-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hn7373A8dXYsRALbFD7dj+Qy2kJiiKe5BWGnvGN2C7qdmC/BpsM1YJi/S/3jJX1/ DlOGvKLW5hUoor/3T1OGCQ== 0000897101-98-000768.txt : 19980805 0000897101-98-000768.hdr.sgml : 19980805 ACCESSION NUMBER: 0000897101-98-000768 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980804 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIT MONEY MARKET FUND INC CENTRAL INDEX KEY: 0000746603 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 411492046 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: SEC FILE NUMBER: 811-04032 FILM NUMBER: 98676976 BUSINESS ADDRESS: STREET 1: 4600 NORWEST CTR 90 S 7TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123323223 MAIL ADDRESS: STREET 1: 4600 NORWEST CTR, 90 SOUTH SEVENTH ST STREET 2: 4600 NORWEST CTR, 90 SOUTH SEVENTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4130 FORMER COMPANY: FORMER CONFORMED NAME: SIT NEW BEGINNING INVESTMENT RESERVE FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEGINNING INVESTMENT RESERVE FUND INC DATE OF NAME CHANGE: 19870907 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIT MUTUAL FUNDS II INC CENTRAL INDEX KEY: 0000746601 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: SEC FILE NUMBER: 811-04033 FILM NUMBER: 98676977 BUSINESS ADDRESS: STREET 1: 4600 NORWEST CTR 90 S 7TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 612-332-3223 MAIL ADDRESS: STREET 2: 4600 NORWEST CTR, 90 SOUTH SEVENTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 FORMER COMPANY: FORMER CONFORMED NAME: SIT NEW BEGINNING TAX FREE INCOME FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SIT NEW BEGINNING YIELD FUND INC DATE OF NAME CHANGE: 19880929 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEGINNING YIELD FUND INC DATE OF NAME CHANGE: 19870907 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIT U S GOVERNMENT SECURITIES FUND INC CENTRAL INDEX KEY: 0000809981 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 411570831 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: SEC FILE NUMBER: 811-04995 FILM NUMBER: 98676978 BUSINESS ADDRESS: STREET 1: 4600 NORWEST CTR 90 S 7TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123323223 MAIL ADDRESS: STREET 1: 4600 NORWEST CENTER, 90 SOUTH SEVENTH ST STREET 2: 4600 NORWEST CENTER, 90 SOUTH SEVENTH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4130 FORMER COMPANY: FORMER CONFORMED NAME: SIT NEW BEGINNING U S GOVERNMENT SECURITIES FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEGINNING U S GOVERNMENT SECURITIES FUND INC DATE OF NAME CHANGE: 19870601 N-30B-2 1 BOND FUNDS QUARTERLY REPORT QUARTER ENDED JUNE 30, 1998 A FAMILY OF 100% NO-LOAD FUNDS ------------------------------ MONEY MARKET FUND U.S. GOVERNMENT SECURITIES FUND BOND FUND TAX-FREE INCOME FUND MINNESOTA TAX-FREE INCOME FUND [LOGO] SIT(SM) MUTUAL FUNDS THE INVESTMENT IS MUTUAL(SM) SIT MUTUAL FUNDS BOND FUNDS QUARTERLY REPORT TABLE OF CONTENTS PAGE ---- A Look at Sit Mutual Funds.............................. 2 Chairman's Letter....................................... 3 Performance Review...................................... 4 Fund Reviews Money Market Fund................................. 6 U.S. Government Securities Fund................... 8 Bond Fund......................................... 10 Tax-Free Income Fund.............................. 12 Minnesota Tax-Free Income Fund.................... 14 This document must be preceded or accompanied by a Prospectus. A LOOK AT THE SIT MUTUAL FUNDS Sit Mutual Funds is managed by Sit Investment Associates, Inc. Sit Investment Associates was founded by Eugene C. Sit in July 1981 and is dedicated to a single purpose, to be one of the premier investment management firms in the United States. Sit Investment Associates currently manages approximately $6 billion as of June 30, 1998, for some of America's largest corporations, foundations and endowments. Sit Mutual Funds is comprised of thirteen 100% NO-LOAD funds. 100% NO-LOAD means that the funds have no sales charges on purchases, no deferred sales charges, no 12b-1 fees, no redemption fees and no exchange fees. Every dollar you invest goes to work for you. Some other features include: * Free telephone exchange * Dollar-cost averaging through automatic investment plan * Electronic transfer for purchases and redemptions * Free check-writing privileges on bond funds * Retirement accounts including IRAs, Keoghs and 401(k) Plans SIT FAMILY OF FUNDS [GRAPHIC] STABILITY: INCOME: GROWTH: HIGH GROWTH: Safety of principal Increased income Long-term capital Long-term capital and current income appreciation appreciation and income MONEY MARKET U.S. GOVERNMENT BALANCED MID CAP GROWTH SECURITIES LARGE CAP GROWTH INTERNATIONAL GROWTH TAX-FREE INCOME REGIONAL GROWTH SMALL CAP GROWTH MINNESOTA TAX-FREE SCIENCE AND INCOME TECHNOLOGY GROWTH BOND DEVELOPING MARKETS GROWTH SIT MUTUAL FUNDS CHAIRMAN'S LETTER - QUARTER ENDED JUNE 30, 1998 [PHOTO] EUGENE C. SIT, CFA CHIEF INVESTMENT OFFICER Dear Fellow Shareholders: U.S. Treasury bond rates fell during the quarter as concerns over Asia fueled expectations for a slowing economy and low inflation as well as further strength in the U.S. dollar. Domestic fixed income instruments provided slightly better than coupon rates of return during the quarter. Economic Overview The domestic economy appears to have slowed following the unsustainable +5.4% rate of real GDP growth in the first quarter. Consensus expectations are that