753 980,972
Professional fees 61,649 33,191
ICI dues 23,365 20,048
Registration fees 8,879 20,140
Fidelity bond expense 5,377 4,827
Directors' fees 7,200 8,129
Reports to shareowners 32,580 11,907
Security evaluation fees 4,571 4,893
Franchise taxes 17,600 17,229
Custodian fees 17,895 17,454
Proxy and related expense -- 14,077
Other 131 140
----------- -----------
Total expenses 1,293,000 1,133,007
----------- -----------
Net investment income 28,408,853 27,764,696
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Net realized gain on sales of
investments 10,843,298 446,940
Change in net unrealized appreciation 48,274,008 70,040,582
----------- -----------
Net realized and unrealized gain on
investments 59,117,306 70,487,522
----------- -----------
Net change in net assets resulting from
operations $87,526,159 98,252,218
=========== ===========
</TABLE>
See accompanying notes to financial statements.
- ---------
22
<PAGE>
STATE FARM BALANCED FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 28,408,853 27,764,696
Net realized gain on sales of
investments 10,843,298 446,940
Change in net unrealized appreciation 48,274,008 70,040,582
------------ -----------
Net change in net assets resulting from
operations 87,526,159 98,252,218
Undistributed net investment income
included in price of shares issued and
redeemed 270,649 714,370
DISTRIBUTIONS TO SHAREOWNERS FROM:
Net investment income (27,062,617) (26,507,020)
Net realized gain (382,353) (11,354,841)
------------ -----------
Total distributions to shareowners (27,444,970) (37,861,861)
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 112,775,656 143,691,069
Reinvestment of ordinary income
dividends and capital gain
distributions 26,064,784 36,429,240
------------ -----------
138,840,440 180,120,309
Less payments for shares redeemed 101,669,744 110,302,865
------------ -----------
Net increase in net assets from Fund
share transactions 37,170,696 69,817,444
------------ -----------
Total increase in net assets 97,522,534 130,922,171
------------ -----------
NET ASSETS:
Beginning of year 893,201,368 762,279,197
------------ -----------
End of year (including undistributed
net investment income of $26,295,808
in 1999, and $24,614,336 in 1998) $990,723,902 893,201,368
============ ===========
</TABLE>
See accompanying notes to financial statements.
23-------
<PAGE>
STATE FARM BALANCED FUND, INC.
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES (For a share outstanding throughout each
year)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $49.54 46.09 42.04 37.76 31.12 30.88 31.24 27.98 22.72 22.27
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 1.51 1.54 1.40 1.39 1.25 1.03 0.98 0.98 0.94 1.06
Net gain or (loss) on
investments (both realized
and unrealized) 3.23 4.14 5.45 4.38 6.77 0.17 (0.09) 3.29 5.81 0.74
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations 4.74 5.68 6.85 5.77 8.02 1.20 0.89 4.27 6.75 1.80
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Net investment income (1.47) (1.54) (1.47) (1.30) (1.19) (0.89) (1.01) (0.89) (1.03) (0.92)
Capital gains (0.02) (0.69) (1.33) (0.19) (0.19) (0.07) (0.24) (0.12) (0.46) (0.43)
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (1.49) (2.23) (2.80) (1.49) (1.38) (0.96) (1.25) (1.01) (1.49) (1.35)
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of year $52.79 49.54 46.09 42.04 37.76 31.12 30.88 31.24 27.98 22.72
====== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN 9.72% 12.72% 17.33% 15.78% 26.53% 3.98% 2.91% 15.43% 31.09% 8.29%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(millions) $990.7 893.2 762.3 626.1 499.7 370.5 327.8 259.7 173.5 108.8
Ratio of expenses to average
net assets 0.13% 0.14% 0.14% 0.15% 0.17%(a) 0.17% 0.19% 0.22% 0.26% 0.27%
Ratio of net investment income
to average net assets 2.96% 3.34% 3.42% 3.63% 3.66% 3.36% 3.20% 3.29% 3.66% 4.87%
Portfolio turnover rate 5% 2% 6% 9% 6% 4% 4% 4% 1% 10%
</TABLE>
- ----------
(a) The ratio based on net custodian expenses would have been .16% in 1995.
- ---------
24
<PAGE>
STATE FARM INTERIM FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1999
<TABLE>
<CAPTION>
Principal Coupon Maturity
amount Rate Date Value
- ---------- ------ ------------------- ------------
<C> <S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS (97.7%)
$2,000,000 U.S. Treasury Notes 6.375% January 15, 2000 $ 2,001,440
2,000,000 U.S. Treasury Notes 8.500% February 15, 2000 2,012,220
1,000,000 U.S. Treasury Notes 6.875% March 31, 2000 1,004,550
6,250,000 U.S. Treasury Notes 5.500% April 15, 2000 6,248,625
1,000,000 U.S. Treasury Notes 6.750% April 30, 2000 1,004,670
1,000,000 U.S. Treasury Notes 8.875% May 15, 2000 1,015,270
1,000,000 U.S. Treasury Notes 6.250% May 31, 2000 1,003,040
4,000,000 U.S. Treasury Notes 8.750% August 15, 2000 4,081,720
3,750,000 U.S. Treasury Notes 8.500% November 15, 2000 3,842,625
3,000,000 U.S. Treasury Notes 5.500% December 31, 2000 2,987,580
1,000,000 U.S. Treasury Notes 5.250% January 31, 2001 992,900
4,000,000 U.S. Treasury Notes 7.750% February 15, 2001 4,083,520
4,000,000 U.S. Treasury Notes 5.625% February 28, 2001 3,985,960
5,000,000 U.S. Treasury Notes 8.000% May 15, 2001 5,140,100
4,000,000 U.S. Treasury Notes 7.875% August 15, 2001 4,119,120
3,000,000 U.S. Treasury Notes 6.375% September 30, 2001 3,018,330
4,000,000 U.S. Treasury Notes 7.500% November 15, 2001 4,107,960
4,000,000 U.S. Treasury Bonds 14.250% February 15, 2002 4,670,320
4,000,000 U.S. Treasury Notes 7.500% May 15, 2002 4,131,680
8,000,000 U.S. Treasury Notes 6.375% August 15, 2002 8,056,240
4,000,000 U.S. Treasury Bonds 11.625% November 15, 2002 4,584,400
5,000,000 U.S. Treasury Notes 5.750% November 30, 2002 4,958,550
6,000,000 U.S. Treasury Notes 6.250% February 15, 2003 6,024,540
7,000,000 U.S. Treasury Notes 5.750% April 30, 2003 6,923,560
2,000,000 U.S. Treasury Bonds 10.750% May 15, 2003 2,278,100
2,000,000 U.S. Treasury Bonds 11.125% August 15, 2003 2,318,260
7,000,000 U.S. Treasury Notes 5.750% August 15, 2003 6,913,550
1,000,000 U.S. Treasury Bonds 11.875% November 15, 2003 1,193,600
3,000,000 U.S. Treasury Notes 5.875% February 15, 2004 2,975,820
8,000,000 U.S. Treasury Notes 7.250% May 15, 2004 8,326,880
5,000,000 U.S. Treasury Notes 7.250% August 15, 2004 5,213,950
8,000,000 U.S. Treasury Notes 7.875% November 15, 2004 8,556,400
4,000,000 U.S. Treasury Notes 7.500% February 15, 2005 4,221,200
4,000,000 U.S. Treasury Notes 6.500% May 15, 2005 4,050,000
8,000,000 U.S. Treasury Notes 6.500% August 15, 2005 8,100,240
4,000,000 U.S. Treasury Notes 5.875% November 15, 2005 3,934,680
------------
Total U.S. treasury obligations
(cost $154,727,422) 148,081,600
------------
<CAPTION>
Shares or
Principal
amount
- -------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (2.2%)
<C> <S> <C> <C> <C>
1,000,000 U.S. Treasury Bills, 4.670%,
January, 2000 995,190
2,341,436 Chase Vista Treasury Plus
Money Market Fund 2,341,436
------------
Total short-term investments
(cost $3,336,496) 3,336,626
------------
TOTAL INVESTMENTS (99.9%)
(cost $158,063,918) 151,418,226
CASH AND OTHER ASSETS, NET OF LIABILITIES (0.1%) 150,001
------------
NET ASSETS (100.0%) $151,568,227
============
</TABLE>
Notes:
At November 30, 1999, net unrealized depreciation of $6,645,692 consisted of
gross unrealized appreciation of $27,412 and gross unrealized depreciation of
$6,673,104 based on cost of $158,063,918 for federal income tax purposes.
See accompanying notes to financial statements.
27-------
<PAGE>
STATE FARM INTERIM FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1999
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (cost
$158,063,918) $151,418,226
Receivable for:
Interest $2,019,638
Shares of the Fund sold 61,773 2,081,411
----------
Prepaid expenses 4,909
------------
Total assets 153,504,546
LIABILITIES AND NET ASSETS
Dividends payable to shareowners 1,634,840
Payable for:
Shares of the Fund redeemed 217,722
Other (including $59,681 to Manager) 83,757 301,479
---------- ------------
Total liabilities 1,936,319
------------
Net assets applicable to 15,999,067
shares outstanding of
$1.00 par value common stock
(40,000,000 shares authorized) $151,568,227
============
Net asset value, offering price and
redemption price per share $ 9.47
============
ANALYSIS OF NET ASSETS
Excess of amounts received from sales
of shares over amounts paid on
redemptions of shares on account of
capital $162,221,550
Accumulated net realized loss on sales
of investments (4,007,631)
Net unrealized depreciation of
investments (6,645,692)
------------
Net assets applicable to shares
outstanding $151,568,227
============
</TABLE>
See accompanying notes to financial statements.
- ---------
28
<PAGE>
STATE FARM INTERIM FUND, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------
1999 1998
------------ ----------
<S> <C> <C>
INVESTMENT INCOME:
Interest $10,570,203 8,742,391
EXPENSES:
Investment advisory and management
fees 230,126 199,209
Professional fees 41,759 19,501
ICI dues 6,174 3,283
Registration fees 145 12,266
Fidelity bond expense 2,709 2,638
Directors' fees 2,400 2,709
Reports to shareowners 5,533 2,713
Security evaluation fees 963 1,862
Franchise taxes 8,323 12,547
Custodian fees 10,256 6,112
Proxy and related expense -- 2,950
Other 131 140
----------- ---------
Total expenses 308,519 265,930
----------- ---------
Net investment income 10,261,684 8,476,461
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized loss on sales of
investments (884,533) (994,996)
Change in net unrealized appreciation
or depreciation (7,167,018) 2,484,327
----------- ---------
Net realized and unrealized gain (loss)
on investments (8,051,551) 1,489,331
----------- ---------
Net change in net assets resulting from
operations $ 2,210,133 9,965,792
=========== =========
</TABLE>
See accompanying notes to financial statements.
29-------
<PAGE>
STATE FARM INTERIM FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 10,261,684 8,476,461
Net realized loss on sales of
investments (884,533) (994,996)
Change in net unrealized appreciation
or depreciation (7,167,018) 2,484,327
------------ -----------
Net change in net assets resulting from
operations 2,210,133 9,965,792
DISTRIBUTIONS TO SHAREOWNERS FROM:
Net investment income (10,261,684) (8,476,461)
------------ -----------
Total distributions to shareowners (10,261,684) (8,476,461)
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 75,116,757 100,294,008
Reinvestment of ordinary income
dividends 9,326,141 7,418,955
------------ -----------
84,442,898 107,712,963
Less payments for shares redeemed 78,967,686 67,903,936
------------ -----------
Net increase in net assets from Fund
share transactions 5,475,212 39,809,027
------------ -----------
Total increase (decrease) in net assets (2,576,339) 41,298,358
------------ -----------
NET ASSETS:
Beginning of year 154,144,566 112,846,208
------------ -----------
End of year $151,568,227 154,144,566
============ ===========
</TABLE>
See accompanying notes to financial statements.
- ---------
30
<PAGE>
STATE FARM INTERIM FUND, INC.
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES (For a share outstanding throughout each
year)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 9.98 9.85 9.98 10.15 9.72 10.52 10.46 10.50 10.16 10.17
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.64 0.68 0.69 0.70 0.70 0.71 0.74 0.78 0.78 0.82
Net gain or (loss) on
investments (both
realized and
unrealized) (0.51) 0.13 (0.13) (0.17) 0.43 (0.80) 0.06 (0.04) 0.34 (0.01)
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations 0.13 0.81 0.56 0.53 1.13 (0.09) 0.80 0.74 1.12 0.81
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Net investment income (0.64) (0.68) (0.69) (0.70) (0.70) (0.71) (0.74) (0.78) (0.78) (0.82)
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.64) (0.68) (0.69) (0.70) (0.70) (0.71) (0.74) (0.78) (0.78) (0.82)
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of
year $ 9.47 9.98 9.85 9.98 10.15 9.72 10.52 10.46 10.50 10.16
====== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN 1.35% 8.31% 5.87% 5.44% 11.91% (0.85)% 7.82% 7.19% 11.41% 8.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(millions) $151.6 154.1 112.8 107.6 104.7 94.3 103.7 85.9 66.8 52.7
Ratio of expenses to
average net assets 0.20% 0.21% 0.22% 0.23%(a) 0.25%(a) 0.22% 0.25% 0.27% 0.28% 0.30%
Ratio of net investment
income to average net
assets 6.63% 6.80% 7.03% 7.03% 7.00% 7.00% 7.00% 7.30% 7.65% 8.12%
Portfolio turnover rate 12% 14% 15% 17% 17% 15% 15% 15% 14% 14%
</TABLE>
- ----------
(a) The ratio based on net custodian expenses would have been .22% in 1996 and
.24% in 1995.
31-------
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
November 30, 1999
<TABLE>
<CAPTION>
Rating(b)
Principal Coupon Maturity (Moody's
amount Rate Date or S&P) Value
- ---------- ------ ------------------- --------- ------------
<C> <S> <C> <C> <C> <C>
LONG-TERM MUNICIPAL BONDS (97.8%)
Alabama (1.8%)
$2,200,000 The Water Works and Sewer Board,
Birmingham, Alabama, Water and Sewer
Revenue Bonds, Series 1994
(Prerefunded to 1-1-2004 @ 102) 4.750% January 1, 2005 Aa3 $ 2,243,648
2,165,000 Huntsville, Alabama, General Obligation
Warrants, Series 1998A 4.600% November 1, 2013 Aa2 1,931,656
2,465,000 Limestone County Board of Education,
Alabama, Capital Outlay Tax Antic
Warrants, Series 1998 4.900% July 1, 2015 Aaa 2,240,217
------------
6,415,521
------------
Alaska (1.6%)
1,505,000 Anchorage, Alaska, General Obligation
General Purpose Refunding Bonds 4.600% February 1, 2003 Aaa 1,506,099
1,500,000 Municipality of Anchorage, Alaska, 1993
General Obligation Refunding School
Bonds, Series B 4.900% September 1, 2003 Aaa 1,516,275
1,100,000 Municipality of Anchorage, Alaska, 1994
General Obligation School Bonds 5.400% July 1, 2005 Aaa 1,131,955
1,565,000 Matanuska-Susitna Borough, Alaska,
General Obligation School Bonds, 1999
Series A 5.000% March 1, 2015 Aaa 1,442,226
------------
5,596,555
------------
Arizona (6.0%)
1,000,000 Pima County, Arizona, General Obligation
Refunding Bonds, Series 1992 6.300% July 1, 2002 A1 1,045,870
2,250,000 Pima County, Arizona, Unified School
District No. 1, Tucson School
Improvement Bonds, Series 1990 B
(Prerefunded to 7-1-2000 @ 101) 6.900% July 1, 2002 A2 2,310,142
3,000,000 Tempe Union High School District No.
213, Maricopa County, Arizona, School
Improvement General Obligation Bonds,
Project of 1989, Series 1992B
(Prerefunded to 7-1-2001 @ 101) 5.875% July 1, 2002 A+ 3,101,490
2,000,000 Deer Valley Unified School District No.
97 of Maricopa County, Arizona, School
Improvement Bonds, Project of 1992,
Series A (1993) 5.125% July 1, 2004 Aaa 2,038,740
1,000,000 Maricopa County, Arizona, Unified School
District No. 69, Paradise Valley
School Improvement Bonds,
Series 1990A 7.100% July 1, 2004 A1 1,095,640
2,340,000 City of Phoenix, Arizona, General
Obligation Refunding Bonds,
Series 1993 A 5.300% July 1, 2006 Aa1 2,406,620
1,000,000 Maricopa County, Arizona, Unified School
District No. 69, Paradise Valley
School Improvement Bonds,
Series 1994A 7.100% July 1, 2008 A1 1,132,700
1,200,000 Maricopa County, Arizona, Unified School
District No. 69, Paradise Valley
School Improvement Bonds,
Series 1994A 7.000% July 1, 2009 A1 1,360,392
2,500,000 Maricopa County, Arizona, Unified School
District No. 69, Paradise Valley
School Improvement Bonds,
Series 1994A 7.000% July 1, 2010 A1 2,862,650
4,250,000 Mesa Unified School District No. 4 of
Maricopa County, Arizona, School
Improvement Bonds, Project of 1995,
Series D (1997) 4.750% July 1, 2010 Aaa 4,062,277
------------
21,416,521
------------
California (5.0%)
3,000,000 State of California, Various Purpose
General Obligation Bonds 5.900% February 1, 2000 Aa3 3,011,100
400,000 State of California, General Obligation
Veterans Bonds, Series AL 9.600% April 1, 2001 Aa3 428,192
1,400,000 San Diego County, California, Water
Authority Water Revenue Certificates
of Participation, Series 1991A 6.000% May 1, 2001 Aa3 1,437,632
3,500,000 City of Los Angeles, California,
Wastewater System Revenue Bonds,
Series 1990 B (Prerefunded to 6-1-2000
@ 102) 6.900% June 1, 2004 Aaa 3,623,340
3,000,000 City of Los Angeles, California,
Department of Water and Power,
Electric Plant Refunding Revenue
Bonds, Second Issue of 1993 4.800% November 15, 2004 Aa3 3,044,340
2,000,000 State of California, Various Purpose
General Obligation Bonds 6.000% October 1, 2006 Aa3 2,161,280
</TABLE>
- ---------
34
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 1999
<TABLE>
<CAPTION>
Rating(b)
Principal Coupon Maturity (Moody's
amount Rate Date or S&P) Value
- ---------- ------ ------------------- --------- ------------
<C> <S> <C> <C> <C> <C>
$2,830,000 Sacramento County, California, Sanitary
District Financing Authority Revenue
Bonds, 1995 5.000% December 1, 2007 Aa3 $ 2,886,091
1,500,000 Sacramento County, California, Sanitary
District Financing Authority Revenue
Bonds, 1995 5.000% December 1, 2008 Aa3 1,520,730
------------
18,112,705
------------
Colorado (4.0%)
2,620,000 Cherry Creek School District No. 5,
Arapahoe County, Colorado, General
Obligation Improvement Bonds,
Series 1990 (Prerefunded to
12-15-2000 @ 101) 7.000% December 15, 2003 Aa2 2,725,612
2,000,000 Jefferson County, Colorado, School
District No. R-1 General Obligation
Bonds, Series 1992 (Prerefunded to
12-15-2002 @ 101) 5.750% December 15, 2003 Aaa 2,093,560
2,000,000 Arapahoe County School District # 6,
Colorado, Littleton Public Schools
General Obligation Improvement Bonds,
Series 1995A 5.000% December 1, 2007 Aa2 2,019,700
2,540,000 Mesa County Valley School District No.
