<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1999.
Registration Nos. 2-61491; 811-02818
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE / /
SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 34 /X/
AND/OR
REGISTRATION STATEMENT UNDER / /
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 30 /X/
[Check appropriate box or boxes]
________________________
SM&R BALANCED FUND, INC.
[Exact Name of Registrant as Specified in Charter]
2450 SOUTH SHORE BOULEVARD, SUITE 400, LEAGUE CITY, TEXAS 77573
[Address of Principal Executive Offices] [Zip Code]
Registrant's Telephone Number, Including Area Code: (281) 334-2469
NAME AND ADDRESS OF WITH COPY TO:
AGENT FOR SERVICE:
JERRY L. ADAMS
TERESA E. AXELSON GREER, HERZ & ADAMS, L.L.P.
2450 SOUTH SHORE BOULEVARD ONE MOODY PLAZA
SUITE 400 GALVESTON, TEXAS 77550
LEAGUE CITY, TEXAS 77573
FREDERICK R. BELLAMY
SUTHERLAND, ASBILL & BRENNAN LLP
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2415
___________________
It is proposed that this filing will become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/X/ on May 1, 1999 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on (date) pursuant to paragraph (a)(1) of Rule 485
/ / 75 days after filing pursuant to paragraph (a) of Rule 485
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/ / this Post-Effective Amendment designates a new effective date for a
previously filed Post-Effective Amendment
Title of Securities Being Registered ....Common Stock, par value $.01 per share.
<PAGE>
[LOGO]
P R O S P E C T U S
MAY 1, 1999
- SM&R GROWTH FUND, INC.
- SM&R EQUITY INCOME FUND, INC.
- SM&R BALANCED FUND, INC.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
CLASSES A, B, AND C
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
RISK/RETURN SUMMARY....................................................................... 1
SM&R Growth Fund........................................................................ 1
SM&R Equity Income Fund................................................................. 2
SM&R Balanced Fund...................................................................... 3
Types of Investment Risk................................................................ 4
Bar Chart and Performance Table......................................................... 4
Fees and Expenses of the Funds.......................................................... 8
SHARES OF THE FUNDS....................................................................... 11
Sales Charges........................................................................... 12
Sales Charge Reductions and Waivers..................................................... 13
Distribution and Shareholder Service (12b-1) Fees....................................... 16
INVESTMENT OBJECTIVES AND POLICIES........................................................ 17
Growth Fund............................................................................. 17
Equity Income Fund...................................................................... 18
Balanced Fund........................................................................... 19
RISK FACTORS.............................................................................. 21
PURCHASES AND REDEMPTIONS................................................................. 23
Purchasing Shares....................................................................... 23
Pricing of Fund Shares.................................................................. 24
Special Purchase Plans and Services..................................................... 25
Retirement Plans........................................................................ 28
Dividends, Distributions, and Taxes..................................................... 28
Redeeming Shares........................................................................ 29
THE FUNDS AND MANAGEMENT.................................................................. 33
FINANCIAL HIGHLIGHTS...................................................................... 36
Growth Fund............................................................................. 36
Equity Income Fund...................................................................... 37
Balanced Fund........................................................................... 38
APPENDIX.................................................................................. A-1
</TABLE>
i
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND, INC.
- --------------------------------------------------------------------------------
GROWTH FUND'S INVESTMENT OBJECTIVE
The Growth Fund seeks long-term capital growth by investing
primarily in common stocks that provide an opportunity for
capital appreciation over time.
GROWTH FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Growth Fund normally invests at least 85% of its total
assets in common stocks. In selecting stocks, this fund:
- chooses the stocks of financially sound companies that have a
proven ability to make and sustain a profit over time, and
- places an emphasis on companies with growth potential.
The Growth Fund generally purchases a higher proportion of
stocks (relative to their market weight) from those sectors of
the market with higher growth prospects, referred to as
"overweighting." Examples of sectors with higher growth
prospects currently include technology, healthcare, and
consumer staples. On the other hand, the fund generally
purchases a smaller proportion of stocks (relative to their
market weight) from sectors of the market with below average
growth characteristics (for example, utilities and basic
materials), referred to as "underweighting."
The Growth Fund may also invest in debt obligations (such as
convertible preferred stocks, debentures, and notes), including
below investment grade bonds ("junk" bonds).
PRINCIPAL RISKS OF INVESTING IN THE GROWTH FUND
You could lose money on your investment in the Growth Fund, or
it could underperform other investments, if any of the
following occurs:
- the stock market goes down
- the investment decisions of management (such as sector
overweighting and underweighting and individual stock
selection) do not achieve the desired results
- interest rates increase
- issuers of debt obligations default or are unable to pay
amounts due
Investments by the Growth Fund in smaller companies may involve
greater risks than larger established companies.
WHO MAY WANT TO INVEST IN THE GROWTH FUND
This fund may be appropriate if you:
- have long time horizons (ten years or more)
- are willing to accept higher short-term risk along with
higher potential long-term returns
- want to diversify your portfolio
- are investing for retirement or other goals that are many
years in the future
This fund may NOT be appropriate:
- if you are investing with a shorter time horizon
- if you are uncomfortable with an investment that will go up
and down in value
- as your complete portfolio
1
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND, INC.
- --------------------------------------------------------------------------------
EQUITY INCOME FUND'S INVESTMENT OBJECTIVE
The Equity Income Fund seeks current income with a secondary
objective of long-term capital appreciation.
EQUITY INCOME FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Equity Income Fund normally invests at least 75% of its
assets in equity securities. This fund also invests in
preferred stocks and investment grade debt securities (such as
publicly traded corporate bonds, debentures, notes, commercial
paper, repurchase agreements, and certificates of deposit). In
selecting common and preferred stocks, the fund focuses on
companies with consistent and increasing dividend payment
histories and future earnings potential sufficient to continue
such dividend payments. This fund's goal is to maintain a
portfolio dividend yield (before fees and expenses) at least
50% greater than that of the S&P 500 Index.
The Equity Income Fund generally purchases a higher proportion
of stocks (relative to their market weight) from those sectors
of the market with greater dividend prospects, referred to as
"overweighting." Examples of sectors with greater dividend
prospects currently include financial companies like banks,
insurance companies, and real estate investment trusts. On the
other hand, the fund generally purchases a smaller proportion
of stocks (relative to their market weight) from sectors of the
market with below average dividend yields (such as technology
and consumer staples), referred to as "underweighting."
PRINCIPAL RISKS OF INVESTING IN THE EQUITY INCOME FUND
You could lose money on your investment in the Equity Income
Fund, or it could underperform other investments, if any of the
following occurs:
- the stock market goes down and/or interest rates increase
- the investment decisions of management (such as sector
overweighting and underweighting and individual stock
selection) do not achieve the desired results
- issuers of debt obligations default or are unable to pay
amounts due
- the fund cannot find a buyer for securities
Investments by the Equity Income Fund in smaller companies may
involve greater risks than larger established companies.
WHO MAY WANT TO INVEST IN THE EQUITY INCOME FUND
This fund may be appropriate if you:
- are looking for a fund that has both growth and income
components
- are seeking to protect the purchasing power of your money
while retaining the potential for growth and reducing
exposure to the volatility of the market
- are willing to accept higher short-term risk along with
higher potential long-term returns
- are retired or nearing retirement
This fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require a high degree of stability of your principal
- desire your return to be either ordinary income or capital
gains, but not both
2
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND, INC.
- --------------------------------------------------------------------------------
BALANCED FUND'S INVESTMENT OBJECTIVE
The Balanced Fund seeks to conserve principal, produce current
income, and achieve long-term capital appreciation.
BALANCED FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Balanced Fund uses a "balanced" approach by investing part
of the assets in common stocks and the remainder in a
combination of U.S. Government bonds, investment grade
corporate bonds, collateralized mortgage obligations, mortgaged
backed securities, convertible bonds, and money market
instruments. The ratio of stocks to bonds changes in response
to changing economic conditions. This flexibility may help to
reduce price volatility.
This fund's goal is relative stability of principal through a
balance of stocks, bonds, and cash. The stocks are diversified
and are selected based upon two models. One model is based on
profitability measurements and the other model is based on the
corporation's return on invested cash. The bonds, meanwhile,
may serve as a stabilizing force during times of eroding stock
market value, as well as provide a fixed income payment stream.
The fund invests at least 25% of assets in fixed income
securities, all of which are rated BBB or better (investment
grade).
PRINCIPAL RISKS OF INVESTING IN THE BALANCED FUND
You could lose money on your investment in the Balanced Fund,
or it could underperform other investments, if any of the
following occurs:
- interest rates increase or the stock market goes down
- issuers of debt obligations default or are unable to pay
amounts due
- the investment decisions of management do not achieve the
desired results
Investments by the Balanced Fund in smaller companies may
involve greater risks than larger established companies.
WHO MAY WANT TO INVEST IN THE BALANCED FUND
This fund may be appropriate if you:
- are seeking supplemental income and conservation of the
purchasing power of your capital
- are looking for a more conservative alternative to a
growth-oriented fund
- want a well-diversified and relatively stable investment
allocation
- need a core investment
- are retired or nearing retirement
This fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- desire your return to be either ordinary income or capital
gains, but not both
- require a high degree of stability of your principal
3
<PAGE>
RISK/RETURN SUMMARY
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
As indicated above, each of the three funds is subject to the following types of
risks to varying degrees:
CREDIT RISK. The risk that the issuer of a security, or a party to a contract,
will default or otherwise not honor a financial obligation. THIS RISK APPLIES TO
ALL OF THE FUNDS, BUT MAY HAVE A GREATER IMPACT ON THE BALANCED AND EQUITY
INCOME FUNDS.
INTEREST RATE RISK. The risk of declines in market value of an income-bearing
investment due to changes in prevailing interest rates. With fixed-rate
securities, a rise in interest rates typically causes a decline in market
values, while a fall in interest rates typically causes an increase in market
values. THIS RISK APPLIES TO ALL OF THE FUNDS, BUT MAY HAVE A GREATER IMPACT ON
THE BALANCED AND EQUITY INCOME FUNDS.
LIQUIDITY RISK. The risk that certain securities or other investments may be
difficult or impossible to sell at the time the fund would like to sell them or
at the price the fund values them. The fund may have to sell at a lower price,
sell other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance.
INVESTMENT STYLE OR MANAGEMENT RISK. The risk that a strategy used by a fund's
management may fail to produce the intended result because: (1) management fails
to properly implement the selected investment strategy; or (2) the securities
that fit the fund's investment style do worse than securities that fit other
investment styles. This risk is common to all mutual funds.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. The fluctuations may cause a security to be
worth less than the price originally paid for it, or less than it was worth at
an earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. This risk is common to all stocks and bonds
and the mutual funds that invest in them.
BAR CHART AND PERFORMANCE TABLE
The bar charts and performance tables shown below provide some indication of the
risks of investing in the funds and the variability of returns:
- - by showing each fund's performance for each year over a ten year period, and
- - by showing how each fund's average annual returns for 1, 5, and 10 years
compare to those of both a broad-based securities market index, and an index
of funds with similar investment objectives.
The returns shown are based on an investment in the funds prior to the creation
of multiple classes of shares, but do not reflect any sales loads that would be
imposed on the purchase or sale of any shares. We created the multiple classes
of shares on January 1, 1999. If multiple classes of shares of the funds had
been in existence, the financial performance of Class A, B, and C shares would
have been lower than depicted because of the imposition of distribution and/or
service (12b-1) fees.
Past performance is not necessarily an indication of how the funds will perform
in the future.
4
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 24.33%
1990 -2.94%
1991 36.98%
1992 -2.50%
1993 8.17%
1994 4.98%
1995 25.20%
1996 17.64%
1997 22.24%
1998 18.35%
</TABLE>
During the ten year period shown in the bar chart, the Growth Fund's highest
return for a quarter was 19.41% achieved December 31, 1998 and its lowest return
for a quarter was a negative 13.16% for the quarter September 30, 1990.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING
DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
GROWTH FUND 11.53% 16.10% 13.90%
S&P 500-REGISTERED TRADEMARK-* 28.61% 24.05% 19.19%
LIPPER GROWTH FUND INDEX** 25.69% 19.82% 17.20%
</TABLE>
* The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices.
Standard & Poor's, S&P, and S&P 500-Registered Trademark- are registered
trademarks of Standard & Poor's Corporation.
** The Lipper Growth Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 30 largest open-end funds which invest in companies whose long
term earnings are expected to grow significantly faster than the earnings of the
stocks represented in the major unmanaged stock indices.
5
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 28.12%
1990 0.75%
1991 29.06%
1992 3.31%
1993 10.63%
1994 -0.61%
1995 29.12%
1996 16.46%
1997 22.72%
1998 12.11%
</TABLE>
During the ten year period shown in the bar chart, the Equity Income Fund's
highest return for a quarter was 11.12% achieved December 31, 1991 and its
lowest return for a quarter was a negative 7.61% for the quarter September 30,
1998.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING
DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
EQUITY INCOME FUND 5.65% 14.15% 13.95%
S&P 500-REGISTERED TRADEMARK-* 28.61% 24.05% 19.19%
LIPPER EQUITY INCOME FUND INDEX** 11.78% 16.62% 14.89%
</TABLE>
* The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices.
Standard & Poor's, S&P, and S&P 500-Registered Trademark- are registered
trademarks of Standard & Poor's Corporations.
** The Lipper Equity Income Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 10 largest open-end funds which seek relatively high current
income and growth of income through investing 60% or more of their portfolios in
equities.
6
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 13.66%
1990 1.37%
1991 24.53%
1992 3.00%
1993 6.31%
1994 1.49%
1995 22.29%
1996 11.86%
1997 17.46%
1998 13.83%
</TABLE>
During the ten year period shown in the bar chart, the Balanced Fund's highest
return for a quarter was 10.18% achieved December 31, 1998 and its lowest return
for a quarter was a negative 7.64% for the quarter September 30, 1990.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING
DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
BALANCED FUND 7.28% 11.81% 10.64%
LEHMAN BROTHERS INTERMEDIATE 8.44% 6.60% 8.52%
GOVERNMENT/CORPORATE INDEX*
LIPPER BALANCED FUND INDEX** 15.09% 13.88% 13.32%
</TABLE>
* The Lehman Brothers Intermediate Government/Corporate Index is an unmanaged
index generally representative of the performance of the bond market as a whole.
** The Lipper Balanced Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 30 largest open-end funds whose primary objective is to
conserve principal by maintaining a balanced portfolio of stocks and bonds. The
stock/bond ratio typically ranges around 60%/40%.
7
<PAGE>
RISK/RETURN SUMMARY
- --------------------------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
GROWTH, EQUITY INCOME, AND
BALANCED FUNDS
---------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
MAXIMUM SALES CHARGE (TOTAL) 5.00% 5.00% 2.00%
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 5.00%(1) None 1.00%
Maximum Deferred Sales Charge (as a
percentage of offering price)(2) None(3) 5.00%(4) 1.00%(5)
Maximum Sales Charge Imposed on Reinvested
Dividends and other Distributions (as a
percentage of offering price) None None None
EXCHANGE FEES None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES(6)
(expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
GROWTH FUND EQUITY INCOME FUND
--------------------------------- ---------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fees 0.49% 0.49% 0.49% 0.67% 0.67% 0.67%
Distribution and/or Service (12b-1) Fees 0.25% 0.75% 1.00% 0.25% 0.75% 1.00%
Other Expenses(7) 0.36% 0.36% 0.36% 0.34% 0.34% 0.34%
------- ------- ------- ------- ------- -------
Total Annual Fund Operating Expenses(8) 1.10% 1.60% 1.85% 1.26% 1.76% 2.01%
</TABLE>
<TABLE>
<CAPTION>
BALANCED FUND
---------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Management Fees 0.75% 0.75% 0.75%
Distribution and/or Service (12b-1) Fees 0.25% 0.75% 1.00%
Other Expenses(7) 0.62% 0.62% 0.62%
------- ------- -------
Total Annual Fund Operating Expenses(8) 1.62% 2.12% 2.37%
</TABLE>
NOTES TO THE FEES AND EXPENSES
(1) You pay a sales charge of 5.00% on initial investments in Class A shares of
less than $50,000. You pay a reduced sales charge at certain breakpoints,
as follows:
- 4.50% on initial investments of at least $50,000 but less than $100,000
8
<PAGE>
RISK/RETURN SUMMARY
- --------------------------------------------------------------------
- 3.50% on initial investments of at least $100,000 but less than $250,000
- 2.50% on initial investments of at least $250,000 but less than $500,000
- 1.50% on initial investments of at least $500,000 but less than $1 million
- zero on initial investments of $1 million or more
(2) You pay an $8.00 transaction fee for each expedited wire redemption.
(3) Purchases of $1 million or more of Class A shares may be made without an
initial sales charge. Redemptions of such shares within the first thirteen
months after purchase, however, will be subject to a contingent deferred
sales charge of 1.00%.
(4) The maximum 5.00% contingent deferred sales charge on Class B shares applies
to redemptions during the first year after purchase. The charge declines to
4.00% during the second year, 3.00% during the third year, 2.00% during the
fourth year, 1.00% during the fifth year, and zero during the sixth year and
thereafter.
(5) A contingent deferred sales charge of 1.00% only applies to redemptions of
Class C shares during the first thirteen months after purchase.
(6) The "Management Fee" and "Other Expenses" shown for the funds are for the
year ended December 31, 1998.
(7) "Other Expenses" include the 0.25% Administrative Service Fee. Because Class
A, B, and C shares were not available prior to the date of this Prospectus,
"Other Expenses" for Class A, B, and C shares are based on the expenses and
average net assets of the Growth, Equity Income, and Balanced Fund for the
fiscal year ended December 31, 1998.
(8) The Fee Table does NOT reflect any fees waived or expenses assumed either
contractually or voluntarily by the funds' manager, Securities Management
and Research, Inc. ("SM&R"). Pursuant to the Administrative Service
Agreement, SM&R will pay (or reimburse) each fund for regular operating
expenses in excess of 1.25% per year of such fund's average daily net assets.
Regular operating expenses include the advisory fee and administrative fee,
but do not include the 12b-1 fee or class-specific expenses. During the
fiscal year ended December 31, 1998, SM&R waived management fees of 0.12% for
the Balanced Fund.
9
<PAGE>
RISK/RETURN SUMMARY
- --------------------------------------------------------------------
EXAMPLES OF EXPENSES
These examples are intended to help you compare the cost of investing in the
funds with the cost of investing in other mutual funds. These examples assume
that you invest $10,000 in each fund and applicable class thereof for the time
periods indicated, based on expenses BEFORE fee waivers and expense
reimbursements. These examples also assume that your investment has a 5% return
each year and that the funds' operating expenses remain the same. YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER THAN SHOWN.
You would pay the following expenses, based on these assumptions, if you
actually redeem all of your shares at the end of the period shown:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Fund
Class A..................................... $ 617 $ 832 $ 1,076 $ 1,773
Class B..................................... $ 663 $ 805 $ 971 $ 1,766
Class C..................................... $ 386 $ 676 $ 1,091 $ 2,247
Equity Income Fund
Class A..................................... $ 622 $ 880 $ 1,157 $ 1,946
Class B..................................... $ 679 $ 854 $ 1,054 $ 1,942
Class C..................................... $ 402 $ 724 $ 1,172 $ 2,414
Balanced Fund
Class A..................................... $ 657 $ 986 $ 1,337 $ 2,326
Class B..................................... $ 715 $ 964 $ 1,239 $ 2,325
Class C..................................... $ 438 $ 832 $ 1,353 $ 2,779
</TABLE>
However, you would pay the following expenses, based on these assumptions, if
you did NOT redeem your shares:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Fund
Class A..................................... $ 617 $ 832 $ 1,076 $ 1,773
Class B..................................... $ 163 $ 505 $ 871 $ 1,766
Class C..................................... $ 286 $ 676 $ 1,091 $ 2,247
Equity Income Fund
Class A..................................... $ 622 $ 880 $ 1,157 $ 1,946
Class B..................................... $ 179 $ 554 $ 954 $ 1,942
Class C..................................... $ 302 $ 724 $ 1,172 $ 2,414
Balanced Fund
Class A..................................... $ 657 $ 986 $ 1,337 $ 2,326
Class B..................................... $ 215 $ 664 $ 1,139 $ 2,325
Class C..................................... $ 338 $ 832 $ 1,353 $ 2,779
</TABLE>
10
<PAGE>
SHARES OF THE FUNDS
- --------------------------------------------------------------------------------
The funds ("we") offer three classes of shares through this Prospectus, called
Class A, Class B, and Class C. Each class has its own cost structure, allowing
you to choose the class that best suits your circumstances and preferences. Your
representative can help you decide.
The funds offer other classes through separate prospectuses. The other classes
can only be bought by specified types of investors or through certain
distribution channels. FOR MORE INFORMATION ON THE OTHER CLASSES OF SHARES OR TO
REQUEST A PROSPECTUS FOR ANOTHER CLASS, CALL INVESTOR SERVICES AT (800)
231-4639.
You may select from among the following three classes of shares:
CLASS A
(FRONT-END LOAD)
- - Front-end sales charges, as described below. There are several ways to reduce
these charges, also described below.
- - Lower annual expenses than Class B or Class C shares.
CLASS B
(BACK-END LOAD)
- - No front-end sales charge; all your money goes to work for you right away.
- - Higher annual expenses than Class A shares.
- - A deferred sales charge on shares you sell within five years of purchase, as
described below.
- - Automatic conversion to Class A shares after eight years, thus reducing future
annual expenses.
CLASS C
(LEVEL LOAD)
- - Lower front-end sales charge than Class A shares, as described below.
- - Higher annual expenses than Class A and Class B shares.
- - A deferred sales charge on shares you sell within thirteen months of purchase,
as described below.
FOR EXPENSES OF CLASS A, B, AND C SHARES, SEE THE FEES AND EXPENSES OF THE FUNDS
EARLIER IN THIS PROSPECTUS.
11
<PAGE>
SALES CHARGES
- --------------------------------------------------------------------------------
CLASS A SALES CHARGES
The offering price of Class A shares is the net asset value plus a "front-end"
sales charge. The sales charge is a percentage of the offering price, as shown
in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS A %
SALES CHARGE AS A % OF NET AMOUNT
AMOUNT OF INVESTMENT OF OFFERING PRICE INVESTED
- ------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Less than $50,000 5.00% 5.3%
$50,000 but less than $100,000 4.5% 4.7%
$100,000 but less than $250,000 3.5% 3.6%
$250,000 but less than $500,000 2.5% 2.6%
$500,000 but less than $1,000,000 1.5% 1.5%
$1,000,000 and over See below None
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE. If you invest $1 million or more in Class A
shares, you do not pay any "front-end" sales charge. However, you will pay a
contingent deferred sales charge (CDSC) of 1.00% of the offering price if you
redeem those shares within 13 months after you bought them. The CDSC will be
calculated in the same manner as for Class B shares, as described below.
CLASS B SALES CHARGES
Class B shares are sold at net asset value, without any initial sales charge.
However, there is a CDSC on shares you sell within five years of buying them.
The CDSC shown in the following table is a percentage of the offering price:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE
YEARS SINCE PURCHASE (AS A % OF OFFERING PRICE)
- ----------------------------------------------------- -------------------------------
<S> <C>
Year 1 5.00%
Year 2 4.00%
Year 3 3.00%
Year 4 2.00%
Year 5 1.00%
Year 6+ None
</TABLE>
If the net asset value of shares being redeemed has increased since you bought
them, we do not impose any CDSC on such increase in net asset value. We do not
impose any CDSC on shares you buy with reinvested dividends or capital gain
distributions. We will minimize any applicable CDSC by assuming that an investor
(i) first redeems Class B shares bought through reinvested dividends and capital
gains distributions, and (ii) next redeems Class B shares held the longest.
CLASS C SALES CHARGES
Class C shares are sold at the net asset value plus a "front-end" sales charge
of 1.00% of the offering price. A contingent deferred sales charge of 1.00% also
applies on redemptions of Class C shares during the first thirteen months after
purchase.
12
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
- --------------------------------------------------------------------------------
REDUCING YOUR CLASS A SALES CHARGE
DISCOUNTS THROUGH CONCURRENT PURCHASES. To qualify for a reduced sales charge on
Class A shares, you may combine concurrent purchases of Class A shares of funds
managed by Securities Management and Research, Inc. ("SM&R") on which you
paid a front-end sales charge. Investors that are eligible to combine
concurrent purchases to qualify for a reduced sales charge include:
(1) Any individual;
(2) Any individual, his or her spouse, and trusts or custodial accounts
for their minor children;
(3) A trustee or fiduciary of a single trust estate or single fiduciary
account;
(4) Tax-exempt organizations specified in Sections 501(c)(3) or (13) of
the Internal Revenue Code, or employees' trusts, pension,
profit-sharing, or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code; and
(5) Employees (or employers on behalf of employees) under any employee
benefit plan not qualified under Section 401 of the Internal Revenue
Code.
Purchases in connection with employee benefit plans not qualified under
Section 401 of the Internal Revenue Code will qualify for the above
quantity discounts only if the fund will realize economies of scale in
sales effort and sales related expenses as a result of the employer's or
the plan's bearing the expense of any payroll deduction plan, making the
fund's prospectus available to individual investors or employees,
forwarding investments by such employees to the funds, and the like.
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class A or Class T
shares of a fund managed by SM&R, on which you paid a front-end sales charge,
you may be able to receive a discount when you buy additional shares. The
current net asset value of the shares you already own may be
"accumulated"--I.E., combined together with the dollar amount being
invested-- to achieve quantities eligible for discount.
LETTER OF INTENT. You may qualify for a reduced sales charge on purchases of
Class A shares of funds managed by SM&R by completing the Letter of Intent
section of the account application. Under a Letter of Intent, an investor
expresses an intention to purchase, within 13 months of the initial
investment, a specified amount of Class A shares of funds managed by SM&R
which, if made concurrently, would qualify for a reduced sales charge. Upon
execution of the Letter of Intent, the investor must make a minimum initial
investment equal to ten percent (10%) of the amount necessary to qualify for
the applicable reduced sales charge. To assure that the full applicable
sales charge will be paid if the intended purchase is not completed, five
percent (5%) of the total intended purchase amount will be held in escrow in
shares registered in the investor's name. Shares held in escrow under a
Letter of Intent are not eligible for the exchange privilege until the
Letter of Intent is completed or canceled. A
13
<PAGE>
Letter of Intent does not represent a binding obligation on the part of the
investor to purchase or the funds to sell the full amount of shares
specified.
WAIVER OF SALES CHARGES. Class A shares may be sold without a front-end sales
charge (at net asset value) to:
a. persons appointed as insurance agents by: (1) American National
Insurance Company ("American National"), (2) American National
subsidiaries, and (3) any insurance company for which any of American
National's present directors serve as a director (and the spouses of
such persons).
b. any child, step-child, grand child, parent, grandparent, brother or
sister of any person named in (a) above and their spouses;
c. any trust, pension, profit-sharing plan, IRA, or other benefit plan
for any persons mentioned in (a) or (b) above;
d. custodial accounts for minor children of such persons mentioned in
(a) pursuant to the Uniform Gift to Minors or Uniform Transfers to
Minors Acts;
e. persons who have received a distribution from a pension,
profit-sharing, or other benefit plan, to the extent such
distribution represents the proceeds of a redemption of shares of any
fund managed by SM&R (other than the Money Market and Primary Funds);
f. policyholders of American National subsidiaries that have entered
into a net asset value agreement with SM&R;
g. persons purchasing shares for a federal or state sponsored
post-secondary education funding program;
h. any non-profit business, trade, professional, charitable, civic or
similar associations and clubs with an active membership of at least
100 persons;
i. registered representatives and employees of dealers who have entered
into mutual fund sales or distribution agreements with SM&R and
members of the immediate family (including spouse, children, parents
and parents of spouse) provided that purchases at net asset value are
permitted by the policies of the dealer; and
j. any other persons that have been determined by the Board of
Directors (or by the distributor based on guidelines established by
the Board) to have acquired shares under circumstances not involving
any sales expense to the Funds.
YOU HAVE THE SOLE RESPONSIBILITY OF NOTIFYING SM&R THAT YOU INTEND TO
QUALIFY UNDER ONE OF THESE CATEGORIES.
The funds may terminate or change the terms of any waiver of sales
charges at any time.
THE EDUCATION FUNDING INVESTMENT ACCOUNT PROGRAM. The Education Funding
Investment Account Program is a service expressly created to help investors
accumulate funds for their children's or grandchildren's college education
by reducing the standard sales charge breakpoints. Breakpoints for the
Program differ from standard breakpoints in two respects: (1) investments in
Class A shares of less than $100,000 are subject to a lower initial sales
charge, and
14
<PAGE>
(2) investments in Class A shares above $500,000 are not subject to an
initial sales charge. The following breakpoints apply to purchases of Class
A shares made by individuals investing in the funds through the use of The
Education Funding Investment Account Program, as well as the Education IRA:
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF SALES CHARGE AS A % OF
AMOUNT OF INVESTMENT OFFERING PRICE NET AMOUNT INVESTED
- --------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Less than $100,000 4.5% 4.7%
$100,000 but less than $250,000 3.5% 3.6%
$250,000 but less than $500,000 2.5% 2.6%
$500,000 and over See below None
</TABLE>
INVESTMENTS OF $500,000 OR MORE. If you invest $500,000 or more in Class A
shares, you do not pay any "front-end" sales charge. However, you will pay a
CDSC of 1.00% of the offering price if you redeem those shares within 13
months after you bought them. The CDSC will be calculated in the same manner
as for Class B shares, as described above.
TO PARTICIPATE IN THIS SPECIAL PLAN, INVESTORS MUST COMPLETE THE SPECIAL
EDUCATION FUNDING INVESTMENT ACCOUNT APPLICATION DESIGNED SPECIFICALLY FOR THE
PROGRAM OR AN EDUCATION IRA APPLICATION.
CLASS B WAIVERS OF CONTINGENT DEFERRED SALES CHARGES
The CDSC will be waived on the following redemptions of Class B shares:
(1) 12% FREE AMOUNT. We waive the CDSC on redemptions pursuant to a
systematic withdrawal plan of up to 12% of account value per year. We
apply this 12% waiver on a per fund basis to the account value
determined at the time you elect a systematic withdrawal plan.
(Remember that the CDSC does not apply to appreciation and reinvested
dividends. Redemptions from appreciation and reinvested dividends,
which occur first, do not count toward the 12% free amount.)
(2) DEATH OR DISABILITY. We waive the CDSC on redemptions of Class B
shares following the shareholder's death or disability, so long as:
(a) the disablity began after the shares were purchased;
(b) SM&R is notified of such death or disability at the time of the
redemption request and receives satisfactory evidence of such
death or disability;
(c) the redemptions are made within one year following death or
initial determination of disability; and
(d) the shares were held at the time of death or initial
determination of disability.
For purposes of this waiver, the death or disability must meet the
definition in Section 72(m)(7) of the Internal Revenue Code (the "Code").
If the shares are held in a joint account, then all registered joint
owners must be dead or disabled.
(3) MINIMUM REQUIRED DISTRIBUTIONS. We waive the CDSC on redemptions of
Class B shares in connection with certain distributions from four
types of qualified retirement plans: IRAs, custodial accounts
maintained pursuant to Code Section 403(b), deferred compensation
plans qualifed under Code 457 and plans qualified under
15
<PAGE>
Code Section 401. To qualify for the waiver, the redemptions must
result from one of the following:
(a) required minimum distributions to plan participants or
beneficiaries who are age 70 1/2 or older to the extent it does
not exceed 12% annually of the participant's or beneficiary's
account value;
(b) tax-free rollovers or transfers of assets to another IRA, Section
403(b) plan, Section 457 plan or Section 401 plan invested in
Class B shares of one or more funds managed by SM&R;
(c) tax-free returns of excess contributions or returns of excess
deferral amounts; and
(d) distributions upon the death or disability (as defined in the
Code) of the participant or beneficiary.
(4) SMALL ACCOUNTS. We waive the CDSC on redemptions by the funds of
small accounts (accounts with a value less than $500).
(5) SM&R INVESTMENTS. We waive the CDSC on redemptions of shares owned by
SM&R or any of its affiliates.
DISTRIBUTION AND SHAREHOLDER SERVICE (12b-1) FEE
Classes A, B, and C pay SM&R, the principal underwriter, a distribution
and/or shareholder servicing (12b-1) fee. BECAUSE DISTRIBUTION AND/OR
SHAREHOLDER SERVICING (12b-1) FEES ARE PAID OUT OF FUND ASSETS ON AN
ONGOING BASIS, THE FEES MAY, OVER TIME, INCREASE THE COST OF AN
INVESTMENT IN A FUND AND COST INVESTORS MORE THAN OTHER TYPES OF SALES
LOADS.
These fees are computed as an annual percentage of the average daily net
assets of each class of shares of a fund, as follows:
<TABLE>
<CAPTION>
DISTRIBUTION SERVICE TOTAL 12b-1
CLASS FEE FEE FEE
- -------------------------------------------------------------- ----------- --------- -----------
<S> <C> <C> <C>
Class A Shares (FRONT-END LOAD)............................... 0.25% -0- 0.25%
Class B Shares (BACK-END LOAD (CDSC))......................... 0.50% 0.25% 0.75%
Class C Shares (LEVEL LOAD)................................... 0.75% 0.25% 1.00%
</TABLE>
The distribution fee is for services that are primarily intended to
result in or are primarily attributable to the distribution of the Class
A, B, and C shares. The service fee is for providing ongoing servicing to
shareholders of the Class B and C shares. These fees compensate SM&R, or
enable SM&R to compensate other persons (including distributors of the
shares), for providing such services.
16
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
Each fund pursues its own investment objective through various investment
policies and techniques. ONLY THE PRINCIPAL INVESTMENT STRATEGIES OF EACH FUND
AND THE PRINCIPAL TYPES OF SECURITIES EACH FUND PLANS TO PURCHASE ARE DESCRIBED
BELOW. More investment information is in the Statement of Additional
Information. These policies and techniques are not fundamental and may be
changed by the Board of Directors without shareholder approval.
Because of the market risks inherent in any investment, the funds may not
achieve their investment objectives. In addition, effective management of each
fund is subject to general economic conditions and to the ability and investment
techniques of management. The net asset value of each fund's shares will vary
and the redemption value of shares may be either higher or lower than the
shareholder's cost. Since each fund has a different investment objective, each
will have different investment results and incur different market, financial,
and other risks.
SM&R GROWTH FUND, INC.
(FORMERLY NAMED AMERICAN NATIONAL GROWTH FUND, INC.)
The Growth Fund considers its portfolio investments and the composition
of its total portfolio from the viewpoint of potential capital
appreciation. The Growth Fund adjusts this composition from time to time
in light of current conditions. Under normal conditions, the Growth Fund
invests at least 85% of its total assets in common stocks.
The Growth Fund invests in the stocks of financially sound companies that
have a proven ability to make and sustain a profit over time. Management
places an emphasis on companies with growth potential. The Growth Fund
does not employ exotic investment strategies, such as using options and
futures.
We identify candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then, we evaluate each candidate
stock on a fundamental basis by examining past financial performance,
managerial skill and foresight, and relative valuation to industry peers
and the market as a whole. We utilize this combination of disciplines and
human judgement to drive our stock selection process. We believe in
evaluating each company's prospects as opposed to relying on broad
forecasts of industry prospects. We do not attempt to time economic,
market, style or capitalization cycles. Diversification, or weighting of
individual economic sectors, is also dictated by a combination of
disciplines and human judgement to varying degrees. We believe in never
having less than half or more than double the market weighting in any one
sector. The Growth Fund limits cash to 15% of its assets unless
circumstances dictate otherwise.
Because of the Growth Fund's goal of seeking long-term capital growth,
certain sectors of the market will have greater weight in the Growth
Fund's portfolio while other sectors of the market will have lower
representation. For example, the Growth Fund generally overweights the
technology sector, which represents approximately 15% to 20% of the
Standard & Poor's 500 Index, in the portfolio relative to its market
weight. This overweighting reflects the higher growth prospects of
technology companies relative to the average company in the market. At
varying times, we may also overweight other sectors of the market
providing above average growth prospects, like healthcare and consumer
staples.
17
<PAGE>
Conversely, the Growth Fund generally underrepresents certain sectors of the
market in its portfolio that tend to have below average growth
characteristics, like utilities, basic materials, and communications
services. As a result of such strategic overweighting and underweighting,
the Growth Fund's performance may differ substantially from broad market
indexes like the S&P 500 and tend to incur more price volatility than these
indexes.
The Growth Fund may invest in convertible preferred stocks rated at least
"B" by Standard and Poor's Corporation ("S&P") or at least "b" by Moody's
Investors Service, Inc. ("Moody's") preferred stock ratings, and convertible
debentures and notes rated at least "B" by S&P and Moody's corporate bond
ratings. Investments in convertible securities having these ratings may
involve greater risks than convertible securities having higher ratings.
The proportion of assets invested in any particular type of security can be
expected to vary, depending on SM&R's appraisal of market and economic
conditions. Common stocks and convertible securities purchased will be of
companies that SM&R believes will provide an opportunity for capital
appreciation. On a temporary basis, the Growth Fund may invest in commercial
paper which at the date of such investment, is rated in one of the two top
categories by one or more of the nationally recognized statistical rating
organizations, in certificates of deposit in domestic banks and savings
institutions having at least $1 billion of total assets, and in repurchase
agreements.
SM&R EQUITY INCOME FUND, INC.
(FORMERLY NAMED AMERICAN NATIONAL INCOME FUND, INC.)
The Equity Income Fund considers its portfolio investments and the
composition of its total portfolio not only from the viewpoint of present
and potential yield, but also from the viewpoint of potential capital
appreciation. We adjust this composition of portfolio investments from time
to time to best accomplish the Equity Income Fund's investment objectives
under current conditions.
In pursuit of its objectives, the Equity Income Fund will invest in common
stocks, preferred stocks, and marketable debt securities selected in
accordance with its investment objectives. Common and preferred stocks
purchased will generally be of companies with consistent and increasing
dividend payment histories that SM&R believes will have further earnings
potential sufficient to continue such dividend payments. Debt securities
include publicly traded corporate bonds, debentures, notes, commercial
paper, repurchase agreements, and certificates of deposit in domestic banks
and savings institutions having at least $1 billion of total assets. The
proportion of assets invested in any particular type of security can be
expected to vary, depending on SM&R's appraisal of market and economic
conditions. Under normal conditions, the Equity Income Fund will invest at
least 75% of its assets in equity securities rather than debt securities.
We view common stocks, as well as investments in preferred stocks and bonds
convertible into common stock, from their potential for capital appreciation
in addition to their current and potential income yield. Our goal is to
maintain a portfolio dividend yield (before fees and expenses) at least 50%
greater than that of the S&P 500 Index.
We identify candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then, we evaluate each candidate stock
on a fundamental basis by
18
<PAGE>
examining past financial performance, managerial skill and foresight, and
relative valuation to industry peers and the market as a whole. We utilize
this combination of disciplines and human judgement to drive our stock
selection process. We believe in evaluating each company's prospects as
opposed to relying on broad forecasts of industry prospects. We do not
attempt to time economic, market, style or capitalization cycles.
Diversification, or weighting of individual sectors, is also dictated by a
combination of disciplines and human judgement to varying degrees. We
believe in never having less than half or more than double the market
weighting in any one sector. Cash is limited to 15% of the fund unless
circumstances dictate otherwise.
Certain sectors of the market will have greater weight in the Equity Income
Fund's portfolio while other sectors of the market will have lower
representation. For example, the Equity Income Fund generally overweights
the finance sector in its portfolio relative to that sector's market weight
(which is approximately 16% of the Standard & Poor's 500 Index). This
reflects the greater dividend prospects of financial companies like banks,
insurance companies, and real estate investment trusts as compared to the
average company in the market. At varying times, we may also overweight
other sectors of the market that provide above average dividend prospects,
like utilities and energy.
Conversely, the Equity Income Fund generally underrepresents certain sectors
of the market tending to have below average dividend yields, like
technology, consumer staples, and healthcare. As a result of such strategic
overweighting and underweighting, the Equity Income Fund's performance may
differ substantially from broad market indexes like the S&P 500.
Corporate debt obligations purchased by the Equity Income Fund will consist
only of obligations rated either Baa or better by Moody's or BBB or better
by S&P. Bonds which are rated Baa by Moody's are considered as medium grade
obligations, that is, they are neither highly protected nor poorly secured.
Bonds rated BBB by S&P are regarded as having an adequate capacity to pay
interest and repay principal. Commercial paper and notes will consist only
of direct obligations of corporations whose bonds and/or debentures are
rated as set forth above.
SM&R BALANCED FUND, INC.
(FORMERLY NAMED TRIFLEX FUND, INC.)
The Balanced Fund uses a "balanced" approach by investing part of its assets
in stocks of well-known companies and the remainder in a combination of
high-grade bonds, bonds convertible into the common stock of the issuing
corporations, and money market instruments. We change the ratio of stocks to
bonds in response to changing economic conditions. This flexibility helps to
reduce price volatility.