second quarter real GDP growth should moderate to less than +2.0%, and a few economists are even postulating a negative growth quarter. Contributing factors are lower inventory accumulation, the GM strike and the widening trade deficit, which is the most worrisome. However, strength in the consumer sector makes it difficult to assign a high probability to a sudden, near-term economic downturn. We expect U.S. real GDP growth to moderate to approximately +1.0% in the second quarter and average +2.5% in the second half of the year. While inflation readings remain tame, the Consumer Price Index appears to have reached an intermediate bottom. The CPI upticked in May to a year-over-year increase of +1.7% compared to an average of +1.4% for February-April. Our expectations are that the CPI will increase at less than +2.0% over the balance of the year. Federal budget trends continue to improve with a surplus of up to $90 billion projected for fiscal 1998, and possibly $175 billion in fiscal 1999. Growth in 1999 receipts over spending is projected to result in a net surplus of 2.0% of GDP, compared to 1992 when the deficit was a record 4.7% of GDP (-$290 billion). While booming financial markets have produced huge capital gains for taxation purposes, wage and salary withholding has also been growing nearly 10%, reflecting high levels of employment and a strong economy. The U.S. intervened jointly with Japan to support the yen in early June. Most observers, including ourselves, believe this and any future interventions will be insufficient to correct Japan's inherent problems without meaningful internal programs. With the U.S. dollar exchange rate at the upper end of its past ten-year trading range, the possibility of further currency intervention holds potential for increased volatility in the months ahead. Strategy Summary To no one's surprise, the Federal Reserve again left unchanged the 5.50% federal funds rate target at its July 1st meeting, but retained a "bias toward tightening." In his testimony before the Joint Economic Committee on June 10th, Chairman Alan Greenspan admitted that, despite conditions in Asia, the economy was "still enjoying a virtuous cycle" and reiterated the need for continued vigilence on inflation. As long as overall inflation remains dormant, and the Asian economies continue to show weakness, we expect the Fed to maintain its policy of neutrality, but with a bias toward tightening. Given our expectations for continued strength in the U.S. economy in the second half of the year and indications that domestic inflation trends may have bottomed, we continue to believe that Treasury bond yields are likely to remain in a stable to slightly higher range in coming months. Thus, we have maintained taxable fixed income portfolio durations slightly lower than related benchmarks. In addition, we have made initial purchases of inflation-linked Treasury notes. In municipal accounts, we remain focused on sector and security selection. As the incremental yield provided by lower rated credits remains very narrow, we continue to seek opportunities to improve the credit quality of portfolios without giving up much income. Municipal bonds remain cheaply valued relative to taxable bonds and we are watchful of opportunities created by supply conditions. Given our expectations for stable to slightly higher interest rates, we believe our focus on high current income and stability of principal will help provide positive incremental returns over longer term periods. We appreciate your continued interest in the Sit Mutual Funds and look forward to helping you achieve your long-term investment goals. Sincerely, /s/ Eugene C. Sit Eugene C. Sit, CFA Chairman and Chief Investment Officer June 30, 1998 3 SIT MUTUAL FUNDS QUARTER ENDED JUNE 30, 1998 PERFORMANCE SUMMARY - BOND FUNDS BOND MARKET REVIEW The Federal Reserve left monetary policy unchanged during the quarter. Concerns over Asia caused the Fed to shift to a neutral bias last December but evidence of continued strength in the U.S. led the Fed to reinstate its bias toward tightening on March 31, 1998. The 5.50% federal funds rate provided resistance to falling short-term interest rates. 3-Month Treasury bill yields declined from 5.13% to 5.08% during the second quarter of the year and remained in a relatively narrow range between 4.97% and 5.23%. After a relatively stable first quarter, longer term taxable bond yields fell during the second quarter as concerns over Asia fueled expectations for a slowing economy and low inflation as well as further strength in the dollar. The 30-year Treasury bond yield decreased from 5.94% to 5.62% during the second quarter. These conditions resulted in a further flattening of the taxable yield curve. The low level of interest rates resulted in heavy corporate issuance which caused yield spreads in that sector to widen late in the quarter. Despite corporates' higher yield levels, the government and corporate sectors were the best performing sectors during the quarter. The lowest return came from the mortgage sector as investors feared a repeat of the record refinancing activity that occurred in the first quarter this year. The asset-backed sector also lagged due to its shorter duration. In contrast to the taxable bond market, municipal bond yields were relatively unchanged during the quarter and year-to-date. The Bond Buyer 40-Bond Index yield decreased from 5.27% to 5.22% during the quarter and, given the decline in Treasury yields, the relative yield ratio of long municipals to long Treasury bonds rose from 89% to almost 93%. Without the benefit of price appreciation, municipal indices posted coupon rates of return during the quarter. Electrics and housing were the top performing revenue sectors. The hospital sector kept pace during the quarter and remains the top performer over most longer term periods due to continued narrow incremental yield spreads. Municipal new-issue volume is approximately 50% higher than one year ago and is on track to keep pace with the record issuance volume of 1993. Security selection remains a strong component of the attractive returns earned by the Sit bond funds during the past year. These results are consistent with the Funds' dual objectives of high income and principal stability. 