51, County of Mesa, State of Colorado,
General Obligation Bonds, Series 1996 5.300% December 1, 2010 Aaa 2,559,761
3,135,000 St. Vrain School District # R3-1J,
Colorado, General Obligation,
Series 1997 5.000% December 15, 2012 Aaa 3,024,303
1,855,000 City of Boulder, Colorado, Open Space
Acquisition Refunding Bonds,
Series 1999 5.000% August 15, 2013 Aa1 1,778,426
------------
14,201,362
------------
Delaware (.7%)
1,125,000 The State of Delaware, General
Obligation Bonds, Series 1994B
(Prerefunded to 12-1-2004 @ 100) 6.000% December 1, 2011 Aa1 1,191,577
1,125,000 The State of Delaware, General
Obligation Bonds, Series 1994B
(Prerefunded to 12-1-2004 @ 100) 6.000% December 1, 2012 Aa1 1,191,577
------------
2,383,154
------------
Florida (1.9%)
2,000,000 School District of Leon County, Florida,
General Obligation Refunding Bonds,
Series 1991 5.850% July 1, 2001 A1 2,050,040
2,000,000 State of Florida, State Board of
Education, Public Education Capital
Outlay Refunding Bonds, 1995 Series C 5.125% June 1, 2008 Aa2 2,015,940
3,000,000 State of Florida, State Board of
Education Capital Outlay, 1999
Series A 4.750% January 1, 2015 Aa2 2,699,970
------------
6,765,950
------------
Georgia (8.0%)
1,500,000 Municipal Electric Authority of Georgia,
General Power Revenue Bonds,
Series 1993A 5.000% January 1, 2004 A3 1,504,875
2,100,000 Cherokee County School Systems, Georgia,
General Obligation School,
Series 1993 4.900% February 1, 2004 A2 2,120,349
1,205,000 DeKalb County School District, Georgia,
General Obligation Refunding Bonds,
Series 1993 5.100% July 1, 2004 Aa2 1,230,606
3,215,000 Forsyth County School District, Georgia,
General Obligation Bonds, Series 1995
(Prerefunded to 7-1-2005 @ 102) 5.050% July 1, 2007 Aaa 3,315,983
3,590,000 State of Georgia, General Obligation
Bonds, Series 1996C 6.250% August 1, 2009 Aaa 3,930,440
2,000,000 State of Georgia, General Obligation
Bonds, Series 1995C 5.700% July 1, 2011 Aaa 2,103,900
4,000,000 Gwinnett County Water & Sewer Authority,
Georgia, Revenue Series 1998 5.000% August 1, 2011 Aaa 3,947,560
3,000,000 State of Georgia, General Obligation
Bonds, Series 1995B 5.750% March 1, 2012 Aaa 3,147,870
3,000,000 State of Georgia, General Obligation
Bonds, Series 1994B 6.250% April 1, 2012 Aaa 3,283,920
1,055,000 Columbia County, Georgia, General
Obligation Bonds (Courthouse/Detention
Center Projects), Series 1998 4.700% February 1, 2013 A+ 958,309
</TABLE>
35-------
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 1999
<TABLE>
<CAPTION>
Rating(b)
Principal Coupon Maturity (Moody's
amount Rate Date or S&P) Value
- ---------- ------ ------------------- --------- ------------
<C> <S> <C> <C> <C> <C>
$1,195,000 Columbia County, Georgia, General
Obligation Bonds (Courthouse/Detention
Center Projects), Series 1998 4.800% February 1, 2014 A+ $ 1,082,025
2,500,000 Fayette County School District, Georgia,
General Obligation Refunding School
Bonds, Series 1999 4.750% March 1, 2015 Aa3 2,241,100
------------
28,866,937
------------
Hawaii (2.7%)
2,200,000 City and County of Honolulu, Hawaii,
General Obligation Refunding Bonds,
Series 1 5.600% June 1, 2001 Aa3 2,239,578
1,775,000 City and County of Honolulu, Hawaii,
General Obligation Bonds, 1996
Series A 5.400% September 1, 2009 Aaa 1,804,554
2,225,000 City and County of Honolulu, Hawaii,
General Obligation Bonds, 1996
Series A (Prerefunded to 9-1-2008 @
100) 5.400% September 1, 2009 Aaa 2,292,061
3,000,000 State of Hawaii, General Obligation
Bonds of 1992, Series BW 6.375% March 1, 2011 A1 3,267,750
------------
9,603,943
------------
Idaho (.4%)
1,540,000 Joint School District No. 2, Ada &
Canyon Counties, Idaho, General
Obligation School Bonds, Series 1994 5.000% July 30, 2004 Aa2 1,564,224
------------
Illinois (5.8%)
200,000 Charleston, Illinois, Water Works
Improvement Bonds 8.000% January 1, 2000 A 200,648
2,500,000 DuPage Water Commission, Illinois,
General Obligation Water Refunding
Bonds, Series 1992 5.850% March 1, 2000 Aaa 2,511,775
2,000,000 Lake County, Illinois, Forest Preserve
District General Obligation Refunding
Bonds, Series 1992B 5.700% February 1, 2003 Aa1 2,068,820
2,000,000 State of Illinois, General Obligation
Refunding Bonds, Series of June 1993 5.000% June 1, 2003 Aa2 2,027,540
2,025,000 County of DuPage, Illinois, General
Obligation Refunding Bonds (Alternate
Rev. Source--Stormwater Project) 5.100% January 1, 2004 Aaa 2,056,975
4,000,000 State of Illinois, General Obligation
Bonds, Series September 1996 5.450% September 1, 2009 Aaa 4,086,200
2,500,000 Forest Preserve District of Kane County,
Kane County, Illinois, General
Obligation Bonds, Series 1999 5.000% December 30, 2011 Aa3 2,429,250
3,785,000 DuPage County Forest Preserve District,
Illinois, General Obligation,
Series 1997 4.900% October 1, 2013 Aaa 3,579,361
2,195,000 Community Unit School District Number
200, DuPage County, Illinois,
(Wheaton-Warrenville), General
Obligation School Building Bonds,
Series 1999 5.050% February 1, 2015 Aaa 2,036,082
------------
20,996,651
------------
Indiana (2.9%)
900,000 Monroe County Jail, Indiana, First
Mortgage Refunding Bonds, Series 1993 4.900% January 1, 2002 A1 906,165
925,000 Monroe County Jail, Indiana, First
Mortgage Refunding Bonds, Series 1993 4.900% July 1, 2002 A1 932,557
2,000,000 Indianapolis, Indiana, Local Public
Improvement Bond Bank, Series 1993A
Bonds 5.250% January 10, 2004 Aaa 2,045,840
2,300,000 Indianapolis, Indiana, Local Public
Improvement Bond Bank Refunding Bonds,
Series 1993 B 4.700% February 15, 2004 Aaa 2,303,841
2,125,000 Southwest Allen, Indiana, High School
Building Corp., 1st Mortgage Refunding
Bonds, Series 1996B 4.850% July 15, 2006 Aaa 2,118,944
2,325,000 Eagle-Union Community Schools Building
Corporation, Boone County, Indiana,
1st Mortgage Refunding Bonds,
Series 1999 4.875% July 5, 2015 Aaa 2,086,222
------------
10,393,569
------------
</TABLE>
- ---------
36
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 1999
<TABLE>
<CAPTION>
Rating(b)
Principal Coupon Maturity (Moody's
amount Rate Date or S&P) Value
- ---------- ------ ------------------- --------- ------------
<C> <S> <C> <C> <C> <C>
Iowa (1.2%)
$2,000,000 City of Des Moines, Iowa, Sewer Revenue
Bonds, Series 1992D 6.000% June 1, 2003 Aaa $ 2,068,340
2,045,000 City of Iowa City, Johnson County, Iowa,
Sewer Revenue Bonds 5.875% July 1, 2004 Aaa 2,100,276
------------
4,168,616
------------
Kansas (.1%)
315,000 Johnson County Water District No. 1,
Kansas, Water Revenue, Series 1982A
(Escrowed to maturity) 10.250% August 1, 2002 Aaa 344,383
------------
Kentucky (.8%)
1,665,000 Jefferson County, Kentucky, General
Obligation Refunding Bonds,
Series 1998A 4.600% December 1, 2013 Aa2 1,498,284
1,745,000 Jefferson County, Kentucky, General
Obligation Refunding Bonds,
Series 1998A 4.700% December 1, 2014 Aa2 1,567,830
------------
3,066,114
------------
Louisiana (1.4%)
5,000,000 State of Louisiana, General Obligation
Bonds, Series 1997A 5.375% April 15, 2011 Aaa 5,019,750
------------
Maryland (2.1%)
2,000,000 Howard County, Maryland, Consolidated
Public Improvement Refunding Bonds,
Series 1991B 5.800% August 15, 2001 Aaa 2,053,340
5,750,000 Montgomery County, Maryland, General
Obligation Consolidated Public
Improvement, 1998 Series A 4.875% May 1, 2013 Aaa 5,453,645
------------
7,506,985
------------
Michigan (3.3%)
3,140,000 State of Michigan, General Obligation
Bonds, Clean Michigan Initiative
Program, Series 1999A 5.500% November 1, 2009 Aa1 3,254,013
3,800,000 Northville Public Schools, Michigan,
1997 General Obligation School
Building & Site & Refunding 5.100% May 1, 2011 Aaa 3,737,908
2,465,000 Clarkston Community Schools, County of
Oakland, State of Michigan, 1998
Refunding Bonds (General
Obligation-Unlimited Tax) 4.850% May 1, 2012 Aaa 2,319,097
1,400,000 Avondale School District, Oakland
County, Michigan, 1999 Refunding Bonds
(Unlimited Tax General Obligation) 4.850% May 1, 2015 Aaa 1,263,472
1,400,000 Avondale School District, Oakland
County, Michigan, 1999 Refunding Bonds
(Unlimited Tax General Obligation) 4.900% May 1, 2016 Aaa 1,259,706
------------
11,834,196
------------
Minnesota (3.5%)
1,885,000 Anoka County, Minnesota, General
Obligation Capital Improvement
Refunding Bonds, Series 1992C 5.200% February 1, 2001 A1 1,905,226
1,500,000 County of Ramsey, Minnesota, General
Obligation Capital Improvement
Refunding Bonds, Series 1992C 5.400% December 1, 2002 Aaa 1,545,165
3,215,000 State of Minnesota, General Obligation
State Refunding Bonds of 1983 5.125% August 1, 2004 Aaa 3,277,725
3,000,000 Becker, Minnesota, Pollution Control
Revenue Refunding Bonds,
Series 1989A, (Northern States Power
Co.--Sherburne County Gen. Station
Units 1 & 2 Project) 6.800% April 1, 2007 A1 3,063,780
3,000,000 Wayzata Independent School District
#284, Minnesota, General Obligation
School Building Refunding,
Series 1998A 5.000% February 1, 2012 Aa1 2,927,700
------------
12,719,596
------------
</TABLE>
37-------
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 1999
<TABLE>
<CAPTION>
Rating(b)
Principal Coupon Maturity (Moody's
amount Rate Date or S&P) Value
- ---------- ------ ------------------- --------- ------------
<C> <S> <C> <C> <C> <C>
Mississippi (1.2%)
$2,100,000 Jackson Public School District,
Mississippi, General Obligation School
Bonds, Series 1992 5.800% July 1, 2002 A1 $ 2,168,964
2,000,000 City of Jackson, Mississippi, Water and
Sewer System Revenue Refunding Bonds,
Series 1993-A 4.850% September 1, 2004 Aaa 2,015,900
------------
4,184,864
------------
Nebraska (4.4%)
2,000,000 City of Lincoln, Nebraska, Water Revenue
and Refunding Bonds, Series 1993 4.900% August 15, 2003 Aa2 2,026,920
2,850,000 City of Lincoln, Nebraska, Electric
System Revenue Refunding Bonds, 1993
Series A 4.700% September 1, 2003 Aa2 2,865,390
3,000,000 Omaha Public Power District of Nebraska,
Electric System Revenue, Series A
(Prerefunded to 2-1-2000 @ 101.5) 6.700% February 1, 2005 AA 3,058,620
1,500,000 Omaha, Nebraska, Public Power District
Electric System Revenue Bonds, 1993
Series B 5.100% February 1, 2005 Aa2 1,525,095
6,000,000 Omaha Public Power District, Nebraska,
Electric System Revenue Bonds, 1992
Series B (Escrowed to maturity) 6.150% February 1, 2012 Aa2 6,437,040
------------
15,913,065
------------
Nevada (.6%)
2,110,000 State of Nevada, General Obligation
(Limited Tax) Hoover Uprating
Refunding Bonds, Series 1992 6.000% October 1, 2001 Aa2 2,172,540
------------
New Mexico (.7%)
2,500,000 City of Albuquerque, New Mexico, Joint
Water and Sewer Refunding Revenue
Bonds, Series 1990B 7.000% July 1, 2003 Aa3 2,589,675
------------
New York (.3%)
1,250,000 State of New York, Power Authority
General Purpose Bonds, Series Z
(Escrowed to maturity) 6.000% January 1, 2001 Aaa 1,273,588
------------
North Carolina (3.1%)
1,600,000 County of Buncombe, North Carolina,
Refunding Bonds, Series 1993 5.100% March 1, 2004 Aa2 1,632,944
1,325,000 Winston-Salem, North Carolina, Water and
Sewer System Revenue Bonds,
Series 1995B 5.000% June 1, 2007 Aa2 1,332,407
1,665,000 Winston-Salem, North Carolina, Water and
Sewer System Revenue Bonds,
Series 1995B 5.100% June 1, 2008 Aa2 1,675,306
4,000,000 County of Wake, North Carolina, General
Obligation School Bonds, Series 1997 4.900% March 1, 2009 Aaa 3,969,200
3,000,000 State of North Carolina, Public School
Building Bonds, General Obligation,
Series 1999 4.600% April 1, 2016 Aaa 2,628,180
------------
11,238,037
------------
North Dakota (.6%)
2,000,000 Fargo, North Dakota, Water Revenue of
1993 (Escrowed to maturity) 5.000% January 1, 2004 Aaa 2,027,920
------------
Ohio (2.3%)
1,535,000 Columbus, Ohio, Sewer Improvement No. 27
Refunding Bonds, Series 1991
(Unlimited Tax General Obligation
Bonds) 5.900% February 15, 2002 Aaa 1,585,440
5,000,000 State of Ohio, Full Faith & Credit
General Obligation Infrastructure
Improvement Bonds, Series 1997 5.350% August 1, 2012 Aa1 5,020,250
</TABLE>
- ---------
38
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 1999
<TABLE>
<CAPTION>
Rating(b)
Principal Coupon Maturity (Moody's
amount Rate Date or S&P) Value
- ---------- ------ ------------------- --------- ------------
<C> <S> <C> <C> <C> <C>
$1,970,000 Delaware County, Ohio, General
Obligation, Limited Tax, Sewer
District Improvement Bonds,
Series 1999 4.900% December 1, 2015 Aaa $ 1,792,483
------------
8,398,173
------------
Oklahoma (2.1%)
1,500,000 City of Tulsa, Oklahoma, General
Obligation Refunding Bonds of 1993 5.050% June 1, 2002 Aa2 1,523,940
1,050,000 Oklahoma City, Oklahoma, General
Obligation Bonds, Series 1993 5.150% May 1, 2003 Aa2 1,070,706
1,050,000 Oklahoma City, Oklahoma, General
Obligation Bonds, Series 1993 5.250% May 1, 2004 Aa2 1,070,328
2,000,000 Oklahoma City, Oklahoma, General
Obligation Refunding Bonds,
Series 1993 5.300% August 1, 2005 Aa2 2,054,980
1,680,000 City of Tulsa, Oklahoma, General
Obligation Bonds, Series 1999 (a) 5.250% December 1, 2009 Aa2 1,703,503
------------
7,423,457
------------
Oregon (1.7%)
4,000,000 Portland, Oregon, Sewer System Revenue
Refunding Bonds, 1997 Series A 5.000% June 1, 2011 Aaa 3,921,200
2,000,000 Washington and Clackamas Counties School
District #23J (Tigard-Tualatin),
Oregon, General Obligation Bonds,
Series 1995 5.550% June 1, 2011 A1 2,037,100
------------
5,958,300
------------
Pennsylvania (1.1%)
1,645,000 City of Lancaster, Lancaster County,
Pennsylvania, General Obligation
Bonds, Series A of 1998 4.650% May 1, 2013 Aaa 1,486,455
2,695,000 City of Lancaster, Lancaster County,
Pennsylvania, General Obligation
Bonds, Series A of 1998 4.750% May 1, 2014 Aaa 2,430,701
------------
3,917,156
------------
South Carolina (2.7%)
1,625,000 Charleston County, South Carolina,
General Obligation Bonds of 1994 (ULT)
(Escrowed to maturity) 5.400% June 1, 2005 Aa3 1,676,415
1,700,000 State of South Carolina, General
Obligation State Highway Bonds,
Series 1995 5.100% August 1, 2008 Aaa 1,720,315
1,700,000 State of South Carolina, General
Obligation State Highway Bonds,
Series 1995 5.250% August 1, 2009 Aaa 1,727,761
2,675,000 City of Columbia, South Carolina,
Waterworks and Sewer System Revenue
Bonds, Series 1999 5.500% February 1, 2010 Aa2 2,743,935
1,800,000 School District No. 1 of Richland
County, South Carolina, General
Obligation Bonds, Series 1999 5.500% March 1, 2010 Aa1 1,850,994
------------
9,719,420
------------
Tennessee (4.0%)
1,200,000 Shelby County, Tennessee, General
Obligation Refunding Bonds, 1992
Series B 5.200% March 1, 2001 Aa3 1,214,136
1,000,000 Williamson County, Tennessee, Public
Works Refunding Bonds, Series 1992 5.650% March 1, 2002 Aa1 1,027,260
2,000,000 Nashville & Davidson County, Tennessee,
Electric System Revenue Bonds, 1992
Series B 5.500% May 15, 2002 Aa3 2,051,160
2,000,000 Nashville & Davidson County, Tennessee,
General Obligation Refunding Bonds of
1993 5.000% May 15, 2003 Aa2 2,031,020
1,500,000 Nashville & Davidson County, Tennessee,
Water and Sewer Revenue Refunding
Bonds, Series 1993 4.900% January 1, 2004 Aaa 1,514,310
1,800,000 Nashville & Davidson County, Tennessee,
General Obligation Refunding Bonds of
1993 5.000% May 15, 2005 Aa2 1,823,958
4,500,000 Nashville & Davidson County, Tennessee,
Water and Sewer Revenue Refunding
Bonds, Series 1996 5.250% January 1, 2008 Aaa 4,561,920
------------
14,223,764
------------
</TABLE>
39-------
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 1999
<TABLE>
<CAPTION>
Rating(b)
Principal Coupon Maturity (Moody's
amount Rate Date or S&P) Value
- ---------- ------ ------------------- --------- ------------
<C> <S> <C> <C> <C> <C>
Texas (5.6%)
$1,000,000 State of Texas, Veterans' Land Board
General Obligation Bonds, Series 1984
(Prerefunded to 12-1-1999 @ 100) 9.000% December 1, 2000 Aa1 $ 1,000,140
2,000,000 Texas Public Finance Authority, State of
Texas, General Obligation Refunding
Bonds, Series 1992A 5.700% October 1, 2003 Aa1 2,084,280
2,000,000 City of Dallas, Texas, Waterworks and
Sewer System Revenue Refunding Bonds,
Series 1993 4.900% April 1, 2004 Aa2 2,017,000
2,000,000 Harris County, Texas, Road and Refunding
Bonds, Series 1993 4.700% October 1, 2004 Aa1 2,007,260
2,355,000 Carrollton-Farmers Branch Independent
School District (Dallas and Denton
Counties, Texas) School Building
Unlimited Tax Bonds, Series 1996 5.200% February 15, 2008 Aaa 2,375,936
1,000,000 Carrollton-Farmers Branch Independent
School District (Dallas County, Texas)
School Building Unlimited Tax Bonds,
Series 1999 (a) 5.375% February 15, 2008 Aaa 1,022,890
3,000,000 State of Texas, Public Finance
Authority, General Obligation
Refunding Bonds, Series 1996B 5.400% October 1, 2008 Aa1 3,070,290
2,455,000 Carrollton-Farmers Branch Independent
School District (Dallas County, Texas)
School Building Unlimited Tax Bonds,
Series 1999 (a) 5.500% February 15, 2009 Aaa 2,526,244
1,840,000 City of Dallas, Texas, Waterworks and
Sewer System Revenue Bonds,
Series 1994A (Prerefunded to 10-1-2001
@ 101.5) 6.375% October 1, 2012 Aa2 1,932,773
2,250,000 Round Rock Independent School District,
Williamson and Travis Counties, Texas,
Unlimited Tax School Building and
Refunding Bonds, Series 1999 4.750% August 1, 2015 Aaa 1,998,158
------------
20,034,971
------------
Utah (1.1%)
2,780,000 Salt Lake County, Utah, General
Obligation Jail Bonds, Series 1995 5.000% December 15, 2007 Aaa 2,801,545
1,300,000 City of Provo, Utah County, Utah,
General Obligation Library Bonds,
Series 1999 5.250% March 1, 2009 Aaa 1,317,004
------------
4,118,549
------------
Virginia (.5%)
1,685,000 Hampton Roads Sanitation District,
Virginia, Wastewater Refunding and
Capital Improvement Revenue Bonds,
Series 1993 4.700% October 1, 2004 Aa3 1,691,841
------------
Washington (6.8%)
1,250,000 Washington Public Power Supply System
Nuclear Project No. 3, Refunding
Revenue Bonds, Series 1991A 6.250% July 1, 2000 Aa1 1,265,350
1,000,000 Washington Public Power Supply System
Nuclear Project No. 1, Revenue
Refunding Bonds, Series 1990C 7.700% July 1, 2002 Aa1 1,074,690
2,000,000 Washington Public Power Supply System
Nuclear Project No. 3, Refunding
Revenue Bonds, Series 1993C 4.800% July 1, 2003 Aa1 2,008,420
2,520,000 Federal Way School District No. 210,
King County, Washington, Unlimited Tax
General Obligation and Refunding
Bonds, Series 1993 5.250% December 1, 2003 Aaa 2,583,882
2,000,000 City of Seattle, Washington, Unlimited
Tax General Obligation Refunding Bonds
of 1993 4.800% December 1, 2004 Aaa 2,008,320
1,500,000 Washington Public Power Supply System
Nuclear Project No. 2, Revenue
Refunding Bonds, Series 1990A
(Prerefunded to 7-1-2000 @ 102) 7.625% July 1, 2008 Aaa 1,560,240
4,500,000 State of Washington, General Obligation
Bonds, Series 1993A 5.750% October 1, 2012 Aa1 4,690,755
2,000,000 City of Vancouver, Washington, Water and
Sewer Revenue Refunding Bonds, 1998 4.600% June 1, 2013 Aaa 1,783,620
2,495,000 Seattle, Washington, Water System
Revenue 1998 5.000% October 1, 2013 Aa2 2,370,425
2,605,000 City of Vancouver, Washington, Water and
Sewer Revenue Refunding Bonds, 1998 4.650% June 1, 2014 Aaa 2,298,470
</TABLE>
- ---------
40
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS (Continued)
November 30, 1999
<TABLE>
<CAPTION>
Rating(b)
Principal Coupon Maturity (Moody's
amount Rate Date or S&P) Value
- ---------- ------ ------------------- --------- ------------
<C> <S> <C> <C> <C> <C>
$3,000,000 State of Washington, Variable Purpose
General Obligation Refunding Bonds,
Series R-99A 4.750% January 1, 2015 Aa1 $ 2,669,340
------------
24,313,512
------------
West Virginia (.7%)
2,540,000 State of West Virginia, State Road
General Obligation Bonds, Series 1998 5.000% June 1, 2013 Aaa 2,417,750
------------
Wisconsin (4.6%)
3,500,000 Milwaukee, Wisconsin, Metropolitan
Sewerage District General Obligation
Capital Purpose Bonds, Series 1990A
(Escrowed to maturity) 6.700% October 1, 2002 Aa1 3,709,300
2,000,000 State of Wisconsin, General Obligation
Refunding Bonds of 1993, Series 1 5.300% November 1, 2003 Aa2 2,055,380
2,000,000 State of Wisconsin, General Obligation
Refunding Bonds of 1993, Series 3 4.750% November 1, 2003 Aa2 2,016,280
2,000,000 State of Wisconsin, General Obligation
Bonds of 1995, Series A (Prerefunded
to 5-1-2005 @ 100) 6.000% May 1, 2008 Aaa 2,121,080
2,500,000 State of Wisconsin, General Obligation
Refunding Bonds of 1993, Series 2 5.125% November 1, 2010 Aa2 2,500,925
2,180,000 Dane County, Wisconsin, General
Obligation Refunding Bonds,
Series 1998B 4.800% March 1, 2012 Aaa 2,066,684
2,220,000 Dane County, Wisconsin, General
Obligation Refunding Bonds,
Series 1998B 4.800% March 1, 2013 Aaa 2,075,323
------------
16,544,972
------------
Wyoming (.5%)
1,600,000 Natrona County, Wyoming, School District
No. 1 General Obligation Bonds,
Series 1994 (Prerefunded to 7-1-2004 @
100) 5.450% July 1, 2006 Aaa 1,654,256
------------
Total long-term municipal bonds
(cost $348,822,220) 350,792,542
------------
<CAPTION>
Shares or
Principal
amount
- ----------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (2.2%)
<C> <S> <C> <C> <C> <C>
$2,000,000 General Electric Capital Corp., 5.260%,
December, 1999 2,006,156
4,900,000 U.S. Treasury Bills, 4.690% and 5.075%,
December, 1999 and February, 2000 4,867,909
1,005,823 Chase Vista Treasury Plus Money Market
Fund 1,005,823
------------
Total short-term investments
(cost $7,879,917) 7,879,888
------------
TOTAL INVESTMENTS (100.0%)
(cost $356,702,137) 358,672,430
LIABILITIES, NET OF CASH AND OTHER ASSETS (0.0%) (118,733)
------------
NET ASSETS (100.0%) $358,553,697
============
</TABLE>
Notes:
(a) Purchased on a 'when-issued' basis.
