-----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, JVRGEGmM4+6Jf7jTzz7uOBZLVmwnLzxKPOLfeYjQqJEHVkjZt2kIsz0pg3z+ou+L OD7qyY067lbwMK1ameHH1g== 0000897101-96-001032.txt : 19961202 0000897101-96-001032.hdr.sgml : 19961202 ACCESSION NUMBER: 0000897101-96-001032 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961126 SROS: NONE 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-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04033 FILM NUMBER: 96672743 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 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-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04032 FILM NUMBER: 96672744 BUSINESS ADDRESS: STREET 1: 4600 NORWEST CTR 90 S 7TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123323223 MAIL ADDRESS: 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 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-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04995 FILM NUMBER: 96672745 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-30D 1 BOND FUNDS SEMI-ANNUAL REPORT September 30, 1996 A FAMILY OF 100% NO-LOAD FUNDS Bond Fund Minnesota Tax-Free Income Fund Tax-Free Income Fund U.S. Government Securities Fund Money Market Fund [LOGO] SIT MUTUAL FUNDS A LOOK AT THE SIT MUTUAL FUNDS Sit Mutual Funds is managed by Sit Investment Associates, Inc. Sit Investment 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 currently manages more than $5.1 billion for some of America's largest corporations, foundations and endowments. Sit Mutual Funds is comprised of eleven 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 of the other features include: * Free telephone exchange * Dollar-cost averaging through automatic investment plan * Electronic transfer of funds for purchases and redemptions * Free check-writing privileges on bond funds * Retirement accounts including IRAs, Keoghs and 401(k) Plans OUR FAMILY OF FUNDS [CHART OMITTED] SIT MUTUAL FUNDS BOND FUNDS SEMI-ANNUAL REPORT TABLE OF CONTENTS PAGE Chairman's Letter.......................................... 2 Performance Review......................................... 4 Fund Reviews and Portfolios of Investments Bond Fund............................................ 6 Minnesota Tax-Free Income Fund....................... 10 Tax-Free Income Fund................................. 16 U.S. Government Securities Fund...................... 26 Money Market Fund.................................... 30 Notes to Portfolios of Investments......................... 35 Statements of Assets and Liabilities....................... 36 Statements of Operations................................... 37 Statements of Changes in Net Assets........................ 38 Notes to Financial Statements.............................. 40 Financial Highlights....................................... 43 This document must be preceded or accompanied by a Prospectus. SIT MUTUAL FUNDS CHAIRMAN'S LETTER - SEPTEMBER 30, 1996 [PHOTO-CHAIRMAN] Dear Fellow Shareholders: Domestic financial assets provided positive results during the six-month period ended September 30, 1996 amid mixed economic indicators and oscillating interest rates, generally subdued inflation and healthy corporate profit growth. ECONOMIC OVERVIEW The domestic economy slowed during the third quarter of 1996 to a +2.2% annualized rate of real GDP growth, down from the second quarter's hearty +4.7% expansion. Personal consumption expenditures, a major component of the nation's economy, grew at a +0.4% annual rate during the third quarter and slowed considerably from the second quarter's +3.4% rate. A contraction in government spending also contributed to the deceleration, as federal spending to compensate for the temporary government shutdown peaked during the second quarter. Contributing positively to third quarter growth, business inventories, a typically volatile component of GDP, ballooned by roughly $20 billion. Although the economy showed signs of softness during the third quarter, several indicators point toward a slight uptick in fourth quarter growth. Strong personal income gains and a continued low unemployment rate of 5.2% support the notion that consumer spending could rebound during the fourth quarter. Additionally, consumer confidence, despite drifting slightly lower in September, remains at high levels. Durable equipment expenditures also continue to trend higher on strength in the transportation and technology sectors. Overall, we believe fourth quarter growth should approximate +2.5%, resulting in a growth rate of roughly +2.7% for calendar 1996. With economic growth trending near moderate levels, concern over mounting inflationary pressures is minimal. Consumer inflation looks stable at +3.0%, according to the year-over-year change in the CPI, while producer price pressures, as shown by the PPI, are slightly less at +2.9%. Other indicators such as the CRB (commodity) Index, producer indices like the NAPM (producer) Price Component and decreased spot energy prices suggest modest price pressures. An area of concern for fixed income investors this year, however, has been potential wage pressures, particularly given exceptionally strong employment reports. Recent decreases in the employment cost index, however, seem to indicate a leveling-off in wage and benefit gains, although we will continue to monitor these levels closely. Price competition at the consumer level, particularly for non-durable goods like cereals and soda, appears sufficient to keep inflationary pressures at bay over the near term. Contrary to third quarter expectations, the Federal Reserve did not raise short-term interest rates in September. With recent data pointing to a deceleration in the third quarter, we believe the Fed will maintain its neutral stance when it reconvenes in mid-November. The Fed will be closely monitoring consumer and capital spending as well as wage levels as it considers any policy shifts in 1997. Although the U.S. dollar has risen in 1996 against the Japanese yen and the German mark, it remains stable when viewed against an average of G-10 currencies and should not impact the competitiveness of American industry. The European economies appear to be rebounding modestly, although European monetary authorities have expressed reluctance to ease short-term rates further. The Japanese recovery has also been sluggish; although further monetary ease is unlikely given deflationary pressures, already low short rates and generally weak demand. These factors suggest that exports will not likely provide a substantial boost to fourth quarter growth in the U.S.; however, the continued moderate growth and heavy foreign interest in U.S. Treasuries should provide support for the U.S. dollar. In terms of U.S. fiscal policy, November's elections have ensured divided government for at least the next two years, a period that will be critical in terms of addressing the issue of entitlement spending growth. Even though President Clinton won reelection, the Republican majority in Congress will continue to push for fiscal discipline, particularly in containing national health care costs given projections for Medicaid/Medicare insolvency by 2002. The 1996 fiscal year deficit declined to $107 billion, $57 billion less than that posted for fiscal year 1995. Key factors in the deficit improvement were economic strength, higher tax receipts and lower defense spending. However, unless they are soon addressed, entitlement spending mandates will likely increase the deficit in the years ahead. STRATEGY SUMMARY Data released in October and early November reflected slower economic growth and stable inflation, fueling a bond market rally and further supporting the Federal Reserve's decision not to increase interest rates at their September meeting. The 30-year Treasury yield dropped to 6.65% on October 31st and broke through the narrow 6.75% to 7.25% range in which it had been trading since early April. Whether this rally is sustainable will be determined by key future economic releases related to consumer spending and inflation. EMPLOYMENT COST CONCERNS ABATING Employment Costs: Under Control Year-to-year percentage change; quarterly data [PLOT POINTS OMITTED] SOURCE: BUREAU OF LABOR STATISTICS Source: The Wall Street Journal, October 30, 1996 Given the current economic climate of moderating growth and stable inflation and the status quo results in the elections, we expect no changes in monetary policy over the near term. Our current interest rate forecast calls for bond yields to remain fairly stable within a relatively narrow, but slightly lower, trading range over the next year. This forecast is supported by historical data which shows that since 1920, on average, percentage price moves in the bond market in the year following a Presidential election have been quite modest, +0.87% when a Democrat wins versus -2.03% when a Republican wins. In addition, over the last 50 years, the bond market has produced stronger returns when government was divided than when unified, primarily because regulatory growth nearly grinds to a halt. The election results, then, should be fairly positive for the bond market over the next two years. Duration remains the key to sector performance, as it has been for much of the year. With the bond market rally in October, all taxable bond sectors have now produced positive returns on a year-to-date basis. Despite lagging the recent rally, the mortgage sector is now the top performing sector for the year, outperforming the Lehman Aggregate Bond Index by over 150 basis points. Given our expectations for relatively stable interest rates, our taxable bond investment strategies continue to emphasize securities that provide high levels of income and relative principal stability, and portfolios continue to be positioned with durations near their benchmarks. Long-term municipal bonds have not kept pace with the rally in the taxable bond market in recent weeks. Long municipal bond yields ended October at approximately 88% of long Treasury bond yields compared with 85% at the beginning of the month, in part due to higher relative supply. Municipal bonds have lost a good part of the positive incremental return that they achieved earlier in the year and now, on a year-to-date basis, are only slightly ahead of taxable bonds. As we expect bond yields to remain within a narrow trading range in the months ahead, we believe that municipal bonds will return to more normal valuation levels relative to taxable bonds, particularly as investors seek to reinvest proceeds from heavy seasonal coupon and principal payments over the next few months. We continue to look for opportunities to reinvest in higher yielding opportunities with greater call protection. The Sit Mutual Fund fixed income funds remain focused on providing attractive returns consistent with their dual objectives of high income and principal stability. We appreciate your continued interest and support as shareholders. With best wishes, /s/ Eugene C. Sit Eugene C. Sit, CFA Chairman and Chief Investment Officer SIT MUTUAL FUNDS SEPTEMBER 30, 1996 PERFORMANCE SUMMARY - BOND FUNDS BOND MARKET REVIEW The Federal Reserve Board made no changes to short-term interest rates during the six month period as the economy posted mixed signs of strength. 3-month Treasury bill yields increased from 5.14% on March 31, 1996 to a high of 5.36%, in anticipation of a possible tightening move by the Federal Reserve, before decreasing to 5.06% on September 30, 1996 as these expectations diminished. Longer term interest rates rose, however. The yield on the 30-year Treasury increased approximately 25 basis points to 6.92% on September 30th while intermediate maturity Treasury yields increased by approximately 35 basis points during the period. Conflicting economic releases have kept bond yields in their most narrow trading range in almost seven years, with the 30-year Treasury bond yielding between 6.75% and 7.25% since early April. Within this narrow range, the bond market has shown a great deal of volatility. September marked the seventh time this year long bond yields rose over 7.0%, as data supporting a strengthening economy once again took center stage. Within the taxable bond market, the more defensive asset backed and mortgage pass-through sectors provided the best returns during this period of rising bond yields. While corporate bond yields rose less than Treasury yields, corporates were the worst performing sector due to their relatively longer durations. Performance in the Sit taxable bond funds benefited from their focus on securities within those sectors that provided higher levels of income. The municipal market experienced greater price stability during the period, as reflected in the yield on the Bond Buyer 40-Bond Revenue Index which decreased slightly from 5.96% on March 31, 1996, to 5.89% on September 30, 1996, and remained in a narrower range between 5.80% and 6.22%. Long term municipal yields ended the period at approximately 85% of long Treasury yields, compared to 89% at the beginning of the period. Municipal bonds have returned to their March 1995 relative valuation level, prior to any talk of tax reform and this improvement in valuation is a primary reason why municipals have continued to outperform taxable bonds on a year-to-date basis. Among revenue bonds, the hospital sector earned the highest return, and was helped by its income advantage as well as from narrowing incremental yield spreads.
TOTAL RETURN - CALENDAR YEAR YIELD YTD AS OF DISTRIBUTION 1988 1989 1990 1991 1992 1993 1994 1995 1996 9/30/96 RATE(2) SIT BOND FUND ---- ---- ---- ---- ---- 0.34%(1) -1.31% 16.83% 1.07% 6.61% 6.61% SIT MINNESOTATAX-FREE INCOME FUND ---- ---- ---- ---- ---- 1.60(1) 0.63 11.90 3.83 5.64(3) 5.67 (NASDAQ Symbol: SMTFX) SIT TAX-FREE INCOME FUND 2.19%(1) 8.38% 7.29% 9.25% 7.71% 10.42 -0.63 12.86 3.30 5.65(4) 5.67 (NASDAQ Symbol: SNTIX) SIT U.S. GOV'T. SECURITIES FUND (NASDAQ Symbol: SNGVX) 7.86 11.04 10.97 12.87 5.43 7.34 1.77 11.50 2.80 6.20 6.36 SIT MONEY MARKET FUND ---- ---- ---- ---- ---- 0.46(1) 3.84 5.58 3.79 5.06(6) (NASDAQ Symbol: SNIXX) LEHMAN AGGREGATE BOND INDEX 7.89 14.53 8.96 16.00 7.40 9.75/0.54(1) -2.92 18.47 0.61 LEHMAN 5-YEAR MUNICIPAL BOND INDEX 6.39/0.75(1) 9.07 7.70 11.41 7.62 8.73 -1.28 11.65 2.20 LEHMAN INTER. GOVERNMENT BOND INDEX 6.40 12.68 9.56 14.11 6.93 8.17 -1.75 14.41 1.71 3-MONTH U.S. TREASURY BILL 7.10 8.73 8.04 5.72 3.56 3.13 4.47 5.98 3.94 SIT INVESTMENT RESERVE FUND 6.65 8.53 7.59 6.14 3.81 2.34(5) (Inception date 1/25/85. Converted to SIT Money Market Fund on 11/1/93.)
