-----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, UttXdawPSdZe3RXwPUReXg3kyJAS4k9g+g65VPbLHBu8vlu+ZaY0+lood5+s2SVu JXnN4dSKqAQnwyBrctOZKg== 0000897101-02-000505.txt : 20020724 0000897101-02-000505.hdr.sgml : 20020724 20020724172613 ACCESSION NUMBER: 0000897101-02-000505 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020724 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIT MUTUAL FUNDS II INC CENTRAL INDEX KEY: 0000746601 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-04033 FILM NUMBER: 02710175 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: NEW BEGINNING YIELD FUND INC DATE OF NAME CHANGE: 19870907 FORMER COMPANY: FORMER CONFORMED NAME: SIT NEW BEGINNING YIELD FUND INC DATE OF NAME CHANGE: 19880929 FORMER COMPANY: FORMER CONFORMED NAME: SIT NEW BEGINNING TAX FREE INCOME FUND INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIT U S GOVERNMENT SECURITIES FUND INC CENTRAL INDEX KEY: 0000809981 IRS NUMBER: 411570831 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-04995 FILM NUMBER: 02710176 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: NEW BEGINNING U S GOVERNMENT SECURITIES FUND INC DATE OF NAME CHANGE: 19870601 FORMER COMPANY: FORMER CONFORMED NAME: SIT NEW BEGINNING U S GOVERNMENT SECURITIES FUND INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIT MONEY MARKET FUND INC CENTRAL INDEX KEY: 0000746603 IRS NUMBER: 411492046 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-04032 FILM NUMBER: 02710177 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: NEW BEGINNING INVESTMENT RESERVE FUND INC DATE OF NAME CHANGE: 19870907 FORMER COMPANY: FORMER CONFORMED NAME: SIT NEW BEGINNING INVESTMENT RESERVE FUND INC DATE OF NAME CHANGE: 19920703 N-30B-2 1 sitbond023634_n30b2.txt SIT BOND FUNDS QUARTERLY REPORT FORM N-30B-2 SIT MUTUAL FUNDS BOND FUNDS QUARTERLY REPORT JUNE 30, 2002 MONEY MARKET FUND U.S. GOVERNMENT SECURITIES FUND TAX-FREE INCOME FUND MINNESOTA TAX-FREE INCOME FUND BOND FUND [LOGO] SIT INVESTMENT ASSOCIATES ------------------------- SIT MUTUAL FUNDS SIT MUTUAL FUNDS BOND FUNDS QUARTERLY REPORT TABLE OF CONTENTS PAGE ---- Chairman's Letter 3 Performance Summary and Bond Market Review 4 Average Annual Total Returns 6 FUND REVIEWS Money Market Fund 8 U.S. Government Securities Fund 10 Tax-Free Income Fund 12 Minnesota Tax-Free Income Fund 14 Bond Fund 16 A Look at Sit Mutual Funds 19 This document must be preceded or accompanied by a Prospectus. This page has been left blank intentionally. 2 [PHOTO] SIT MUTUAL FUNDS QUARTER ENDED JUNE 30, 2002 ---------------------------------------------------------------- [LOGO] CHAIRMAN'S LETTER Dear Fellow Shareholders: Generally favorable economic reports coupled with subdued inflation pressures have enabled the Federal Reserve to maintain low short-term interest rate levels since late last year. The Fed's low interest rate policy will continue to provide stimulus in the near-term but poses risks to the inflation outlook if sustained much beyond the later part of this year. Consequently, bond yields should be relatively stable through the summer but turn to a rising trend by the first half of next year. ECONOMIC OVERVIEW The recession of 2001 proved to be the mildest on record, with only one quarter of -1.3% real gross domestic product growth being experienced in the third quarter of last year. Spurred on by aggressive auto incentives, 4Q01 growth turned positive at +1.7% and 1Q02 growth exploded to +6.1%. The inventory component of GDP played a major role in first quarter GDP, providing over 60% of the gain. The important consumer sector also participated as well, growing at a +3.3% rate, which appears sustainable. We believe the inventory restocking factor will diminish in relative importance in coming quarters, but will still be positive, and the remaining sectors should be able to sustain overall GDP growth in the +2.5% to +3.5% range. For the full year, the United States should grow approximately +3.0% in inflation-adjusted terms, up nicely from +1.2% in 2001. On the inflation front, the year-over-year increase in the Consumer Price Index did bottom at +1.1% in February, as we had suggested, and has started to move up gradually. We continue to believe that the magnitude of the cyclical increase will be moderate. Accordingly, with trend line real growth and moderate inflation, we believe the fundamental environment for financial asset investing remains reasonable. STRATEGY SUMMARY Economic growth slowed in the second quarter, and our forecast is for reaccelerated growth in the second half of the year. While inflationary pressures will remain moderate this year, renewed growth in the second half will eventually require the Federal Reserve to raise short-term interest rates to a less accommodative level to head off inflationary pressures that could become more evident next year. As a result, we believe that the Federal Reserve will raise short-term interest rates by 1.0% or more by mid-year 2003. Higher short-term interest rates are expected to be transmitted to higher interest rate levels across all maturities of U.S. Treasury debt. Our taxable bond portfolios are positioned with durations that are shorter than their benchmarks to lessen the impact of the rising interest rate trends that we expect to commence later this year. Furthermore, we are maintaining minimal holdings in the U.S. Treasury sector as we favor higher yielding mortgage pass-throughs, asset-backed