(b) Ratings are unaudited.
At November 30, 1999, net unrealized appreciation of $1,970,293 consisted of
gross unrealized appreciation of $7,558,840 and gross unrealized depreciation of
$5,588,547 based on cost of $356,702,137 for federal income tax purposes.
See accompanying notes to financial statements.
41-------
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1999
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (cost
$356,702,137) $358,672,430
Receivable for:
Interest $6,008,089
Shares of the Fund sold 79,500
Securities sold 2,320,236 8,407,825
----------
Prepaid expenses 9,987
------------
Total assets 367,090,242
LIABILITIES AND NET ASSETS
Dividends payable to shareowners 3,136,424
Payable for:
Shares of the Fund redeemed 23,750
Securities purchased 5,226,586
Other (including $113,785 to
Manager) 149,785 5,400,121
---------- ------------
Total liabilities 8,536,545
------------
Net assets applicable to 44,171,716
shares outstanding
of $1.00 par value common stock
(100,000,000 shares authorized) $358,553,697
============
Net asset value, offering price and
redemption price per share $ 8.12
============
ANALYSIS OF NET ASSETS
Excess of amounts received from sales
of shares over amounts paid on
redemptions of shares on account of
capital $356,624,780
Accumulated net realized loss on sales
of investments (41,376)
Net unrealized appreciation of
investments 1,970,293
------------
Net assets applicable to shares
outstanding $358,553,697
============
</TABLE>
See accompanying notes to financial statements.
- ---------
42
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
INVESTMENT INCOME:
Taxable interest $ 458,646 548,684
Tax-exempt interest 19,158,717 18,524,272
----------- ----------
Total investment income 19,617,363 19,072,956
EXPENSES:
Investment advisory and management
fees 442,211 425,519
Professional fees 54,134 27,144
ICI dues 12,972 9,948
Registration fees 2,879 7,226
Fidelity bond expense 3,453 3,768
Directors' fees 4,800 5,420
Reports to shareowners 6,310 3,591
Security evaluation fees 21,288 19,711
Franchise taxes 17,420 19,353
Custodian fees 12,456 10,425
Proxy and related expense -- 3,710
Other 131 140
----------- ----------
Total expenses 578,054 535,955
----------- ----------
Net investment income 19,039,309 18,537,001
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss) on sales of
investments 21,485 (62,861)
Change in net unrealized appreciation
or depreciation (19,471,906) 5,100,703
----------- ----------
Net realized and unrealized gain (loss)
on investments (19,450,421) 5,037,842
----------- ----------
Net change in net assets resulting from
operations $ (411,112) 23,574,843
=========== ==========
</TABLE>
See accompanying notes to financial statements.
43-------
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 19,039,309 18,537,001
Net realized gain (loss) on sales of
investments 21,485 (62,861)
Change in net unrealized appreciation
or depreciation (19,471,906) 5,100,703
------------ -----------
Net change in net assets resulting
from operations (411,112) 23,574,843
DISTRIBUTIONS TO SHAREOWNERS FROM:
Net investment income (19,039,309) (18,537,001)
------------ -----------
Total distributions to shareowners (19,039,309) (18,537,001)
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 39,488,742 38,871,460
Reinvestment of ordinary income
dividends 14,382,411 13,564,060
------------ -----------
53,871,153 52,435,520
Less payments for shares redeemed 38,958,604 30,744,422
------------ -----------
Net increase in net assets from Fund
share transactions 14,912,549 21,691,098
------------ -----------
Total increase (decrease) in net assets (4,537,872) 26,728,940
------------ -----------
NET ASSETS:
Beginning of year 363,091,569 336,362,629
------------ -----------
End of year $358,553,697 363,091,569
============ ===========
</TABLE>
See accompanying notes to financial statements.
- ---------
44
<PAGE>
STATE FARM MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
Per Share Income and Capital Changes (For a share outstanding throughout each
year)
<TABLE>
<CAPTION>
Year ended November 30,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 8.55 8.43 8.44 8.50 7.88 8.59 8.34 8.15 7.98 7.96
Income from Investment
Operations
Net investment income 0.43 0.45 0.47 0.48 0.48 0.48 0.50 0.53 0.54 0.58
Net gain or (loss) on
investments (both realized
and unrealized) (0.43) 0.12 (0.01) (0.06) 0.62 (0.69) 0.25 0.19 0.17 0.02
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations -- 0.57 0.46 0.42 1.10 (0.21) 0.75 0.72 0.71 0.60
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Less Distributions
Net investment income (0.43) (0.45) (0.47) (0.48) (0.48) (0.48) (0.50) (0.53) (0.54) (0.58)
Capital gains(a) -- -- -- -- -- (0.02) -- -- -- --
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (0.43) (0.45) (0.47) (0.48) (0.48) (0.50) (0.50) (0.53) (0.54) (0.58)
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of year $ 8.12 8.55 8.43 8.44 8.50 7.88 8.59 8.34 8.15 7.98
====== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total Return 0.04% 6.82% 5.68% 5.21% 14.25% (2.55)% 9.17% 9.05% 9.17% 7.78%
Ratios/Supplemental Data
Net assets, end of year
(millions) $358.6 363.1 336.4 321.1 307.4 269.9 276.4 211.3 167.2 132.8
Ratio of expenses to average
net assets 0.16% 0.15% 0.15% 0.16% 0.17%(b) 0.16% 0.18% 0.19% 0.21% 0.23%
Ratio of net investment income
to average net assets 5.20% 5.29% 5.61% 5.76% 5.80% 5.80% 5.84% 6.36% 6.75% 7.30%
Portfolio turnover rate 10% 6% 6% 6% 7% 8% 5% 4% 2% 8%
</TABLE>
- ----------
(a) Distributions representing less than $.01 per share were made in 1997,
1996, 1993 and 1992.
(b) The ratio based on net custodian expenses would have been .16% in 1995.
45-------
<PAGE>
STATE FARM MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS
1. OBJECTIVE
The investment objective of the STATE FARM GROWTH FUND, INC. (GROWTH FUND) is
long-term growth of capital and income. The Fund seeks to achieve this objective
by investing most of its assets in common stocks and other income producing
equity securities that are believed to have potential for long-term growth of
capital or income, or both.
The investment objective of the STATE FARM BALANCED FUND, INC. (BALANCED 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.
The investment objective of the STATE FARM INTERIM FUND, INC. (INTERIM FUND) is
the realization over a period of years of the highest yield consistent with
relative price stability (relatively low volatility). The Fund seeks to achieve
its investment objective through investment in high quality debt securities with
primarily short-term (less than five years) and intermediate-term (five to
fifteen years) maturities.
The investment objective of the STATE FARM MUNICIPAL BOND FUND, INC. (MUNICIPAL
BOND FUND) is to provide its shareowners with as high a rate of income exempt
from federal income taxes as is consistent with prudent investment management.
The Fund seeks to achieve its investment objective through investment primarily
in a diversified portfolio of Municipal Bonds with maturities of 1-17 years.
The following is a summary of significant accounting policies followed by the
Funds in the preparation of their financial statements in accordance with
generally accepted accounting principles.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITIES 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 Boards of Directors or their delegate.
SECURITIES 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. Premiums and original issue
discounts on tax-exempt securities in the Municipal Bond Fund are amortized.
Realized gains and losses from security transactions are reported on an
identified cost basis.
SECURITIES PURCHASED ON A 'WHEN-ISSUED' BASIS
The Municipal Bond Fund may purchase municipal bonds on a 'when-issued' basis.
Delivery and payment for these securities may be a month or more after the
purchase date, during which time such securities are subject to market
fluctuations. It is possible that the securities will never be issued and the
commitment cancelled. At November 30, 1999, there were commitments of $5,226,586
for such securities, included in the investment portfolio.
FUND SHARE VALUATION
Fund shares are sold and redeemed on a continuous basis at net asset value. The
net asset value per share is determined daily on each day the New York Stock
Exchange is open, except that a 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 values for the Growth Fund, Balanced Fund, and Interim Fund are determined
as of the close of regular session trading on the New York Stock Exchange
(usually 3:00 p.m. Bloomington, Illinois time). The net asset value for the
Municipal Bond Fund is determined as of 1:00 p.m. Bloomington, Illinois time.
The net asset value per share is computed by dividing the total value of a
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 each 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 taxable income, as well as any net realized gain on
sales of investments reportable for federal income tax purposes. Each Fund has
complied with this policy and, accordingly, no provision for federal income
taxes is required.
- ---------
46
<PAGE>
STATE FARM MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Interim Fund and Municipal Bond Fund declare dividends daily equal to each
Fund's respective net investment income, and distributions of such amounts are
made at the end of each calendar quarter.
Net realized gains on sales of investments, if any, are distributed annually
after the close of a Fund's fiscal year. Dividends and distributions payable to
shareowners are recorded by the respective Fund on the ex-dividend date.
On December 17, 1999, the Growth Fund declared an ordinary income dividend of
$.33 per share and a capital gain distribution of $.23 per share to shareowners
of record on December 17, 1999 (reinvestment date December 20, 1999).
On December 17, 1999, the Balanced Fund declared an ordinary income dividend of
$.79 per share and a capital gain distribution of $.57 per share to shareowners
of record on December 17, 1999 (reinvestment date December 20, 1999).
The accumulated net realized loss on sales of investments at November 30, 1999
for the Interim Fund, amounting to $4,007,631, is available to offset future
taxable gains. If not applied, the capital loss carryover expires as follows:
$22,669 in 2000, $162,716 in 2001, $335,277 in 2002, $321,293 in 2003, $363,957
in 2004, $922,190 in 2005, $994,996 in 2006, and $884,533 in 2007. A capital
loss carryover of $92,150 expired in 1999 and was re-classified from Accumulated
net realized loss on sales of investments to Excess of amounts received from
sales of shares over amounts paid on redemptions of shares on account of capital
on the Statement of Assets and Liabilities.
The accumulated net realized loss on sales of investments at November 30, 1999
for the Municipal Bond Fund, amounting to $41,376, is available to offset future
taxable gains. If not applied, the capital loss carryover expires in 2006.
EQUALIZATION ACCOUNTING
A portion of proceeds from sales and payments on redemptions of Fund shares is
credited or charged to undistributed net investment income for the Growth Fund
and Balanced Fund. As a result, undistributed net investment income per share is
unaffected by sales or redemptions of shares.
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.
3. TRANSACTIONS WITH AFFILIATES
Each Fund has an investment advisory and management services agreement with
State Farm Investment Management Corp. (Manager) pursuant to which each Fund
pays the Manager an annual fee (computed on a daily basis and paid quarterly) at
the following rates:
<TABLE>
<S> <C>
State Farm Growth Fund, Inc. .20% of the first $100 million of average net
assets
.15% of the next $100 million of average net
assets
.10% of the average net assets in excess of
$200 million
State Farm Balanced Fund, Inc. .20% of the first $100 million of average net
assets
.15% of the next $100 million of average net
assets
.10% of the average net assets in excess of
$200 million
State Farm Interim Fund, Inc. .20% of the first $50 million of average net
assets
.15% of the next $50 million of average net assets
.10% of the average net assets in excess of
$100 million
State Farm Municipal Bond Fund, Inc. .20% of the first $50 million of average net
assets
.15% of the next $50 million of average net assets
.10% of the average net assets in excess of
$100 million
</TABLE>
Under the terms of these agreements, the Funds incurred the following fees for
the fiscal years ended November 30:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
State Farm Growth Fund, Inc. $2,740,037 2,221,492
State Farm Balanced Fund, Inc. 1,113,753 980,972
State Farm Interim Fund, Inc. 230,126 199,209
State Farm Municipal Bond Fund, Inc. 442,211 425,519
</TABLE>
The Funds do not pay any discount, commission or other compensation for transfer
agent or underwriting services provided by the Manager.
47-------
<PAGE>
STATE FARM MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Certain officers and/or directors of each Fund are also officers and/or
directors of the Manager. The Funds made no payments to their officers or
directors during the fiscal years ended November 30, except for the following
directors' fees paid to the Funds' independent directors:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
State Farm Growth Fund, Inc. $14,400 15,300
State Farm Balanced Fund, Inc. 7,200 7,650
State Farm Interim Fund, Inc. 2,400 2,550
State Farm Municipal Bond Fund, Inc. 4,800 5,100
</TABLE>
4. INVESTMENT TRANSACTIONS
Investment transactions (exclusive of short-term instruments) for each of the
fiscal years ended November 30, were as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
STATE FARM GROWTH FUND, INC.
Purchases $166,759,514 309,663,058
Proceeds from sales 50,948,078 14,874,459
STATE FARM BALANCED FUND, INC.
Purchases 121,270,812 92,615,420
Proceeds from sales 42,344,646 17,698,918
STATE FARM INTERIM FUND, INC.
Purchases 26,673,672 52,146,094
Proceeds from sales 17,750,000 16,756,328
STATE FARM MUNICIPAL BOND FUND, INC.
Purchases 48,533,279 48,047,861
Proceeds from sales 35,579,660 20,915,700
</TABLE>
5. FUND SHARE TRANSACTIONS
Proceeds and payments on Fund shares as shown in each Fund's statement of
changes in net assets are in respect of the following number of shares:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
STATE FARM GROWTH FUND, INC.
Shares sold 6,423,670 8,122,332
Shares issued in reinvestment of
ordinary income dividends and capital
gain distributions 666,008 2,034,859
---------- ----------
7,089,678 10,157,191
Less shares redeemed 4,646,586 5,105,810
---------- ----------
Net increase in shares outstanding 2,443,092 5,051,381
========== ==========
STATE FARM BALANCED FUND, INC.
Shares sold 2,212,658 3,094,918
Shares issued in reinvestment of
ordinary income dividends and capital
gain distributions 518,187 785,967
---------- ----------
2,730,845 3,880,885
Less shares redeemed 1,992,292 2,390,819
---------- ----------
Net increase in shares outstanding 738,553 1,490,066
========== ==========
STATE FARM INTERIM FUND, INC.
Shares sold 7,721,510 10,094,227
Shares issued in reinvestment of
ordinary income dividends 959,304 748,608
---------- ----------
8,680,814 10,842,835
Less shares redeemed 8,132,727 6,846,009
---------- ----------
Net increase in shares outstanding 548,087 3,996,826
========== ==========
STATE FARM MUNICIPAL BOND FUND, INC.
Shares sold 4,692,572 4,573,153
Shares issued in reinvestment of
ordinary income dividends 1,721,081 1,593,850
---------- ----------
6,413,653 6,167,003
Less shares redeemed 4,685,530 3,616,812
---------- ----------
Net increase in shares outstanding 1,728,123 2,550,191
========== ==========
</TABLE>
- ---------
48
<PAGE>
STATE FARM BALANCED FUND, INC.
PART C OF THE REGISTRATION STATEMENT
---------------------------------------------------------------
Item 23. Exhibits
Note: As used herein the term "Registration Statement" refers to
registration statement of registrant on Form S-5, N-1 or
N-1A no. 2-27769.
(a) Amended and restated articles of incorporation of
registrant*
(b) By-laws of registrant (as amended and restated June 12,
1998)**
(c) Form of stock certificate*
(d) Investment advisory and management services agreement
between registrant and State Farm Investment Management
Corp. dated April 1, 1987*
(e) Underwriting agreement between registrant and State Farm
Investment Management Corp., dated April 1, 1972*
(f) None
(g)(i) Custody agreement between registrant and Chase
Manhattan Bank dated July 7, 1998.
(g)(ii) Global custody rider to custody agreement between
registrant and Chase Manhattan Bank dated January 15,
1999.
(g)(iii) Special foreign custody manager agreement between
registrant and State Farm Investment Management Corp.
dated January 15, 1999.
(g)(iv) Custodian agreement between registrant and The Peoples
Bank dated October 1, 1991*
(h)(i) Service agreement among registrant, State Farm Investment
Management Corp. and State Farm Mutual Automobile Insurance
Company, as amended, dated March 17, 1976*
(h)(ii) Transfer agent agreement between registrant and State Farm
Investment Management Corp. dated April 1, 1992*
(i) Consent of Bell, Boyd & Lloyd
(j) Consent of Independent Auditors
(k) None
(l) None
(m) None
(n) None
<PAGE>
(p) Code of Ethics of State Farm Growth Fund, Inc., State Farm
Interim Fund, Inc., State Farm Balanced Fund, Inc., State
Farm Municipal Bond Fund, Inc., State Farm Investment
Management Corp. and State Farm Variable Product Trust.
* Incorporated by reference to post-effective amendment no. 36 to the
Registration Statement.
** Incorporated by reference to post-effective amendment No. 39 to the
Registration Statement.
Item 24. Persons controlled by or under Common Control with Registrant
The registrant does not consider that there are any persons directly
or indirectly controlling, controlled by, or under common control
with, the registrant within the meaning of this item. The information
in the Statement of Additional Information under the caption
"Directors and Officers" and "General Information - Ownership of
Shares" and in the first two paragraphs under the caption "Investment
Advisory and Other Services" is incorporated herein by reference.
Item 25. Indemnification
Section 2-418 of the Maryland General Corporation Law authorizes the
registrant to indemnify its directors and officers under specified
circumstances.
Article XVII of the by-laws of the registrant, as amended, provides
that the registrant shall indemnify its directors and officers under
specified circumstances.
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
provisions, 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 its 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.