TOTAL RETURN AVERAGE ANNUAL TOTAL RETURNS FOR TOTAL RETURN SIX MONTHS THE PERIODS ENDED SEPTEMBER 30, 1996 QUARTER ENDED ENDED SINCE INCEPTION 9/30/96 9/30/96 1 YEAR 3 YEARS 5 YEARS INCEPTION SIT BOND FUND 12/01/93 1.97% 2.45% 4.99% ---- ---- 5.68% SIT MINNESOTA TAX-FREE INCOME FUND 12/01/93 2.56 3.81 7.08 ---- ---- 6.27 SIT TAX-FREE INCOME FUND 09/29/88 2.27 3.72 6.78 5.49% 7.12% 7.53 SIT U.S. GOV'T. SECURITIES FUND 06/02/87 1.69 2.36 5.83 5.70 6.54 8.27 SIT MONEY MARKET FUND 11/01/93 1.27 2.51 5.17 ---- ---- 4.69 LEHMAN AGGREGATE BOND INDEX 1.85 2.43 4.90 5.01 7.46 5.49 LEHMAN 5-YEAR MUNICIPAL BOND INDEX 1.65 2.19 4.30 4.46 6.39 7.15 LEHMAN INTER. GOVERNMENT BOND INDEX 1.72 2.40 5.10 4.62 6.75 8.10 3-MONTH U.S. TREASURY BILL 1.32 2.63 5.35 5.01 4.42 5.06
(1) Period from Fund inception through calendar year-end. (2) Based on the last 12 monthly distributions of net investment income and average NAV as of 9/30/96. (3) For Minnesota residents in the 31%, 36% and 39.6% federal tax brackets, the double exempt tax equivalent yields are 8.93%, 9.63% and 10.20%, respectively (Assumes the maximum Minnesota tax bracket of 8.5%). (4) For individuals in the 31%, 36%, and 39.6% federal tax brackets, the federal tax equivalent yields are 8.19%, 8.83% and 9.35%, respectively (Income subject to state tax, if any). (5) Period January 1, 1993, through October 31, 1993, at which time the Fund converted to the Sit Money Market Fund. (6) Figure represents 7-day compound effective yield. The 7-day simple yield as of 9/30/96 was 4.94%. PLEASE REMEMBER THAT PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS AND IS ONLY ONE OF THE FACTORS TO CONSIDER IN CHOOSING A FUND. AS WITH ALL INVESTMENTS, THE SHARE PRICE AND RETURN MAY VARY AND YOU MAY HAVE A GAIN OR LOSS AT THE TIME OF SALE. SIT BOND FUND REVIEW SEPTEMBER 30, 1996 [PHOTO] MICHAEL C. BRILLEY SENIOR PORTFOLIO MANAGER BRYCE A. DOTY, CFA PORTFOLIO MANAGER The Sit Bond Fund provided investors a +2.45% return for the six months ended September 30, 1996 and a +2.43% return for the Lehman Aggregate Bond Index. The Fund's cumulative return since inception of +16.93% ranks it in the top 15% of the 103 funds in the Lipper Intermediate Investment Grade Bond Fund universe. The yield on the 10-year Treasury note ended the past six months 0.38% higher at a yield of 6.70%. For most of the period, the yield remained in a narrow range of 6.50% to 7.00%. The Fund maintained its effective duration near that of the 4.8 year duration of the Lehman Aggregate Bond Index over the past six months. The Fund's performance benefited from the high level of interest income that it earns as well as from the relative price stability of its mortgage pass-through holdings. The Fund's longest duration holdings are its Treasury securities which provided the lowest returns for the past six months due to their greater price sensitivity to the rising interest rate trend. The Fund's most significant sector shifts involved selling mortgage pass-through securities and purchasing less defensive securities primarily in the Treasury sector. Other activity was focused within the asset-backed sector. The fund improved its average credit quality by selling its holdings of AA-rated securities backed by manufactured housing loans and reinvesting the proceeds in insured AAA-rated issues backed by home equity loans at comparable yield levels. Conflicting economic data have caused uncertainty regarding the economy's current and projected rate of growth. Consequently, interest rates have moved within a narrow range for the past six months. We expect stable to declining interest rates over the next six months as the economy's growth slows. The Fund will continue to invest in securities that offer attractive total return potential while maintaining its high 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'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 9/30/96: $9.74 Per Share 3/31/96: $9.83 Per Share Total Net Assets: $5.40 Million 30-Day SEC Yield: 6.61% 12-Month Distribution Rate: 6.61% Average Maturity: 16.7 Years Effective Duration: 4.8 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] Agency Mortgage 30.1 Pass-Through Securities Asset-Backed Securities 18.7 Government & Agency 17.2 Corporate Bonds & Notes 14.4 Collateralized Mortgage 12.0 Obligations Miscellaneous 5.1 Other Assets & Liabilities 2.5
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 1.97% 1.78% 1.85% 1.97% 1.78% 1.85% (unannualized) 1 Year 4.99 4.30 4.90 4.99 4.30 4.90 Inception 5.68 4.66 5.49 16.93 13.79 16.35 (12/1/93)
* As of 9/30/96 PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF FUTURE PERFORMANCE. 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 POINT CHART OMITTED] The sum of $10,000 invested at inception (12/1/93) and held until 9/30/96 would have grown to $11,693 in the Fund or $11,635 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 USED. [PIE CHART] Agency Mortgage-Backed Securities & CMO's 42.1% Government & Agency 17.2% AAA 18.7% A 10.1% BBB 9.4% Other Assets & Liabilities 2.5% SIT BOND FUND PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1996 (UNAUDITED) QUANTITY NAME OF ISSUER MARKET VALUE(1) U.S. GOVERNMENT SECURITIES (17.2%) (2) 450,000 U.S. Treasury Note, 8.25%, 7/15/98 $466,173 250,000 U.S. Treasury Bond, 7.25%, 5/15/04 258,825 5 U.S. 30-yr. Treasury Put Option, Expires 11/16/96 5,703 U.S. Treasury Coupon Strip: 150,000 6.93% Effective Yield on Purchase Date, 11/15/04 87,276 150,000 7.17% Effective Yield on Purchase Date, 5/15/09 62,787 250,000 U.S. Treasury Principal Strip, 7.14% Effective Yield on Purchase Date, 2/15/19 50,813 Total U.S. government securities 931,577 (cost: $930,560) ASSET-BACKED SECURITIES (18.7%) 250,000 Advanta Mortgage Loan Trust, 7.07%, 3/25/27 234,947 75,000 Cityscape Home Equity Loan Trust, 1996-3 A8, 7.65%, 9/25/25 74,397 ContiMortgage Home Equity Loan Trust: 249,998 1996-1 A7, 7.00%, 3/15/27 235,711 100,000 1996-3 A7, 8.04%, 9/15/27 100,892 100,000 EQCC Home Equity Loan Trust, Series 1996-1, 6.93%, 3/15/27 94,059 100,000 EquiVantage, 1996-3 A3, 7.70%, 9/25/27 99,501 75,000 Green Tree Corp., Series 1995-5, 7.25%, 9/15/26 72,989 100,000 Security Pacific Corp., Series 1995-1, 7.65%, 4/10/20 96,192 Total asset-backed securities (cost: $1,032,324) 1,008,688 CORPORATE BONDS (14.4%) 250,000 Ford Motor Credit Corp., 9.14%, 12/30/14 270,665 275,000 Franchise Finance Corp. Medium Term Note, 7.02%, 2/20/03 262,281 250,000 Nationwide Health Properties Medium Term Note, 6.93%, 12/18/01 $243,437 Total corporate bonds & notes (cost: $793,730) 776,383 MORTGAGE PASS-THROUGH SECURITIES (3)(30.1%) Federal Home Loan Mortgage Corp.: 54,283 10.25%, 9/1/09 58,599 38,059 10.75%, 3/1/11 41,549 Government National Mortgage Association: 21,758 8.75%, 11/15/01 22,811 12,651 9.00%, 8/15/11 13,218 99,494 9.00%, 12/15/16 103,901 74,041 9.00%, 11/15/19 77,319 46,943 9.25%, 5/15/01 49,571 27,507 9.50%, 3/15/03 29,214 186,010 9.50%, 11/15/05 196,876 82,954 9.50%, 2/15/11 87,375 5,929 9.75%, 8/15/02 6,299 57,849 10.00%, 8/15/02 61,543 45,210 10.25%, 4/15/01 48,048 47,920 10.25%, 4/15/01 50,930 14,108 10.25%, 4/15/12 15,074 13,075 10.25%, 5/15/12 13,966 18,075 10.25%, 5/15/12 19,332 109,440 10.25%, 5/15/12 116,965 14,057 10.25%, 6/15/12 15,019 18,208 10.25%, 6/15/12 19,476 45,805 10.25%, 7/15/12 48,955 19,198 10.25%, 7/15/12 20,540 82,879 10.25%, 8/15/12 88,545 65,029 10.25%, 6/15/13 69,620 58,623 10.50%, 7/15/00 62,336 33,359 10.75%, 8/15/98 34,370 73,151 10.75%, 1/15/01 77,814 36,258 11.25%, 10/15/00 38,565 96,218 11.75%, 7/15/00 102,400 32,005 11.75%, 7/15/01 34,306 Total mortgage pass-through securities (cost: $1,630,418) 1,624,536 COLLATERALIZED MORTGAGE OBLIGATIONS (12.0%) 250,000 Federal National Mortgage Association, 1994-38, 6.65%, 12/25/23 $ 235,687 Vendee Mortgage Trust: 30,609 1992-1 2B, 7.75%, 9/15/10 30,852 75,000 1992-2 2D, 7.00%, 9/15/15 74,171 100,000 1994-1 2E, 6.50%, 1/15/17 93,481 75,000 1996-2 1D, 6.75%, 11/15/15 72,150 150,000 1996-2 1E, 6.75%, 5/15/20 140,888 Total collateralized mortgage obligations (cost: $643,664) 647,229 CLOSED-END INVESTMENT COMPANIES (5.1%) 2,400 American Strategic Income Portfolio 25,500 11,200 American Strategic Income Portfolio II 120,400 12,500 American Strategic Income Portfolio III 129,687 Total closed-end investment companies (cost: $274,616) 275,587 SHORT-TERM SECURITIES (1.5%) 82,686 Cash Management Fund, 5.28% 82,686 (cost: $82,686) Total investments in securities (cost: $5,387,998) (6) $5,346,686 See accompanying notes to portfolios of investments on page 35. SIT MINNESOTA TAX-FREE INCOME FUND REVIEW SEPTEMBER 30, 1996 [PHOTO] MICHAEL C. BRILLEY SENIOR PORTFOLIO MANAGER DEBRA A. SIT, CFA PORTFOLIO MANAGER Long term municipal bond yields decreased slightly during the six month period, as reflected in the yield of the Bond Buyer 40-Bond Revenue Index which decreased from 5.96% to 5.89% and remained within a narrow range between 6.22% and 5.80%. During the period, the Fund's per share net asset value ranged between $9.98 and $10.18. The Fund provided shareholders a six month return of +3.81%, compared to +2.19% for the Lehman 5-Year Municipal Index. The Fund's performance ranked #4 of 46 Minnesota funds tracked by Lipper Analytical Services for the most recent quarter, and #1 for the 12-month period (of 46 funds) and period since inception (of 27 funds). The Fund's ability to provide high income and stability of principal is highlighted in its attractive longer term returns. The Fund's 30-day SEC yield decreased slightly from 5.72% to 5.64% while its 12-month distribution rate increased from 5.60% to 5.67% over the semi-annual period. The Fund's implied duration, which we began reporting in June, increased from 3.6 years to 3.9 years during the most recent quarter as the Fund has continued to focus on purchasing securities with greater call protection. The most significant shifts in the Fund's portfolio structure included decreases in single family housing, health care, and in industrial revenue. Increases occurred in the education sector and other revenue bonds. New purchases in the Fund focused primarily on securities rated "A" or "BBB." Thus Fund holdings in securities rated A or better by the major ratings agencies remained relatively constant while holdings rated BBB increased from 6.7% to 8.7%. The Fund's performance continues to benefit from security selection, particularly within the housing and health care sectors. The relative valuation of municipal bonds has returned to more normal levels as the tax-exempt market has recovered from the negative impact of last year's threat of a flat tax. In the months ahead, we expect that municipal bond yields will continue to follow the trading range of taxable yields as we continue to see mixed indications on the strength of the economy. Within this environment, we intend to reduce lower yielding holdings and find higher yielding opportunities with greater call protection. We remain focused on finding investments that help meet the Fund's dual objectives of high income and stability of principal. 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 9/30/96: $10.18 Per Share 3/31/96: $10.09 Per Share Total Net Assets: $70.91 Million 30-Day SEC Yield: 5.64% Tax Equivalent Yield: 10.20% (1) 12-Month Distribution Rate: 5.67% Average Maturity: 18.5 Years Duration to Estimated Avg. Life: 6.9 Years (2) Implied Duration: 3.9 Years (2) (1) For individuals in the 39.6% Federal and 8.5% MN tax brackets. (2) See page 11. PORTFOLIO STRUCTURE (% of total net assets) [BAR CHART] Multifamily Mortgage Revenue 36.3 Single Family Mortgage Revenue 17.3 Hospital/Health Care Revenue 15.7 Industrial Revenue/Pollution Control 11.9 Other Revenue Bonds 9.8 Education/Student Loan 2.2 General Obligation 1.6 Municipal Lease Rental 1.1 Other Assets & Liabilities 4.1
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS* MN Tax-Free Lipper Lehman MN Tax-Free Lipper Lehman Income MN Muni. 5-Year Muni. Income MN Muni. 5- Year Muni. Fund Bond Fund Avg. Bond Index Fund Bond Fund Avg. Bond Index 3 Months 2.56% 2.11% 1.65% 2.56% 2.11% 1.65% (unannualized) 1 Year 7.08 5.21 4.30 7.08 5.21 4.30 Inception 6.27 4.13 4.83 18.79 12.17 14.28 (12/1/93)
* As of 9/30/96 PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF FUTURE PERFORMANCE. 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 The sum of $10,000 invested at inception (12/1/93) and held until 9/30/96 would have grown to $11,879 in the Fund or $11,428 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] AA 20.5% AAA 20.6% Other Assets % Liabilities 4.1% Not Rated 35.7% BBB 8.7% A 10.4% ADVISOR'S ASSESSMENT OF NOT-RATED SECURITIES AA 0.9% A 1.5 BBB 25.5 BB 6.3 B 1.5 Total 35.7%