securities, collateralized mortgage obligations, and corporate issues which we expect to benefit from narrowing yield differentials with the Treasury market. Sustained economic growth is expected to create a favorable environment for lower risk premiums in non-Treasury debt. Municipal bond portfolios are also considerably shorter in duration than they were one year ago, reflecting our expectations of higher interest rates across all maturities in the municipal bond market. We are currently targeting municipal portfolio durations nearer to their benchmark at approximately 4.5 years, which is slightly less than their benchmark duration. We appreciate your interest in Sit Mutual Funds and believe our continued focus on high current income and stability of principal value will help you achieve your long-term investment goals. With best wishes, /s/ Eugene C. Sit Eugene C. Sit, CFA Chairman and Chief Investment Officer 3 SIT MUTUAL FUNDS QUARTER ENDED JUNE 30, 2002 - -------------------------------------------------------------------------------- PERFORMANCE SUMMARY AND BOND MARKET REVIEW Bond yields declined across all maturities of the Treasury yield curve during the second quarter, reflecting investor expectations that the Federal Reserve would maintain short-term interest rates at the current low levels for a more extended period. During the first quarter, when economic growth was rapidly rebounding to a +6.1% growth rate, investors generally expected the Federal Reserve to raise short-term rates by late spring or early summer. Now that the economy has clearly slowed to a more moderate growth rate in the +2% to +3% range, investors expect the Fed to delay any tightening moves until late this year or the first half of next year. Indeed, the Fed maintained a neutral assessment of risks at its June 26th FOMC meeting. In the taxable bond market, U.S. Treasury and agency debt, mortgage pass-throughs, asset-backed bonds, and highly rated corporate debt issues all experienced price appreciation, while lower rated and below investment-grade corporates experienced price depreciation. Investors reacted negatively to questionable and sometimes fraudulent accounting practices in addition to the ongoing corporate scandals, CEO resignations, and the ongoing weakness in the telecommunications sector. Corporate bond investors continue to demand higher yields to compensate for the elevated risk. Municipal bond yields declined modestly across all maturities and quality sectors, reflecting strong investor demand from traditional buyers as well as investors moving away from the stock market. Shorter maturity municipal yields ended the quarter approaching record lows. All market sectors and maturities provided returns that varied only slightly, as market developments were generally positive and there was little controversy. Currently, we believe municipals in the 3 to 10 year range offer the most attractive risk/return profile.
1993 1994 ------------------------- SIT MONEY MARKET FUND (1) 0.46%(2) 3.84% - ----------------------------------------------------------------------- SIT U.S. GOV'T. SECURITIES FUND 7.34 1.77 - ----------------------------------------------------------------------- SIT TAX-FREE INCOME FUND 10.42 -0.63 - ----------------------------------------------------------------------- SIT MINNESOTA TAX-FREE INCOME FUND 1.60(2) 0.63 - ----------------------------------------------------------------------- SIT BOND FUND 0.34(2) -1.31 - ----------------------------------------------------------------------- 3-MONTH U.S. TREASURY BILL 0.53(2) 4.47 LEHMAN INTER. GOVERNMENT BOND INDEX 8.17 -1.75 LEHMAN 5-YEAR MUNICIPAL BOND INDEX 8.73 -1.28 LEHMAN AGGREGATE BOND INDEX 0.54(2) -2.92
NASDAQ SYMBOL INCEPTION ------ --------- SIT MONEY MARKET FUND SNIXX 11/01/93 - ----------------------------------------------------------------------- SIT U.S. GOV'T. SECURITIES FUND SNGVX 06/02/87 - ----------------------------------------------------------------------- SIT TAX-FREE INCOME FUND SNTIX 09/29/88 - ----------------------------------------------------------------------- SIT MINNESOTA TAX-FREE INCOME FUND SMTFX 12/01/93 - ----------------------------------------------------------------------- SIT BOND FUND SIBOX 12/01/93 - ----------------------------------------------------------------------- 3-MONTH U.S. TREASURY BILL 11/01/93 LEHMAN INTER. GOVERNMENT BOND INDEX 05/31/87 LEHMAN 5-YEAR MUNICIPAL BOND INDEX 09/30/88 LEHMAN AGGREGATE BOND INDEX 11/30/93
(1) Converted from Sit Investment Reserve Fund to Sit Money Market Fund on 11/1/93. (2) Period from Fund inception through calendar year-end. (3) Based on the last 12 monthly distributions of net investment income and average NAV as of 6/30/02. (4) Figure represents 7-day compound effective yield. The 7-day simple yield as of 6/30/02 was 1.24%. (5) For individuals in the 27%, 30%, 35%, and 38.6% federal tax brackets, the federal tax equivalent yields are 6.71%, 7.00%, 7.54% and 7.98%, respectively (Income subject to state tax, if any). 4 - ------------------------------------------------------------------------- [LOGO]