Item 26. Business and Other Connections of Investment Adviser
The information in the prospectus under the caption "Management of the
Fund" is incorporated herein by reference. Neither State Farm
Investment Management Corp., nor any of its directors or officers, has
at any time during the past two years engaged in any other business,
profession, vocation or employment of a
<PAGE>
substantial nature either for its own account or in the capacity of
director, officer, employee, partner or trustee.
Directors and Officers of Investment Adviser -
--------------------------------------------
Edward B. Rust, Jr., Director and President*
Roger Joslin, Director, Vice President and Treasurer*
Kurt Moser, Director and Senior Vice President*
John J. Killian, Director - Vice President and Controller, State Farm
Mutual Automobile Insurance Company and holds a similar position with
certain subsidiaries and affiliates.
Vincent J. Trosino, Director - President, Vice Chairman and Chief
Operating Officer State Farm
Mutual Automobile Insurance Company.
Paul N. Eckley, Senior Vice President*
David R. Grimes, Assistant Vice President and Secretary*
Michael L. Tipsord, Assistant Secretary*
Jerel S. Chevalier, Assistant Secretary-Treasurer*
Donald O. Jaynes, Assistant Secretary*
Howard A. Thomas, Assistant Secretary - Treasurer*
* Information in the Statement of Additional Information
under the caption "Directors and Officers" is
incorporated herein by reference.
Item 27. Principal Underwriters
(a) Information under the caption "Investment Advisory and Other
Services" in the Statement of Additional Information is
incorporated herein by reference.
(b) Registrant's principal underwriter is also registrant's
investment adviser. Accordingly, the information in Item 26
hereof is incorporated herein by reference.
(c) Not applicable.
Item 28. Location of Accounts and Records
Howard A. Thomas, State Farm Investment Management Corp., One State
Farm Plaza, Bloomington, Illinois 61710 maintains physical possession
of each
<PAGE>
account, book, or other document required to be maintained by Section
31(a) of the 1940 Act and the Rules promulgated thereunder.
Item 29. Management Services
None
Item 30. Undertakings
(a) Not applicable
(b) Not applicable
(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report
to shareowners, upon request and without charge.
<PAGE>
SIGNATURES
-------------------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Bloomington, and State of
Illinois on the 20th day of March, 2000.
STATE FARM BALANCED FUND, INC.
By: /s/ Edward B. Rust, Jr.
------------------------
Edward B. Rust, Jr., President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
/s/ Edward B. Rust, Jr. Director
- ---------------------------- and President
Edward B. Rust, Jr. (Principal Executive
Officer)
/s/ Roger Joslin Director, Vice President,
- ---------------------------- and Treasurer
Roger Joslin (Principal financial
and accounting officer)
/s/ Albert H. Hoopes Director March 20, 2000
- ---------------------------- ----------------
Albert H. Hoopes
/s/ Thomas M. Mengler Director
- ----------------------------
Thomas M. Mengler
/s/ Davis U. Merwin Director
- ----------------------------
Davis U. Merwin
/s/ James A. Shirk Director
- ----------------------------
James A. Shirk
<PAGE>
INDEX FOR EXHIBITS
FILED WITH THIS AMENDMENT
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------------ --------------------
<S> <C>
23(g)(i) Custody agreement between registrant
and Chase Manhattan Bank dated July 7, 1998
23(g)(ii) Global custody rider to custody agreement
between registrant and Chase Manhattan Bank
dated January 15, 1999
23(g)(iii) Special Foreign custody manager agreement
between registrant and State Farm
Investment Management Corp. dated
January 15, 1999
23(i) Consent of Bell, Boyd & Lloyd
23(j) Consent of Independent Auditors
23(n) Code of Ethics of State Farm Growth Fund,
Inc., State Farm Interim Fund, Inc., State
Farm Balanced Fund, Inc., State Farm
Municipal Bond Fund, Inc., State Farm
Investment Management Corp. and State Farm
Variable Product Trust.
</TABLE>
<PAGE>
CUSTODY AGREEMENT
THIS IS A CUSTODY AGREEMENT, dated as of July 7, 1998, between The
Chase Manhattan Bank (herein called the "Custodian"), a New York banking
corporation, having its principal place of business in New York, New York and
State Farm Balanced Fund, Inc. (herein called the "Fund"), a corporation
organized and doing business under the laws of the State of Maryland and an
investment company registered as such under the Investment Company Act of 1940,
having its principal place of business at Bloomington, Illinois.
In consideration of the mutual premises and agreements herein
contained, the parties hereto agree as follows:
SECTION 1 DEFINITIONS.
"Agreement" means this Custody Agreement.
"Authorization Letter" or "Letter" means a writing from the Fund substantially
in the form of Exhibit A(1) or A(2) hereto, in respect of Financial Assets,
signed by any of two (2) persons of the Fund authorized to execute such
authorization pursuant to certain corporate resolutions of the Fund, and
instructing the Custodian to take action in respect of the Custody Account and
the Cash Account and such other action incidental thereto and to the Agreement.
Custodian may rely upon a Letter received by facsimile transmission or Letter in
the form of an Electronic Instruction as hereinafter defined.
"Cash Account" means the cash ledger of the Custody Account to which debits and
credits are made in respect of security transactions and other deposits to said
account and against which no withdrawal may be made by check or draft.
"Custodian" means The Chase Manhattan Bank, a New York banking corporation and
member of the Federal Reserve System.
"Custody Account" means a securities account in the name of the Fund on
Custodian's records to which a Financial Asset is or may be credited pursuant to
this Agreement.
"Depository" means DTC, PTC, and FRBNY and any other depository acceptable to
the Fund.
"DTC" means The Depository Trust Company, a New York limited purpose trust
company.
"Electronic Instruction" means an electronic instruction received by the
Custodian (i) through DTC's Institutional Delivery System ("IDS") or (ii)
through such other electronic delivery
1 of 17
<PAGE>
system accessed by password or other security device and acceptable to the Fund
and Custodian for the delivery of instructions. Fund shall safeguard any
testkeys, identification codes or other security device made available by
Custodian to Fund and Custodian may rely upon any electronic instructions as
being authorized by the Fund which is received using the proper security device.
"Entitlement holder" means the person on the records of a securities
intermediary as the person having a security entitlement against the securities
intermediary.
"Financial Assets" means securities or other investments owned by the Fund. As
the context requires, a Financial Asset means either the interest itself or the
means by which a person's claim to it is evidenced, including a certificated or
uncertificated security, a security certificate, or a securities entitlement.
"FRBNY" means the Federal Reserve Bank of New York.
"Fund" means State Farm Balanced Fund, Inc., a Maryland Corporation and an
investment company registered as such under the Investment Company Act of 1940.
"Instructions" includes, without limitation, any instructions to sell, assign,
transfer, deliver, purchase or receive for the Custody Account, Financial Assets
or to transfer funds from the Custody Account or a Cash Account.
"PTC" means Participants Trust Company, a New York limited purpose trust
company.
"Securities" means stocks, bonds, rights, warrants and other negotiable and
non-negotiable paper issued in certificated ("certificated securities") or book
entry form ("uncertificated securities") and commonly traded or dealt in on
securities exchanges or financial markets, and other obligations of an issuer,
or shares, participations and interests in an issuer recognized in an area in
which it is issued or dealt in as a medium for investment and any other property
as shall be acceptable to Custodian for the Custody Account.
"Security entitlement" means the rights and property interest of an entitlement
holder with respect to a financial asset as specified in Part 5 of Article 8 of
the Uniform Commercial Code.
"Securities intermediary" means, Custodian, DTC, PTC, the FRBNY, and any other
Depository or financial institution acceptable to the Fund which in the ordinary
course of business maintains securities accounts for others and acts in that
capacity.
"Uniform Commercial Code" means the Uniform Commercial Code of the State of New
York.
SECTION 2 TERMS OF THE CUSTODY.
2 of 17
<PAGE>
SECTION 2.1 CUSTODY ACCOUNT. The parties agree that there shall be a
Custody Account maintained in the name of the Fund with the Custodian, at an
office in New York. The Custody Account shall be entitled as described on
Exhibit B.
SECTION 2.2 APPOINTMENT. The Fund authorizes The Chase Manhattan Bank
to serve as custodian for the Fund, and to act on its behalf solely to the
extent expressly provided herein, or in any Authorization Letter and to take
such other action as may be reasonably incidental thereto. Custodian shall not
use any securities intermediaries other than DTC, PTC and the FRBNY without
Fund's prior written consent.
SECTION 2.3 DUTIES OF THE CUSTODIAN. It is the expressed understanding
of the parties that:
SECTION 2.3.1 ACCEPT, DELIVER AND EXCHANGE SECURITIES. Upon receipt of
and pursuant to an Authorization Letter, oral notice (hereinafter "Notice,")
from the Fund (such Notice to be followed by written confirmation in the form of
an Authorization Letter), or Electronic Instructions, the Custodian shall accept
and deliver Financial Assets for the Fund. From time to time, pursuant to a
Letter, Notice, such Notice to be followed by the Fund's written confirmation
thereof, or Electronic Instructions, the Custodian shall exercise or dispose of
subscriptions, rights and warrants of any Financial Assets held in the Custody
Account or to be received by the Custodian for deposit to the Custody Account.
In respect of a Notice, in the event that the written confirmation has not been
received prior to the time requested action must take place, the Custodian may
rely upon the Notice provided that, the Custodian has been able to orally
confirm such instruction with such other persons as the Fund shall designate
from time to time in writing to the Custodian as authorized to make such
confirmations. Except as otherwise advised in a Letter, Notice, or by Electronic
Instructions, in delivering Financial Assets, the Custodian shall do so only
against payment, or upon the receipt of other Financial Assets .
SECTION 2.3.2 PURCHASE OF SECURITIES. Upon receipt of a Letter, Notice
from the Fund (such Notice to be followed by written confirmation in the form of
an Authorization Letter), or Electronic Instruction, the Custodian shall
purchase for the Fund such Financial Assets in the amounts and maturing on the
dates therein described and charge the payment for such purchases to the Cash
Account. In the event that the written confirmation has not been received prior
to the time requested action must take place, the Custodian may rely upon the
Notice, provided that the Custodian has been able to orally confirm such
instruction with such other persons as the Fund shall designate from time to
time in writing to the Custodian as authorized to make such confirmations.
Unless and until otherwise instructed by the Fund pursuant to the terms herein
contained, the Custodian shall deposit any and all Financial Assets purchased
hereunder into the Fund's Custody Account as soon as reasonably feasible
following its receipt thereof. Except as otherwise advised in a Letter, Notice,
or by Electronic Instructions, the Custodian shall make payment for Financial
Assets purchased only at the time of delivery of such Financial Assets to the
Custodian.
3 of 17
<PAGE>
SECTION 2.3.3 PAYMENT OF MONIES. From time to time, the Custodian shall
upon its receipt of a Letter or Notice, such Notice to be followed by written
confirmation in the form of a Transfer Letter (as used herein the term "Transfer
Letter" shall mean the Fund's transfer letter, substantially in the form of
Exhibit C attached hereto) or Electronic Instruction, transfer monies from the
Custody Account; PROVIDED THAT: the Custodian complies with the requirements of
The Chase Manhattan Bank Funds Transfer Service Security Procedure Agreement
(Exhibit D).
From time to time, the Fund shall notify Custodian of deposits for its
accounts. Upon receipt of funds identifying the Fund by account number as
beneficiary, the Custodian shall credit such funds to the account identified and
notify the Fund.
SECTION 2.3.4 SALE OF SECURITIES. Upon the receipt of a Letter, Notice
(such Notice to be followed by written confirmation in the form of a Letter), or
Electronic Instruction, the Custodian shall use its reasonable best efforts,
subject to the terms and conditions herein contained, to present for sale in the
amount and on the dates therein stated such Financial Assets of the Fund as
therein described, and held in the Custody Account and cause the proceeds
generated by such sale(s), to be deposited into the Cash Account. In the event
that the written confirmation has not been received prior to the time the
requested action must take place, the Custodian may rely upon the Notice,
provided that the Custodian has been able to orally confirm such instruction
with such other persons as the Fund shall designate from time to time in writing
to the Custodian as authorized to make such confirmations.
In the event that it shall be impracticable for the Custodian, in
accordance with such Letter, Notice, or Electronic Instruction, to present for
sale Financial Assets on the dates specified, the Custodian shall as soon as it
learns of any such impracticability, notify the Fund via telephone .
Unless the Custodian shall have received from the Fund a Letter,
Notice, or Electronic Instruction to the contrary, the Custodian shall deliver
the Financial Assets to a broker, a dealer or other purchaser identified in the
instruction against payment. It is understood by the Fund that delivery against
payment in the securities markets means delivery against a receipt or other
evidence that a payment is due later but before the end of the same business
day. The Custodian shall have no liability with respect to the non-receipt of
payment arising from:
i) Any insolvency of any broker, dealer or other purchaser which occurs
after delivery of the Financial Assets by Custodian but before payment
is received by Custodian; or
ii) Insolvency of any issuer of the Financial Assets ; or
iii) Any act or omission of any broker, attorney, custodian, escrowee, or
similar agent designated by Fund to perform any act with respect to the
Financial Assets .
This Section shall not be interpreted to relieve or to lessen the standard of
care the Custodian is required to use by other terms of this Agreement.
4 of 17
<PAGE>
SECTION 2.3.5 REGISTERED SECURITIES. Except as otherwise set forth in
this Section 2.3.5, the Custodian shall register any registerable Financial
Assets held and maintained in a Custody Account in Custodian's nominee name or
that of an affiliate or Depository. Private placements and other types of
Financial Assets which the Fund from time to time identifies shall be registered
in the name of the Fund. All taxes or other expenses incidental to any transfer
to or from the name of a nominee shall be borne by the Fund.
SECTION 2.3.6 CALLS FOR PAYMENT. The Custodian shall use its reasonable
best efforts to determine from financial information services to which it
subscribes, or such other financial services as agreed to by the parties, when
Financial Assets held in the Custody Account are called for payment and
surrender for payment any Financial Assets or notes which have matured or with
respect to which it received or knows of a notice to call.
SECTION 2.3.7 NOTICES, ADVICE, ETC. The Custodian shall use its
reasonable best efforts to:
(a) promptly notify the Fund of any unpaid principal amounts, or
any unpaid amounts of interest accrued and owing, or payable
on any Financial Assets held or maintained in a Custody
Account of which Custodian is aware;
(b) forward to the Fund as of the close of business each business
day (electronically or by mail) advices of the Financial
Assets and cash transactions in a Custody Account;
(c) deliver to the Fund, promptly upon receipt of the Fund's
request, a schedule of the Financial Assets held and
maintained in a Custody Account;
(d) promptly notify the Fund of any legal action of which the
Custodian's corporate actions unit becomes aware with respect
to any Financial Assets held and maintained in a Custody
Account;
(e) promptly notify the Fund of any subscriptions, warrants or
like rights it may have of which the Custodian's corporate
action unit becomes aware;
(f) promptly notify the Fund of any invitations to tender a
Financial Asset, held and maintained in a Custody Account of
which the Custodian's corporate action unit becomes aware; and
(g) deliver to the Fund all printed material received by the
Custodian's corporate actions unit and requiring some action
by the Fund pertaining to any Financial Assets held or
maintained in a Custody Account.
SECTION 2.3.8 STOCK DIVIDENDS, ETC. Financial Assets delivered to the
Custodian as
5 of 17
<PAGE>
stock dividends, stock splits or as a result of the exercise of rights, shall be
deposited into and held and maintained in the Custody Account of the Fund and
treated in like manner as all other Financial Assets therein held and
maintained.
SECTION 2.3.9 FRACTIONAL SHARES. In the event that an issuer of a
Financial Asset held by the Custodian in the Custody Account shall declare a
dividend payable in stock, and such dividend results in a fractional share of
stock being issued, the Custodian, without prior notice to or from the Fund,
shall sell such fractional share(s) and deposit the proceeds received from such
sale into the Custody Account. The Custodian shall notify the Fund of such sale
thereafter.
SECTION 2.3.10 COLLECTION OF INCOME AND PRINCIPAL. The Custodian shall
from time to time take necessary action(s) to collect dividends, interest
payments, payments made on account of called and matured Financial Assets, and
any other payments with respect to such Financial Assets deposited into or held
or maintained in the Custody Account, when such payments shall become owing;
provided that so long as Custodian's actions are in compliance with the standard
of care set forth in Section 7.17, Custodian shall not be responsible for
failure to receive payment of (or late payment of) distributions with respect to
Financial Assets or other property held in the Custody Account. Upon receipt of
such funds collected hereunder, Custodian will use its best efforts to deposit
such collected funds into the Custody Account on the same business day upon
which such collected funds are received by the Custodian. Accordingly, in making
collections of income or principal hereunder, the Custodian may to the extent
necessary or required by any applicable law of any sovereign body, including the
United States, or a State, and solely to such extent, execute on behalf of the
Fund certificates or other like documents. All cash shall be held and maintained
in the Custody Account subject to further instruction from the Fund. In the
event the Custody Account is credited by the Custodian in anticipation of the
Custodian's collection of monies, and the Custodian is unable to collect such
monies, the Fund agrees that it shall promptly upon telephonic notice from the
Custodian, return an amount equal to the amount so credited and not collected to
the Custodian in immediately available funds.
SECTION 2.3.11 EXCHANGE CERTIFICATES. The Custodian shall exchange
temporary for definitive certificates or effect mandatory exchanges of
certificates.
SECTION 2.3.12 BOOKS AND RECORDS. Custodian shall at all times maintain
proper books and records that shall identify the Fund as the entitlement holder
of such Financial Assets and the location of the Financial Assets.
The Custodian shall with respect to the Fund create and maintain all
records relating to its activities and obligations under this Contract. All such
records shall upon reasonable notice and during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Fund, including the Fund's independent public accountant, and
employees and agents of the United States Securities and Exchange Commission.
The Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by the Fund and held by the Custodian and shall, when requested
to do so by the Fund and for such
6 of 17
<PAGE>
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
The Custodian shall cooperate with and supply reasonable and customary
information regarding the Custody Account to the entity or entities appointed by
the Board of Directors of the Fund to keep the books of account of the Fund.
Unless Fund shall send to Custodian a written exception or objection to
any statement of account within 90 days of its receipt of such statement from
Custodian, Fund shall be deemed to have approved such statement.
SECTION 2.3.13 CERTIFICATE OF THE BANK. The Custodian shall:
(a) deliver to the Fund on or before January 31st of each calendar
year, a certified schedule, dated December 31, of the
preceding calendar year, executed by two duly elected and
authorized officers of Custodian setting forth a full
description of the Financial Assets held and maintained in
each Custody Account, including, but not limited to, among
other things, the par value of each bond and the number of
shares for each stock or the equivalent, as the case may be,
as of the close of business on December 31st, of each calendar
year;
(b) use its best efforts to deliver to the Fund, within five (5)
business days after the receipt of the written request of the
Fund a certified schedule, dated the date of its issue,
executed by two duly elected and authorized officers of
Custodian, setting forth a full description of the Financial
Assets held and maintained in the Custody Accounts, including
among other things, the par value of each bond and the number
of shares for each stock or the equivalent, as the case may
be; and
(c) deliver, following a request by the Fund, to any governmental
agency certified by the Fund to the Custodian and, in a timely
manner, a certified schedule, which schedule, to the extent
possible, shall be substantially in the form of the certified
schedule to be delivered pursuant to the preceding clause (b)
of this subsection.
In the event the Custodian is unable to deliver, pursuant to clause (c)
above, the certified schedule therein described, the Custodian shall,
immediately upon learning of such inability, notify the Fund by telephone and
promptly confirm such notice to the Fund in writing. Such written notice to the
Fund shall set forth (i) an explanation as to the Custodian's inability to
deliver such certified schedule and (ii) the date upon which such certified
schedule shall be delivered.
SECTION 2.3.14 OTHER SECURITIES. Upon receipt of an Authorization
Letter or Electronic Instruction, the Custodian is authorized to take any and
all actions necessary to settle transactions in futures and/or options
contracts.
7 of 17
<PAGE>
SECTION 2.4 LOTTERY. In the event Financial Assets held in the Custody
Account at a Securities Depository are called for partial redemption by the
issuer, the Custodian will, in its reasonable discretion, allocate the called
portion to the respective holders in a manner which is fair, equitable, and in
accordance with its established procedures.
SECTION 2.5 CONVERSION. The Custodian shall, except where instructed
otherwise by the Fund, convert monies received by the Custodian with respect to
Financial Assets maintained in the Custody Account of foreign issue into United
States dollars at prevailing rates. In effecting such conversion, the Custodian
may use any commercially reasonable method or agency available to it, including
the facilities of its own divisions or affiliates. The Fund agrees that it shall
bear all risk and reasonable expense of such conversion, including without
limitation, losses arising from fluctuations in the exchange rate provided that
the Custodian has acted in good faith and in accordance with the commercial
standard of care for Money Center banks which offer custodial services.
SECTION 2.6 MAINTAIN DUPLICATE RECORDS. The Custodian shall store
"off-premises" tapes of daily transactions with respect to the Custody Account.