SIT MINNESOTA TAX-FREE INCOME FUND PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1996 (UNAUDITED) QUANTITY NAME OF ISSUER MARKET VALUE(1) MUNICIPAL BONDS (95.9%) (2) EDUCATION/STUDENT LOAN (2.2%) Minnesota Higher Education Fac. Auth. Rev. Series 1996-4I (Hamline Univ.): 1,000,000 6.00%, 10/1/12 $1,000,740 585,000 6.00%, 10/1/16 578,957 1,579,697 GENERAL OBLIGATION (1.6%) 600,000 Carver Co. Hsg. & Redev. Auth. Hsg. & Dev. Gross Rev. Ltd.Tax G.O. (Chanhassen Apts. Proj.), 7.00%, 1/1/25 612,558 500,000 Goodhue (City of) G.O. Gas Utility Series 1996, 6.75%, 1/1/26 508,690 1,121,248 HOSPITAL/HEALTH CARE (15.7%) 500,000 Brooklyn Center Hlth. Care Fac. Rev. Series 1993 (Maranatha Proj.), 7.50%, 12/1/10 523,280 215,000 Fergus Falls Hlth. Care Fac. Auth. Rev. Refunding Series 1993A (Lake Region Hosp. Corp. Proj.), 6.25%, 9/1/04 217,662 650,000 Fergus Falls Hlth. Care Fac. Auth. Series 1995 (LRHC Long-Term Care Fac. Proj.), 6.40%,12/1/15 654,206 1,540,000 Hibbing Hlth. Care Facs. Rev. Series 1995A (St. Francis Hlth. Svcs. Proj.), 7.35%, 11/1/15 1,556,124 1,685,000 Maplewood Hlth. Care Fac. Rev. (VOA Care Ctrs. Proj.), 7.375%, 10/1/12 1,763,572 1,000,000 Minneapolis Hlth. Care Fac. Rev. Series 1993 (St. Olaf Res. Proj.), 7.00%,10/1/18 1,007,490 New Ulm Hlth. Care Fac. Rev. (Highland Manor Proj.): 1,100,000 Series 1994, 7.25%, 6/1/14 1,132,395 570,000 Series 1995A, 7.625%, 6/1/15 581,138 180,000 Puerto Rico Industrial, Tourist, Educ., Med. & Env. Ctrl. Fac. Fin. Auth. Hosp. Rev. 1994 Series A (Ryder Mem. Hosp. Proj.), 5.75%, 5/1/99 182,531 Red Wing Hlth. Care Ctr. Fac. Rev. Refunding (River Region Obligated Group): 125,000 Series 1993A, 6.20%, 9/1/05 129,430 130,000 Series 1993A, 6.30%, 9/1/06 134,313 200,000 Series 1993B, 6.20%, 9/1/05 207,088 Sherburne Co. Nursing Home Fac. Rev. Series 1994 (Guardian Angels Care Ctr. Proj.): 75,000 7.30%, 6/1/07 77,896 80,000 7.35%, 6/1/08 83,083 90,000 7.40%, 6/1/09 93,735 555,000 7.50%, 6/1/14 576,268 140,000 7.75%, 6/1/15 146,747 150,000 7.75%, 6/1/16 157,500 95,000 St. Paul Hsg. & Redev. Auth. Comm. Dev. Rev. Refunding Series 1992 (Beverly Enterprises Proj.), 7.75%, 11/1/02 97,579 960,000 St. Paul Hsg. & Redev. Auth. Nursing Home Dev. Rev. Refunding Series 1996C (Franciscan Hlth. Cmmty. Proj., St. Mary's Home), 7.00%, 7/1/21 939,005 820,000 Wadena Co. Hlth. Care Fac. Rev. Series 1994B, 7.45%, 9/1/15 856,310 11,117,352 INDUSTRIAL /POLLUTION CONTROL (11.9%) 500,000 Anoka Industrial Dev. Rev. Series 1994 (Lund Industries Inc. Proj.), 6.50%, 9/1/04 (4) 514,340 Cloquet Pollution Control Rev. (Potlach Corp. Proj.): 110,000 Series 1978, 6.50%, 6/1/08 110,288 635,000 Series 1979, 6.75%, 6/1/09 636,746 1,055,000 Duluth Commercial Dev. Rev. Refunding Series 1995A (Radisson Hotel Proj.), 7.00%, 12/1/00 1,050,506 MN Agricultural & Econ. Dev. Board Small Business Dev. Ln. Prgm. Rev.: 390,000 Series 1989A Lot 1, 8.25%, 8/1/09 (4) 399,344 105,000 Series 1995A Lot 1, 6.40%, 8/1/04 (4) 102,779 1,000,000 Series 1990B Lot1(May Printing Co.), 8.375%, 8/1/10 (4) 1,052,040 3,155,000 Plymouth Rev. Refunding Series 1992 (Carlson Ctr. Proj.) (LOC First Bank, N.A.), 7.00%, 4/1/12 3,302,970 200,000 Richfield Cmty. Dev. Rev. Refunding 1994 (Richfield Shoppes Proj.), 8.375% 10/1/05 215,332 1,105,000 St. Paul Port Authority Hotel Facility Senior Rev. Series 1996A (Radisson Kellogg Project), 7.00%, 8/1/01 1,091,276 8,475,621 MULTIFAMILY MORTGAGE (36.3%) Austin Hsg. & Redev. Auth. Governmental Hsg. Gross Rev. Series 1995A (Courtyard Res. Proj.): 220,000 7.00%, 1/1/15 220,986 500,000 7.25%, 1/1/26 500,300 Burnsville Multifamily Hsg. Rev. Refunding: 425,000 Series 1991 (Atrium Proj.) (Trygg-Hansa insured), 7.20%, 5/1/11 442,557 960,000 Series 1994 (Bridgeway Apts. Proj.), 7.25%, 2/1/14 982,992 405,000 Chisago City Health Fac. Rev. Refunding Series 1995A (Pleasant Heights Proj.), 7.30%, 7/1/18 409,534 Dakota Cnty. Hsg. & Redev. Auth. Multifamily Hsg. Rev. Refunding (Walnut Trails Apts. Proj.): 1,700,000 Series 1995A (GNMA collateralized), 7.90%, 1/20/31 (4) 1,907,009 270,000 Series 1995C Subordinate, 9.00%, 1/20/15 (4) 269,457 Eden Prairie Multifamily Hsg. Rev. Refunding : 60,000 Series 1990A (Welsh Parkway Apts. Ltd. Proj.)(FHA insured), 8.00%, 7/1/26 64,690 700,000 Series 1991 (Windslope Apts. Proj.)(Section 8), 7.00%, 11/1/06 747,278 1,500,000 Series 1991 (Windslope Apts. Proj.)(Section 8), 7.10%, 11/1/17 1,570,245 1,505,000 Eagan Multifamily Rental Hsg. Refunding Rev. Series 1996 (Wescott Apts. Proj.) (FHA insured), 6.00%, 12/1/27 1,508,492 Hopkins Elderly Hsg. Rev. Refunding (St. Therese Southwest Proj.): 1,600,000 Series 1994A (Asset Gty. insured), 6.25%, 3/1/14 1,627,216 360,000 Series 1994B, 9.00%, 11/1/19 381,233 1,015,000 Hopkins Hsg. Facs. Rev. Refunding Series 1995 (Augustana Chapel View Homes Proj.), 7.00%, 12/1/15 1,003,277 580,000 Hopkins Subordinate Multifamily Hsg. Rev. Refunding Series 1996C (Auburn Apts. Proj.), 8.00%, 6/20/31 586,038 450,000 Hopkins Multifamily Hsg. Rev. Series 1996 (Hopkins Renaissance Proj.), 6.25%, 4/1/15 460,589 500,000 Hutchinson Hsg. Facs. Rev. Series 1994 (Prince of Peace Proj.), 7.375%, 10/1/12 516,895 565,000 Minneapolis Multifamily Hsg. Rev. Series 1994 (Findley Place Townhomes Proj) (Section 8), 7.00%, 12/1/16 (4) 592,572 75,000 Minneapolis Multifamily Rev. Series 1991 (Trinity Hsg. Proj.) (Section 8), 7.875%, 2/1/06 76,955 350,000 Minneapolis/ St. Paul Hsg. Fin. Board Multifamily Rev. Series 1988 (Riverside Place Proj.), (FHA insured) (GNMA collateralized), 8.20%, 12/20/18 (4) 368,442 MN HFA Multifamily Hsg. Dev. Rev.: 45,000 Series 1977, 6.25%, 2/1/08 45,516 140,000 Series 1977, 6.375%, 2/1/20 141,558 25,000 Series 1988A, 7.70%, 8/1/08 26,112 135,000 MN HFA Rental Hsg. Rev. Refunding Series 1993E, 6.00%, 2/1/14 136,184 Minnetonka Hsg. Fac. Rev. Series 1994 (Beacon Hill Housing Proj.): 890,000 7.00%, 6/1/04 914,270 1,000,000 7.50%, 6/1/14 1,036,690 525,000 Minnetonka Multifamily Hsg. Rev. Refunding Subordinate Series 1994C (Brier Creek Proj.), 8.00%, 12/20/16 551,061 500,000 Monticello Senior Hsg. Rev. Series 1995 (Mississippi Shores Proj.), 7.25%, 7/1/16 503,880 385,000 Mora Multifamily Rev. Refunding Hsg. Alternatives Partnership Series 1995, 6.50%, 6/1/02 386,040 750,000 Plymouth Multifamily Hsg. Rev. Refunding Series 1996A (Fox Forest Apts. Proj.) (GNMA collateralized), 8.05%, 6/20/31 864,300 2,500,000 Puerto Rico Housing Finance Corp. Rev. Multifamily Mtg. Portfolio Series 1990 A-I, 7.50%, 10/1/15 2,649,400 325,000 Sandstone Econ. Dev. Auth. Hsg. & Dev. Rev. Series 1994A (Family Apts. Proj.), 8.00%, 1/1/12 339,732 1,000,000 Spring Lake Park Sr. Hsg. Rev. Series 1996 (Noah's Ark Affordable Hsg. Inc.), 7.25%, 9/1/16 1,002,290 650,000 St. Louis Park Multifamily Hsg. Rev. Refunding Series 1995 (Knollwood Cmty. Hsg. Proj.) (FHA insured), 6.15%, 12/1/16 656,208 500,000 St. Paul Hsg. & Redev. Auth. Multifamily Hsg. Refunding Series 1992 (Point of St. Paul Proj.) (FNMA backed), 6.60%, 10/1/12 519,810 200,000 St. Paul Hsg. & Redev. Auth. Multifamily Hsg. Refunding Series 1995 (Sun Cliffe Apts. Proj.) (GNMA collateralized), 5.875%, 7/1/15 200,878 440,000 St. Paul Port Auth. Commercial Dev. Rev. Refunding Series 1990-1 (Fort Rd. Med./ Irvine Pk. Proj.) (Asset Gty. insured), 7.50%, 9/1/02 468,833 1,055,000 Washington Co. Hsg. & Redev. Auth. Multifamily Hsg. Rev. Refunding Series 1994 (White Bear Lake Transitional Hsg. Proj.), 6.625%, 8/1/24 1,094,457 25,773,976 MUNICIPAL LEASE RENTAL (1.1%) 585,000 Burnsville Solid Waste Rev. Series 1990 (Freeway Transfer Inc. Proj.), 9.00%, 4/1/10 (4) 648,086 100,000 Rice Co. Certificates of Participation 1996A, 5.85%, 12/1/14 99,526 747,612 SINGLE FAMILY MORTGAGE (17.3%) 656,589 Brooklyn Center/Columbia Heights/Moorhead/Robbinsdale Econ. Dev. Auth. Residual Interest Rev. Series 1992B (FNMA backed), 7.15%, 11/1/14 674,133 Dakota County Hsg. & Redev. Auth. Single Family Mtg. Rev.: 1,000,000 Series 1994A (FNMA backed), 6.70%, 10/1/09 (4) 1,052,360 400,000 Series 1995 (FNMA & GNMA backed), 6.25%, 10/1/09 (4) 411,476 795,000 Dakota/Wash./Stearns Cos. Hsg. & Redev. Auth. Single Family Rev. Refunding Series 1994A (FNMA backed), 6.50%, 9/1/10 (4) 825,552 Minneapolis Redev. Mtg. Rev. Series 1987A (Riverplace Proj.) (LOC Bk. of Tokyo): 210,000 7.00%, 1/1/07 216,800 500,000 7.10%, 1/1/20 514,485 2,100,000 Minneapolis Residual Interest Mtg. Rev. Series 1995 Convertible Capital Appreciation Bonds, 7.00% Effective Yield on Purchase Date, 10/1/12 712,194 35,000 Minneapolis/ St. Paul Hsg. Fin. Bd. Single Family Mtg. Rev. Series 1989A (GNMA backed), 7.65%, 12/1/00 (4) 36,561 MN HFA Single Family Mtg. Rev.: 120,000 Series 1988D, 8.25%, 8/1/20 (4) 126,078 15,000 Series 1989B, 7.05%, 1/1/03 15,871 55,000 Series 1989B, 7.05%, 7/1/03 58,193 20,000 Series 1990A, 7.95%, 7/1/22 (4) 21,140 290,000 Series 1990C, 7.70%, 7/1/14 306,342 240,000 Series 1991A, 7.05%, 7/1/22 (4) 249,278 600,000 Series 1991A, 7.45%, 7/1/22 (4) 628,506 1,735,000 Series 1992B-1, 6.75%, 1/1/26 (4) 1,786,668 55,000 Series 1992G, 6.10%, 1/1/11 55,538 1,000,000 Series 1994F, 6.30%, 7/1/25 1,023,800 95,000 Series 1994K, 5.90%, 1/1/07 96,042 345,000 Series 1994L, 6.70%, 7/1/20 (4) 355,740 655,000 Minneapolis Single Family Mtg. Rev. Series 1995V (FNMA & GNMA backed), 6.25%, 4/1/22 666,463 3,800,000 Moorhead Single Family Mtg. Rev. Refunding Series 1992B Zero Coupon, 7.00% Effective Yield on Purchase Date, 8/1/11 1,382,478 670,000 St. Paul Hsg. & Redev. Auth. Single Family Mtg. Rev. Refunding Series 1995 (FNMA backed), 6.125%, 3/1/17 688,713 966,042 St. Paul Residual Interest Rev. Series 1995 Convertible Capital Appreciation Bonds, Zero Coupon, 7.23% Effective Yield on Purchase Date, 9/1/11 337,719 12,242,130 OTHER REVENUE BONDS (9.8%) 1,500,000 Commissioner of Iron Range Resources and Rehabilitation Gross Rev. Bonds Series 1996 (Giants Ridge Rec. Area Proj.), 7.25%, 10/1/11 1,505,490 640,000 Minneapolis Cmty. Dev. Agy. Common Bond Fund, Series 1995-1, 6.625%, 12/1/09 (4) 658,733 3,000,000 St. Paul Hsg. & Redev. Sales Tax Rev. Refunding Series 1996 (FSA insured) (Civic Center Proj.), 7.10%, 11/1/23 3,525,510 1,245,000 St. Paul Recreational Facs. Gross Rev. Series 1996D 5.875%, 6/1/18 1,248,975 6,938,708 Total municipal bonds (cost: $66,502,566) 67,996,344 SHORT-TERM SECURITIES (2.1%) 1,500,000 University of Minnesota Regents, 3.35%, 10/2/96 1,500,000 (cost: $1,500,000) Total investments in securities (cost: $68,002,566) (6) $69,496,344 See accompanying notes to portfolios of investments on page 35.
SIT TAX-FREE INCOME FUND REVIEW SEPTEMBER 30, 1996 [PHOTO] MICHAEL C. BRILLEY SENIOR PORTFOLIO MANAGER DEBRA A. SIT, CFA PORTFOLIO MANAGER Long term municipal bond yields decreased slightly during the six month period, as reflected in the yield of the Bond Buyer 40-Bond Revenue Index which decreased from 5.96% to 5.89% and remained within a narrow range between 6.22% and 5.80%. During the period the Fund's per share net asset value ranged between $9.78 and $9.98. The Fund provided shareholders a six month return of +3.72%, compared to +2.19% for the Lehman 5-Year Municipal Index. The Fund's 12-month return of +6.78% continues to rank among the top 15% of 230 funds in its category. While the Fund's quarterly return of +2.27% was comparable to the average for the Lipper General Municipal Fund universe, the Fund's ability to provide high income and stability of principal is highlighted in its attractive longer term returns. Fund assets increased from $279.8 million to $294.9 million during the last six months. The Fund's implied duration, which we began reporting in June, increased from 3.8 years to 4.1 years during the most recent quarter as the Fund has continued to focus on purchasing securities with greater call protection. Since March 31, 1996, the Fund's weighting in multifamily housing bonds has increased. Two bond issues held by the Fund were prerefunded, thus resulting in decreased weightings in the health care sector and in lease bonds, and an increase in AAA-rated securities. Within BBB-rated holdings, which decreased slightly, selected health care issues were sold as their yields declined relative to other sectors and proceeds were reinvested in multifamily housing bonds. Other significant shifts included decreases in single family housing bonds, and in industrial revenue bonds. The Fund's performance continues to benefit from security selection, particularly within the housing sector. The relative valuation of municipal bonds has returned to more normal levels as the tax-exempt market has recovered from the negative impact of last year's threat of a flat tax. In the months ahead, we expect that municipal bond yields will continue to follow the trading range of taxable yields as we continue to see mixed indications on the strength of the economy. Within this environment, we intend to take advantage of opportunities to reduce BBB-rated credits as yield spreads narrow. We remain focused on finding investments that help meet the Fund's dual objectives of high income and stability of principal. INVESTMENT OBJECTIVE AND STRATEGY The objective of the 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. PORTFOLIO SUMMARY Net Asset Value 9/30/96: $9.96 Per Share 3/31/96: $9.88 Per Share Total Net Assets: $294.86 Million 30-Day SEC Yield: 5.65% Tax Equivalent Yield: 9.35% (1) 12-Month Distribution Rate: 5.67% Average Maturity: 16.6 Years Duration to Estimated Avg. Life: 6.3 Years (2) Implied Duration: 4.1 Years (2) (1) For individuals in the 39.6% federal tax bracket. (2) See page 17. PORTFOLIO STRUCTURE (% of total net assets) [BAR CHART] Multifamily Mortgage Revenue 32.0 Hospital/Health Care Revenue 20.2 Single Family Mortgage Revenue 15.9 Industrial Revenue/Pollution Control 6.4 Other Revenue 6.3 Transportation 5.0 Escrowed to Maturity/Pre-Refund 3.6 Public Facilities 2.8 Miscellaneous 2.4 Municipal Lease Rental 1.1 Sales Tax Revenue 1.0 Other Assets & Liabilities 3.3