1989 1990 1991 ---- ---- ---- SIT MONEY MARKET FUND ---- ---- ---- SIT U.S. GOV'T. SECURITIES FUND 11.04 10.97 12.87 SIT BOND FUND ---- ---- ---- SIT TAX-FREE INCOME FUND 8.38 7.29 9.25 SIT MINNESOTA TAX-FREE INCOME FUND ---- ---- ---- 3-MONTH U.S. TREASURY BILL 8.73 8.04 5.72 LEHMAN INTER. GOVERNMENT BOND INDEX 12.68 9.56 14.11 LEHMAN AGGREGATE BOND INDEX 14.53 8.96 16.00 LEHMAN 5-YEAR MUNICIPAL BOND INDEX 9.07 7.70 11.41 SIT INVESTMENT RESERVE FUND 8.53% 7.59% 6.14% (Inception date 1/25/85. Converted to Sit Money Market Fund on 11/1/93) NASDAQ SYMBOL INCEPTION ------ --------- SIT MONEY MARKET FUND SNIXX 11/01/93 SIT U.S. GOV'T. SECURITIES FUND SNGVX 06/02/87 SIT BOND FUND SIBOX 12/01/93 SIT TAX-FREE INCOME FUND SNTIX 09/29/88 SIT MINNESOTA TAX-FREE INCOME FUND SMTFX 12/01/93 3-MONTH U.S. TREASURY BILL 11/01/93 LEHMAN INTER. GOVERNMENT BOND INDEX 05/31/87 LEHMAN AGGREGATE BOND INDEX 11/30/93 LEHMAN 5-YEAR MUNICIPAL BOND INDEX 09/30/88 (1) Period from Fund inception through calendar year-end. converted to the Sit Money Market Fund. (2) Based on the last 12 monthly distributions of net investment income and NAV as of 6/30/98. (3) For Minnesota residents in the 28%, 31%, 36% and 39.6% federal tax brackets, the double exempt tax equivalent yields are 7.29%, 7.60%, 8.20%, and 8.69%, respectively (Assumes the maximum Minnesota tax bracket of 8.5%). (4) For individuals in the 28%, 31%, 36% and 39.6% federal tax brackets, the federal tax equivalent yields are 6.63%, 6.91%, 7.45% and 7.90%, respectively (income subject to state tax, if any). 4 TOTAL RETURN - CALENDAR YEAR YIELD YTD AS OF DISTRIBUTION 1991 1992 1993 1994 1995 1996 1997 1998 6/30/98 RATE (2) - --------------------------------------------------------- --------------------- ---- ---- 0.46%(1) 3.84% 5.58% 5.08% 5.22% 2.57% 5.30%(6) 12.87 5.43 7.34 1.77 11.50 4.99 8.19 3.12 5.63 5.72% ---- ---- 0.34(1) -1.31 16.83 4.25 9.44 3.26 5.07 5.99% 9.25 7.71 10.42 -0.63 12.86 5.69 9.87 2.83 4.77(4) 5.17% ---- ---- 1.60(1) 0.63 11.90 5.89 8.19 2.55 4.80(3) 5.21% 5.72 3.56 3.13 4.47 5.98 5.27 5.32 2.60 14.11 6.93 8.17 -1.75 14.41 4.06 7.72 3.39 16.00 7.40 0.54(1) -2.92 18.47 3.63 9.65 3.93 11.41 7.62 8.73 -1.28 11.65 4.22 6.38 2.29 6.14% 3.81% 2.34%(5) AVERAGE ANNUAL TOTAL RETURNS FOR THE TOTAL RETURN PERIODS ENDED JUNE 30, 1998 QUARTER SIX MONTHS SINCE ENDED 6/30/98 ENDED 6/30/98 1 YEAR 3 YEARS 5 YEARS INCEPTION - ----------------------------- ---------------------------------------- 1.28% 2.57% 5.27% 5.21% ---- 4.88% 1.70 3.12 8.32 7.14 6.38% 8.19 2.06 3.26 9.25 7.60 ---- 7.00 1.36 2.83 8.91 8.06 6.94 7.73 1.36 2.55 7.79 7.24 ---- 6.67 1.28 2.60 5.29 5.34 ---- 5.15 1.85 3.39 8.38 6.74 5.91 8.05 2.34 3.93 10.54 7.88 ---- 7.04 1.12 2.29 6.24 5.82 5.29 6.96 (5) Period January 1, 1993, through October 31, 1993, at which time the Fund (6) Figure represents 7-day compound effective yield. The 7-day average simple yield as of 6/30/98 was 5.09%. PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. MONEY FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT A MONEY FUND WILL MAINTAIN A $1 SHARE VALUE. YIELD FLUCTUATES. 5 SIT MONEY MARKET FUND REVIEW QUARTER ENDED JUNE 30, 1998 [PHOTO] MICHAEL C. BRILLEY SENIOR PORTFOLIO MANAGER PAUL J. JUNGQUIST, CFA PORTFOLIO MANAGER The Sit Money Market Fund provided investors with a +1.28% return for the second quarter of 1998, compared to a +1.20% average return for the Lipper Analytical Services, Money Market Fund universe. The Fund's performance ranked 57th of 310 funds in its Lipper peer group category for the quarter. The Fund's performance ranked 57th of 298 funds, 51st of 257 funds and 45th of 200 funds in its Lipper peer group, respectively, for the year, three year and since inception (October 31, 1993) periods ended June 30, 1998. As of June 30, 1998, the Fund's 7-day compound yield was 5.30% and its average maturity was 33 days, compared to 5.20% and 28 days, respectively, at March 31, 1998. The Federal Reserve Board maintained the federal funds rate at 5.50% for the entire quarter. Three-month Treasury bill yields were again confined to a narrow range over the past three months, ranging from 4.97% to 5.23%. Current yield levels imply that the market is expecting no policy change by the Fed in the third quarter of 1998. Strong but slowing economic growth and signs of incipient wage inflation are offset by continued weakness in Asian economies and reduced financing needs by the Treasury. Accordingly, the Fund will try to take advantage of current yield levels and maintain the average maturity of the portfolio in a range of 20 to 40 days in anticipation of no near term change in policy by the Fed. The