The Balanced Fund's goal is relative stability of principal through a
balance of stocks, bonds, and cash. The stocks serve to capture the benefits
that ownership in corporate America brings. The bonds, meanwhile, can serve
as a stabilizing force during times of eroding stock market value, as well
as provide a fixed income payment stream into the portfolio.
We identify candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then we evaluate each candidate stock on
a fundamental basis by examining past financial performance, managerial
skill and foresight, and relative valuation to industry peers and the market
as a whole. We utilize this combination of disciplines and
19
<PAGE>
human judgement to drive our stock selection process. We believe in
evaluating each company's prospects as opposed to relying on broad forecasts
of industry prospects. We do not attempt to time economic, market, style or
capitalization cycles. Diversification, or weighting of individual sectors,
is also dictated by a combination of disciplines and human judgement to
varying degrees. We believe in never having less than half or more than
double the market weighting in any one sector. Cash is limited to 15% of the
portfolio unless circumstances dictate otherwise.
The Balanced Fund will only purchase corporate bonds rated either Baa or
better by Moody's or BBB or better by S&P. Bonds which are rated Baa by
Moody's are considered as medium grade obligations, that is, they are
neither highly protected nor poorly secured. Bonds rated BBB by S&P are
regarded as having an adequate capacity to pay interest and repay principal.
Commercial paper and notes will consist only of direct obligations of
corporations whose bonds and/or debentures are rated as set forth above. The
Balanced Fund may also invest in repurchase agreements. This balanced
investment policy is intended to reduce risk and to obtain results in
keeping with the Balanced Fund's objectives.
The Balanced Fund will invest in fixed-income securities and equity
securities as described above. However, the Balanced Fund will sometimes be
more heavily invested in equity securities and at other times it will be
more heavily invested in fixed-income securities, depending on management's
appraisal of market and economic conditions. SM&R believes that a fund that
is wholly invested in fixed-income securities carries a large interest rate
risk. Interest rate risk is the uncertainty about losses due to changes in
the rate of interest on debt instruments. The major interest rate risk for
investors, however, is not in the interest rate itself, but in the change in
the market price of bonds that results from changes in the prevailing
interest rate. Higher interest rates would mean lower bond prices and lower
net asset value for the Balanced Fund's shareholders assuming no change in
its current investment objective and portfolio. Diversifying the Balanced
Fund's portfolio with investments such as commercial paper, convertible
securities, and common stocks may reduce the decline in value attributable
to the increase in interest rate and resulting decrease in the market value
of bonds and may reduce the interest rate risk. However, stock prices also
fluctuate in response to a number of factors, including changes in general
level of interest rates, economic and political developments, and other
factors which impact individual companies or specific types of companies.
Such market risks cannot be avoided but can be limited through a program of
diversification and a careful and consistent evaluation of trends in the
capital market and fundamental analysis of individual equity holdings.
SM&R, through an ongoing program of asset allocation, will determine the
appropriate level of equity to debt holdings consistent with SM&R's outlook
and evaluation of trends in the economy and the financial markets. The
Balanced Fund determines its level of commitment to common stocks and
specific common stock investments as a result of this process. For example,
within an environment of rising inflation, common stocks historically have
preserved their value better than bonds; therefore, inclusion of common
stocks could tend to conserve principal better than a portfolio consisting
entirely of bonds and other debt obligations. In addition, within an
environment of accelerating growth in the economy, common stocks
historically have conserved their value better than bonds in part due to a
rise in interest rates that occur coincidentally with accelerating growth
and profitability of the companies.
20
<PAGE>
RISK FACTORS
- --------------------------------------------------------------------------------
The following discussion relates to all three funds. The risk/return summary
located at the beginning of this prospectus identifies some specific risks
applicable to each individual fund.
GENERAL. There is no assurance that a fund will achieve its goals. Generally, if
the securities owned by a fund increase in value, the value of the shares of the
fund which you own will increase. Similarly, if the securities owned by a
fund decrease in value, the value of your shares will also go down. In this
way, you participate in any change in the value of the securities owned by a
fund.
The risk inherent in investing in any fund is a risk common to any security.
That is, the value of a fund's shares will fluctuate in response to changes
in economic conditions, interest rates and the market's perception of the
underlying portfolio securities held by that fund. Each fund's share value
depends on general economic and securities market conditions, the investment
decisions of its management, and numerous other factors. All of these
factors are inherently uncertain and, in some cases, unforeseeable.
Any of the funds could lose money if the stock markets in general go down or
if the particular stocks purchased by a fund go down in value. In addition,
the funds could lose money if prevailing interest rates increase or if the
debt securities purchased by a fund are downgraded or defaulted upon.
STOCK INVESTMENT RISKS. Because each fund invests a substantial portion of its
assets in stocks, the value of each fund's portfolio will be affected by changes
in the stock markets. At times, the stock markets can be volatile and stock
prices can change substantially. This market risk will affect each fund's
net asset value per share, which will fluctuate as the values of each fund's
portfolio securities change. Stock prices do not always change uniformly or
at the same time and the various stock markets do not always move in the
same direction at the same time. Other factors specific to a particular
company also affect that company's stock price (for example, poor earnings,
loss of major customers, or major litigation). The funds cannot always
predict the factors that will affect a stock's price. The funds, however, do
attempt to limit market risk by diversifying their investments. The funds
diversify their investments by generally investing only a small percentage
of their assets in any one company and by not holding a substantial amount
of the stock of any one company.
For the Growth Fund and the Equity Income Fund, the portfolio managers
decide to overweight or underweight certain industry sectors and to purchase
individual stocks based on their assessment of the future growth or income
prospects of an industry sector or particular stock. If certain industries
or investments do not perform as a fund expects (I.E., do not grow in value
or produce dividend income as expected), that fund could underperform its
peers or lose money.
The Growth Fund is generally considered more aggressive than the Equity
Income and Balanced Funds because it invests for capital appreciation in
common stocks, emphasizing "growth" stocks that tend to be more volatile
than other investments. Investors in the Growth Fund should expect greater
fluctuations in share price, yield, and total return than with less
aggressive funds.
21
<PAGE>
DEBT SECURITIES RISKS. Debt securities are subject to changes in their values
due to changes in prevailing interest rates. When prevailing interest rates
fall, the values of already-issued debt securities generally rise.
Accordingly, if interest rates go down after a security is purchased, such
security might be valued and/or sold at a price greater than its cost. On
the other hand, when prevailing interest rates rise, the values of
already-issued debt securities generally fall. Accordingly, if interest
rates increase after a security is purchased, such security might be valued
and/or sold at a price less than its cost. The magnitude of these
fluctuations will often be greater for longer-term debt securities than
shorter-term debt securities.
The funds could lose money if any bonds they own are downgraded in credit
rating or go into default. In general, lower-rated bonds, such as junk
bonds, have higher credit risks. The Growth Fund is the only fund permitted
to invest in junk bonds. Junk bonds have additional risks, including
limitations on a fund's ability to re-sell the lower-rated debt securities
and less readily available market quotations for such securities. If there
are not readily available market quotations for a debt security, its value
is determined largely by the investment manager's judgment. When and if the
debt security is sold, the investment manager may find that its estimation
of the debt security's value is substantially different than the actual
price at which it can be sold. Moreover, substantial redemptions of fund
shares could require a fund to sell portfolio securities at a time when a
sale might not be favorable.
SMALLER COMPANY RISKS. Smaller companies in which each of the funds may invest
may involve greater risks than large established companies. Such smaller
companies may have limited product lines, markets, financial resources, and
management depth. Their securities may trade less frequently and in more
limited volume than the securities of larger or more established companies.
Smaller companies may also be more vulnerable than larger companies to
adverse business or market developments. As a result, the prices of smaller
companies may fluctuate to a greater degree than the prices of securities of
larger companies.
OTHER RISKS. Each investor will be subject to all the risks normally attendant
to business operations, changes in general economic conditions, governmental
rules and fiscal policies, acts of God, and other factors beyond the control
of the funds' management.
YEAR 2000 RISKS. Many services provided to the funds and their shareholders
depend on the smooth functioning of computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900
because of the way dates are encoded and calculated, referred to as the
"Year 2000 Problem." The Year 2000 Problem could have a negative impact on
handling securities trades, payment of interest and dividends, pricing, and
account services. Like other mutual funds, financial and business
organizations, and individuals around the world, the funds could be
adversely affected if the computer systems used by SM&R (which acts as their
investment adviser, underwriter, custodian, and transfer agent) do not
properly process and calculate date-related information and data from and
after January 1, 2000. SM&R is taking steps to address the Year 2000 Problem
with respect to the computer systems that it uses and to obtain assurances
that comparable steps are being taken by any other service providers. At
this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the funds and their shareholders.
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<PAGE>
PURCHASES AND REDEMPTIONS
- --------------------------------------------------------------------------------
PURCHASING SHARES
You may purchase shares of a fund from registered representatives of SM&R, from
authorized broker-dealers, or directly from SM&R. Such purchases will be at the
offering price for such shares determined as and when provided below (See
"Pricing of Fund Shares"). You should carefully review all account statements
and promptly report any discrepancies to SM&R. You may make initial and
subsequent purchases directly through SM&R at the following address:
Securities Management and Research, Inc.
P.O. Box 58969
Houston, Texas 77258-8969
Investors whose shares are held in the name of a broker-dealer or other party
are not shareholders of record and, therefore, may not be able to utilize
services available only to shareholders of record.
Certificates are not issued for shares of the funds. SM&R confirms investors'
purchases and credits such purchases to their accounts on the books maintained
by SM&R. Investors have the same rights of share ownership as they would if
certificates had been issued.
OPENING AN ACCOUNT: To purchase shares, you must submit a completed account
application which includes the purchaser suitability form. If you would like to
take advantage of the electronic services available, please complete the
applicable Special Investor Services section of the account application.
Special forms are required when establishing an IRA/SEP or 403(b) plan.
Please call Investor Services at (800) 231-4639 and request special forms
when establishing retirement plans.
MINIMUM PURCHASE REQUIREMENT: The minimum initial investment requirement for
each fund is $100. The minimum amount of any subsequent purchase is $20 for each
fund. We waive these initial investment minimums when purchases are part of
certain systematic investment programs (See "Special Purchase Plans and
Services" for additional information on reduction of the minimums). We
reserve the right to reject any purchase.
PURCHASES BY MAIL: Make your check(s) payable to SM&R and send the check(s) to
the address indicated above. Please note that third party checks will not be
accepted to open a new account, except for IRA rollover checks that are
properly endorsed. If you make subsequent investments by mail, you must
indicate your name, account number, and the name of the class and the fund
being purchased. You may use the remittance slip attached to the
confirmation statement.
PURCHASES BY WIRE: TO ENSURE PROPER CREDITING OF A WIRE INVESTMENT, YOU MUST
HAVE AN EXECUTED ACCOUNT APPLICATION AND PURCHASER SUITABILITY FORM ON FILE WITH
THE TRANSFER AGENT. You may then
23
<PAGE>
wire your investment to The Moody National Bank of Galveston ("Moody
National Bank") by providing the following instructions to your bank:
The Moody National Bank of Galveston ABA #113100091
Securities Management and Research, Inc. #035 868 9
Name of Class and Fund (E.G., Class A of the Growth Fund)
Fund Account Number (number appears on your confirmation statement)
Your Name (E.G., Mary Smith)
PURCHASES BY EXCHANGE: Call Investor Services if you have established telephone
exchange privileges on your account. See "Special Purchase Plans and
Services--Exchange Privilege" for procedures and additional information
relating to telephone exchanges. For limitations on exchanges, see
"Excessive Trading" also under "Special Purchase Plans and Services."
PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). We determine each fund's offering price once
each day the New York Stock Exchange (the "Exchange") is open for regular
trading. The offering price equals a fund's net asset value plus the sales
charge, if any, computed at the rate set forth in the applicable tables for
the classes. (See "Shares of the Funds--Sales Charges.") Although the legal
rights of the Class A, B, and C shares are substantially identical, the
different expenses borne by each class will result in different net asset
values and dividends. The net asset value of the Class B and C shares
generally will be lower than the Class A shares as a result of respective
service and distribution (12b-1) fees charged.
EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS (WHEN SHARES ARE PRICED). We
calculate net asset value once each day at the close of regular trading on the
Exchange (currently 3:00 p.m. Central Time). In the event the Exchange
closes early on a particular day we will determine the net asset value of
each fund as of the close of the Exchange that day. The price you pay or
receive for shares of a fund depends, in part, on the day and time you make
your purchase or redemption. On any day the Exchange is open for regular
trading, we will execute purchases and redemptions at the next applicable
price determined THAT DAY if:
- SM&R receives your order in proper form prior to the close of regular
trading on the Exchange;
- a securities dealer having a dealer contract with SM&R receives and
reports your order to SM&R prior to the close of regular trading on the
Exchange on the same day; or
- for purchases, Moody National Bank receives your purchase payment by bank
wire and reports it to SM&R prior to the close of the Exchange.
If we receive your order after the close of the Exchange or on any day that
the Exchange is closed, we will execute your purchase or redemption at the
price determined on the next business day. In unusual circumstances, any
fund may temporarily suspend the processing of sell requests, or may
postpone payment of proceeds for up to three business days or longer, as
allowed by federal securities laws.
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<PAGE>
SPECIAL PURCHASE PLANS AND SERVICES
In addition to the special plans described above that permit you to reduce the
initial sales charge assessed on Class A shares or the CDSC on Class B shares,
the funds offers other services and plans designed to facilitate investments. At
this time, there is no charge to you for these services. The funds may impose
fees for such services in the future. Be aware, however, that if you elect to
participate in the ACH plan described below, you should check with your
financial institution for any additional charges imposed for this service. For
additional information contact your registered representative, broker-dealer or
SM&R. A shareholder considering any of the plans or services described below
should consult a tax advisor before beginning a plan.
ELECTRONIC TRANSFERS (ACH). The electronic transfer option allows you to move
money between your account(s) and your bank, savings and loan, or credit union
account using the Automated Clearing House ("ACH") network. To arrange for
electronic transfers, complete the relevant Special Investor Services
section of the account application at the time you open your account and
specify the type of service or services desired. Attach a voided,
pre-printed check or deposit slip from your checking, savings and loan, or
credit union account. PASSBOOK SAVINGS ACCOUNTS ARE NOT ELIGIBLE FOR THE
ELECTRONIC TRANSFER OPTION. ADDITIONALLY, YOUR BANK MUST BE A MEMBER OF THE
AUTOMATED CLEARING HOUSE (ACH) NETWORK FOR YOU TO TAKE ADVANTAGE OF THIS
SERVICE. You will receive a confirmation verifying initialization of the
electronic transfer option and may begin conducting transactions in your
account(s) under this option approximately 20 calendar days after receipt of
the verification notice from SM&R. If you elect this option after your
account is established, it may be necessary for you to obtain a signature
guarantee for all individuals named on the account(s).
GROUP SYSTEMATIC INVESTMENT PLAN. SM&R can establish a Group Systematic
Investment Plan with an employer having 5 or more participants under a single
payroll deduction arrangement. The employees may initially invest a minimum
of $100 ($20 per individual) in the funds followed by additional payments of
at least $20 for each individual investing under a single payroll deduction
plan. Any such plan may be terminated by SM&R or the shareholder at any time
upon sixty (60) days written notice. Contact SM&R for further information
regarding these plans.
TELEPHONE SERVICES. You can only use telephone services for transaction amounts
of $500 or more. You can take advantage of this service by completing the
appropriate Special Investor Services sections of the account application
when opening your account. Through this service, you will be able to
purchase additional shares for an existing SM&R mutual fund account by ACH.
You may also use the telephone services to redeem and exchange shares on
those accounts for which you have an executed account application on file,
and have received written verification from SM&R that the service has been
initialized as explained under Electronic Transfers above. If this option is
elected after your account is established, it may be necessary for you to
obtain a signature guarantee for all individuals named on the account(s). We
permit transfers by telephone from a joint account only to another joint
account registered in the identical names. There may be additional
restrictions on telephone transactions by joint account owners. Contact your
registered representative for more information. PLEASE NOTE THAT THE
TELEPHONE REDEMPTION OPTION IS NOT AVAILABLE TO RETIREMENT PLANS.
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<PAGE>
The funds have implemented the following security procedures intended to
protect your account from losses resulting from unauthorized or fraudulent
telephone instructions: The caller must know:
(i) the name of the fund or funds;
(ii) all digits of the account number;
(iii) the exact name and address used in the registration(s); and
(iv) the Social Security or Employer Identification Number listed on the
account(s).
Additionally, we record all telephone transactions for your protection.
Neither the funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone which comply with the current
security procedures and other requirements. SM&R believes that such security
procedures and other requirements are reasonable and, if followed, you
should bear the risk of any losses resulting from unauthorized or fraudulent
telephone transactions on your account(s).
During times of economic turmoil or market volatility or during periods of
severe weather or a natural disaster, it may be difficult to contact SM&R by
telephone to institute a redemption or exchange.
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from your bank account and invested
monthly, bi-monthly, quarterly, or annually into the designated fund(s) at
the applicable offering price determined on the date of the electronic
transfer.
EXCHANGE PRIVILEGE. As an investor in a fund, you may be permitted to exchange
shares that you own in a fund with shares of some of the other mutual funds
managed by SM&R without the payment of an exchange fee, subject to certain
conditions. EXCHANGES BETWEEN A FUND AND ANOTHER FUND MANAGED BY SM&R ARE
AVAILABLE ONLY IN STATES WHERE THE APPLICABLE FUNDS ARE REGISTERED AND THE
EXCHANGE MAY BE LEGALLY MADE. YOU SHOULD CONTACT SM&R TO DETERMINE WHETHER A
FUND IS REGISTERED IN A PARTICULAR STATE AND WHETHER AN EXCHANGE IS
PERMITTED.
WE MAY TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE OFFER AT ANY TIME.
You may exchange Class A, B, or C shares of a fund, without an exchange fee
or sales charge, for shares of the corresponding class of another fund
managed by SM&R. You also may exchange your Class A or B shares for shares
of SM&R Investments, Inc.'s Primary Fund and Money Market Fund, subject to
two conditions:
- any applicable CDSC period has expired on the shares you wish to exchange
(I.E., 13 months in the case of Class A and Class C shares and 5 years in
the case of Class B shares), and
- you meet any minimum investment requirement for the shares you wish to
acquire.
You CANNOT exchange Class C shares for shares of the Money Market Fund or
Primary Fund.
We waive any sales charges on Class A and Class T shares acquired through an
exchange if you previously paid a sales charge on amounts invested in those
shares. For example, assume you purchase Class A shares of the Growth Fund.
You then exchange your Class A shares for shares of the SM&R Investments,
Inc. Money Market Fund. Later, you re-exchange those
26
<PAGE>
shares of the Money Market Fund for Class A shares of the Equity Income
Fund. We would not impose any sales charge upon the re-exchange into Class A
shares because you previously paid a sales charge on amounts invested in
those shares. In other words, we will never impose a front-end sales charge
on the same investment TWICE.
Shares of any fund managed by SM&R held in escrow under a Letter of Intent
are not eligible for the exchange privilege. Such shares will not be
released from escrow until the balance invested during the period specified
in the Letter of Intent equals or exceeds the amount required to be invested
under the Letter of Intent or the shareholder requests, in writing, that the
Letter of Intent be canceled and pays any adjustments in sales charge. After
release from escrow, shares may be exchanged, provided all other applicable
conditions are met.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met:
(a) the exchange must be made between accounts that are registered in the
same name, address and, if applicable, taxpayer identification
number;
(b) the shares of the fund acquired through exchange must be qualified
for sale in the state in which you reside;
(c) the dollar amount of a written exchange must meet the minimum
investment requirement applicable to the shares of the fund that you
would acquire through the exchange;
(d) the minimum dollar amount of a telephone exchange is $500;
(e) SM&R must have received full payment for the shares being exchanged;
(f) your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal
Revenue Service Form W-8 (certificate of foreign status) or Form W-9
(certifying exempt status);
(g) any shares that you wish to exchange must have been held for at least
ten (10) business days; and
(h) you have received a prospectus for the shares you receive in the
exchange.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may
be modified or discontinued by the participating funds or by SM&R at any
time. ANY GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE
RECOGNIZED FOR FEDERAL AND STATE INCOME TAX PURPOSES. YOU SHOULD CONSULT
YOUR TAX ADVISOR FOR THE TAX TREATMENT AND EFFECT OF EXCHANGES.
AUTOMATIC CONVERSIONS. Class B shares convert automatically to the appropriate
number of Class A shares of equal dollar value after the investor has owned the
Class B shares for eight (8) years. Dividends and other distributions paid
to an investor in the form of additional Class B shares also convert to
Class A shares on a pro-rata basis. The conversion benefits shareholders
because Class A shares are subject to a lower ongoing 12b-1 fee. If an
investor exchanges Class B shares of a fund for Class B shares of another
fund managed by SM&R,
27
<PAGE>
the purchase date of the original investment will be used to determine the
appropriate conversion date.
EXCESSIVE TRADING. Frequent trades, involving either substantial fund assets or
a substantial portion of your account or accounts controlled by you, can disrupt
management of the funds and raise the funds' expenses. We currently define
"excessive trading" as exceeding one purchase and sale involving the same
fund within any 120-day period.
For example, you are in Fund X. You can move substantial assets from Fund X
to Fund Y and, within the next 120 days, sell your shares in Fund Y to
return to Fund X or move to Fund Z. If you exceed the number of trades
described above, you may be barred indefinitely from further transactions
between the participating funds.
There are two types of transactions exempted from the excessive trading
guidelines. They are (1) redemptions that are not part of exchanges and (2)
systematic purchases or redemptions.
RETIREMENT PLANS
The following retirement plans may invest in shares of the funds:
- Individual Retirement Accounts (IRAs), which include traditional IRAs,
Roth IRAs, Education IRAs, and SIMPLE IRAs,
- Simplified Employee Pension Plans (SEPs),
- 403(b) Custodial Accounts (TSAs), and
- corporate retirement plans.
These plans allow you to shelter investment income from federal income tax while
saving for retirement. Information concerning IRAs and TSAs, and the forms
necessary to adopt such plans, can be obtained by contacting your registered
representative or calling SM&R. A regular fund application should be used when
establishing a corporate retirement plan. In connection with retirement plans,
the minimum initial purchase for each fund is $100. SM&R acts as trustee or
custodian for IRAs, SEPs, and TSAs for the funds. An annual custodial fee of
$7.50 per account will be charged for any part of a calendar year in which an
investor has an IRA, SEP, or TSA in the funds and will be automatically deducted
from each account. An individual considering a retirement plan may wish to
consult with an attorney or tax adviser.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS. The Equity Income and Balanced Funds will pay dividends from
investment income, if any, quarterly, generally during the months of March,
June, September and December, and distribute capital gains, if any, in
December. The Growth Fund will pay dividends from investment income, if any,
semi-annually during the months of June and December and distribute capital
gains, if any, in December. Dividends from net investment income may include
net short-term capital gains, if any.
Dividends and distributions paid by the funds have the effect of reducing
net asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution of record shortly after the purchase
of shares by an investor represents, in substance, a return of capital.
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<PAGE>
DIVIDEND REINVESTMENTS. Dividends and capital gains will be automatically
reinvested at net asset value in additional shares of the fund making such
distribution unless SM&R is instructed otherwise in writing. Distributions
not reinvested are paid by check or transmitted to your bank account through
an ACH transaction, if elected. If the Postal Service cannot deliver your
check, or if your check remains uncashed for six months, the funds reserve
the right to reinvest your distribution check in your account at the net
asset value on the business day of the reinvestment and to reinvest all
future distributions in shares of the funds. Dividends and capital gains
declared in December to shareholders of record in December and paid the
following January will be taxable to shareholders as if received in
December. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earning base. Of course, any shares
so acquired remain at market risk.
Shareholders have the right to change their election with respect to the
receipt of distributions by notifying SM&R in writing, but any such change
will be effective only as to distributions for which the record date is
seven or more business days after SM&R has received the shareholder's
written request.
TAXABILITY OF DIVIDENDS. Dividends you receive from the funds, whether
reinvested or taken as cash, are generally considered taxable. A fund's
long-term capital gains distributions are taxable as capital gains;
dividends from other sources are generally taxable as ordinary income. Some
dividends paid in January may be taxable as if they had been paid the
previous December. Corporations may be entitled to take a dividends-received
deduction for a portion of certain dividends they receive. The Form 1099
that is mailed to you every January details your dividends and their federal
tax category, although you should verify your tax liability with your tax
professional.
BACKUP WITHHOLDING. Backup withholding of federal income tax may be applied at
the rate of 31% from taxable dividends, distributions, and redemption proceeds
(including exchanges) if you fail to furnish the funds with a correct and
properly certified Social Security or Employer Identification Number when
you sign your application, or if you underreport your income to the Internal
Revenue Service.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on
the transaction. You are responsible for any tax liabilities generated by
your transactions. You should consult with a tax advisor concerning the tax
reporting requirements in effect on the redemption or exchange of such
shares.
REDEEMING SHARES
You can redeem fund shares at the net asset value, plus any applicable CDSC,
determined on the date the request is received by SM&R in proper form. A
redemption request must be addressed to Securities Management and Research,
Inc., P.O. Box 58969, Houston, Texas 77258-8969.
If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as practicable and normally
within seven days after receipt of a redemption request in proper form. We
currently charge a fee in the amount of $8.00 for redemptions by wire under
$5,000.
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<PAGE>
If the shares being redeemed were purchased by wire, certified check, money
order, or other immediately available funds, redemption proceeds will be mailed
no later than the seventh calendar day following receipt. For shares purchased
by a personal check or ACH transfer, SM&R will process your redemption but will
generally delay sending you the proceeds for up to ten (10) business days to
allow the check or transfer to clear.
TELEPHONE REDEMPTIONS. You may request redemptions by telephone if you have
completed the account application and requested this option. Telephone
privileges are not available to shareholders automatically. This redemption
feature can only be used if:
(a) the redemption proceeds are to be mailed to the address of record or
wired to the pre-authorized bank account indicated on the account
application;
(b) there has been no change of address of record or pre-authorized bank
account within the preceding 30 business days;
(c) the proceeds of the redemption are $500 or more and do not exceed
$25,000; and
(d) the security procedures discussed under "Special Purchase Plans And
Services-- Exchange Privilege" have been met.
These instructions may be changed only in writing, accompanied by a
signature guarantee and additional documentation may be required for
corporations.
FAX REDEMPTIONS. You may request redemptions by fax as long as they meet the
requirements stated (a)-(c) under Telephone Redemptions above.
SYSTEMATIC WITHDRAWAL PLAN. Each fund has a Systematic Withdrawal Plan
("Withdrawal Account"), which permits shareholders having an account value of
$5,000 or more to automatically withdraw a minimum of $50 monthly or each
calendar quarter on or about the 20th of the applicable month. Shareholders
maintaining a Withdrawal Account may elect to have the withdrawal proceeds
automatically deposited in their pre-authorized bank account via an ACH
transaction. This is accomplished by completing the relevant section of the
account application and returning it to SM&R. See "Special Purchase Plans
and Services--Electronic Transfers" for additional information. It may not
be advisable for shareholders to maintain a Withdrawal Account while
concurrently purchasing shares of the funds because of the sales charge or
CDSC (as applicable) involved in additional purchases. See "Class B Waivers
of Contingent Deferred Sales Charges" for a discussion of the CDSC waivers
available. You should carefully consider such purchases and contact your
financial adviser regarding their advisability. Dividends and capital gains
distributions will automatically be reinvested in additional shares at net
asset value. As with other redemptions, a withdrawal is a sale for federal
income tax purposes. The Systematic Withdrawal Plan will automatically
terminate if all shares are liquidated or withdrawn from the account. No
account covered by a Letter of Intent can be changed to a Systematic
Withdrawal Plan until such time as the Letter of Intent is fulfilled or
terminated, nor can an account under a Systematic Withdrawal Plan be placed
under a Letter of Intent.
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REINVESTMENT PRIVILEGE. Within ninety (90) days of a redemption of Class A
shares of a fund, a shareholder may reinvest all or part of the proceeds in
Class A shares of that same fund at the net asset value next computed after
receipt of the proceeds to be reinvested by SM&R. The shareholder must ask
the transfer agent for this privilege at the time of reinvestment. Prior to
reinvestment of redemption proceeds, a shareholder is encouraged to consult
with his or her accountant or tax advisor to determine any possible tax
ramifications of such a transaction. Each fund managed by SM&R may amend,
suspend, or cease offering this privilege at any time as to shares redeemed
after the date of the amendment, suspension, or cessation.
For further information about the "Systematic Withdrawal Plan" and
"Reinvestment Privilege," contact a registered representative or SM&R.
"PROPER FORM" means the request for redemption must include:
(1) your letter of instruction or a stock assignment specifying the fund,
account number, and number of shares or dollar amount to be redeemed.
Both share certificates and stock powers, if any, must be endorsed
and executed exactly as the fund shares are registered. It is
suggested that certificates be returned by certified mail for your
protection;
(2) any required signature guarantees (see "Signature Guarantees" below);
and
(3) other supporting legal documents, if required in the case of estates,
trusts, guardianships, divorce, custodianships, corporations,
partnerships, pension or profit sharing plans, retirement plans, and
other organizations.
Please keep in mind that as a shareholder, it is your responsibility to
ensure that all requests are submitted to SM&R in proper form for
processing.
SIGNATURE GUARANTEES. A signature guarantee verifies the authenticity of your
signature. Signature guarantees are required when:
(1) the proceeds of the redemption exceed $25,000;
(2) the proceeds (in any amount) are to be paid to someone OTHER THAN the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address OTHER THAN
the shareholder's address of record, pre-authorized bank account or
exchanged to one of the other funds managed by SM&R; or
(4) the fund or its transfer agent believes a signature guarantee would
protect against potential claims based on the transfer instructions,
including, when the authority of a representative of a corporation,
partnership, association, or other entity has not been established to
the satisfaction of the fund or transfer agent.
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<PAGE>
You should be able to obtain an acceptable signature guarantee from a bank,
broker, dealer, municipal securities dealer or broker, government securities
dealer or broker, credit union, national securities exchange, or registered
securities association. WITNESSING OR NOTARIZATION IS NOT SUFFICIENT.
TEXAS OPTIONAL RETIREMENT PROGRAM. You may not redeem shares in any account
established under the Texas Optional Retirement Program unless SM&R receives
satisfactory evidence from the state that one of the following conditions
exist:
(1) death of the employee;
(2) termination of service with the employer; or
(3) retirement of employee.
REDEMPTION OF SMALL ACCOUNTS. The funds reserve the right to redeem shares in
any account (which will be promptly paid to the shareholder) if, due to your
redemptions, the value of the account falls below $500. You will be notified
that the value of your account is less than the required minimum and allowed
at least 60 days to make an additional investment to increase the value of
your account above the required minimum. The funds may, from time to time,
change such required minimum investment.
RIGHTS RESERVED BY THE FUNDS. The funds, acting directly or through SM&R,
reserve the right:
- to waive or lower investment minimums;
- to accept initial purchases by telephone from a registered
representative;
- to refuse any purchase order;
- to cancel or rescind any purchase or exchange at any time prior to
receipt by the shareholder of written confirmation or, if later, within
five (5) business days of the transaction;
- to freeze an account and suspend account services when notice has been
received of a dispute involving the account owners or other parties or
there is reason to believe a fraudulent transaction may occur or has
occurred;
- to restrict or refuse the use of faxed redemptions where there is a
question as to the validity of the request or proper documents have not
been received;
- to otherwise modify the conditions of purchase and any services at any
time;
- to refuse to act on instructions not believed to be genuine; or
- to eliminate duplicate mailings of fund material to shareholders who
reside at the same address.
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THE FUNDS AND MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Each fund's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the fund's investment adviser, the management of the
fund's day-to-day business and affairs. In addition, SM&R invests the funds'
assets, provides administrative services, and serves as transfer agent,
custodian, dividend paying agent, and underwriter. While the use of this
combined Prospectus subjects each fund to possible liability as the result of
statements or omissions regarding another fund, the Board of Directors of each
fund considers the benefits to the respective fund of using a combined
Prospectus to outweigh the risk.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). SM&R was incorporated in 1964 and has managed mutual
funds since 1966. SM&R does and may, from time to time, serve as investment
adviser to other clients including banks, employee benefit plans, other
investment companies, banks, foundations and endowment funds.
ADVISORY AGREEMENTS
GROWTH FUND. We deduct an investment advisory fee from the value of the shares
each day. We calculate this fee for the Growth Fund at the annual rate as
follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S BASIC ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- -------------------------------------------------------------------------- -----------------------
<S> <C>
Not exceeding $100,000,000 0.750%
Exceeding $100,000,000 but not exceeding $200,000,000 0.625%
Exceeding $200,000,000 but not exceeding $300,000,000 0.500%
Exceeding $300,000,000 0.400%
</TABLE>
We adjust the basic advisory fee rate by comparing the fund's investment
performance during the previous thirty-six (36) months with the investment
performance of the Lipper Growth Fund Index (the "Lipper Index") published by
Lipper Analytical Services, Inc. over the same period. Specifically, we adjust
the basic advisory fee each month by adding to or subtracting from such rate,
when appropriate, the applicable performance adjustment amount percentage shown
in the table below. The resulting advisory fee rate is then applied to the
average daily net asset value of the fund for the succeeding month. The advisory
fee for such month will be one-twelfth (1/12th) of the resulting dollar figure.
33
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE PERFORMANCE
COMPARED TO ADJUSTMENT
LIPPER INDEX AMOUNT
- ---------------------- ---------------
<S> <C>
0.10% to 0.99% above +0.02%
1.00% to 1.99% above +0.04%
2.00% to 2.99% above +0.06%
3.00% to 3.99% above +0.08%
4.00% to 4.99% above +0.10%
5.00% to 5.99% above +0.12%
6.00% to 6.99% above +0.14%
7.00% to 7.99% above +0.16%
8.00% to 8.99% above +0.18%
9.00% and above +0.20%
0.10% to 0.99% below -0.02%
1.00% to 1.99% below -0.04%
2.00% to 2.99% below -0.06%
3.00% to 3.99% below -0.08%
4.00% to 4.99% below -0.10%
5.00% to 5.99% below -0.12%
6.00% to 6.99% below -0.14%
7.00% to 7.99% below -0.16%
8.00% to 8.99% below -0.18%
9.00% and below -0.20%
</TABLE>
See "INVESTMENT ADVISORY AND OTHER SERVICES" in the Funds' Statement of
Additional Information for a more detailed description of the method used in
calculating the performance adjustment. See Appendix B for a description of
these ratings.
EQUITY INCOME AND BALANCED FUNDS. We deduct an investment advisory fee from the
value of the shares each day. We calculate this fee for the Equity Income and
Balanced Funds at the annual rate as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S BASIC ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- -------------------------------------------------------------------------- -----------------------
<S> <C>
Not exceeding $100,000,000 0.750%
Exceeding $100,000,000 but not exceeding $200,000,000 0.625%
Exceeding $200,000,000 but not exceeding $300,000,000 0.500%
Exceeding $300,000,000 0.400%
</TABLE>
SM&R received total advisory fees from the Growth, Equity Income, and Balanced
Funds for the fiscal year ended December 31, 1998 of 0.49%, 0.67%, and 0.75%,
respectively, of each fund's average daily net assets. Each fund's advisory fees
may be higher than the fees paid by other mutual funds, but each fund believes
its fees are comparable to those paid by funds with the same or similar
investment objective.
34
<PAGE>
ADMINISTRATIVE SERVICES
Pursuant to an Administrative Service Agreement with each fund, SM&R provides
all non-investment related management, executive, administrative, transfer
agent, and operational services to the funds. Under these agreements, SM&R
receives an administrative service fee from each fund at the annual rate of
average daily net asset values as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S ADMINISTRATIVE SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
- -------------------------------------------------------------------- -----------------------------
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
In these agreements, SM&R has agreed to pay (or to reimburse each fund for) each
fund's regular operating expenses in excess of 1.25% per year of such fund's
average daily net assets. Regular operating expenses include the advisory fee
and administrative service fee, if any, paid to SM&R, but do not include 12b-1
fees, class-specific expenses, interest, taxes, commissions, and other expenses
incidental to portfolio transactions.
SM&R received total administrative service fees of 0.23% for the Growth Fund;
0.22% for the Equity Income Fund; and 0.25% for the Balanced Fund for the fiscal
year ended December 31, 1998 of each fund's average daily net assets.
PORTFOLIO MANAGEMENT
SM&R's portfolio management team uses a disciplined, team approach in providing
investment advisory services to the funds. While the following individual is
primarily responsible for the day-to-day portfolio management of the funds, all
accounts are reviewed on a regular basis by SM&R's Investment Committee to
ensure that they are being invested in accordance with investment policies.
GORDON D. DIXON, DIRECTOR, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER OF
SECURITIES MANAGEMENT AND RESEARCH, INC., VICE PRESIDENT, PORTFOLIO MANAGER OF
THE GROWTH FUND, AND PORTFOLIO MANAGER OF THE EQUITY INCOME FUND AND BALANCED
FUND. Mr. Dixon joined Securities Management and Research, Inc. in 1993. He
graduated from the University of South Dakota with a B.A. in Finance and
Accounting and from Northwestern University in 1972 with an M.B.A in Finance
and Accounting. Mr. Dixon began his investment career in 1972 as an
Administrative and Research Manager with Penmark Investments. In 1979 he
began working for American Airlines in the management of the $600 million
American Airlines Pension Portfolio, of which approximately $100 million was
equities. In 1984 he was employed by C&S/Sovran Bank in Atlanta, Georgia as
Director of Equity Strategy where he had responsibility for all research,
equity trading and quantitative services groups as well as investment policy
input of a portfolio of approximately $7 billion, of which $3.5 billion was
equities.
35
<PAGE>
FINANCIAL HIGHLIGHTS GROWTH FUND
- --------------------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Growth Fund's financial performance for the past five years. Certain information
reflects financial results for a single share outstanding throughout each period
shown. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Growth Fund (assuming reinvestment
of all dividends and distributions) prior to addition of multiple classes of
shares, but do not reflect any sales loads that would be imposed on the purchase
or sale of any shares. This information is derived from the financial statements
of the Growth Fund, which for the years ended December 31, 1997 and 1998 have
been audited by Tait, Weller & Baker, independent auditors, whose report, along
with the Growth Fund's financial statements, are incorporated by reference into
the Statement of Additional Information, which is available upon request. The
information for years ending December 31, 1996 and prior, has been audited by
the Growth Fund's former independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 5.24 $ 4.95 $ 4.39 $ 3.83 $ 4.15
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04 0.06 0.05 0.08 0.06
Net Realized and Unrealized Gain
(Loss) on Securities 0.85 1.03 0.73 0.88 0.15
------------ -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 0.89 1.09 0.78 0.96 0.21
------------ -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.04) (0.06) (0.05) (0.08) (0.06)
Distributions from Capital Gains (0.40) (0.74) (0.17) (0.32) (0.47)
------------ -------- -------- -------- --------
TOTAL DISTRIBUTIONS (0.44) (0.80) (0.22) (0.40) (0.53)
------------ -------- -------- -------- --------
Net Asset Value, End of Year $ 5.69 $ 5.24 $ 4.95 $ 4.39 $ 3.83
------------ -------- -------- -------- --------
------------ -------- -------- -------- --------
TOTAL RETURN 18.35% 22.24% 17.64% 25.20% 4.98%
------------ -------- -------- -------- --------
------------ -------- -------- -------- --------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000's omitted) $ 203,109 $178,344 $152,758 $134,821 $113,250
Ratio of Expenses to Average Net Assets 0.85% 0.96% 1.15% 0.98% 0.97%
Ratio of Net Income to Average Net
Assets 0.69% 1.03% 1.02% 1.67% 1.46%
Portfolio Turnover Rate 27.31% 46.79% 18.72% 37.00% 46.26%
</TABLE>
36
<PAGE>
FINANCIAL HIGHLIGHTS EQUITY INCOME FUND
- --------------------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Equity Income Fund's financial performance for the past five years. Certain
information reflects financial results for a single Equity Income Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Equity Income Fund (assuming reinvestment of all dividends and
distributions) prior to addition of multiple classes of shares, but do not
reflect any sales loads that would be imposed on the purchase or sale of any
shares. This information is derived from the financial statements of the Equity
Income Fund, which for the years ended December 31, 1997 and 1998 have been
audited by Tait, Weller & Baker, independent auditors, whose report, along with
the Equity Income Fund's financial statements, are incorporated by reference
into the Statement of Additional Information, which is available upon request.