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS* Lipper Lehman Lipper Lehman Tax-Free General Muni. 5-Year Muni. Tax-Free General Muni. 5-Year Muni. Income Fund Bond Fund Avg. Bond Index Income Fund Bond Fund Avg. Bond Index 3 Months 2.27% 2.27% 1.65% 2.27% 2.27% 1.65% (unannualized) 1 Year 6.78 5.61 4.30 6.78 5.61 4.30 3 Years 5.49 3.72 4.46 17.40 11.59 14.00 5 Years 7.12 6.97 6.39 41.03 40.04 36.31 Inception 7.53 7.72 7.15 78.87 81.40 73.80 (9/29/88)
* As of 9/30/96 PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF FUTURE PERFORMANCE. 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 OMITTED] The sum of $10,000 invested at inception (9/29/88) and held until 9/30/96 would have grown to $17,887 in the Fund or $17,380 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 35.2% AA 9.5% AAA 11.4% Other Assets & Liabilities 3.3% BB 0.5% BBB 40.1% Total number of holdings: 218
SIT TAX-FREE INCOME FUND PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1996 (UNAUDITIED) QUANTITY NAME OF ISSUER MARKET VALUE(1) MUNICIPAL BONDS (96.7%) (2) ALASKA (0.1%) 350,000 AK Industrial Dev. & Export Auth. Rev. Refunding Revolving Fund Series 1993A, 5.60%, 4/1/03 $ 355,079 ARIZONA (3.3%) AZ Hlth. Fac. Auth. Hosp. System Refunding Rev. Series 1991 (Phoenix Mem. Hosp.): 1,120,000 8.00%, 6/1/06 1,210,485 1,500,000 8.125%, 6/1/12 1,612,935 770,000 8.20%, 6/1/21 828,659 Maricopa Co. Industrial Dev. Auth. Multifamily Hsg. Rev.: 3,000,000 Series 1995A, 6.50%, 10/1/25 3,068,610 575,000 Series 1995B, 7.15%, 10/1/25 576,300 1,400,000 Senior Series 1996A (Advantage Pt. Arrowood Village), 6.50%, 7/1/16 1,420,510 1,070,000 Valley HDC Phoenix Hsg. Rev. 1979 (Roosevelt Plaza) (Section 8), 8.00%, 10/1/20 1,091,732 9,809,231 ARKANSAS (1.9%) Drew Co. Public Fac. Bd. Single Family Mtg. Rev. Refunding: 191,488 Series 1993B, 7.75%, 8/1/11 203,437 393,038 Series 1993-A2 (FNMA backed), 7.90%, 8/1/11 421,400 293,863 Jacksonville Res. Hsg. Fac. Bd. Single Family Mtg. Rev. Refunding Series 1993B, 7.75%, 1/1/11 314,049 303,848 Lonoke Co. Res. Hsg. Fac. Bd. Single Family Mtg. Rev. Refunding 1993B, 7.375%, 4/1/11 324,764 2,100,000 Maumelle HDC First Lien Rev. Refunding 1992 Series A (Section 8), 7.875%, 7/1/09 2,259,222 1,905,000 Saline Co. Res. Hsg. Fac. Bd. Single Family Mtg. Rev. Refunding Series 1992, 7.875%, 3/1/11 2,022,462 5,545,334 CALIFORNIA (3.9%) 1,200,000 Bell Cmnty. Hsg. Auth. Rev. Series 1995A (Mobilehomes Park Acquisition Proj.), 6.40%, 10/1/15 1,211,316 1,000,000 Chula Vista Redev. Agency Refunding Tax Allocation Senior Series 1994A (Bayfront-Town Center Redev. Proj.), 7.625%, 9/1/24 1,115,350 Foothill / Eastern Transportation Corridor Agy. Toll Rd. Rev Series 1995A Sr. Lien: 2,000,000 Zero Coupon Convertible Bond, 6.10% Effective Yield on Purchase Date, 1/1/07 1,244,000 5,000,000 Zero Coupon Convertible Bond, 7.10% Effective Yield on Purchase Date, 1/1/11 3,096,700 2,000,000 Glendale Hosp. Rev. Refunding Series 1994 (Verdugo Hills Hosp.), 8.00%, 1/1/12 2,302,880 1,505,000 Sacramento Public Television Fac. Rev. 1989 Series A (KVIE inc.) (LOC Wells Fargo & Co.), 7.50%, 7/1/20 1,579,197 990,000 Upland Hsg. Auth. Multifamily Rev. 1990 Issue A, 7.85%, 7/1/20 1,027,818 11,577,261 COLORADO (6.0%) 1,000,000 Adams Co. HA Mtg. Rev. Series 1996 (Village of Greenbriar Proj.), 6.75%, 7/1/21 971,790 Arapahoe Co. Cap. Improvement Tr. Fund Highway Rev. (E-470 Project) Senior Capital Appreciation Zero Coupon: 2,000,000 7.08% Effective Yield on Purchase Date, 8/31/04 1,228,660 2,500,000 7.13% Effective Yield on Purchase Date, 8/31/05 1,431,725 18,495,000 7.40% Effective Yield on Purchase Date, 8/31/09 7,942,123 1,250,000 Aurora Single Family Mtg. Rev. Refunding Series 1993B, 7.50%, 5/1/11 1,292,738 2,000,000 CO HFA Single Family Program Senior Series 1996 B-2, 7.45%, 11/1/27 2,221,120 365,000 LaPlata Co. Southwestern CO Single Family Mtg. Participation Rev. Refunding 1991 Series A, 7.375%, 9/1/11 383,725 510,000 Thornton Single Family Mtg. Rev. Refunding 1992 Series A, 8.05%, 8/1/09 544,935 470,000 Vail Single Family Mtg. Rev. Refunding Series 1992, 8.125%, 6/1/10 506,604 1,195,000 Westminster Multifamily Hsg. Rev. Refunding Series 1992 (Ironwood at the Ranch Proj.), 7.45%, 12/1/10 1,237,028 17,760,448 CONNECTICUT (0.4%) 1,000,000 CT Hlth. & Educ. Fac. Auth. Rev. Series 1990C (St. Mary's Hosp.) 7.375%, 7/1/20 1,034,670 DELAWARE (0.4%) 16,825,000 DE EDA Multifamily Rev. 1985 (GNMA collateralized) (Valley Stream Apts. Proj.) Zero Coupon, 8.10% Effective Yield on Purchase Date, 12/20/27 1,209,381 DISTRICT OF COLUMBIA (0.5%) 1,500,000 District of Columbia HFA Multifamily Hsg. Refunding Rev. Series 1992C (FHA insured) (Chastleton Dev.), 6.95%, 7/1/27 1,556,085 FLORIDA (0.5%) 295,000 Brevard Co. HFA Single Family Mtg. Rev. Refunding Series 1993 Zero Coupon, 7.38% Effective Yield on Purchase Date, 5/20/12 95,067 10,055,000 FL HFA Residential Mtg. Rev. 1983 Series Zero Coupon, 9.90% Effective Yield on Purchase Date, 11/1/16 1,449,730 1,544,797 GEORGIA (1.3%) 800,000 Cobb Co. Hsg. Auth. Multifamily Rev. Refunding Series 1992A (Signature Place Project), 6.875%, 10/1/17 823,512 Dekalb Co. Hsg. Auth. Multifamily Hsg. Rev. (Regency Woods I & II): 1,700,000 Senior Series 1996A, 6.375%, 1/1/11 1,726,673 1,370,000 Subordinate Series 1996C, 7.25%, 1/1/26 1,280,498 3,830,683 HAWAII (0.4%) 1,250,000 Honolulu Mtg. Rev. Ref. Series 1996A (Hale-Pauahi Proj.)(FHA insured) (MBIA insured), 6.80%, 7/1/28 1,299,388 ILLINOIS (14.4%) 1,000,000 Alton (Madison Co.) Hosp. Fac. Rev. Refunding Series 1996 (Saint Anthony's Hlth. Ctr.), 5.875%, 9/1/06 987,250 2,745,000 Chicago Metropolitan Hsg. Dev. Corp. Mtg. Rev. Refunding Series 1992A (FHA insured) (Section 8), 6.70%, 7/1/12 2,829,821 5,065,000 Chicago Res. Mtg. Rev. Refunding Series 1992B (MBIA insured) Zero Coupon, 7.30% Effective Yield on Purchase Date, 10/1/09 2,052,237 2,000,000 Collinsville (City of) Madison Co. Industrial Dev. Rev. Refunding (Drury Inn-Collinsville Proj.) Series 1993, 6.00%, 11/1/04 2,019,240 Edwardsville Elderly Hsg. Corp. 1978 (Section 8): 50,000 7.75%, 6/1/97 50,150 60,000 7.75%, 6/1/99 60,180 65,000 7.75%, 6/1/00 65,195 75,000 7.75%, 6/1/02 75,225 85,000 7.75%, 6/1/04 85,255 95,000 7.75%, 6/1/05 95,285 110,000 7.75%, 6/1/07 110,330 1,000,000 IL DFA Econ. Dev. Rev. Refunding Series 1992 (Drury Inn-Schaumberg Proj.) (NWNL), 7.125%, 9/15/12 1,016,010 1,790,000 IL DFA Elderly Hsg. Rev. Refunding Series 1995A (Pontiac Towers Proj.) (Section 8), 6.65%, 10/1/09 1,868,760 3,000,000 IL HDA Elderly Hsg. Rev. Series 1992C (Village Ctr.) (Section 8), 6.85%, 3/1/20 3,118,230 IL HDA Multifamily Hsg. Rev.: Refunding 1992 Series A (Section 8): 2,150,000 6.65%, 7/1/04 2,292,954 1,495,000 7.00%, 7/1/10 1,578,840 Refunding 1991 Series C (Section 8): 260,000 7.35%, 7/1/11 276,887 100,000 7.40%, 7/1/23 105,623 1,090,000 IL HDA Res. Mtg. 1987 Series A, 7.00%, 8/1/17 1,128,433 IL Hlth. Fac. Auth. Rev.: Refunding Series 1993 (Lutheran Social Svcs. IL): 610,000 5.70%, 8/15/00 601,643 475,000 5.80%, 8/15/01 466,288 525,000 6.00%, 8/15/03 506,362 545,000 6.10%, 8/15/04 523,581 1,250,000 6.125%, 8/15/20 1,120,275 850,000 Refunding Series 1992 (Mercy Ctr. for Hlth. Care Svcs.), 6.625%, 10/1/12 854,395 5,740,000 Refunding Series 1992 (Galesburg Cottage Hosp.) (Asset Guaranty insured), 6.25%, 5/1/11 5,850,552 1,000,000 Refunding Series 1994 (Passavant Memorial Area Hospital Assn.), 5.95%, 10/1/11 994,120 1,000,000 Refunding Series 1994 (Friendship Village Schamburg), 6.25%, 12/1/04 1,040,850 Refunding Series 1994 (St. Elizabeth's Hosp. of Chicago, Inc.): 2,160,000 7.25%, 7/1/05 2,274,329 1,000,000 7.625%, 7/1/10 1,068,480 2,500,000 Metropolitan Pier & Exposition Auth. McCormick Place Convention Complex Hospitality Fac. Rev. Series 1996A, 6.25%, 7/1/17 2,508,775 540,000 Rochelle Water & Sewer Rev. Refunding Series 1992, 7.15%, 5/1/14 584,053 2,000,000 Roselle Multifamily Hsg. Rev. Refunding Series 1994A (GNMA Collateralized) (Waterbury Apts.) (FHA insured), 7.00%, 1/1/25 2,133,880 1,140,000 Springfield Community Improvement Rev. 1985 (Garden Court Proj. - FHA insured) (Section 8) (MBIA insured), 10.50%, 4/1/26 1,288,177 1,445,000 Urbana Res. Mtg. Rev. Refunding 1991 Series B Zero Coupon, 7.39% Effective Yield on Purchase Date, 3/1/07 681,823 42,313,488 INDIANA (8.5%) 1,000,000 East Chicago Multi School Bldg. Corp. First Mtg. Series 1996, 6.50%, 1/15/16 1,043,430 1,800,000 Elkhart Co. Hosp. Auth. Rev. Series 1992 (Goshen Hosp. Proj.), 7.25%, 7/1/05 1,913,904 2,165,000 Elkhart HFC Multifamily Mtg. Rev. Series 1996A (Section 8 Assisted Proj.) (Stratford Commons), 6.00%, 11/1/10 2,170,239 1,095,000 IN Bond Bank Special Prgm. Series 1993B (Gary Sanitary Dist.), 6.15%, 2/1/08 1,139,019 IN Educ. Fac. Auth. Educ. Fac. Rev. Series 1992 (Manchester College Proj.): 515,000 6.45%, 10/1/04 539,545 250,000 6.50%, 10/1/05 262,382 305,000 6.60%, 10/1/06 318,859 350,000 6.75%, 10/1/08 368,077 1,000,000 6.85%, 10/1/18 1,038,610 IN Hlth. Fac. Fin. Auth. Hosp. Rev.: Series 1991 (Jackson Co. Schneck Mem. Hosp. Proj.): 1,200,000 7.50%, 2/15/05 1,293,156 1,000,000 7.50%, 2/15/22 1,050,170 Series 1992 (Fayette Mem. Hosp. Proj.): 250,000 7.00%, 10/1/02 261,080 295,000 7.10%, 10/1/03 310,119 315,000 7.20%, 10/1/04 335,516 340,000 7.25%, 10/1/05 360,784 365,000 7.25%, 10/1/06 385,666 390,000 7.30%, 10/1/07 411,540 420,000 7.30%, 10/1/08 441,323 Series 1992 (Floyd Mem. Hosp. Proj.): 460,000 6.75%, 2/15/06 488,713 595,000 6.80%, 2/15/07 630,242 2,000,000 Series 1992 (Mem. Hosp. & Hlth. Care Ctr. Proj.), 7.35%, 3/1/12 2,101,420 830,000 IN HFA Home Mtg. Prog. 1990 Series F1 (GNMA collateralized), 7.50%, 1/1/16 878,970 2,750,000 Indianapolis Econ. Dev. Refunding & Imprv. Rev. Series 1992 (Natl. Benevolent Assn.-Robin Run Village Proj.), 7.25%, 10/1/10 2,891,625 Indianapolis Econ. Dev. Rev. (Willowbrook Apts. Proj.): 2,000,000 Senior Series 1996A, 6.50%, 7/1/16 2,011,160 1,365,000 Subordinate Series 1996C, 7.125%, 7/1/26 1,374,500 935,000 Marion HC Mtg. Rev. Refunding Series 1994 (Hilltop Towers Project) (Section 8), 6.90%, 10/1/10 975,336 24,995,385 IOWA (1.8%) 1,500,000 IA Fin. Auth. Small Business Dev. Refunding Rev. Series 1992 (University Civic Ctr. Court Assn. Proj.), 7.40%, 3/1/17 1,612,920 1,500,000 Ottumwa Hosp. Rev. Refunding Series 1993 (Ottumwa Regional Hlth. Ctr.), 6.00%, 10/1/10 1,449,480 Polk Co. Hlth. Svcs. Residential Care Fac. Rev. Series 1991: 460,000 7.25%, 2/1/06 498,649 1,500,000 7.50%, 2/1/16 1,640,325 5,201,374 KANSAS (0.5%) 380,000 Geary Co. Single Family Mtg. Rev. 1980 (FGIC insured), 10.75%, 4/1/12 399,676 5,455,000 Kansas City Single Family Mtg. Rev. Series 1982A Zero Coupon, 11.23% Effective Yield on Purchase Date, 11/1/14 763,918 2,170,000 Olathe & Labette Cos. Mtg. Loan Rev. 1991 Series B (GNMA collateralized) Zero Coupon, 7.56% Effective Yield on Purchase Date, 2/1/23 323,417 1,487,011 KENTUCKY (0.9%) 1,500,000 Jefferson Co. First Mtg. Rev. Series 1994 (Christian Church Homes Proj.), 6.00%, 11/15/09 1,480,200 1,200,000 KY DFA Hosp. Rev. Series 1989 (Sisters of Charity of Nazareth Hlth. Corp.) (BIG insured), 6.25%, 11/1/19 1,221,420 2,701,620 LOUISIANA (4.8%) 715,000 Calcasieu Parish Industrial Dev. Rev. 1975 (Cities Service Co. Proj.), 7.80%, 12/1/05 717,560 535,000 Calcasieu Parish Public Trust Auth. Mtg. Rev. Refunding 1992 Series B, 6.875%, 11/1/12 561,654 5,650,000 Denham Springs/Livingston Hsg. & Mtg. Fin. Auth. Residual Rev. Series 1992C Zero Coupon, 7.65% Effective Yield on Purchase Date, 7/10/14 1,506,120 4,000,000 Houma-Terrebonne Public Trust Fin. Auth. Residual Rev. Series 1992C Zero Coupon, 7.60% Effective Yield on Purchase Date, 7/10/14 1,101,840 1,665,000 LA HFA Residual Lien Refunding Mtg. Rev. Series 1992, 7.375%, 9/1/13 1,722,542 399,770 LA PFA Single Family Mtg. Purchase Rev. Series 1992 (Lafayette PTFA Mtg. Acquisition), 