Fund has produced competitive returns by focusing on credit research, optimizing average maturity and avoiding the use of risky derivatives. We intend to continue these conservative policies in the future. As economic activity starts to slow, we do not foresee a significant impact on the short-term creditworthiness of top tier commercial paper issuers in general. However, merger and acquisition activity has heated up considerably, particularly in the financial services and telecommunications sectors, so we will monitor the Fund's permissible credits in these industries particularly closely. The Fund continues to diversify its core holdings and its industry exposure. In the months ahead, we plan to add top tier credits in the technology, capital goods and consumer non-durable industries. INVESTMENT OBJECTIVE AND STRATEGY The objective of the Fund is to achieve maximum current income to the extent consistent with the preservation of capital and maintenance of liquidity. The Fund pursues this objective by investing in a diversified portfolio of high quality short-term debt instruments. The Fund seeks to maintain a stable net asset value of $1.00 per share. However, there is no assurance of a constant share price. An investment in the Fund is neither insured nor guaranteed by the U.S. government and there can be no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share. PORTFOLIO SUMMARY Net Asset Value 6/30/98: $1.00 Per Share 3/31/98: $1.00 Per Share Total Net Assets: $40.92 Million PORTFOLIO STRUCTURE (% of total net assets) [BAR CHART] Diversified Finance 19.9 Consumer Loan Finance 17.1 Captive Equipment Finance 11.9 U.S. Government 10.0 Captive Auto Finance 9.8 Consumer Non-Durables 3.4 Retail 3.3 Captive Oil Finance 3.2 Energy 3.2 Utilities 2.8 Insurance 2.2 Technology/Business Equip. 1.5 Capital Goods 1.1 Other Assets & Liabilities 10.6 6
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS* ---------------------------------------- ------------------------------------------ Money Lipper Money U.S. Treasury Money Lipper Money U.S. Treasury Market Market Bill Market Market Bill Fund Average (3-Month) Fund Average (3-Month) ------ ------------ ------------- ------ ------------ ------------- 3 Months 1.28% 1.20% 1.28% 1.28% 1.20% 1.28% (unannualized) 1 Year 5.27 4.96 5.29 5.27 4.96 5.29 3 Year 5.21 4.94 5.34 16.48 15.56 16.89 Inception 4.88 4.67 5.15 24.91 23.75 26.41 (11/1/93)
* As of 06/30/98 PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. MONEY FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT A FUND WILL MAINTAIN A $1 SHARE VALUE. YIELD FLUCTUATES. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE U.S. TREASURY BILL. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS. GROWTH OF $10,000 [PLOT POINTS CHART] 3-MONTH U.S. SIT MONEY TREASURY MARKET FUND BILL INDEX The sum of $10,000 invested at inception (11/1/93) and held until 06/30/98 would have grown to $12,491 in the Fund or $12,641 in the 3-Month U.S. Treasury Bill Index assuming reinvestment of all dividends and capital gains. QUALITY RATINGS [PIE CHART] (% of total net assets) AS RATED BY MOODY'S, S&P AND FITCH First Tier Securities 100% Second Tier Securities 0% 7 SIT U.S. GOVERNMENT SECURITIES FUND REVIEW QUARTER ENDED JUNE 30, 1998 [PHOTO] MICHAEL C. BRILLEY SENIOR PORTFOLIO MANAGER BRYCE A. DOTY, CFA PORTFOLIO MANAGER The Sit U.S. Government Securities Fund provided investors with a +1.70% return for the first quarter of 1998 compared to a +1.85% return of the Lehman Int. Government Bond Index. For the twelve months ending June 30, 1998, the Fund's total return was +8.32% versus +8.38% return for the Lehman Index. As of June 30, 1998, the Fund's 30-day SEC yield was 5.63% and its 12-month distribution rate was 5.72%, compared to 5.61% and 5.93%, respectively, at March 31, 1998. Interest rates fell during the second quarter with longer maturity yields falling the furthest. Specifically, the yield on the 30-year maturity U. S. Treasury fell -0.32% while the 2-year maturity yield fell only -0.12%. Consequently, prices appreciated significantly in the Fund's longer duration Collateralized Mortgage Obligation and U.S. Treasury holdings. The decline in yields renewed concerns of higher prepayments in the mortgage pass-through sector. As a result, the pass-through holdings provided the lowest return in the Fund for the quarter. Investment activity involved the successful combination of smaller mortgage-backed securities into one large security. This combination increases the value of the assets due to the greater demand that exists for larger-sized pools. Also, the Fund purchased a 4-year maturity inflation-linked Treasury note. The principal value of this security increases at the rate of CPI and the security pays a fixed rate coupon. The coupon yield or real yield on the note was 3.87% at the time of purchase while a traditional equivalent-maturity Treasury had a yield of approximately 5.50%. Therefore, if inflation is higher than the differential of 1.63%, the inflation-linked note will outperform. Interest rates declined last quarter as weakening Asian economies were expected to further slow domestic growth. However, the Federal Reserve continues to maintain a bias toward tightening due to concerns that tight labor markets and strong consumer demand will lead to higher inflation. We expect inflation to increase slightly and interest rates to move modestly higher. This outlook adds increased importance to the