The information for years ending December 31, 1996 and prior, has been audited
by the Equity Income Fund's former independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 26.99 $ 25.05 $ 22.59 $ 18.90 $ 21.66
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.62 0.63 0.58 0.62 0.62
Net Realized and Unrealized Gain
(Loss) on Securities 2.50 4.96 3.10 4.82 (0.75)
-------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 3.12 5.59 3.68 5.44 (0.13)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.62) (0.64) (0.58) (0.63) (0.61)
Distributions from Capital Gains (0.47) (3.01) (0.64) (1.12) (2.02)
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (2.09) (3.65) (1.22) (1.75) (2.63)
-------- -------- -------- -------- --------
Net Asset Value, End of Year $ 28.02 $ 26.99 $ 25.05 $ 22.59 $ 18.90
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN 12.11% 22.72% 16.46% 29.12% (0.61)%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000's omitted) $218,980 $198,687 $165,786 $141,058 $114,231
Ratio of Expenses to Average Net Assets 1.01% 1.05% 1.10% 1.12% 1.12%
Ratio of Net Income to Average Net
Assets 2.22% 2.28% 2.42% 2.89% 2.86%
Portfolio Turnover Rate 19.29% 39.14% 27.07% 44.00% 52.46%
</TABLE>
37
<PAGE>
FINANCIAL HIGHLIGHTS BALANCED FUND
- --------------------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Balanced Fund's financial performance for the past five years. Certain
information reflects financial results for a single Balanced Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Balanced Fund (assuming reinvestment of all dividends and distributions)
prior to addition of multiple classes of shares, but do not reflect any sales
loads that would be imposed on the purchase or sale of any shares. This
information is derived from the financial statements of the Balanced Fund, which
for the years ended December 31, 1997 and 1998 have been audited by Tait, Weller
& Baker, independent auditors, whose report, along with the Balanced Fund's
financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request. The information for
years ending December 31, 1996 and prior, has been audited by the Balanced
Fund's former independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 18.32 $ 17.90 $ 16.85 $ 14.32 $ 15.35
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.48 0.57 0.49 0.49 0.45
Net Realized and Unrealized Gain (Loss) on Securities 1.96 2.50 1.48 2.67 (0.22)
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 2.44 3.07 1.97 3.16 0.23
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.47) (0.59) (0.49) (0.49) (0.45)
Distributions from Capital Gains (0.66) (2.06) (0.43) (0.14) (0.81)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (1.13) (2.65) (0.92) (0.63) (1.26)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year $ 19.63 $ 18.32 $ 17.90 $ 16.85 $ 14.32
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 13.83% 17.46% 11.86% 22.29% 1.49%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000's omitted) $ 29,367 $ 25,838 $ 23,188 $ 21,757 $ 19,023
Ratio of Expenses to Average Net Assets(1) 1.25% 1.26% 1.21% 1.26% 1.25%
Ratio of Net Income to Average Net Assets 2.55% 3.02% 2.83% 2.99% 2.91%
Portfolio Turnover Rate 16.01% 27.52% 23.78% 16.39% 46.95%
</TABLE>
(1) Expenses for these calculations are net of a reimbursement from Securities
Management and Research, Inc. Without these reimbursements, the ratio of
expenses to average net assets would have been 1.37%, 1.36%, 1.34%, 1.46%
and 1.45% for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
38
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
(Description of Ratings Used in Prospectus)
- --------------------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND (BONDS THAT EXTEND
LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S LONG-TERM BOND (BONDS THAT
EXTEND LONGER THAN ONE YEAR) RATINGS:
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risks appear
somewhat larger than the Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
A-1
<PAGE>
Baa Bonds which are rated "Baa" are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
PREFERRED STOCK RATING
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S PREFERRED STOCK RATING:
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations is
very strong, although not as overwhelmingly as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the "A"
category.
BB Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with
B respect to the issuer's capacity to pay preferred stock obligations. "BB"
indicates the lowest degree of speculation
CCC and "CCC"' the highest. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
A-2
<PAGE>
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S PREFERRED STOCK RATING:
aaa An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
ba An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
FEDERAL FUNDS
As used in this Prospectus and in the Funds' Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.
A-3
<PAGE>
FOR MORE INFORMATION ABOUT THE FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The following documents contain more information about the SM&R GROWTH FUND, INC.
funds and are available free upon request: SM&R EQUITY INCOME FUND,
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI contains INC.
additional information about all aspects of the funds. A SM&R BALANCED FUND, INC.
current SAI has been filed with the Securities and Exchange
Commission and is incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS. The funds' annual and
semi-annual reports provide additional information about the
funds' investments. The annual report for the fiscal year
ended December 31, 1998 will contain a discussion of the
market conditions and investment strategies that
significantly affected each fund's performance during the
last fiscal year.
</TABLE>
REQUESTING DOCUMENTS. You may request a free copy of the SAI and these reports,
make shareholder inquiries, or request further information about the funds
either by contacting your broker or by contacting the funds at:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE: 1-800-231-4639 (TOLL FREE) OR
1-281-334-2469 (COLLECT)
PUBLIC INFORMATION. You can review and copy information about the funds,
including the SAI, at the Securities and Exchange Commission's Public Reference
Room in Washington D.C. You may obtain information on the operation of the
public reference room by calling the Commission at 1-800-SEC-0330. Reports and
other information about the funds also are available on the Commission's
Internet site at http://www.sec.gov. You may obtain copies of this information,
upon payment of a duplicating fee, by writing the Public Reference Section of
the Securities and Exchange Commission, Washington, D.C. 20549-6009.
Investment Company
File Nos. 811-00623
811-01916
811-02818
<PAGE>
SM&R
LOGO
P R O S P E C T U S
MAY 1, 1999
- SM&R GROWTH FUND, INC.
- SM&R EQUITY INCOME FUND, INC.
- SM&R BALANCED FUND, INC.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
CLASS Y (INSTITUTIONAL SALES)
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------
<TABLE>
<S> <C>
RISK/RETURN SUMMARY.......................................... 1
SM&R Growth Fund........................................... 1
SM&R Equity Income Fund.................................... 3
SM&R Balanced Fund......................................... 5
Types of Investment Risk................................... 7
Bar Chart and Performance Table............................ 8
Fees and Expenses of the Funds............................. 12
SHARES OF THE FUNDS.......................................... 14
INVESTMENT OBJECTIVES AND POLICIES........................... 16
Growth Fund................................................ 16
Equity Income Fund......................................... 18
Balanced Fund.............................................. 19
RISK FACTORS................................................. 21
PURCHASES AND REDEMPTIONS.................................... 24
Purchasing Shares.......................................... 24
Pricing of Fund Shares..................................... 26
Special Purchase Plans and Services........................ 27
Retirement Plans........................................... 31
Dividends, Distributions, and Taxes........................ 31
Redeeming Shares........................................... 33
THE FUNDS AND MANAGEMENT..................................... 37
FINANCIAL HIGHLIGHTS......................................... 41
Growth Fund................................................ 41
Equity Income Fund......................................... 42
Balanced Fund.............................................. 43
APPENDIX..................................................... A-1
</TABLE>
ii
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND, INC.
- -------------------------------------------------------------------
GROWTH FUND'S INVESTMENT OBJECTIVE
The Growth Fund seeks long-term capital
growth by investing primarily in common stocks that provide
an opportunity for capital appreciation over time. Growth
Fund's principal investment strategies
GROWTH FUND'S PRINCIPAL INVESTMENT STRATEGY
The Growth Fund normally invests at least 85% of its total
assets in common stocks. In selecting stocks, this fund:
- chooses the stocks of financially sound companies that have
a proven ability to make and sustain a profit over time,
and
- places an emphasis on companies with growth potential.
The Growth Fund generally purchases a higher proportion of
stocks (relative to their market weight) from those sectors
of the market with higher growth prospects, referred to as
"overweighting." Examples of sectors with higher growth
prospects currently include technology, healthcare, and
consumer staples. On the other hand, the fund generally
purchases a smaller proportion of stocks (relative to their
market weight) from sectors of the market with below average
growth characteristics (for example, utilities and basic
materials), referred to as "underweighting."
The Growth Fund may also invest in debt obligations (such as
convertible preferred stocks, debentures, and notes),
including below investment grade bonds ("junk" bonds).
1
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND, INC.
- -------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE GROWTH FUND
You could lose money on your investment in the
Growth Fund, or it could underperform other investments, if
any of the following occurs:
- the stock market goes down
- the investment decisions of management (such as sector
overweighting and underweighting and individual stock
selection) do not achieve the desired results
- interest rates increase
- issuers of debt obligations default or are unable to pay
amounts due
Investments by the Growth Fund in smaller companies may
involve greater risks than larger established companies.
WHO MAY WANT TO INVEST IN THE GROWTH FUND
This fund may be appropriate if you:
- have long time horizons (ten years or more)
- are willing to accept higher short-term risk along with
higher potential long-term returns
- want to diversify your portfolio
- are investing for retirement or other goals that are many
years in the future
This fund may NOT be appropriate:
- if you are investing with a shorter time horizon
- if you are uncomfortable with an investment that will go up
and down in value
- as your complete portfolio
2
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND, INC.
- -------------------------------------------------------------------
EQUITY INCOME FUND'S INVESTMENT OBJECTIVE
The Equity Income Fund seeks current income
with a secondary objective of long-term capital appreciation.
EQUITY INCOME FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Equity Income Fund normally invests at
least 75% of its assets in equity securities. This fund also
invests in preferred stocks and investment grade debt
securities (such as publicly traded corporate bonds,
debentures, notes, commercial paper, repurchase agreements,
and certificates of deposit). In selecting common and
preferred stocks, the fund focuses on companies with
consistent and increasing dividend payment histories and
future earnings potential sufficient to continue such
dividend payments. This fund's goal is to maintain a
portfolio dividend yield (before fees and expenses) at least
50% greater than that of the S&P 500 Index.
The Equity Income Fund generally purchases a higher
proportion of stocks (relative to their market weight) from
those sectors of the market with greater dividend prospects,
referred to as "overweighting." Examples of sectors with
greater dividend prospects currently include financial
companies like banks, insurance companies, and real estate
investment trusts. On the other hand, the fund generally
purchases a smaller proportion of stocks (relative to their
market weight) from sectors of the market with below average
dividend yields (such as technology and consumer staples),
referred to as "underweighting."
3
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND, INC.
- -------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE EQUITY INCOME FUND
You could lose money on your investment in the
Equity Income Fund, or it could underperform other
investments, if any of the following occurs:
- the stock market goes down and/or interest rates increase
- the investment decisions of management (such as sector
overweighting and underweighting and
- individual stock selection) do not achieve the desired
results
- issuers of debt obligations default or are unable to pay
amounts due
- the fund cannot find a buyer for securities
Investments by the Equity Income Fund in smaller companies
may involve greater risks than larger established companies.
WHO MAY WANT TO INVEST IN THE EQUITY INCOME FUND
This fund may be appropriate if you:
- are looking for a fund that has both growth and income
components
- are seeking to protect the purchasing power of your money
while retaining the potential for growth and reducing
exposure to the volatility of the market
- are willing to accept higher short-term risk along with
higher potential long-term returns
- are retired or nearing retirement
This fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require a high degree of stability of your principal
- desire your return to be either ordinary income or capital
gains, but not both
4
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND, INC.
- -------------------------------------------------------------------
BALANCED FUND'S INVESTMENT OBJECTIVE
The Balanced Fund seeks to conserve principal, produce
current income, and achieve long-term capital appreciation.
BALANCED FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Balanced Fund uses a "balanced" approach
by investing part of the assets in common stocks and the
remainder in a combination of U.S. Government bonds,
investment grade corporate bonds, collateralized mortgage
obligations, mortgaged backed securities, convertible bonds,
and money market instruments. The ratio of stocks to bonds
changes in response to changing economic conditions. This
flexibility may help to reduce price volatility.
This fund's goal is relative stability of principal through a
balance of stocks, bonds, and cash. The stocks are
diversified and are selected based upon two models. One model
is based on profitability measurements and the other model is
based on the corporation's return on invested cash. The
bonds, meanwhile, may serve as a stabilizing force during
times of eroding stock market value, as well as provide a
fixed income payment stream. The fund invests at least 25% of
assets in fixed income securities, all of which are rated BBB
or better (investment grade).
PRINCIPAL RISKS OF INVESTING IN THE BALANCED FUND
You could lose money on your investment in the
Balanced Fund, or it could underperform other investments, if
any of the following occurs:
- interest rates increase or the stock market goes down
- issuers of debt obligations default or are unable to pay
amounts due
- the investment decisions of management do not achieve the
desired results
Investments by the Balanced Fund in smaller companies may
involve greater risks than larger established companies.
5
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND, INC.
- -------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE BALANCED FUND
This fund may be appropriate if you:
- are seeking supplemental income and conservation of the
purchasing power of your capital
- are looking for a more conservative alternative to a
growth-oriented fund
- want a well-diversified and relatively stable investment
allocation
- need a core investment
- are retired or nearing retirement
This fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- desire your return to be either ordinary income or capital
gains, but not both
- require a high degree of stability of your principal
6
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------------------------------------
TYPES OF INVESTMENT RISK
As indicated above, each of the three funds is subject to the following types of
risks to varying degrees:
CREDIT RISK. The risk that the issuer of a security, or a party to a contract,
will default or otherwise not honor a financial obligation. THIS RISK APPLIES TO
ALL OF THE FUNDS, BUT MAY HAVE A GREATER IMPACT ON THE BALANCED AND EQUITY
INCOME FUNDS.
INTEREST RATE RISK. The risk of declines in market value of an income-bearing
investment due to changes in prevailing interest rates. With fixed-rate
securities, a rise in interest rates typically causes a decline in market
values, while a fall in interest rates typically causes an increase in market
values. THIS RISK APPLIES TO ALL OF THE FUNDS, BUT MAY HAVE A GREATER IMPACT ON
THE BALANCED AND EQUITY INCOME FUNDS.
LIQUIDITY RISK. The risk that certain securities or other investments may be
difficult or impossible to sell at the time the fund would like to sell them or
at the price the fund values them. The fund may have to sell at a lower price,
sell other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance.
INVESTMENT STYLE OR MANAGEMENT RISK. The risk that a strategy used by a fund's
management may fail to produce the intended result because:
- - management fails to properly implement the selected investment strategy; or
- - the securities that fit the fund's investment style do worse than securities
that fit other investment styles.
This risk is common to all mutual funds.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. The fluctuations may cause a security to be
worth less than the price originally paid for it, or less than it was worth at
an earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. This risk is common to all stocks and bonds
and the mutual funds that invest in them.
7
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------------------------------------
BAR CHART AND PERFORMANCE TABLE
The bar charts and performance tables shown below provide some indication of the
risks of investing in the funds and the variability of returns:
- - by showing each fund's performance for each year over a ten year period, and
- - by showing how each fund's average annual returns for 1, 5, and 10 years
compare to those of both a broad-based securities market index, and an index
of funds with similar investment objectives.
The returns shown are based on an investment in the funds prior to the creation
of multiple classes of shares, but do not reflect any sales loads that would be
imposed on the purchase or sale of any shares. No sales loads apply to Class Y
shares. We created the multiple classes of shares on January 1, 1999.
Past performance is not necessarily an indication of how the funds will perform
in the future.
8
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 24.33%
1990 -2.94%
1991 36.98%
1992 -2.50%
1993 8.17%
1994 4.98%
1995 25.20%
1996 17.64%
1997 22.24%
1998 18.35%
</TABLE>
During the ten year period shown in the bar chart, the Growth Fund's highest
return for a quarter was 19.41% achieved December 31, 1998 and its lowest return
for a quarter was a negative 13.16% for the quarter September 30, 1990.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
GROWTH FUND 11.53% 16.10% 13.90%
S&P 28.61% 24.05% 19.19%
500-REGISTERED TRADEMARK-*
LIPPER GROWTH FUND 25.69% 19.82% 17.20%
INDEX**
</TABLE>
* The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices.
Standard & Poor's, S&P, and S&P 500-Registered Trademark- are registered
trademarks of Standard & Poor's Corporation.
** The Lipper Growth Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 30 largest open-end funds which invest in companies whose long
term earnings are expected to grow significantly faster than the earnings of the
stocks represented in the major unmanaged stock indices.
9
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 28.12%
1990 0.75%
1991 29.06%
1992 3.31%
1993 10.63%
1994 -0.61%
1995 29.12%
1996 16.46%
1997 22.72%
1998 12.11%
</TABLE>
During the ten year period shown in the bar chart, the Equity Income Fund's
highest return for a quarter was 11.12% achieved December 31, 1991 and its
lowest return for a quarter was a negative 7.61% for the quarter September 30,
1998.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
EQUITY INCOME FUND 5.65% 14.15% 13.95%
S&P 28.61% 24.05% 19.19%
500-REGISTERED TRADEMARK-*
LIPPER EQUITY INCOME FUND 11.78% 16.62% 14.89%
INDEX**
</TABLE>
* The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices.
Standard & Poor's, S&P, and S&P 500-Registered Trademark- are registered
trademarks of Standard & Poor's Corporation.
** The Lipper Equity Income Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 10 largest open-end funds which seek relatively high current
income and growth of income through investing 60% or more of their portfolios in
equities.
10
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 13.66%
1990 1.37%
1991 24.53%
1992 3.00%
1993 6.31%
1994 1.49%
1995 22.29%
1996 11.86%
1997 17.46%
1998 13.83%
</TABLE>
During the ten year period shown in the bar chart, the Balanced Fund's highest
return for a quarter was 10.18% achieved December 31, 1998 and its lowest return
for a quarter was a negative 7.64% for the quarter September 30, 1990.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
BALANCED FUND 7.28% 11.81% 10.64%
LEHMAN BROTHERS 8.44% 6.60% 8.52%
INTERMEDIATE
GOVERNMENT/CORPORATE
INDEX*
LIPPER BALANCED FUND 15.09% 13.88% 13.32%
INDEX**
</TABLE>
* The Lehman Brothers Intermediate Government/Corporate Index is an unmanaged
index generally representative of the performance of the bond market as a whole.
** The Lipper Balanced Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 30 largest open-end funds whose primary objective is to
conserve principal by maintaining a balanced portfolio of stocks and bonds. The
stock/bond ratio typically ranges around 60%/40%.
11
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
THERE ARE NO SALES CHARGES OR OTHER SHAREHOLDER TRANSACTION CHARGES IN
CONNECTION WITH PURCHASES OR REDEMPTIONS OF CLASS Y SHARES OF THE FUNDS, OTHER
THAN AN $8.00 TRANSACTION FEE CHARGED FOR EACH EXPEDITED WIRE REDEMPTION.
ANNUAL FUND OPERATING EXPENSES(1)
(expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
EQUITY BALANCED
GROWTH FUND INCOME FUND FUND
------------ ------------ ------------
CLASS Y CLASS Y CLASS Y
------------ ------------ ------------
<S> <C> <C> <C>
Management Fees 0.49% 0.67% 0.75%
Other Expenses(2) 0.36% 0.34% 0.62%
--- --- ---
Total Annual Fund Operating Expenses(3) 0.85% 1.01% 1.37%
</TABLE>
NOTES TO FEES AND EXPENSES OF THE FUNDS
(1) The "Management Fees" and "Other Expenses" shown below for the funds are for
the year ended December 31, 1998. NO DISTRIBUTION OR SERVICE (12b-1) FEES
ARE IMPOSED ON CLASS Y SHARES OF THE FUNDS.
(2) "Other Expenses" include the 0.25% Administrative Service Fee. Because Class
Y shares were not available prior to the date of this Prospectus, "Other
Expenses" for Class Y shares are based on the expenses and average net
assets of the Growth, Equity Income, and Balanced Fund for the fiscal year
ended December 31, 1998.
(3) The Fee Table does not reflect any fees waived or expenses assumed either
contractually or voluntarily by the funds' manager, Securities Management
and Research, Inc. ("SM&R"). Pursuant to the Administrative Service
Agreement, SM&R will pay (or reimburse) each fund for regular operating
expenses in excess of 1.25% per year of such fund's average daily net
assets. Regular operating expenses include the advisory fee and
administrative fee, but do not include any 12b-1 fee or class-specific
expenses. During the fiscal year ended December 31, 1998, SM&R waived
management fees of 0.12% for the Balanced Fund.
12
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EXAMPLES OF EXPENSES
These examples are intended to help you compare the cost of investing in the
funds with the cost of investing in other mutual funds. These examples assume
that you invest $10,000 in Class Y shares of fund for the time periods
indicated, based on expenses before fee waivers and expense reimbursements.
These examples also assume that your investment has a 5% return each year and
that the funds' operating expenses remain the same. YOUR ACTUAL COSTS MAY BE
HIGHER OR LOWER THAN SHOWN.
You would pay the following expenses, based on these assumptions, if you
actually redeem all of your shares at the end of the period shown:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Growth Fund (Class Y) $ 87 $ 271 $ 471 $ 1,049
----- ----- ----- -----------
Equity Income Fund (Class
Y) $ 103 $ 322 $ 558 $ 1,236
----- ----- ----- -----------
Balanced Fund (Class Y) $ 139 $ 434 $ 750 $ 1,646
----- ----- ----- -----------
</TABLE>
Because there are no sales charges or redemption fees, you would pay the same
expenses, based on these assumptions, if you did not redeem your shares.
13
<PAGE>
SHARES OF THE FUNDS
- -------------------------------------------------------------------
The funds ("we") offer Class Y shares through certain financial intermediaries
(such as broker-dealers, investment advisers and mutual fund "supermarkets")
that have distribution agreements with Securities Management and Research, Inc.
("SM&R"). Policies and fees established by these financial intermediaries may be
different than those discussed in this prospectus. Additionally, not all of the
services discussed may be available to you, and these financial intermediaries
may charge you separately for using their services. Please keep in mind that the
funds are not responsible for the failure of any financial intermediary not
carrying out its obligations to its customers.
Class Y shares of the funds are offered to institutions and certain other
investors at net asset value, with no sales charges or distribution and service
(12b-1) fees. As a result, 100% of your purchase is immediately invested.
Class Y shares may be purchased by:
(a) institutional investors, such as insurance companies, banks, investment
companies, retirement plans, and other institutional investors approved
by SM&R;
(b) trust companies and bank trust departments for funds over which they
exercise exclusive discretionary investment authority or they serve as a
directed trustee and which are held in a fiduciary, agency, advisory,
custodial or similar capacity;
(c) accounts managed by SM&R;
(d) any non-profit business, trade, professional, charitable, civic or
similar associations and clubs with an active membership of at least 100
persons who have entered into an net asset value agreement with SM&R;
and
(e) other investors, including individuals, with initial investments of
$500,000 or more.
NOTIFYING SM&R OF AN INTENT TO QUALIFY UNDER ONE OF THESE CATEGORIES IS THE SOLE
RESPONSIBILITY OF THE PROSPECTIVE INVESTOR.
The funds also offer other classes of shares through separate prospectuses: (1)
Class A "front-end load" shares; (2) Class B "back-end load" shares; (3) Class C
"level load" shares; (4) Class T shares sold only to investors that were
shareholders of the funds on December 31, 1998 and certain designated persons;
and (5) Class J shares
14
<PAGE>
sold only through special "network" distribution arrangements. Class A, B, C, T,
and J shares are subject to different sales charges and other expenses and,
accordingly, may have expense ratios and performance that differs from those of
Class Y shares. FOR MORE INFORMATION ON THE OTHER CLASSES OF SHARES OR TO
REQUEST A PROSPECTUS FOR ANOTHER CLASS, CALL INVESTOR SERVICES AT (800)
231-4639.
15
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
- -------------------------------------------------------------------
Each fund pursues its own investment objective through various investment
policies and techniques. ONLY THE PRINCIPAL INVESTMENT STRATEGIES OF EACH FUND
AND THE PRINCIPAL TYPES OF SECURITIES EACH FUND PLANS TO PURCHASE ARE DESCRIBED
BELOW. More investment information is in the Statement of Additional
Information. These policies and techniques are not fundamental and may be
changed by the Board of Directors without shareholder approval.
Because of the market risks inherent in any investment, the funds may not
achieve their investment objectives. In addition, effective management of each
fund is subject to general economic conditions and to the ability and investment
techniques of management. The net asset value of each fund's shares will vary
and the redemption value of shares may be either higher or lower than the
shareholder's cost. Since each fund has a different investment objective, each
will have different investment results and incur different market, financial,
and other risks.
SM&R GROWTH FUND, INC.
(FORMERLY NAMED AMERICAN NATIONAL GROWTH FUND, INC.)
The Growth Fund considers its portfolio investments and the composition of its
total portfolio from the viewpoint of potential capital appreciation. The Growth
Fund adjusts this composition from time to time in light of current conditions.
Under normal conditions, the Growth Fund invests at least 85% of its total
assets in common stocks.
The Growth Fund invests in the stocks of financially sound companies that have a
proven ability to make and sustain a profit over time. Management places an
emphasis on companies with growth potential. The Growth Fund does not employ
exotic investment strategies, such as using options and futures.
We identify candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then, we evaluate each candidate stock on a
fundamental basis by examining past financial performance, managerial skill and
foresight, and relative valuation to industry peers and the market as a whole.
We utilize this combination of disciplines and human judgement to drive our
stock selection process. We believe in evaluating each company's prospects as
16
<PAGE>
opposed to relying on broad forecasts of industry prospects. We do not attempt
to time economic, market, style or capitalization cycles. Diversification, or
weighting of individual economic sectors, is also dictated by a combination of
disciplines and human judgement to varying degrees. We believe in never having
less than half or more than double the market weighting in any one sector. The
Growth Fund limits cash to 15% of its assets unless circumstances dictate
otherwise.
Because of the Growth Fund's goal of seeking long-term capital growth, certain
sectors of the market will have greater weight in the Growth Fund's portfolio
while other sectors of the market will have lower representation. For example,
the Growth Fund generally overweights the technology sector, which represents
approximately 15% to 20% of the Standard & Poor's 500 Index, in the portfolio
relative to its market weight. This overweighting reflects the higher growth
prospects of technology companies relative to the average company in the market.
At varying times, we may also overweight other sectors of the market providing
above average growth prospects, like healthcare and consumer staples.
Conversely, the Growth Fund generally underrepresents certain sectors of the
market in its portfolio that tend to have below average growth characteristics,
like utilities, basic materials, and communications services. As a result of
such strategic overweighting and underweighting, the Growth Fund's performance
may differ substantially from broad market indexes like the S&P 500 and tend to
incur more price volatility than these indexes.
The Growth Fund may invest in convertible preferred stocks rated at least "B" by
Standard and Poor's Corporation ("S&P") or at least "b" by Moody's Investors
Service, Inc. ("Moody's") preferred stock ratings, and convertible debentures
and notes rated at least "B" by S&P and Moody's corporate bond ratings.
Investments in convertible securities having these ratings may involve greater
risks than convertible securities having higher ratings.
The proportion of assets invested in any particular type of security can be
expected to vary, depending on SM&R's appraisal of market and economic
conditions. Common stocks and convertible securities purchased will be of
companies that SM&R believes will provide an opportunity for capital
appreciation. On a temporary basis, the Growth Fund may invest in commercial
paper which at the date of
17
<PAGE>
such investment, is rated in one of the two top categories by one or more of the
nationally recognized statistical rating organizations, in certificates of
deposit in domestic banks and savings institutions having at least $1 billion of
total assets, and in repurchase agreements.
SM&R EQUITY INCOME FUND, INC.
(FORMERLY NAMED AMERICAN NATIONAL INCOME FUND, INC.)
The Equity Income Fund considers its portfolio investments and the composition
of its total portfolio not only from the viewpoint of present and potential
yield, but also from the viewpoint of potential capital appreciation. We adjust
this composition of portfolio investments from time to time to best accomplish
the Equity Income Fund's investment objectives under current conditions.
In pursuit of its objectives, the Equity Income Fund will invest in common
stocks, preferred stocks, and marketable debt securities selected in accordance
with its investment objectives. Common and preferred stocks purchased will
generally be of companies with consistent and increasing dividend payment
histories that SM&R believes will have further earnings potential sufficient to
continue such dividend payments. Debt securities include publicly traded
corporate bonds, debentures, notes, commercial paper, repurchase agreements, and
certificates of deposit in domestic banks and savings institutions having at
least $1 billion of total assets. The proportion of assets invested in any
particular type of security can be expected to vary, depending on SM&R's
appraisal of market and economic conditions. Under normal conditions, the Equity
Income Fund will invest at least 75% of its assets in equity securities rather
than debt securities.
We view common stocks, as well as investments in preferred stocks and bonds
convertible into common stock, from their potential for capital appreciation in
addition to their current and potential income yield. Our goal is to maintain a
portfolio dividend yield (before fees and expenses) at least 50% greater than
that of the S&P 500 Index.
We identify candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then, we evaluate each candidate stock on a
fundamental basis by examining past financial performance, managerial skill and
foresight, and relative valuation to industry peers and the market as a whole.
We utilize this combination of disciplines and human judgement to drive our
stock selection
18
<PAGE>
process. We believe in evaluating each company's prospects as opposed to relying
on broad forecasts of industry prospects. We do not attempt to time economic,
market, style or capitalization cycles. Diversification, or weighting of
individual sectors, is also dictated by a combination of disciplines and human
judgement to varying degrees. We believe in never having less than half or more
than double the market weighting in any one sector. Cash is limited to 15% of
the fund unless circumstances dictate otherwise.
Certain sectors of the market will have greater weight in the Equity Income
Fund's portfolio while other sectors of the market will have lower
representation. For example, the Equity Income Fund generally overweights the
finance sector in its portfolio relative to that sector's market weight (which
is approximately 16% of the Standard & Poor's 500 Index). This reflects the
greater dividend prospects of financial companies like banks, insurance
companies, and real estate investment trusts as compared to the average company
in the market. At varying times, we may also overweight other sectors of the
market that provide above average dividend prospects, like utilities and energy.
Conversely, the Equity Income Fund generally underrepresents certain sectors of
the market tending to have below average dividend yields, like technology,
consumer staples, and healthcare. As a result of such strategic overweighting
and underweighting, the Equity Income Fund's performance may differ
substantially from broad market indexes like the S&P 500.
Corporate debt obligations purchased by the Equity Income Fund will consist only
of obligations rated either Baa or better by Moody's or BBB or better by S&P.
Bonds which are rated Baa by Moody's are considered as medium grade obligations,
that is, they are neither highly protected nor poorly secured. Bonds rated BBB
by S&P are regarded as having an adequate capacity to pay interest and repay
principal. Commercial paper and notes will consist only of direct obligations of
corporations whose bonds and/or debentures are rated as set forth above.
SM&R BALANCED FUND, INC.
(FORMERLY NAMED TRIFLEX FUND, INC.)
The Balanced Fund uses a "balanced" approach by investing part of its assets in
stocks of well-known companies and the remainder in a combination of high-grade
bonds, bonds convertible into the common
19
<PAGE>
stock of the issuing corporations, and money market instruments. We change the
ratio of stocks to bonds in response to changing economic conditions. This
flexibility helps to reduce price volatility.
The Balanced Fund's goal is relative stability of principal through a balance of
stocks, bonds, and cash. The stocks serve to capture the benefits that ownership
in corporate America brings. The bonds, meanwhile, can serve as a stabilizing
force during times of eroding stock market value, as well as provide a fixed
income payment stream into the portfolio.
We identify candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then we evaluate each candidate stock on a
fundamental basis by examining past financial performance, managerial skill and
foresight, and relative valuation to industry peers and the market as a whole.
We utilize this combination of disciplines and human judgement to drive our
stock selection process. We believe in evaluating each company's prospects as
opposed to relying on broad forecasts of industry prospects. We do not attempt
to time economic, market, style or capitalization cycles. Diversification, or
weighting of individual sectors, is also dictated by a combination of
disciplines and human judgement to varying degrees. We believe in never having
less than half or more than double the market weighting in any one sector. Cash
is limited to 15% of the portfolio unless circumstances dictate otherwise. The
Balanced Fund will only purchase corporate bonds rated either Baa or better by
Moody's or BBB or better by S&P. Bonds which are rated Baa by Moody's are
considered as medium grade obligations, that is, they are neither highly
protected nor poorly secured. Bonds rated BBB by S&P are regarded as having an
adequate capacity to pay interest and repay principal. Commercial paper and
notes will consist only of direct obligations of corporations whose bonds and/or
debentures are rated as set forth above. The Balanced Fund may also invest in
repurchase agreements. This balanced investment policy is intended to reduce
risk and to obtain results in keeping with the Balanced Fund's objectives.
The Balanced Fund will invest in fixed-income securities and equity securities
as described above. However, the Balanced Fund will sometimes be more heavily
invested in equity securities and at other times it will be more heavily
invested in fixed-income securities, depending on management's appraisal of
market and economic conditions. SM&R believes that a fund that is wholly
invested in
20
<PAGE>
fixed-income securities carries a large interest rate risk. Interest rate risk
is the uncertainty about losses due to changes in the rate of interest on debt
instruments. The major interest rate risk for investors, however, is not in the
interest rate itself, but in the change in the market price of bonds that
results from changes in the prevailing interest rate. Higher interest rates
would mean lower bond prices and lower net asset value for the Balanced Fund's
shareholders assuming no change in its current investment objective and
portfolio. Diversifying the Balanced Fund's portfolio with investments such as
commercial paper, convertible securities, and common stocks may reduce the
decline in value attributable to the increase in interest rate and resulting
decrease in the market value of bonds and may reduce the interest rate risk.
However, stock prices also fluctuate in response to a number of factors,
including changes in general level of interest rates, economic and political
developments, and other factors which impact individual companies or specific
types of companies. Such market risks cannot be avoided but can be limited
through a program of diversification and a careful and consistent evaluation of
trends in the capital market and fundamental analysis of individual equity
holdings.
SM&R, through an ongoing program of asset allocation, will determine the
appropriate level of equity to debt holdings consistent with SM&R's outlook and
evaluation of trends in the economy and the financial markets. The Balanced Fund
determines its level of commitment to common stocks and specific common stock
investments as a result of this process. For example, within an environment of
rising inflation, common stocks historically have preserved their value better
than bonds; therefore, inclusion of common stocks could tend to conserve
principal better than a portfolio consisting entirely of bonds and other debt
obligations. In addition, within an environment of accelerating growth in the
economy, common stocks historically have conserved their value better than bonds
in part due to a rise in interest rates that occur coincidentally with
accelerating growth and profitability of the companies.
RISK FACTORS
- -------------------------------------------------------------------
The following discussion relates to all three funds. The risk/return summary
located at the beginning of this prospectus identifies some specific risks
applicable to each individual fund.
21
<PAGE>
GENERAL. There is no assurance that a fund will achieve its goals. Generally, if
the securities owned by a fund increase in value, the value of the shares of the
fund which you own will increase. Similarly, if the securities owned by a fund
decrease in value, the value of your shares will also go down. In this way, you
participate in any change in the value of the securities owned by a fund.
The risk inherent in investing in any fund is a risk common to any security.
That is, the value of a fund's shares will fluctuate in response to changes in
economic conditions, interest rates and the market's perception of the
underlying portfolio securities held by that fund. Each fund's share value
depends on general economic and securities market conditions, the investment
decisions of its management, and numerous other factors. All of these factors
are inherently uncertain and, in some cases, unforeseeable.
Any of the funds could lose money if the stock markets in general go down or if
the particular stocks purchased by a fund go down in value. In addition, the
funds could lose money if prevailing interest rates increase or if the debt
securities purchased by a fund are downgraded or defaulted upon.
STOCK INVESTMENT RISKS. Because each fund invests a substantial portion of its
assets in stocks, the value of each fund's portfolio will be affected by changes
in the stock markets. At times, the stock markets can be volatile and stock
prices can change substantially. This market risk will affect each fund's net
asset value per share, which will fluctuate as the values of each fund's
portfolio securities change. Stock prices do not always change uniformly or at
the same time and the various stock markets do not always move in the same
direction at the same time. Other factors specific to a particular company also
affect that company's stock price (for example, poor earnings, loss of major
customers, or major litigation). The funds cannot always predict the factors
that will affect a stock's price. The funds, however, do attempt to limit market
risk by diversifying their investments. The funds diversify their investments by
generally investing only a small percentage of their assets in any one company
and by not holding a substantial amount of the stock of any one company.
For the Growth Fund and the Equity Income Fund, the portfolio managers decide to
overweight or underweight certain industry sectors and to purchase individual
stocks based on their assessment
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<PAGE>
of the future growth or income prospects of an industry sector or particular
stock. If certain industries or investments do not perform as a fund expects
(I.E., do not grow in value or produce dividend income as expected), that fund
could underperform its peers or lose money.
The Growth Fund is generally considered more aggressive than the Equity Income
and Balanced Funds because it invests for capital appreciation in common stocks,
emphasizing "growth" stocks that tend to be more volatile than other
investments. Investors in the Growth Fund should expect greater fluctuations in
share price, yield, and total return than with less aggressive funds.
DEBT SECURITIES RISKS. Debt securities are subject to changes in their values
due to changes in prevailing interest rates. When prevailing interest rates
fall, the values of already-issued debt securities generally rise. Accordingly,
if interest rates go down after a security is purchased, such security might be
valued and/or sold at a price greater than its cost. On the other hand, when
prevailing interest rates rise, the values of already-issued debt securities
generally fall. Accordingly, if interest rates increase after a security is
purchased, such security might be valued and/or sold at a price less than its
cost. The magnitude of these fluctuations will often be greater for longer-term
debt securities than shorter-term debt securities.
The funds could lose money if any bonds they own are downgraded in credit rating
or go into default. In general, lower-rated bonds, such as junk bonds, have
higher credit risks. The Growth Fund is the only fund permitted to invest in
junk bonds. Junk bonds have additional risks, including limitations on a fund's
ability to re-sell the lower-rated debt securities and less readily available
market quotations for such securities. If there are not readily available market
quotations for a debt security, its value is determined largely by the
investment manager's judgment. When and if the debt security is sold, the
investment manager may find that its estimation of the debt security's value is
substantially different than the actual price at which it can be sold. Moreover,
substantial redemptions of fund shares could require a fund to sell portfolio
securities at a time when a sale might not be favorable.
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<PAGE>
SMALLER COMPANY RISKS. Smaller companies in which each of the funds may invest
may involve greater risks than large established companies. Such smaller
companies may have limited product lines, markets, financial resources, and
management depth. Their securities may trade less frequently and in more limited
volume than the securities of larger or more established companies. Smaller
companies may also be more vulnerable than larger companies to adverse business
or market developments. As a result, the prices of smaller companies may
fluctuate to a greater degree than the prices of securities of larger companies.
OTHER RISKS. Each investor will be subject to all the risks normally attendant
to business operations, changes in general economic conditions, governmental
rules and fiscal policies, acts of God, and other factors beyond the control of
the funds' management.
YEAR 2000 RISKS. Many services provided to the funds and their shareholders
depend on the smooth functioning of computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated, referred to as the "Year 2000
Problem." The Year 2000 Problem could have a negative impact on handling
securities trades, payment of interest and dividends, pricing, and account
services. Like other mutual funds, financial and business organizations, and
individuals around the world, the funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and transfer agent) do not properly process and
calculate date-related information and data from and after January 1, 2000. SM&R
is taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by any other service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
funds and their shareholders.
PURCHASES AND REDEMPTIONS
- -------------------------------------------------------------------
PURCHASING SHARES
You may purchase Class Y shares of a fund through certain financial
intermediaries (such as broker-dealers, investment advisers and mutual fund
"supermarkets") that have distribution agreements with
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<PAGE>
SM&R and are authorized to accept orders on the funds behalf. Shares are sold at
the next asset value per share next computed as and when provided below (See
"Pricing of Fund Shares"). These financial intermediaries may charge you a fee
for this service and may require different minimum initial and subsequent
purchased than the funds. These financial intermediaries may also impose other
charges or restrictions different from those applicable to individuals who
invest in other classes of the funds directly. You should carefully review all
account statements and promptly report any discrepancies to SM&R. You may make
initial and subsequent purchases directly through SM&R at the following address:
Securities Management and Research, Inc.
P.O. Box 58969
Houston, Texas 77258-8969
You should keep in mind that if your shares are held in the name of a financial
intermediary or other party, you are not considered a shareholder of record and
therefore may not be able to utilize services available only to shareholders of
record.
Certificates are not issued for shares of the funds. SM&R confirms investors'
purchases and credits such purchases to their accounts on the books maintained
by SM&R. Investors have the same rights of share ownership as they would if
certificates had been issued.
OPENING AN ACCOUNT: To purchase shares, you must submit a completed account
application. If you would like to take advantage of the electronic services
available, please complete the applicable Special Investor Services section of
the account application. Special forms are required when establishing an IRA/SEP
or 403(b) plan. Please call Investor Services at (800) 231-4639 and request
special forms when establishing retirement plans.
MINIMUM PURCHASE REQUIREMENT: For Class Y shares, the minimum initial investment
is $500,000 (we may waive this minimum for certain institutional investors). All
subsequent investments must be at least $2,000. We apply investment minimums to
the aggregate value invested in omnibus accounts established by broker-dealers.
We reserve the right to reject any purchase.
PURCHASES BY MAIL: Make your check(s) payable to SM&R and send the check(s) to
the address indicated above. Please note that third party checks will not be
accepted to open a new account, except for
25
<PAGE>
IRA rollover checks that are properly endorsed. If you make subsequent
investments by mail, you must indicate your name, account number, and the name
of the class and the fund being purchased. You may use the remittance slip
attached to the confirmation statement.