7.50%, 10/1/15 424,428 LA PFA Rev. Multifamily Hsg. Rev.: 1,290,000 Series 1991 (Volunteers of America Natl. Hsg. Corp.) (Asset Guaranty insured), 7.25%, 11/1/04 1,396,502 3,000,000 Series 1991 (Volunteers of America Natl. Hsg. Corp.) (Asset Guaranty insured), 7.75%, 11/1/16 3,211,380 735,000 Series Sr. Lien 1994A (VOA Willows Affordable Hsg. Corp.), 7.00%, 6/1/24 769,214 1,000,000 Monroe - McKeen Plaza Hsg. Dev. Corp. Multifamily Hsg. Rev. Refunding Series 1994A (Murray Plaza Apts.) (Section 8), 6.80%, 2/1/12 1,038,360 1,550,000 Orleans Levee Dist. Improvement Serial and Term Receipts Series 1995A (FSA insured), 5.95%, 11/1/14 1,576,722 14,026,322 MAINE (0.1%) 250,000 ME HA Mtg. Purchase 1987 Series A-2, 7.65%, 11/15/15 258,780 MASSACHUSETTS (2.4%) MA Hlth. & Educ. Fac. Auth. Rev.: 655,000 Series 1982 (Malden Hosp.) (FHA insured), 9.50%, 8/1/08 656,919 1,850,000 Series 1990B (Goddard Mem. Hosp.), 9.00%, 7/1/15 2,151,624 2,980,000 Series 1990B Prerefunded (Goddard Mem. Hosp.), 9.00%, 7/1/15 3,298,562 1,000,000 Series 1991C (New England Deaconess Hosp.), 7.20%, 4/1/22 1,071,890 7,178,995 MICHIGAN (5.6%) 1,305,000 Detroit Econ. Dev. Corp. Limited Obligation Rev. Refunding Series 1992 (E.H. Associates Ltd. Partnership Proj.), 7.00%, 6/1/12 1,374,243 4,500,000 MI HDA Rental Hsg. Rev. Series 1992A, 6.60%, 4/1/12 4,649,400 1,300,000 Romulus Econ. Dev. Corp. Ltd. Obligation Rev. Refunding Series 1992 Escrowed to Maturity (Romulus HIR Ltd. Partnership Proj.) (ITT Lyndon), 7.00%, 11/1/15 1,444,729 4,000,000 Saginaw Hosp. Fin. Auth. Rev. Refunding Series 1989 (Saginaw Gen. Hosp.), 7.625%, 10/1/19 4,235,600 1,675,000 Tri City Village Hsg. Corp. Mtg. Refunding Multifamily Tri City Apts. Series 1992A (Section 8) (FNMA backed), 7.75%, 8/15/23 1,824,879 2,750,000 Troy City EDC Econ. Dev. Rev. Refunding Series 1992 (Drury Inn-Troy Proj.) (Lincoln Natl. Corp.), 6.75%, 10/1/12 2,884,007 16,412,858 MINNESOTA (1.8%) 740,000 Hopkins Multifamily Hsg. Rev. Series 1996 (Hopkins Renaissance Proj.) (Section 8), 6.375%,4/1/20 755,348 4,560,480 Moorhead Single Family Mtg. Rev. Refunding Series 1992B (FNMA backed), Zero Coupon, 7.00% Effective Yield on Purchase Date, 8/1/11 1,659,148 2,500,000 Plymouth Multifamily Hsg. Dev. Rev. Refunding Series 1996A (GNMA collateralized) (Fox Forest Apts. Proj.), 8.05%, 6/20/31 2,881,000 5,295,496 MISSISSIPPI (0.7%) 5,750,000 MS Home Corp. Residual Rev. Series 1992-II Zero Coupon, 7.38% Effective Yield on Purchase Date, 4/15/12 1,938,268 MISSOURI (0.1%) 235,000 MO HDC Single Family Mtg. Rev. Series 1985, 9.25%, 4/1/05 243,538 70,000 St. Louis Co. Single Family Res. Mtg. Series 1984 (MBIA insured), 9.75%, 4/1/10 71,995 315,533 NEVADA (2.3%) 1,475,000 Humboldt General Hosp. Dist. Series 1993, 6.125%, 6/1/13 1,446,945 Reno Redev. Agency Subordinate Tax Allocation and Revenue Refunding Series 1995A: 400,000 6.00%, 6/1/08 392,732 1,000,000 6.10%, 6/1/11 980,930 1,000,000 6.125%, 6/1/12 977,760 3,000,000 Reno-Sparks Indian Colony Public Fac. Fin. Auth. Sales & Excise Tax Rev. Series 1995A, 7.50%, 7/1/07 3,072,330 6,870,697 NEW HAMPSHIRE (0.4%) 540,000 NH Higher Educ. & Hlth. Fac. Auth. Series 1991 (St. Joseph's Hosp.), 7.25%, 1/1/02 577,471 3,480,000 NH HFA Single Family Res. Mtg. 1982 Series A Zero Coupon, 11.75% Effective Yield on Purchase Date, 1/1/14 529,900 1,107,371 NEW MEXICO (0.5%) 500,000 Farmington Pollution Control. Rev., Series 1978 (Public Service Co. New Mexico) (MBIA insured), 6.00%, 3/1/08 500,180 779,000 Hobbs Single Family Mtg. Rev. Refunding Series 1992, 8.75%, 7/1/11 840,003 1,340,183 NEW YORK (1.6%) 3,000,000 New York City Hsg. Dev. Corp. Multifamily Hsg. Rev. Series 1993B (FHA insured) (Section 8), 5.85%, 5/1/26 2,937,870 1,580,000 NY State Mtg. Agy. Homeowner Mtg. Rev. 1994 Series 43 (MBIA insured), 6.45%, 10/1/17 1,648,193 4,586,063 NORTH DAKOTA (2.4%) 1,950,000 Oliver Co. Pollution Control Rev. Series 1976 (Sq. Butte Elec. Coop. Proj.), 7.00%, 12/31/10 1,959,379 Ward Co. Hlth. Care Fac. Rev.: 1,490,000 Series 1994 (St. Joseph Hosp.), 8.00%, 11/15/04 1,566,184 2,000,000 Series 1994 (St. Joseph Hosp.), 8.875%, 11/15/14 2,161,840 1,400,000 Series 1991A (St. Joseph Hosp.), 7.50%, 11/1/15 1,424,486 7,111,889 OHIO (0.8%) 2,055,000 Cleveland Parking Fac. Imprv. Rev. Series 1992 Prerefunded, 7.60%, 9/15/03 2,379,875 OKLAHOMA (2.5%) 1,555,000 Cleveland Co. Home Loan Auth. Single Family Mtg. Rev. Refunding Series 1991, 8.00%, 8/1/12 1,656,806 Midwest City Mem. Hosp. Auth. Hosp. Rev. Series 1992: 115,000 Prerefunded, 7.25%, 4/1/06 128,948 365,000 Prerefunded, 8.75%, 4/1/03 434,923 325,000 Escrowed to Maturity, 10.00%, 4/1/01 389,799 345,000 Escrowed to Maturity, 10.00%, 4/1/02 425,599 2,000,000 Muskogee Co. HFA Single Family Mtg. Rev. Refunding 1990 Series A (FGIC insured) Zero Coupon, 7.65% Effective Yield on Purchase Date, 6/1/11 675,300 340,000 Muskogee Co. Industrial Pollution Rev. Series 1987A (Oklahoma G&E Proj.), 7.00%, 3/1/17 349,527 625,000 Payne Co. Home Loan Auth. Single Family Rev. Refunding Series 1993A, 8.625%, 3/1/11 669,425 2,540,000 Tulsa Public Facilities Auth. Recreational Facs. Rev. Series 1985, 6.20%, 11/1/12 2,562,631 7,292,958 PENNSYLVANIA (6.4%) Horizon Hosp. System Auth. Hosp. Rev. Series 1996 (Horizon Hosp. Sys.): 600,000 5.95%, 5/15/06 596,484 715,000 6.15%, 5/15/08 710,839 710,000 6.25%, 5/15/09 709,936 4,030,000 Mercer Co. Industrial Dev. Auth. Rev. Refunding Series 1991 (FHA insured) (Hillcrest Nursing Industrial Ctr. Proj.) Zero Coupon, 6.85% Effective Yield on Purchase Date, 1/15/13 1,253,088 6,000,000 Montgomery Co. Industrial Dev. Auth. Resource Recovery Rev. Series 1989 (LOC Banque Paribas), 7.50%, 1/1/12 6,419,220 2,240,000 Montgomery Co. Redev. Auth. Multifamily Hsg. Rev. 1993 Series A (KBF Assoc. L.P.), 6.375%, 7/1/12 2,218,899 Pittsburgh Urban Redev. Auth. (Center Triangle Tax Increment Fin. District) (LOC PNC Bank): 3,000,000 Series 1995A, 6.00%, 12/1/11 2,993,790 2,100,000 Series 1995B, 6.25%, 3/15/15 2,101,407 Sharon Regional Hlth. Sys. Auth. Hosp. Rev. Refunding (Sharon Regional Hlth. Sys. Proj.) Series 1993A: 705,000 6.40%, 12/1/00 730,944 255,000 6.50%, 12/1/01 265,850 800,000 6.60%, 12/1/02 834,816 18,835,273 SOUTH CAROLINA (0.5%) 1,455,000 Myrtle Beach PFC Certificates of Participation Series 1992 (Myrtle Beach Convention Ctr. Proj.), 6.75%, 7/1/02 1,539,826 SOUTH DAKOTA (0.7%) 2,000,000 SD HDA Multifamily Hsg. Rev. 1992 Series B (Section 8), 7.00%, 4/1/12 2,099,720 TENNESSEE (2.5%) 1,675,000 Metro. Govt. of Nashville & Davison Cos. TN Industrial Dev. Board Rev. Refunding Multifamily Mtg. Rev. 92C (FHA insured) (Picadilly Apts.), 6.95%, 7/1/27 1,767,912 Shelby Co. Hlth., Educ. & Hsg. Fac. Board Multifamily Hsg. Rev.: (Eastwood Park Apts. Proj.): 1,000,000 Senior Series 1995 A2, 6.40%, 9/1/25 1,004,840 425,000 Subordinate Series 1995C, 7.50%, 9/1/25 429,692 (Raleigh Forest & Sherwood Apts. Proj.): 2,885,000 Senior Series 1996A, 6.60%, 1/1/26 2,914,283 800,000 Subordinate Series 1996C, 7.25%, 1/1/26 810,920 830,000 TN HDA Homeownership Program Series 1991 Issue U, 7.35%, 7/1/11 876,380 7,804,027 TEXAS (12.5%) 2,360,000 Baytown HFC Single Family Mtg. Rev. Refunding Series 1992B, 8.50%, 9/1/11 2,557,013 Beaumont Hsg. Auth. Multifamily Mtg. Rev. Series 1993A (Section 8): 1,365,000 6.65%, 11/1/07 1,423,968 650,000 6.75%, 11/1/10 670,078 1,765,000 Bexar Co. HFC Residual Rev. Series 1993 Zero Coupon, 6.50% Effective Yield on Purchase Date, 3/1/15 555,993 365,000 Brazos Co. HFC Single Family Mtg. Rev. 1985 (MBIA insured) Zero Coupon, 10.55% Effective Yield on Purchase Date, 9/1/11 79,176 1,800,000 Cleveland Ind. School Dist. Public Fac. Corp. Lease Rev. Series 1996, 6.10%, 2/15/11 1,791,342 Dallas Hsg. Corp. Capital Program Revenue Bonds: 1,715,000 Series 1995A (Estell Village Apts.) (Section 8), 7.875%, 12/1/09 1,769,863 1,700,000 Series 1995 (Cedar Glen Apts.) (Section 8), 7.75%, 12/1/09 1,752,479 1,000,000 Dallas HFC Cap. Proj. Refunding 1990 (Section 8), 7.85%, 8/1/13 1,069,140 3,000,000 Denison Hospital Auth. Rev. Refunding Series 1986 (Texoma Med. Ctr. Proj.), 8.00%, 9/1/16 3,064,110 50,000 Ft. Worth HFC Home Mtg. Rev. Refunding 1991, 8.50%, 10/1/11 54,560 580,000 Harris Co. HFC Single Family Mtg. Rev. Series 1983A, 10.125%, 7/15/03 581,317 1,735,000 Lubbock HFC Multifamily Hsg. Rev. Refunding Series 1992A (Los Colinas, Park Ridge Place & Quail Creek), 7.75%, 1/1/22 1,790,208 3,250,000 Midland Co. Hosp. Dist. Hosp. Rev. Series 1992 Zero Coupon 7.61% Effective Yield on Purchase Date, 6/1/07 1,685,417 Midland HFC Single Family Mtg. Rev. Refunding: 564,405 Series 1992 B-2, 8.15%, 12/1/11 602,762 766,859 Series 1992 A-2, 8.45%, 12/1/11 821,973 1,021,700 Series 1992, 9.00%, 9/1/01 1,083,288 Mesquite Hlth. Fac. Dev. Corp. Retirement Fac. Rev. Series 1996A (Christian Care Ctrs. Proj.): 1,000,000 6.30%, 2/15/12 983,980 1,000,000 6.40%, 2/15/16 981,960 3,000,000 Northeast Hosp. Authority Rev. Series 1993B (NE Med. Ctr. Hosp.), 7.25%, 7/1/22 3,117,300 1,881,615 Odessa HFC Single Family Mtg. Rev. Refunding Series 1992B Class B-2, 8.125%, 11/1/11 2,017,073 650,000 San Marcos HA Multifamily Mtg. Rev. Series 1993A (FHA insured) (Section 8), 5.80%, 11/1/10 638,319 Southeast TX HFC Residual Revenue: 1,555,000 Series 1995A Zero Coupon, 6.50% Effective Yield on Purchase Date, 11/1/14 506,308 3,000,000 Series 1992A Zero Coupon, 7.63% Effective Yield on Purchase Date, 9/1/17 638,670 950,000 TX HA Single Family Mtg. Refunding Series 1991A, 7.00%, 3/1/05 1,001,994 3,670,000 TX Dept. Hsg. & Cmnty. Affairs Single Family Rev. Refunding Junior Lien Series 1994A Zero Coupon 6.93% Effective Yield on Purchase Date, 3/1/15 1,068,704 1,500,000 TX Dept. Hsg. & Cmnty. Affairs Multifamily Hsg. Rev. Senior Series 1996A (Dallas - Ft. Worth Apt. Pool Proj.), 6.50%, 7/1/16 1,508,370 3,000,000 Washington Co. Hlth. Fac. Dev. Corp. Rev. 1994 (Lutheran Soc. Svcs.), 7.50%, 8/15/15 3,068,190 36,883,555 WASHINGTON (1.7%) WA HFC Nonprofit Housing Revenue: 2,500,000 Series 1993 (CRISTA Shores Proj.)(LOC US Bk. Wash.), 6.20%, 7/1/14 2,521,625 1,000,000 Series 1995A (Judson Park Project)(LOC US Bk. Wash.), 6.90%, 7/1/16 1,042,630 1,390,000 Series 1996A (Presbyterian Ministries) (LOC US Bk. Wash.), 6.85%, 7/1/21 1,411,100 4,975,355 WEST VIRGINIA (1.1%) 60,000 Berkeley, Brooke & Fayette Cos., etc. (21 Municipalities) Single Family Mtg. 1984 Series A, (MBIA insured), 10.125%, 9/1/10 62,991 5,435,000 Huntington Res. Mtg. Rev. Refunding Series 1991 Zero Coupon Escrowed to Maturity, 7.37% Effective Yield on Purchase Date, 9/1/12 1,951,111 2,000,000 Mason Co. Residual Rev. Series 1992C Zero Coupon, 7.58% Effective Yield on Purchase Date, 7/10/14 547,000 3,000,000 Ohio Co. Residual Rev. Series 1992C Zero Coupon, 7.43% Effective Yield on Purchase Date, 7/10/14 824,280 3,385,382 WISCONSIN (0.5%) 1,300,000 WI HEDA Hsg. Rev. Series 1992A (Section 8), 6.85%, 11/1/12 1,356,290 Total municipal bonds (cost: $277,591,568) 285,215,951 SHORT-TERM SECURITIES (3.5%) 9,235,385 Tax-Exempt Cash Management Fund, 3.58% 9,235,385 1,071,066 Tax-Exempt Cash Management Fund, 3.56% 1,071,066 Total short-term securities (cost: $10,306,451) 10,306,451 Total investments in securities (cost: $287,898,019) (6) $295,522,402
See accompanying notes to portfolios of investments on page 35. SIT U.S. GOVERNMENT SECURITIES FUND REVIEW SEPTEMBER 30, 1996 [PHOTO] MICHAEL C. BRILLEY SENIOR PORTFOLIO MANAGER BRYCE A, DOTY, CFA PORTFOLIO MANAGER The Sit U.S. Government Securities Fund provided investors a +2.36% total return for the six months and a +5.83% return for the 12 months ended September 30, 1996. The Fund ranked #1 out of 173 funds within the Lipper U.S. Government Bond Fund universe for its 12 month return. The Fund also ranked #1 out of 110 funds for its cumulative 3-year return of +18.08% for the period ended September 30, 1996 within the same universe. In addition, Morningstar, a nationally recognized firm which evaluates mutual funds, recently reviewed 181 government bond funds. They ranked the Fund #1 for having the lowest risk and ranked the Fund #2 for its risk and return characteristics for the five years ended September 30, 1996. The Fund's continued recognition for its competitive and stable performance has resulted in steady asset growth. The Fund's net assets have grown from $52.45 million as of March 31, 1996 to $55.11 million as of September 30, 1996. The Fund has achieved its superior results by continuing to focus on securities that provide a high level of income and relative price stability. The Fund's holdings in seasoned, high coupon mortgage pass-through securities provided the highest income return compared to the other market sectors in which the Fund invests. The Fund also invests in collateralized mortgage obligations (CMO's) that provide attractive levels of income. The Fund's U.S. Treasury holdings provide the lowest levels of income and typically consist of less than 20% of the portfolio's assets. Conflicting economic data have caused uncertainty regarding the economy's current and projected rate of growth. Consequently, interest rates have moved within a narrow range for the past six months. We expect stable to declining interest rates over the next six months as the economy's growth slows. The Fund will continue to invest in securities that offer consistently high levels of income and price stability. 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 9/30/96: $10.39 Per Share 3/31/96: $10.47 Per Share Total Net Assets: $55.11 Million 30-Day SEC Yield: 6.20% 12-Month Distribution Rate: 6.36% Average Maturity: 13.4 Years Effective Duration: 3.1 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 60.3 Securities U.S. Treasury 19.3 Bonds Collateralized 11.4 Mortgage Obligations FHLMC Pass-Through 4.3 Securities FNMA Pass-Through 2.7 Securities Other Assets & Liabilities 2.0