Such tapes shall be maintained in accordance with the Custodian's practice in
effect from time to time .
SECTION 2.7 SETTLEMENT. The Fund intends to have sufficient immediately
available funds each day in the Custody Account to pay for the settlement of all
Financial Assets delivered against payment to Custodian or its agents and
credited to the Custody Account. Should Fund fail to have sufficient immediately
available funds in a Custody Account to settle deliveries of Financial Assets
pursuant to Section 2.3.2 (a "Deficit"), Custodian may elect (i) to reject the
settlement of any or all of the Financial Assets delivered to it that day to a
Custody Account but only after notice to Fund, (ii) to settle the deliveries on
the Fund's behalf and debit the Custody Account of the Fund for the amount of
such Deficit , or (iii) to reverse the posting of the Financial Assets credited
to the Custody Account, but only after notice to the Fund.
No prior action or course of dealing on the part of Custodian with
respect to the settlement of Financial Assets transactions on Fund's behalf
shall be used by or give rise to any claim or action by Fund against Custodian
for its refusal to pay or settle for a securities transaction that has not been
timely funded as required herein.
SECTION 2.8 SECURITY INTEREST. To the extent Custodian has advanced
funds on Fund's behalf in connection with the settlement of purchases and sales
of Financial Assets for the Custody Account, Custodian shall have a security
interest in the Financial Assets which are the subject of such purchases and
sales until Fund shall have repaid the amount of such advance to Custodian, and
Custodian's security interest in such Financial Assets shall be released upon
Fund's repayment of such advance to Custodian.
SECTION 3 SAFEKEEPING OF FINANCIAL ASSETS.
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SECTION 3.1 SAFEKEEPING. The Custodian shall hold all Financial Assets
held in the Custody Account in its vault and physically segregate for the
account of the Fund all Financial Assets held by it, except those Financial
Assets which are book-entry securities maintained on the Federal Reserve
Book-Entry Account System or which are eligible for deposit with a Depository.
Unless specified in the Authorization Letter to the contrary, it is understood
that, eligible Financial Assets will be maintained with a Depository. The
Custodian shall be responsible for all Financial Assets deposited into and held
and maintained in the Custody Account whether the Financial Assets be in the
physical custody of the Custodian or held by the Custodian through a Depository;
PROVIDED that the Custodian shall not be responsible for loss or destruction of
Securities held and maintained in the Custody Account, where such loss or
destruction is caused by earthquake, volcanic eruptions or such like
disturbances of nature, by reason of war, whether declared or undeclared; or
caused by the lawful act of any executive, legislative, judicial, administrative
or other governmental or military body or officer. Custodian shall be obligated
to indemnify Fund for any loss of Financial Assets received for, and credited to
the Custody Account resulting from (i) the negligence or willful misconduct of
Custodian or its officers, employees or agents (excluding any Depository
retained for such Financial Assets) or (ii) the burglary, robbery, hold-up,
theft or mysterious disappearance, including loss by damage or destruction. In
the event of a loss of Financial Assets for which it is required to indemnify
Fund pursuant to the immediately preceding sentence, Custodian shall promptly
replace such Financial Assets (by among other means posting appropriate security
or bond with the issuer(s) of such Financial Assets and obtaining their reissue)
or if agreed to by Fund and Custodian, Custodian shall replace the value thereof
(determined based upon the market value of the Financial Assets which are the
subject of such loss as of the date of the discovery of such loss or as of the
date of replacement) and the value of any loss of rights or privileges resulting
from the loss of such Financial Assets. The foregoing indemnity shall be the
exclusive liability of Custodian to Fund for its loss of Financial Assets held
for the Custody Account.
Custodian shall be responsible for only those duties expressly stated
in this Agreement or expressly contained in instructions to perform the services
described herein given to Custodian pursuant to the provisions of this Agreement
and accepted by Custodian but, without limiting the foregoing, Custodian and its
agents shall have no duty or responsibility;
(a) to supervise the investment of, or make recommendations
with respect to the purchase, retention or sale of, Financial Assets
relating to the Custody Account, or to maintain any insurance on
Financial Assets in the Custody Account for Fund's benefit;
(b) with regard to any Financial Assets in the Custody Account
as to which a default in the payment of principal or interest has
occurred, to take any action other than giving of notice with respect
to such default; except, in each instance, where Custodian has been
requested by Fund and Custodian has agreed in writing to do so;
(c) to evaluate, or report to Fund regarding, the financial
condition of any person,
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firm or corporation to which Custodian is instructed to deliver Financial Assets
or funds pursuant to this Agreement;
(d) for any loss occasioned by delay in the actual receipt of
notice by Custodian of any payment, redemption or other transaction in
respect to which Custodian is authorized to take some action pursuant
to this Agreement; or
(e) for any errors or omissions made by any securities pricing
services used by Custodian to value Financial Assets credited to the
Custody Account as part of any service subscribed to by Fund from
Custodian.
SECTION 3.2 USE OF A DEPOSITORY. The Custodian shall:
(a) upon the delivery or transfer, by book-entry or otherwise, of
any of the Fund's Financial Assets to a Securities Depository
Account as provided herein, identify in its records the
Financial Assets as held for the Fund in the Custody
Agreement;
(b) at all times retain against the Depository any and all rights
provided the Custodian, whether such rights be provided by
applicable law, governmental rules or regulations, rules and
regulations of the Depository, or otherwise, including but not
limited to, the right to recover from the Depository (for the
benefit of the Fund) for any loss or losses on the part of the
Depository;
(c) from time to time, as the need may arise, to enforce, for the
benefit of the Fund, any and all rights provided the
Custodian, whether such rights be provided by applicable law,
governmental rules or regulations or otherwise, against the
Depository pertaining to any Financial Assets which are the
property of the Custody Account and are deposited by the
Custodian with the Depository;
(d) within ten (10) business days after its receipt of a request
from the Fund, deliver to the Fund the most current report
issued by the Depository pertaining to its system of internal
accounting control; and
(e) make payment for securities purchased and sold through the
clearing medium employed by such Depository for transactions
of participants acting through it. Upon any purchase of
securities, payment will be made only upon delivery of the
securities to or for the account of the Fund; and upon any
sale of securities, delivery of the securities will be made
only against payment therefor.
SECTION 3.3 THE DEPOSITORY ACCOUNT. The Depository account maintained
by the Custodian and receiving Financial Assets which have been recorded by the
Custodian as held for the Custody Account, shall hold only Financial Assets in
which the Custodian has interest only in a fiduciary or agency capacity for
clients and the Financial Assets in such account will not be commingled with the
Custodian's own Financial Assets.
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SECTION 3.4 CERTAIN CONDITIONS. Any Financial Assets held by the
Custodian for the benefit of the Fund pursuant hereto (including those Financial
Assets held in a Depository) shall be considered by the parties hereto, and
shall be at all times, the sole, absolute property of the Fund, and for purposes
of this Agreement, shall be considered part of the Financial Assets held and
maintained in the Custody Account.
SECTION 3.5 SEGREGATED ACCOUNT. The Custodian shall upon receipt of
Instructions from the Fund establish and maintain a segregated account or
accounts for and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities (including securities maintained in an
account by the Custodian pursuant to Section 3.2. hereof):
(a) in accordance with the provisions of any agreement among the
Fund, the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the NASD (or
any futures commission merchant registered under the Commodity
Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any
similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the
Fund,
(b) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Fund
or commodity futures contracts or options thereon purchased or
sold by the Fund,
(c) for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts
by registered investment companies, and
(d) for other proper corporate purposes.
SECTION 4 PUT OPTIONS. Notwithstanding any provision hereunder to the
contrary, with respect to Financial Assets which possess so-called put options
or similar characteristics which grant the Fund the option to redeem such
Financial Assets prior to their maturity date ("Put Options Securities")
including, but not limited to so-called put bonds, the following shall apply:
(a) with respect to put options which are exercisable
semi-annually, or less frequently than semi-annually, and
where such Put Option Financial Assets is actually delivered
to the Custodian not less than fifteen (15) business days
prior to the put option exercise date, the Custodian shall use
its reasonable best efforts to notify the Fund of such put
option, where correct and timely notification is published in
the publications or services ("Notification Sources") the
Custodian routinely uses
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for this purpose, or as to which the Custodian receives
timely notice from the Fund;
(b) once notified, the Fund must direct the exercise or
non-exercise of such put option by Letter delivered to the
Custodian not less than five (5) business days prior to the
put option exercise date, and if the Fund fails to make such
direction, the Custodian shall not exercise such put option;
and
(c) for purposes of this Section 3: a "business day" is a day on
which the Custodian is open for business under the laws of the
State of New York; the notification sources include, but are
not limited to, J.J. Kenney, THE WALL STREET JOURNAL and/or
DTC, and the Custodian reserves the right to utilize
commercially acceptable other notification sources or
discontinue any of the aforementioned notification sources at
any time and without notice; and
(d) the Custodian shall not notify the Fund of put options
exercisable more frequently than semi-annually.
SECTION 5 BULK HOLDING. The Custodian may hold the Financial Assets of
the Fund in its own vault, separate from its own Financial Assets in bulk with
Financial Assets of the same class and the same issue of other of its own
fiduciary and agency customers; PROVIDED THAT: the Financial Assets in such bulk
shall be adequately identified as belonging to the Fund on the records of the
Custodian.
SECTION 6 THE CUSTODIAN. The Fund and the Custodian agree that the
Custodian in carrying out the provisions of this Agreement, including but not
limited to the purchase of any Financial Assets for deposit into, or the selling
or delivering of any Financial Assets held and maintained in, the Custody
Account, is acting solely as the agent of the Fund. Unless the Custodian shall
otherwise agree in writing, the Custodian shall not have the duty to take any
action other than those actions expressly set forth herein or those actions
necessary and advisable to accomplish such expressly set forth actions. The
Custodian is hereby expressly authorized to execute in the name of the Fund such
certificates as may be necessary to obtain payment with respect to, or to effect
the sale, transfer or other disposition of any Financial Assets held in the
Custody Account in accordance with the Fund's instructions. In carrying out the
purchase or sale of any Financial Assets hereunder, the Custodian may, upon
receipt of the Fund's instructions, purchase from or sell to the Custodian's
bond department or an affiliate of the Custodian.
SECTION 7 GENERAL.
SECTION 7.1 WAIVER; AMENDMENTS. Except as otherwise provided in Section
2.3.12, no delay on the part of the Fund or the Custodian in the exercise of any
right, power or remedy shall operate as a waiver thereof, nor shall any single
or partial exercise by the Fund or the Custodian of any right, power or remedy
preclude other or further exercise thereof, or the exercise of any other right,
power or remedy. No amendment, modification or waiver of, or
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consent with respect to, any provision of this Agreement, shall in any event be
effective unless the same shall be in writing and signed and delivered by each
of the Custodian and the Fund.
SECTION 7.2 NOTICE. Notices with respect to termination, any disputes
hereunder, specification of authorized officers and employees, and terms and
conditions for instructions required hereunder, shall be in writing, and shall
be deemed to have been duly given if delivered personally, by courier service or
by mail, postage prepaid, to the following addresses (or to such other address
as either party hereto may from time to time designate by notice duly given in
accordance with this paragraph):
To the Fund at:
State Farm Balanced Fund, Inc.
One State Farm Plaza
Bloomington, Illinois 61710
Attention: David R. Grimes
To Custodian, to the attention of the individual designated by
Custodian as the safekeeping account administrator for Fund's account, at:
The Chase Manhattan Bank
North American Insurance Securities Services
3 Chase MetroTech Center, 6th Floor
Brooklyn, New York 11245
SECTION 7.3 COMPUTATIONS. Where the character or amount of any asset or
liability or item of income or expense is required to be determined, or any
consolidation or other accounting computation is required to be made, for the
purpose of this Agreement, such determination or calculation shall, to the
extent applicable, be made in accordance with generally accepted accounting
principles.
SECTION 7.4 HEADINGS. Section headings used in this Agreement are for
convenience only, and shall not effect the construction of this Agreement.
SECTION 7.5 GOVERNING LAW. This Agreement shall be a contract made
under and governed by the internal laws of the State of New York including the
Uniform Commercial Code.
SECTION 7.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon the Fund and the Custodian individually and each of their respective
successors and assigns, and shall inure to the benefit of the Fund and the
Custodian and the respective successors and assigns of the Fund and the
Custodian; PROVIDED that, the Custodian may not assign or transfer this
Agreement or delegate any of its duties hereunder except as permitted herein,
without the prior written consent of the Fund.
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SECTION 7.7 INTEGRATION; COURSE OF DEALING. This Agreement constitutes
the sole agreement of the parties with respect to the subject matter hereof and
supersedes all oral negotiations and prior writings with respect to the subject
matter hereof.
SECTION 7.8 TERMINATION. This Agreement shall terminate 90 days after
the receipt by the Custodian or the Fund, or such mutually agreed date as the
case may be, of written notice from the Custodian or the Fund terminating this
Agreement.
SECTION 7.9 CERTAIN NOTICES BY THE FUND AND THE CUSTODIAN. The Fund
agrees to promptly notify the Custodian of any material change in its
organization or any reorganization by it. The Custodian shall notify the Fund of
any changes in its organization which affect its ability to do business as a
banking corporation.
SECTION 7.10 CERTAIN REPRESENTATIONS BY THE FUND AND THE CUSTODIAN. (a)
The Fund herewith promises to the Custodian that (i) all instructions and
confirmations given hereunder shall be given and are given pursuant to
authorizations contained or to be contained in resolutions of its Board of
Directors and by persons authorized by such resolutions to give the same, and
(ii) it shall from time to time furnish the Custodian with certified copies of
such resolutions upon which it may rely for the authorizations contained therein
until otherwise notified in writing of a change thereto. (b) The Custodian
herewith promises to the Fund that (i) it has the full power and authority to
perform its obligations hereunder, (ii) this Agreement constitutes its legal,
valid and binding obligation enforceable in accordance with its terms and (iii)
it has taken all necessary action to authorize the execution and delivery
hereof.
SECTION 7.11 TAXPAYER IDENTIFICATION NUMBER. The Fund's taxpayer
identification number is 36-0902466. Unless Fund has already done so, as a U.S.
citizen or resident, it shall deliver promptly to Custodian with respect to the
Custody Account established under this Agreement, two duly completed and
executed copies of United States Internal Revenue Service form W-9 for the Fund.
Fund shall provide duly executed and completed updates of such form after the
occurrence of an event requiring a change in the form previously delivered by
Fund to Custodian. The Fund shall be responsible for the payment of all taxes
relating to the Financial Assets in the Custody Account.
SECTION 7.12 EXPENSES AND TAXES. The Fund agrees to pay, and to save
the Custodian harmless from all liability, for any taxes which may be payable in
connection with the Financial Assets and any proceeds generated by Financial
Assets and any other property of the Fund purchased or held and maintained
hereunder. All obligations provided for in this subsection 7.12, and in
subsection 7.13 hereof, shall survive any termination of this Agreement.
SECTION 7.13 FEES. For and in consideration of the Custodian acting as
the custodian and the agent of the Fund pursuant to the terms herein contained,
the Fund agrees to pay to the Custodian fees for such services as mutually
agreed upon by the parties hereto and as set forth in
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Exhibit E hereto. Such agreed upon fees may from time to time be modified by the
Custodian pursuant to its notice to the Fund effective no less than 90 days
following the Fund's receipt of such notice. To the extent that Custodian
advances funds to the Custody Account for disbursements or to effect the
settlement of purchase transactions, the Custodian shall be entitled to collect
from the Custody Account an amount equal to The Chase Manhattan Bank's Prime
Rate in effect as announced by it from time to time, unless the Fund and
Custodian have agreed in writing to another interest rate.
SECTION 7.14 HOLD HARMLESS. The Fund agrees to indemnify and hold the
Custodian harmless from and against all claims, losses, liabilities and
expenses, including without limitation, reasonable legal fees and expenses,
arising from any claim of any party arising or resulting from actions the
Custodian takes that are required by this Agreement; provided that the Custodian
shall have acted in good faith and in accordance with the commercial standard of
care for Money Center banks which offer custodial services.
SECTION 7.15 FORCE MAJEURE. Neither the Custodian nor the Fund shall be
responsible for its failure to carry out its responsibilities hereunder where
such failure is caused by circumstances reasonably beyond the control of the
parties so affected including but not limited to, acts of God, war, internal
strife and acts of government.
SECTION 7.16 DISCLAIMER OF LIABILITY. UNDER NO CIRCUMSTANCES WHATSOEVER
SHALL EITHER PARTY BE RESPONSIBLE TO THE OTHER PARTY FOR ANY INCIDENTAL,
SPECIAL, CONSEQUENTIAL, OR INDIRECT DAMAGES OF ANY KIND WHATSOEVER, PROVIDED THE
PARTY AGAINST WHOM THE DAMAGES ARE CLAIMED HAS NOT ACTED IN BAD FAITH OR ENGAGED
IN WILLFUL MISCONDUCT; AND, PROVIDED FURTHER, THAT ANY INDEMNITY CLAIM BY THE
CUSTODIAN UNDER SECTION 7.14 SHALL CONSTITUTE A DIRECT DAMAGES CLAIM AND SHALL
NOT BE SUBJECT TO THE LIMITATION SET FORTH HEREIN.
SECTION 7.17 STANDARD OF CARE. The Custodian expressly agrees that in
carrying out its responsibilities hereunder it shall be responsible for damages,
except as limited by Section 3.1, the Fund suffers as a result of Custodian's,
its employees' and agents' negligence, willful misconduct or failure to act in
good faith and in accordance with the commercial standard of care for Money
Center banks which offer custodial services. The Custodian shall not be
responsible for the title, validity or genuineness of any property or evidence
of title thereto received by it or delivered by it pursuant to this Agreement.
The Custodian shall be held harmless in acting upon any Letter, Notice, request,
direction, instruction, consent, certification or other instrument believed by
it, acting in good faith, to be genuine and delivered by an authorized officer
of Fund.
SECTION 7.18 EXHIBITS. The parties agree that any exhibits attached
hereto may be modified effective upon written notice from the Fund to the
Custodian. Any such modified exhibit shall be and is hereby deemed to be the
exhibit (indicated in such written notice) to this
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Agreement.
SECTION 7.19 NONDISCLOSURE, CONFIDENTIALITY. The Custodian expressly
agrees that it shall not use the name of, nor identify, the Fund or any of its
subsidiaries in any of the Custodian's media or other advertising distributed by
the Custodian to its customers or potential customers.
The Custodian shall maintain the confidentiality of the Fund's Custody
Account information and not disclose any such information except as permitted by
this Agreement or as required by laws, rules, regulations or orders having the
force of law, but only after notice to Fund.
The Shareholders Communications Act of 1985 and subsequent amendments
to the act authorize Custodian to release to issuers of Securities and to other
security holders of an issue, Fund name, address and Securities position if Fund
Custody Account was opened after December 28, 1985, unless Fund states its
objection. Custodian hereby acknowledges Fund's objection.
SECTION 7.20 "FREE RIDING" PROHIBITION. Fund hereby acknowledges that
the act of placing a buy order and sale order for the same securities which are
to settle on the same date in instances where Fund does not have in the Custody
Account sufficient funds independent of the sale of such securities to satisfy
fifty percent (50%) or more of the purchase price (or such other percentage as
may be required by applicable law and regulation) constitutes the practice
commonly known as "free riding" and is prohibited under both Regulation T and
Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R.
Parts 220 and 221).
SECTION 7.21 FUND RESPONSIBILITY. Fund agrees that it shall be
responsible to Custodian as a principal for all of its obligations to Custodian
arising under or in connection with this Agreement, and Fund warrants its
authority to deposit in the Custody Account any Financial Assets and funds which
Custodian receives therefor and to give instructions relative thereto. Fund
further agrees that Custodian shall not be subject to, nor shall its right and
obligations with respect to this Agreement and the Custody Account be affected
by, any agreement between Fund and any such person.
SECTION 7.22 BINDING OBLIGATION AND LIMITATION OF LIABILITY. It is
expressly understood that the obligations of the Fund under this Agreement will
not be binding on any of the Directors, shareholders, nominees, officers, agents
or employees of the Fund personally, but bind only the assets and property of
the Fund.
Custodian agrees that no Director, shareholder, nominee, officer, agent
or employee of the Fund may be held personally liable or responsible for any
obligations of the Fund arising out of this Agreement.
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SECTION 7.23 RESERVATION OF RIGHT. Custodian shall have the right not
to accept for deposit to the Custody Account any Financial Assets which are in a
form or condition which Custodian, in its sole discretion, determines not to be
suitable for the services Custodian provides under this Agreement.
Custodian's and Fund's rights and remedies under this Agreement are in
addition to, and not in limitation of, any other rights and remedies available
to Custodian and Fund under applicable law.
SECTION 7.24 CUSTODIAN'S ANNUAL REPORT. Upon the Fund's request,
Custodian will send the annual report (SAS 70 Report) prepared by its external
auditors on its systems of internal accounting control of custodied Financial
Assets. In addition, the Custodian shall allow the Fund's independent public
accountant reasonable access to the records of the Custodian relating to the
Financial Assets as is required in connection with their examination of books
and records pertaining to the Fund's affairs.