TOTAL RETURN - CALENDAR YEAR 30-DAY SEC YIELD YTD AS OF DISTRIBUTION 1995 1996 1997 1998 1999 2000 2001 2002 6/30/02 RATE(3) - -------------------------------------------------------------------------- ----------------------- 5.58% 5.08% 5.22% 5.17% 4.79% 6.03% 3.67% 0.64% 1.25%(4) - ---------------------------------------------------------------------------------------------------- 11.50 4.99 8.19 6.52 1.37 9.15 8.56 3.07 5.55 5.20% - ---------------------------------------------------------------------------------------------------- 12.86 5.69 9.87 6.29 -4.01 8.32 5.84 2.67 4.90(5) 4.62 - ---------------------------------------------------------------------------------------------------- 11.90 5.89 8.19 6.14 -3.82 8.09 5.85 3.47 4.74(6) 4.77 - ---------------------------------------------------------------------------------------------------- 16.83 4.25 9.44 6.52 -0.34 9.25 8.36 3.97 5.27 5.91 - ---------------------------------------------------------------------------------------------------- 5.98 5.27 5.32 5.01 4.88 6.16 3.50 0.88 14.41 4.06 7.72 8.49 0.49 10.47 8.42 3.59 11.65 4.22 6.38 5.84 0.74 7.72 6.21 4.72 18.47 3.63 9.65 8.69 -0.82 11.63 8.44 3.79
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED JUNE 30, 2002 TOTAL RETURN ---------------------------------------------------------- QUARTER SIX MONTHS SINCE ENDED 6/30/02 ENDED 6/30/02 1 YEAR 5 YEARS 10 YEARS INCEPTION - ------------------------------- ---------------------------------------------------------- 0.33% 0.64% 1.93% 4.58% -- 4.66% - ---------------------------------------------------------------------------------------------------- 2.33 3.07 7.31 6.73 6.48% 7.69 - ---------------------------------------------------------------------------------------------------- 2.16 2.67 5.35 4.93 6.01 6.62 - ---------------------------------------------------------------------------------------------------- 2.52 3.47 6.24 4.90 -- 5.50 - ---------------------------------------------------------------------------------------------------- 3.90 3.97 8.68 6.69 -- 6.55 - ---------------------------------------------------------------------------------------------------- 0.44 0.88 2.17 4.61 -- 4.82 3.86 3.59 8.58 7.23 6.73 7.75 4.12 4.72 7.10 5.82 5.85 6.59 3.69 3.79 8.63 7.57 -- 6.94
(6) For Minnesota residents in the 27%, 30%, 35% and 38.6% federal tax brackets, the double exempt tax equivalent yields are 7.05%, 7.35%, 7.91% and 8.38%, respectively (Assumes the maximum Minnesota tax bracket of 7.85%). 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. 5 SIT MUTUAL FUNDS - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2001 The tables on the next page show the Funds' average annual total returns (before and after taxes) and the change in value of a broad-based market index over various periods ended December 31, 2001. The index information is intended to permit you to compare each Fund's performance to a broad measure of market performance. The after-tax returns are intended to show the impact of federal income taxes on an investment in a Fund. The highest individual federal marginal income tax rate in effect during the specified period is assumed, and the state and local tax impact is not reflected. A Fund's "Return After Taxes on Distributions" shows the effect of taxable distributions (dividends and capital gain distributions), but assumes that you still hold the fund shares at the end of the period and so do not have any taxable gain or loss on your investment in the Fund. A Fund's "Return After Taxes on Distributions and Sale of Fund Shares" shows the effect of both taxable distributions and any taxable gain or loss that would be realized if the Fund shares were purchased at the beginning and sold at the end of the specified period. The Funds' past performance, before and after taxes, is not an indication of how the Funds will perform in the future. Your actual after-tax returns depend on your own tax situation and may differ from those shown. After-tax returns reflect past tax effects and are not predictive of future tax effects. After-tax returns are not relevant to investors who hold their Fund shares in a tax-deferred account (including a 401(k) or IRA account). 6 - ------------------------------------------------------------------------- [LOGO]
- -------------------------------------------------------------------------------------------------------- SIT U.S. GOVERNMENT SECURITIES FUND 1 YEAR 5 YEARS 10 YEARS Return Before Taxes 8.6% 6.7% 6.4% Return After Taxes on Distributions 6.1% 4.3% 3.9% Return After Taxes on Distributions and Sale of Fund Shares 5.6% 4.2% 3.9% Lehman Intermediate Government Bond Index* 8.4% 7.1% 6.7% - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- SIT TAX-FREE INCOME FUND 1 YEAR 5 YEARS 10 YEARS Return Before Taxes 5.8% 5.1% 6.1% Return After Taxes on Distributions 5.8% 5.1% 6.0% Return After Taxes on Distributions and Sale of Fund Shares 5.7% 5.1% 6.0% Lehman 5-Year Municipal Bond Index* 6.2% 5.4% 5.7% - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- SIT MINNESOTA TAX-FREE INCOME FUND 1 YEAR 5 YEARS SINCE INCEPTION Return Before Taxes 5.9% 4.8% 5.4% Return After Taxes on Distributions 5.9% 4.8% 5.4% Return After Taxes on Distributions and Sale of Fund Shares 5.7% 4.9% 5.5% Lehman 5-Year Municipal Bond Index* 6.2% 5.4% 5.3% - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- SIT BOND FUND 1 YEAR 5 YEARS SINCE INCEPTION Return Before Taxes 8.4% 6.6% 6.5% Return After Taxes on Distributions 5.6% 3.9% 3.8% Return After Taxes on Distributions and Sale of Fund Shares 5.3% 3.9% 3.8% Lehman Aggregate Bond Index* 8.4% 7.4% 6.9% - --------------------------------------------------------------------------------------------------------