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS* U.S. Gov't. Lipper U.S. Gov't. Lehman Inter. U.S. Gov't. Lipper U.S. Gov't. Lehman Inter. Securities Fund Fund Average Gov't. Bond Index Securities Fund Fund Average Gov't. Bond Index 3 Months 1.69% 1.52% 1.72% 1.69% 1.52% 1.72% (unannualized) 1 Year 5.83 3.24 5.10 5.83 3.24 5.10 3 Years 5.70 3.38 4.62 18.08 10.50 14.51 5 Years 6.54 6.34 6.75 37.30 35.98 38.62 Inception 8.27 7.50 8.10 110.01 96.50 107.08 (6/2/87)
* As of 9/30/96 PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF FUTURE PERFORMANCE. 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 OMITTED] The sum of $10,000 invested at inception (6/2/87) and held until 9/30/96 would have grown to $21,001 in the Fund or $20,708 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 2.2% 1-5 82.1% 5-10 14.6% 10-20 1.1% SIT U.S. GOVERNMENT SECURITIES FUND PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1996 (UNAUDITED) QUANTITY NAME OF ISSUER MARKET VALUE(1) MORTGAGE PASS-THROUGH SECURITIES (67.3%) (2) FEDERAL HOME LOAN MORTGAGE CORPORATION (4.3%): 41,736 8.75%, 12/1/01 $ 42,878 681,137 9.00%, 10/1/16 709,316 719,738 9.00%, 6/1/17 749,883 81,376 9.50%, 6/1/16 86,438 139,047 9.75%, 6/1/17 148,530 536,920 10.25%, 6/1/10 579,580 41,888 10.50%, 4/1/04 43,898 7,427 11.00%, 10/1/00 7,787 2,368,310 FEDERAL NATIONAL MORTGAGE ASSOCIATION (2.7%): 217,572 9.00%, 4/1/10 226,361 138,922 9.00%, 9/1/17 144,513 447,489 9.00%, 9/1/20 466,411 386,950 9.50%, 4/1/20 411,526 197,756 10.00%, 9/1/20 213,442 1,462,253 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (3) (60.3%): 1,415,358 8.00%, 6/15/16 1,450,235 397,697 8.50%, 12/15/11 412,024 901,734 8.50%, 9/15/16 935,829 260,174 8.75%, 5/15/03 272,823 534,554 8.75%, 10/15 - 11/15/06 561,178 258,492 8.75%, 2/15/07 268,773 252,469 8.75%, 11/15/09 262,667 690,448 8.75%, 6/15 - 12/15/11 718,519 208,447 9.00%, 10/15/04 219,673 410,725 9.00%, 4/15/06 432,829 347,099 9.00%, 10/15/07 362,227 154,489 9.00%, 11/15/09 161,377 1,355,888 9.00%, 6/15 - 9/15/11 1,416,638 262,104 9.00%, 1/15/12 273,840 3,006,711 9.00%, 4/20 - 12/20/16 3,163,623 76,687 9.00%, 5/15/18 80,144 115,417 9.00%, 11/15/19 120,577 175,013 9.00%, 7/20/21 181,587 132,741 9.25%, 4/15 - 9/15/01 140,252 466,101 9.25%, 11/15/11 489,042 302,103 9.25%, 4/15/12 317,041 50,155 9.50%, 1/15 - 1/20/05 53,047 1,329,243 9.50%, 1/15 - 8/15/10 1,408,395 740,529 9.50%, 1/15 - 3/15/11 780,040 858,627 9.50%, 11/20/16 909,675 245,185 9.50%, 8/20/17 259,716 51,855 9.75%, 5/15/99 53,572 220,289 9.75%, 11/15/02 234,000 67,045 9.75%, 3/15/04 71,253 491,893 9.75%, 8/15/05 523,141 272,307 9.75%, 2/15/06 290,345 2,620,381 9.75%, 8/15 - 12/15/10 2,799,753 1,199,912 9.75%, 11/15 - 12/15/12 1,284,489 185,615 10.00%, 5/15/04 197,338 1,190,376 10.00%, 7/15/05 1,267,277 197,640 10.00%, 1/15/06 210,137 218,915 10.00%, 11/15/08 233,960 137,790 10.00%, 5/15 - 11/15/09 147,764 261,793 10.00%, 6/15 - 7/15/10 280,040 179,188 10.00%, 1/15/11 191,740 47,404 10.00%, 9/15/16 51,338 334,731 10.00%, 2/20/20 355,810 101,812 10.25%, 11/15/00 108,214 110,046 10.25%, 8/15/04 117,166 487,566 10.25%, 7/15/05 518,966 3,449,307 10.25%, 1/15 - 8/15/12 3,688,197 963,900 10.25%, 2/15 - 7/15/13 1,031,101 13,940 10.50%, 9/15/00 14,688 71,909 10.50%, 9/15/01 76,469 114,878 10.50%, 12/15/02 122,238 168,958 10.50%, 7/15/10 180,298 365,974 10.50%, 8/15 - 11/15/15 399,986 151,958 10.50%, 3/15 - 12/15/16 166,067 13,328 10.75%, 7/15 - 10/15/98 13,765 226,092 10.75%, 7/15 - 8/15/11 241,428 705,239 11.00%, 1/15 - 6/15/10 781,754 18,422 11.00%, 7/15/13 20,045 6,138 11.25%, 5/15/98 6,355 228,237 11.25%, 8/15 - 12/15/00 242,859 50,129 11.25%, 1/15/01 53,304 33,726 11.25%, 5/15/03 35,867 1,195,582 11.25%, 2/15 - 10/15/11 1,317,002 99,048 11.75%, 5/15/00 105,414 109,584 11.75%, 5/15/04 116,719 29,389 12.75%, 1/15/00 31,111 909 14.75%, 4/15/97 937 33,233,678 Total mortgage pass-through securities (cost: $37,172,516) 37,064,241 U.S. GOVERNMENT SECURITIES (19.3%) U.S. Treasury Note: 1,000,000 7.125%, 2/29/00 1,022,740 2,500,000 7.25%, 5/15/04 2,588,250 2,500,000 8.25%, 7/15/98 2,589,850 6,500,000 U.S. Treasury Coupon Strip, 6.925% Effective Yield on Purchase Date, 11/15/04 3,781,959 3,000,000 U.S. Treasury Principal Strip, 7.08% Effective Yield on Purchase Date, 2/15/19 609,750 25 U.S. 30-yr. Treasury Put Option, Expires 11/15/96 28,516 Total U.S. government securities (cost: $10,597,008) 10,621,065 COLLATERALIZED MORTGAGE OBLIGATIONS (11.4%) 295,847 Federal Home Loan Mortgage Corporation, 1006-C, 9.15%, 10/15/20 308,831 Vendee Mortgage Trust: 3,000,000 Series 1996-2 1B, 6.75%, 9/15/09 2,979,365 200,000 Series 1996-2 1D, 6.75%, 11/15/15 192,400 500,000 Series 1996-2 1E, 6.75%, 5/15/20 469,626 1,000,000 Series 1992-1 2K, 7.75%, 5/15/08 1,005,848 1,350,000 Series 1992-2D, 7.00%, 9/15/15 1,335,082 Total collateralized mortgage obligations (cost: $6,199,837) 6,291,152 SHORT-TERM SECURITIES (0.8%) 426,172 Government Cash Management Fund, 5.23% 426,172 (cost: $426,172) Total investments in securities (cost: $54,395,533) (6) $54,402,630 See accompanying notes to portfolios of investments on page 35. SIT MONEY MARKET FUND REVIEW SEPTEMBER 30, 1996 [PHOTO] MICHAEL C. BRILLEY SENIOR PORTFOLIO MANAGER PAUL J. JUNGQUIST, CFA PORTFOLIO MANAGER The Sit Money Market Fund provided investors with a +2.51% return for the six months ended September 30, 1996, compared to a +2.36% average return for the Lipper Analytical Services, Inc. Money Market Fund universe. Within its Lipper peer group category, the Fund's performance ranked 33rd of 295 funds and 57th of 287 funds, respectively, for the three and twelve month periods ended September 30, 1996. As of September 30, 1996, the Fund's 7-day compound yield was 5.06% and its average maturity was 31 days, compared to 4.93% and 36 days, respectively, at March 31, 1996. Three-month Treasury bill rates were somewhat volatile over the past six months, as considerable uncertainty about the direction of Federal Reserve policy existed during the period. In the end, the Fed left the federal funds rate unchanged during the period, and the three-month Treasury bill rate decreased from 5.14% at March 31 to 5.04% at September 30. The Fund shortened its average maturity during the period without sacrificing yield to take advantage of the somewhat volatile market conditions. Economic growth appears to be slowing from the rapid pace of the second quarter, with inflation remaining moderate. Given this data, most market analysts now expect no change in Fed policy over the near term. We are continuing to take advantage of current yield levels, and expect to maintain the average maturity of the portfolio in a range of 30 to 40 days in anticipation of no short-term change in policy by the Fed. While economic activity has slowed in the third quarter, we do not foresee a significant impact on the creditworthiness of top tier commercial paper issuers. We remain concerned about the relatively high levels of consumer bankruptcies and debt, however, and will continue to monitor our eligible consumer finance credits closely. The Fund continues to diversify its core holdings and its industry exposure. In the months ahead, we plan to add Tier I credits in the captive finance, technology 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 9/30/96: $1.00 Per Share 3/31/96: $1.00 Per Share Total Net Assets: $27.66 Million PORTFOLIO STRUCTURE (% of total net assets) [BAR CHART] Consumer Loan Finance 19.0 Diversified Finance 18.8 U.S. Government 11.9 Utilities 11.8 Captive Equipment Finance 10.2 Captive Auto Finance 8.1 Insurance 6.1 Retail 4.2 Captive Oil Finance 3.2 Consumer Non-Durables 3.0 Technology/Business Equip. 0.9 Other Assets & Liabilities 2.8
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS* Money Lipper Money U.S. Treasury Money Lipper Money U.S. Treasury Market Fund Market Avg. Bill (3-Month) Market Fund Market Avg. Bill (3-Month) 3 Months 1.27% 1.19% 1.32% 1.27% 1.19% 1.32% (unannualized) 1 Year 5.17 4.89 5.35 5.17 4.89 5.35 Inception 4.69 4.49 5.06 14.31 13.66 15.50 (11/1/93)
* As of 9/30/96 PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. SHARE PRICE AND RETURN WILL VARY SO THAT A GAIN OR LOSS MAY BE REALIZED WHEN SHARES ARE SOLD. TOTAL RETURN SHOULD NOT BE TAKEN AS A REPRESENTATION OF FUTURE PERFORMANCE. 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 OMITTED] The sum of $10,000 invested at inception (11/1/93) and held until 9/30/96 would have grown to $11,431 in the Fund or $11,550 in the 3-Month U.S. Treasury Bill Index assuming reinvestment of all dividends and capital gains. QUALITY RATINGS (% of total net assets) AS RATED BY MOODY'S, S&P AND FITCH [PIE CHART] First Tier Securities 100% Second Tier Securities 0% SIT MONEY MARKET FUND PORTFOLIO OF INVESTMENTS - SEPTEMBER 30, 1996 (UNAUDITED) QUANTITY NAME OF ISSUER MARKET VALUE(1) COMMERCIAL PAPER (85.3%) (2) CAPTIVE AUTO FINANCE (8.1%) Ford Motor Credit Corp.: 441,000 5.37%, 10/9/96 $ 440,479 475,000 5.33%, 11/5/96 472,566 325,000 5.46%, 11/19/96 322,611 General Motors Acceptance Corp.: 250,000 5.49%, 10/7/96 249,774 200,000 5.58%, 11/22/96 199,361 158,000 5.64%, 11/7/96 157,100 400,000 5.50%, 12/9/96 395,837 2,237,728 CAPTIVE EQUIPMENT FINANCE (10.2%) IBM Credit Corp.: 185,000 5.31%, 10/7/96 184,837 340,000 5.42%, 11/25/96 337,216 450,000 5.39%, 12/3/96 445,803 John Deere Capital Corp.: 500,000 5.47%, 10/4/96 499,777 450,000 5.45%, 11/22/96 446,496 255,000 5.33%, 12/4/96 252,606 Pitney Bowes Credit Corp., 652,000 5.35%, 11/8/96 648,364 2,815,099 CAPTIVE OIL FINANCE (3.2%) Chevron Oil Finance: 440,000 5.33%, 10/24/96 438,518 460,000 5.32%, 10/31/96 457,972 896,490 CONSUMER LOAN FINANCE (19.0%) American Express Credit Corp.: 365,000 5.37%, 10/10/96 364,513 200,000 5.36%, 10/23/96 199,352 183,000 5.40%, 10/29/96 182,237 490,000 5.36%, 11/1/96 487,764 327,000 American General Financial, 5.35%, 10/31/96 325,558 Beneficial Corp.: 600,000 5.36%, 11/6/96 596,820 175,000 5.38%, 12/2/96 173,394 233,000 5.53%, 12/18/96 230,249 225,000 5.47%, 12/19/96 222,334 Household Finance Corp.: 287,000 5.35%, 10/16/96 286,367 334,000 5.35%, 10/21/96 332,998 389,000 5.34%, 10/30/96 387,345 230,000 5.47%, 12/2/96 227,857 Norwest Financial, Inc.: 288,000 5.35%, 10/2/96 287,958 475,000 5.46%, 11/13/96 471,936 475,000 5.43%, 11/26/96 471,025 5,247,707 CONSUMER NON-DURABLES (3.0%) 390,000 Coca Cola Co., 5.29%, 10/15/96 389,204 200,000 Coca Cola Enterprises, 5.34%, 10/21/96 (5) 199,413 231,000 Sara Lee Corp., 5.34%, 10/24/96230,215 818,832 DIVERSIFIED FINANCE (18.8%) Associates Corp. N.A.: 417,000 5.52%, 10/15/96 416,118 210,000 5.36%, 10/23/96 209,320 200,000 5.36%, 10/29/96 199,176 423,000 5.35%, 11/18/96 420,022 CIT Group Holdings, Inc.: 514,000 5.47%, 10/18/96 512,697 556,000 5.44%, 11/15/96 552,261 General Electric Capital Corp.: 202,000 5.35%, 10/10/96 201,732 225,000 5.48%, 11/20/96 223,306 610,000 5.45%, 11/29/96 604,624 General Electric Capital Services: 500,000 5.52%, 10/11/96 499,244 631,000 5.35%, 11/4/96 627,847 Transamerica Finance Corp.: 400,000 5.37%, 11/14/96 397,404 350,000 5.47%, 11/27/96 346,996 5,210,747 INSURANCE (6.1%) American Family Financial: 600,000 5.47%, 11/12/96 596,206 500,000 5.53%, 12/13/96 494,474 American General Corp.: 400,000 5.42%, 10/1/96 400,000 200,000 5.50%, 10/3/96 199,940 1,690,620 TECHNOLOGY/BUSINESS EQUIPMENT (0.9%) 245,000 IBM Corp., 5.36%, 10/28/96 244,026 RETAIL (4.2%) Sears Roebuck & Co.: 235,000 5.51%, 10/8/96 234,751 201,000 5.36%, 10/28/96 200,201 151,000 5.37%, 11/7/96 150,176 307,000 5.46%, 11/12/96 305,066 289,000 5.48%, 11/21/96 286,781 1,176,975 UTILITIES (11.8%) Ameritech Corp.: 122,000 5.44%, 10/2/96 121,982 200,000 5.31%, 11/6/96 198,944 A T & T Corp.: 450,000 5.52%, 10/25/96 448,371 200,000 5.43%, 11/12/96 198,747 BellSouth Telecommincations, Inc: 217,000 5.32%, 10/4/96 216,904 400,000 5.42%, 11/4/96 397,965 505,000 5.40%, 11/19/96 501,323 1,169,000 Southwestern Bell Capital Corp., 5.33%, 10/22/96 (5) 1,165,395 3,249,631 Total commercial paper (cost: $23,587,855) 23,587,855 U.S. GOVERNMENT SECURITIES (11.9%) 2,900,000 Federal Home Loan Mtg. Corp., 5.65%, 10/1/96 2,900,000 400,000 Federal National Mtg. Assoc., 5.35%, 10/17/96 399,045 Total U.S. government securities (cost: $3,299,045) 3,299,045 Total investments in securities (cost: $26,886,900) (6) $26,886,900 NOTES TO PORTFOLIO OF INVESTMENTS See accompanying notes to portfolios of investments on page 35. (This page has been left blank intentionally.) SIT MUTUAL FUNDS NOTES TO PORTFOLIO OF INVESTMENTS (1) Securities are valued by procedures described in note 1 to the financial statements. (2) Percentage figures indicate percentage of total net assets. (3) At September 30, 1996, 48.4% of the U.S. Government Securities Fund and 24.9% of the Bond Fund was invested in GNMA mobile home pass-through securities. (4) Securities the income from which is treated as a tax preference that is included in alternative minimum taxable income for purposes of computing federal alternative minimum tax (AMT). At September 30, 1996, approximately 16.9% of the Minnesota Tax-Free Income Fund was invested in such securities. (5) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under the guidelines established by the Board of Directors. (6) At September 30, 1996, the cost of securities for federal income tax purposes and the aggregate gross unrealized appreciation and depreciation based on that cost were as follows:
MINNESOTA TAX-FREE TAX-FREE BOND INCOME INCOME FUND FUND FUND Cost for federal income tax purposes $5,387,998 $68,002,566 $287,898,019 Unrealized appreciation (depreciation)on investments: Gross unrealized appreciation $25,475 $1,570,973 $8,276,303 Gross unrealized depreciation (66,787) (77,195) (651,920) Net unrealized appreciation (depreciation) ($41,312) $1,493,778 $7,624,383 U.S. GOVERNMENT MONEY SECURITIES MARKET FUND FUND Cost for federal income tax purposes $54,395,533 $26,886,900 Unrealized appreciation (depreciation)on investments: Gross unrealized appreciation $295,226 None Gross unrealized depreciation (288,129) None Net unrealized appreciation (depreciation) $7,097 None
SIT MUTUAL FUNDS STATEMENTS OF ASSETS & LIABILITIES - SEPTEMBER 30, 1996 (UNAUDITED)
MINNESOTA U.S. TAX-FREE TAX-FREE GOVERNMENT MONEY BOND INCOME INCOME SECURITIES MARKET FUND FUND FUND FUND FUND ASSETS Investments in securities, at identified cost................... $5,387,998 $68,002,566 $287,898,019 $54,395,533 $26,886,900 Investments in securities, at market value - see accompanying schedules for detail............................ $5,346,686 $69,496,344 $295,522,402 $54,402,630 $26,886,900 Cash in bank on demand deposit........................... ------ ------ ------ ------ 674 Accrued interest receivable........................ 62,830 1,401,184 6,469,385 575,621 ------ Receivable for principal paydowns.......................... 1,768 ------ ------ 32,206 ------ Receivable for Fund shares sold.............................. ------ 205,255 782,767 352,648 1,071,240 Total assets.................... 5,411,284 71,102,783 302,774,554 55,363,105 27,958,814 LIABILITIES Payable for investment securities purchased......................... ------ ------ 5,368,076 ------ ------ Disbursements in excess of cash balances..................... 90 51,593 1,426,992 90,790 ------ Payable for Fund shares redeemed.......................... ------ 20,234 567,245 84,278 279,512 Cash portion of dividends payable to shareholders........... 6,102 74,519 360,020 42,212 12,870 Accrued investment management and advisory services fee......... 3,516 45,577 188,457 35,265 11,077 Total liabilities.................... 9,708 191,923 7,910,790 252,545 303,459 Net assets applicable to outstanding capital stock......... $5,401,576 $70,910,860 $294,863,764 $55,110,560 $27,655,355 Capital stock Par............................... $0.001 $0.001 $0.001 $0.01 $0.001 Authorized shares.................10,000,000,000 10,000,000,000 10,000,000,000 10,000,000,000 10,000,000,000 Outstanding shares................ 554,784 6,965,254 29,591,264 5,306,261 27,658,360 Net asset value per share of outstanding capital stock......... $9.74 $10.18 $9.96 $10.39 $1.00 See accompanying notes to financial statements on pages 40-47.
SIT MUTUAL FUNDS STATEMENTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
MINNESOTA U.S. TAX-FREE TAX-FREE GOVERNMENT MONEY BOND INCOME INCOME SECURITIES MARKET FUND FUND FUND FUND FUND INVESTMENT INCOME: INCOME: Interest............................... $191,480 $2,086,225 $8,954,493 $1,791,035 $652,274 Total income....................... 191,480 2,086,225 8,954,493 1,791,035 652,274 EXPENSES (NOTE 3): Investment management and advisory services fee.............. 20,755 258,676 1,116,779 256,962 96,283 Less fees and expenses absorbed by investment adviser............ ---- ---- (14,232) (50,133) (36,072) Total net expenses................. 20,755 258,676 1,102,547 206,829 60,211 Net investment income.............. 170,725 1,827,549 7,851,946 1,584,206 592,063 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS : Net realized gain (loss) (note 2)...... (54,652) 101,925 39,020 (493,546) ---- Net change in unrealized appreciation.. 7,600 521,889 2,317,485 93,054 ---- Net gain (loss) on investments..... (47,052) 623,814 2,356,505 (400,492) ---- Net increase in net assets resulting from operations.............................. $123,673 $2,451,363 $10,208,451 $1,183,714 $592,063 See accompanying notes to financial statements on pages 40-47.
SIT MUTUAL FUNDS STATEMENTS OF CHANGES IN NET ASSETS
BOND MINNESOTA TAX-FREE TAX-FREE FUND INCOME FUND INCOME FUND SIX MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, 1996 MARCH 31, 1996 MARCH 31, 1996 (UNAUDITED) 1996 (UNAUDITED) 1996 (UNAUDITED) OPERATIONS: Net investment income.............................. $170,725 $314,579 $1,827,549 $3,066,188 $7,851,946 Net realized gain (loss) on investments............ (54,652) 154,186 101,925 29,311 39,020 Net change in unrealized appreciation (depreciation) of investments..................... 7,600 742 521,889 515,415 2,317,485 Net increase in net assets resulting from operations...................................... 123,673 469,507 2,451,363 3,610,914 10,208,451 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income.............................. (170,725) (314,579) (1,827,549) (3,075,266) (7,859,372) Net realized gains on investments.................. ---- ---- ---- ---- ---- Total distributions............................... (170,725) (314,579) (1,827,549) (3,075,266) (7,859,372) CAPITAL SHARE TRANSACTIONS: Proceeds from shares sold.......................... 808,280 2,009,736 17,458,350 32,851,258 71,302,780 Reinvested distributions........................... 139,482 270,336 1,403,246 2,334,848 5,893,542 Payments for shares redeemed....................... (721,521) (745,612) (11,554,822) (16,622,975) (64,450,237) Increase (decrease) in net assets from capital share transactions...................... 226,241 1,534,460 7,306,774 18,563,131 12,746,085 Total increase (decrease) in net assets......... 179,189 1,689,388 7,930,588 19,098,779 15,095,164 NET ASSETS Beginning of period................................ 5,222,387 3,532,999 62,980,272 43,881,493 279,768,600 End of period...................................... $5,401,576 $5,222,387 $70,910,860 $62,980,272 $294,863,764 NET ASSETS CONSIST OF: Capital (par value and paid-in surplus)............ $5,481,141 $5,254,900 $69,740,998 $62,434,224 $289,678,319 Undistributed (distributions in excess of) net investment income................................. ---- ---- (9,078) (9,078) (7,426) Accumulated net realized gain (loss) from security transactions............................. (38,253) 16,399 (314,838) (416,763) (2,431,512) Unrealized appreciation (depreciation) on investments.................................... (41,312) (48,912) 1,493,778 971,889 7,624,383 ................................................ $5,401,576 $5,222,387 $70,910,860 $62,980,272 $294,863,764 CAPITAL TRANSACTIONS IN SHARES: Sold............................................... 83,434 205,474 1,731,329 3,250,281 7,211,990 Reinvested distributions........................... 14,403 27,247 139,044 231,001 596,074 Redeemed........................................... (74,155) (74,482) (1,147,187) (1,644,655) (6,534,695) Net increase (decrease).............................. 23,682 158,239 723,186 1,836,627 1,273,369
[WIDE TABLE CONTINUED FROM ABOVE]
TAX-FREE U.S. GOVERNMENT MONEY MARKET INCOME FUND SECURITIES FUND FUND SIX MONTHS SIX MONTHS ENDED ENDED YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30, YEAR ENDED MARCH 31, 1996 MARCH 31, 1996 MARCH 31, 1996 (UNAUDITED) 1996 (UNAUDITED) 1996 OPERATIONS: Net investment income.............................. $14,969,020 $1,584,206 $2,991,108 $592,063 $1,188,260 Net realized gain (loss) on investments............ 1,047,369 (493,546) 466,171 ---- ---- Net change in unrealized appreciation (depreciation) of investments..................... 3,528,518 93,054 162,827 ---- ---- Net increase in net assets resulting from operations...................................... 19,544,907 1,183,714 3,620,106 592,063 1,188,260 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income.............................. (14,968,966) (1,584,203) (2,991,108) (592,068) (1,188,260) Net realized gains on investments.................. ---- ---- ---- ---- ---- Total distributions............................... (14,968,966) (1,584,203) (2,991,108) (592,068) (1,188,260) CAPITAL SHARE TRANSACTIONS: Proceeds from shares sold.......................... 131,895,973 12,131,202 31,591,518 98,332,262 107,451,651 Reinvested distributions........................... 11,117,875 1,389,854 2,618,331 514,514 1,076,722 Payments for shares redeemed....................... (122,978,226) (10,460,006) (19,842,777) (92,451,722) (117,090,139) Increase (decrease) in net assets from capital share transactions...................... 20,035,622 3,061,050 14,367,072 6,395,054 (8,561,766) Total increase (decrease) in net assets......... 24,611,563 2,660,561 14,996,070 6,395,049 (8,561,766) NET ASSETS Beginning of period................................ 255,157,037 52,449,999 37,453,929 21,260,306 29,822,072 End of period...................................... $279,768,600 $55,110,560 $52,449,999 $27,655,355 $21,260,306 NET ASSETS CONSIST OF: Capital (par value and paid-in surplus)............ $276,932,234 $55,762,050 $52,700,997 $27,655,355 $21,260,306 Undistributed (distributions in excess of) net investment income................................. ---- ---- ---- ---- ---- Accumulated net realized gain (loss) from security transactions............................. (2,470,532) (658,587) (165,041) ---- ---- Unrealized appreciation (depreciation) on investments.................................... 5,306,898 7,097 (85,957) ---- ---- ................................................ $279,768,600 $55,110,560 $52,449,999 $27,655,355 $21,260,306 CAPITAL TRANSACTIONS IN SHARES: Sold............................................... 13,320,566 1,169,119 3,015,296 98,332,262 107,451,651 Reinvested distributions........................... 1,122,623 134,119 249,905 514,514 1,076,722 Redeemed........................................... (12,420,344) (1,008,192) (1,895,812) (92,451,722) (117,090,140) Net increase (decrease).............................. 2,022,845 295,046 1,369,389 6,395,054 (8,561,767) See accompanying notes to financial statements on pages 40-47.
SIT MUTUAL FUNDS NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Sit Mutual Funds (the Funds) are 100% no-load funds, and are registered under the Investment Company Act of 1940 (as amended) as diversified (except Minnesota Tax-Free Income Fund which is non-diversified), open-end management investment companies, or series thereof. The Sit Bond Fund, Sit Minnesota Tax-Free Income Fund, and the Sit Tax-Free Income Fund are series funds of Sit Mutual Funds II, Inc. This report covers the bond funds of the Sit Mutual Funds. The investment objective for each Fund is as follows:
FUND INVESTMENT OBJECTIVE Bond Maximize total return, consistent with the preservation of capital. Minnesota Tax-Free Income High level of current income that is exempt from federal income tax and Minnesota regular personal income tax, consistent with the preservation of capital. Tax-Free Income High level of current income that is exempt from federal income tax, consistent with the preservation of capital. U.S. Government Securities High current income and safety of principal. Money Market Maximize current income with the preservation of capital and maintenance of liquidity.