Fund's continued emphasis on interest income. INVESTMENT OBJECTIVE AND STRATEGY The objective of the Fund is to provide high current income and safety of principal. The Fund invests solely in securities issued, guaranteed or insured by the U.S. government or its agencies or its instrumentalities. Agency mortgage securities and U.S. Treasury securities will be the principal holdings in the Fund. The mortgage securities that the Fund will purchase consist of pass-through securities (Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), and Federal Home Loan Mortgage Corporation (FHLMC)). PORTFOLIO SUMMARY Net Asset Value 6/30/98: $10.67 Per Share 3/31/98: $10.63 Per Share Total Net Assets: $112.99 Million 30-Day SEC Yield: 5.63% 12-Month Distribution Rate: 5.72% Average Maturity: 14.6 Years Effective Duration: 2.6 Years (1) (1) Effective duration is a measure which reflects estimated price sensitivity to a given change in interest rates. For example, for an interest rate change of 1.0%, a portfolio with a duration of 5 years would be expected to experience a price change of 5%. Effective duration is based on current interest rates and the Adviser's assumptions regarding the expected average life of individual securities held in the portfolio. PORTFOLIO STRUCTURE (% of total net assets) [BAR CHART] GNMA Pass-Through 50.4 U.S. Treasury 18.5 Collateralized Mortgage Obligations 11.4 FNMA Pass-Through 10.5 FHLMC Pass-Through 4.3 Closed-End Mutual Funds 1.5 Municipal 0.6 Other Assets and Liabilities 2.8 8
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS* ------------------------------------------ ------------------------------------------ U.S. Gov't. Lipper Lehman Inter. U.S. Gov't. Lipper Lehman Inter. Securities U.S. Gov't. Gov't. Bond Securities U.S. Gov't. Bond Fund Fund Fund Average Index Fund Fund Average Index ----------- ------------ ------------- ----------- ------------ ------------- 3 Months 1.70% 2.30% 1.85% 1.70% 2.30% 1.85% (unannualized) 1 Year 8.32 10.17 8.38 8.32 10.17 8.38 3 Years 7.14 6.91 6.74 22.98 22.21 21.62 5 Years 6.38 5.76 5.91 36.25 32.16 33.23 10 Years 7.91 7.91 8.05 114.03 114.04 116.90 Inception 8.19 7.81 8.05 139.30 130.15 135.96 (6/2/87)
* As of 6/30/98 PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS. GROWTH OF $10,000 [PLOT POINTS CHART] SIT U.S. GOV'T. LEHMAN INTER. SECURITIES GOV'T. BOND INDEX FUND The sum of $10,000 invested at inception (6/2/87) and held until 6/30/98 would have grown to $23,930 in the Fund or $23,596 in the Lehman Intermediate Government Bond Index assuming reinvestment of all dividends and capital gains. ESTIMATED AVERAGE LIFE PROFILE The Adviser's estimates of the dollar weighted average life of the portfolio's securities, which may vary from their stated maturities. [BAR CHART] Years 0-1 2.8% 1-5 80.7% 5-10 11.2% 10-20 2.9% 20+ 2.4% 9 SIT BOND FUND REVIEW QUARTER ENDED JUNE 30, 1998 [PHOTO] MICHAEL C. BRILLEY SENIOR PORTFOLIO MANAGER BRYCE A. DOTY, CFA PORTFOLIO MANAGER The Sit Bond Fund provided investors with a +2.06% return for the second quarter of 1998 compared to a +2.05% average return for the Lipper Analytical Services Intermediate Investment Grade Bond Fund universe. For the three years ended June 30, 1998, the Fund's annualized total return of +7.60% exceeded the +7.09% average return for its Lipper universe, ranking of 37th of 160 funds. Also, the Fund's performance since inception (December 1, 1993) ranked 21st of 105 funds. As of June 30, 1998, the Fund's 30-day SEC yield was 5.07% and its 12-month distribution rate was 5.99%, compared to 5.43% and 6.35%, respectively, at March 31, 1998. Interest rates fell during the second quarter with longer maturity yields falling the furthest. Specifically, the yield on the 30-year maturity U. S. Treasury fell -0.32% while the 2-year maturity yield fell only -0.12%. This resulted in significant price appreciation in the Fund's longer duration corporate, asset-backed, and U.S. Treasury holdings. The decline in yields renewed concerns of higher prepayments in the mortgage pass-through sector. As a result, the pass-through holdings provided the lowest return in the Fund for the quarter. Investment activity included selling two corporate securities to take advantage of attractive bids. Later in the quarter, as interest rates continued to fall, corporate issuance of debt rose substantially as corporations rushed to lock in lower rates. The heavy supply caused corporate yield spreads to reach their widest level in five years. The Fund took advantage of this opportunity by purchasing three corporate bonds. Interest rates declined last quarter as weakening Asian economies were expected to further slow domestic growth. However, the Federal Reserve continues to maintain a bias toward tightening due to concerns that tight labor markets and strong consumer demand will lead to higher inflation. We expect inflation to increase slightly and interest rates to move modestly higher. The Fund will continue to focus on high quality securities that offer attractive total return opportunities. INVESTMENT OBJECTIVE AND STRATEGY The investment objective of the Fund is to maximize total return, consistent with preservation of capital. The Fund's "total return" is a combination of income, changes in principal value and reinvested dividends. The Fund will pursue its objective by investing in a diversified portfolio of fixed-income securities which include, but are not limited to, the following: U.S. government