PURCHASES BY WIRE: TO ENSURE PROPER CREDITING OF A WIRE INVESTMENT, YOU MUST
HAVE AN EXECUTED ACCOUNT APPLICATION AND PURCHASER SUITABILITY FORM ON FILE WITH
THE TRANSFER AGENT. You may then wire your investment to The Moody National Bank
of Galveston ("Moody National Bank") by providing the following instructions to
your bank:
The Moody National Bank of Galveston ABA #113100091
Securities Management and Research, Inc. #035 868 9
Name of Class and Fund (E.G., Class Y of the Growth Fund)
Fund Account Number (number appears on your confirmation
statement)
Investor's Name (E.G., First National Bank)
PURCHASES BY EXCHANGE: Call Investor Services if you have established telephone
exchange privileges on your account. See "Special Purchase Plans and
Services--Exchange Privilege" for procedures and additional information relating
to telephone exchanges. For limitations on exchanges, see "Excessive Trading"
also under "Special Purchase Plans and Services."
PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). We determine each fund's offering price once
each day the New York Stock Exchange (the "Exchange") is open for regular
trading. You may purchase Class Y shares without a sales charge. Accordingly,
the offering price for Class Y shares of a fund is the net asset value per
share.
EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS (WHEN SHARES ARE PRICED). We
calculate net asset value once each day the Exchange is open at the close of
regular trading on the Exchange (currently 3:00 p.m. Central Time). In the event
the Exchange closes early on a particular day, we will determine the net asset
value of each fund as of the close of the Exchange that day. The price you pay
or receive for shares of a fund depends, in part, on the day and time you make
your purchase or redemption. On any day the Exchange is open for
26
<PAGE>
regular trading, we will execute purchases and redemptions at the next
applicable price determined that day if:
- SM&R receives your order in proper form prior to the close of regular
trading on the Exchange;
- a financial intermediary having a distribution agreement with SM&R
receives and reports your order to SM&R prior to the close of regular
trading on the Exchange on the same day; or
- for purchases, Moody National Bank receives your purchase payment by
bank wire and reports it to SM&R prior to the close of the Exchange.
If we receive your order after the close of the Exchange or on any day that the
Exchange is closed, we will execute your purchase or redemption at the price
determined on the next business day. In unusual circumstances, any fund may
temporarily suspend the processing of sell requests, or may postpone payment of
proceeds for up to three business days or longer, as allowed by federal
securities laws.
SPECIAL PURCHASE PLANS AND SERVICES
The funds offer services and plans designed to facilitate investments. At this
time, there is no charge to you for these services. The funds may impose fees
for such services in the future. Be aware, however, that if you elect to
participate in the ACH plan described below, you should check with your
financial institution for any additional charges imposed for this service. For
additional information contact your broker-dealer, investment adviser or SM&R. A
shareholder considering any of the plans or services described below should
consult a tax advisor before beginning a plan.
ELECTRONIC TRANSFERS (ACH). The electronic transfer option allows you to move
money between your account(s) and your bank, savings and loan, or credit union
account using the Automated Clearing House ("ACH") network. To arrange for
electronic transfers, complete the relevant Special Investor Services section of
the account application at the time you open your account and specify the type
of service or services desired. Attach a voided, pre-printed check or deposit
slip from your checking, savings and loan, or credit union account. PASSBOOK
SAVINGS ACCOUNTS ARE NOT ELIGIBLE FOR THE ELECTRONIC TRANSFER
27
<PAGE>
OPTION. ADDITIONALLY, YOUR BANK MUST BE A MEMBER OF THE AUTOMATED CLEARING HOUSE
(ACH) NETWORK FOR YOU TO TAKE ADVANTAGE OF THIS SERVICE. You will receive a
confirmation verifying initialization of the electronic transfer option and may
begin conducting transactions in your account(s) under this option approximately
20 calendar days after receipt of the verification notice from SM&R. If you
elect this option after your account is established, it may be necessary for you
to obtain a signature guarantee for all individuals named on the account(s).
TELEPHONE SERVICES. You can only use telephone services for transaction amounts
of $500 or more. You can take advantage of this service by completing the
appropriate Special Investor Services sections of the account application when
opening your account. Through this service, you will be able to purchase
additional shares for an existing SM&R mutual fund account by ACH. You may also
use the telephone services to redeem and exchange shares on those accounts for
which you have an executed account application on file, and have received
written verification from SM&R that the service has been initialized as
explained under Electronic Transfers above. If this option is elected after your
account is established, it may be necessary for you to obtain a signature
guarantee for all individuals named on the account(s). We permit transfers by
telephone from a joint account only to another joint account registered in the
identical names. There may be additional restrictions on telephone transactions
by joint account owners. Contact your broker-dealer, investment adviser or SM&R
for more information. PLEASE NOTE THAT THE TELEPHONE REDEMPTION OPTION IS NOT
AVAILABLE TO RETIREMENT PLANS.
The funds have implemented the following security procedures intended to protect
your account from losses resulting from unauthorized or fraudulent telephone
instructions: The caller must know:
(i) the name of the fund or funds;
(ii) all digits of the account number;
(iii) the exact name and address used in the registration(s); and
(iv) the Social Security or Employer Identification Number listed on the
account(s).
Additionally, we record all telephone transactions for your protection.
Neither the funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone which comply with
28
<PAGE>
the current security procedures and other requirements. SM&R believes that such
security procedures and other requirements are reasonable and, if followed, you
should bear the risk of any losses resulting from unauthorized or fraudulent
telephone transactions on your account(s).
During times of economic turmoil or market volatility or as a result of severe
weather or a natural disaster, it may be difficult to contact SM&R by telephone
to institute a redemption or exchange.
EXCHANGE PRIVILEGE. As an investor in a fund, you may be permitted to exchange
shares that you own in a fund with shares of some of the other mutual funds
managed by SM&R without the payment of an exchange fee, subject to certain
conditions. EXCHANGES BETWEEN A FUND AND ANOTHER FUND MANAGED BY SM&R ARE
AVAILABLE ONLY IN STATES WHERE THE APPLICABLE FUNDS ARE REGISTERED AND THE
EXCHANGE MAY BE LEGALLY MADE. YOU SHOULD CONTACT SM&R TO DETERMINE WHETHER A
FUND IS REGISTERED IN A PARTICULAR STATE AND WHETHER AN EXCHANGE IS PERMITTED.
WE MAY TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE OFFER AT ANY TIME.
You may exchange Class Y shares of a fund, without an exchange fee, for Class Y
shares of another fund managed by SM&R. You also may exchange your Class Y
shares for shares of SM&R Investments, Inc.'s Primary Fund and Money Market
Fund, provided that you meet any minimum investment requirement for the shares
you wish to acquire. You cannot exchange shares of the Money Market Fund or
Primary Fund for Class B or C shares of another fund.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met:
(a) the exchange must be made between accounts that are registered in the
same name, address and, if applicable, taxpayer identification number;
(b) the shares of the fund acquired through exchange must be qualified for
sale in the state in which you reside;
(c) the dollar amount of a written exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
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<PAGE>
(d) the minimum dollar amount of a telephone exchange is $500;
(e) SM&R must have received full payment for the shares being exchanged;
(f) your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal
Revenue Service Form W-8 (certificate of foreign status) or Form W-9
(certifying exempt status);
(g) any shares that you wish to exchange must have been held for at least
ten (10) business days;
(h) certificates representing shares, if any, are returned before such
shares are exchanged; and
(i) you have received a prospectus for the shares you receive in the
exchange.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time. ANY
GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE INCOME TAX PURPOSES. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR
THE TAX TREATMENT AND EFFECT OF EXCHANGES.
EXCESSIVE TRADING. Frequent trades, involving either substantial fund assets or
a substantial portion of your account or accounts controlled by you, can disrupt
management of the funds and raise the funds' expenses. We currently define
"excessive trading" as exceeding one purchase and sale involving the same fund
within any 120-day period.
For example, you are in Fund X. You can move substantial assets from Fund X to
Fund Y and, within the next 120 days, sell your shares in Fund Y to return to
Fund X or move to Fund Z. If you exceed the number of trades described above,
you may be barred indefinitely from further transactions between the
participating funds.
There are two types of transactions exempted from the excessive trading
guidelines. They are (1) redemptions that are not part of exchanges and (2)
systematic purchases or redemptions.
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<PAGE>
RETIREMENT PLANS
The following retirement plans may invest in Class Y shares of the funds:
- Individual Retirement Accounts (IRAs), which include traditional IRAs,
Roth IRAs, Education IRAs, and SIMPLE IRAs,
- Simplified Employee Pension Plans (SEPs),
- 403(b) Custodial Accounts (TSAs), and
- corporate retirement plans.
These plans allow you to shelter investment income from federal income tax while
saving for retirement. Information concerning IRAs and TSAs, and the forms
necessary to adopt such plans, can be obtained by contacting your registered
representative or calling SM&R. A regular fund application should be used when
establishing a corporate retirement plan. (See "Purchasing Shares" for the
minimum initial and subsequent purchase requirements.) SM&R acts as trustee or
custodian for IRAs, SEPs, and TSAs for the funds. An annual custodial fee of
$7.50 per account will be charged for any part of a calendar year in which an
investor has an IRA, SEP, or TSA in the funds and will be automatically deducted
from each account. An individual considering a retirement plan may wish to
consult with an attorney or tax adviser.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS. The Equity Income and Balanced Funds will pay dividends from
investment income, if any, quarterly, generally during the months of March,
June, September and December, and distribute capital gains, if any, in December.
The Growth Fund will pay dividends from investment income, if any, semi-annually
during the months of June and December and distribute capital gains, if any, in
December. Dividends from net investment income may include net short-term
capital gains, if any.
Dividends and distributions paid by the funds have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution of record shortly after the purchase of
shares by an investor represents in substance, a return of capital.
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<PAGE>
DIVIDEND REINVESTMENTS. Dividends and capital gains will be automatically
reinvested at net asset value in additional shares of the fund making such
distribution unless SM&R is instructed otherwise in writing. Distributions not
reinvested are paid by check or transmitted to your bank account through an ACH
transaction, if elected. If the Postal Service cannot deliver your check, or if
your check remains uncashed for six months, the funds reserve the right to
reinvest your distribution check in your account at the net asset value on the
business day of the reinvestment and to reinvest all future distributions in
shares of the funds. Dividends and capital gains declared in December to
shareholders of record in December and paid the following January will be
taxable to shareholders as if received in December. This is a convenient way to
accumulate additional shares and maintain or increase the shareholder's earning
base. Of course, any shares so acquired remain at market risk.
Shareholders have the right to change their election with respect to the receipt
of distributions by notifying SM&R in writing, but any such change will be
effective only as to distributions for which the record date is seven or more
business days after SM&R has received the shareholder's written request.
TAXABILITY OF DIVIDENDS. Dividends you receive from the funds, whether
reinvested or taken as cash, are generally considered taxable. A fund's
long-term capital gains distributions are taxable as capital gains; dividends
from other sources are generally taxable as ordinary income. Some dividends paid
in January may be taxable as if they had been paid the previous December.
Corporations may be entitled to take a dividends-received deduction for a
portion of certain dividends they receive. The Form 1099 that is mailed to you
every January details your dividends and their federal tax category, although
you should verify your tax liability with your tax professional.
BACKUP WITHHOLDING. Backup withholding of federal income tax may be applied at
the rate of 31% from taxable dividends, distributions, and redemption proceeds
(including exchanges) if you fail to furnish the funds with a correct and
properly certified Social Security or Employer Identification Number when you
sign your application, or if you underreport your income to the Internal Revenue
Service.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price
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<PAGE>
and the sale price of the shares you sell or exchange, you may have a gain or a
loss on the transaction. You are responsible for any tax liabilities generated
by your transactions. You should consult with a tax advisor concerning the tax
reporting requirements in effect on the redemption or exchange of such shares.
REDEEMING SHARES
You can redeem fund shares at the net asset value determined on the date the
request is received by SM&R in proper form. If you redeem through a financial
intermediary, the financial intermediary may charge you a fee for this service.
If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as practicable and normally
within seven days after receipt of a redemption request in proper form. We
currently charge a fee in the amount of $8.00 for redemptions by wire under
$5,000.
If the shares being redeemed were purchased by wire, certified check, money
order, or other immediately available funds, redemption proceeds will be mailed
no later than the seventh calendar day following receipt. For shares purchased
by a personal check or ACH transfer, SM&R will process your redemption but will
generally delay sending you the proceeds for up to ten (10) business days to
allow the check or transfer to clear.
TELEPHONE REDEMPTIONS. You may request redemptions by telephone if you have
completed the account application and requested this option. Telephone
privileges are not available to shareholders automatically. This redemption
feature can only be used if:
(a) the redemption proceeds are to be mailed to the address of record or
wired to the pre-authorized bank account indicated on the account
application;
(b) there has been no change of address of record or pre-authorized bank
account within the preceding 30 business days;
(c) the proceeds of the redemption are $500 or more and do not exceed
$25,000; and
(d) the security procedures discussed under "Special Purchase Plans And
Services--Exchange Privilege" have been met.
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These instructions may be changed only in writing, accompanied by a signature
guarantee and additional documentation may be required for corporations.
During times of economic turmoil or market volatility or as a result of severe
weather or a natural disaster, it may be difficult to contact SM&R by telephone
to institute a redemption or exchange.
SYSTEMATIC WITHDRAWAL PLAN. Each fund has a Systematic Withdrawal Plan
("Withdrawal Account"), which permits shareholders having an account value of
$50,000 or more to automatically withdraw a minimum of $50 monthly or each
calendar quarter on or about the 20th of the applicable month. Shareholders
maintaining a Withdrawal Account may elect to have the withdrawal proceeds
automatically deposited in their pre-authorized bank account via an ACH
transaction. This is accomplished by completing the relevant section of the
account application and returning it to SM&R. See "Special Purchase Plans and
Services--Electronic Transfers" for additional information. Dividends and
capital gains distributions will automatically be reinvested in additional
shares at net asset value. As with other redemptions, a withdrawal is a sale for
federal income tax purposes. The Systematic Withdrawal Plan will automatically
terminate if all shares are liquidated or withdrawn from the account.
Certificates are not issued for shares held in a Withdrawal Account and
certificates held, if any, must be surrendered when shares are transferred to a
Withdrawal Account. No account covered by a Letter of Intent can be changed to a
Systematic Withdrawal Plan until such time as the Letter of Intent is fulfilled
or terminated, nor can an account under a Systematic Withdrawal Plan be placed
under a Letter of Intent.
For further information about the "Systematic Withdrawal Plan," contact a
registered representative or SM&R.
"PROPER FORM" means the request for redemption must include:
(1) your letter of instruction or a stock assignment specifying the fund,
account number, and number of shares or dollar amount to be redeemed.
Both share certificates and stock powers, if any, must be endorsed and
executed exactly as the fund shares are registered. It is suggested that
certificates be returned by certified mail for your protection;
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<PAGE>
(2) any required signature guarantees (see "Signature Guarantees" below);
and
(3) other supporting legal documents, if required in the case of estates,
trusts, guardianships, divorce, custodianships, corporations,
partnerships, pension or profit sharing plans, retirement plans, and
other organizations.
Please keep in mind that as a shareholder, it is your responsibility to ensure
that all requests are submitted to SM&R in proper form for processing.
SIGNATURE GUARANTEES. A signature guarantee verifies the authenticity of your
signature. Signature guarantees are required when:
(1) the proceeds of the redemption exceed $25,000;
(2) the proceeds (in any amount) are to be paid to someone OTHER THAN the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address OTHER THAN
the shareholder's address of record, pre-authorized bank account or
exchanged to one of the other funds managed by SM&R; or
(4) the fund or its transfer agent believes a signature guarantee would
protect against potential claims based on the transfer instructions,
including, when the authority of a representative of a corporation,
partnership, association, or other entity has not been established to
the satisfaction of the fund or transfer agent.
You should be able to obtain an acceptable signature guarantee from a bank,
broker, dealer, municipal securities dealer or broker, government securities
dealer or broker, credit union, national securities exchange, or registered
securities association. WITNESSING OR NOTARIZATION IS NOT SUFFICIENT.
REDEMPTION OF SMALL ACCOUNTS. The funds reserve the right to redeem shares in
any account (which will be promptly paid to the shareholder) if, due to your
redemptions, the value of the account falls below $10,000. You will be notified
that the value of your account is less than the required minimum and allowed at
least 60 days to make an additional investment to increase the value of your
account above the required minimum. The funds may, from time to time, change
such required minimum investment.
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<PAGE>
RIGHTS RESERVED BY THE FUNDS. The funds, acting directly or through SM&R,
reserve the right:
- to waive or lower investment minimums;
- to accept subsequent purchases by telephone from financial intermediaries;
- to refuse any purchase order;
- to cancel or rescind any purchase or exchange at any time prior to receipt
by the shareholder of written confirmation or, if later, within five (5)
business days of the transaction;
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- to freeze an account and suspend account services when notice has been
received of a dispute involving the account owners or other parties or there
is reason to believe a fraudulent transaction may occur or has occurred;
- to restrict or refuse the use of faxed redemptions where there is a question
as to the validity of the request or proper documents have not been
received;
- to otherwise modify the conditions of purchase and any services at any time;
- to refuse to act on instructions not believed to be genuine; or
- to eliminate duplicate mailings of fund material to shareholders who reside
at the same address.
THE FUNDS AND MANAGEMENT
- -------------------------------------------------------------------
INVESTMENT ADVISER
Each fund's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the fund's investment adviser, the management of the
fund's day-to-day business and affairs. In addition, SM&R invests the funds'
assets, provides administrative services, and serves as transfer agent,
custodian, dividend paying agent, and underwriter. While the use of this
combined Prospectus subjects each fund to possible liability as the result of
statements or omissions regarding another fund, the Board of Directors of each
fund considers the benefits to the respective fund of using a combined
Prospectus to outweigh the risk.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). SM&R was incorporated in 1964 and has managed mutual
funds since 1966. SM&R does and may, from time to time, serve as investment
adviser to other clients including banks, employee benefit plans, other
investment companies, banks, foundations and endowment funds.
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ADVISORY AGREEMENTS
GROWTH FUND. We deduct an investment advisory fee from the value of the shares
each day. We calculate this fee for the Growth Fund at the annual rate as
follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S BASIC ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ------------------------------------------------- --------------------
<S> <C>
Not exceeding $100,000,000 0.750%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.625%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.500%
Exceeding $300,000,000 0.400%
</TABLE>
We adjust the basic advisory fee rate by comparing the fund's investment
performance during the previous thirty-six (36) months with the investment
performance of the Lipper Growth Fund Index (the "Lipper Index") published by
Lipper Analytical Services, Inc. over the same period. Specifically, we adjust
the basic advisory fee each month by adding to or subtracting from such rate,
when appropriate, the applicable performance adjustment amount percentage shown
in the table below. The resulting advisory fee rate is then applied to the
average daily net asset value of the fund for the succeeding month. The advisory
fee for such month will be one-twelfth (1/12th) of the resulting dollar figure.
<TABLE>
<CAPTION>
PERFORMANCE
PERFORMANCE COMPARED ADJUSTMENT
TO LIPPER INDEX AMOUNT
- -------------------------------- -------------------
<S> <C>
0.10% to 0.99% above +0.02%
1.00% to 1.99% above +0.04%
2.00% to 2.99% above +0.06%
3.00% to 3.99% above +0.08%
4.00% to 4.99% above +0.10%
5.00% to 5.99% above +0.12%
6.00% to 6.99% above +0.14%
7.00% to 7.99% above +0.16%
8.00% to 8.99% above +0.18%
9.00% and above +0.20%
0.10% to 0.99% below -0.02%
1.00% to 1.99% below -0.04%
2.00% to 2.99% below -0.06%
3.00% to 3.99% below -0.08%
4.00% to 4.99% below -0.10%
5.00% to 5.99% below -0.12%
6.00% to 6.99% below -0.14%
7.00% to 7.99% below -0.16%
8.00% to 8.99% below -0.18%
9.00% and below -0.20%
</TABLE>
38
<PAGE>
See "INVESTMENT ADVISORY AND OTHER SERVICES" in the Funds' Statement of
Additional Information for a more detailed description of the method used in
calculating the performance adjustment. See Appendix B for a description of
these ratings
EQUITY INCOME AND BALANCED FUNDS. We deduct an investment advisory fee from the
value of the shares each day. We calculate this fee for the Equity Income and
Balanced Funds at the annual rate as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S BASIC ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- -------------------------------------------- -------------------------
<S> <C>
Not exceeding $100,000,000 0.750%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.625%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.500%
Exceeding $300,000,000 0.400%
</TABLE>
SM&R received total advisory fees from the Growth, Equity Income, and Balanced
Funds for the fiscal year ended December 31, 1998 of 0.49%, 0.67%, and 0.75%,
respectively, of each fund's average daily net assets. Each fund's advisory fees
may be higher than the fees paid by other mutual funds, but each fund believes
its fees are comparable to those paid by funds with the same or similar
investment objective.
ADMINISTRATIVE SERVICES
Pursuant to the Administrative Service Agreements with the funds, SM&R provides
all non-investment related management, executive, administrative, transfer
agent, and operational services to the funds. Under the agreements, SM&R
receives an administrative service fee from each fund at the annual rate of
average daily net asset values as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S ADMINISTRATIVE SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
- -------------------------------------------- --------------------------
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.20%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
In each fund's administrative service agreement, SM&R has agreed to pay (or to
reimburse each fund for) each fund's regular operating expenses in excess of
1.25% per year of such fund's average daily net assets. Regular operating
expenses include the advisory fee and
39
<PAGE>
administrative service fee, if any, paid to SM&R, but do not include 12b-1 fees,
class-specific expenses, interest, taxes, commissions, and other expenses
incidental to portfolio transactions.
SM&R received total administrative service fees of 0.23% for the Growth Fund;
0.22% for the Equity Income Fund; and 0.25% for the Balanced Fund for the fiscal
year ended December 31, 1998 of each fund's average daily net assets.
PORTFOLIO MANAGEMENT
SM&R's portfolio management team uses a disciplined, team approach in providing
investment advisory services to the funds. While the following individual is
primarily responsible for the day-to-day portfolio management of the funds, all
accounts are reviewed on a regular basis by SM&R's Investment Committee to
ensure that they are being invested in accordance with investment policies.
GORDON D. DIXON, DIRECTOR, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER OF
SECURITIES MANAGEMENT AND RESEARCH, INC., VICE PRESIDENT, PORTFOLIO MANAGER OF
THE GROWTH FUND, AND PORTFOLIO MANAGER OF THE EQUITY INCOME FUND AND BALANCED
FUND. Mr. Dixon joined Securities Management and Research, Inc. in 1993. He
graduated from the University of South Dakota with a B.A. in Finance and
Accounting and from Northwestern University in 1972 with an M.B.A in Finance
and Accounting. Mr. Dixon began his investment career in 1972 as an
Administrative and Research Manager with Penmark Investments. In 1979 he
began working for American Airlines in the management of the $600 million
American Airlines Pension Portfolio, of which approximately $100 million was
equities. In 1984 he was employed by C&S/Sovran Bank in Atlanta, Georgia as
Director of Equity Strategy where he had responsibility for all research,
equity trading and quantitative services groups as well as investment policy
input of a portfolio of approximately $7 billion, of which $3.5 billion was
equities.
40
<PAGE>
FINANCIAL HIGHLIGHTS GROWTH FUND
- -------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Growth Fund's financial performance for the past five years. Certain information
reflects financial results for a single share outstanding throughout each period
shown. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Growth Fund (assuming reinvestment
of all dividends and distributions) prior to addition of multiple classes of
shares. This information is derived from the financial statements of the Growth
Fund, which for the years ended December 31, 1997 and 1998 have been audited by
Tait, Weller & Baker, independent auditors, whose report, along with the Growth
Fund's financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request. The information for
years ending December 31, 1996 and prior, has been audited by the Growth Fund's
former independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 5.24 $ 4.95 $ 4.39 $ 3.83 $ 4.15
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04 0.06 0.05 0.08 0.06
Net Realized and Unrealized Gain (Loss) on
Securities 0.85 1.03 0.73 0.88 0.15
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 0.89 1.09 0.78 0.96 0.21
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.04) (0.06) (0.05) (0.08) (0.06)
Distributions from Capital Gains (0.40) (0.74) (0.17) (0.32) (0.47)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.44) (0.80) (0.22) (0.40) (0.53)
--------- --------- --------- --------- ---------
Net Asset Value,
End of Year $ 5.69 $ 5.24 $ 4.95 $ 4.39 $ 3.83
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 18.35% 22.24% 17.64% 25.20% 4.98%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000's omitted) $ 203,109 $ 178,344 $ 152,758 $ 134,821 $ 113,250
Ratio of Expenses to Average Net Assets 0.85% 0.96% 1.15% 0.98% 0.97%
Ratio of Net Income to Average Net Assets 0.69% 1.03% 1.02% 1.67% 1.46%
Portfolio Turnover Rate 27.31% 46.79% 18.72% 37.00% 46.26%
</TABLE>
41
<PAGE>
FINANCIAL HIGHLIGHTS EQUITY INCOME FUND
- -------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Equity Income Fund's financial performance for the past five years. Certain
information reflects financial results for a single Equity Income Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Equity Income Fund (assuming reinvestment of all dividends and
distributions) prior to addition of multiple classes of shares. This information
is derived from the financial statements of the Equity Income Fund, which for
the years ended December 31, 1997 and 1998 have been audited by Tait, Weller &
Baker, independent auditors, whose report, along with the Equity Income Fund's
financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request. The information for
years ending December 31, 1996 and prior, has been audited by the Equity Income
Fund's former independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 26.99 $ 25.05 $ 22.59 $ 18.90 $ 21.66
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.62 0.63 0.58 0.62 0.62
Net Realized and Unrealized Gain
(Loss) on Securities 2.50 4.96 3.10 4.82 (0.75)
------------ --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 3.12 5.59 3.68 5.44 (0.13)
------------ --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.62) (0.64) (0.58) (0.63) (0.61)
Distributions from Capital Gains (1.47) (3.01) (0.64) (1.12) (2.02)
------------ --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (2.09) (3.65) (1.22) (1.75) (2.63)
------------ --------- --------- --------- ---------
Net Asset Value, End of Year $ 28.02 $ 26.99 $ 25.05 $ 22.59 $ 18.90
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
TOTAL RETURN 12.11% 22.72% 16.46% 29.12% (0.61)%
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000's omitted) $ 218,980 $ 198,687 $ 165,786 $ 141,058 $ 114,231
Ratio of Expenses to Average Net Assets 1.01% 1.05% 1.10% 1.12% 1.12%
Ratio of Net Income to Average Net
Assets 2.22% 2.28% 2.42% 2.89% 2.86%
Portfolio Turnover Rate 19.29% 39.14% 27.07% 44.00% 52.46%
</TABLE>
42
<PAGE>
FINANCIAL HIGHLIGHTS BALANCED FUND
- -------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Balanced Fund's financial performance for the past five years. Certain
information reflects financial results for a single Balanced Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Balanced Fund (assuming reinvestment of all dividends and distributions)
prior to addition of multiple classes of shares. This information is derived
from the financial statements of the Balanced Fund, which for the years ended
December 31, 1997 and 1998 have been audited by Tait, Weller & Baker,
independent auditors, whose report, along with the Balanced Fund's financial
statements, are incorporated by reference into the Statement of Additional
Information, which is available upon request. The information for years ending
December 31, 1996 and prior, has been audited by the Balanced Fund's former
independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 18.32 $ 17.90 $ 16.85 $ 14.32 $ 15.35
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.48 0.57 0.49 0.49 0.45
Net Realized and Unrealized Gain (Loss) on
Securities 1.96 2.50 1.48 2.67 (0.22)
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 2.44 3.07 1.97 3.16 0.23
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.47) (0.59) (0.49) (0.49) (0.45)
Distributions from Capital Gains (0.66) (2.06) (0.43) (0.14) (0.81)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (1.13) (2.65) (0.92) (0.63) (1.26)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year $ 19.63 $ 18.32 $ 17.90 $ 16.85 $ 14.32
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 13.83% 17.46% 11.86% 22.29% 1.49%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000's omitted) $ 29,367 $ 25,838 $ 23,188 $ 21,757 $ 19,023
Ratio of Expenses to Average Net Assets(1) 1.25% 1.26% 1.21% 1.26% 1.25%
Ratio of Net Income to Average Net Assets 2.55% 3.02% 2.83% 2.99% 2.91%
Portfolio Turnover Rate 16.01% 27.52% 23.78% 16.39% 46.95%
</TABLE>
(1) Expenses for these calculations are net of a reimbursement from Securities
Management and Research, Inc. Without these reimbursements, the ratio of
expenses to average net assets would have been 1.37%, 1.36%, 1.34%, 1.46%
and 1.45% for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
43
<PAGE>
- -------------------------------------------------------------------
APPENDIX A
(Description of Ratings Used in Prospectus)
- -------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND (BONDS THAT EXTEND
LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S LONG-TERM BOND (BONDS THAT
EXTEND LONGER THAN ONE YEAR) RATINGS:
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements
A-1
<PAGE>
are likely to change, such changes as can be visualized are most unlikely
to impair the fundamentally strong position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risks appear
somewhat larger than the Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated "Baa" are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
PREFERRED STOCK RATING
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S PREFERRED STOCK RATING:
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated
"AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to
A-2
<PAGE>
make payments for a preferred stock in this category than for issues
in the "A" category.
BB Preferred stock rated "BB," "B," and "CCC" are regarded, on balance,
B as predominantly speculative with respect to the issuer's capacity to pay
CCC preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest. While such issues will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S PREFERRED STOCK RATING:
aaa An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater then in the
"aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
ba An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
FEDERAL FUNDS
As used in this Prospectus and in the Funds' Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.
A-3
<PAGE>
FOR MORE INFORMATION ABOUT THE FUNDS
- -------------------------------------------------------------------
<TABLE>
<S> <C>
The following documents contain more information about the SM&R GROWTH FUND, INC.
funds and are available free upon request: SM&R EQUITY INCOME FUND,
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI contains INC.
additional information about all aspects of the funds. A SM&R BALANCED FUND, INC.
current SAI has been filed with the Securities and Exchange
Commission and is incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS. The funds' annual and
semi-annual reports provide additional information about the
funds' investments. The annual report for the fiscal year
ended December 31, 1998 will contain a discussion of the
market conditions and investment strategies that
significantly affected each fund's performance during the
last fiscal year.
</TABLE>
REQUESTING DOCUMENTS. You may request a free copy of the SAI and these reports,
make shareholder inquiries, or request further information about the funds
either by contacting your broker or by contacting the funds at:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE: 1-800-231-4639 (TOLL FREE) OR
281-334-2469 (COLLECT)
PUBLIC INFORMATION. You can review and copy information about the funds,
including the SAI, at the Securities and Exchange Commission's Public Reference
Room in Washington D.C. You may obtain information on the operation of the
public reference room by calling the Commission at 1-800-SEC-0330. Reports and
other information about the funds also are available on the Commission's
Internet site at http://www.sec.gov. You may obtain copies of this information,
upon payment of a duplicating fee, by writing the Public Reference Section of
the Securities and Exchange Commission, Washington, D.C. 20549-6009.
Investment Company
File Nos. 811-00623
811-01916
811-02818
<PAGE>
SM&R
LOGO
P R O S P E C T U S
MAY 1, 1999
- SM&R GROWTH FUND, INC.
- SM&R EQUITY INCOME FUND, INC.
- SM&R BALANCED FUND, INC.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
CLASS J
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------
<TABLE>
<S> <C>
RISK/RETURN SUMMARY.......................................... 1
SM&R Growth Fund........................................... 1
SM&R Equity Income Fund.................................... 3
SM&R Balanced Fund......................................... 5
Types of Investment Risk................................... 7
Bar Chart and Performance Table............................ 8
Fees and Expenses of the Funds............................. 12
SHARES OF THE FUNDS.......................................... 14
Distribution and Shareholder Service (12b-1) Fee........... 14
INVESTMENT OBJECTIVES AND POLICIES........................... 15
Growth Fund................................................ 15
Equity Income Fund......................................... 17
Balanced Fund.............................................. 18
RISK FACTORS................................................. 21
PURCHASES AND REDEMPTIONS.................................... 24
Purchasing Shares.......................................... 24
Pricing of Fund Shares..................................... 24
Special Services........................................... 25
Retirement Plans........................................... 27
Dividends, Distributions, and Taxes........................ 28
Redeeming Shares........................................... 29
THE FUNDS AND MANAGEMENT..................................... 32
FINANCIAL HIGHLIGHTS......................................... 36
Growth Fund................................................ 36
Equity Income Fund......................................... 37
Balanced Fund.............................................. 38
APPENDIX..................................................... A-1
</TABLE>
ii
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND, INC.
- -------------------------------------------------------------------
GROWTH FUND'S INVESTMENT OBJECTIVE
The Growth Fund seeks long-term capital
growth by investing primarily in common stocks that provide
an opportunity for capital appreciation over time.
GROWTH FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Growth Fund normally invests at least 85%
of its total assets in common stocks. In selecting stocks,
this fund:
- chooses the stocks of financially sound companies that have
a proven ability to make and sustain a profit over time,
and
- places an emphasis on companies with growth potential.
The Growth Fund generally purchases a higher proportion of
stocks (relative to their market weight) from those sectors
of the market with higher growth prospects, referred to as
"overweighting." Examples of sectors with higher growth
prospects currently include technology, healthcare, and
consumer staples. On the other hand, the fund generally
purchases a smaller proportion of stocks (relative to their
market weight) from sectors of the market with below average
growth characteristics (for example, utilities and basic
materials), referred to as "underweighting."
The Growth Fund may also invest in debt obligations (such as
convertible preferred stocks, debentures, and notes),
including below investment grade bonds ("junk" bonds).
1
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND, INC.
- -------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE GROWTH FUND
You could lose money on your investment in the
Growth Fund, or it could underperform other investments, if
any of the following occurs:
- the stock market goes down
- the investment decisions of management (such as sector
overweighting and underweighting and individual stock
selection) do not achieve the desired results
- interest rates increase
- issuers of debt obligations default or are unable to pay
amounts due
Investments by the Growth Fund in smaller companies may
involve greater risks than larger established companies.
WHO MAY WANT TO INVEST IN THE GROWTH FUND
This fund may be appropriate if you:
- have long time horizons (ten years or more)
- are willing to accept higher short-term risk along with
higher potential long-term returns
- want to diversify your portfolio
- are investing for retirement or other goals that are many
years in the future
This fund may NOT be appropriate:
- if you are investing with a shorter time horizon
- if you are uncomfortable with an investment that will go up
and down in value
- as your complete portfolio
2
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND, INC.
- -------------------------------------------------------------------
EQUITY INCOME FUND'S INVESTMENT OBJECTIVE
The Equity Income Fund seeks current income
with a secondary objective of long-term capital appreciation.
EQUITY INCOME FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Equity Income Fund normally invests at
least 75% of its assets in equity securities. This fund also
invests in preferred stocks and investment grade debt
securities (such as publicly traded corporate bonds,
debentures, notes, commercial paper, repurchase agreements,
and certificates of deposit). In selecting common and
preferred stocks, the fund focuses on companies with
consistent and increasing dividend payment histories and
future earnings potential sufficient to continue such
dividend payments. This fund's goal is to maintain a
portfolio dividend yield (before fees and expenses) at least
50% greater than that of the S&P 500 Index.
The Equity Income Fund generally purchases a higher
proportion of stocks (relative to their market weight) from
those sectors of the market with greater dividend prospects,
referred to as "overweighting." Examples of sectors with
greater dividend prospects currently include financial
companies like banks, insurance companies, and real estate
investment trusts. On the other hand, the fund generally
purchases a smaller proportion of stocks (relative to their
market weight) from sectors of the market with below average
dividend yields (such as technology and consumer staples),
referred to as "underweighting."
3
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND, INC.
- -------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE EQUITY INCOME FUND
You could lose money on your investment in the
Equity Income Fund, or it could underperform other
investments, if any of the following occurs:
- the stock market goes down and/or interest rates increase
- the investment decisions of management (such as sector
overweighting and underweighting and individual stock
selection) do not achieve the desired results
- issuers of debt obligations default or are unable to pay
amounts due
- the fund cannot find a buyer for securities
Investments by the Equity Income Fund in smaller companies
may involve greater risks than larger established companies.
WHO MAY WANT TO INVEST IN THE EQUITY INCOME FUND
This fund may be appropriate if you:
- are looking for a fund that has both growth and income
components
- are seeking to protect the purchasing power of your money
while retaining the potential for growth and reducing
exposure to the volatility of the market
- are willing to accept higher short-term risk along with
higher potential long-term returns
- are retired or nearing retirement
This fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require a high degree of stability of your principal
- desire your return to be either ordinary income or capital
gains, but not both
4
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND, INC.
- -------------------------------------------------------------------
BALANCED FUND'S INVESTMENT OBJECTIVE
The Balanced Fund seeks to conserve principal,
produce current income, and achieve long-term capital
appreciation.
BALANCED FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Balanced Fund uses a "balanced" approach
by investing part of the assets in common stocks and the
remainder in a combination of U.S. Government bonds,
investment grade corporate bonds, collateralized mortgage
obligations, mortgaged backed securities, convertible bonds,
and money market instruments. The ratio of stocks to bonds
changes in response to changing economic conditions. This
flexibility may help to reduce price volatility.
This fund's goal is relative stability of principal through a
balance of stocks, bonds, and cash. The stocks are
diversified and are selected based upon two models. One model
is based on profitability measurements and the other model is
based on the corporation's return on invested cash. The
bonds, meanwhile, may serve as a stabilizing force during
times of eroding stock market value, as well as provide a
fixed income payment stream. The fund invests at least 25% of
assets in fixed income securities, all of which are rated BBB
or better (investment grade).
5
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND, INC.
- -------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE BALANCED FUND
You could lose money on your investment in the
Balanced Fund, or it could underperform other investments, if
any of the following occurs:
- interest rates increase or the stock market goes down
- issuers of debt obligations default or are unable to pay
amounts due
- the investment decisions of management do not achieve the
desired results
Investments by the Balanced Fund in smaller companies may
involve greater risks than larger established companies.
WHO MAY WANT TO INVEST IN THE BALANCED FUND
This fund may be appropriate if you:
- are seeking supplemental income and conservation of the
purchasing power of your capital
- are looking for a more conservative alternative to a
growth-oriented fund
- want a well-diversified and relatively stable investment
allocation
- need a core investment
- are retired or nearing retirement
This fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- desire your return to be either ordinary income or capital
gains, but not both
- require a high degree of stability of your principal
6
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------------------------------------
TYPES OF INVESTMENT RISK
As indicated above, each of the three funds is subject to the following types of
risks to varying degrees:
CREDIT RISK. The risk that the issuer of a security, or a party to a contract,
will default or otherwise not honor a financial obligation. THIS RISK APPLIES TO
ALL OF THE FUNDS, BUT MAY HAVE A GREATER IMPACT ON THE BALANCED AND EQUITY
INCOME FUNDS.
INTEREST RATE RISK. The risk of declines in market value of an income-bearing
investment due to changes in prevailing interest rates. With fixed-rate
securities, a rise in interest rates typically causes a decline in market
values, while a fall in interest rates typically causes an increase in market
values. THIS RISK APPLIES TO ALL OF THE FUNDS, BUT MAY HAVE A GREATER IMPACT ON
THE BALANCED AND EQUITY INCOME FUNDS.
LIQUIDITY RISK. The risk that certain securities or other investments may be
difficult or impossible to sell at the time the fund would like to sell them or
at the price the fund values them. The fund may have to sell at a lower price,
sell other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance.
INVESTMENT STYLE OR MANAGEMENT RISK. The risk that a strategy used by a fund's
management may fail to produce the intended result because:
- management fails to properly implement the selected investment strategy;
or
- the secruities that fit the fund's investment style do worse than
securities that fit other investment styles.
This risk is common to all mutual funds.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. The fluctuations may cause a security to be
worth less than the price originally paid for it, or less than it was worth at
an earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. This risk is common to all stocks and bonds
and the mutual funds that invest in them.
7
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
BAR CHART AND PERFORMANCE TABLE
The bar charts and performance tables shown below provide some indication of the
risks of investing in the funds and the variability of returns:
- - by showing each fund's performance for each year over a ten year period, and
- - by showing how each fund's average annual returns for 1, 5, and 10 years
compare to those of both a broad-based securities market index and an index of
funds with similar investment objectives.
The returns shown are based on an investment in the funds prior to the creation
of multiple classes of shares, but do not reflect any sales loads that would be
imposed on the purchase or sale of any shares. We created the multiple classes
of shares on January 1, 1999. If multiple classes of shares of the funds had
been in existence, the financial performance of Class J shares would have been
lower than depicted because of the imposition of distribution and/or service
(12b-1) fees.
Past performance is not necessarily an indication of how the funds will perform
in the future.
8
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 24.33%
1990 -2.94%
1991 36.98%
1992 -2.50%
1993 8.17%
1994 4.98%
1995 25.20%
1996 17.64%
1997 22.24%
1998 18.35%
</TABLE>
During the ten year period shown in the bar chart, the Growth Fund's highest
return for a quarter was 19.41% achieved December 31, 1998 and its lowest return
for a quarter was a negative 13.16% for the quarter September 30, 1990.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
GROWTH FUND 11.53% 16.10% 13.90%
S&P 28.61% 24.05% 19.19%
500-REGISTERED TRADEMARK-*
LIPPER GROWTH FUND 25.69% 19.82% 17.20%
INDEX**
</TABLE>
* The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices.