* Indices reflect no deduction for fees, expenses, or taxes. 7 [PHOTO] SIT MONEY MARKET FUND QUARTER ENDED JUNE 30, 2002 ----------------------------------------------------------------------- MICHAEL C. BRILLEY, SENIOR PORTFOLIO MANAGER PAUL J. JUNGQUIST, CFA, SENIOR PORTFOLIO MANAGER The Sit Money Market Fund provided investors with a +0.33% return for the three months ended June 30, 2002, compared to a +0.27% average return for the Lipper Analytical Services, Money Market Fund universe. The Fund's performance ranked 127th of 385 funds in its Lipper peer group category for the second quarter of 2002. For the 1-, 3- , 5-year and since inception periods ended June 30, 2002, the Fund's performance ranked 162nd of 380 funds, 120th of 320 funds, 78th of 248 funds and 46th of 166 funds, respectively, in its Lipper(1) peer group. As of June 30, 2002, the Fund's 7-day compound yield was 1.25% and its average maturity was 33 days, compared to 1.29% and 29 days, respectively, at March 31, 2002. The Federal Reserve Board held the federal funds rate steady at 1.75% during the quarter, recognizing the improving strength in the economy, but did not raise rates because the sustainability of this economic strength is still in question. Three-month Treasury bill yields were fairly stable over the past quarter, ranging from 1.81% in early April, and finishing at 1.69% on June 30th. Current yield levels imply that the market is not expecting the first tightening move by the Fed in the third quarter of 2002. With the economic data reported in June and early July being indicative of a firming economy, an initial tightening move or moves by the Fed later this year is still a real possibility. Until Fed policy becomes more clear, the Fund anticipates maintaining an average maturity near 30 days. 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 domestic economic activity firms and stabilizes from a weak 2001, and global economic activity strengthens as well, we foresee improvement in the short-term creditworthiness of top tier commercial paper issuers in general. Many of these issuers have strengthened their balance sheets and enhanced their liquidity over the past few months in response to the weaker economy and investor demands. The Fund anticipates beginning to purchase top quality (A1/P1 - rated) asset-backed commercial paper to meet its investment needs in the coming year. The Fund continues to diversify its core holdings and its industry exposure. In the months ahead, we hope to add top tier credits from the diversified finance industry and asset-backed commercial paper products to our list of permissible holdings. 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 short-term debt instruments which mature in 397 days or less and by maintaining a dollar-weighted portfolio maturity of 90 days or less. 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 6/30/02: $1.00 Per Share 3/31/02: $1.00 Per Share Total Net Assets: $63.8 Million PORTFOLIO STRUCTURE (% OF TOTAL NET ASSETS) [BAR CHART] Consumer Non-Durables 13.5 Financial Services 11.9 Insurance 10.7 Consumer Loan Finance 10.5 Communications 10.5 Diversified Finance 7.8 Consumer Services 7.5 Sectors less than 5.0% 23.9 Cash and Other Net Assets 3.7 8 - ------------------------------------------------------------------------- [LOGO] AVERAGE ANNUAL TOTAL RETURNS* SIT MONEY 3-MONTH LIPPER MARKET U.S. TREASURY MONEY FUND BILL MARKET AVG. --------- ------------- ----------- 3 Month** 0.33% 0.44% 0.27% 6 Month** 0.64 0.88 n/a 1 Year 1.93 2.17 1.76 3 Year 4.28 4.35 4.03 5 Year 4.58 4.61 4.35 Inception 4.66 4.82 4.50 (11/1/93) CUMULATIVE TOTAL RETURNS* SIT MONEY 3-MONTH LIPPER MARKET U.S. TREASURY MONEY FUND BILL MARKET AVG. --------- ------------- ----------- 1 Year 1.93% 2.17% 1.76% 3 Year 13.38 13.63 12.57 5 Year 25.12 25.27 23.71 Inception 48.45 50.39 46.43 (11/1/93) *AS OF 6/30/02. **NOT ANNUALIZED. 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 3-MONTH U.S. TREASURY BILL. THE LIPPER AVERAGES ARE OBTAINED FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS. - -------------------------------------------------------------------------------- (1) Lipper Analytical Services, Inc., a large independent evaluator of mutual funds, rankings reflect historical performance returns through 6/30/02. Sit Money Market Fund rankings for the 1-, 3-, 5-year and since inception periods were 162nd of 380 funds, 120th of 320 funds, 78th of 248 funds and 46th of 166 funds, respectively. GROWTH OF $10,000 [PLOT POINTS CHART] The sum of $10,000 invested at inception (11/1/93) and held until 6/30/02 would have grown to $14,845 in the Fund or $15,039 in the 3-Month U.S. Treasury Bill assuming reinvestment of all dividends and capital gains. QUALITY RATINGS (% OF TOTAL NET ASSETS) LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED. [PIE CHART] First Tier Securities 100% First Tier Securities 100% Second Tier Securities 0% 9 [PHOTO] SIT U.S. GOVERNMENT SECURITIES FUND QUARTER ENDED JUNE 30, 2002 ----------------------------------------------------------------------- MICHAEL C. BRILLEY, SENIOR PORTFOLIO MANAGER BRYCE A. DOTY, CFA, SENIOR PORTFOLIO MANAGER The Sit U.S. Government Securities Fund provided investors with a +2.3% return for the quarter ended June 30, 2002, compared to +3.9% for the Lipper U.S. Government Fund universe average and +3.9% for Lehman Intermediate Bond Index. The Fund holds a 5-star overall rating by Morningstar(1) out of 60 funds