securities; corporate debt securities; corporate commercial paper; mortgage and other asset-backed securities. PORTFOLIO SUMMARY Net Asset Value 6/30/98: $10.11 Per Share 3/31/98: $10.03 Per Share Total Net Assets: $10.91 Million 30-Day SEC Yield: 5.07% 12-Month Distribution Rate: 5.99% Average Maturity: 17.8 Years Effective Duration: 4.0 Years(1) (1) Effective duration is a measure which reflects estimated price sensitivity to a given change in interest rates. For example, for an interest rate change of 1.0%, a portfolio with a duration of 5 years would be expected to experience a price change of 5%. Effective duration is based on current interest rates and the Adviser's assumptions regarding the expected average life of individual securities held in the portfolio. PORTFOLIO STRUCTURE (% of total net assets) [BAR CHART] Government Agency Pass-Through Securities 46.5 Corporate Bonds & Notes 15.1 U.S. Treasury 14.0 Asset-Backed Securities 10.7 Closed-End Mutual Funds 4.7 Collateralized Mortgage Obligations 3.7 Trust Preferred Securities 1.4 Municipal 0.5 Other Assets & Liabilities 3.4 10
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS* --------------------------------------- --------------------------------------- Lipper Inter. Lehman Lipper Inter. Lehman Bond Investment Grade Aggregate Bond Investment Grade Aggregate Fund Bond Fund Avg. Bond Index Fund Bond Fund Avg. Bond Index ----- ---------------- ---------- ------ ---------------- ---------- 3 Months 2.06% 2.05% 2.34% 2.06% 2.05% 2.34% (unannualized) 1 Year 9.25 9.42 10.54 9.25 9.42 10.54 3 Year 7.60 7.09 7.88 24.57 22.82 25.55 Inception 7.00 6.20 7.04 36.31 31.72 36.57 (12/1/93)
* As of 6/30/98 PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE LEHMAN AGGREGATE BOND INDEX. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS. GROWTH OF $10,000 [PLOT POINTS CHART] SIT BOND LEHMAN AGGREGATE FUND BOND INDEX The sum of $10,000 invested at inception (12/1/93) and held until 6/30/98 would have grown to $13,631 in the Fund or $13,657 in the Lehman Aggregate Bond Index assuming reinvestment of all dividends and capital gains. QUALITY RATINGS [PIE CHART] (% of total net assets) LOWER OF MOODY'S OR S&P USED. U.S. Government 14.0% Government Agency Backed Securities & CMO's 50.2% AAA 11.2% AA 2.6% A 10.0% BBB 8.6% Other Assets & Liabilities 3.4% 11 SIT TAX-FREE INCOME FUND REVIEW QUARTER ENDED JUNE 30, 1998 [PHOTO] MICHAEL C. BRILLEY SENIOR PORTFOLIO MANAGER DEBRA A. SIT, CFA PORTFOLIO MANAGER Municipal bond yields remained relatively stable over the quarter. The Sit Tax-Free Income Fund provided shareholders a total return of +1.36% for the quarter and +8.91% for the 12 months ended June 30, 1998. The Fund's total return ranked #125 of 248 general municipal funds tracked by Lipper Analytical Services for the quarter and ranked #57 of 233 funds for the twelve month period. In addition, the Fund's returns ranked #31 of 192 funds for the three year period, #4 of 124 funds for the five year period and #44 of 75 funds since its inception on September 29, 1988. The Fund's price per share increased $0.01 during the quarter to $10.42 on June 30, 1998 and remains below its all-time high of $10.48 reached in early January 1998. As of June 30th, the Fund's 30-day SEC yield was 4.77% and its 12-month distribution rate was 5.17%, compared to 4.70% and 5.30%, respectively, on March 31, 1998. Fund assets increased from $519.6 million to $561.4 million during the quarter, contributing to an increased cash position from 3.8% to 6.5%. Purchases were made in the education sector which increased from 1.8% to 2.6% of total assets and in other revenue bonds which increased from 6.0% to 7.2%. Despite additional purchases across other sectors, the rest of the Fund's industry weightings remained unchanged or were diluted by cash flow. Multifamily housing issues decreased from 29.4% to 27.8% and health care holdings decreased from 23.5% to 22.3%. Prerefunded bonds increased from 3.6% to 4.1% as a result of continued advance refunding activity. Securities rated BBB decreased from 32.2% to 30.9%, reflecting lesser emphasis on lower rated credits as incremental yield spreads remain narrow. Holdings in securities rated "A" or better comprised more than two-thirds of the portfolio at quarter end. The Fund has focused on purchasing new issue securities with greater call protection. With the increase in cash position, the Fund's implied duration remained stable during the quarter at 5.7 years while its average maturity decreased from 18.7 years to 17.9 years. With relatively stable municipal bond yields during the quarter, the Fund's performance was driven by its emphasis on securities which provide higher coupon income. We expect economic activity to moderate in the second half of the year and municipal bond yields to remain relatively stable. In this environment, we will continue to focus on securities that provide incremental yield. INVESTMENT OBJECTIVE AND STRATEGY The objective of the Tax-Free Income Fund is to provide a high level of current income that is exempt from federal income tax, consistent with the preservation of capital, by investing in investment-grade municipal securities. Such municipal securities generate interest that is exempt from regular federal income taxes. Of the municipal securities in which the Fund invests, 100% will be rated investment grade at time of purchase. The Adviser does not intend to invest in securities that generate