Significant accounting policies followed by the Funds are summarized below: INVESTMENTS IN SECURITIES Securities maturing more than 60 days from the valuation date, with the exception of those in Money Market Fund, are valued at the market price or approximate market value based on current interest rates; those securities with maturities of less than 60 days when acquired, or which subsequently are within 60 days of maturity, are valued at amortized cost, which approximates market value. When market quotations are not readily available, securities are valued at fair value based on procedures determined in good faith by the Boards of Directors. Such fair values are determined using prices quoted by independent brokers or pricing services. Pursuant to Rule 2a-7 of the Investment Company Act of 1940, all securities in the Money Market Fund are valued at amortized cost, which approximates market value, in order to maintain a constant net asset value of $1 per share. Security transactions are accounted for on the date the securities are purchased or sold. Securities gains and losses are calculated on the identified-cost basis. Interest, including level-yield amortization of long-term bond premium and discount, is recorded on the accrual basis. Delivery and payment for securities which have been purchased by the Minnesota Tax-Free Income, Tax-Free Income, and U.S. Government Securities Funds on a forward commitment or when-issued basis can take place a month or more after the transaction date. During this period, such securities are subject to market fluctuations and each Fund maintains, in a segregated account with its custodian, assets with a market value equal to the amount of its purchase commitments. The Minnesota Tax-Free Income Fund concentrates its investments in Minnesota, and therefore may have more credit risk related to the economic conditions in the state of Minnesota than a portfolio with broader geographical diversification. FEDERAL TAXES The Funds' policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to shareholders. Therefore, no income tax provision is required. Also, in order to avoid the payment of any federal excise taxes, the Funds will distribute substantially all of their net investment income and net realized gains on a calendar year basis. Net investment income and net realized gains may differ for financial statement and tax purposes. The character of distributions made during the year for net investment income or net realized gains may also differ from its ultimate characterization for tax purposes. For federal income tax purposes the Minnesota Tax-Free Income Fund, Tax-Free Income Fund, and U.S. Government Securities Fund has a capital loss carryover of $446,763, $2,470,532, and $165,041, respectively, at March 31, 1996 which, if not offset by subsequent capital gains, will begin to expire in 2003. It is unlikely the Board of Directors will authorize a distribution of any net realized gains until the available capital loss carryover is offset or expires. DISTRIBUTIONS Distributions to shareholders are recorded as of the close of business on the record date. Such distributions are payable in cash or reinvested in additional shares of the Funds' capital stock. Distributions from net investment income are declared daily and paid monthly for the Funds. Distributions from net realized gains, if any, will be made annually for each of the Funds. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported results. Actual results could differ from those estimates. NOTE 2 - INVESTMENT SECURITY TRANSACTIONS Purchases of and proceeds from sales and maturities of investment securities, other than short-term securities, for the year ended September 30, 1996, were as follows: Purchases Proceeds Bond Fund $ 4,583,152 $ 4,447,576 Minnesota Tax-Free Income Fund 11,752,729 7,605,076 Tax-Free Income Fund 55,790,266 40,524,497 U.S. Government Securities Fund 34,748,290 31,812,668 For Money Market Fund during the six months ended September 30, 1996, purchases of and proceeds from sales and maturities of investment securities aggregated $203,101,638 and $197,309,974, respectively. NOTE 3 - EXPENSES INVESTMENT ADVISER The Funds each have entered into an investment management agreement with Sit Investment Associates Inc. (SIA), under which SIA manages the Fund's assets and provides research, statistical and advisory services, and pays related office rental, executive expenses and executive salaries. SIA also is obligated to pay all of Bond, Minnesota Tax-Free Income, Tax Free Income, U.S. Government Securities, and Money Market Funds' expenses (excluding extraordinary expenses, stock transfer taxes, interest, brokerage commissions, and other transaction charges relating to investing activities). The fee for investment management and advisory services is based on the average daily net assets of the Funds at the annual rate of: Average Daily Net Assets Bond Fund .80% Minnesota Tax-Free Income Fund .80% Tax-Free Income Fund .80% First Over $50 Million $50 Million U.S. Government Securities Fund 1.00% .80% Money Market Fund .80% .60% For the period April 1, 1995, through March 31, 1997, the Adviser has voluntarily agreed to limit the flat monthly fee (and, thereby, all Fund expenses, except extraordinary expenses, interest, brokerage commissions and other transaction charges not payable by the Adviser) paid by the Tax-Free Income Fund to an annual rate of .70% of the Fund's average daily net assets in excess of $250 million and .60% of the Fund's average daily net assets in excess of $500 million. After March 31, 1997, this voluntary fee waiver may be discontinued by the Adviser in its sole discretion. For the period April 1, 1995, through March 31, 1997, the Adviser has voluntarily agreed to limit the flat monthly fee (and, thereby, all Fund expenses, except extraordinary expenses, interest, brokerage commissions and other transaction charges not payable by the Adviser) paid by the U.S. Government Securities Fund and Money Market Fund to an annual rate of .80% and .50%, respectively of the Fund's average daily net assets. After March 31, 1997, this voluntary fee waiver may be discontinued by the Adviser in its sole discretion. TRANSACTIONS WITH AFFILIATES The investment adviser, affiliates of the investment adviser, directors and officers of the Funds as a whole owned the following shares as of September 30, 1996: % Shares Shares Outstanding Bond Fund 61,764 11.13 Minnesota Tax-Free Income Fund 316,521 4.54 Tax-Free Income Fund 1,621,939 5.48 U.S. Government Securities Fund 499,022 9.40 Money Market Fund 3,129,136 11.31 NOTE 4 - FINANCIAL HIGHLIGHTS Per share data for a share of capital stock outstanding during the period and selected supplemental and ratio information for each period(s), are indicated as follows: SIT BOND FUND FINANCIAL HIGHLIGHTS
Six Months Period from Ended December 1, September 30, 1993 (1) to 1996 Years Ended March 31, March 31, (Unaudited) 1996 1995 1994 NET ASSET VALUE: Beginning of period $9.83 $9.48 $9.69 $10.00 OPERATIONS: Net investment income .32 .64 .62 .19 Net realized and unrealized gains (losses) on investments (.09) .35 (.21) (.31) Total from operations .23 .99 .41 (.12) DISTRIBUTIONS TO SHAREHOLDERS: From net investment income (.32) (.64) (.62) (.19) NET ASSET VALUE: End of period $9.74 $9.83 $9.48 $9.69 Total investment return (2) 2.45% 10.57% 4.51% (1.22%) Net assets at end of period (000's omitted) $5,402 $5,222 $3,533 $3,403 RATIOS: Expenses to average daily net assets 0.80%(3) 0.80% 0.80% 0.80%(3) Net investment income to average daily net assets 6.58%(3) 6.49% 6.63% 6.24%(3) Portfolio turnover rate (excluding short-term securities) 88.85% 159.45% 41.25% 43.49%
(1) Commencement of operations. (2) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. (3) Adjusted to an annual rate. SIT MINNESOTA TAX-FREE INCOME FUND FINANCIAL HIGHLIGHTS
Six Months Period from Ended December 1, September 30, 1993 (1) to 1996 Years Ended March 31, March 31, (Unaudited) 1996 1995 1994 NET ASSET VALUE: Beginning of period $10.09 $9.96 $9.79 $10.00 OPERATIONS: Net investment income .29 .57 .56 .17 Net realized and unrealized gains (losses) on investments .09 .13 .17 (.21) Total from operations .38 .70 .73 (.04) DISTRIBUTIONS TO SHAREHOLDERS: From net investment income (.29) (.57) (.56) (.17) NET ASSET VALUE: End of period $10.18 $10.09 $9.96 $9.79 Total investment return (2) 3.81% 7.12% 7.68% (0.80%) Net assets at end of period (000's omitted) $70,911 $62,980 $43,881 $18,105 RATIOS: Expenses to average daily net assets 0.80%(3) 0.80% 0.80% 0.80%(3) Net investment income to average daily net assets 5.65%(3) 5.62% 5.72% 5.23%(3) Portfolio turnover rate (excluding short-term securities) 12.14% 15.85% 34.20% 12.23%
(1) Commencement of operations. (2) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. (3) Adjusted to an annual rate. SIT TAX-FREE INCOME FUND FINANCIAL HIGHLIGHTS
Six Months Ended Nine Months September 30, Ended 1996 Years Ended March 31, March 31, Years Ended June 30, (Unaudited) 1996 1995 1994 1993 1992 NET ASSET VALUE: Beginning of period $9.88 $9.70 $9.63 $10.02 $9.74 $9.59 OPERATIONS: Net investment income .28 .56 .56 .43 .60 .69 Net realized and unrealized gains (losses) on investments .08 .18 .09 (.30) .32 .15 Total from operations .36 .74 .65 .13 .92 .84 DISTRIBUTIONS TO SHAREHOLDERS: From net investment income (.28) (.56) (.56) (.43) (.60) (.69) From realized gains ---- ---- (.02) (.09) (.04) ---- Total distributions (.28) (.56) (.58) (.52) (.64) (.69) NET ASSET VALUE: End of period $9.96 $9.88 $9.70 $9.63 $10.02 $9.74 Total investment return (1) 3.72% 7.73% 7.00% 1.19% 9.81% 9.09% Net assets at end of period (000's omitted) $294,864 $279,769 $255,157 $324,691 $338,977 $192,808 RATIOS: Expenses to average daily net assets 0.79%(2) 0.80%(2) 0.79%(2) 0.77%(2) 0.80% 0.80% Net investment income to average daily net assets 5.62%(2) 5.65%(2) 5.84%(2) 5.68%(2) 6.17% 7.02% Portfolio turnover rate (excluding short-term securities) 15.15% 25.50% 13.13% 47.56% 58.29% 80.27%
(1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. (2) Percentages for the periods ended September 30, 1996 and March 31, 1994, are adjusted to an annual rate. Total Fund expenses are contractually limited to .80% of average daily net assets. However, during the periods ended September 30, 1996, and March 31, 1996, 1995 and 1994, the investment adviser voluntarily absorbed $14,232, $15,540, $24,991 and $77,029 in expenses that were otherwise payable by the Fund. Had the Fund incurred these expenses, the ratio of expenses to average daily net assets would have been .80% for the periods ended September 30, 1996, and March 31, 1996, 1995 and 1994, and the ratio of net investment income to average daily net assets would have been 5.61%, 5.65%, 5.83% and 5.65%, respectively. SIT U.S. GOVERNMENT SECURITIES FUND FINANCIAL HIGHLIGHTS
Six Months Ended Nine Months September 30, Ended 1996 Years Ended March 31, March 31, Years Ended June 30, (Unaudited) 1996 1995 1994 1993 1992 NET ASSET VALUE: Beginning of period $10.47 $10.28 $10.50 $10.73 $10.81 $10.54 OPERATIONS: Net investment income .32 .70 .67 .47 .71 .77 Net realized and unrealized gains (losses) on investments (.08) .19 (.22) (.18) .07 .44 Total from operations .24 .89 .45 .29 .78 1.21 DISTRIBUTIONS TO SHAREHOLDERS: From net investment income (.32) (.70) (.67) (.47) (.71) (.77) From realized gains ---- ---- ---- (.05) (.15) (.17) Total distributions (.32) (.70) (.67) (.52) (.86) (.94) NET ASSET VALUE: End of period $10.39 $10.47 $10.28 $10.50 $10.73 $10.81 Total investment return (1) 2.36% 8.87% 4.47% 2.70% 7.50% 11.87% Net assets at end of period (000's omitted) $55,111 $52,450 $37,454 $38,683 $31,538 $35,353 RATIOS: Expenses to average daily net assets 0.80%(3) 0.80%(3) 0.80%(3) 0.86%(3 ) 0.89%(2) 0.80%(2) Net investment income to average daily net assets 6.13%(3) 6.72%(3) 6.48%(3) 5.79%(3 ) 6.60%(2) 7.28%(2) Portfolio turnover rate (excluding short-term securities) 62.76% 51.37% 38.51% 73.87% 76.66% 133.86%
(1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. (2) Prior to January 1, 1993, total Fund expenses were contractually limited to 1.25% of average daily net assets for the first $30 million of Fund net assets and 1.00% of average daily net assets exceeding $30 million of Fund net assets. However, during the years ended June 30, 1993 and 1992, the investment adviser voluntarily absorbed an additional $72,628 and $134,559 of expenses that were otherwise payable by the Fund. Had the Fund incurred these expenses, the ratio of expenses to average daily net assets would have been 1.11% and 1.21%, respectively for these periods, and the ratio of net investment income to average daily net assets would have been 6.38% and 6.87%, respectively. (3) Percentages for the periods ended September 30, 1996 and March 31, 1994, are adjusted to an annual rate. Total Fund expenses are contractually limited to 1.00% of average daily net assets for the first $50 million in Fund net assets and .80% of average daily net assets exceeding $50 million. However, during the periods ended September 30, 1996, and March 31, 1996, 1995 and 1994, the investment adviser voluntarily absorbed $50,133, $88,625, $73,460 and $39,324 of expenses that were otherwise payable by the Fund. Had the Fund incurred these expenses, the ratio of expenses to average daily net assets would have been 1.00% for each of these periods, and the ratio of net investment income to average daily net assets would have been 5.93%, 6.52%, 6.28% and 5.65%, respectively. SIT MONEY MARKET FUND FINANCIAL HIGHLIGHTS As of November 1, 1993, the Fund's name was changed to Sit Money Market Fund, Inc. from Sit Investment Reserve Fund, Inc. Effective on this date, the Fund's primary investment policy was amended to comply with Rule 2a-7 of the Investment Company Act of 1940 governing money market funds. The Fund's investment objective, however, remains the achievement of maximum current income to the extent consistent with the preservation of capital and maintenance of liquidity. Per share amounts prior to November 1, 1993 have been restated to reflect the 9.98 to 1 stock split.
MONEY MARKET FUND SIT INVESTMENT RESERVE FUND Six Months Period From Period From Ended November 1, July 1, September 30, 1993 to 1993 to 1996 Years Ended March 31, March 31, October 31, Years Ended June 30, (Unaudited) 1996 1995 1994 1993 1993 1992 NET ASSET VALUE: Beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 OPERATIONS: Net investment income 0.02 0.05 0.04 0.01 0.01 0.03 0.05 Total from operations 0.02 0.05 0.04 0.01 0.01 0.03 0.05 DISTRIBUTIONS TO SHAREHOLDERS: From net investment income (0.02) (0.05) (0.04) (0.01) (0.01) (0.03) (0.05) NET ASSET VALUE: End of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 Total investment return (1) 2.51% 5.44% 4.57% 1.14% 0.92% 3.02% 5.03% Net assets at end of period (000's omitted)$27,655 $21,260 $29,822 $17,864 $12,626 $10,869 $16,234 RATIOS: Expenses to average daily net assets 0.50%(3) 0.50%(3) 0.50%(3) 0.50%(3) 0.72%(3) 0.80%(2) 0.80%(2) Net investment income to average daily net assets 4.91%(3) 5.35%(3) 4.63%(3) 2.76%(3) 2.67%(3) 2.98%(2) 4.74%(2)
(1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of distributions at net asset value. (2) Prior to January 1, 1993, total Fund expenses were contractually limited to 1.00% of average daily net assets for the first $30 million of Fund net assets. Subsequent to January 1, 1993 total Fund expenses are contractually limited to .80% of the first $50 million of Fund net assets. However, during the years ended June 30, 1993 and 1992, the investment adviser voluntarily absorbed $16,480 and $20,635 of expenses that were otherwise payable by the Fund. Had the Fund incurred these expenses, the ratio of expenses to daily net assets would have been 0.91% and 1.00%, repectively, for these periods, and the ratio of net investment income to average daily net assets would have been 2.87% and 4.54%, respectively. (3) Percentages for the periods ended September 30, 1996, March 31, 1994, and October 31, 1993, are adjusted to an annual rate. Total Fund expenses are contractually limited to .80% of average daily net assets for the first $50 million in Fund net assets and .60% of average daily net assets for Fund net assets exceeding $50 million. However, during the periods ended September 30, 1996, and March 31, 1996, 1995 and 1994, and October 31, 1993, the investment adviser voluntarily absorbed $36,072, $66,862, $63,828, $17, 565 and $3,224, respectively, in expenses that were otherwise payable by the Fund. Had the Fund incurred these expenses, the ratio of expenses to average daily net assets would have been .80% for each of these periods and the ratio of net investment income to average daily net assets would have been 4.61%, 5.05%, 4.33%, 2.46%, and 2.59%, respectively. (This page has been left blank intentionally.) [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 Michael C. Brilley Senior Vice President Mary K. Stern President 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 Paul E. Rasmussen Vice President & Treasurer Michael P. Eckert Vice President - Group Manager Michael J. Radmer Secretary Parnell M. Kingsley Assistant Secretary Carla J. Rose Assistant Secretary
(1) Bond, Balanced and U.S. Government Securities Funds only. (2) Money Market Fund only. SEMI-ANNUAL REPORT BOND FUNDS SEPTEMBER 30, 1996 INVESTMENT ADVISOR 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 9763 PROVIDENCE, RI 02940-9763 AUDITORS KPMG PEAT MARWICK LLP 4200 NORWEST CENTER MINNEAPOLIS, MN 55402 LEGAL COUNCEL DORSEY & WHITNEY LLP 220 SOUTH SIXTH STREET MINNEAPOLIS, MN 55402 MEMBER OF 100% NO-LOAD MUTUAL FUND COUNCIL -----END PRIVACY-ENHANCED MESSAGE-----