in its category as of June 30, 2002. The U.S. Treasury yield curve continued to steepen during the quarter as overall interest rates fell. The 2-year Treasury yield declined -0.93% as investors' expectations of near-term increases in the federal funds rate disappeared. The 30-year Treasury yield fell only -0.30%, with demand for longer maturity Treasuries less robust than for shorter-term Treasuries. As of June 30, 2002, the 2-year and the 30-year Treasuries were yielding 2.79% and 5.51%, respectively. Investment activity for the period included reinvestments in seasoned high-coupon agency mortgage pass-through securities as existing holdings paid down. These seasoned securities are less likely than other mortgage-backed securities to experience large increases in prepayments as interest rates decline. Since the homeowners on these underlying mortgages have not taken advantage of the opportunities to refinance in the past, they are less likely to refinance in the future. In the U.S. Treasury sector, Treasury Inflation Protected Securities (TIPS) were purchased to take advantage of recent monthly spikes in the inflation rates. These securities pay a fixed rate of interest and the principal increases at the monthly rate of the CPI. The Fund's holdings in the sector provided strong returns of approximately +3.3% for the quarter. Looking ahead, we believe that the U.S. economy will continue the improvement we have seen so far this year. This will cause yields to increase over the next few quarters. We expect yields in the Treasury sector to increase faster than in non-Treasury sectors, and thus are underweighted in U.S. Treasuries. We continue to seek government securities that offer high levels of current income, such as seasoned high-coupon mortgage pass-throughs and conservatively structured collateralized mortgage obligations, as we expect them to provide the most attractive total return opportunities. INVESTMENT OBJECTIVE AND STRATEGY The objective of the U.S. Government Securities Fund is to provide high current income and safety of principal, which it seeks to attain by investing solely in debt obligations issues, 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 including those issued by Government National Mortgage Association (GNMA), Federal National Mortgage Asociation (FNMA), and Federal Home Loan Mortgage Corporation (FHLMC). PORTFOLIO SUMMARY Net Asset Value 6/30/02: $10.80 Per Share 3/31/02: $10.69 Per Share Total Net Assets: $252.8 Million 30-day SEC Yield: 5.55% 12-Month Distribution Rate: 5.20% Average Maturity: 16.0 Years Effective Duration: 2.2 Years(2) (2) 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] Collateralized Mortgage Obligations 34.3 GNMA Pass-Through 20.7 FHLMC Pass-Through 15.9 FNMA Pass-Through 15.0 U.S. Treasury 4.0 Taxable Municipal 0.8 Cash & Other Net Assets 9.3 10 - ------------------------------------------------------------------------- [LOGO] AVERAGE ANNUAL TOTAL RETURNS* SIT U.S. GOV'T. LEHMAN LIPPER SECURITIES INTER. GOV'T. U.S. GOV'T. FUND BOND INDEX FUND AVG. ---------- ------------- ----------- 3 Month** 2.33% 3.86% 3.91% 6 Month** 3.07 3.59 n/a 1 Year 7.31 8.58 7.88 5 Year 6.73 7.23 6.63 10 Year 6.48 6.73 6.47 Inception 7.69 7.75 7.36 (6/2/87) CUMULATIVE TOTAL RETURNS* SIT U.S. GOV'T. LEHMAN LIPPER SECURITIES INTER. GOV'T. U.S. GOV'T. FUND BOND INDEX FUND AVG. ---------- ------------- ----------- 1 Year 7.31% 8.58% 7.88% 5 Year 38.52 41.78 37.85 10 Year 87.28 91.79 87.14 Inception 206.00 208.69 191.78 (6/2/87) *AS OF 6/30/02. **NOT ANNUALIZED. 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. - -------------------------------------------------------------------------------- (1) Morningstar proprietary ratings reflect historical risk-adjusted performance through 6/30/02. These ratings are subject to change monthly and are calculated from the funds' 3-, 5-, and 10-year average annual returns in excess of 90-day Treasury bill returns with appropriate fee adjustments and a risk factor that reflects fund performance below 90-day Treasury bill returns. Ten percent of the funds in an investment category receive 5 stars, 22.5% receive 4, 35% receive 3, and 22.5% receive 2. In the short government category, Sit U.S. Government Securities Fund received a 4-star rating for the 3- and 5-year periods and a 5-star rating for the 10-year period out of 60, 59 and 36 funds, respectively. GROWTH OF $10,000 [PLOT POINTS CHART] The sum of $10,000 invested at inception (6/2/87) and held until 6/30/02 would have grown to $30,600 in the Fund or $30,869 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] 0 - 1 Year 9.3% 1 - 5 Years 78.7% 5 - 10 Years 10.1% 10 - 20 Years 1.1% 20+ Years 0.8% 11 [PHOTO] SIT TAX-FREE INCOME FUND QUARTER ENDED JUNE 30, 2002 ----------------------------------------------------------------------- MICHAEL C. BRILLEY, SENIOR PORTFOLIO MANAGER DEBRA A. SIT, CFA, SENIOR PORTFOLIO MANAGER Municipal yields fell during the quarter, reflecting strong investor demand. Shorter maturity yields fell by more than twice as much as longer maturity yields, causing the yield curve to steepen substantially, and ended the quarter near record lows. With the decline in interest rates, the Sit Tax-Free Income Fund's per share net asset value increased from $9.82 to $9.92 during the period. The Fund provided investors with a +2.2% return for the second quarter of 2002, compared to a +4.1% return for the Lehman 5-Year