interest income treated as a tax preference for alternative minimum taxable income purposes. PORTFOLIO SUMMARY Net Asset Value 6/30/98: $10.42 Per Share 3/31/98: $10.41 Per Share Total Net Assets: $561.36 Million 30-Day SEC Yield: 4.77% Tax Equivalent Yield: 7.90%(1) 12-Month Distribution Rate: 5.17% Average Maturity: 17.9 Years Duration to Estimated Avg. Life: 7.2 Years(2) Implied Duration: 5.7 Years(2) (1) For individuals in the 39.6% federal tax bracket. (2) See page 13. PORTFOLIO STRUCTURE (% of total net assets) [BAR CHART] Multifamily Mortgage Revenue 27.8 Hospital/Health Care Revenue 22.3 Single Family Mortgage Revenue 15.2 Other Revenue 7.2 Closed-End Mutual Funds 5.7 Escrowed to Maturity/Pre-Refund 4.1 Industrial Revenue/Pollution Control 3.9 Education/Student Loan 2.6 Transportation 2.1 Municipal Lease Rental 1.0 Public Facilities 0.8 Sales Tax Revenue 0.7 Utility 0.1 Other Assets and Liabilities 6.5 12
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS* ------------------------------------------- ------------------------------------------- Tax-Free Lipper General Lehman Tax-Free Lipper General Lehman Income Muni. Bond 5-Year Muni. Income Muni. Bond 5-Year Muni. Fund Fund Avg. Bond Index Fund Fund Avg. Bond Index -------- -------------- ------------ -------- -------------- ------------ 3 Months 1.36% 1.33% 1.12% 1.36% 1.33% 1.12% (unannualized) 1 Year 8.91 8.39 6.24 8.91 8.39 6.24 3 Years 8.06 7.33 5.82 26.19 23.63 18.50 5 Years 6.94 5.78 5.29 39.85 32.41 29.41 Inception 7.73 7.87 6.96 106.77 109.31 92.86 (9/29/88)
* As of 6/30/98 PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE LEHMAN 5-YEAR MUNICIPAL BOND INDEX. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS. (2) Duration is a measure which reflects estimated price sensitivity to a given change in interest rates. For example, for an interest rate change of 1%, a portfolio with a duration of 5 years would be expected to experience a price change of 5%. Estimated average life duration is based on current interest rates and the Adviser's assumptions regarding the expected average life of individual securities held in the portfolio. Implied duration is calculated based on historical price changes of securities held by the Fund. The Adviser believes that the portfolio's implied duration is a more accurate estimate of price sensitivity provided interest rates remain within their historical range. If interest rates exceed the historical range, the estimated average life duration may be a more accurate estimate of price sensitivity. GROWTH OF $10,000 [PLOT POINTS CHART] SIT TAX-FREE LEHMAN 5-YEAR INCOME FUND MUNI. BOND INDEX The sum of $10,000 invested at inception (9/29/88) and held until 6/30/98 would have grown to $20,677 in the Fund or $19,286 in the Lehman 5-Year Municipal Bond Index assuming reinvestment of all dividends and capital gains. QUALITY RATINGS [PIE CHART] (% of total net assets) LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED. BBB 30.9% A 28.2% AA 12.9% AAA 21.5% Other Assets & Liabilities 6.5% 13 SIT MINNESOTA TAX-FREE INCOME FUND REVIEW QUARTER ENDED JUNE 30, 1998 [PHOTO] MICHAEL C. BRILLEY SENIOR PORTFOLIO MANAGER DEBRA A. SIT, CFA PORTFOLIO MANAGER Municipal bond yields remained relatively stable during the quarter. The Sit Minnesota Tax-Free Income Fund provided shareholders a total return of +1.36% for the quarter and +7.79% for the 12 months ended June 30, 1998. The Fund's total return ranked #27 of 47 Minnesota municipal funds tracked by Lipper Analytical Services for the quarter and ranked #25 of 45 funds for the twelve-month period. In addition, the Fund's returns ranked #12 of 44 funds for the three-year period and #1 of 25 funds since its inception on December 1, 1993. The Fund's price per share increased $0.01 during the quarter to $10.50 on June 30, 1998 and remains below its all-time high of $10.56 reached in early January 1998. As of June 30th, the Fund's 30-day SEC yield was 4.80% and its 12-month distribution rate was 5.21%, compared to 5.02% and 5.31%, respectively, on March 31, 1998. Fund assets increased from $143.6 million to $167.8 million during the quarter. Cash decreased from 7.0% to 5.6% of total assets as purchases were made in the multi-family housing sector which increased from 42.3% to 44.0% and in industrial revenue bonds which increased from 3.6% to 5.2%. In addition, closed-end bond fund holdings increased from 4.1% to 4.8% and health care increased from 12.5% to 13.1%. Other sector weightings were slightly diluted by the new cash flow. Non-rated holdings increased slightly from 33.4% to 35.1% during the quarter while securities rated "A" or better remained at approximately 60%. The Fund's focus on purchasing new issue securities with greater call protection and the reduction in cash position resulted in its implied duration lengthening from 5.0 years to 6.0 years and its average maturity increasing from 19.5 years to 20.2 years during the quarter. With relatively stable municipal bond yields during the quarter, the Fund's performance was driven by its emphasis on securities which provide higher coupon income. We expect economic activity to moderate in the second half of the year and municipal bond yields to remain relatively stable. In this environment, we will continue to focus on securities that provide incremental yield. INVESTMENT OBJECTIVE AND STRATEGY The investment objective of the Fund is to provide a high level of current income exempt from federal regular