SECTION 7.25 YEAR 2000. The Custodian confirms that it is aware of the
problem that may be presented for certain computer systems by use of the date
fields and the like on and after January 1, 2000, and the Custodian has
developed and is implementing a plan to help assure that Custodian's systems as
the same relate to services provided hereunder will be unaffected by such
problems.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers effective as of the day
and year first written above.
State Farm Balanced Fund, Inc.
By: David R. Grimes
Title: Assistant Vice President and Secretary
The Chase Manhattan Bank
By: Craig F. Werder
Title: Vice President
Address:__________________
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[FOR DOMESTIC CUSTODY AGREEMENTS HAVING REVISED UCC ARTICLE 8 DEFINITIONS]
GLOBAL CUSTODY RIDER
TO
DOMESTIC CUSTODY AGREEMENT
This Rider is entered into by and between The Chase Manhattan Bank
("Custodian") and State Farm Balanced Fund, Inc. ("Company") to provide Global
Custody Services subject to the terms of the Custody Agreement dated as of July
7, 1998, and the terms herein. If there is any conflict between the terms in the
Custody Agreement and the terms in this Rider with regard to the provision by
Custodian of Global Custody Services to Company, the terms of this Rider shall
govern. The terms of this Rider shall be effective as of the date Custodian
commences to provide Global Custody Services to Company. Capitalized terms used
herein and not defined herein shall have the meaning as set forth in the Custody
Agreement.
1. MAINTENANCE OF FINANCIAL ASSETS AND CASH OUTSIDE THE UNITED STATES.
Global Custody Services shall be provided for those Financial Assets
that are to be held outside the United States and unless Company's instructions
specifically require another location acceptable to Custodian:
(a) Financial Assets shall be held in the country or other jurisdiction
in which the principal trading market for such Financial Assets are located,
where such Financial Assets are to be presented for payment or where such
Financial Assets are acquired; and
(b) cash shall be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
Cash may be held pursuant to instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Custodian can comply with Company's instructions to it, Custodian
is authorized to maintain cash balances on deposit for Company with Custodian or
one of its Affiliates at such reasonable rates of interest as may from time to
time be paid on such accounts, or in non-interest bearing accounts as Company
may direct, if acceptable to Custodian. For purposes hereof, the term
"Affiliate" shall mean an entity controlling, controlled by, or under common
control with, Custodian.
If Company wishes to have any of the Financial Assets held in the
custody of a Securities Intermediary other than the established Subcustodians as
defined in Section 2 hereof (or their securities depositories), such arrangement
must be authorized by a written agreement, signed by Custodian and Company.
2. SUBCUSTODIANS AND DEPOSITORIES.
Custodian may act under this Rider through the subcustodians listed in
Schedule A hereto with which Chase entered into subcustodial agreements
("Subcustodians"). At Company's request,
<PAGE>
Custodian may, but need not, add to Schedule A an Eligible Foreign Custodian
(hereinafter defined) that is either a bank or a non-Compulsory Depository where
Custodian has not acted as Foreign Country Manager (hereinafter defined) with
respect to the selection thereof. Custodian shall notify Company in writing in
the event that Custodian agrees to add any such entity. Company authorizes
Custodian to hold Financial Assets recorded to the Custody Account in accounts
which Custodian has established with one or more of its branches or
Subcustodians. Custodian and Subcustodians are authorized to hold any of the
Financial Assets in their accounts with any securities depository in which
Custodian or Subcustodians participate, subject in the case of a Compulsory
Depository to the provisions set forth in section 9(e) hereof.
Custodian may add new, replace or remove Subcustodians. Company shall
be given reasonable notice by Custodian of any amendment to Schedule A. Upon
Company's request, Custodian shall identify the name, address and principal
place of business of any Subcustodian of Company's Financial Assets and the name
and address of the governmental agency or other regulatory authority that
supervises or regulates such Subcustodian.
To be a Subcustodian of Financial Assets maintained outside the United
States the Subcustodian chosen must be either a branch of a U.S. Bank or an
Eligible Foreign Custodian, which are further defined as follows:
(i) "U.S. Bank" shall mean a qualified U.S. bank as defined in Rule
17f-5(a)(7) under the Investment Company Act of 1940, as amended (the " 1940
Act");
(ii) "Eligible Foreign Custodian" shall mean (1) a banking institution
or trust company, incorporated or organized under the laws of a country other
than the United States, that is regulated as such by that country's government
or an agency thereof, (2) a majority owned direct or indirect subsidiary of a
U.S. Bank or bank holding company that is incorporated or organized under the
laws of a country other than the United States, (3) a foreign securities
depository or clearing agency, incorporated or organized under the laws of a
country other than the United States that acts as a system for handling of
securities or equivalent book-entries in that country and that is regulated by a
foreign financial regulatory authority as defined under Section 2(a)(5) of the
1940 Act, (4) a securities depository or clearing agency organized under the
laws of a country other than the United States, when acting as a transnational
system for the central handling of Financial Assets or equivalent book-entries,
and (5) any other entity that H shall have been so qualified by exemptive order,
rule or other appropriate action of the Securities and Exchange Commission (the
"SEC").
3. USE OF SUBCUSTODIAN.
(a) Custodian shall identify the Financial Assets on its books as
belonging to Company.
(b) A Subcustodian shall hold Company's Financial Assets together with
Financial Assets belonging to other of Custodian's customers in accounts
identified on such Subcustodian's books as for the exclusive benefit of
Custodian's customers.
(c) Any Financial Assets in the accounts held by a Subcustodian shall
be subject only to the instruction of Custodian. Any Financial Assets held in a
securities depository for the account of a Subcustodian shall be subject only to
the directions of such Subcustodian.
<PAGE>
(d) Any agreement Custodian enters into with a Subcustodian for holding
its customers' assets shall provide that such assets shall not be subject to any
right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets shall be freely transferable without the payment of
money or value other than for safe custody or administration or, in the case of
cash deposit, liens or rights in favor of creditors of the Subcustodian arising
under bankruptcy, insolvency or similar laws. Where Financial Assets are
deposited by a Subcustodian with a securities depository, Custodian shall cause
the Subcustodian to identify on its books as belonging to Custodian, as agent,
the Financial Assets shown on the Subcustodian's account on the books of such
securities depository. The foregoing shall not apply to the extent of any
special agreement or arrangement made by Company with any particular
Subcustodian.
4. GLOBAL FINANCIAL ASSETS ACCOUNT TRANSACTIONS.
(a) Financial Assets shall be transferred, exchanged or delivered by
Custodian or Subcustodian upon receipt by Custodian of instructions from Company
which include all information required by Custodian. Settlement and payment for
Financial Assets received for, and delivery of Financial Assets out of, the
Custody Account may be made in accordance with the customary or established
Securities trading or Securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including, without
limitation, delivery of Securities to a purchaser, dealer or their agents
against a receipt with the expectation of receiving later payment and free
delivery. Delivery of Financial Assets out of the Custody Account may be made in
any manner specifically required by Company's instructions acceptable to
Custodian.
All collections of funds or other property paid or distributed
in respect of Financial Assets in the Custody Account shall be made at Company's
risk. Custodian shall have no liability for any loss occasioned by delay in the
actual receipt of notice by Custodian or by Subcustodians of any payment,
redemption or other transaction regarding Financial Assets in the Custody
Account in respect of which Custodian has agreed to take any action under the
Agreement.
5. CORPORATE ACTIONS; PROXIES; TAX RECLAIMS.
(a) CORPORATE ACTIONS. Whenever Custodian receives information
concerning the Financial Assets which requires discretionary action by the
beneficial owner of the Financial Assets (other than a proxy), such as
subscription rights, bonus issues, stock repurchase plans and rights offerings,
or legal notices or other material intended to be transmitted to Securities
holders ("Corporate Actions"), Custodian shall give Company notice of such
Corporate Actions to the extent that its central corporate actions department
has actual knowledge of a Corporate Action in time to notify its customers.
Custodian shall notify Company of any Corporate Action regarding Financial
Assets held for the Company, that Custodian shall have received after its
intended expiration.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, Custodian shall endeavor to obtain
instructions from Company or an Authorized Officer, but if instructions are not
received in time for Custodian to take timely action, or actual notice of such
Corporate Action was received too late to seek instructions, Custodian is
authorized to sell such rights entitlement or
<PAGE>
fractional interest and to credit the Cash Account with the proceeds or take any
other action Custodian deems, in good faith, to be appropriate.
(b) PROXY VOTING. Custodian shall provide proxy voting services, if
elected by Company , in accordance with the terms of the Proxy Voting Services
Rider hereto. Proxy voting services may be provided by Custodian or, in whole or
in part, by one or more third parties appointed by Custodian (which may be its
Affiliates); provided that Custodian shall be liable for the performance of any
such third party to the same extent as Custodian would have been if it performed
such services itself.
(c) Tax Reclaims.
(i) Subject to the provisions hereof, Custodian shall apply for a
reduction of withholding tax and any refund of any tax paid or tax credits which
apply in each applicable market in respect of income payments on Financial
Assets for Company's benefit which Custodian believes may be available to
Company.
(ii) The provision of tax reclaim services by Custodian is conditional
upon it receiving from Company or, to the extent the Financial Assets are
beneficially owned by others, from each beneficial owner, A) a declaration of
the beneficial owner's identity and place of residence and (B) certain other
documentation (PRO FORMA copies of which are available from Custodian). Company
acknowledges that, if Custodian does not receive such declarations,
documentation and information Custodian will be unable to provide tax reclaim
services.
(iii) Custodian and its agents shall not be liable to Company or any
third party for any taxes, fines or penalties payable by Custodian or its agents
or by Company, and shall be indemnified accordingly, whether these result from
the inaccurate completion of documents by Company or any third party, or as a
result of the provision to Custodian or any third party of inaccurate or
misleading information or the withholding of material information by Company or
any other third party, or as a result of any delay of any revenue authority or
any other matter beyond Custodian's or its agents' control.
(iv) Custodian shall perform tax reclaim services only with respect to
taxation levied by the revenue authorities of the countries notified to Company
from time to time and Custodian may, by notification in writing, supplement or
amend the markets in which the tax reclaim services are offered. Other than as
expressly provided in this sub-clause, Custodian shall have no responsibility
with regard to Company's tax position or status in any jurisdiction.
(v) Company confirms that Custodian is authorized to disclose any
information requested by any revenue authority or any governmental body in
relation to Company or the Financial Assets and/or cash held for Company.
(vi) Tax reclaim services may be provided by Custodian or, in whole or
in part, by one or more third parties appointed by Custodian (which may be
Affiliates); provided that Custodian shall be liable for the performance of any
such third party to the same extent as Custodian would have been if it performed
such services.
(d) TAX OBLIGATIONS AND INDEMNIFICATION.
<PAGE>
(i) Company confirms that Custodian is authorized to deduct from any
cash received or credited to the Cash Account any taxes or levies required by
any revenue or governmental authority for whatever reason in respect of the
Custody Account.
(ii) Company agrees that if Custodian does not receive appropriate
declarations, documentation and information that additional United Kingdom
taxation shall be deducted from all income received in respect of the Financial
Assets issued outside the United Kingdom and that any applicable United States
withholding tax shall be deducted from income received from the Financial
Assets. Company shall provide to Custodian such documentation and information as
Custodian may require in connection with taxation, and warrant that, when given,
this information shall be true and correct in every respect, not misleading in
any way, and contain all material information. Company undertakes to notify
Custodian immediately if any such information requires updating or amendment.
(iii) Company shall be responsible for the payment of all taxes
relating to the Financial Assets in the Custody Account, and Company agrees to
pay, indemnify and hold Custodian and its agents harmless from and against any
and all liabilities, penalties, interest or additions to tax with respect to or
resulting from, any delay in, or failure by, Custodian or its agents (1) to pay,
withhold or report any U.S. federal, state or local taxes or foreign taxes
imposed on, or (2) to report interest, dividend or other income paid or credited
to the Cash Account, whether such failure or delay by Custodian or its agents to
pay, withhold or report tax or income is the result of W Company's failure to
comply with the terms of this paragraph, or (y) Custodian or its agents own acts
or omissions; provided however, Company shall not be liable to Custodian and its
agents for any penalty or additions to tax due as a result of the failure of
Custodian or its agents to pay or withhold tax or to report interest, dividend
or other income paid or credited to the Cash Account solely as a result of
negligent acts or omissions of Custodian or its agents.
6. NOMINEES.
Financial Assets which are ordinarily held in registered form may be
registered in a nominee name of Custodian, Subcustodians or securities
depositories, as the case may be. Custodian may without notice to Company cause
any such Financial Assets to cease to be registered in the name of any such
nominee and to be registered in Company's name. Company agrees to hold
Custodian, Subcustodians, securities depositories and its and their respective
nominees harmless from any liability arising directly or indirectly from its or
their status as a mere record holder of Financial Assets in the Custody Account.
7. STANDARD OF CARE.
Custodian shall use reasonable care with respect to its obligations and
the safekeeping of Company's Financial Assets hereunder. Custodian shall be
liable to Company for any loss which shall occur as the result of the failure of
a Subcustodian (except that Custodian shall have no liability for the
performance of a Compulsory Depository as defined in section 9(e) hereof) to
exercise reasonable care with respect to the safekeeping of Financial Assets
where such loss results directly from the failure of a Subcustodian to use
reasonable care in the provision of custodial services by it in accordance with
the standards prevailing in its local market or from the willful default of such
Subcustodian in the provision of custodial services by it. Any liability of the
Custodian hereunder shall
<PAGE>
be limited to the extent set forth in section 7.16 of the Custody Agreement.
Custodian shall not be responsible for the insolvency of any Subcustodian which
is not a branch or its Affiliate.
Custodian shall be entitled to rely, and may act, upon the advice of
counsel (who may be counsel for Company) on all matters and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
Without limiting anything else contained in this section, Custodian
shall not be liable for any loss which results from: 1) the general risk of
investing, or 2) investing or holding Financial Assets in a particular country
including, but not limited to, nationalization, expropriation or other
governmental actions; regulation of the banking or securities industry; currency
restrictions, devaluations or fluctuations; and market conditions which prevent
the orderly execution of securities transactions or affect the value of
Financial Assets.
8. FEES AND EXPENSES.
Company agrees to pay Custodian for Global Custody Services hereunder
the fees set forth in Schedule B hereto or such other amounts as may be agreed
upon in writing, together with its reasonable out-of-pocket or incidental
expenses, including, but not limited to, legal fees.
9. MISCELLANEOUS.
(a) FOREIGN EXCHANGE TRANSACTIONS. To facilitate the administration of
Company's trading and investment activity, when instructed by specific or
standing instruction, Custodian is authorized to enter into spot or forward
foreign exchange contracts for Company's account with itself (or any of its
Affiliates). Custodian may establish rules or limitations concerning any foreign
exchange facility made available. In all cases where Custodian or its Affiliates
have entered into a separate master foreign exchange contract with Company that
covers a foreign exchange transaction for the Custody Account, the terms and
conditions of that foreign exchange contract and, to the extent not
inconsistent, the Agreement shall apply to such transaction.
(b) CERTIFICATION OF RESIDENCY, ETC. Company certifies that it is a
resident of the United States and agrees to notify Custodian of any changes in
residency. Custodian may rely upon this certification or the certification of
such other facts as may be required to administer Custodian's obligations under
this Rider and the Agreement. Company shall indemnify Custodian and its agents
against all losses, liability, damages, claims or demands arising directly or
indirectly from any such certifications.
(c) ACCESS TO RECORDS. Custodian shall allow Company's independent
public accountant reasonable access to records relating to the Custody Account
as is required in connection with their examination of books and records
pertaining to Company's affairs. Subject to restrictions under applicable law,
Custodian shall also obtain an undertaking to permit Company's independent
public accountants reasonable access to the records of any Subcustodian which
has physical possession of any Financial Assets as may be required in connection
with the examination of Company's books and records.
<PAGE>
(d) COMANY'S REPRESENTATION. Company represents that the Financial
Assets being placed in Custodian's custody are subject to the 1940 Act, as the
same may be amended from time to time.
(e) COMPLIANCE WITH SEC RULE 17f-5.
(1) Company's board of directors (or equivalent body) (hereinafter
"Board") hereby delegates to Custodian, and Custodian hereby accepts the
delegation to Custodian, of the obligation to perform as its "Foreign Custody
Manager" (as that term is defined in SEC 'Rule 17f-5(a)(2)), both for the
purpose of selecting Eligible Foreign Custodians (as that term is defined in SEC
Rule 17f-5(a)(1), and as the same may be amended from time to time, or that have
otherwise been made exempt pursuant to an SEC exemptive order) to hold Financial
Assets and of evaluating the contractual arrangements with such Eligible Foreign
Custodians (as set forth in SEC Rule 17f-5(c)(2)); provided that, the term
Eligible Foreign Custodian shall not include any "Compulsory Depository". A
Compulsory Depository shall mean a securities depository or clearing agency the
use of which is compulsory because: W its use is required by law or regulation,
(ii) securities cannot be withdrawn from the depository, or (iii) maintaining
securities outside the depository is not consistent with prevailing custodial
practices in the country which the depository serves. Compulsory Depositories
used by Custodian as of the date hereof are set forth in Appendix 1-A hereto,
and as the same may be amended on notice to Company from time to time.
(2) In connection with the foregoing, Custodian shall:
(i) provide written reports notifying our Board of the placement of
Financial Assets with particular Eligible Foreign Custodians and of any material
change in the arrangements with such Eligible Foreign Custodians, with such
reports to be provided to our Board at such times as the Board deems reasonable
and appropriate based on the circumstances of our foreign custody arrangements
(and until further notice from us such reports shall be provided not less than
quarterly with respect to the placement of Financial Assets with particular
Eligible Foreign Custodians and with reasonable promptness upon the occurrence
of any material change in the arrangements with such Eligible Foreign
Custodians);
(ii) exercise such reasonable care, prudence and diligence in
performing as Company's Foreign Custody Manager as a person having
responsibility for the safekeeping of Financial Assets would exercise;
(iii) in selecting an Eligible Foreign Custodian, first have determined
that Financial Assets placed and maintained in the safekeeping of such Eligible
Foreign Custodian shall be subject to reasonable care, based on the standards
applicable to custodians in the relevant market, after having considered all
factors relevant to the safekeeping of such Financial Assets, including, without
limitation, those factors set forth in SEC Rule 17f-5(c)(1)(i)-(iv);
(iv) determine that the written contract with the Eligible Foreign
Custodian (or, in the case of an Eligible Foreign Custodian that is a securities
depository or clearing agency, such contract, the rules or established practices
or procedures of the depository, or any combination of the foregoing) requires
that the Eligible Foreign Custodian will provide reasonable care for Financial
Assets based on the standards applicable to custodians in the relevant market;
and
<PAGE>
(v) have established a system to monitor the continued appropriateness
of maintaining Financial Assets with particular Eligible Foreign Custodians and
of the governing contractual arrangements; it being understood, however, that in
the event that Custodian shall have determined that the existing Eligible
Foreign Custodian in a given country would no longer afford Financial Assets
reasonable care and that no other Eligible Foreign Custodian in that country
would afford reasonable care, Custodian shall promptly so advise Company and
shall then act in accordance with Company's instructions with respect to the
disposition of the affected Financial Assets.
Subject to paragraphs W(2)(O-M above, Custodian is hereby authorized to place
and maintain Financial Assets on Company's behalf with Eligible Foreign
Custodians pursuant to a written contract deemed appropriate by Custodian.
(3) Except as expressly provided herein, Company shall be solely
responsible to assure that the maintenance of Financial Assets hereunder
complies with the rules, regulations, interpretations and exemptive orders
promulgated by or under the authority of the SEC.
(4) Custodian represents to Company that Custodian is a U.S. Bank as
defined in Rule 17f-5(a)(7). Company represents to Custodian that: (i) the
Financial Assets being placed and maintained in Custodian's custody are subject
to the 1940 Act, as the same may be amended from time to time; (ii) Company's
Board: (A) has determined that it is reasonable to rely on Custodian to perform
as its Foreign Custody Manager (B) or Company's investment adviser shall have
determined that Company may maintain Financial Assets in each country in which
Financial Assets shall be held hereunder and determined to accept the risks
arising therefrom (including, but not limited to, a country's financial
infrastructure (and including any Compulsory Depository operating in such
country), prevailing custody and settlement practices, laws applicable to the
safekeeping and recovery of Financial Assets held in custody, and the likelihood
of nationalization, currency controls and the like) (collectively ("Country
Risk")). Nothing contained herein shall require Custodian to make any selection
or to engage in any monitoring on Company's behalf that would entail
consideration of Country Risk.
(5) Custodian shall provide to Company such information relating to
Country Risk as is specified in Appendix 1-B hereto. Company hereby acknowledges
that: (i) such information is solely designed to inform it of market conditions
and procedures, but is not intended to influence Company's investment decisions;
and (ii) Custodian has gathered the information from sources it considers
reliable, but that Custodian shall have no responsibility for inaccuracies or
incomplete information.