Municipal Bond Index and a +3.4% average return for the Lipper General Municipal Bond Fund universe. The Fund's 30-day SEC Yield was 4.90% and its 12-month distribution rate was 4.62%. These levels compare with 4.96% and 4.78%, respectively, on March 31, 2002. The Fund's income return was comparable to its benchmark income return. The Fund's strategy is to invest in securities that provide higher incremental income and stability of principal value. These securities lagged in price appreciation during the quarter as short and intermediate municipal yields declined dramatically during the quarter. The Fund's holdings in the hospital, multifamily housing and industrial revenue sectors lagged, in particular, as investors sought higher quality credits. Closed-end bond funds, single family housing and education were the Fund's strongest performing sectors. Portfolio structure was little changed over the quarter with the largest shifts being an increase in the hospital sector from 22.8% to 24.3% and in industrial revenue from 4.8% to 6.4%. The Fund's average quality rating remains at "A." We believe the Fund is well positioned to provide attractive relative returns in the period ahead from its holdings in securities that provide incremental yield. The Fund's duration was shortened substantially over the past year in anticipation of higher interest rates with stronger economic growth. While Fed tightening will probably be delayed until later this year or early next year, we expect to maintain the Fund's duration around its current 4.5 years. Currently, we believe municipals in the 3 to 10 year maturity range offer the most attractive risk/reward profile. 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 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 6/30/02: $9.92 Per Share 3/31/02: $9.82 Per Share Total Net Assets: $431.1 Million 30-day SEC Yield: 4.90% Tax Equivalent Yield: 7.98%(1) 12-Month Distribution Rate: 4.62% Average Maturity: 13.4 Years Duration to Estimated Avg. Life: 4.6 Years(2) Implied Duration: 4.5 Years(2) (1) For individuals in the 38.6% federal tax bracket. (2) See next page. PORTFOLIO STRUCTURE (% OF TOTAL NET ASSETS) [BAR CHART] Multifamily Mortgage Revenue 28.1 Hospital/Health Care Revenue 24.3 Other Revenue 16.0 Single Family Mortgage 6.7 Industrial/Pollution Control 6.4 Sectors Under 5.0% 17.9 Cash & Other Net Assets 0.6 12 - ------------------------------------------------------------------------- [LOGO] AVERAGE ANNUAL TOTAL RETURNS* SIT LIPPER TAX-FREE LEHMAN GENERAL INCOME 5-YEAR MUNI. MUNI. BOND FUND BOND INDEX FUND AVG. -------- ------------ ---------- 3 Month** 2.16% 4.12% 3.40% 6 Month** 2.67 4.72 n/a 1 Year 5.35 7.10 5.75 5 Year 4.93 5.82 5.02 10 Year 6.01 5.85 5.85 Inception 6.62 6.59 6.81 (9/29/88) CUMULATIVE TOTAL RETURNS* SIT LIPPER TAX-FREE LEHMAN GENERAL INCOME 5-YEAR MUNI. MUNI. BOND FUND BOND INDEX FUND AVG. -------- ------------ ---------- 1 Year 5.35% 7.10% 5.75% 5 Year 27.18 32.67 27.78 10 Year 79.34 76.59 76.50 Inception 141.46 140.62 147.71 (9/29/88) *AS OF 6/30/02. **NOT ANNUALIZED. 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 MUNI. BOND INDEX. THE LIPPER AVERAGES 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] The sum of $10,000 invested at inception (9/29/88) and held until 6/30/02 would have grown to $24,146 in the Fund or $24,062 in the Lehman 5-Year Municipal Bond Index assuming reinvestment of all dividends and capital gains. QUALITY RATINGS (% OF TOTAL NET ASSETS) LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED. [PIE CHART] AAA 24.2% BBB 29.9% AA 10.8% Less than BBB 3.5% A 31.0% Other Assets and Liabilities 0.6% Total number of holdings: 383 13 [PHOTO] SIT MINNESOTA TAX-FREE INCOME FUND QUARTER ENDED JUNE 30, 2002 ----------------------------------------------------------------------- SENIOR PORTFOLIO MANAGERS MICHAEL C. BRILLEY * DEBRA A. SIT, CFA * PAUL J. JUNGQUIST, CFA Municipal yields fell during the quarter, reflecting strong investor demand. Shorter maturity yields fell by more than twice as much as longer maturity yields, causing the yield curve to steepen substantially, and ended the quarter near record lows. With the decline in interest rates, the Sit Minnesota Tax-Free Income Fund's per share net asset value increased from $9.99 to $10.12 during the period. The Fund provided investors with a +2.5% return for the second quarter of 2002, compared to a +4.1% return for the Lehman 5-Year Municipal Bond Index and a +3.1% average return for the Lipper Minnesota Municipal Bond Fund universe. The Fund's 30-day SEC Yield was 4.74% and its 12-month distribution rate was 4.77%. These levels compare with 5.05% and 4.84%, respectively, on March 31, 2002. The Fund's income return was comparable to its benchmark income return. The Fund's strategy is to invest in securities that provide higher incremental income and stability of principal value. These securities lagged in price appreciation during the quarter as short and intermediate municipal yields declined dramatically during the quarter. The Fund's holdings in the multifamily and industrial revenue sectors lagged, in particular, as investors sought higher quality credits. The hospital sector was among the Fund's best performing sectors, along with closed-end bond funds, transportation and other revenue bonds, as investors sought yield in an environment of light supply. Portfolio structure was little changed over the quarter with the