income tax and Minnesota regular personal income tax as is consistent with the preservation of capital. The Fund will endeavor to invest 100% of its assets in municipal securities, the income from which is exempt from federal regular income tax and Minnesota regular personal income tax. The Fund anticipates that substantially all of its distributions to its shareholders will be exempt as such. For investors subject to the alternative minimum tax ("AMT"), up to 20% of the Fund's income may be treated as an item of tax preference that is included in the alternative minimum taxable income. PORTFOLIO SUMMARY Net Asset Value 6/30/98: $10.50 Per Share 3/31/98: $10.49 Per Share Total Net Assets: $167.82 Million 30-Day SEC Yield: 4.80% Tax Equivalent Yield: 8.69%(1) 12-Month Distribution Rate: 5.21% Average Maturity: 20.2 Years Duration to Estimated Avg. Life: 8.0 Years(2) Implied Duration: 6.0 Years(2) (1) For individuals in the 39.6% Federal and 8.5% MN tax brackets. (2) See page 15. PORTFOLIO STRUCTURE (% of total net assets) [BAR CHART] Multifamily Mortgage Revenue 44.0 Hospital/Health Care Revenue 13.1 Single Family Mortgage Revenue 13.0 Other Revenue Bonds 6.0 Industrial Revenue/Pollution Control 5.2 Closed-End Mutual Funds 4.8 General Obligation 3.5 Lease 2.3 Public Facilities 1.5 Education/Student Loan 1.0 Other Assets and Liabilities 5.6 14
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS* ------------------------------------------ -------------------------------------------- MN Tax-Free Lipper MN Lehman MN Tax-Free Lipper MN Lehman Income Muni. Bond 5-Year Muni. Income Muni. Bond 5- Year Muni. Fund Fund Avg. Bond Index Fund Fund Avg. Bond Index ----------- ---------- ------------ ----------- ---------- ------------- 3 Months 1.36% 1.39% 1.12% 1.36% 1.39% 1.12% (unannualized) 1 Year 7.79 7.72 6.24 7.79 7.72 6.24 3 Year 7.24 6.72 5.82 23.35 21.54 18.50 Inception 6.67 5.43 5.32 34.42 27.41 26.82 (12/1/93)
*As of 6/30/98 PERFORMANCE FIGURES ARE HISTORICAL AND DO NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL VARY, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL SHARES. AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE PRICE AS WELL AS REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. MANAGEMENT FEES AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN THE FUND'S PERFORMANCE; HOWEVER, FEES AND EXPENSES ARE NOT INCORPORATED IN THE LEHMAN 5-YEAR MUNICIPAL BOND INDEX. THE LIPPER AVERAGES AND INDICES ARE OBTAINED FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS. (2) Duration is a measure which reflects estimated price sensitivity to a given change in interest rates. For example, for an interest rate change of 1%, a portfolio with a duration of 5 years would be expected to experience a price change of 5%. Estimated average life duration is based on current interest rates and the Adviser's assumptions regarding the expected average life of individual securities held in the portfolio. Implied duration is calculated based on historical price changes of securities held by the Fund. The Adviser believes that the portfolio's implied duration is a more accurate estimate of price sensitivity provided interest rates remain within their historical range. If interest rates exceed the historical range, the estimated average life duration may be a more accurate estimate of price sensitivity. GROWTH OF $10,000 [PLOTS POINTS CHART] SIT MN TAX-FREE LEHMAN 5-YEAR INCOME FUND MUNI. BOND INDEX The sum of $10,000 invested at inception (12/1/93) and held until 6/30/98 would have grown to $13,442 in the Fund or $12,682 in the Lehman 5-Year Municipal Bond Index assuming reinvestment of all dividends and capital gains. QUALITY RATINGS [PIE CHART] (% of total net assets) LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED. Not Rated 35.1% BBB 4.9% A 10.7% AA 21.8% AAA 21.9% Other Assets & Liabilities 5.6% ADVISER'S ASSESSMENT OF NOT-RATED SECURITIES AA 0.4% A 1.9 BBB 21.1 BB 11.0 B 0.7 Total 35.1% 15 [LOGO] Directors: Eugene C. Sit, CFA Peter L. Mitchelson, CFA Michael C. Brilley John E. Hulse Sidney L. Jones Donald W. Phillips William E. Frenzel Director Emeritus: Melvin C. Bahle Officers: Eugene C. Sit, CFA Chairman Peter L. Mitchelson, CFA Vice Chairman Mary K. Stern, CFA President Michael C. Brilley Senior Vice President Paul E. Rasmussen Vice President & Treasurer Debra A. Sit, CFA Vice President - Investments; Assistant Treasurer Bryce A. Doty, CFA (1) Vice President - Investments Paul J. Jungquist, CFA (2) Vice President - Investments Michael P. Eckert Vice President - Group Manager Michael J. Radmer Secretary Carla J. Rose Assistant Secretary (1) Bond and U.S. Government Securities Funds only. (2) Money Market Fund only. QUARTERLY REPORT BOND FUNDS QUARTER ENDED JUNE 30, 1998 INVESTMENT ADVISER SIT INVESTMENT ASSOCIATES, INC. 4600 NORWEST CENTER MINNEAPOLIS, MN 55402 612-334-5888 (METRO AREA) 800-332-5580 DISTRIBUTOR SIA SECURITIES CORP. 4600 NORWEST CENTER MINNEAPOLIS, MN 55402 612-334-5888 (METRO AREA) 800-332-5580 CUSTODIAN THE NORTHERN TRUST COMPANY 50 SOUTH LASALLE STREET CHICAGO, IL 60675 TRANSFER AGENT AND DISBURSING AGENT FIRST DATA INVESTOR SERVICES P.O. BOX 5166 WESTBORO, MA 01581-5166 AUDITORS KPMG PEAT MARWICK LLP 4200 NORWEST CENTER MINNEAPOLIS, MN 55402 LEGAL COUNSEL DORSEY & WHITNEY LLP 220 SOUTH SIXTH STREET MINNEAPOLIS, MN 55402 MEMBER OF ==================== 100% NO-LOAD MUTUAL FUND COUNCIL ==================== -----END PRIVACY-ENHANCED MESSAGE-----