STATE FARM BALANCED FUND, INC.
By: Edward B. Rust, Jr.
Title: President
Date: January 15, 1999
Accepted and agreed to:
THE CHASE MANHATTAN BANK
<PAGE>
By: Craig F. Werder
Title: Vice President
<PAGE>
SPECIAL FOREIGN CUSTODY MANAGER AGREEMENT
This agreement is made as of January 15, 1999 between State Farm
Balanced Fund, Inc. (the "Fund") and State Farm Investment Management Corp. (the
"Adviser").
WHEREAS, The Fund desires to appoint the Adviser as a Special Foreign
Custody Manager on the terms and conditions contained herein.
WHEREAS, The adviser believes it appropriate that it serve as Special
Foreign Custody Manager and perform the duties set forth herein on the terms and
condition contained herein.
NOW, THEREFORE, in consideration of the terms of this agreement, each
of the Fund and the Adviser agrees as follows:
SECTION 1 - DEFINED TERMS. Whenever used in this agreement, the following words
and phrases shall have the following meanings, unless the context otherwise
requires:
"Compulsory Securities Depository" means a foreign Securities
Depository or clearing agency that, either as a legal or practical matter, must
be used if the Fund determines to place Foreign Assets in a country outside the
United States (i) because required by law or regulation; (ii) because securities
cannot be withdrawn from such foreign Securities Depository or clearing agency;
or (iii) because maintaining or effecting trades in securities outside the
foreign Securities Depository or clearing agency is not consistent with
prevailing or developing custodial or market practices.
"Country Risk" means all factors reasonably related to the systemic
risk of holding Foreign Assets in a particular country including, but not
limited to, such country's political environment; economic and financial
infrastructure, prevailing or developing custody and settlement practices; and
laws and regulations applicable to the safekeeping and recovery of Foreign
Assets held in custody in that country.
"Eligible Foreign Custodian" has the meaning provided in the Rule.
"Foreign Assets" means any of the Fund's investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Fund's
transactions in such investments.
"Rule" means Rule 17f-5 under the Investment Company Act of 1940, as
amended.
"Securities Depository" means any securities depository or clearing
agency within the meaning of Sections (a)(1)(ii) or (a)(1)(iii) of the Rule.
"1940 Act" means the Investment Company Act of 1940, as amended.
SECTION 2 - DELEGATION TO THE ADVISER AS SPECIAL FOREIGN CUSTODY MANAGER. The
Fund, pursuant to resolution adopted by its Board of Directors (the "Board"),
hereby delegates to the Adviser, subject to Section (b) of Rule 17f-5, the
responsibility for selecting, contracting with, and monitoring Eligible Foreign
Custodians that are Compulsory Securities Depositories, and the Adviser hereby
accepts such delegation, as Special Foreign Custody Manager of the Fund.
SECTION 3 - COUNTRIES COVERED. The Special Foreign Custody Manager shall be
responsible for performing the delegated responsibilities defined below only
with respect to the countries and custody arrangements for each such country
listed on Schedule A to this agreement, which list of countries may be amended
from time to time by the Fund with the agreement of the Special Foreign Custody
Manager. The Special Foreign Custody Manager shall list on Schedule B the
Compulsory Securities Depositories selected by the Special Foreign Custody
Manger to maintain the assets of the Fund, which list of Compulsory Securities
Depositories may be amended from time to time in the sole discretion of the
Special Foreign Custody Manager. The Special Foreign Custody Manger will provide
amended versions of Schedules A and B in accordance with Section 7 hereunder.
Upon receipt by the Special Foreign Custody Manager of Authorization to
place or maintain Foreign Assets in a country listed on Schedule A, the Special
Foreign Custody Manager shall be deemed to have been delegated by the Board
responsibility as Special Foreign Custody Manager and to have accepted such
delegation. Upon closing the Fund's account with the Compulsory Securities
Depository, the Adviser shall immediately cease to be the Special Foreign
Custody Manager of the Fund with respect to the country.
<PAGE>
The Special Foreign Custody Manager may withdraw its acceptance of
delegated responsibilities with respect to a designated country upon written
notice to the Fund. Thirty days (or such longer period as to which the parties
agree in writing) after receipt of any such notice by the Fund, the Adviser
shall have no further responsibility as Special Foreign Custody Manager to the
Fund with respect to the country as to which the adviser's acceptance of
delegation is withdrawn.
SECTION 4 - SCOPE OF DELEGATED RESPONSIBILITIES.
4.1 SELECTION OF COMPULSORY SECURITIES DEPOSITORIES
Subject to the provisions of this Section 4, the Special
Foreign Custody Manager may place and maintain the Foreign Assets in
the Care of the Compulsory Securities Depository selected by the
Special Foreign Custody Manager in each country listed on Schedule A,
as amended from time to time.
In performing its delegated responsibilities as Special Foreign Custody Manager
to place or maintain Foreign Assets with Compulsory Securities Depositories, the
Special Foreign Custody Manager shall determine that the Foreign Assets will be
subject to reasonable card, based on the standards applicable to custodians in
the country in which the Foreign Assets will be held by that Compulsory
Securities Depository, after considering all factors relevant to the safekeeping
of such assets, including, without limitation the factors specified in Section
(c)(1) of the Rule.
4.2 CONTRACTS WITH COMPULSORY SECURITIES DEPOSITORIES
The Special Foreign Custody Manager shall determine that the
contract with each Compulsory Securities Depository selected by the
Special Foreign Custody Manager (or if no contract exists, the rules
or established practices or procedures of the Compulsory Foreign
Securities Depository) will satisfy the requirements of Section (c)(2)
of the Rule.
4.3 MONITORING
In each case in which the Special Foreign Custody Manager
maintains Foreign Assets with a Compulsory Securities Depository
selected by the Special Foreign Custody Manager, the Special Foreign
Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Compulsory
Securities Depository and (ii) the contract governing the custody
arrangements established by the Special Foreign Custody Manger with
the Compulsory Securities Depository referred to in Section 4.2. In
the event the Special Foreign Custody Manager determines that the
custody arrangements with a Compulsory Securities Depository it has
selected are no longer appropriate, the Special Foreign Custody
Manager shall notify the Board in accordance with Section 7 hereunder.
SECTION 5 - GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY. For purposes of
this Section 5, the Board shall be deemed to have considered and determined to
accept such Country Risk as is incurred by placing and maintaining the Foreign
Assets in each country for which the Adviser is serving as Special Foreign
Custody Manger of the Fund, and the Board shall be deemed to be monitoring on a
continuing basis such Country Risk to the extent the Board considers necessary
or appropriate.
SECTION 6 - STANDARD OF CARE AS SPECIAL FOREIGN CUSTODY MANAGER OF THE Fund. In
performing the responsibilities delegated to it, the Special Foreign Custody
Manager agrees to exercise reasonable care, prudence and diligence such as a
person having responsibility for the safekeeping of assets of management
investment companies registered under the 1940 Act would exercise.
SECTIONS 7 - REPORTING REQUIREMENTS. The Special Foreign Custody Manager shall
report the withdrawal of the Foreign Assets from a Compulsory Securities
Depository by providing the Board amended Schedules A or B at the end of the
calendar quarter in which an amendment to either Schedule has occurred. The
Special Foreign Custody Manager shall make written reports notifying the Board
of any other material change in the foreign custody arrangements of the Fund
with respect to Compulsory Securities Depositories described in this Agreement
after the occurrence of the material change.
SECTION 8 - REPRESENTATIONS WITH RESPECT TO THE Rule. The Fund represents to the
Adviser that the Board has determined that it is reasonable for the Board to
rely on the Adviser to perform the responsibilities delegated pursuant to this
Agreement to the Adviser as the Special Foreign Custody Manager of the Fund.
<PAGE>
SECTION 9 - EFFECTIVE DATE AND TERMINATION OF THE ADVISER AS SPECIAL FOREIGN
CUSTODY MANAGER. The Board's delegation to the Adviser as Special Foreign
Custody Manager of the Fund shall be effective as of the date hereof and shall
remain in effect until terminated at any time, without penalty, by written
notice from the terminating party to the non-terminating party. Termination will
become effective thirty days after receipt by the non-terminating party of such
notice.
SECTION 10 - REPRESENTATIONS.
10.1 The Fund hereby represents that (a) this Agreement has been duly
authorized, executed and delivered by the Fund, constitutes a valid and legally
binding obligation of the Fund enforceable in accordance with its terms, and no
statute, regulation, rule, order, judgment or contract binding on the Fund
prohibits the Fund's execution or performance of this agreement; and (b) this
agreement has been duly approved and authorized by the Board.
10.2 The Adviser represents that this agreement has been duly
authorized, executed and delivered by the Adviser, constitutes a valid and
legally binding obligation of the Adviser enforceable in accordance with its
terms, and no statute, regulation, rule, order, judgment or contract binding on
the Adviser prohibits the Adviser's execution or performance of this agreement.
SECTION 11 - MISCELLANEOUS.
11.1 The Adviser shall not be liable under this agreement for any
costs, expenses, damages, liabilities or claims, including attorneys' and
accountants' fees, sustained or incurred by, or asserted against the Fund,
except to the extent the same arises out of the failure by the Adviser to
exercise the care, prudence and diligence required by Section 6 of this
Agreement. In no event shall the Adviser be liable to either the Fund, its
Board, or any third party for special, direct or consequential damages, or for
lost profits or loss of business, arising in connection with this Agreement.
11.2 This Agreement constitutes the entire agreement between the
Adviser and the Fund regarding the delegation of responsibilities under the
Rule.
11.3 Any notice or other instrument in writing, authorized or required
by this agreement to be given to the Adviser, shall be sufficiently given if
received by it at its offices at One State Farm Plaza, Bloomington, Illinois
61710 or at such other place as the Adviser may from time to time designate in
writing.
11.4 Any notice or other instrument in writing, authorized or required
by this agreement to be given to the Fund shall be sufficiently given if
received by it at its offices at One State Farm Plaza, Bloomington, Illinois
61710 or at such other place as the Fund may from time to time designate in
writing.
11.5 In case any provision in or obligation under this agreement shall
be invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
thereby. This agreement may not be amended or modified in any manner except by a
written agreement executed by both parties. This agreement shall extend to and
shall be binding upon the parties hereto, and their respective successors and
assigns; provided, however, that this agreement shall not be assignable by
either party without the written consent of the other.
11.6 This agreement shall be construed in accordance with the
substantive laws of the State of Illinois, without regard to conflicts of laws
principles thereof. Each of the Adviser and the Fund consents to the
Jurisdiction of a state or federal court situated in Illinois in connection with
any dispute arising hereunder and irrevocably waives, to the fullest extent
permitted by applicable law, any objection which it may now or hereafter have to
the laying of venue of any such proceeding brought in such a court and any claim
that such proceeding brought in such a court has been brought in an inconvenient
forum. Each of the Adviser and the Rind irrevocably waives any and all rights to
trial by jury in any legal proceeding arising out of or relating to this
agreement.
11.7 The parties hereto agree that, in performing hereunder, the
Adviser is acting solely on behalf of the Fund and no contractual or service
relationship shall be deemed to be established hereby between the Adviser and
any other person.
11.8 This agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
<PAGE>
IN WITNESS WHEREOF, each the Fund and the Adviser have caused this
agreement to be executed by their respective officers, thereunto duly
authorized, as of the date first above written.
State Farm Growth Fund, Inc.
By: Edward B. Rust, Jr.
Title: President
State Farm Investment Management Corp.
By: Roger S. Joslin
Title: Vice President - Treasurer
<PAGE>
SCHEDULE A
Specified Countries
1. Netherlands
<PAGE>
SCHEDULEB
Compulsory Securities Depositories
1 - Nederlands Centraal Instituut voor Giraal Effectenverkeer B.V. (NECIGEF)
<PAGE>
BELL BOYD & LLOYD LLC
Three First National Plaza
70 West Madison Street, Suite 3300
Chicago, Illinois 60602-4207
312 372 1121
Fax: 312 372 2098
March 24, 2000
As counsel for State Farm Balanced Fund, Inc. (the "Registrant"), we
consent to the incorporation by reference of our opinion dated March 8, 1996,
filed with the Registrant's registration statement on Form N-1A, on March 21,
1996, Securities Act file no. 2-27058.
In giving this consent we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933.
/s/ Bell, Boyd & Lloyd LLC
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors," and to the use of our report dated
December 17, 1999 for the State Farm Balanced Fund, Inc. in the Registration
Statement (Form N-1A) of the State Farm Balanced Fund, Inc. and its
incorporation by reference in the related Prospectus and Statement of Additional
Information filed with the Securities and Exchange Commission in this
Post-Effective Amendment No. 40 to the Registration Statement under the
Securities Act of 1933 (File No. 2-27769) and in this Amendment No. 21 to the
Registration Statement under the Investment Company Act of 1940 (File No.
811-1520).
ERNST & YOUNG LLP
Chicago, Illinois
March 22, 2000
<PAGE>
CODE OF ETHICS
STATE FARM GROWTH FUND, INC.
STATE FARM INTERIM FUND, INC.
STATE FARM BALANCED FUND, INC.
STATE FARM MUNICIPAL BOND FUND, INC.
STATE FARM INVESTMENT MANAGEMENT CORP.
STATE FARM VARIABLE PRODUCT TRUST
ARTICLE I. INTRODUCTION
The general principles and other rules set forth in this Code of Ethics are
based upon the fundamental objectives that invested assets should be managed
exclusively for the benefit of their owners and that knowledge about any current
or prospective transactions in invested assets should be utilized exclusively
for the benefit of their owners. The people making investment related decisions
or having knowledge about current or prospective transactions should conduct
themselves in a way that no actual or apparent conflicts arise between the
shareowners' interest and their own personal interest.
Although we have attempted to draft this Code of Ethics in a manner that is
easily understood, there are some technical terms and phrases used which have
special meanings. In order to help you understand these terms and phrases,
Article VIII contains several definitions. We have also attempted to draft this
Code of Ethics in a manner that is easily administered. However, not all
possible situations can be covered by specific provisions. As a result, the
people responsible for enforcement must exercise their judgment when
interpreting the Code of Ethics and applying it to the particular facts and
circumstances. This judgment will be exercised in a manner that is consistent
not only with the specific provisions, but also with the underlying intent as
described in the fundamental objectives and general principles.
ARTICLE II. GENERAL PRINCIPLES
A. The principle governing all activities of the Manager is that the
Manager functions exclusively for the benefit of the owners or beneficiaries of
the assets it manages.
B. Assets under management or knowledge as to current or prospective
transactions in managed assets shall not be utilized for personal advantage or
for the advantage of anyone other than the owners or beneficiaries of those
assets.
C. It is extremely important in performing their duties that persons
associated with the Manager and Funds avoid situations involving actual or
potential conflicts of interest with the owners or beneficiaries of managed
assets.
D. Situations appearing to involve actual or potential conflicts of
interest or impairment of objectivity shall be avoided whenever doing so does
not run counter to the interests of the owners or beneficiaries of the managed
assets.
<PAGE>
E. The following specific rules and reporting procedures are promulgated
to assure that Personal Securities Transactions of the Subscribers are conducted
in accordance with the principles set forth above. There is no intention to
limit arbitrarily or unreasonably anyone's personal investment flexibility.
Quite the contrary, our experience has been that investment lessons are learned
much more quickly and more thoroughly by personal investment than by giving poor
advice to third parties. We also believe strongly investment advisers should
"take their own medicine" whenever it can be done within a framework that avoids
conflicts of interest with their clients.
ARTICLE III. SCOPE
Not all prohibitions, monitoring and reporting rules contained in Articles
IV, V and VI apply to each person required to subscribe to this Code of Ethics.
The scope varies depending upon the responsibilities and positions of the
Subscriber. This Code of Ethics specifically identifies the group of Subscribers
subject to each prohibition, monitoring and reporting rule contained in Articles
IV, V and VI.
The application of the prohibitions, monitoring and reporting rules
contained in Articles IV, V and VI may extend beyond transactions in Securities
in which the Subscriber has a direct interest to include transactions in
Securities in which the Subscriber has an indirect interest. However, the
prohibitions, monitoring and reporting rules contained in Articles IV, V and VI
shall not apply to transactions effected for any account over which the
Subscriber does not have any direct or indirect influence or control.
The definitions of Securities, Personal Securities Transactions and
Beneficial Ownership should be consulted to determine the scope of the
prohibitions, monitoring and reporting rules contained in Articles IV, V and VI.
With regard to State Farm Variable Product Trust (the "Trust"), each
investment sub-adviser's code of ethics (e.g., the code of ethics of Barclays
Global Investors, N.A. (the "sub-adviser"), which is attached as Appendix A), is
incorporated herein by reference as the Trust's Code of Ethics applicable to
persons described below. Those provisions of an investment sub-adviser's code of
ethics applicable to persons who, in connection with their regular functions or
duties, make, participate in, or obtain information regarding the purchase or
sale of a security, or whose functions relate to the making of any
recommendation with respect to such purchase or sale by registered investment
companies sponsored, managed or advised by such investment sub-adviser are
hereby incorporated herein by reference as additional provisions of this Code of
Ethics applicable to those Subscribers who are partners, directors, or employees
of such sub-adviser and who have direct responsibility for investments of any of
the Funds of the Trust.
A violation of an investment sub-adviser's code of ethics by Subscribers
who are partners, directors, or employees of such investment sub-adviser shall
constitute a violation of this Code of Ethics.
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<PAGE>
In connection with Article VI below, provided that an investment
sub-adviser reports any violations of the Code of Ethics that it uncovers from
its review of personal securities transaction reports made to it by those
Subscribers who are partners, directors, or employees of such sub-adviser and
who have direct responsibility for investments of any of the Funds of the Trust,
and certifies in writing at the end of each calendar quarter of the Trust to the
compliance officer of the Trust that no violation of the Code of Ethics occurred
during that quarter other than those violations reported, then reporting of such
security transactions by partners, directors, or employees of an investment
sub-adviser in compliance with procedures established pursuant to the investment
sub-adviser's code of ethics shall constitute the reporting required under this
Code of Ethics.
ARTICLE IV. PROHIBITIONS
PROHIBITIONS APPLICABLE TO ALL SUBSCRIBERS
A. TRANSACTIONS WITH MANAGER. Subscribers shall not knowingly sell to or
purchase from the Manager any Securities or other property except shares issued
by the Funds.
B. TRANSACTIONS WITH FUNDS. Subscribers shall not knowingly sell to or
purchase from any Fund any Securities or other property except shares issued by
the Funds.
C. SECURITIES UNDER CONSIDERATION. Subscribers who know, or have reason
to know, that a Security is being actively considered for purchase or sale by
the Manager or the Funds (other than any Funds managed by an unaffiliated
sub-adviser), shall not enter into Personal Securities Transactions involving
that Same Security. This prohibition shall not apply to the acquisition of
Securities by a Subscriber through a dividend reinvestment plan or through a
regular automatic purchase feature of a Direct Purchase Plan, if the Subscriber
was a participant in the dividend reinvestment plan or in the Direct Purchase
Plan more than 15 days prior to the time at which the Manager began to actively
consider purchasing or selling the Security.
D. CONFIDENTIALITY OF INFORMATION. Subscribers shall not (a) disclose any
of the Funds' current or the Manager's contemplated transactions except as may
be necessary to fulfill his or her job-related responsibilities or (b) utilize
any information concerning the Funds' current or the Manager's contemplated
transactions except for the benefit of the owners or beneficiaries of assets
managed by the Manager or owned by the Funds and in no event for personal gain.
E. PREFERENTIAL TREATMENT. Subscribers shall not seek or accept favors,
preferential treatment, any special benefit or other consideration (of more than
a de minimis value) from broker-dealers or other providers of goods or services
to the Funds, the Manager or their affiliates.
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<PAGE>
PROHIBITION APPLICABLE TO ALL SUBSCRIBERS
OTHER THAN MUTUAL FUND DISINTERESTED DIRECTORS/TRUSTEES
F. INSIDER INFORMATION. Subscribers, other than the Mutual Fund
Disinterested Directors/Trustees, who obtain material non-public information
regarding a company (a) shall not disclose that information to anyone but a
designated Investment Professional and (b) shall not engage in any transactions
involving securities of that company for portfolios under management or for a
personal account until the information is publicly disseminated or becomes
obsolete. Whenever information is suspected of being material and non-public, a
designated Investment Professional should be advised of the circumstances
immediately. The Mutual Fund Disinterested Directors/Trustees shall be subject
to the legal obligations generally associated with insider information. (See
Appendix I for discussion of Insider Trading.)