Standard & Poor's, S&P, and S&P 500-Registered Trademark- are registered
trademarks of Standard & Poor's Corporation.
** The Lipper Growth Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 30 largest open-end funds which invest in companies whose long
term earnings are expected to grow significantly faster than the earnings of the
stocks represented in the major unmanaged stock indices.
9
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 28.12%
1990 0.75%
1991 29.06%
1992 3.31%
1993 10.63%
1994 -0.61%
1995 29.12%
1996 16.46%
1997 22.72%
1998 12.11%
</TABLE>
During the ten year period shown in the bar chart, the Equity Income Fund's
highest return for a quarter was 11.12% achieved December 31, 1991 and its
lowest return for a quarter was a negative 7.61% for the quarter September 30,
1998.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
EQUITY INCOME FUND 5.65% 14.15% 13.95%
S&P 28.61% 24.05% 19.19%
500-REGISTERED TRADEMARK-*
LIPPER EQUITY INCOME FUND 11.78% 16.62% 14.89%
INDEX**
</TABLE>
* The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices.
Standard & Poor's, S&P, and S&P 500-Registered Trademark- are registered
trademarks of Standard & Poor's Corporation.
** The Lipper Equity Income Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 10 largest open-end funds which seek relatively high current
income and growth of income through investing 60% or more of their portfolios in
equities.
10
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 13.66%
1990 1.37%
1991 24.53%
1992 3.00%
1993 6.31%
1994 1.49%
1995 22.29%
1996 11.86%
1997 17.46%
1998 13.83%
</TABLE>
During the ten year period shown in the bar chart, the Balanced Fund's highest
return for a quarter was 10.18% achieved December 31, 1998 and its lowest return
for a quarter was a negative 7.64% for the quarter September 30, 1990.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
BALANCED FUND 7.28% 11.81% 10.64%
LEHMAN BROTHERS 8.44% 6.60% 8.52%
INTERMEDIATE
GOVERNMENT/CORPORATE
INDEX*
LIPPER BALANCED FUND 15.09% 13.88% 13.32%
INDEX**
</TABLE>
* The Lehman Brothers Intermediate Government/Corporate Index is an unmanaged
index generally representative of the performance of the bond market as a whole.
** The Lipper Balanced Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 30 largest open-end funds whose primary objective is to
conserve principal by maintaining a balanced portfolio of stocks and bonds. The
stock/bond ratio typically ranges around 60%/40%.
11
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
SHAREHOLDER EXPENSES
(fees paid directly from your investment)
THERE ARE NO SALES CHARGES OR OTHER SHAREHOLDER TRANSACTION CHARGES IN
CONNECTION WITH PURCHASES OR REDEMPTIONS OF CLASS J SHARES OF THE FUNDS, OTHER
THAN AN $8.00 TRANSACTION FEE CHARGED FOR EACH EXPEDITED WIRE REDEMPTION.
ANNUAL FUND OPERATING EXPENSES(1)
(expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
EQUITY
INCOME BALANCED
GROWTH FUND FUND FUND
----------- -------- --------
CLASS J CLASS J CLASS J
----------- -------- --------
<S> <C> <C> <C>
Management Fees 0.49% 0.67% 0.75%
Distribution and/or Service (12b-1) Fees 0.75% 0.75% 0.75%
Other Expenses(2) 0.36% 0.34% 0.62%
--- --- ---
Total Annual Fund Operating Expenses(3) 1.60% 1.76% 2.12%
</TABLE>
NOTES TO FEES AND EXPENSES OF THE FUNDS
(1) The "Management Fees" and "Other Expenses" shown for the funds are for the
year ended December 31, 1998.
(2) "Other Expenses" include the 0.25% Administrative Service Fee. Because Class
J shares were not available prior to the date of this Prospectus, "Other
Expenses" for Class J shares are based on the expenses and average net
assets of the Growth, Equity Income, and Balanced Fund for the fiscal year
ended December 31, 1998.
(3) The Fee Table does NOT reflect any fees waived or expenses assumed either
contractually or voluntarily by the funds' manager, Securities Management and
Research, Inc. ("SM&R"). Pursuant to the Administrative Service Agreement,
SM&R will pay (or reimburse) each fund for regular operating expenses in
excess of 1.25% per year of such fund's average daily net assets. Regular
operating expenses include the advisory fee and administrative fee, but do
not include the 12b-1 fee or class-specific expenses. During the fiscal year
ended December 31, 1998, SM&R waived management fees of 0.12% for the
Balanced Fund.
12
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EXAMPLES OF EXPENSES
These examples are intended to help you compare the cost of investing in the
funds with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in Class J shares of fund for the
time periods indicated, based on expenses before fee waivers and expense
reimbursements. These examples also assume that your investment has a 5% return
each year and that the funds' operating expenses remain the same. YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER THAN SHOWN.
You would pay the following expenses, based on these assumptions, if you
actually redeem all of your shares at the end of the period shown:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Fund (Class J) $ 163 $ 505 $ 871 $ 1,900
Equity Income Fund (Class
J) $ 179 $ 554 $ 954 $ 2,073
Balanced Fund (Class J) $ 215 $ 664 $ 1,139 $ 2,452
</TABLE>
Because there are no sales charges or redemption fees, you would pay the same
expenses, based on these assumptions, if you did NOT redeem your shares.
13
<PAGE>
SHARES OF THE FUNDS
- -------------------------------------------------------------------
The funds ("we") offer Class J shares through certain financial intermediaries
(such as broker-dealers, investment advisers and mutual fund "supermarkets")
that have distribution agreements with Securities Management and Research, Inc.
("SM&R"). Policies and fees established by these financial intermediaries may be
different than those discussed in this prospectus. Additionally, not all of the
services discussed may be available to you, and these financial intermediaries
may charge you separately for using their services. Please keep in mind that the
funds are not responsible for the failure of any financial intermediary not
carrying out its obligations to its customers.
Class J shares of the funds are offered at their respective net asset values,
without the imposition of any sales charge on their purchase or redemption. As a
result, 100% of your purchase is immediately invested. Class J shares, however,
are subject to an ongoing asset-based distribution (12b-1) fee.
The funds also offer other classes of shares through separate prospectuses: (1)
Class A "front-end load" shares; (2) Class B "back-end load" shares; (3) Class C
"level load" shares; (4) Class T shares sold only to investors that were
shareholders of the funds on December 31, 1998 and certain designated persons;
and (5) Class Y "institutional" shares. Class A, B, C, T, and Y shares are
subject to different sales charges and other expenses and, accordingly, may have
expense ratios and performance that differs from those of Class J shares. You
are encouraged to consider all of the class alternatives and choose the one that
fits your individual circumstances at the lowest level of fees. FOR MORE
INFORMATION ON THE OTHER CLASSES OF SHARES OR TO REQUEST A PROSPECTUS FOR
ANOTHER CLASS, CALL INVESTOR SERVICES AT (800) 231-4639.
DISTRIBUTION AND SHAREHOLDER SERVICE (12b-1) FEE
Class J shares pay SM&R, the principal underwriter, a distribution (12b-1) fee
of 0.75%. This fee is computed as an annual percentage of the average daily net
assets of the class. BECAUSE DISTRIBUTION (12b-1) FEES ARE PAID OUT OF FUND
ASSETS ON AN ONGOING BASIS, THE FEES MAY, OVER TIME, INCREASE THE COST OF AN
INVESTMENT IN A FUND AND COST INVESTORS MORE THAN OTHER TYPES OF SALES LOADS.
14
<PAGE>
The distribution fee is for services that are primarily intended to result in or
are primarily attributable to the distribution of Class J shares. This fee
compensates SM&R, or enables SM&R to compensate other persons (including
distributors of the shares), for providing such services.
INVESTMENT OBJECTIVES AND POLICIES
- -------------------------------------------------------------------
Each fund pursues its own investment objective through various investment
policies and techniques. ONLY THE PRINCIPAL INVESTMENT STRATEGIES OF EACH FUND
AND THE PRINCIPAL TYPES OF SECURITIES EACH FUND PLANS TO PURCHASE ARE DESCRIBED
BELOW. More investment information is in the Statement of Additional
Information. These policies and techniques are not fundamental and may be
changed by the Board of Directors without shareholder approval.
Because of the market risks inherent in any investment, the funds may not
achieve their investment objectives. In addition, effective management of each
fund is subject to general economic conditions and to the ability and investment
techniques of management. The net asset value of each fund's shares will vary
and the redemption value of shares may be either higher or lower than the
shareholder's cost. Since each fund has a different investment objective, each
will have different investment results and incur different market, financial,
and other risks.
SM&R GROWTH FUND, INC.
(FORMERLY NAMED AMERICAN NATIONAL GROWTH FUND, INC.)
The Growth Fund considers its portfolio investments and the composition of its
total portfolio from the viewpoint of potential capital appreciation. The Growth
Fund adjusts this composition from time to time in light of current conditions.
Under normal conditions, the Growth Fund invests at least 85% of its total
assets in common stocks.
The Growth Fund invests in the stocks of financially sound companies that have a
proven ability to make and sustain a profit over time. Management places an
emphasis on companies with growth potential. The Growth Fund does not employ
exotic investment strategies, such as using options and futures.
We identify candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then, we evaluate each
15
<PAGE>
candidate stock on a fundamental basis by examining past financial performance,
managerial skill and foresight, and relative valuation to industry peers and the
market as a whole. We utilize this combination of disciplines and human
judgement to drive our stock selection process. We believe in evaluating each
company's prospects as opposed to relying on broad forecasts of industry
prospects. We do not attempt to time economic, market, style or capitalization
cycles. Diversification, or weighting of individual economic sectors, is also
dictated by a combination of disciplines and human judgement to varying degrees.
We believe in never having less than half or more than double the market
weighting in any one sector. The Growth Fund limits cash to 15% of its assets
unless circumstances dictate otherwise.
Because of the Growth Fund's goal of seeking long-term capital growth, certain
sectors of the market will have greater weight in the Growth Fund's portfolio
while other sectors of the market will have lower representation. For example,
the Growth Fund generally overweights the technology sector, which represents
approximately 15% to 20% of the Standard & Poor's 500 Index, in the portfolio
relative to its market weight. This overweighting reflects the higher growth
prospects of technology companies relative to the average company in the market.
At varying times, we may also overweight other sectors of the market providing
above average growth prospects, like healthcare and consumer staples.
Conversely, the Growth Fund generally underrepresents certain sectors of the
market in its portfolio that tend to have below average growth characteristics,
like utilities, basic materials, and communications services. As a result of
such strategic overweighting and underweighting, the Growth Fund's performance
may differ substantially from broad market indexes like the S&P 500 and tend to
incur more price volatility than these indexes.
The Growth Fund may invest in convertible preferred stocks rated at least "B" by
Standard and Poor's Corporation ("S&P") or at least "b" by Moody's Investors
Service, Inc. ("Moody's") preferred stock ratings, and convertible debentures
and notes rated at least "B" by S&P and Moody's corporate bond ratings.
Investments in convertible securities having these ratings may involve greater
risks than convertible securities having higher ratings.
16
<PAGE>
The proportion of assets invested in any particular type of security can be
expected to vary, depending on SM&R's appraisal of market and economic
conditions. Common stocks and convertible securities purchased will be of
companies that SM&R believes will provide an opportunity for capital
appreciation. On a temporary basis, the Growth Fund may invest in commercial
paper which at the date of such investment, is rated in one of the two top
categories by one or more of the nationally recognized statistical rating
organizations, in certificates of deposit in domestic banks and savings
institutions having at least $1 billion of total assets, and in repurchase
agreements.
SM&R EQUITY INCOME FUND, INC.
(FORMERLY NAMED AMERICAN NATIONAL INCOME FUND, INC.)
The Equity Income Fund considers its portfolio investments and the composition
of its total portfolio not only from the viewpoint of present and potential
yield, but also from the viewpoint of potential capital appreciation. We adjust
this composition of portfolio investments from time to time to best accomplish
the Equity Income Fund's investment objectives under current conditions.
In pursuit of its objectives, the Equity Income Fund will invest in common
stocks, preferred stocks, and marketable debt securities selected in accordance
with its investment objectives. Common and preferred stocks purchased will
generally be of companies with consistent and increasing dividend payment
histories that SM&R believes will have further earnings potential sufficient to
continue such dividend payments. Debt securities include publicly traded
corporate bonds, debentures, notes, commercial paper, repurchase agreements, and
certificates of deposit in domestic banks and savings institutions having at
least $1 billion of total assets. The proportion of assets invested in any
particular type of security can be expected to vary, depending on SM&R's
appraisal of market and economic conditions. Under normal conditions, the Equity
Income Fund will invest at least 75% of its assets in equity securities rather
than debt securities.
We view common stocks, as well as investments in preferred stocks and bonds
convertible into common stock, from their potential for capital appreciation in
addition to their current and potential income yield. Our goal is to maintain a
portfolio dividend yield (before fees and expenses) at least 50% greater than
that of the S&P 500 Index.
17
<PAGE>
We identify candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then, we evaluate each candidate stock on a
fundamental basis by examining past financial performance, managerial skill and
foresight, and relative valuation to industry peers and the market as a whole.
We utilize this combination of disciplines and human judgement to drive our
stock selection process. We believe in evaluating each company's prospects as
opposed to relying on broad forecasts of industry prospects. We do not attempt
to time economic, market, style or capitalization cycles. Diversification, or
weighting of individual sectors, is also dictated by a combination of
disciplines and human judgement to varying degrees. We believe in never having
less than half or more than double the market weighting in any one sector. Cash
is limited to 15% of the fund unless circumstances dictate otherwise.
Certain sectors of the market will have greater weight in the Equity Income
Fund's portfolio while other sectors of the market will have lower
representation. For example, the Equity Income Fund generally overweights the
finance sector in its portfolio relative to that sector's market weight (which
is approximately 16% of the Standard & Poor's 500 Index). This reflects the
greater dividend prospects of financial companies like banks, insurance
companies, and real estate investment trusts as compared to the average company
in the market. At varying times, we may also overweight other sectors of the
market that provide above average dividend prospects, like utilities and energy.
Conversely, the Equity Income Fund generally underrepresents certain sectors of
the market tending to have below average dividend yields, like technology,
consumer staples, and healthcare. As a result of such strategic overweighting
and underweighting, the Equity Income Fund's performance may differ
substantially from broad market indexes like the S&P 500.
Corporate debt obligations purchased by the Equity Income Fund will consist only
of obligations rated either Baa or better by Moody's or BBB or better by S&P.
Bonds which are rated Baa by Moody's are considered as medium grade obligations,
that is, they are neither highly protected nor poorly secured. Bonds rated BBB
by S&P are regarded as having an adequate capacity to pay interest and repay
principal. Commercial paper and notes will consist only of direct obligations of
corporations whose bonds and/or debentures are rated as set forth above.
18
<PAGE>
SM&R BALANCED FUND, INC.
(FORMERLY NAMED TRIFLEX FUND, INC.)
The Balanced Fund uses a "balanced" approach by investing part of its assets in
stocks of well-known companies and the remainder in a combination of high-grade
bonds, bonds convertible into the common stock of the issuing corporations, and
money market instruments. We change the ratio of stocks to bonds in response to
changing economic conditions. This flexibility helps to reduce price volatility.
The Balanced Fund's goal is relative stability of principal through a balance of
stocks, bonds, and cash. The stocks serve to capture the benefits that ownership
in corporate America brings. The bonds, meanwhile, can serve as a stabilizing
force during times of eroding stock market value, as well as provide a fixed
income payment stream into the portfolio.
We identify candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then we evaluate each candidate stock on a
fundamental basis by examining past financial performance, managerial skill and
foresight, and relative valuation to industry peers and the market as a whole.
We utilize this combination of disciplines and human judgement to drive our
stock selection process. We believe in evaluating each company's prospects as
opposed to relying on broad forecasts of industry prospects. We do not attempt
to time economic, market, style or capitalization cycles. Diversification, or
weighting of individual sectors, is also dictated by a combination of
disciplines and human judgement to varying degrees. We believe in never having
less than half or more than double the market weighting in any one sector. Cash
is limited to 15% of the portfolio unless circumstances dictate otherwise.
The Balanced Fund will only purchase corporate bonds rated either Baa or better
by Moody's or BBB or better by S&P. Bonds which are rated Baa by Moody's are
considered as medium grade obligations, that is, they are neither highly
protected nor poorly secured. Bonds rated BBB by S&P are regarded as having an
adequate capacity to pay interest and repay principal. Commercial paper and
notes will consist only of direct obligations of corporations whose bonds and/or
debentures are rated as set forth above. The Balanced Fund may also invest in
repurchase agreements. This balanced investment policy is intended to reduce
risk and to obtain results in keeping with the Balanced Fund's objectives.
19
<PAGE>
The Balanced Fund will invest in fixed-income securities and equity securities
as described above. However, the Balanced Fund will sometimes be more heavily
invested in equity securities and at other times it will be more heavily
invested in fixed-income securities, depending on management's appraisal of
market and economic conditions. SM&R believes that a fund that is wholly
invested in fixed-income securities carries a large interest rate risk. Interest
rate risk is the uncertainty about losses due to changes in the rate of interest
on debt instruments. The major interest rate risk for investors, however, is not
in the interest rate itself, but in the change in the market price of bonds that
results from changes in the prevailing interest rate. Higher interest rates
would mean lower bond prices and lower net asset value for the Balanced Fund's
shareholders assuming no change in its current investment objective and
portfolio. Diversifying the Balanced Fund's portfolio with investments such as
commercial paper, convertible securities, and common stocks may reduce the
decline in value attributable to the increase in interest rate and resulting
decrease in the market value of bonds and may reduce the interest rate risk.
However, stock prices also fluctuate in response to a number of factors,
including changes in general level of interest rates, economic and political
developments, and other factors which impact individual companies or specific
types of companies. Such market risks cannot be avoided but can be limited
through a program of diversification and a careful and consistent evaluation of
trends in the capital market and fundamental analysis of individual equity
holdings.
SM&R, through an ongoing program of asset allocation, will determine the
appropriate level of equity to debt holdings consistent with SM&R's outlook and
evaluation of trends in the economy and the financial markets. The Balanced Fund
determines its level of commitment to common stocks and specific common stock
investments as a result of this process. For example, within an environment of
rising inflation, common stocks historically have preserved their value better
than bonds; therefore, inclusion of common stocks could tend to conserve
principal better than a portfolio consisting entirely of bonds and other debt
obligations. In addition, within an environment of accelerating growth in the
economy, common stocks historically have conserved their value better than bonds
in part due to a rise in interest rates that occur coincidentally with
accelerating growth and profitability of the companies.
20
<PAGE>
RISK FACTORS
- -------------------------------------------------------------------
The following discussion relates to all three funds. The risk/return summary
located at the beginning of this prospectus identifies some specific risks
applicable to each individual fund.
GENERAL. There is no assurance that a fund will achieve its goals. Generally, if
the securities owned by a fund increase in value, the value of the shares of the
fund which you own will increase. Similarly, if the securities owned by a fund
decrease in value, the value of your shares will also go down. In this way, you
participate in any change in the value of the securities owned by a fund.
The risk inherent in investing in any fund is a risk common to any security.
That is, the value of a fund's shares will fluctuate in response to changes in
economic conditions, interest rates and the market's perception of the
underlying portfolio securities held by that fund. Each fund's share value
depends on general economic and securities market conditions, the investment
decisions of its management, and numerous other factors. All of these factors
are inherently uncertain and, in some cases, unforeseeable.
Any of the funds could lose money if the stock markets in general go down or if
the particular stocks purchased by a fund go down in value. In addition, the
funds could lose money if prevailing interest rates increase or if the debt
securities purchased by a fund are downgraded or defaulted upon.
STOCK INVESTMENT RISKS. Because each fund invests a substantial portion of its
assets in stocks, the value of each fund's portfolio will be affected by changes
in the stock markets. At times, the stock markets can be volatile and stock
prices can change substantially. This market risk will affect each fund's net
asset value per share, which will fluctuate as the values of each fund's
portfolio securities change. Stock prices do not always change uniformly or at
the same time and the various stock markets do not always move in the same
direction at the same time. Other factors specific to a particular company also
affect that company's stock price (for example, poor earnings, loss of major
customers, or major litigation). The funds cannot always predict the factors
that will affect a stock's price. The funds, however, do attempt to limit market
risk by diversifying their investments. The funds diversify their investments by
generally investing only a small percentage of their assets in any one company
and
21
<PAGE>
by not holding a substantial amount of the stock of any one company.
For the Growth Fund and the Equity Income Fund, the portfolio managers decide to
overweight or underweight certain industry sectors and to purchase individual
stocks based on their assessment of the future growth or income prospects of an
industry sector or particular stock. If certain industries or investments do not
perform as a fund expects (I.E., do not grow in value or produce dividend income
as expected), that fund could underperform its peers or lose money.
The Growth Fund is generally considered more aggressive than the Equity Income
and Balanced Funds because it invests for capital appreciation in common stocks,
emphasizing "growth" stocks that tend to be more volatile than other
investments. Investors in the Growth Fund should expect greater fluctuations in
share price, yield, and total return than with less aggressive funds.
DEBT SECURITIES RISKS. Debt securities are subject to changes in their values
due to changes in prevailing interest rates. When prevailing interest rates
fall, the values of already-issued debt securities generally rise. Accordingly,
if interest rates go down after a security is purchased, such security might be
valued and/or sold at a price greater than its cost. On the other hand, when
prevailing interest rates rise, the values of already-issued debt securities
generally fall. Accordingly, if interest rates increase after a security is
purchased, such security might be valued and/or sold at a price less than its
cost. The magnitude of these fluctuations will often be greater for longer-term
debt securities than shorter-term debt securities.
The funds could lose money if any bonds they own are downgraded in credit rating
or go into default. In general, lower-rated bonds, such as junk bonds, have
higher credit risks. The Growth Fund is the only fund permitted to invest in
junk bonds. Junk bonds have additional risks, including limitations on a fund's
ability to re-sell the lower-rated debt securities and less readily available
market quotations for such securities. If there are not readily available market
quotations for a debt security, its value is determined largely by the
investment manager's judgment. When and if the debt security is sold, the
investment manager may find that its estimation of the debt security's value is
substantially different than the actual price at which it can be sold. Moreover,
substantial redemptions of fund
22
<PAGE>
shares could require a fund to sell portfolio securities at a time when a sale
might not be favorable.
OTHER RISKS. Each investor will be subject to all the risks normally attendant
to business operations, changes in general economic conditions, governmental
rules and fiscal policies, acts of God, and other factors beyond the control of
the funds' management.
SMALLER COMPANY RISKS. Smaller companies in which each of the funds may invest
may involve greater risks than large established companies. Such smaller
companies may have limited product lines, markets, financial resources, and
management depth. Their securities may trade less frequently and in more limited
volume than the securities of larger or more established companies. Smaller
companies may also be more vulnerable than larger companies to adverse business
or market developments. As a result, the prices of smaller companies may
fluctuate to a greater degree than the prices of securities of larger companies.
YEAR 2000 RISKS. Many services provided to the funds and their shareholders
depend on the smooth functioning of computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated, referred to as the "Year 2000
Problem." The Year 2000 Problem could have a negative impact on handling
securities trades, payment of interest and dividends, pricing, and account
services. Like other mutual funds, financial and business organizations, and
individuals around the world, the funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and transfer agent) do not properly process and
calculate date-related information and data from and after January 1, 2000. SM&R
is taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by any other service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
funds and their shareholders.
23
<PAGE>
PURCHASES AND REDEMPTIONS
- -------------------------------------------------------------------
PURCHASING SHARES
You may purchase Class J shares of a fund through certain financial
intermediaries (such as broker-dealers, investment advisers and mutual fund
"supermarkets") that have distribution agreements with SM&R and are authorized
to accept orders on the funds behalf. Shares are sold at the net asset value per
share next computed as and when provided below (See "Pricing of Fund Shares").
These financial intermediaries may charge you a fee for this service and may
require different minimum initial and subsequent purchases than the funds. These
financial intermediaries may also impose other charges or restrictions different
from those applicable to individuals who invest in other classes of the funds
directly.
You should keep in mind that if your shares are held in the name of a financial
intermediary or other party, you are not considered a shareholder of record and
therefore may not be able to utilize services available only to shareholders of
record.
Certificates are not issued for shares of the funds. SM&R confirms investors'
purchases and credits such purchases to their accounts on the books maintained
by SM&R. Investors have the same rights of share ownership as they would if
certificates had been issued.
OPENING AN ACCOUNT: To purchase shares, you must submit a completed account
application. Special forms or information may be required when establishing an
IRA/SEP or 403(b) plan. Please note that third party checks will not be accepted
to open a new account, except for IRA Rollover checks that are properly
endorsed.
MINIMUM PURCHASE REQUIREMENT: The minimum initial investment is $2,000 and all
subsequent investments must be at least $500. We apply investment minimums to
the aggregate value invested in omnibus accounts established by broker-dealers.
We reserve the right to reject any purchase.
PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). We determine each fund's offering price once
each day the New York Stock Exchange (the "Exchange") is open for regular
trading. The offering price equals a fund's net asset value plus the sales
charge, if any. You may purchase shares
24
<PAGE>
offered in this prospectus without a sales charge. The offering price for shares
offered in this prospectus is the applicable net asset value.
EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS (WHEN SHARES ARE PRICED). We
calculate net asset value each day at the close of regular trading on the
Exchange (currently 3:00 p.m. Central Time). In the event the Exchange closes
early on a particular day, we will determine the net asset value of each fund as
of the close of the Exchange that day. The price you pay or receive for shares
of a fund depends, in part, on the day and time you make your purchase or
redemption. On any day the Exchange is open for regular trading, we will execute
purchases and redemptions at the next applicable price determined THAT DAY if:
- SM&R receives your order in proper form prior to the close of regular
trading on the Exchange;
- a financial intermediary having a distribution agreement with SM&R
receives your order prior to the close of regular trading on the
Exchange on the same day; or
- for purchases, Moody National Bank receives your purchase payment by
bank wire and reports it to SM&R prior to the close of the Exchange.
If we receive your order after the close of the Exchange or on any day that the
Exchange is closed, we will execute your purchase or redemption at the price
next determined on the next business day. In unusual circumstances, any fund may
temporarily suspend the processing of sell requests, or may postpone payment of
proceeds for up to three business days or longer, as allowed by federal
securities laws.
SPECIAL SERVICES
EXCHANGE PRIVILEGE. As an investor in a fund, you may be permitted to exchange
shares that you own in a fund with shares of some of the other mutual funds
managed by SM&R without the payment of an exchange fee, subject to certain
conditions. EXCHANGES BETWEEN A FUND AND ANOTHER FUND MANAGED BY SM&R ARE
AVAILABLE ONLY IN STATES WHERE THE APPLICABLE FUNDS ARE REGISTERED AND THE
EXCHANGE MAY BE LEGALLY MADE. YOU SHOULD CONTACT SM&R TO DETERMINE WHETHER A
FUND IS REGISTERED IN A PARTICULAR STATE AND WHETHER AN EXCHANGE IS PERMITTED.
WE MAY TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE OFFER AT ANY TIME.
25
<PAGE>
You may exchange Class J shares of a fund, without an exchange fee, for shares
of the CORRESPONDING CLASS of another fund managed by SM&R. You also may
exchange your Class J shares for shares of SM&R Investments, Inc.'s Primary Fund
and Money Market Fund, provided that you meet any minimum investment requirement
for the shares you wish to acquire.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met:
(a) the exchange must be made between accounts that are registered in the
same name, address and, if applicable, taxpayer identification number;
(b) the shares of the fund acquired through exchange must be qualified for
sale in the state in which you reside;
(c) the dollar amount of a written exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(d) the minimum dollar amount of a telephone exchange is $500;
(e) SM&R must have received full payment for the shares being exchanged;
(f) your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal
Revenue Service Form W-8 (certificate of foreign status) or Form W-9
(certifying exempt status);
(g) any shares that you wish to exchange must have been held for at least
ten (10) business days;
(h) certificates representing shares, if any, are returned before such
shares are exchanged; and
(i) you have received a prospectus for the shares you receive in the
exchange.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time. ANY
GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE
26
<PAGE>
INCOME TAX PURPOSES. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR THE TAX TREATMENT
AND EFFECT OF EXCHANGES.
EXCESSIVE TRADING. Frequent trades, involving either substantial fund assets or
a substantial portion of your account or accounts controlled by you, can disrupt
management of the funds and raise the funds' expenses. We currently define
"excessive trading" as exceeding one purchase and sale involving the same fund
within any 120-day period.
For example, you are in Fund X. You can move substantial assets from Fund X to
Fund Y and, within the next 120 days, sell your shares in Fund Y to return to
Fund X or move to Fund Z. If you exceed the number of trades described above,
you may be barred indefinitely from further transactions between the
participating funds.
There are two types of transactions exempted from the excessive trading
guidelines. They are (1) redemptions that are not part of exchanges and (2)
systematic purchases or redemptions.
RETIREMENT PLANS
The following retirement plans may invest in Class J shares of the funds:
- Individual Retirement Accounts (IRAs), which include traditional IRAs,
Roth IRAs, Education IRAs, and SIMPLE IRAs,
- Simplified Employee Pension Plans (SEPs),
- 403(b) Custodial Accounts (TSAs), and
- corporate retirement plans.
These plans allow you to shelter investment income from federal income tax while
saving for retirement. Information concerning IRAs and TSAs, and the forms
necessary to adopt such plans, can be obtained by contacting your financial
intermediary. A regular fund application should be used when establishing a
corporate retirement plan. The minimum initial purchase for the funds is $100.
SM&R acts as trustee or custodian for IRAs, SEPs, and TSAs for the funds. An
annual custodial fee of $7.50 per account will be charged for any part of a
calendar year in which an investor has an IRA, SEP, or TSA in the funds and will
be automatically deducted from each account. An individual considering a
retirement plan may wish to consult with an attorney or tax adviser.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS. The Equity Income and Balanced Funds will pay dividends from
investment income, if any, quarterly, generally during the months of March,
June, September and December, and distribute capital gains, if any, in December.
The Growth Fund will pay dividends from investment income, if any, semi-annually
during the months of June and December and distribute capital gains, if any, in
December. Dividends from net investment income may include net short-term
capital gains, if any.
Dividends and distributions paid by the funds have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution of record shortly after the purchase of
shares by an investor represents in substance, a return of capital.
DIVIDEND REINVESTMENTS. Dividends and capital gains will be automatically
reinvested at net asset value in additional shares of the fund making such
distribution unless SM&R is instructed otherwise in writing. Distributions not
reinvested are paid by check or transmitted to your bank account through an ACH
transaction, if elected. If the Postal Service cannot deliver your check, or if
your check remains uncashed for six months, the funds reserve the right to
reinvest your distribution check in your account at the net asset value on the
business day of the reinvestment and to reinvest all future distributions in
shares of the funds. Dividends and capital gains declared in December to
shareholders of record in December and paid the following January will be
taxable to shareholders as if received in December. This is a convenient way to
accumulate additional shares and maintain or increase the shareholder's earning
base. Of course, any shares so acquired remain at market risk.
Shareholders have the right to change their election with respect to the receipt
of distributions by notifying SM&R in writing, but any such change will be
effective only as to distributions for which the record date is seven or more
business days after SM&R has received the shareholder's written request.
TAXABILITY OF DIVIDENDS. Dividends you receive from the funds, whether
reinvested or taken as cash, are generally considered taxable. A fund's
long-term capital gains distributions are taxable as capital gains; dividends
from other sources are generally taxable as ordinary income. Some dividends paid
in January may be taxable as if they
28
<PAGE>
had been paid the previous December. Corporations may be entitled to take a
dividends-received deduction for a portion of certain dividends they receive.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
BACKUP WITHHOLDING. Backup withholding of federal income tax may be applied at
the rate of 31% from taxable dividends, distributions, and redemption proceeds
(including exchanges) if you fail to furnish the funds with a correct and
properly certified Social Security or Employer Identification Number when you
sign your application, or if you underreport your income to the Internal Revenue
Service.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions. You should consult with a tax advisor concerning the tax reporting
requirements in effect on the redemption or exchange of such shares.
REDEEMING SHARES
You can redeem fund shares at the net asset value determined on the date the
request is received by SM&R in proper form. If you redeem through a financial
intermediary, the financial intermediary may charge you a fee for this service.
If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as practicable and normally
within seven days after receipt of a redemption request in proper form. We
currently charge a fee in the amount of $8.00 for redemptions by wire under
$5,000.
If the shares being redeemed were purchased by wire, certified check, money
order, or other immediately available funds, redemption proceeds will be mailed
no later than the seventh calendar day following receipt. For shares purchased
by a personal check or ACH transfer, SM&R will process your redemption but will
generally delay sending you the proceeds for up to ten (10) business days to
allow the check or transfer to clear.
SYSTEMATIC WITHDRAWAL PLAN. The funds have a Systematic Withdrawal Plan
("Withdrawal Account"), which permits shareholders having an
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<PAGE>
account value of $5,000 or more to automatically withdraw a minimum of $50
monthly or each calendar quarter on or about the 20th of the applicable month.
Shareholders maintaining a Withdrawal Account may elect to have the withdrawal
proceeds automatically deposited in their pre-authorized bank account via an ACH
transaction. This is accomplished by completing the relevant section of the
account application and returning it to SM&R. Dividends and capital gains
distributions will automatically be reinvested in additional shares at net asset
value. As with other redemptions, a withdrawal is a sale for federal income tax
purposes. The Systematic Withdrawal Plan will automatically terminate if all
shares are liquidated or withdrawn from the account.
For further information about the "Systematic Withdrawal Plan," contact your
investment adviser or broker-dealer.
"PROPER FORM" means the request for redemption must include:
(1) your letter of instruction or a stock assignment specifying the fund,
account number, and number of shares or dollar amount to be redeemed.
Both share certificates and stock powers, if any, must be endorsed and
executed exactly as the fund shares are registered. It is suggested that
certificates be returned by certified mail for your protection;
(2) any required signature guarantees (see "Signature Guarantees" below);
and
(3) other supporting legal documents, if required in the case of estates,
trusts, guardianships, divorce, custodianships, corporations,
partnerships, pension or profit sharing plans, retirement plans, and
other organizations.
Please keep in mind that as a shareholder, it is your responsibility to ensure
that all requests are submitted to the fund's transfer agent in proper form for
processing.
SIGNATURE GUARANTEES. A signature guarantee verifies the authenticity of your
signature. Signature guarantees are required when:
(1) the proceeds of the redemption exceed $25,000;
(2) the proceeds (in any amount) are to be paid to someone OTHER THAN the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address OTHER THAN
the shareholder's address of record, pre-authorized bank account or
exchanged to one of the other funds managed by SM&R; or
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<PAGE>
(4) the funds or its transfer agent believes a signature guarantee would
protect against potential claims based on the transfer instructions,
including, when the authority of a representative of a corporation,
partnership, association, or other entity has not been established to
the satisfaction of the funds or transfer agent.
You should be able to obtain an acceptable signature guarantee from a bank,
broker, dealer, municipal securities dealer or broker, government securities
dealer or broker, credit union, national securities exchange, or registered
securities association. WITNESSING OR NOTARIZATION IS NOT SUFFICIENT.
REDEMPTION OF SMALL ACCOUNTS. The funds reserve the right to redeem shares in
any account (which will be promptly paid to the shareholder) if, due to your
redemptions, the value of the account falls below $500. You will be notified
that the value of your account is less than the required minimum and allowed at
least 60 days to make an additional investment to increase the value of your
account above the required minimum. The funds may, from time to time, change
such required minimum investment.
RIGHTS RESERVED BY THE FUNDS. The funds, acting directly or through SM&R,
reserve the right:
- to waive or lower investment minimums;
- to accept subsequent purchases by telephone from financial
intermediaries;
- to refuse any purchase order;
- to cancel or rescind any purchase or exchange at any time prior to
receipt by the shareholder of written confirmation or, if later, within
five (5) business days of the transaction;
- to freeze an account and suspend account services when notice has been
received of a dispute involving the account owners or other parties or
there is reason to believe a fraudulent transaction may occur or has
occurred;
- to otherwise modify the conditions of purchase and any services at any
time;
- to refuse to act on instructions not believed to be genuine; or
- to eliminate duplicate mailings of fund material to shareholders who
reside at the same address.
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<PAGE>
THE FUNDS AND MANAGEMENT
- -------------------------------------------------------------------
INVESTMENT ADVISER
Each fund's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the fund's investment adviser, the management of the
fund's day-to-day business and affairs. In addition, SM&R invests the funds'
assets, provides administrative services, and serves as transfer agent,
custodian, dividend paying agent, and underwriter. While the use of this
combined Prospectus subjects each fund to possible liability as the result of
statements or omissions regarding another fund, the Board of Directors of each
fund considers the benefits to the respective fund of using a combined
Prospectus to outweigh the risk.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). SM&R was incorporated in 1964 and has managed mutual
funds since 1966. SM&R does and may, from time to time, serve as investment
adviser to other clients including banks, employee benefit plans, other
investment companies, banks, foundations and endowment funds.
ADVISORY AGREEMENTS
GROWTH FUND. We deduct an investment advisory fee from the value of the shares
each day. We calculate this fee for the Growth Fund at the annual rate as
follows:
<TABLE>
<CAPTION>
ON THE PORTION OF EACH FUND'S BASIC ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ------------------------------------------------- --------------------
<S> <C>
Not exceeding $100,000,000 0.750%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.625%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.500%
Exceeding $300,000,000 0.400%
</TABLE>
We adjust the basic advisory fee rate by comparing the fund's investment
performance during the previous thirty-six (36) months with the investment
performance of the Lipper Growth Fund Index (the "Lipper Index") published by
Lipper Analytical Services, Inc. over the same period. Specifically, we adjust
the basic advisory fee each month by adding to or subtracting from such rate,
when appropriate, the applicable performance adjustment amount percentage shown
in
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<PAGE>
the table below. The resulting advisory fee rate is then applied to the average
daily net asset value of the fund for the succeeding month. The advisory fee for
such month will be one-twelfth ( 1/12th) of the resulting dollar figure.
<TABLE>
<CAPTION>
PERFORMANCE
PERFORMANCE COMPARED ADJUSTMENT
TO LIPPER INDEX AMOUNT
- -------------------------------- -------------------
<S> <C>
0.10% to 0.99% above +0.02%
1.00% to 1.99% above +0.04%
2.00% to 2.99% above +0.06%
3.00% to 3.99% above +0.08%
4.00% to 4.99% above +0.10%
5.00% to 5.99% above +0.12%
6.00% to 6.99% above +0.14%
7.00% to 7.99% above +0.16%
8.00% to 8.99% above +0.18%
9.00% and above +0.20%
0.10% to 0.99% below -0.02%
1.00% to 1.99% below -0.04%
2.00% to 2.99% below -0.06%
3.00% to 3.99% below -0.08%
4.00% to 4.99% below -0.10%
5.00% to 5.99% below -0.12%
6.00% to 6.99% below -0.14%
7.00% to 7.99% below -0.16%
8.00% to 8.99% below -0.18%
9.00% and below -0.20%
</TABLE>
See "INVESTMENT ADVISORY AND OTHER SERVICES" in the Funds' Statement of
Additional Information for a more detailed description of the method used in
calculating the performance adjustment. See Appendix B for a description of
these ratings
EQUITY INCOME AND BALANCED FUNDS. We deduct an investment advisory fee from the
value of the shares each day. We calculate this fee for the Equity Income and
Balanced Funds at the annual rate as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF EACH FUND'S BASIC ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ------------------------------------------------- --------------------
<S> <C>
Not exceeding $100,000,000 0.750%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.625%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.500%
Exceeding $300,000,000 0.400%
</TABLE>
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<PAGE>
SM&R received total advisory fees from the Growth, Equity Income, and Balanced
Funds for the fiscal year ended December 31, 1998 of 0.49%, 0.67%, and 0.75%,
respectively, of each fund's average daily net assets. Each fund's advisory fees
may be higher than the fees paid by other mutual funds, but each fund believes
its fees are comparable to those paid by funds with the same or similar
investment objective.
ADMINISTRATIVE SERVICES
Pursuant to Administrative Service Agreements with the funds, SM&R provides all
non-investment related management, executive, administrative, transfer agent,
and operational services to the funds. Under the agreements, SM&R receives an
administrative service fee from each fund at the annual rate of average daily
net asset values as follows:
<TABLE>
<CAPTION>
ADMINISTRATIVE
ON THE PORTION OF EACH FUND'S SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
- ------------------------------------------------------ -----------------
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
In each fund's administrative service agreement, SM&R has agreed to pay (or to
reimburse each fund for) each fund's regular operating expenses in excess of
1.25% per year of such fund's average daily net assets. Regular operating
expenses include the advisory fee and administrative service fee, if any, paid
to SM&R, but do not include 12b-1 fees, class-specific expenses, interest,
taxes, commissions, and other expenses incidental to portfolio transactions.
SM&R received total administrative service fees of 0.23% for the Growth Fund;
0.22% for the Equity Income Fund; and 0.25% for the Balanced Fund for the fiscal
year ended December 31, 1998 of each fund's average daily net assets.