largest shift being a decrease in the hospital sector from 18.3% to 17.3%. The Fund's average quality rating remains at "A." We believe the Fund is well positioned to provide attractive relative returns in the period ahead from its holdings in securities that provide incremental yield. The Fund's duration was shortened substantially over the past year in anticipation of higher interest rates with stronger economic growth. While Fed tightening will probably be delayed until later this year or early next year, we expect to maintain the Fund's duration around its current 4.2 years. Currently, we believe municipals in the 3- to 10-year maturity range offer the most attractive risk/reward profile. INVESTMENT OBJECTIVE AND STRATEGY The investment objective of the Minnesota Tax-Free Income 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 seeks to achieve its objective by investing primarily 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 alternative minimum taxable income. PORTFOLIO SUMMARY Net Asset Value 6/30/02: $10.12 Per Share 3/31/02: $9.99 Per Share Total Net Assets: $201.3 Million 30-day SEC Yield: 4.74% Tax Equivalent Yield: 8.38%(1) 12-Month Distribution Rate: 4.77% Average Maturity: 13.7 Years Duration to Estimated Avg. Life: 5.3 Years(2) Implied Duration: 4.2 Years(2) (1) For individuals in the 38.6% federal tax and 7.85% MN tax brackets. (2) See next page. PORTFOLIO STRUCTURE (% OF TOTAL NET ASSETS) [BAR CHART] Multifamily Mortgage Revenue 38.0 Hospital/Health Care Revenue 17.3 Single Family Mortgage Revenue 8.3 Other Revenue Bonds 8.1 Sectors less than 5.0% 18.1 Cash & Other Net Assets 10.2 14 - ------------------------------------------------------------------------- [LOGO] AVERAGE ANNUAL TOTAL RETURNS* SIT LEHMAN LIPPER MN TAX-FREE 5-YEAR MUNI. MN MUNI. BOND INCOME FUND BOND INDEX FUND AVG. ----------- ------------ ------------- 3 Month** 2.52% 4.12% 3.05% 6 Month** 3.47 4.72 n/a 1 Year 6.24 7.10 5.79 3 Year 4.44 6.54 4.99 5 Year 4.90 5.82 4.90 Inception 5.50 5.50 4.99 (12/1/93) CUMULATIVE TOTAL RETURNS* SIT LEHMAN LIPPER MN TAX-FREE 5-YEAR MUNI. MN MUNI. BOND INCOME FUND BOND INDEX FUND AVG. ----------- ------------ ------------- 1 Year 6.24% 7.10% 5.79% 3 Year 13.92 20.94 15.72 5 Year 27.01 32.67 27.01 Inception 58.39 58.36 51.84 (12/1/93) *AS OF 6/30/02. **NOT ANNUALIZED. 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 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] The sum of $10,000 invested at inception (12/1/93) and held until 6/30/02 would have grown to $15,839 in the Fund or $15,836 in the Lehman 5-Year Municipal Bond Index assuming reinvestment of all dividends and capital gains. QUALITY RATINGS (% OF TOTAL NET ASSETS) LOWER OF MOODY'S, S&P, FITCH OR DUFF & PHELPS RATINGS USED. [PIE CHART] A 20.1% ASSESSMENT OF AA 8.5% NON-RATED AAA 15.4% SECURITIES Other Assets and Liabilities 10.2% Not-Rated 36.4% AAA 4.4% Less Than BBB 0.6% AA 0.3 BBB 8.8% A 3.0 BBB 18.5 BB 9.3 B 0.9 ---------- Total 36.4% 15 [PHOTO] SIT BOND FUND QUARTER ENDED JUNE 30, 2002 ----------------------------------------------------------------------- MICHAEL C. BRILLEY, SENIOR PORTFOLIO MANAGER BRYCE A. DOTY, CFA, SENIOR PORTFOLIO MANAGER The Sit Bond Fund provided investors a +3.9% return for the three months ended June 30, 2002, compared to +2.7% for the Lipper Investment Grade Bond Fund universe average and +3.7% for the Lehman Aggregate Average Bond Index. For the period since its inception, the Fund ranked in the top 25% of its Lipper universe out of 91 funds.(1) The U.S. Treasury yield curve continued to steepen during the quarter as overall interest rates fell. The 2-year Treasury yield declined -0.93% as investors' expectations of near-term increases in the federal funds rate disappeared. The 30-year Treasury yield fell only -0.30%, as demand for longer maturity Treasuries was less robust than for shorter-term Treasuries. As of June 30, 2002, the 2-year and the 30-year Treasuries were yielding 2.79% and 5.51%, respectively. The U.S. Treasury sector was the best performing of the quarter as investors purchased high quality bonds in response to multiple cases of questionable and sometimes fraudulent corporate accounting practices. Investors' desire for quality was readily apparent in the worst performing sector, corporate bonds. While AAA corporates nearly matched the returns of the Treasury and Agency sectors, BBB rated corporates provided much lower returns, trailing AAA corporate returns by nearly 3.00%. The asset-backed and mortgage sectors trailed the Treasury sector modestly as their high credit quality was somewhat offset by increasing prepayments as interest rates moved lower. The Fund added to its holdings of agency high coupon seasoned pass-through mortgage securities to protect against rising interest rates, as the short effective duration of these securities provides relative price stability. We also purchased Treasury Inflation Protected Securities (TIPS) to take advantage of recent monthly spikes in inflation rates. These securities pay a fixed rate of interest and the principal increases at the monthly rate of the CPI. Looking ahead, we believe that the U.S. economy will continue the improvement we have seen so far this year, and that the majority of corporations are ethical and forthright. A stronger economy and increased confidence in corporate America will cause investors to seek non-Treasury securities in order to benefit from the