PROHIBITION APPLICABLE TO ALL INVESTMENT PROFESSIONALS, FUND
OFFICERS AND MUTUAL FUND INTERESTED DIRECTORS/TRUSTEES
G. PROHIBITION ON SHORT-TERM PERSONAL SECURITIES TRANSACTIONS. No
Investment Professional, Fund officer or Mutual Fund Interested Director/Trustee
shall profit from the purchase and sale, or the sale and purchase, of the Same
Security within 30 calendar days; provided, however, that the Compliance Officer
may, upon request, exempt a Personal Securities Transaction from this
prohibition, in whole or in part, upon such conditions as the Compliance Officer
may impose, if the Compliance Officer concludes that no harm to a Fund would
result and that the application of the prohibition would be inequitable or
result in undue hardship to the individual who entered into the transaction. Any
profit realized on a transaction that the Compliance Officer had not exempted
from this prohibition shall be disgorged to the McLean County chapter of the
American Red Cross by check from the Subscriber, payable to the McLean County
chapter of the American Red Cross and delivered to the Compliance Officer for
delivery to such charity.
H. UNDERWRITTEN PUBLIC OFFERINGS AND INITIAL PUBLIC OFFERINGS. Investment
Professionals, the Funds' officers and Mutual Fund Interested Directors/Trustees
shall not purchase any Securities in an underwritten public offering or Initial
Public Offering. (It is important to avoid any actual or perceived obligation to
brokers as a result of being provided hot offering allocations.) Taxable and
tax-exempt debt securities that are not convertible into equity Securities and
are not being considered for purchase or sale by the Manager or the Funds may be
purchased in underwritten offerings for long term investment, but only when (i)
the transaction does not conflict with the activity of the Manager or the Funds
in those issues, and (ii) the person seeks approval from a designated Investment
Professional, as that procedure is described in I below.
I. LIMITED OFFERINGS. Investment Professionals, the Funds' officers and
Mutual Fund Interested Directors/Trustees may not purchase Securities in a
Limited Offering without the prior approval of a designated Investment
Professional. The designated Investment Professional who approves purchases of
Securities in Limited Offerings may not purchase Securities in a Limited
Offering without the prior approval of the Funds' executive committee. Any
Investment
4
<PAGE>
Professional who has acquired a Security in a Limited Offering must disclose the
interest in the Security to the other Investment Professionals participating in
the investment decision process whenever an investment in a Security of the same
issuer is being considered for purchase or sale. Any Investment Professional who
has acquired a Security in a Limited Offering will be disqualified from
participating in any subsequent decisions by the Manager relating to the
Security acquired in the Limited Offering.
PROHIBITIONS APPLICABLE TO ALL INVESTMENT PROFESSIONALS
J. CERTAIN SHORT TERM AND SPECULATIVE TRADING. As a general rule,
Investment Professionals should not engage in highly speculative short term
trading practices or purchase securities with borrowed funds. Moreover,
Investment Professionals shall avoid the possibility of becoming so indebted as
a consequence of a poor investment that there might be temptation to utilize
assets under management to retrieve the personal investment or to repay the
broker involved. As a result, the following three prohibitions have been
included to address these types of situations. However, it is recognized that
certain cases may arise in which these types of activities could be used as a
part of a legitimate long term investment strategy. Therefore, exceptions to
these three rules may be permitted on a case-by-case basis in advance by a
designated Investment Professional who himself or herself must obtain advance
approval for an exception to these rules from the Compliance Officer.
1. PLEDGES AND MARGIN PURCHASES. Investment Professionals shall not
purchase any type of financial instrument (including securities,
options and debt instruments) with borrowed money or in a margin
account or trade futures contracts on margin, and shall not use
Securities as collateral for a loan.
2. SHORT SALES. Investment Professionals shall not engage in short
sales of any type of financial instrument (including securities,
options and debt instruments).
3. OPTIONS AND FUTURES CONTRACTS. Investment Professionals shall not
engage in any transaction in options or futures contracts on (a)
any Securities owned in the portfolios managed by the Manager or
(b) Securities in the business area for which the Investment
Professional has responsibility for analysis, decision-making or
transactions, whether or not owned in a portfolio under
management. Options and futures contracts on Securities that are
not owned in the portfolios under management and that are not
within the area for which the Investment Professional has
responsibility for analysis, decision-making or transactions may
be purchased after obtaining prior approval of a designated
Investment Professional to assure that the underlying issue is
not being considered for purchase or sale.
K. DISCLOSURE OF PERSONAL HOLDINGS. Investment Professionals who are in a
position to influence any decision by the Manager or the Funds to purchase, hold
or sell Securities must disclose their Beneficial Ownership interest in such
Security being considered for purchase or
5
<PAGE>
sale by the Manager or the Funds to the other Investment Professionals
participating in the investment decision process. Investment Professionals are
not required to disclose their Beneficial Ownership interest in Securities held
in an account over which the Investment Professional does not have any direct or
indirect influence or control.
L. SERVICE AS A DIRECTOR. Investment Professionals shall not serve as
directors of publicly traded companies unless prior authorization is granted by
a designated Investment Professional who himself or herself shall not serve as a
director of a publicly traded company unless prior authorization is granted by
the Funds' executive committee. Authorization to serve as a director of a
publicly traded company should be granted only if it is determined that such
service as a director would be consistent with the interests of the Funds and
the Funds' shareowners. Any Investment Professional who serves as a director of
a publicly traded company shall be appropriately isolated from Investment
Professionals making any investment decisions relating to the publicly traded
company.
ARTICLE V. MONITORING
All Personal Securities Transactions in a Security by Investment
Professionals, the Funds' officers and Mutual Fund Interested Directors/Trustees
shall be reviewed by the Compliance Officer to identify those transactions, if
any, executed during the period that begins seven calendar days before a Fund
(other than a Fund managed by an unaffiliated sub-adviser) trades in the Same
Security and ends seven calendar days after a Fund (other than a Fund managed by
an unaffiliated sub-adviser), trades in the Same Security.
The Compliance Officer, in his discretion, may require the person to
reverse any Personal Securities Transaction that occurs during the period that
begins seven calendar days before a Fund (other than a Fund managed by an
unaffiliated sub-adviser) trades in the Same Security and ends seven calendar
days after a Fund (other than a Fund managed by an unaffiliated sub-adviser),
trades in the Same Security, and disgorge the profits in accordance with the
requirements described below.
Any profits from a transaction that is reversed shall be disgorged to the
McLean County chapter of the American Red Cross by check from the Subscriber,
payable to the McLean County chapter of the American Red Cross and delivered to
the Compliance Officer for delivery to such charity. A Subscriber may appeal any
determination by the Compliance Officer with regard to this Section V to the
Financial Vice President of State Farm Mutual Automobile Insurance Company,
whose decision shall be final.
Notwithstanding the requirements stated above, no Personal Securities
Transaction that occurs during the period that begins seven calendar days before
a Fund (other than a Fund managed by an unaffiliated sub-adviser) trades in the
Same Security and ends seven calendar days after a fund (other than a Fund
managed by an unaffiliated sub-adviser), trades in the Same Security, shall be
reversed if the Fund trade in the Security was effected to rebalance a Fund in
accordance with such Fund's index investment mandate, was the result of an
investment program
6
<PAGE>
of dollar-cost averaging or was effected by the Manager for reasons other than
pursuant to the exercise of the Manager's investment discretion.
Personal Securities Transactions of Subscribers reportable under Article VI
shall be reviewed by the Compliance Officer to identify whether the transaction
is consistent with the requirements of this Code of Ethics. If, in his
discretion, the Compliance Officer determines that a Personal Securities
Transaction of a Subscriber violates this Code of Ethics, the Compliance Officer
may require the Subscriber to reverse the transaction and disgorge any profits
as set forth above.
For purposes of this Article V, the acquisition of a Security through a
Direct Purchase Plan or reinvestment of dividends or distributions through a
pre-established dividend reinvestment plan is not a Personal Securities
Transaction, and no profits realized from the acquisition of a Security through
a Direct Purchase Plan or dividend reinvestment plan shall be required to be
disgorged pursuant to this paragraph.
ARTICLE VI. REPORTING
Subject to the exclusions set forth in Sections F below, every Subscriber
must report to the Compliance Officer the following:
A. INITIAL HOLDINGS REPORT. No later than 10 days after a person becomes
a Subscriber, he or she shall complete an Initial Holdings Report in the form
attached hereto as Appendix II if he or she has a Beneficial Ownership interest
in Securities. This report shall be made as of the date the person became a
Subscriber.
B. TRANSACTION REPORT. Subscribers shall report Personal Securities
Transactions on the form attached hereto as Appendix III. The report shall be
filed with the Compliance Officer as soon as practicable after the execution of
the transaction, but in no event later than 5 business days after the
transaction. A Subscriber need not make a transaction report:
1. With respect to regular purchases through dividend reinvestment
plans.
2. With respect to purchases of Securities through a Direct Purchase
Plan.
C. REPORT ON NEW SECURITIES ACCOUNTS: Subscribers shall report the
establishment of new Securities accounts on the form attached hereto as Appendix
III. The report shall be filed with the Compliance Officer as soon as
practicable after the establishment of the account, but in no event later than 5
business days after the establishment of the account.
D. ANNUAL HOLDINGS REPORT. No later than 30 days after the end of the
calendar year, a Subscriber who has a Beneficial Ownership interest in
Securities shall complete an Annual Holdings Report in the form attached hereto
as Appendix II. This report shall be completed with
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<PAGE>
information as of December 31. The first Annual Holdings Report shall be due
January 30, 2001, and shall report holdings as of December 31, 2000.
E. BROKER CONFIRMATIONS. Investment Professionals, the Funds' Officers
and Mutual Fund Interested Directors shall require their broker/dealers to
supply the Compliance Officer with duplicate copies of confirmations of all
Personal Securities Transactions.
F. EXCLUSIONS FROM ALL REPORTING UNDER THIS ARTICLE. A Subscriber need
not make a report under this Article:
1. With respect to transactions effected for, and Securities held
in, any account over which the person has no direct or indirect influence or
control.
2. With respect to securities excluded from the definition of
Security under the list of General Exclusions. Accordingly, a Subscriber need
not include such securities in a Transaction Report, a Report on New Securities
Accounts, an Initial Holdings Report, or an Annual Holdings Report.
3. Any Mutual Fund Disinterested Director/Trustee who is a
Subscriber solely by reason of being a director or trustee of one or more of the
Funds is not required to file either an Initial Holdings Report or an Annual
Holdings Report, and such person only needs to file a Transaction Report with
respect to purchases or sales of a Security if he or she knew, or in the
ordinary course of fulfilling his or her official duties as a director or
trustee should have known, that during the 15-day period immediately preceding
or after a Personal Securities Transaction the Same Security was purchased or
sold by the Fund (other than an index Fund) of which the person is a director or
trustee or that such purchase or sale was considered during that period by the
Fund (other than an index Fund) or the Manager.
ARTICLE VII. ENFORCEMENT
A. Reports filed pursuant to Article VI of this Code of Ethics will be
maintained in strictest confidence and will be reviewed in accordance with
Article V of this Code of Ethics to detect any violation of this Code of Ethics.
Additional information may be required to clarify the nature of particular
transactions.
B. Subscribers shall conduct themselves at all times in the best
interests of the Funds. Compliance with ALL provisions of the Code of Ethics
shall be a condition of employment or continued affiliation with the Funds and
the Manager and conduct which is not in accordance with these provisions shall
constitute grounds for termination of employment or removal from office.
C. Violations of this Code of Ethics may also constitute violations of
law and may subject the Subscriber, the Funds, or the Manager to civil or
criminal penalties.
8
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D. No less frequently than annually, the Compliance Officer will furnish
the Board of Directors/Trustees a written report that describes any issues
arising under this Code of Ethics since the last report to the Board of
Directors/Trustees, including, but not limited to, information about material
violations of this Code of Ethics and sanctions imposed in response to the
material violations. The report shall also certify that the Funds have adopted
procedures reasonably necessary to prevent access persons from violating the
code.
ARTICLE VIII. DEFINITIONS
A. BENEFICIAL OWNERSHIP: A Subscriber shall be deemed to have Beneficial
Ownership of a Security if the Subscriber, either directly or indirectly,
through any contract, arrangement, understanding, relationship, or otherwise,
has or shares a direct or indirect pecuniary interest in the Security. This type
of pecuniary interest can arise when the Subscriber has an opportunity to profit
directly or indirectly from a transaction in the Security. Situations where an
indirect pecuniary interest in a Security can exist with respect to Securities
include, but are not limited to the following:
1. A Security held by a member of the Subscriber's immediate family
who shares the same household.
2. A general partner's proportionate interest in portfolio
Securities held by the partnership.
3. A shareholder's proportionate interest in portfolio Securities
held by the corporation if the shareholder is a controlling
shareholder of the corporation. A shareholder will be considered
to be a controlling shareholder if the shareholder has the power
to exercise a controlling influence over the management or
policies of a company. For a more comprehensive definition of
control, please refer to Section 2(a)(9) of the Investment
Company Act of 1940.
4. A performance-related fee, other than an asset-based fee,
received by any broker, dealer, bank, insurance company,
investment company, investment adviser, investment manager,
trustee or person or entity performing a similar function.
However, no pecuniary interest will be present where (a) the
performance-related fee is calculated based upon net capital
gains and/or net capital appreciation generated from the
portfolio or from the fiduciary's overall performance over a
period of one year or more, and (b) equity securities of the
issuer do not account for more than ten percent of the market
value of the portfolio.
5. A Subscriber's interest in Securities held pursuant to certain
trust arrangements. The types of trust arrangements where an
indirect pecuniary interest could arise include the following:
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(a) the ownership of Securities as a trustee where either the
trustee or members of his or her immediate family have a
vested interest in the income or corpus of the trust;
(b) the ownership of a vested beneficial interest in the trust;
and
(c) the ownership of Securities as a settlor of a trust in which
the settlor has the power to revoke the trust without
obtaining the consent of all the beneficiaries.
6. A Subscriber's right to dividends that is separated or separable
from the underlying Securities.
7. A Subscriber's right to acquire equity Securities through the
exercise or conversion of any derivative Security, whether or not
presently exercisable.
B. DIRECT PURCHASE PLAN: A Personal Securities Transaction in which the
Subscriber acquires an interest in a Security directly from the issuer of the
Security through a program that allows program participants to accumulate shares
by making optional cash payments.
C. INITIAL PUBLIC OFFERING: An Initial Public Offering means an offering
of Securities registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934.
D. INVESTMENT PROFESSIONALS: Investment Professionals shall mean the
individuals who work in the Investment Department and inside counsel for the
Investment Department and the State Farm Mutual Funds.
E. INVESTMENT SUB-ADVISER: Investment sub-adviser means any person named
as an investment sub-manager or investment sub-adviser in the Trust's currently
effective registration statement filed with the U.S. Securities and Exchange
Commission.
F. LIMITED OFFERING: A Limited Offering means an offering that is exempt
from registration under the Securities Act of 1933 pursuant to section 4(2) or
section 4(6) or pursuant to rule 504, rule 505, or rule 506 under the Securities
Act of 1933.
G. MUTUAL FUND DISINTERESTED DIRECTOR/TRUSTEE: Mutual Fund Disinterested
Director/Trustee means a duly elected director or trustee of a Fund who is not
an "interested person" of the Fund within the meaning of Section 2(a)(19) of the
Investment Company Act of 1940.
H. MUTUAL FUND INTERESTED DIRECTOR/TRUSTEE: Mutual Fund Interested
Director/Trustee means a duly elected director or trustee of a Fund who is an
"interested person" of the Fund within the meaning of Section 2(a)(19) of the
Investment Company Act of 1940.
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I. PERSONAL SECURITIES TRANSACTIONS: Personal Securities Transactions
shall include not only transactions involving the purchase or sale of Securities
directly owned by the Subscriber, but also the purchase or sale of any
Securities in which the Subscriber has a Beneficial Ownership interest. Personal
Securities Transactions shall not include transactions effected for any account
over which the Subscriber does not have any direct or indirect influence or
control.
J. SECURITY:
1. General Definition: Subject to the exceptions noted below,
Security shall have the meaning set forth in Section 2(a)(36) of
the Investment Company Act of 1940. The definition contained in
Section 2(a)(36) of the Investment Company Act is as follows:
Security means any note, stock, treasury stock, bond
debenture, evidence of indebtedness certificate of interest
or participation in any profit-sharing agreement,
collateral-trust certificate, preorganization certificate of
subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a
security, fractional undivided interest in oil, gas or other
mineral rights, any put, call straddle, option, or privilege
on any security (including a certificate of deposit) or on
any group or index of securities (including any interest
therein or based on the value thereof, or any put, call,
straddle, option, or privilege entered into on a national
securities exchange relating to foreign currency, or, in
general, any interest or instrument commonly know as a
"security," or any certificate of interest or participation
in, temporary or interim certificate for, receipt for,
guarantee of, or warrant or right to subscribe to or
purchase, any of the foregoing.
2. General Exclusions: As a general rule, Security shall not
include:
(a) shares of registered open-end investment companies,
(b) direct obligations of the government of the United States,
(c) bankers' acceptances,
(d) bank certificates of deposit,
(e) commercial paper, and
(f) high quality short-term debt instruments, including
repurchase agreements.
These general exclusions from the definition of Security shall not be
applicable for purposes of the rules concerning pledges and margin
purchases, short sales, and insider information.
I. SAME SECURITY: The Security, any class of that Security, or another
Security which derives its value by that Security.
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J. SUBSCRIBER(S): A Subscriber is any person who executes the Code of
Ethics. Subscribers will include at least the following: Investment
Professionals, Mutual Fund Department personnel, Mutual Fund accounting
personnel, Mutual Fund Officers, Mutual Fund Disinterested Directors/Trustees,
Mutual Fund Interested Directors/Trustees, Management Corp. Officers, Management
Corp. Directors and inside counsel for the Funds and Investment Department.
* * * * * * * * *
I acknowledge that I have read and understand the Code of Ethics, and I
agree to comply with its terms and provisions.
Dated:
------------------------- --------------------------------
Subscriber's Signature
--------------------------------
Subscriber's Name (please print)
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APPENDIX II
Initial Holdings Report -------
Annual Holdings Report -------
(check one)
Please report any Security in which you have a direct or indirect Beneficial
Ownership interest. For the definition of Beneficial Ownership and Security,
please see Article VIII of the Code of Ethics. If the Security holdings in which
you have a Beneficial Ownership interest are limited to variable products, U.S.
government securities, and/or shares of open-end mutual funds, you do not have
to complete this report.
<TABLE>
<CAPTION>
Name of Broker Dealer
Number of Shares or or Bank with Whom the
Title of Security Principal Amount of Security Account is Maintained
----------------- ---------------------------- -----------------------
<S> <C> <C> <C>
--------------------- -------------------------------- ----------------------------------
--------------------- -------------------------------- ----------------------------------
--------------------- -------------------------------- ----------------------------------
--------------------- -------------------------------- ----------------------------------
--------------------- -------------------------------- ----------------------------------
--------------------- -------------------------------- ----------------------------------
--------------------- -------------------------------- ----------------------------------
--------------------- -------------------------------- ----------------------------------
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</TABLE>
If this is an Initial Holdings Report, you must report each Security in
which you have a direct or indirect Beneficial Ownership interest as of the date
you became a Subscriber to the Code of Ethics. The Initial Holdings Report must
be filed with the Compliance Officer by the 10th day following the day you
became a Subscriber. If this is an Annual Holdings Report, you must report each
Security in which you have a direct or indirect Beneficial Ownership interest as
of December 31, and you must file this report with the Compliance Officer by the
following January 30.
- -------------------------------- -----------------------------
<PAGE>
Subscriber's Signature Date
<PAGE>
APPENDIX III
REPORT OF PERSONAL SECURITY TRANSACTIONS
AND REPORT OF ESTABLISHMENT OF NEW SECURITIES ACCOUNTS
BY CODE OF ETHICS SUBSCRIBERS
1. TRANSACTIONS IN SECURITIES DURING THE CALENDAR QUARTER
<TABLE>
<CAPTION>
Buy, Amount Broker,
Sell or Number of Shares and (# of Shares Dealer or
Date Other Description of Security* Price x Price) Bank
<S> <C> <C> <C> <C> <C>
- ---- ------- ----------------------- ----- ------------ ---------
- ---- ------- ----------------------- ----- ------------ ---------
- ---- ------- ----------------------- ----- ------------ ---------
- ---- ------- ----------------------- ----- ------------ ---------
- ---- ------- ----------------------- ----- ------------ ---------
- ---- ------- ----------------------- ----- ------------ ---------
- ---- ------- ----------------------- ----- ------------ ---------
- ---- ------- ----------------------- ----- ------------ ---------
</TABLE>
* If a note, bond, or other fixed or variable rate Security, report the
interest rate and maturity date along with a description of the Security.
2. ESTABLISHMENT OF SECURITIES ACCOUNT DURING THE CALENDAR QUARTER
a. Name of broker, dealer, or bank with whom the account was established:
---------------------------------------------------------
b. Date the account was established:
-----------------------------------
* * * * * * * * *
Signature: Date of this report:
------------------------ ---------------------
All Subscribers must file this report as soon as practicable after the execution
of the transaction, or establishment of the account, but in no event later than
5 business days after such event.
- ---------------------------------- ---------------------------
Subscriber's Signature Date