PORTFOLIO MANAGEMENT
SM&R's portfolio management team uses a disciplined, team approach in providing
investment advisory services to the funds. While the following individual is
primarily responsible for the day-to-day portfolio management of the funds, all
accounts are reviewed on
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<PAGE>
a regular basis by SM&R's Investment Committee to ensure that they are being
invested in accordance with investment policies.
GORDON D. DIXON, DIRECTOR, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER OF
SECURITIES MANAGEMENT AND RESEARCH, INC., VICE PRESIDENT, PORTFOLIO MANAGER OF
THE GROWTH FUND, AND PORTFOLIO MANAGER OF THE EQUITY INCOME FUND AND BALANCED
FUND. Mr. Dixon joined Securities Management and Research, Inc. in 1993. He
graduated from the University of South Dakota with a B.A. in Finance and
Accounting and from Northwestern University in 1972 with an M.B.A in Finance
and Accounting. Mr. Dixon began his investment career in 1972 as an
Administrative and Research Manager with Penmark Investments. In 1979 he
began working for American Airlines in the management of the $600 million
American Airlines Pension Portfolio, of which approximately $100 million was
equities. In 1984 he was employed by C&S/Sovran Bank in Atlanta, Georgia as
Director of Equity Strategy where he had responsibility for all research,
equity trading and quantitative services groups as well as investment policy
input of a portfolio of approximately $7 billion, of which $3.5 billion was
equities.
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<PAGE>
FINANCIAL HIGHLIGHTS GROWTH FUND
- -------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Growth Fund's financial performance for the past five years. Certain information
reflects financial results for a single share outstanding throughout each period
shown. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Growth Fund (assuming reinvestment
of all dividends and distributions) prior to addition of multiple classes of
shares. This information is derived from the financial statements of the Growth
Fund, which for the years ended December 31, 1997 and 1998 have been audited by
Tait, Weller & Baker, independent auditors, whose report, along with the Growth
Fund's financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request. The information for
years ending December 31, 1996 and prior, has been audited by the Growth Fund's
former independent auditors. IF MULTIPLE CLASSES OF SHARES OF THE GROWTH FUND
HAD BEEN IN EXISTENCE DURING THE PAST FIVE YEARS, THE FINANCIAL PERFORMANCE OF
CLASS J SHARES OF THE GROWTH FUND WOULD HAVE BEEN LOWER THAN DEPICTED BECAUSE OF
THE IMPOSITION OF DISTRIBUTION AND/OR SERVICE (12b-1) FEES.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 5.24 $ 4.95 $ 4.39 $ 3.83 $ 4.15
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04 0.06 0.05 0.08 0.06
Net Realized and Unrealized Gain (Loss)
on Securities 0.85 1.03 0.73 0.88 0.15
------------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 0.89 1.09 0.78 0.96 0.21
------------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.04) (0.06) (0.05) (0.08) (0.06)
Distributions from Capital Gains (0.40) (0.74) (0.17) (0.32) (0.47)
------------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.44) (0.80) (0.22) (0.40) (0.53)
------------- --------- --------- --------- ---------
Net Asset Value, End of Year $ 5.69 $ 5.24 $ 4.95 $ 4.39 $ 3.83
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
TOTAL RETURN 18.35% 22.24% 17.64% 25.20% 4.98%
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000's omitted) $ 203,109 $ 178,344 $ 152,758 $ 134,821 $ 113,250
Ratio of Expenses to Average Net Assets 0.85% 0.96% 1.15% 0.98% 0.97%
Ratio of Net Income to Average Net Assets 0.69% 1.03% 1.02% 1.67% 1.46%
Portfolio Turnover Rate 27.31% 46.79% 18.72% 37.00% 46.26%
</TABLE>
36
<PAGE>
FINANCIAL HIGHLIGHTS EQUITY INCOME FUND
- -------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Equity Income Fund's financial performance for the past five years. Certain
information reflects financial results for a single Equity Income Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Equity Income Fund (assuming reinvestment of all dividends and
distributions) prior to addition of multiple classes of shares. This information
is derived from the financial statements of the Equity Income Fund, which for
the years ended December 31, 1997 and 1998 have been audited by Tait, Weller &
Baker, independent auditors, whose report, along with the Equity Income Fund's
financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request. The information for
years ending December 31, 1996 and prior, has been audited by the Equity Income
Fund's former independent auditors. IF MULTIPLE CLASSES OF SHARES OF THE EQUITY
INCOME FUND HAD BEEN IN EXISTENCE DURING THE PAST FIVE YEARS, THE FINANCIAL
PERFORMANCE OF CLASS J SHARES OF THE EQUITY INCOME FUND WOULD HAVE BEEN LOWER
THAN DEPICTED BECAUSE OF THE IMPOSITION OF DISTRIBUTION AND/OR SERVICE (12b-1)
FEES.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 26.99 $ 25.05 $ 22.59 $ 18.90 $ 21.66
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.62 0.63 0.58 0.62 0.62
Net Realized and Unrealized Gain
(Loss) on Securities 2.50 4.96 3.10 4.82 (0.75)
------------ -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 3.12 5.59 3.68 5.44 (0.13)
------------ -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.62) (0.64) (0.58) (0.63) (0.61)
Distributions from Capital Gains 1.47 (3.01) (0.64) (1.12) (2.02)
------------ -------- -------- -------- --------
TOTAL DISTRIBUTIONS (2.09) (3.65) (1.22) (1.75) (2.63)
------------ -------- -------- -------- --------
Net Asset Value, End of Year $ 28.02 $ 26.99 $ 25.05 $ 22.59 $ 18.90
------------ -------- -------- -------- --------
------------ -------- -------- -------- --------
TOTAL RETURN 12.11% 22.72% 16.46% 29.12% (0.61)%
------------ -------- -------- -------- --------
------------ -------- -------- -------- --------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000's omitted) $218,980 $198,687 $165,786 $141,058 $114,231
Ratio of Expenses to Average Net Assets 1.01% 1.05% 1.10% 1.12% 1.12%
Ratio of Net Income to Average Net
Assets 2.22% 2.28% 2.42% 2.89% 2.86%
Portfolio Turnover Rate 19.29% 39.14% 27.07% 44.00% 52.46%
</TABLE>
37
<PAGE>
FINANCIAL HIGHLIGHTS BALANCED FUND
- -------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Balanced Fund's financial performance for the past five years. Certain
information reflects financial results for a single Balanced Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Balanced Fund (assuming reinvestment of all dividends and distributions)
prior to addition of multiple classes of shares. This information is derived
from the financial statements of the Balanced Fund, which for the years ended
December 31, 1997 and 1998 have been audited by Tait, Weller & Baker,
independent auditors, whose report, along with the Balanced Fund's financial
statements, are incorporated by reference into the Statement of Additional
Information, which is available upon request. The information for years ending
December 31, 1996 and prior, has been audited by the Balanced Fund's former
independent auditors. IF MULTIPLE CLASSES OF SHARES OF THE BALANCED FUND HAD
BEEN IN EXISTENCE DURING THE PAST FIVE YEARS, THE FINANCIAL PERFORMANCE OF CLASS
J SHARES OF THE BALANCED FUND WOULD HAVE BEEN LOWER THAN DEPICTED BECAUSE OF THE
IMPOSITION OF DISTRIBUTION AND/OR SERVICE (12b-1) FEES.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 18.32 $ 17.90 $ 16.85 $ 14.32 $ 15.35
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.48 0.57 0.49 0.49 0.45
Net Realized and Unrealized Gain (Loss) on
Securities 1.96 2.50 1.48 2.67 (0.22)
------------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 2.44 3.07 1.97 3.16 0.23
------------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.47) (0.59) (0.49) (0.49) (0.45)
Distributions from Capital Gains (0.66) (2.06) (0.43) (0.14) (0.81)
------------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (1.13) (2.65) (0.92) (0.63) (1.26)
------------- --------- --------- --------- ---------
Net Asset Value, End of Year $ 19.63 $ 18.32 $ 17.90 $ 16.85 $ 14.32
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
TOTAL RETURN 13.83% 17.46% 11.86% 22.29% 1.49%
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000's omitted) $ 29,367 $ 25,838 $ 23,188 $ 21,757 $ 19,023
Ratio of Expenses to Average Net Assets(1) 1.25% 1.26% 1.21% 1.26% 1.25%
Ratio of Net Income to Average Net Assets 2.55% 3.02% 2.83% 2.99% 2.91%
Portfolio Turnover Rate 16.01% 27.52% 23.78% 16.39% 46.95%
</TABLE>
(1) Expenses for these calculations are net of a reimbursement from Securities
Management and Research, Inc. Without these reimbursements, the ratio of
expenses to average net assets would have been 1.37%, 1.36%, 1.34%, 1.46%
and 1.45% for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
38
<PAGE>
- -------------------------------------------------------------------
APPENDIX A
(Description of Ratings Used in Prospectus)
- --------------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND (BONDS THAT EXTEND
LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S LONG-TERM BOND (BONDS THAT
EXTEND LONGER THAN ONE YEAR) RATINGS:
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-
A-1
<PAGE>
edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risks appear
somewhat larger than the Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated "Baa" are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
PREFERRED STOCK RATING
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S PREFERRED STOCK RATING:
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA A preferred stock issue rate "AA" also qualifies as a high-quality, fixed-
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
A-2
<PAGE>
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the "A"
category.
BB Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
B predominantly speculative with respect to the issuer's capacity to pay pre-
CCC ferred stock obligations. "BB" indicates the lowest degree of speculation
and "CCC" the highest. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S PREFERRED STOCK RATING:
aaa An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
ba An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
FEDERAL FUNDS
As used in this Prospectus and in the Funds' Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.
A-3
<PAGE>
FOR MORE INFORMATION ABOUT THE FUNDS
- -------------------------------------------------------------------
<TABLE>
<S> <C>
The following documents contain more information about the SM&R GROWTH FUND, INC.
funds and are available free upon request: SM&R EQUITY INCOME FUND,
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI contains INC.
additional information about all aspects of the funds. A SM&R BALANCED FUND, INC.
current SAI has been filed with the Securities and Exchange
Commission and is incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS. The funds' annual and
semi-annual reports provide additional information about the
funds' investments. The annual report for the fiscal year
ended December 31, 1998 will contain a discussion of the
market conditions and investment strategies that
significantly affected each fund's performance during the
last fiscal year.
</TABLE>
REQUESTING DOCUMENTS. You may request a free copy of the SAI and these reports,
make shareholder inquiries, or request further information about the funds
either by contacting your broker or by contacting the funds at:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE: 1-800-231-4639 (TOLL FREE) OR
1-281-334-2469 (COLLECT)
PUBLIC INFORMATION. You can review and copy information about the funds,
including the SAI, at the Securities and Exchange Commission's Public Reference
Room in Washington D.C. You may obtain information on the operation of the
public reference room by calling the Commission at 1-800-SEC-0330. Reports and
other information about the funds also are available on the Commission's
Internet site at http://www.sec.gov. You may obtain copies of this information,
upon payment of a duplicating fee, by writing the Public Reference Section of
the Securities and Exchange Commission, Washington, D.C. 20549-6009.
Investment Company
File Nos. 811-00623
811-01916
811-02818
<PAGE>
SM&R
EQUITY FUNDS
P R O S P E C T U S
MAY 1, 1999
- SM&R GROWTH FUND, INC.
- SM&R EQUITY INCOME FUND, INC.
- SM&R BALANCED FUND, INC.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
CLASS T (CERTAIN ELIGIBLE PURCHASERS
AND SHAREHOLDERS
PRIOR TO JANUARY 1, 1999)
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------
<TABLE>
<S> <C>
RISK/RETURN SUMMARY.......................................... 1
SM&R Growth Fund........................................... 1
SM&R Equity Income Fund.................................... 3
SM&R Balanced Fund......................................... 5
Types of Investment Risk................................... 7
Bar Chart and Performance Table............................ 8
Fees and Expenses of the Funds............................. 12
SHARES OF THE FUNDS.......................................... 14
Eligible Purchasers of Class T Shares...................... 14
Class T Sales Charges...................................... 16
Sales Charge Reductions and Waivers........................ 16
INVESTMENT OBJECTIVES AND POLICIES........................... 18
Growth Fund................................................ 18
Equity Income Fund......................................... 20
Balanced Fund.............................................. 22
RISK FACTORS................................................. 24
PURCHASES AND REDEMPTIONS.................................... 27
Purchasing Shares.......................................... 27
Pricing of Fund Shares..................................... 28
Special Purchase Plans and Services........................ 29
Retirement Plans........................................... 33
Dividends, Distributions, and Taxes........................ 34
Redeeming Shares........................................... 36
THE FUNDS AND MANAGEMENT..................................... 40
FINANCIAL HIGHLIGHTS......................................... 44
Growth Fund................................................ 44
Equity Income Fund......................................... 45
Balanced Fund.............................................. 46
APPENDIX..................................................... A-1
</TABLE>
i
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND
- -------------------------------------------------------------------
GROWTH FUND'S INVESTMENT OBJECTIVE
The Growth Fund seeks long-term capital
growth by investing primarily in common stocks that provide
an opportunity for capital appreciation over time.
GROWTH FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Growth Fund normally invests at least 85%
of its total assets in common stocks. In selecting stocks,
this fund:
- chooses the stocks of financially sound companies that have
a proven ability to make and sustain a profit over time,
and
- places an emphasis on companies with growth potential.
The Growth Fund generally purchases a higher proportion of
stocks (relative to their market weight) from those sectors
of the market with higher growth prospects, referred to as
"overweighting." Examples of sectors with higher growth
prospects currently include technology, healthcare, and
consumer staples. On the other hand, the fund generally
purchases a smaller proportion of stocks (relative to their
market weight) from sectors of the market with below average
growth characteristics (for example, utilities and basic
materials), referred to as "underweighting."
The Growth Fund may also invest in debt obligations (such as
convertible preferred stocks, debentures, and notes),
including below investment grade bonds ("junk" bonds).
PRINCIPAL RISKS OF INVESTING IN THE GROWTH FUND
You could lose money on your investment in the
Growth Fund, or it could underperform other investments, if
any of the following occurs:
- the stock market goes down
1
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND, INC.
- -------------------------------------------------------------------
- the investment decisions of management (such as sector
overweighting and underweighting and individual stock
selection) do not achieve the desired results
- interest rates increase
- issuers of debt obligations default or are unable to pay
amounts due
Investments by the Growth Fund in smaller companies may
involve greater risks than larger established companies.
WHO MAY WANT TO INVEST IN THE GROWTH FUND
This fund may be appropriate if you:
- have long time horizons (ten years or more)
- are willing to accept higher short-term risk along with
higher potential long-term returns
- want to diversify your portfolio
- are investing for retirement or other goals that are many
years in the future
This fund may NOT be appropriate:
- if you are investing with a shorter time horizon
- if you are uncomfortable with an investment that will go up
and down in value
- as your complete portfolio
2
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND, INC.
- -------------------------------------------------------------------
EQUITY INCOME FUND'S INVESTMENT OBJECTIVE
The Equity Income Fund seeks current income
with a secondary objective of long-term capital appreciation.
EQUITY INCOME FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Equity Income Fund normally invests at
least 75% of its assets in equity securities. This fund also
invests in preferred stocks and investment grade debt
securities (such as publicly traded corporate bonds,
debentures, notes, commercial paper, repurchase agreements,
and certificates of deposit). In selecting common and
preferred stocks, the fund focuses on companies with
consistent and increasing dividend payment histories and
future earnings potential sufficient to continue such
dividend payments. This fund's goal is to maintain a
portfolio dividend yield (before fees and expenses) at least
50% greater than that of the S&P 500 Index.
The Equity Income Fund generally purchases a higher
proportion of stocks (relative to their market weight) from
those sectors of the market with greater dividend prospects,
referred to as "overweighting." Examples of sectors with
greater dividend prospects currently include financial
companies like banks, insurance companies, and real estate
investment trusts. On the other hand, the fund generally
purchases a smaller proportion of stocks (relative to their
market weight) from sectors of the market with below average
dividend yields (such as technology and consumer staples),
referred to as "underweighting."
3
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND, INC.
- -------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE EQUITY INCOME FUND
You could lose money on your investment in the
Equity Income Fund, or it could underperform other
investments, if any of the following occurs:
- the stock market goes down and/or interest rates increase
- the investment decisions of management (such as sector
overweighting and underweighting and individual stock
selection) do not achieve the desired results
- issuers of debt obligations default or are unable to pay
amounts due
- the fund cannot find a buyer for securities
Investments by the Equity Income Fund in smaller companies
may involve greater risks than larger established companies.
WHO MAY WANT TO INVEST IN THE EQUITY INCOME FUND
This fund may be appropriate if you:
- are looking for a fund that has both growth and income
components
- are seeking to protect the purchasing power of your money
while retaining the potential for growth and reducing
exposure to the volatility of the market
- are willing to accept higher short-term risk along with
higher potential long-term returns
- are retired or nearing retirement
This fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require a high degree of stability of your principal
- desire your return to be either ordinary income or capital
gains, but not both
4
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND, INC.
- -------------------------------------------------------------------
BALANCED FUND'S INVESTMENT OBJECTIVE
The Balanced Fund seeks to conserve principal,
produce current income, and achieve long-term capital
appreciation.
BALANCED FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Balanced Fund uses a "balanced" approach
by investing part of the assets in common stocks and the
remainder in a combination of U.S. government bonds,
investment grade corporate bonds, collateralized mortgage
obligations, mortgaged backed securities, convertible bonds,
and money market instruments. The ratio of stocks to bonds
changes in response to changing economic conditions. This
flexibility may help to reduce price volatility.
This fund's goal is relative stability of principal through a
balance of stocks, bonds, and cash. The stocks are
diversified and are selected based upon two models. One model
is based on profitability measurements and the other model is
based on the corporation's return on invested cash. The
bonds, meanwhile, may serve as a stabilizing force during
times of eroding stock market value, as well as provide a
fixed income payment stream. The fund invests at least 25% of
assets in fixed income securities, all of which are rated BBB
or better (investment grade).
PRINCIPAL RISKS OF INVESTING IN THE BALANCED FUND
You could lose money on your investment in the
Balanced Fund, or it could underperform other investments, if
any of the following occurs:
- interest rates increase or the stock market goes down
- issuers of debt obligations default or are unable to pay
amounts due
- the investment decisions of management do not achieve the
desired results
Investments by the Balanced Fund in smaller companies may
involve greater risks than larger established companies.
5
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND, INC.
- -------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE BALANCED FUND
This fund may be appropriate if you:
- are seeking supplemental income and conservation of the
purchasing power of your capital
- are looking for a more conservative alternative to a
growth-oriented fund
- want a well-diversified and relatively stable investment
allocation
- need a core investment
- are retired or nearing retirement
This fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- desire your return to be either ordinary income or capital
gains, but not both
- require a high degree of stability of your principal
6
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------------------------------------
TYPES OF INVESTMENT RISK
As indicated above, each of the three funds is subject to the following types of
risks to varying degrees:
CREDIT RISK. The risk that the issuer of a security, or a party to a contract,
will default or otherwise not honor a financial obligation. THIS RISK APPLIES TO
ALL OF THE FUNDS, BUT MAY HAVE A GREATER IMPACT ON THE BALANCED AND EQUITY
INCOME FUNDS.
INTEREST RATE RISK. The risk of declines in market value of an income-bearing
investment due to changes in prevailing interest rates. With fixed-rate
securities, a rise in interest rates typically causes a decline in market
values, while a fall in interest rates typically causes an increase in market
values. THIS RISK APPLIES TO ALL OF THE FUNDS, BUT MAY HAVE A GREATER IMPACT ON
THE BALANCED AND EQUITY INCOME FUNDS.
LIQUIDITY RISK. The risk that certain securities or other investments may be
difficult or impossible to sell at the time the fund would like to sell them or
at the price the fund values them. The fund may have to sell at a lower price,
sell other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance.
INVESTMENT STYLE OR MANAGEMENT RISK. The risk that a strategy used by a fund's
management may fail to produce the intended result because:
- - management fails to properly implement the selected investment strategy; or
- - the securities that fit the fund's investment style do worse than securities
that fit other investment styles
This risk is common to all mutual funds.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. The fluctuations may cause a security to be
worth less than the price originally paid for it, or less than it was worth at
an earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. This risk is common to all stocks and bonds
and the mutual funds that invest in them.
7
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
BAR CHART AND PERFORMANCE TABLE
The bar charts and performance tables shown below provide some indication of the
risks of investing in the funds and the variability of returns:
- - by showing each fund's performance for each year over a ten year period, and
- - by showing how each fund's average annual returns for 1, 5, and 10 years
compare to those of both a broad-based securities market index and an index of
funds with similar investment objectives.
The returns shown do not reflect any sales loads that would be imposed on the
purchase or sale of any shares and are based on an investment in the funds prior
to the creation of multiple classes of shares. We created the multiple classes
of shares on January 1, 1999.
Past performance is not necessarily an indication of how the funds will perform
in the future.
8
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 24.33%
1990 -2.94%
1991 36.98%
1992 -2.50%
1993 8.17%
1994 4.98%
1995 25.20%
1996 17.64%
1997 22.24%
1998 18.35%
</TABLE>
* During the ten year period shown in the bar chart, the Growth Fund's highest
return for a quarter was 19.41% achieved December 31, 1998 and its lowest return
for a quarter was a negative 13.16% for the quarter September 30, 1990.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
- --------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
GROWTH FUND 11.53% 16.10% 13.90%
S&P 500-REGISTERED 28.61% 24.05% 19.19%
TRADEMARK-*
LIPPER GROWTH FUND 25.69% 19.82% 17.20%
INDEX**
</TABLE>
* The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices.
Standard & Poor's, S&P, and S&P 500-Registered Trademark- are registered
trademarks of Standard & Poor's Corporation.
** The Lipper Growth Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 30 largest open-end funds which invest in companies whose long
term earnings are expected to grow significantly faster than the earnings of the
stocks represented in the major unmanaged stock indices.
9
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 28.12%
1990 0.75%
1991 29.06%
1992 3.31%
1993 10.63%
1994 -0.61%
1995 29.12%
1996 16.46%
1997 22.72%
1998 12.11%
</TABLE>
During the ten year period shown in the bar chart, the Equity Income Fund's
highest return for a quarter was 11.12% achieved December 31, 1991 and its
lowest return for a quarter was a negative 7.61% for the quarter September 30,
1998.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
- --------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
EQUITY INCOME FUND 5.65% 14.15% 13.95%
S&P 500-REGISTERED 28.61% 24.05% 19.19%
TRADEMARK-*
LIPPER EQUITY INCOME FUND 11.78% 16.62% 14.89%
INDEX**
</TABLE>
* The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices.
Standard & Poor's, S&P, and S&P 500-Registered Trademark- are registered
trademarks of Standard & Poor's Corporation.
** The Lipper Equity Income Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 10 largest open-end funds which seek relatively high current
income and growth of income through investing 60% or more of their portfolios in
equities.
10
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 13.66%
1990 1.37%
1991 24.53%
1992 3.00%
1993 6.31%
1994 1.49%
1995 22.29%
1996 11.86%
1997 17.46%
1998 13.83%
</TABLE>
During the ten year period shown in the bar chart, the Balanced Fund's highest
return for a quarter was 10.18% achieved December 31, 1998 and its lowest return
for a quarter was a negative 7.64% for the quarter September 30, 1990.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
- --------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
BALANCED FUND 7.28% 11.81% 10.64%
LEHMAN BROTHERS 8.44% 6.60% 8.52%
INTERMEDIATE
GOVERNMENT/CORPORATE
INDEX*
LIPPER BALANCED FUND 15.09% 13.88% 13.32%
INDEX**
</TABLE>
* The Lehman Brothers Intermediate Government/Corporate Index is an unmanaged
index generally representative of the performance of the bond market as a whole.
** The Lipper Balanced Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 30 largest open-end funds whose primary objective is to
conserve principal by maintaining a balanced portfolio of stocks and bonds. The
stock/bond ratio typically ranges around 60%/40%.
11
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
GROWTH,
EQUITY
INCOME, AND
BALANCED
FUNDS
-----------
CLASS T
-----------
<S> <C>
Maximum Sales Charge Imposed on Purchases (as
a percentage of offering price) 5.75%(1)
Maximum Deferred Sales Charge (as a
percentage of offering price)(2) None
Maximum Sales Charge Imposed on Reinvested
Dividends and Other Distributions (as a
percentage of offering price) None
Exchange Fees None
</TABLE>
ANNUAL FUND OPERATING EXPENSES(3)
(expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
EQUITY
INCOME BALANCED
GROWTH FUND FUND FUND
----------- -------- --------
CLASS T CLASS T CLASS T
----------- -------- --------
<S> <C> <C> <C>
Management Fees 0.49% 0.67% 0.75%
Other Expenses(4) 0.36% 0.34% 0.62%
Total Annual Fund Operating Expenses(5) 0.85% 1.01% 1.37%
</TABLE>
NOTES TO FEES AND EXPENSES OF THE FUNDS
(1) You pay a sales charge of 5.75% on initial investments in Class T shares of
less than $50,000. You pay a reduced sales charge at certain breakpoints,
as follows:
- 4.50% on initial investments of at least $50,000 but less than $100,000
- 3.50% on initial investments of at least $100,000 but less than $250,000
- 2.50% on initial investments of at least $250,000 but less than $500,000
- zero on initial investments of $500,000 or more
(2) You pay an $8.00 transaction fee for each expedited wire redemption.
(3) The "Management Fees" and "Other Expenses" shown for the funds are for the
year ended December 31, 1998. NO DISTRIBUTION OR SERVICE (12b-1) FEES ARE
IMPOSED ON CLASS T SHARES OF THE FUNDS.
12
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
(4) "Other Expenses" include the 0.25% Administrative Service Fee. "Other
Expenses" for Class T shares are based on the expenses and average net
assets of the Growth, Equity Income, and Balanced Fund for the fiscal year
ended December 31, 1998.
(5) The Fee Table does NOT reflect any fees waived or expenses assumed either
contractually or voluntarily by the funds' manager, Securities Management and
Research, Inc. ("SM&R"). Pursuant to the Administrative Service Agreement,
SM&R will pay (or reimburse) each fund for regular operating expenses in
excess of 1.25% per year of such fund's average daily net assets. Regular
operating expenses include the advisory fee and administrative fee, but do
not include any 12b-1 fee or class-specific expenses. During the fiscal year
ended December 31, 1998, SM&R waived management fees of 0.12% for the
Balanced Fund.
EXAMPLES OF EXPENSES
These examples are intended to help you compare the cost of investing in the
funds with the cost of investing in other mutual funds. These examples assume
that you invest $10,000 in each fund and applicable class thereof for the time
periods indicated, based on expenses BEFORE fee waivers and expense
reimbursements. These examples also assume that your investment has a 5% return
each year and that the funds' operating expenses remain the same. YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER THAN SHOWN.
You would pay the following expenses, based on these assumptions, if you
actually redeem all of your shares at the end of the period shown:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Fund (Class T) $ 657 $ 831 $ 1,019 $ 1,564
Equity Income Fund (Class
T) $ 672 $ 878 $ 1,101 $ 1,740
Balanced Fund (Class T) $ 706 $ 984 $ 1,282 $ 2,127
</TABLE>
Because there are no deferred sales charges or redemption fees, you would pay
the same expenses, based on these assumptions, if you did NOT redeem your
shares.
13
<PAGE>
SHARES OF THE FUNDS
- -------------------------------------------------------------------
The funds ("we") offer Class T shares through this Prospectus. The funds offer
Class T shares at net asset value plus an initial sales charge. Class T shares
do not impose any distribution and service (12b-1) fees.
The funds offer five other classes through separate prospectuses: (1) Class A
"front-end load" shares; (2) Class B "back-end load" shares; (3) Class C "level
load" shares; (4) Class Y "institutional" shares; and (5) Class J "network"
shares offered through certain financial intermediaries that have distribution
agreements with Securities Management and Research, Inc. ("SM&R"). Class A,
Class B, Class C, Class Y, and Class J shares are subject to different sales
charges and other expenses and, accordingly, may have expense ratios and
performance that differs from those of Class T shares. You are encouraged to
consider all of the class alternatives and choose the one that fits your
individual circumstances at the lowest level of fees. FOR MORE INFORMATION ON
THE OTHER CLASSES OF SHARES OR TO REQUEST A PROSPECTUS FOR ANOTHER CLASS, CALL
INVESTOR SERVICES AT (800) 231-4639.
ELIGIBLE PURCHASERS OF CLASS T SHARES
In general, Class T shares may only be purchased by existing shareholders that
owned shares of a fund on December 31, 1998 and certain other designated
persons. The other designated persons that can purchase Class T shares include:
(a) present and retired directors, officers, and full-time employees of the
funds and their spouses;
(b) present and retired directors, officers, registered representatives, and
full-time employees of SM&R and their spouses;
(c) present and retired officers, directors, and full-time employees (and
their spouses) of: (1) American National Insurance Company ("American
National"), (2) American National subsidiaries, and (3) any insurance
company for which any of American National's present directors serve as
a director;
(d) present and retired partners and full-time employees of legal counsel to
SM&R (and officers and directors of any professional corporations which
are partners of such legal counsel) and their spouses;
14
<PAGE>
(e) any child or step-child of any person named in (a), (b), (c), or (d)
above and their spouses;
(f) any trust, pension, profit-sharing, IRA, or other benefit plan for any
of such persons mentioned in (a), (b), (c), (d) or (e);
(g) custodial accounts for minor children of such persons mentioned in (a),
(b), (c), (d) or (e) pursuant to the Uniform Gifts to Minors or Uniform
Transfers to Minors Acts;
(h) persons who have received a distribution from a pension, profit-sharing,
or other benefit plan, to the extent such distribution represents the
proceeds of a redemption of shares of any fund managed by SM&R (other
than the Money Market and Primary Funds); and
(i) persons purchasing shares for a federal or state sponsored
post-secondary education funding program.
YOU HAVE THE SOLE RESPONSIBILITY OF NOTIFYING SM&R THAT YOU INTEND TO QUALIFY
UNDER ONE OF THESE CATEGORIES.
OPENING AN ACCOUNT. Your ability to open a new account depends on the basis of
your eligibility to purchase Class T shares, as follows:
- If you are eligible to purchase Class T shares because you are an existing
shareholder of a fund (and owned shares on December 31, 1998), you can
purchase additional Class T shares of the fund in which you are invested,
but cannot open a new account in another fund. For example, if you own
shares of the Growth Fund only (and you owned shares of that fund on
December 31, 1998), you may purchase additional Class T shares of that fund.
However, you cannot purchase Class T shares of the Equity Income Fund.
- If you are a designated person listed in (a)-(i) above, you can open a new
account in Class T shares and may purchase Class T shares of any fund
managed by SM&R. YOU ARE ALSO ELIGIBLE FOR WAIVER OF THE INITIAL SALES
CHARGE AS DESCRIBED BELOW.
15
<PAGE>
CLASS T SALES CHARGES
The offering price of Class T shares is the net asset value plus a "front-end"
sales charge. The sales charge is a percentage of the offering price, as shown
in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS A %
SALES CHARGE AS A % OF NET AMOUNT
AMOUNT OF INVESTMENT OF OFFERING PRICE INVESTED
- ---------------------------------------- ------------------- ---------------------
<S> <C> <C>
Less than $50,000 5.75% 6.1%
$50,000 but less than $100,000 4.5% 4.7%
$100,000 but less than $250,000 3.5% 3.6%
$250,000 but less than $500,000 2.5% 2.6%
$500,000 and over None None
</TABLE>
SALES CHARGE REDUCTIONS AND WAIVERS
DISCOUNTS THROUGH CONCURRENT PURCHASES. To qualify for a reduced sales charge on
Class T shares, you may combine concurrent purchases of Class T shares of funds
managed by SM&R that impose a front-end sales charge. Investors that are
eligible to combine concurrent purchases to qualify for a reduced sales charge
include:
(1) Any individual;
(2) Any individual, his or her spouse, and trusts or custodial accounts for
their minor children;
(3) A trustee or fiduciary of a single trust estate or single fiduciary
account;
(4) Tax-exempt organizations specified in Sections 501(c)(3) or (13) of the
Internal Revenue Code, or employees' trusts, pension, profit-sharing, or
other employee benefit plans qualified under Section 401 of the Internal
Revenue Code; and
(5) Employees (or employers on behalf of employees) under any employee
benefit plan not qualified under Section 401 of the Internal Revenue
Code.
Purchases in connection with employee benefit plans not qualified under Section
401 of the Internal Revenue Code will qualify for the above quantity discounts
only if the fund will realize economies of scale in sales effort and sales
related expenses as a result of the employer's or the plan's bearing the expense
of any payroll deduction plan, making the fund's prospectus available to
individual investors or employees, forwarding investments by such employees to
the funds, and the like.
16
<PAGE>
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class A or Class T
shares of a fund managed by SM&R on which you paid a front-end sales charge, you
may be able to receive a discount when you buy additional shares. The current
net asset value for the shares you already own may be "accumulated"--I.E.,
combined together with the dollar amount being invested--to achieve quantities
eligible for discount.
LETTER OF INTENT. You may qualify for a reduced sales charge on purchases of
Class T shares of funds managed by SM&R by completing the Letter of Intent
section of the account application. Under a Letter of Intent, an investor
expresses an intention to purchase, within 13 months of the initial investment,
a specified amount of Class T shares of funds managed by SM&R which, if made
concurrently, would qualify for a reduced sales charge. Upon execution of the
Letter of Intent, the investor must make a minimum initial investment equal to
ten percent (10%) of the amount necessary to qualify for the applicable reduced
sales charge. To assure that the full applicable sales charge will be paid if
the intended purchase is not completed, five percent (5%) of the total intended
purchase amount will be held in escrow in shares registered in the investor's
name. Shares held in escrow under a Letter of Intent are not eligible for the
exchange privilege until the Letter of Intent is completed or canceled. A Letter
of Intent does not represent a binding obligation on the part of the investor to
purchase or the funds to sell the full amount of shares specified.
THE EDUCATION FUNDING INVESTMENT ACCOUNT PROGRAM. The Education Funding
Investment Account Program is a service expressly created to help investors
accumulate funds for their children's or grandchildren's college education by
reducing the standard sales charge for investments of less than $50,000 through
this Program. The following breakpoints apply to purchases of Class T shares
made by individuals investing in the funds through the use of The Education
Funding Investment Account Program, as well as the Education IRA:
<TABLE>
<CAPTION>
SALES CHARGE AS A %
SALES CHARGE AS A % OF NET AMOUNT
AMOUNT OF INVESTMENT OF OFFERING PRICE INVESTED
- ---------------------------------------- ------------------- ---------------------
<S> <C> <C>
Less than $100,000 4.5% 4.7%
$100,000 but less than $250,000 3.5% 3.6%
$250,000 but less than $500,000 2.5% 2.6%
$500,000 and over See below None
</TABLE>
17
<PAGE>
TO PARTICIPATE IN THIS SPECIAL PLAN, INVESTORS MUST COMPLETE THE SPECIAL
EDUCATION FUNDING INVESTMENT ACCOUNT APPLICATION DESIGNED SPECIFICALLY FOR THE
PROGRAM OR AN EDUCATION IRA APPLICATION.
WAIVER OF INITIAL SALES CHARGE FOR CERTAIN PURCHASERS. After SM&R receives a
written request, those designated person listed in (a)-(i) above may purchase
Class T shares of the funds at net asset value per share without the imposition
of any sales charge.
INVESTMENT OBJECTIVES AND POLICIES
- -------------------------------------------------------------------
Each fund pursues its own investment objective through various investment
policies and techniques. ONLY THE PRINCIPAL INVESTMENT STRATEGIES OF EACH FUND
AND THE PRINCIPAL TYPES OF SECURITIES EACH FUND PLANS TO PURCHASE ARE DESCRIBED
BELOW. More investment information is in the Statement of Additional
Information. These policies and techniques are not fundamental and may be
changed by the Board of Directors without shareholder approval.
Because of the market risks inherent in any investment, the funds may not
achieve their investment objectives. In addition, effective management of each
fund is subject to general economic conditions and to the ability and investment
techniques of management. The net asset value of each fund's shares will vary
and the redemption value of shares may be either higher or lower than the
shareholder's cost. Since each fund has a different investment objective, each
will have different investment results and incur different market, financial,
and other risks.
SM&R GROWTH FUND, INC.
(FORMERLY NAMED AMERICAN NATIONAL GROWTH FUND, INC.)
The Growth Fund considers its portfolio investments and the composition of its
total portfolio from the viewpoint of potential capital appreciation. The Growth
Fund adjusts this composition from time to time in light of current conditions.
Under normal conditions, the Growth Fund invests at least 85% of its total
assets in common stocks.
The Growth Fund invests in the stocks of financially sound companies that have a
proven ability to make and sustain a profit over time. Management places an
emphasis on companies with growth potential. The Growth Fund does not employ
exotic investment strategies, such as using options and futures.
18
<PAGE>
We identify candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then, we evaluate each candidate stock on a
fundamental basis by examining past financial performance, managerial skill and
foresight, and relative valuation to industry peers and the market as a whole.
We utilize this combination of disciplines and human judgement to drive our
stock selection process. We believe in evaluating each company's prospects as
opposed to relying on broad forecasts of industry prospects. We do not attempt
to time economic, market, style or capitalization cycles. Diversification, or
weighting of individual economic sectors, is also dictated by a combination of
disciplines and human judgement to varying degrees. We believe in never having
less than half or more than double the market weighting in any one sector. The
Growth Fund limits cash to 15% of its assets unless circumstances dictate
otherwise.
Because of the Growth Fund's goal of seeking long-term capital growth, certain
sectors of the market will have greater weight in the Growth Fund's portfolio
while other sectors of the market will have lower representation. For example,
the Growth Fund generally overweights the technology sector, which represents
approximately 15% to 20% of the Standard & Poor's 500 Index, in the portfolio
relative to its market weight. This overweighting reflects the higher growth
prospects of technology companies relative to the average company in the market.
At varying times, we may also overweight other sectors of the market providing
above average growth prospects, like healthcare and consumer staples.
Conversely, the Growth Fund generally underrepresents certain sectors of the
market in its portfolio that tend to have below average growth characteristics,
like utilities, basic materials, and communications services. As a result of
such strategic overweighting and underweighting, the Growth Fund's performance
may differ substantially from broad market indexes like the S&P 500 and tend to
incur more price volatility than these indexes.
The Growth Fund may invest in convertible preferred stocks rated at least "B" by
Standard and Poor's Corporation ("S&P") or at least "b" by Moody's Investors
Service, Inc. ("Moody's") preferred stock ratings, and convertible debentures
and notes rated at least "B" by S&P and Moody's corporate bond ratings.
Investments in convertible securities having these ratings may involve greater
risks than convertible securities having higher ratings.
19
<PAGE>
The proportion of assets invested in any particular type of security can be
expected to vary, depending on SM&R's appraisal of market and economic
conditions. Common stocks and convertible securities purchased will be of
companies that SM&R believes will provide an opportunity for capital
appreciation. On a temporary basis, the Growth Fund may invest in commercial
paper which at the date of such investment, is rated in one of the two top
categories by one or more of the nationally recognized statistical rating
organizations, in certificates of deposit in domestic banks and savings
institutions having at least $1 billion of total assets, and in repurchase
agreements.
SM&R EQUITY INCOME FUND, INC.
(FORMERLY NAMED AMERICAN NATIONAL INCOME FUND, INC.)
The Equity Income Fund considers its portfolio investments and the composition
of its total portfolio not only from the viewpoint of present and potential
yield, but also from the viewpoint of potential capital appreciation. We adjust
this composition of portfolio investments from time to time to best accomplish
the Equity Income Fund's investment objectives under current conditions.
In pursuit of its objectives, the Equity Income Fund will invest in common
stocks, preferred stocks, and marketable debt securities selected in accordance
with its investment objectives. Common and preferred stocks purchased will
generally be of companies with consistent and increasing dividend payment
histories that SM&R believes will have further earnings potential sufficient to
continue such dividend payments. Debt securities include publicly traded
corporate bonds, debentures, notes, commercial paper, repurchase agreements, and
certificates of deposit in domestic banks and savings institutions having at
least $1 billion of total assets. The proportion of assets invested in any
particular type of security can be expected to vary, depending on SM&R's
appraisal of market and economic conditions. Under normal conditions, the Equity
Income Fund will invest at least 75% of its assets in equity securities rather
than debt securities.
We view common stocks, as well as investments in preferred stocks and bonds
convertible into common stock, from their potential for capital appreciation in
addition to their current and potential income yield. Our goal is to maintain a
portfolio dividend yield (before fees and expenses) at least 50% greater than
that of the S&P 500 Index.
20
<PAGE>
We identify candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then, we evaluate each candidate stock on a
fundamental basis by examining past financial performance, managerial skill and
foresight, and relative valuation to industry peers and the market as a whole.
We utilize this combination of disciplines and human judgement to drive our
stock selection process. We believe in evaluating each company's prospects as
opposed to relying on broad forecasts of industry prospects. We do not attempt
to time economic, market, style or capitalization cycles. Diversification, or
weighting of individual sectors, is also dictated by a combination of
disciplines and human judgement to varying degrees. We believe in never having
less than half or more than double the market weighting in any one sector. Cash
is limited to 15% of the fund unless circumstances dictate otherwise.