historically high yield advantage of these sectors over U.S. Treasuries. We believe yields in the Treasury sector will increase faster than in non-Treasury sectors because we expect the Federal Reserve to raise the federal funds rate early next year. We expect to maintain the Funds duration moderately shorter than that of its benchmark as well as the "AAA" average credit quality. INVESTMENT OBJECTIVE AND STRATEGY The investment objective of the Fund is to maximize total return, consistent with preservation of capital. The Fund pursues this objective by investing in a diversified portfolio of fixed-income securities. The Fund will pursue its objective by investing in a diversified portfolio or 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 6/30/02: $9.92 Per Share 3/31/02: $9.68 Per Share Total Net Assets: $16.9 Million 30-day SEC Yield: 5.27% 12-Month Distribution Rate: 5.91% Average Maturity: 17.2 Years Effective Duration: 3.8 Years(2) (2) 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] Corporate Bonds & Notes 27.4 Mortgage Pass Through 23.2 Asset-Backed Securities 20.7 Collateralized Mortgage Obligations 9.4 Closed-End Mutual Funds 3.7 U.S. Treasury 3.6 Taxable Municipal 0.6 Cash & Other Net Assets 11.4 16 - ------------------------------------------------------------------------- [LOGO] AVERAGE ANNUAL TOTAL RETURNS* LIPPER INTER. SIT LEHMAN INVESTMENT BOND AGGREGATE GRADE BOND FUND BOND INDEX FUND AVG. ---- ---------- --------- 3 Month** 3.90% 3.69% 2.69% 6 Month** 3.97 3.79 n/a 1 Year 8.68 8.63 6.72 3 Year 7.27 8.11 6.79 5 Year 6.69 7.57 6.42 Inception 6.55 6.94 5.97 (12/1/93) CUMULATIVE TOTAL RETURNS* LIPPER INTER. SIT LEHMAN INVESTMENT BOND AGGREGATE GRADE BOND FUND BOND INDEX FUND AVG. ---- ---------- --------- 1 Year 8.68% 8.63% 6.72% 3 Year 23.44 26.34 21.80 5 Year 38.22 44.05 36.51 Inception 72.46 77.97 64.46 (12/1/93) *AS OF 6/30/02. **NOT ANNUALIZED. 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 ARE OBTAINED FROM LIPPER ANALYTICAL SERVICES, INC., A LARGE INDEPENDENT EVALUATOR OF MUTUAL FUNDS. - -------------------------------------------------------------------------------- (1)Lipper Analytical Services, Inc., a large independent evaluator of mutual funds, rankings reflect historical performance returns through 6/30/02. Sit Bond Fund rankings for the 3- and 5-year and since inception periods were 88th of 247 funds, 69th of 174 funds, and 20th of 91 funds, respectively. GROWTH OF $10,000 [PLOT POINTS CHART] The sum of $10,000 invested at inception (12/1/93) and held until 6/30/02 would have grown to $17,246 in the Fund or $17,797 in the Lehman Aggregate Bond Index assuming reinvestment of all dividends and capital gains. QUALITY RATINGS (% OF TOTAL NET ASSETS) LOWER OF MOODY'S OR S&P RATING USED. [PIE CHART] A 10.7% AA 1.1% AAA 29.0% U.S. Treasury 3.6% BBB 12.1% BB 1.0% Govt. Agency Backed Securities 31.1% Cash and other Assets and Liabilities 11.4% 17 - -------------------------------------------------------------------------------- Directors: Eugene C. Sit, CFA John E. Hulse Sidney L. Jones Donald W. Phillips William E. Frenzel Director Emeritus: Melvin C. Bahle Bond Funds Officers: Eugene C. Sit, CFA Chairman Peter L. Mitchelson, CFA Vice Chairman Roger J. Sit Executive Vice President Michael C. Brilley Senior Vice President Debra A. Sit, CFA Vice President - Investments Bryce A. Doty, CFA(1) Vice President - Investments Paul J. Jungquist, CFA(2) Vice President - Investments G. Todd Berkley Chief Operating Officer Michael P. Eckert Vice President - Institutional Client Group Michael J. Radmer Secretary Paul E. Rasmussen Vice President & Treasurer Carla J. Rose Vice President - Assistant Secretary & Assistant Treasurer Kelly K. Boston Assistant Secretary & Assistant Treasurer (1) Bond and U.S. Government Securities Funds only. (2) Money Market Fund and Minnesota Tax-Free Income Fund only. 18 [LOGO] ------------------------------------------------------------------------- A LOOK AT THE SIT MUTUAL FUNDS Sit Mutual Funds are 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 $7.1 billion for some of America's largest corporations, foundations and endowments. Sit Mutual Funds are comprised of twelve NO-LOAD funds. NO-LOAD means that Sit Mutual 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. Sit Mutual Funds offer: * Free telephone exchange * Dollar-cost averaging through an automatic investment plan * Electronic transfer for purchases and redemptions * Free checkwriting privileges on bond funds * Retirement accounts including IRAs and 401(k) plans SIT FAMILY OF FUNDS [GRAPH] 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 SMALL CAP GROWTH MINNESOTA TAX-FREE SCIENCE AND INCOME TECHNOLOGY GROWTH BOND DEVELOPING MARKETS GROWTH 19 This page has been left blank intentionally. 20 QUARTERLY REPORT BOND FUNDS Quarter Ended June 30, 2002 INVESTMENT ADVISER Sit Investment Associates, Inc. 90 South Seventh Street Suite 4600 Minneapolis, MN 55402 612-334-5888 (Metro Area) 800-332-5580 DISTRIBUTOR SIA Securities Corp. 90 South Seventh Street Suite 4600 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 PFPC Inc. P.O. Box 5166 Westboro, MA 01581-5166 AUDITORS KPMG LLP 90 South Seventh Street Suite 4200 Minneapolis, MN 55402 LEGAL COUNSEL Dorsey & Whitney LLP 50 South Sixth Street Suite 1500 Minneapolis, MN 55402 [LOGO] SIT INVESTMENT ASSOCIATES ------------------------- SIT MUTUAL FUNDS -----END PRIVACY-ENHANCED MESSAGE-----