Certain sectors of the market will have greater weight in the Equity Income
Fund's portfolio while other sectors of the market will have lower
representation. For example, the Equity Income Fund generally overweights the
finance sector in its portfolio relative to that sector's market weight (which
is approximately 16% of the Standard & Poor's 500 Index). This reflects the
greater dividend prospects of financial companies like banks, insurance
companies, and real estate investment trusts as compared to the average company
in the market. At varying times, we may also overweight other sectors of the
market that provide above average dividend prospects, like utilities and energy.
Conversely, the Equity Income Fund generally underrepresents certain sectors of
the market tending to have below average dividend yields, like technology,
consumer staples, and healthcare. As a result of such strategic overweighting
and underweighting, the Equity Income Fund's performance may differ
substantially from broad market indexes like the S&P 500.
Corporate debt obligations purchased by the Equity Income Fund will consist only
of obligations rated either Baa or better by Moody's or BBB or better by S&P.
Bonds which are rated Baa by Moody's are considered as medium grade obligations,
that is, they are neither highly protected nor poorly secured. Bonds rated BBB
by S&P are regarded as having an adequate capacity to pay interest and repay
principal. Commercial paper and notes will consist only of direct obligations of
corporations whose bonds and/or debentures are rated as set forth above.
21
<PAGE>
SM&R BALANCED FUND, INC.
(FORMERLY NAMED TRIFLEX FUND, INC.)
The Balanced Fund uses a "balanced" approach by investing part of its assets in
stocks of well-known companies and the remainder in a combination of high-grade
bonds, bonds convertible into the common stock of the issuing corporations, and
money market instruments. We change the ratio of stocks to bonds in response to
changing economic conditions. This flexibility helps to reduce price volatility.
The Balanced Fund's goal is relative stability of principal through a balance of
stocks, bonds, and cash. The stocks serve to capture the benefits that ownership
in corporate America brings. The bonds, meanwhile, can serve as a stabilizing
force during times of eroding stock market value, as well as provide a fixed
income payment stream into the portfolio.
We identify candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then we evaluate each candidate stock on a
fundamental basis by examining past financial performance, managerial skill and
foresight, and relative valuation to industry peers and the market as a whole.
We utilize this combination of disciplines and human judgement to drive our
stock selection process. We believe in evaluating each company's prospects as
opposed to relying on broad forecasts of industry prospects. We do not attempt
to time economic, market, style or capitalization cycles. Diversification, or
weighting of individual sectors, is also dictated by a combination of
disciplines and human judgement to varying degrees. We believe in never having
less than half or more than double the market weighting in any one sector. Cash
is limited to 15% of the portfolio unless circumstances dictate otherwise. The
Balanced Fund will only purchase corporate bonds rated either Baa or better by
Moody's or BBB or better by S&P. Bonds which are rated Baa by Moody's are
considered as medium grade obligations, that is, they are neither highly
protected nor poorly secured. Bonds rated BBB by S&P are regarded as having an
adequate capacity to pay interest and repay principal. Commercial paper and
notes will consist only of direct obligations of corporations whose bonds and/or
debentures are rated as set forth above. The Balanced Fund may also invest in
repurchase agreements. This balanced investment policy is intended to reduce
risk and to obtain results in keeping with the Balanced Fund's objectives.
22
<PAGE>
The Balanced Fund will invest in fixed-income securities and equity securities
as described above. However, the Balanced Fund will sometimes be more heavily
invested in equity securities and at other times it will be more heavily
invested in fixed-income securities, depending on management's appraisal of
market and economic conditions. SM&R believes that a fund that is wholly
invested in fixed-income securities carries a large interest rate risk. Interest
rate risk is the uncertainty about losses due to changes in the rate of interest
on debt instruments. The major interest rate risk for investors, however, is not
in the interest rate itself, but in the change in the market price of bonds that
results from changes in the prevailing interest rate. Higher interest rates
would mean lower bond prices and lower net asset value for the Balanced Fund's
shareholders assuming no change in its current investment objective and
portfolio. Diversifying the Balanced Fund's portfolio with investments such as
commercial paper, convertible securities, and common stocks may reduce the
decline in value attributable to the increase in interest rate and resulting
decrease in the market value of bonds and may reduce the interest rate risk.
However, stock prices also fluctuate in response to a number of factors,
including changes in general level of interest rates, economic and political
developments, and other factors which impact individual companies or specific
types of companies. Such market risks cannot be avoided but can be limited
through a program of diversification and a careful and consistent evaluation of
trends in the capital market and fundamental analysis of individual equity
holdings.
SM&R, through an ongoing program of asset allocation, will determine the
appropriate level of equity to debt holdings consistent with SM&R's outlook and
evaluation of trends in the economy and the financial markets. The Balanced Fund
determines its level of commitment to common stocks and specific common stock
investments as a result of this process. For example, within an environment of
rising inflation, common stocks historically have preserved their value better
than bonds; therefore, inclusion of common stocks could tend to conserve
principal better than a portfolio consisting entirely of bonds and
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other debt obligations. In addition, within an environment of accelerating
growth in the economy, common stocks historically have conserved their value
better than bonds in part due to a rise in interest rates that occur
coincidentally with accelerating growth and profitability of the companies.
RISK FACTORS
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The following discussion relates to all three funds. The risk/return summary
located at the beginning of this prospectus identifies some specific risks
applicable to each individual fund.
GENERAL. There is no assurance that a fund will achieve its goals. Generally, if
the securities owned by a fund increase in value, the value of the shares of the
fund which you own will increase. Similarly, if the securities owned by a fund
decrease in value, the value of your shares will also go down. In this way, you
participate in any change in the value of the securities owned by a fund.
The risk inherent in investing in any fund is a risk common to any security.
That is, the value of a fund's shares will fluctuate in response to changes in
economic conditions, interest rates and the market's perception of the
underlying portfolio securities held by that fund. Each fund's share value
depends on general economic and securities market conditions, the investment
decisions of its management, and numerous other factors. All of these factors
are inherently uncertain and, in some cases, unforeseeable.
Any of the funds could lose money if the stock markets in general go down or if
the particular stocks purchased by a fund go down in value. In addition, the
funds could lose money if prevailing interest rates increase or if the debt
securities purchased by a fund are downgraded or defaulted upon.
STOCK INVESTMENT RISKS. Because each fund invests a substantial portion of its
assets in stocks, the value of each fund's portfolio will be affected by changes
in the stock markets. At times, the stock markets can be volatile and stock
prices can change substantially. This market risk will affect each fund's net
asset value per share, which will fluctuate as the values of each fund's
portfolio securities change. Stock prices do not always change uniformly or at
the same time and the various stock markets do not always move in the same
direction at the same time. Other factors specific to a particular
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company also affect that company's stock price (for example, poor earnings, loss
of major customers, or major litigation). The funds cannot always predict the
factors that will affect a stock's price. The funds, however, do attempt to
limit market risk by diversifying their investments. The funds diversify their
investments by generally investing only a small percentage of their assets in
any one company and by not holding a substantial amount of the stock of any one
company.
For the Growth Fund and the Equity Income Fund, the portfolio managers decide to
overweight or underweight certain industry sectors and to purchase individual
stocks based on their assessment of the future growth or income prospects of an
industry sector or particular stock. If certain industries or investments do not
perform as a fund expects (I.E., do not grow in value or produce dividend income
as expected), that fund could underperform its peers or lose money.
The Growth Fund is generally considered more aggressive than the Equity Income
and Balanced Funds because it invests for capital appreciation in common stocks,
emphasizing "growth" stocks that tend to be more volatile than other
investments. Investors in the Growth Fund should expect greater fluctuations in
share price, yield, and total return than with less aggressive funds.
DEBT SECURITIES RISKS. Debt securities are subject to changes in their values
due to changes in prevailing interest rates. When prevailing interest rates
fall, the values of already-issued debt securities generally rise. Accordingly,
if interest rates go down after a security is purchased, such security might be
valued and/or sold at a price greater than its cost. On the other hand, when
prevailing interest rates rise, the values of already-issued debt securities
generally fall. Accordingly, if interest rates increase after a security is
purchased, such security might be valued and/or sold at a price less than its
cost. The magnitude of these fluctuations will often be greater for longer-term
debt securities than shorter-term debt securities.
The funds could lose money if any bonds they own are downgraded in credit rating
or go into default. In general, lower-rated bonds, such as junk bonds, have
higher credit risks. The Growth Fund is the only fund permitted to invest in
junk bonds. Junk bonds have additional risks, including limitations on a fund's
ability to re-sell the
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lower-rated debt securities and less readily available market quotations for
such securities. If there are not readily available market quotations for a debt
security, its value is determined largely by the investment manager's judgment.
When and if the debt security is sold, the investment manager may find that its
estimation of the debt security's value is substantially different than the
actual price at which it can be sold. Moreover, substantial redemptions of fund
shares could require a fund to sell portfolio securities at a time when a sale
might not be favorable.
OTHER RISKS. Each investor will be subject to all the risks normally attendant
to business operations, changes in general economic conditions, governmental
rules and fiscal policies, acts of God, and other factors beyond the control of
the funds' management.
SMALLER COMPANY RISKS. Smaller companies in which each of the funds may invest
may involve greater risks than large established companies. Such smaller
companies may have limited product lines, markets, financial resources, and
management depth. Their securities may trade less frequently and in more limited
volume than the securities of larger or more established companies. Smaller
companies may also be more vulnerable than larger companies to adverse business
or market developments. As a result, the prices of smaller companies may
fluctuate to a greater degree than the prices of securities of larger companies.
YEAR 2000 RISKS. Many services provided to the funds and their shareholders
depend on the smooth functioning of computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated, referred to as the "Year 2000
Problem." The Year 2000 Problem could have a negative impact on handling
securities trades, payment of interest and dividends, pricing, and account
services. Like other mutual funds, financial and business organizations, and
individuals around the world, the funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and transfer agent) do not properly process and
calculate date-related information and data from and after January 1, 2000. SM&R
is taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by any other service providers. At this time, however, there can be no
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assurance that these steps will be sufficient to avoid any adverse impact on the
funds and their shareholders.
PURCHASES AND REDEMPTIONS
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PURCHASING SHARES
You may purchase shares of a fund from registered representatives of SM&R, from
authorized broker-dealers, or directly from SM&R. WE RESTRICT PURCHASES OF CLASS
T SHARES. FOR MORE INFORMATION ABOUT THESE RESTRICTIONS, SEE "ELIGIBLE
PURCHASERS OF CLASS T SHARES" UNDER "SHARES OF THE FUNDS."
Such purchases will be at the offering price for such shares determined as and
when provided below (See "Pricing of Fund Shares"). You should carefully review
all account statements and promptly report any discrepancies to SM&R. You may
make initial and subsequent purchases directly through SM&R at the following
address:
Securities Management and Research, Inc.
P.O. Box 58969
Houston, Texas 77258-8969
Certificates are not issued for shares of the funds. SM&R confirms investors'
purchases and credits such purchases to their accounts on the books maintained
by SM&R. Investors have the same rights of share ownership as they would if
certificates had been issued.
Investors whose shares are held in the name of a broker-dealer or other party
are not shareholders of record and, therefore, may not be able to utilize
services available only to shareholders of record.
OPENING AN ACCOUNT: To purchase shares, you must submit a completed account
application which includes the purchaser suitability form. The application and
suitability form are to be mailed directly to SM&R at the above address. If you
would like to take advantage of the electronic services available, please
complete the applicable Special Investor Services section of the account
application. Special forms are required when establishing an IRA/SEP or 403(b)
plan. Please call Investor Services at (800) 231-4639 and request special forms
when establishing retirement plans.
MINIMUM PURCHASE REQUIREMENT: Your initial investment must be at least $100 and
all subsequent investments must be at least $20. We waive these initial
investment minimums when purchases are part of
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certain systematic investment programs (See "Special Purchase Plans and
Services" for additional information on reduction of the minimums). We reserve
the right to reject any purchase.
PURCHASES BY MAIL: Make your check(s) payable to SM&R and send the check(s) to
the address indicated above. Please note that third party checks will not be
accepted to open a new account, except for IRA rollover checks that are properly
endorsed. If you make subsequent investments by mail, you must indicate your
name, account number, and the name of the class and the fund being purchased.
You may use the remittance slip attached to the confirmation statement.
PURCHASES BY WIRE: TO ENSURE PROPER CREDITING OF A WIRE INVESTMENT, YOU MUST
HAVE AN EXECUTED ACCOUNT APPLICATION AND PURCHASER SUITABILITY FORM ON FILE WITH
THE TRANSFER AGENT. You may then wire your investment to The Moody National Bank
of Galveston ("Moody National Bank") by providing the following instructions to
your bank:
The Moody National Bank of Galveston ABA #113100091
Securities Management and Research, Inc. #035 868 9
Name of Class and Fund (E.G., Class T of the Growth Fund)
Fund Account Number (number appears on your confirmation statement)
Your Name (E.G., Mary Smith)
PURCHASES BY EXCHANGE: Call Investor Services if you have established telephone
exchange privileges on your account. See "Special Purchase Plans and
Services--Exchange Privilege" for procedures and additional information relating
to telephone exchanges. For limitations on exchanges, see "Excessive Trading"
also under "Special Purchase Plans and Services."
PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). We determine each fund's offering price once
each day the New York Stock Exchange (the "Exchange") is open for regular
trading. The offering price equals a fund's net asset value plus the sales
charge, if any. (See "Shares of the Funds-- Class T Sales Charges.")
EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS (WHEN SHARES ARE PRICED). We
calculate net asset value once each day the Exchange is open at the close of
regular trading on the Exchange (currently 3:00 p.m.
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Central Time). In the event the Exchange closes early on a particular day, we
will determine the net asset value of each fund as of the close of the Exchange
that day. The price you pay or receive for shares of a fund depends, in part, on
the day and time you make your purchase or redemption. On any day the Exchange
is open for regular trading, we will execute purchases and redemptions at the
next applicable price determined THAT DAY if:
- SM&R receives your order in proper form prior to the close of regular
trading on the Exchange;
- a securities dealer having a dealer contract with SM&R receives and
reports your order to SM&R prior to the close of regular trading on the
Exchange on the same day; or
- for purchases, Moody National Bank receives your purchase payment by
bank wire and reports it to SM&R prior to the close of the Exchange.
If we receive your order after the close of the Exchange, or on any day that the
Exchange is closed, we will execute your purchase or redemption at the price
determined on the next business day. In unusual circumstances, any fund may
temporarily suspend the processing of sell requests, or may postpone payment of
proceeds for up to three business days or longer, as allowed by federal
securities laws.
SPECIAL PURCHASE PLANS AND SERVICES
In addition to the special plans described above that permit you to reduce the
initial sales charge assessed on Class T shares, the funds offers other services
and plans designed to facilitate investments. At this time, there is no charge
to you for these services. The funds may impose fees for such services in the
future. Be aware, however, that if you elect to participate in the ACH plan
described below, you should check with your financial institution for any
additional charges imposed for this service. For additional information contact
your registered representative, broker-dealer or SM&R. A shareholder considering
any of the plans or services described below should consult a tax advisor before
beginning a plan.
ELECTRONIC TRANSFERS (ACH). The electronic transfer option allows you to move
money between your account(s) and your bank, savings and loan, or credit union
account using the Automated Clearing House
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("ACH") network. To arrange for electronic transfers, complete the relevant
Special Investor Services section of the account application at the time you
open your account and specify the type of service or services desired. Attach a
voided, pre-printed check or deposit slip from your checking, savings and loan,
or credit union account. PASSBOOK SAVINGS ACCOUNTS ARE NOT ELIGIBLE FOR THE
ELECTRONIC TRANSFER OPTION. ADDITIONALLY, YOUR BANK MUST BE A MEMBER OF THE
AUTOMATED CLEARING HOUSE (ACH) NETWORK FOR YOU TO TAKE ADVANTAGE OF THIS
SERVICE. You will receive a confirmation verifying initialization of the
electronic transfer option and may begin conducting transactions in your
account(s) under this option approximately 20 calendar days after receipt of the
verification notice from SM&R. If you elect this option after your account is
established, it may be necessary for you to obtain a signature guarantee for all
individuals named on the account(s).
TELEPHONE SERVICES. You can only use telephone services for transaction amounts
of $500 or more. You can take advantage of this service by completing the
appropriate Special Investor Services sections of the account application when
opening your account. Through this service, you will be able to purchase
additional shares for an existing SM&R mutual fund account by ACH. You may also
use the telephone services to redeem and exchange shares on those accounts for
which you have an executed account application on file, and have received
written verification from SM&R that the service has been initialized as
explained under Electronic Transfers above. If this option is elected after your
account is established, it may be necessary for you to obtain a signature
guarantee for all individuals named on the account(s). We permit transfers by
telephone from a joint account only to another joint account registered in the
identical names. There may be additional restrictions on telephone transactions
by joint account owners. Contact your registered representative or SM&R for more
information. PLEASE NOTE THAT THE TELEPHONE REDEMPTION OPTION IS NOT AVAILABLE
TO RETIREMENT PLANS.
The funds have implemented the following security procedures intended to protect
your account from losses resulting from unauthorized or fraudulent telephone
instructions: The caller must know:
(i) the name of the fund or funds;
(ii) all digits of the account number;
(iii) the exact name and address used in the registration(s); and
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(iv) the Social Security or Employer Identification Number listed on the
account(s).
Additionally, we record all telephone transactions for your protection.
Neither the funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone which comply with the current
security procedures and other requirements. SM&R believes that such security
procedures and other requirements are reasonable and, if followed, you should
bear the risk of any losses resulting from unauthorized or fraudulent telephone
transactions on your account(s).
During times of economic turmoil or market volatility or as a result of severe
weather or a natural disaster, it may be difficult to contact SM&R by telephone
to institute a redemption or exchange.
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from your bank account and invested
monthly, bi-monthly, quarterly, or annually into the designated fund(s) at the
applicable offering price determined on the date of the electronic transfer.
EXCHANGE PRIVILEGE. As an investor in a fund, you may be permitted to exchange
shares that you own in a fund with shares of some of the other mutual funds
managed by SM&R without the payment of an exchange fee, subject to certain
conditions. EXCHANGES BETWEEN A FUND AND ANOTHER FUND MANAGED BY SM&R ARE
AVAILABLE ONLY IN STATES WHERE THE APPLICABLE FUNDS ARE REGISTERED AND THE
EXCHANGE MAY BE LEGALLY MADE. YOU SHOULD CONTACT SM&R TO DETERMINE WHETHER A
FUND IS REGISTERED IN A PARTICULAR STATE OR WHETHER AN EXCHANGE IS PERMITTED.
WE MAY TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE OFFER AT ANY TIME.
You may exchange Class T shares of a fund, without an exchange fee or sales
charge, for Class T shares of another fund managed by SM&R. You also may
exchange your Class T shares for shares of SM&R Investments, Inc.'s Primary Fund
and Money Market Fund, provided that you meet any minimum investment requirement
for the shares you wish to acquire.
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We waive any sales charges on Class A and Class T shares acquired through an
exchange if you previously paid a sales charge on amounts invested in those
shares. For example, you purchase Class T shares of the Growth Fund. You then
exchange your Class T shares for shares of the SM&R Investments, Inc. Money
Market Fund. Later, you re-exchange those shares of the Money Market Fund for
the Class T shares of the Equity Income Fund. We would not impose any sales
charge upon re-exchange into Class T shares because you previously paid a sales
charge on those amounts invested in shares. In other words, we will never impose
a front-end sales charge on the same investment twice.
Shares of any fund managed by SM&R held in escrow under a Letter of Intent are
not eligible for the exchange privilege. Such shares will not be released from
escrow until the balance invested during the period specified in the Letter of
Intent equals or exceeds the amount required to be invested under the Letter of
Intent or the shareholder requests, in writing, that the Letter of Intent be
canceled and pays any adjustments in sales charge. After release from escrow,
shares may be exchanged, provided all other applicable conditions are met.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met:
(a) the exchange must be made between accounts that are registered in the
same name, address and, if applicable, taxpayer identification number;
(b) the shares of the fund acquired through exchange must be qualified for
sale in the state in which you reside;
(c) the dollar amount of a written exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(d) the minimum dollar amount of a telephone exchange is $500;
(e) SM&R must have received full payment for the shares being exchanged;
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(f) your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal
Revenue Service Form W-8 (certificate of foreign status) or Form W-9
(certifying exempt status);
(g) any shares that you wish to exchange must have been held for at least
ten (10) business days;
(h) certificates representing shares, if any, are returned before such
shares are exchanged; and
(i) you have received a prospectus for the shares you receive in the
exchange.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time. ANY
GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE INCOME TAX PURPOSES. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR
THE TAX TREATMENT AND EFFECT OF EXCHANGES.
EXCESSIVE TRADING. Frequent trades, involving either substantial fund assets or
a substantial portion of your account or accounts controlled by you, can disrupt
management of the funds and raise the funds' expenses. We currently define
"excessive trading" as exceeding one purchase and sale involving the same fund
within any 120-day period.
For example, you are in Fund X. You can move substantial assets from Fund X to
Fund Y and, within the next 120 days, sell your shares in Fund Y to return to
Fund X or move to Fund Z. If you exceed the number of trades described above,
you may be barred indefinitely from further transactions between the
participating funds.
There are two types of transactions exempted from the excessive trading
guidelines. They are (1) redemptions that are not part of exchanges and (2)
systematic purchases or redemptions.
RETIREMENT PLANS
The following retirement plans may invest in with shares of the funds:
- Individual Retirement Accounts (IRAs), which include traditional IRAs,
Roth IRAs, Education IRAs, and SIMPLE IRAs,
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- Simplified Employee Pension Plans (SEPs),
- 403(b) Custodial Accounts (TSAs), and
- corporate retirement plans.
These plans allow you to shelter investment income from federal income tax while
saving for retirement. Information concerning IRAs and TSAs, and the forms
necessary to adopt such plans, can be obtained by contacting your registered
representative or calling SM&R. A regular fund application should be used when
establishing a corporate retirement plan. (See "Purchasing Shares" for the
minimum initial and subsequent purchase requirements.) SM&R acts as trustee or
custodian for IRAs, SEPs, and TSAs for the funds. An annual custodial fee of
$7.50 per account will be charged for any part of a calendar year in which an
investor has an IRA, SEP, or TSA in the funds and will be automatically deducted
from each account. An individual considering a retirement plan may wish to
consult with an attorney or tax adviser.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS. The Equity Income and Balanced Funds will pay dividends from
investment income, if any, quarterly, generally during the months of March,
June, September and December, and distribute capital gains, if any, in December.
The Growth Fund will pay dividends from investment income, if any, semi-annually
during the months of June and December and distribute capital gains, if any, in
December. Dividends from net investment income may include net short-term
capital gains, if any.
Dividends and distributions paid by the funds have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution of record shortly after the purchase of
shares by an investor represents in substance, a return of capital.
DIVIDEND REINVESTMENTS. Dividends and capital gains will be automatically
reinvested at net asset value in additional shares of the fund making such
distribution unless SM&R is instructed otherwise in writing. Distributions not
reinvested are paid by check or transmitted to your bank account through an ACH
transaction, if elected. If the Postal Service cannot deliver your check, or if
your check remains uncashed for six months, the funds reserve the right to
reinvest your
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distribution check in your account at the net asset value on the business day of
the reinvestment and to reinvest all future distributions in shares of the
funds. Dividends and capital gains declared in December to shareholders of
record in December and paid the following January will be taxable to
shareholders as if received in December. This is a convenient way to accumulate
additional shares and maintain or increase the shareholder's earning base. Of
course, any shares so acquired remain at market risk.
Shareholders have the right to change their election with respect to the receipt
of distributions by notifying SM&R in writing, but any such change will be
effective only as to distributions for which the record date is seven or more
business days after SM&R has received the shareholder's written request.
TAXABILITY OF DIVIDENDS. Dividends you receive from the funds, whether
reinvested or taken as cash, are generally considered taxable. A fund's
long-term capital gains distributions are taxable as capital gains; dividends
from other sources are generally taxable as ordinary income. Some dividends paid
in January may be taxable as if they had been paid the previous December.
Corporations may be entitled to take a dividends-received deduction for a
portion of certain dividends they receive. The Form 1099 that is mailed to you
every January details your dividends and their federal tax category, although
you should verify your tax liability with your tax professional.
BACKUP WITHHOLDING. Backup withholding of federal income tax may be applied at
the rate of 31% from taxable dividends, distributions, and redemption proceeds
(including exchanges) if you fail to furnish the funds with a correct and
properly certified Social Security or Employer Identification Number when you
sign your application, or if you underreport your income to the Internal Revenue
Service.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions. You should consult with a tax advisor concerning the tax reporting
requirements in effect on the redemption or exchange of such shares.
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REDEEMING SHARES
You can redeem fund shares at the net asset value determined on the date the
request is received by SM&R in proper form. A redemption request must be
addressed to Securities Management and Research, Inc., P.O. Box 58969, Houston,
Texas 77258-8969.
If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as practicable and normally
within seven days after receipt of a redemption request in proper form. We
currently charge a fee in the amount of $8.00 for redemptions by wire under
$5,000.
If the shares being redeemed were purchased by wire, certified check, money
order, or other immediately available funds, redemption proceeds will be mailed
no later than the seventh calendar day following receipt. For shares purchased
by a personal check or ACH transfer, SM&R will process your redemption but will
generally delay sending you the proceeds for up to ten (10) business days to
allow the check or transfer to clear.
TELEPHONE REDEMPTIONS. You may request redemptions by telephone if you have
completed the account application and requested this option. Telephone
privileges are not available to shareholders automatically. This redemption
feature can only be used if:
(a) the redemption proceeds are to be mailed to the address of record or
wired to the pre-authorized bank account indicated on the account
application;
(b) there has been no change of address of record or pre-authorized bank
account within the preceding 30 business days;
(c) the shares to be redeemed are not in certificate form;
(d) the proceeds of the redemption are $500 or more and do not exceed
$25,000; and
(e) the security procedures discussed under "Special Purchase Plans And
Services--Exchange Privilege" have been met.
These instructions may be changed only in writing, accompanied by a signature
guarantee and additional documentation may be required for corporations.
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FAX REDEMPTIONS. You may request redemptions by fax as long as they meet the
requirements stated in (a)-(d) under Telephone Redemptions above.
SYSTEMATIC WITHDRAWAL PLAN. Each fund has a Systematic Withdrawal Plan
("Withdrawal Account"), which permits shareholders having an account value of
$5,000 or more to automatically withdraw a minimum of $50 monthly or each
calendar quarter on or about the 20th of the applicable month. Shareholders
maintaining a Withdrawal Account may elect to have the withdrawal proceeds
automatically deposited in their pre-authorized bank account via an ACH
transaction. This is accomplished by completing the relevant section of the
account application and returning it to SM&R. See "Special Purchase Plans and
Services--Electronic Transfers" for additional information. It may not be
advisable for shareholders to maintain a Withdrawal Account while concurrently
purchasing shares of the funds because of the sales charge involved in
additional purchases. You should carefully consider such purchases and contact
your financial adviser regarding their advisability. Dividends and capital gains
distributions will automatically be reinvested in additional shares at net asset
value. As with other redemptions, a withdrawal is a sale for federal income tax
purposes. The Systematic Withdrawal Plan will automatically terminate if all
shares are liquidated or withdrawn from the account. No account covered by a
Letter of Intent can be changed to a Systematic Withdrawal Plan until such time
as the Letter of Intent is fulfilled or terminated, nor can an account under a
Systematic Withdrawal Plan be placed under a Letter of Intent.
REINVESTMENT PRIVILEGE. Within ninety (90) days of a redemption of Class T
shares of a fund, a shareholder may reinvest all or part of the proceeds in
Class T shares of that same fund at the net asset value next computed after
receipt of the proceeds to be reinvested by SM&R. The shareholder must ask the
transfer agent for this privilege at the time of reinvestment. Prior to
reinvestment of redemption proceeds, a shareholder is encouraged to consult with
his or her accountant or tax advisor to determine any possible tax ramifications
of such a transaction. Each fund managed by SM&R may amend, suspend, or cease
offering this privilege at any time as to shares redeemed after the date of the
amendment, suspension, or cessation.
For further information about the "Systematic Withdrawal Plan" and "Reinvestment
Privilege," contact a registered representative or SM&R.
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"PROPER FORM" means the request for redemption must include:
(1) your share certificates, if issued;
(2) your letter of instruction or a stock assignment specifying the fund,
account number, and number of shares or dollar amount to be redeemed.
Both share certificates and stock powers, if any, must be endorsed and
executed exactly as the fund shares are registered. It is suggested that
certificates be returned by certified mail for your protection;
(3) any required signature guarantees (see "Signature Guarantees" below);
and
(4) other supporting legal documents, if required in the case of estates,
trusts, guardianships, divorce, custodianships, corporations,
partnerships, pension or profit sharing plans, retirement plans, and
other organizations.
Please keep in mind that as a shareholder, it is your responsibility to ensure
that all requests are submitted to SM&R in proper form for processing.
SIGNATURE GUARANTEES. A signature guarantee verifies the authenticity of your
signature. Signature guarantees are required when:
(1) the proceeds of the redemption exceed $25,000;
(2) the proceeds (in any amount) are to be paid to someone OTHER THAN the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address OTHER THAN
the shareholder's address of record, pre-authorized bank account or
exchanged to one of the other funds managed by SM&R; or
(4) the fund or its transfer agent believes a signature guarantee would
protect against potential claims based on the transfer instructions,
including, when the authority of a representative of a corporation,
partnership, association, or other entity has not been established to
the satisfaction of the fund or transfer agent.
You should be able to obtain an acceptable signature guarantee from a bank,
broker, dealer, municipal securities dealer or broker, government securities
dealer or broker, credit union, national securities
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<PAGE>
exchange, or registered securities association. WITNESSING OR NOTARIZATION IS
NOT SUFFICIENT.
TEXAS OPTIONAL RETIREMENT PROGRAM. You may not redeem shares in any account
established under the Texas Optional Retirement Program unless SM&R receives
satisfactory evidence from the state that one of the following conditions exist:
(1) death of the employee;
(2) termination of service with the employer; or
(3) retirement of employee.
REDEMPTION OF SMALL ACCOUNTS. The funds reserve the right to redeem shares in
any account (which will be promptly paid to the shareholder) if, due to your
redemptions, the value of the account falls below $500. You will be notified
that the value of your account is less than the required minimum and allowed at
least 60 days to make an additional investment to increase the value of your
account above the required minimum. The funds may, from time to time, change
such required minimum investment.
RIGHTS RESERVED BY THE FUNDS. The funds, acting directly or through SM&R,
reserve the right:
- to waive or lower investment minimums;
- to accept initial purchases by telephone from a registered
representative;
- to refuse any purchase order;
- to cancel or rescind any purchase or exchange at any time prior to
receipt by the shareholder of written confirmation or, if later, within
five (5) business days of the transaction;
- to freeze an account and suspend account services when notice has been
received of a dispute involving the account owners or other parties or
there is reason to believe a fraudulent transaction may occur or has
occurred;
- to restrict or refuse the use of faxed redemptions where there is a
question as to the validity of the request or proper documents have not
been received;
- to otherwise modify the conditions of purchase and any services at any
time;
39
<PAGE>
- to refuse to act on instructions not believed to be genuine; or
- to eliminate duplicate mailings of fund material to shareholders who
reside at the same address.
THE FUNDS AND MANAGEMENT
- -------------------------------------------------------------------
INVESTMENT ADVISER
Each fund's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the fund's investment adviser, the management of the
fund's day-to-day business and affairs. In addition, SM&R invests the funds'
assets, provides administrative services, and serves as transfer agent,
custodian, dividend paying agent, and underwriter. While the use of this
combined Prospectus subjects each fund to possible liability as the result of
statements or omissions regarding another fund, the Board of Directors of each
fund considers the benefits to the respective fund of using a combined
Prospectus to outweigh the risk.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). SM&R was incorporated in 1964 and has managed mutual
funds since 1966. SM&R does and may, from time to time, serve as investment
adviser to other clients including banks, employee benefit plans, other
investment companies, banks, foundations and endowment funds.
ADVISORY AGREEMENTS
GROWTH FUND. We deduct an investment advisory fee from the value of the shares
each day. We calculate this fee for the Growth Fund at the annual rate as
follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S BASIC ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ---------------------------------------------------- -----------------
<S> <C>
Not exceeding $100,000,000 0.750%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.625%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.500%
Exceeding $300,000,000 0.400%
</TABLE>
We adjust the basic advisory fee rate by comparing the fund's investment
performance during the previous thirty-six (36) months with the
40
<PAGE>
investment performance of the Lipper Growth Fund Index (the "Lipper Index")
published by Lipper Analytical Services, Inc. over the same period.
Specifically, we adjust the basic advisory fee each month by adding to or
subtracting from such rate, when appropriate, the applicable performance
adjustment amount percentage shown in the table below. The resulting advisory
fee rate is then applied to the average daily net asset value of the fund for
the succeeding month. The advisory fee for such month will be one-twelfth (1/12)
of the resulting dollar figure.
<TABLE>
<CAPTION>
PERFORMANCE
PERFORMANCE COMPARED ADJUSTMENT
TO LIPPER INDEX AMOUNT
- -------------------------------- -------------------
<S> <C>
0.10% to 0.99% above +0.02%
1.00% to 1.99% above +0.04%
2.00% to 2.99% above +0.06%
3.00% to 3.99% above +0.08%
4.00% to 4.99% above +0.10%
5.00% to 5.99% above +0.12%
6.00% to 6.99% above +0.14%
7.00% to 7.99% above +0.16%
8.00% to 8.99% above +0.18%
9.00% and above +0.20%
0.10% to 0.99% below -0.02%
1.00% to 1.99% below -0.04%
2.00% to 2.99% below -0.06%
3.00% to 3.99% below -0.08%
4.00% to 4.99% below -0.10%
5.00% to 5.99% below -0.12%
6.00% to 6.99% below -0.14%
7.00% to 7.99% below -0.16%
8.00% to 8.99% below -0.18%
9.00% and below -0.20%
</TABLE>
See "INVESTMENT ADVISORY AND OTHER SERVICES" in the Funds' Statement of
Additional Information for a more detailed description of the method used in
calculating the performance adjustment. See Appendix B for a description of
these ratings.
41
<PAGE>
EQUITY INCOME AND BALANCED FUNDS. We deduct an investment advisory fee from the
value of the shares each day. We calculate this fee for the Equity Income and
Balanced Funds at the annual rate as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S BASIC ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ---------------------------------------------------- -----------------
<S> <C>
Not exceeding $100,000,000 0.750%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.625%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.500%
Exceeding $300,000,000 0.400%
</TABLE>
SM&R received total advisory fees from the Growth, Equity Income, and Balanced
Funds for the fiscal year ended December 31, 1998 of 0.49%, 0.67%, and 0.75%,
respectively, of each fund's average daily net assets. Each fund's advisory fees
may be higher than the fees paid by other mutual funds, but each fund believes
its fees are comparable to those paid by funds with the same or similar
investment objective.
ADMINISTRATIVE SERVICES
Pursuant to Administrative Service Agreements with the funds, SM&R provides all
non-investment related management, executive, administrative, transfer agent,
and operational services to the Funds. Under the agreements, SM&R receives an
administrative service fee from each fund at the annual rate of average daily
net asset values as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S ADMINISTRATIVE SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
- -------------------------------------------- --------------------------
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.20%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
In each fund's administrative service agreement, SM&R has agreed to pay (or to
reimburse each fund for) each fund's regular operating expenses in excess of
1.25% per year of such fund's average daily net assets. Regular operating
expenses include the advisory fee and administrative service fee, if any, paid
to SM&R, but do not include 12b-1 fees, class-specific expenses, interest,
taxes, commissions, and other expenses incidental to portfolio transactions.
42
<PAGE>
SM&R received total administrative service fees of 0.23% for the Growth Fund;
0.22% for the Equity Income Fund; and 0.25% for the Balanced Fund for the fiscal
year ended December 31, 1998 of each fund's average daily net assets.
PORTFOLIO MANAGEMENT
SM&R's portfolio management team uses a disciplined, team approach in providing
investment advisory services to the funds. While the following individual is
primarily responsible for the day-to-day portfolio management of the funds, all
accounts are reviewed on a regular basis by SM&R's Investment Committee to
ensure that they are being invested in accordance with investment policies.
GORDON D. DIXON, DIRECTOR, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER OF
SECURITIES MANAGEMENT AND RESEARCH, INC., VICE PRESIDENT, PORTFOLIO MANAGER OF
THE GROWTH FUND, AND PORTFOLIO MANAGER OF THE EQUITY INCOME FUND AND BALANCED
FUND. Mr. Dixon joined Securities Management and Research, Inc. in 1993. He
graduated from the University of South Dakota with a B.A. in Finance and
Accounting and from Northwestern University in 1972 with an M.B.A in Finance
and Accounting. Mr. Dixon began his investment career in 1972 as an
Administrative and Research Manager with Penmark Investments. In 1979 he
began working for American Airlines in the management of the $600 million
American Airlines Pension Portfolio, of which approximately $100 million was
equities. In 1984 he was employed by C&S/Sovran Bank in Atlanta, Georgia as
Director of Equity Strategy where he had responsibility for all research,
equity trading and quantitative services groups as well as investment policy
input of a portfolio of approximately $7 billion, of which $3.5 billion was
equities.
43
<PAGE>
FINANCIAL HIGHLIGHTS GROWTH FUND
- --------------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Growth Fund's financial performance for the past five years. Certain information
reflects financial results for a single share outstanding throughout each period
shown. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Growth Fund (assuming reinvestment
of all dividends and distributions) prior to addition of multiple classes of
shares, but do not reflect any sales loads that would be imposed on the purchase
or sale of any shares. This information is derived from the financial statements
of the Growth Fund, which for the years ended December 31, 1997 and 1998 have
been audited by Tait, Weller & Baker, independent auditors, whose report, along
with the Growth Fund's financial statements, are incorporated by reference into
the Statement of Additional Information, which is available upon request. The
information for years ending December 31, 1996 and prior, has been audited by
the Growth Fund's former independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 5.24 $ 4.95 $ 4.39 $ 3.83 $ 4.15
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04 0.06 0.05 0.08 0.06
Net Realized and Unrealized Gain
(Loss) on Securities 0.85 1.03 0.73 0.88 0.15
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 0.89 1.09 0.78 0.96 0.21
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.04) (0.06) (0.05) (0.08) (0.06)
Distributions from Capital Gains (0.40) (0.74) (0.17) (0.32) (0.47)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.44) (0.80) (0.22) (0.40) (0.53)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year $ 5.69 $ 5.24 $ 4.95 $ 4.39 $ 3.83
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 18.35% 22.24% 17.64% 25.20% 4.98%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Year (000's omitted) $ 203,109 $ 178,344 $ 152,758 $ 134,821 $ 113,250
Ratio of Expenses to Average Net Assets 0.85% 0.96% 1.15% 0.98% 0.97%
Ratio of Net Income to Average Net
Assets 0.69% 1.03% 1.02% 1.67% 1.46%
Portfolio Turnover Rate 27.31% 46.79% 18.72% 37.00% 46.26%
</TABLE>
44
<PAGE>
FINANCIAL HIGHLIGHTS EQUITY INCOME FUND
- -------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Equity Income Fund's financial performance for the past five years. Certain
information reflects financial results for a single Equity Income Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Equity Income Fund (assuming reinvestment of all dividends and
distributions) prior to addition of multiple classes of shares, but do not
reflect any sales loads that would be imposed on the purchase or sale of any
shares. This information is derived from the financial statements of the Equity
Income Fund, which for the years ended December 31, 1997 and 1998 have been
audited by Tait, Weller & Baker, independent auditors, whose report, along with
the Equity Income Fund's financial statements, are incorporated by reference
into the Statement of Additional Information, which is available upon request.
The information for years ending December 31, 1996 and prior, has been audited
by the Equity Income Fund's former independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 26.99 $ 25.05 $ 22.59 $ 18.90 $ 21.66
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.62 0.63 0.58 0.62 0.62
Net Realized and Unrealized Gain
(Loss) on Securities 2.50 4.96 3.10 4.82 (0.75)
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 3.12 5.59 3.68 5.44 (0.13)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.62) (0.64) (0.58) (0.63) (0.61)
Distributions from Capital Gains (1.47) (3.01) (0.64) (1.12) (2.02)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (2.09) (3.65) (1.22) (1.75) (2.63)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year $ 28.02 $ 26.99 $ 25.05 $ 22.59 $ 18.90
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 12.11% 22.72% 16.46% 29.12% (0.61)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Year (000's
omitted) $ 218,980 $ 198,687 $ 165,786 $ 141,058 $ 114,231
Ratio of Expenses to Average Net
Assets 1.01% 1.05% 1.10% 1.12% 1.12%
Ratio of Net Income to Average Net
Assets 2.12% 2.28% 2.42% 2.89% 2.86%
Portfolio Turnover Rate 19.29% 39.14% 27.07% 44.00% 52.46%
</TABLE>
45
<PAGE>
FINANCIAL HIGHLIGHTS BALANCED FUND
- -------------------------------------------------------------------
The following financial highlights table is intended to help you understand the
Balanced Fund's financial performance for the past five years. Certain
information reflects financial results for a single Balanced Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Balanced Fund (assuming reinvestment of all dividends and distributions)
prior to addition of multiple classes of shares, but do not reflect any sales
loads that would be imposed on the purchase or sale of any shares. This
information is derived from the financial statements of the Balanced Fund, which
for the years ended December 31, 1997 and 1998 have been audited by Tait, Weller
& Baker, independent auditors, whose report, along with the Balanced Fund's
financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request. The information for
years ending December 31, 1996 and prior, has been audited by the Balanced
Fund's former independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 18.32 $ 17.90 $ 16.85 $ 14.32 $ 15.35
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.48 0.57 0.49 0.49 0.45
Net Realized and Unrealized Gain (Loss) on
Securities 1.96 2.50 1.48 2.67 (0.22)
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 2.44 3.07 1.97 3.16 0.23
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.47) (0.59) (0.49) (0.49) (0.45)
Distributions from Capital Gains (0.66) (2.06) (0.43) (0.14) (0.81)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (1.13) (2.65) (0.92) (0.63) (1.26)
--------- --------- --------- --------- ---------
Net Asset Value, End of Year $ 19.63 $ 18.32 $ 17.90 $ 16.85 $ 14.32
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 13.83% 17.46% 11.86% 22.29% 1.49%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Year (000's omitted) $ 29,367 $ 25,838 $ 23,188 $ 21,757 $ 19,023
Ratio of Expenses to Average Net Assets(1) 1.25% 1.26% 1.21% 1.26% 1.25%
Ratio of Net Income to Average Net Assets 2.55% 3.02% 2.83% 2.99% 2.91%
Portfolio Turnover Rate 16.01% 27.52% 23.78% 16.39% 46.95%
</TABLE>
(1) Expenses for these calculations are net of a reimbursement from Securities
Management and Research, Inc. Without these reimbursements, the ratio of
expenses to average net assets would have been 1.37%, 1.36%, 1.34%, 1.46%
and 1.45% for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
46
<PAGE>
- -------------------------------------------------------------------
APPENDIX A
(Description of Ratings Used in Prospectus)
- -------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND (BONDS THAT EXTEND
LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S LONG-TERM BOND (BONDS THAT
EXTEND LONGER THAN ONE YEAR) RATINGS:
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-
A-1
<PAGE>
edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risks appear
somewhat larger than the Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated "Baa" are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
PREFERRED STOCK RATING
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S PREFERRED STOCK RATING:
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA A preferred stock issue rate "AA" also qualifies as a high-quality, fixed-
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
A-2
<PAGE>
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the "A"
category.
BB Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
B predominantly speculative with respect to the issuer's capacity to pay
CCC preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest. While such issues will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S PREFERRED STOCK RATING:
aaa An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
ba An issue is rated "ba" considered to have speculative elements and its
future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
FEDERAL FUNDS
As used in this Prospectus and in the Funds' Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.
A-3
<PAGE>
FOR MORE INFORMATION ABOUT THE FUNDS
- -------------------------------------------------------------------
<TABLE>
<S> <C>
The following documents contain more information about the SM&R GROWTH FUND, INC.
funds and are available free upon request: SM&R EQUITY INCOME FUND,
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI contains INC.
additional information about all aspects of the funds. A SM&R BALANCED FUND, INC.
current SAI has been filed with the Securities and Exchange
Commission and is incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS. The funds' annual and
semi-annual reports provide additional information about the
funds' investments. The annual report for the fiscal year
ended December 31, 1998 will contain a discussion of the
market conditions and investment strategies that
significantly affected each fund's performance during the
last fiscal year.
</TABLE>
REQUESTING DOCUMENTS. You may request a free copy of the SAI and these reports,
make shareholder inquiries, or request further information about the funds
either by contacting your broker or by contacting the funds at:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE: 1-800-231-4639 (TOLL FREE) OR
1-281-334-2469 (COLLECT)
PUBLIC INFORMATION. You can review and copy information about the funds,
including the SAI, at the Securities and Exchange Commission's Public Reference
Room in Washington D.C. You may obtain information on the operation of the
public reference room by calling the Commission at 1-800-SEC-0330. Reports and
other information about the funds also are available on the Commission's
Internet site at http://www.sec.gov. You may obtain copies of this information,
upon payment of a duplicating fee, by writing the Public Reference Section of
the Securities and Exchange Commission, Washington, D.C. 20549-6009.
Investment Company File Nos. 811-00623
811-01916
811-02818
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
------------------------
SM&R GROWTH FUND, INC.
SM&R EQUITY INCOME FUND, INC.
SM&R BALANCED FUND, INC.
ALL CLASSES (A, B, C, T, Y AND J)
------------------------
Mailing Address: P.O. Box 58969 Telephone Number: (281) 334-2469
Houston, Texas 77258-8969 Toll Free: 1-(800) 231-4639
Street Address: 2450 South Shore Boulevard, Suite 400
League City, Texas 77573
This Statement of Additional Information is NOT a prospectus, but should be
read in conjunction with the prospectus or prospectuses dated May 1, 1999 that
is relevant to the Class or Classes of shares that you own or wish to purchase
(each such prospectus is referred to herein as a "Prospectus" and collectively
as the "Prospectuses"). A copy of each Prospectus may be obtained from your
registered representative, broker-dealer, financial intermediary or Securities
Management and Research, Inc. ("SM&R"), P.O. Box 58969, Houston, Texas
77258-8969 (Telephone No. (281) 334-2469 or Toll Free 1-(800)-231-4639). Terms
not defined herein have the same meaning as given to them in the Prospectuses.
No dealer, sales representative, or other person has been authorized to give
any information or to make any representations other than those contained in
this Statement of Additional Information (and/ or the Prospectuses referred to
above), and if given or made, such information or representations must not be
relied upon as having been authorized by the Funds or SM&R. No Prospectus or
Statement of Additional Information constitutes an offer or solicitation by
anyone in any state in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation.
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TABLE OF CONTENTS
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THE FUNDS................................................................. 1
INVESTMENT OBJECTIVES AND POLICIES........................................ 1
FUNDAMENTAL INVESTMENT POLICIES......................................... 1
NON-FUNDAMENTAL INVESTMENT POLICIES..................................... 2
INVESTMENT TECHNIQUES..................................................... 6
U.S. GOVERNMENT OBLIGATIONS............................................. 6
INVESTMENT IN COVERED CALL OPTIONS...................................... 7
COLLATERALIZED MORTGAGE OBLIGATIONS..................................... 7
REPURCHASE AGREEMENTS................................................... 8
LENDING OF SECURITIES................................................... 8
COMMERCIAL PAPER........................................................ 9
144A SECURITIES AND SECTION 4(2) COMMERCIAL PAPER....................... 9
CERTIFICATE OF DEPOSITS AND BANKERS ACCEPTANCES......................... 9
AMERICAN DEPOSITORY RECEIPTS ("ADRS")................................... 10
PORTFOLIO TURNOVER........................................................ 10
MANAGEMENT OF THE FUNDS................................................... 10
OFFICERS AND DIRECTORS OF THE FUNDS..................................... 11
REMUNERATION OF DIRECTORS............................................... 13
POLICY REGARDING PERSONAL INVESTING....................................... 14
PERSONAL INVESTING BY PORTFOLIO MANAGERS................................ 14
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES................. 14
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 14
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 15
CONTROL AND MANAGEMENT OF SM&R.......................................... 15
INVESTMENT ADVISORY AGREEMENT........................................... 16
PERFORMANCE ADJUSTMENT OF BASIC ADVISORY FEE FOR GROWTH FUND............ 17
ADVISORY FEES PAID...................................................... 19
ADMINISTRATIVE SERVICE AGREEMENT........................................ 19
EXPENSES BORNE BY THE FUNDS............................................. 20
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION........................... 20
DESCRIPTION OF FUND SHARES................................................ 21
PURCHASE, REDEMPTION AND PRICING OF SHARES................................ 22
PURCHASING SHARES....................................................... 22
DETERMINATION OF NET ASSET VALUE........................................ 22
DETERMINATION OF OFFERING PRICE......................................... 23
REDUCTION AND/OR WAIVER OF INITIAL SALES CHARGES (CLASS A AND CLASS T
SHARES)............................................................... 25
REDUCTION AND/OR WAIVER OF CONTINGENT DEFERRED SALES CHARGES (CLASS B
SHARES)............................................................... 27
FUND AND CLASS EXPENSES................................................. 28
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN............................... 28
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SPECIAL PURCHASE PLANS.................................................... 29
AUTOMATIC INVESTMENT PLAN AND ELECTRONIC TRANSFERS...................... 29
GROUP SYSTEMATIC INVESTMENT PLAN........................................ 30
EXCHANGE PRIVILEGE...................................................... 30
REDEMPTION................................................................ 31
GENERAL................................................................. 31
SYSTEMATIC WITHDRAWAL PLAN.............................................. 32
TAX STATUS................................................................ 33
THE UNDERWRITER........................................................... 36
AUDITORS AND FINANCIAL STATEMENTS......................................... 37
CUSTODIAN................................................................. 37
COUNSEL................................................................... 37
TRANSFER AGENT AND DIVIDEND PAYING AGENT.................................. 38
PERFORMANCE AND ADVERTISING DATA.......................................... 38
TOTAL RETURN............................................................ 38
CUMULATIVE TOTAL RETURN................................................. 39
MULTI-CLASS PERFORMANCE................................................. 40
COMPARISONS............................................................... 40
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THE FUNDS
The SM&R Growth Fund, Inc. (the "Growth Fund"), the SM&R Equity Income Fund,
Inc. (the "Equity Income Fund"), and the SM&R Balanced Fund, Inc. (the "Balanced
Fund") (each a "Fund" and collectively the "Funds") are registered under the
Investment Company Act of 1940, as amended (the "1940 Act" or the "Act") as
diversified, open-end management investment companies commonly known as mutual
funds. A mutual fund is a company in which a number of persons invest which in
turn invests in the securities of other companies. Each Fund is an open-end
investment company because it generally must redeem an investor's shares upon
request. Each Fund is a diversified investment company because it offers
investors an opportunity to reduce the risk inherent in all investments in
securities by spreading their investment over a number of companies. However,
diversification cannot eliminate such risks. Registration under the 1940 Act
does not imply any supervision by the Securities and Exchange Commission (the
"SEC") over the Funds' management or investment policies or practices.
The Funds are each divided into six classes of shares (the "Classes") of
common stock designated as:
- Class A (front-end load);
- Class B (back-end load);
- Class C (level load);
- Class Y (institutional shareholders);
- Class J (network); and
- Class T (existing Class T shareholders and certain designated persons).
These Classes of shares have different sales charges and distribution and
service (12b-1) fee structures. Each Class bears its own liabilities and its
proportionate share of the general liabilities of that Fund. A Multiple Class
Plan was adopted for each Fund pursuant to Rule 18f-3 under the 1940 Act.
The Growth Fund was originally incorporated in Florida on March 5, 1953. The
Equity Income Fund was originally incorporated in Texas on July 15, 1969. The
Balanced Fund was originally incorporated in Texas on January 9, 1978.
Each of these three funds was reincorporated under the laws of the State of
Maryland on August 23, 1989. Effective December 31, 1998, each fund adopted its
current name.
INVESTMENT OBJECTIVES AND POLICIES
As noted in the Prospectuses under "Investment Objectives and Policies,"
each Fund has its own investment objective and follows policies and techniques
designed to achieve those objectives.
FUNDAMENTAL INVESTMENT POLICIES
Each Fund's investment objective and the following investment policies have
been adopted as fundamental policies. (A fundamental policy may not be changed
without the approval of shareholders.)
Each Fund is subject to the following fundamental investment policies:
1. The Fund, with respect to 75% of the Fund's total assets, may not
purchase securities of an issuer (other than cash or cash items, or
securities of the U.S. Government, its agencies, or instrumentalities or
of other investment companies), if (i) such purchase would cause more
than 5% of the Fund's total assets taken at market value to be invested
in the securities of such issuer, or (ii) such purchase would at the time
result in more than 10% of the outstanding voting securities of such
issuer being held by the Fund.
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2. The Fund may not invest 25% or more of its total assets in the
securities of one or more issuers conducting their principal business
activities in the same industry (excluding the U.S. Government or any of
its agencies or instrumentalities).
3. The Fund may not borrow money, except (a) the Fund may borrow from banks
(as defined in the Act) or through reverse repurchase agreements in
amounts up to 33 1/3% of its total assets (including the amount
borrowed), (b) the Fund may, to the extent permitted by applicable law,
borrow up to an additional 5% of its total assets for temporary purposes,
(c) the Fund may obtain such short-term credits as may be necessary for
the clearance of purchases and sales of portfolio securities, (d) the
Fund may purchase securities on margin to the extent permitted by
applicable law, and (e) the Fund may engage in transactions in mortgage
dollar rolls which are accounted for as financings.
4. The Fund may not make loans, except through (a) the purchase of debt
obligations in accordance with the Fund's investment objective and
policies, (b) repurchase agreements with banks, brokers, dealers, and
other financial institutions, and (c) loans of securities as permitted by
applicable law.
5. The Fund may not underwrite securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be deemed to
be an underwriting.
6. The Fund may not invest in commodities or commodity contracts, except
that the Fund may invest in currency and financial instruments and
contracts that are commodities or commodity contracts.
7. The Fund may not issue senior securities to the extent such issuance
would violate applicable law.
8. The Fund may not purchase, hold or deal in real estate, although the
Fund may purchase and sell securities that are secured by real estate or
interests therein, securities of real estate investment trusts, and
mortgage-related securities and may hold and sell real estate acquired by
the Fund as a result of the ownership of securities.
In addition to the above, the Balanced Fund has adopted, as a fundamental
policy, that it will be a "balanced fund."
The above investment policies are fundamental policies that may be changed
by a Fund only with the approval of a majority of the outstanding shares of the
Fund, as determined by the provisions of the 1940 Act. This means that
shareholders of a Fund must approve any change to the foregoing policies before
that change may be effected. Such approval requires the affirmative vote of the
lesser of (i) 67% or more of the voting securities present at a meeting if the
holders of more than 50% of voting securities are represented at that meeting or
(ii) more than 50% of the outstanding voting securities of the Fund.
Any investment policy which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or utilization
of assets and results therefrom. This applies to both the fundamental policies
(above) and the non-fundamental policies (below).
NON-FUNDAMENTAL INVESTMENT POLICIES
GROWTH FUND. The Board of Directors of the Growth Fund has adopted the
following non-fundamental investment policies. Non-fundamental investment
policies may be changed by the Board of Directors, without approval from
shareholders.
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1. The Fund will not invest more than 5% of the value of the net assets of
the Fund, at the time of purchase in the securities of any one issuer,
but this limitation does not apply to investments in securities issued
or guaranteed by the U.S. government or its instrumentalities.
2. The Fund will not purchase any security (other than United States
Government obligations) if, as a result, the Fund would hold more than
(a) 10% of the total value of any class of outstanding securities of an
issuer, or (b) 10% of the outstanding voting securities of an issuer.
3. The Fund will not concentrate more than 25% of its net assets in any
one industry or group of industries; provided, however, there is no
limitation with respect to investments in obligations issued or
guaranteed by the United States Government or its agencies or
instrumentalities. For purposes of this policy, telephone, gas and
electric and public utilities are each regarded as separate industries.
4. The Fund will not borrow money except for such action by the Fund for
temporary or emergency purposes in an amount not to exceed 10% of the
Fund's net assets. The Fund will not purchase securities on margin (but
it may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities).
5. The Fund will not pledge or mortgage any of its assets, except for such
action by the Fund for temporary or emergency purposes in an amount not
to exceed 10% of the Fund's net assets.
6. The Fund will not lend money or other assets (although this does not
prevent the purchase of bonds or other corporate debt securities which
are publicly distributed).
7. The Fund will not engage in underwriting securities of other issuers.
8. The Fund will not buy or sell real estate.
9. The Fund will not invest in oil, gas or other mineral leases, rights or
royalty contracts or in real estate or real estate limited
partnerships.
10. The Fund will not invest in real estate mortgage loans although it may
invest in securities which are secured by real estate or real estate
mortgages and securities of issuers which invest or deal in real estate
and/or real estate mortgages, provided such securities meet the
criteria set forth in the Prospectus.
11. The Fund will not purchase or sell commodities or commodity contracts
including future contracts.
12. The Fund will not issue senior securities.
13. The Fund may not purchase any security which is an "illiquid security"
if more than 15% of the net assets of the Fund taken at market value
would be invested in such securities.
14. The Fund does not engage in the strategy of short sales of securities.
15. The Fund will not write or purchase put and call options, or any
combination thereof.
16. The Fund will not invest in companies for the purpose of exercising
control or management.
17. The Fund will not invest in the securities of companies which have a
record of less than three years continuous operation, including
predecessor companies.
18. The Fund will not invest in the securities of an issuer if more than
1/2% interest in it is owned by an officer or director of the Fund or
SM&R and such officers or directors together own more than 5% interest
in such issuer.
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19. The Fund will not purchase the securities of any other investment
company unless such purchases are made on the open market and do not
exceed 5% of the Fund's total assets, taken at market, or unless such
purchases are the result of a plan or merger and do not otherwise
violate the applicable provisions of the Investment Company Act of
1940. Such purchases may cause the Fund to indirectly incur additional
advisory and administrative fees.
20. Any warrants purchased by the Fund must be marketable warrants and the
Fund's investment in warrants valued at the lower of cost or market,
may not exceed 5% of the Fund's total assets. Not more than 2% of the
Fund's total assets may be invested in warrants which are not listed on
the New York or American Stock Exchange.
EQUITY INCOME FUND. The Board of Directors of the Equity Income Fund has
adopted the following non-fundamental investment policies, which may be changed
by the Board of Directors, without approval from shareholders.
1. The Fund will not purchase the securities of any one issuer (other than
those issued or guaranteed by the U.S. Government), if immediately
after and as a result of such purchase the market value of the Fund's
holding in the securities of such issuer exceeds 5% of the market value
of the Fund's total assets. The Fund will not purchase the securities
of an issuer if the purchase will cause the Fund to own more than 10%
of the outstanding voting securities of the issuer.
2. The Fund will not concentrate its investments in any particular
industry or groups of industries; however, it may invest up to 25% of
the value of its total assets in the securities of issuers in any one
industry. Utility companies, for example, such as gas, electric, water
and telephone companies will be considered as separate industries.
3. The Fund will not borrow money except from banks for temporary,
extraordinary or emergency purposes, and then only from a bank and not
in excess of 5% of the value of its total assets and not for investment
purposes.
4. The Fund will not purchase securities on margin. The Fund will not
pledge, mortgage or hypothecate any of its property.
5. The Fund will not make loans to other persons except through the
purchase of bonds, debentures and other debt securities which are
publicly distributed and customarily purchased by institutional
investors.
6. The Fund will not engage in underwriting securities of other companies.
7. The Fund will not buy or sell real estate. The Fund will not invest in
oil, gas or other mineral leases, rights or royalty contracts or in
real estate or real estate limited partnerships.
8. The Fund will not invest in real estate mortgage loans although it may
invest in securities which are secured by real estate or real estate
mortgages and securities of issuers which invest or deal in real estate
and/or real estate mortgages, provided such securities meet the
criteria set forth in the Prospectus.
9. The Fund will not purchase or sell commodities or commodity contracts
including future contracts.
10. The Fund will not issue senior securities.
11. The Fund may not purchase any security which is an "illiquid security"
if more than 15% of the net assets of the Fund taken at market value
would be invested in such securities.
12. The Fund does not engage in the strategy of short sales of securities.
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13. The Fund will not write or purchase from others, put and call options,
or any combination thereof.
14. The Fund will not invest in companies for the purpose of exercising
control or management.
15. The Fund will not invest in the securities of a company having a record
of less than three years of continuous operation, including the
operations of any predecessor company or enterprise to which the
company has succeeded by merger, consolidation, reorganization or
purchase of assets.
16. The Fund will not purchase or retain securities of any issuer if any
officer or director of the Fund or SM&R owns more than 1/2 of 1% of the
securities of such issuer and such officers or directors together own
more than 5% of the securities of such issuer.
17. The Fund will not invest in securities of another investment company
except pursuant to a plan of merger, consolidation or acquisition of
assets approved by shareholders of the Fund.
18. Any warrants purchased by the Fund must be marketable warrants and the
Fund's investment in warrants valued at the lower of cost or market,
may not exceed 5% of the Fund's total assets. Not more than 2% of the
Fund's total assets may be invested in warrants which are not listed on
the New York or American Stock Exchange.
19. The Fund will not participate on a joint or a joint and several basis
in any trading account in securities.
BALANCED FUND. The Board of Directors of the Balanced Fund has adopted the
following non-fundamental investment policies, which may be changed by the Board
of Directors, without approval from shareholders.
1. The Fund will not purchase the securities of any one issuer (other than
those issued or guaranteed by the U.S. Government), if immediately
after and as a result of such purchase the market value of the Fund's
holding in the securities of such issuer exceeds 5% of the market value
of the Fund's total assets.
2. The Fund will not purchase the securities of an issuer if the purchase
will cause the Fund to own more than 10% of the outstanding voting
securities of the issuer.
3. The Fund will not concentrate its investments in any one industry by
investment of more than 25% of the value of its total assets in such
industry. Utility companies, for example, such as gas, electric, water
and telephone companies will be considered as separate industries.
4. The Fund will not borrow money except that the Fund may borrow an
amount up to 10% of its total assets to meet redemption requests and
for the clearance of purchases and sales of portfolio securities (this
borrowing provision is not for investment leverage but solely to
facilitate management of the portfolio to enable the Fund to meet
redemption requests where the liquidation of portfolio securities is
deemed to be disadvantageous or inconvenient and to obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of portfolio securities; all borrowings at any time
outstanding will be repaid before any additional investments are made;
the Fund will not mortgage, pledge or hypothecate any assets in
connection with any such borrowing in excess of 15% of the Fund's total
assets.
5. The Fund will not purchase securities on margin.
6. The Fund will not engage in underwriting securities issued by other
persons.
7. The Fund will not purchase or sell commodities or commodity contracts
including future contracts.
5
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8. The Fund will not issue senior securities.
9. The Fund will not invest in oil, gas or other mineral leases, rights on
royalty contracts or in real estate or real estate limited
partnerships.
10. The Fund will not invest in real estate mortgage loans although it may
invest in securities which are secured by real estate or real estate
mortgages and securities of issuers which invest or deal in real estate
and/or real estate mortgages, provided such securities meet the
criteria set forth in the Prospectus.
11. The Fund does not engage in the strategy of short sales of securities.
12. The Fund will not invest in other companies for the purpose of
exercising control of management.
13. The Fund will not purchase the securities of any other investment
company except in a regular transaction in the open market. Such
purchases may cause the Fund to indirectly incur additional advisory
and administrative fees.
14. The Fund may not purchase any security which is an "illiquid security"
if more than 15% of the net assets of the Fund taken at market value
would be invested in such securities.
15. The Fund will not purchase any securities as to which it would be
deemed a statutory underwriter under the Securities Act of 1933.
16. The Fund will not purchase the securities of any issuer the business of
which has been in continuous operation for less than three (3) years
(however, it is the Fund's operating policy not to invest in any
business which has not been in continuous operation for at least five
(5) years).
17. The Fund will not retain investments in the securities of any issuer if
directors or officers of the Fund or certain other "interested" persons
own more than 5% of such securities.
18. Any warrants purchased by the Fund must be marketable warrants and the
Fund's investment in warrants valued at the lower of cost or market,
may not exceed 5% of the Fund's total assets. Not more than 2% of the
Fund's total assets may be invested in warrants which are not listed on
the New York or American Stock Exchange.
The Balanced Fund does not presently invest in private placement securities.
INVESTMENT TECHNIQUES
U.S. GOVERNMENT OBLIGATIONS
The Funds may invest in United States Government obligations. These
instruments are debt obligations issued by agencies or authorities controlled or
supervised by and acting as instrumentalities of the U.S. Government established
under authority granted by Congress. Such obligations include, but are not
limited to, Government National Mortgage Association, The Tennessee Valley
Authority, The Bank for Cooperatives, Federal Intermediate Credit Banks, Federal
Home Loan Banks, Federal Land Banks and The Federal National Mortgage
Association. Some obligations of U.S. Government agencies, authorities and other
instrumentalities are supported by the full faith and credit of the U.S.
Treasury; others by the rights of the issuer to borrow from the Treasury; and
others only by the credit of the issuer. No assurance can be given that the U.S.
Government would lend money to or otherwise provide financial support to U.S.
Government sponsored instrumentalities. Obligations of the Government National
Mortgage Association are supported by the full faith and credit of the U.S.
Treasury; obligations of the other agencies, authorities and other
instrumentalities shown above are supported only by the credit of the issuers.
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The Funds' adviser will invest in U.S. obligations not backed by the "full
faith and credit" of the U.S. government only when, in its opinion, the credit
risk is minimal. SM&R does not presently intend to invest any significant amount
in such obligations and would do so in the future only to increase a Fund's
liquidity on a short-term basis during adverse and unusual market conditions.
INVESTMENT IN COVERED CALL OPTIONS
Although there is no present intent to do so, the Balanced Fund may write
covered call option contracts provided that the option is listed on a domestic
securities exchange and that no option will be written if, as a result, more
than 25% of the Balanced Fund's assets are subject to call options. A covered
call option is an option on a security which the Balanced Fund owns or can
acquire by converting a convertible security it owns. The purchaser of the
option acquires the right to buy the security from the Balanced Fund at a fixed
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security at that time. A security on which an option has
been written will be held in escrow by the Balanced Fund's custodian until the
option expires, is exercised, or a closing purchase transaction is made. The
Balanced Fund thus foregoes the opportunity to profit from an increase in the
market price in the underlying security above the exercise price, in return for
the premium it receives from the purchaser of the option. The Balanced Fund's
management believes that such premiums will maximize the Balanced Fund's return
without subjecting it to substantial risks.
The Balanced Fund will purchase call options only to close out a position in
an option written by it. In order to close out a position the Balanced Fund will
make a "closing purchase transaction" if such is available. In such a
transaction, the Balanced Fund will purchase a call option on the same security
with the same exercise price and expiration date as the call option which it has
previously written. When a security is sold from the Balanced Fund's portfolio
against which a call option has been written, the Balanced Fund will effect a
closing purchase transaction so as to close out any existing call option on that
security. The Balanced Fund will realize a profit or loss from a closing
purchase transaction if the amount paid to purchase a call option is less or
more than the amount received as a premium from the writing thereof. A closing
purchase transactions cannot be made if trading in the option has been
suspended.
The premium received by the Balanced Fund upon writing a call option will
increase the Balanced Fund's assets, and a corresponding liability will be
recorded and subsequently adjusted from day to day to the current value of the
option written. For example, if the current value of the option exceeds the
premium received, the excess would be an unrealized loss and, conversely, if the
premium exceeds the current value, such excess would be an unrealized gain. The
current value of the option will be the last sales price on the principal
exchange on which the option is traded or, in the absence of any transactions,
the mean between the closing bid and asked price.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Balanced Fund may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by a
portfolio or pool of mortgages, mortgage-backed securities or U.S. Government
securities. Collateralized obligations in which the Balanced Fund may invest are
issued or guaranteed by a U.S. Government agency or instrumentality, such as the
FHLMC. A variety of types of collateralized obligations are currently available
and others may become available in the future. One should keep in mind that
during periods of rapid interest rate fluctuation, the price of a security, such
as a CMO, could either increase or decrease based on inherent interest rate
risk. Additionally, the risk of maturities shortening or lengthening in
conjunction with interest rate movement, could magnify the overall effect of the
price fluctuation.
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A CMO is often issued in multiple classes with varying maturities and
interest rates. As a result the investor may obtain greater predictability of
maturity than with direct investments in mortgage-backed securities. Thus,
classes with shorter maturities may have lower volatility and lower yield while
those with longer maturities may have higher volatility and higher yields. This
provides the investor with greater control over the characteristics of the
investment in a changing interest rate environment.
REPURCHASE AGREEMENTS
Each fund may purchase repurchase agreements either for defensive purposes
due to market conditions or to generate income from its excess cash balances. In
a repurchase agreement, a fund purchases a U.S. government security subject to
resale to a bank or dealer at an agreed upon price and date. These repurchase
agreements will be entered into only with government securities dealers
recognized by the Federal Reserve Board or with member banks of the Federal
Reserve System. A repurchase agreement may be considered a loan collateralized
by securities. The resale price reflects an agreed upon interest rate effective
for the period the instrument is held by a Fund and is unrelated to the interest
rate on the underlying instrument. In these transactions, the securities
acquired by a Fund (including accrued interest earned thereon) must have a total
value in excess of the value of the repurchase agreement and are held by the
Fund's Custodian Bank until repurchased. During the holding period, the seller
must provide additional collateral if the market value of the obligation falls
below the repurchase price. The custodian for the fund purchasing such agreement
will take title to, or actual delivery of the security. A default by the seller
might cause a fund to experience a loss or delay in the liquidation of the
collateral securing the repurchase agreement. A fund might also incur
disposition costs in liquidating the collateral. The funds will purchase only
repurchase agreements maturing in seven (7) days or less.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligations to repurchase the
underlying security at a time when the value of the security has declined, a
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by a Fund not within the control of
that Fund and therefore the realization by that Fund on such collateral may be
automatically stayed. Finally, it is possible that a Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Funds'
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES
Although there is no present intent to do so, the Balanced Fund may lend its
portfolio securities to qualified institutional investors who need to borrow
securities in order to complete certain transactions, such as covering short
sales, avoiding failures to deliver securities or completing arbitrage
operations. By lending its portfolio securities, the Balanced Fund attempts to
increase its income through the receipt of interest on the loan. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Balanced Fund. The Balanced
Fund may lend its portfolio securities to qualified brokers, dealers, banks or
other financial institutions, so long as the terms the structure and the
aggregate amount of such loans are not inconsistent with the 1940 Act, or the
Rules and Regulations or interpretations of the SEC thereunder, which currently
require that (a) the borrower pledge and maintain with the Balanced Fund
collateral consisting of cash, a letter of credit issued by a domestic United
States bank, or securities issued or guaranteed by the United States Government
having a value at all times not less than 100% of the value of the securities
loans, (b) the borrower add to such collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loans be made subject to termination by the
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Balanced Fund at any time, and (d) the Balanced Fund receive reasonable interest
on the loans (which may include the Balanced Fund's investing any cash
collateral in interest bearing short-term investments), any distribution on the
loaned securities and any increase in their market value.
COMMERCIAL PAPER
Commercial paper is short-term unsecured promissory notes issued by
corporations to finance short-term credit needs. Commercial paper is usually
sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months. The funds will not invest in variable amount master
demand notes.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities,
including domestic or foreign securities not listed on domestic or foreign
exchanges and repurchase agreements maturing in excess of seven days.
Non-publicly traded securities may be less liquid than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by a Fund. In addition, companies whose securities are not
publicly traded are not subject to the disclosure and other investor protection
requirements that may be applicable if these securities were publicly traded. A
Fund's investments in illiquid securities are subject to the risk that should
the Fund desire to sell any of these securities when a ready buyer is not
available at a price that SM&R deems representative of their value, the value of
the Fund's net assets could be adversely affected.
144A SECURITIES AND SECTION 4(2) COMMERCIAL PAPER
If otherwise consistent with its investment objective and policies, a Fund
may purchase securities that are not registered under the Securities Act of
1933, as amended (the "1933 Act") but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act, or which
were issued under Section 4(2) of the 1933 Act. Due to changing markets or other
factors, 144A securities may be subject to a greater possibility of becoming
illiquid than securities which have been registered with the SEC for sale.
Any such security may be determined to be LIQUID under procedures adopted by
the Board. These procedures consider trading activity, availability of reliable
price information, and other relevant information to determine whether an
adequate trading market exists for that security. To the extent that, for a
period of time, qualified institutional or other buyers may cease purchasing
such restricted securities, the level of illiquidity of a Fund holding such
securities may increase.
CERTIFICATE OF DEPOSITS AND BANKERS ACCEPTANCES
A certificate of deposit generally is a short-term, interest-bearing
negotiable certificate issued by a commercial bank or savings and loan
association against funds deposited in the issuing institution. The interest
rate may be fixed for the stated term or may be periodically adjusted prior to
the instrument's stated maturity, based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction to finance the import,
export, transfer or storage of goods. The borrower is liable for payment, as is
the bank, which unconditionally guarantees to pay the draft at its face amount
on the maturity date. Most bankers' acceptances have maturities of six months or
less and are traded in secondary markets prior to maturity.
Savings and loan associations whose certificates of deposit may be purchased
by the Funds are subject to regulation and examination by the Office of Thrift
Supervision. Such certificates of deposit
9
<PAGE>
held by a Fund do not benefit materially from insurance from the Federal Deposit
Insurance Corporation.
AMERICAN DEPOSITORY RECEIPTS ("ADRS")
ADRs are U.S. dollar-denominated securities of foreign corporations which
are traded in the U.S. on national securities exchanges or over-the-counter and
are issued by domestic banks. The banks act as custodian of the shares of the
foreign stock and collect dividends on the stock which are either reinvested or
distributed to the ADR holder in U.S. dollars. While ADRs are not considered
foreign securities, they may entail certain political, economic and regulatory
risks. Such risks may include political or social instability, excessive
taxation and limitations on the removal of funds or other assets which could
adversely affect the value of a fund's investments. The economies of many
countries in which a fund may invest may not be as developed as the U.S. economy
and may be subject to significantly different forces. Foreign companies are not
registered with the SEC and are not generally subject to the regulatory controls
imposed on U.S. issuers. Consequently, there is generally less public
information available on foreign securities. Foreign companies are not subject
to uniform accounting, auditing, and financial reporting standards. Income from
foreign securities owned may be reduced by a withholding tax at the source,
which tax would reduce income payable to a fund's shareholders.
PORTFOLIO TURNOVER
Portfolio turnover for a Fund is calculated by dividing the lesser of annual
purchases or sales of portfolio securities by the monthly average of the value
of the Fund's portfolio securities excluding securities whose maturities at the
time of purchase are one year or less. A 100% portfolio turnover rate would
occur, for example, if all of the Fund's portfolio securities were replaced
within one year. In general, it is intended that portfolio changes in the Funds
be made as infrequently as possible, consistent with market and economic factors
generally, and special considerations affecting any particular security such as
the limitation of loss or realization of price appreciation at a time believed
to be opportune. However, purchases and sales of portfolio securities for the
Balanced Fund are made at such times and in such amounts as are deemed advisable
in light of market, economic and other conditions, irrespective of the volume of
portfolio turnover. A high rate of portfolio turnover involves corresponding
greater expenses than a lower rate. A Fund and its shareholders must bear such
higher expenses. High portfolio turnover also may result in the realization of
substantial net short-term capital gains.
The portfolio turnover rates for the Funds for past three fiscal years are
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund 19% 47% 27%
- -----------------------------------------------------------------------------------------------------------
Equity Income Fund 27% 39% 19%
- -----------------------------------------------------------------------------------------------------------
Balanced Fund 24% 28% 16%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
No brokerage commissions have been paid during the Funds' three most recent
periods to any broker which is an affiliated person of the Funds, which is an
affiliated person of a broker which is an affiliated person of the Funds or an
affiliated person of which is an affiliated person of the Funds or SM&R.
MANAGEMENT OF THE FUNDS
The Board of Directors of each Fund has the responsibility for the overall
management of that Fund, including general supervision and review of its
investment activities. The directors, in turn, elect
10
<PAGE>
the officers of each Fund who are responsible for administering day-to-day
operations of the Fund. While the use of this combined Statement of Additional
Information subjects each Fund to possible liability as the result of statements
or omissions regarding another Fund, the Board of Directors of each Fund
considers the benefits to the respective Fund of using a combined Statement of
Additional Information to outweigh the risk.
OFFICERS AND DIRECTORS OF THE FUNDS
Information about each of the officers and directors of the Funds is set
forth below. Unless otherwise specifically noted, each has had the same or
similar employment or position for at least the past five years and occupies the
identical position with all three Funds. Unless otherwise indicated, the address
of an officer or director is 2450 South Shore Boulevard, Suite 400, League City,
Texas 77573. Directors who are deemed to be "interested persons" of the Funds,
as defined in the 1940 Act, are indicated by an asterisk(*).
<TABLE>
<CAPTION>
- ------------------------------------------------
POSITIONS HELD
WITH PRINCIPAL OCCUPATIONS DURING PAST 5
NAME, ADDRESS, AND AGE THE FUNDS YEARS
- -----------------------------------------------------------------------------------------
<S> <C> <C>
MICHAEL W. MCCROSKEY* Director and President, Chief Executive Officer,
Age 55 President since Director and member of the Executive
1994 Committee of SM&R, June 1994 to
present; President, Chief Executive
Officer, and Director of SM&R
Investments, Inc., June 1994 to
present; President and Director of
American National Investment Accounts,
Inc., June 1994 to present; Executive
Vice President, American National
Insurance Company ("American
National"), 1996 to present; Senior
Vice President, American National, 1991
to 1996; Vice President of Standard
Life and Accident Insurance Company,
1988 to present; Assistant Secretary of
American National Life Insurance
Company of Texas, 1986 to present; Vice
President, Investments of American
National Property and Casualty Company,
1994 to present; Vice President,
Investments of American National
General Insurance Company, 1994 to
present; Vice President, Pacific
Property and Casualty, 1996 to present,
life, health and accident insurance
subsidiaries of American National; Vice
President, Garden State Life Insurance
Company, 1994 to present; Director and
President, ANREM Corporation, 1977 to
present; President and Director of
ANTAC Corporation, 1995 to present;
Director, Comprehensive Investment
Services, Inc., 1997 to present.
- -----------------------------------------------------------------------------------------
RALPH S. CLIFFORD(1)(2) Director since Retired attorney, Clifford, Clifford &
Age 83 1972 Olson; Retired Director of Henry County
12304 Blue Sage Rd. Bank; Retired Director of Illini Beef
Oklahoma City, Oklahoma Packers, Inc.; Retired Director of
Industrial Relations of Deere &
Company.
- -----------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------
POSITIONS HELD
WITH PRINCIPAL OCCUPATIONS DURING PAST 5
NAME, ADDRESS, AND AGE THE FUNDS YEARS
- -----------------------------------------------------------------------------------------
<S> <C> <C>
PAUL D. CUMMINGS(2) Director since Retired President and Director of Globe
Age 84 1969 (for Life and Accident Insurance Company.
3102 Belaire Drive Balanced Fund,
Oklahoma City, Oklahoma since 1971)
- -----------------------------------------------------------------------------------------
JACK T. CURRIE(1) Director since Director of American Indemnity
Age 70 1971 Financial Corporation, holding company
515 Post Oak Boulevard, Suite for casualty insurance company, 1978 to
750 present; Director of Stewart &
Houston, Texas Stevenson Services, Inc., designs and
constructs power generating systems,
1990 to present.
- -----------------------------------------------------------------------------------------
IRA W. PAINTON, C.L.U.(1) Chairman of the Retired President of the Funds, 1968 to
Age 81 Board since 1989 1993; Retired President and Director of
12004 Dahoon Drive and Director SM&R.
Oklahoma City, Oklahoma since 1967
- -----------------------------------------------------------------------------------------
DONALD P. STEVENS(2) Director, since Assistant to the President for
Age 52 1985 Government Relations of The University
University of Texas Medical of Texas Medical Branch, a medical
Branch, Station 1, Box 41 school and hospital system, 1975 to
Galveston, Texas present; Vice President of Jamail Gal-
veston Foundation, 1993 to present.
- -----------------------------------------------------------------------------------------
STEVEN H. STUBBS, C.F.A. Director since Former Director, President and Chief
Age 60 1987 Executive Officer of The Westcap
514 Poplar Ave. Corporation, 1994 to 1996; and Former
Philadelphia, Mississippi President and Chief Executive Officer
of SM&R and the Funds, 1987 to 1994.
- -----------------------------------------------------------------------------------------
GORDON D. DIXON Vice President Director, Senior Vice President, Chief
Age 53 and Portfolio Investment Officer of SM&R and a member
Manager of the of the investment and executive
Growth Fund, and committees of SM&R, 1993 to present;
Portfolio Manager Vice President, Portfolio Manager of
of the Equity the American National Investment
Income and Accounts, Inc.--Growth Portfolio;
Balanced Funds Portfolio Manager of the American
National Investment Accounts,
Inc.--Managed Portfolio, October 1998
to present; Portfolio Manager of the
American National Investment Accounts,
Inc.--Balanced Portfolio, October 1998
to present; Vice President of Stocks
for American National Insurance
Company, 1993 to present; Vice
President of Investments for Garden
State Life Insurance Company, 1993 to
present; Director and President,
Comprehensive Investment Services, 1997
to present; Former Director of Equity
Strategy Research and Trading for
C&S/Soran Bank (now Nations Bank)
Atlanta, Georgia, 1984 to 1993.
- -----------------------------------------------------------------------------------------
EMERSON V. UNGER, C.L.U. Vice President Vice President of SM&R since 1983, SM&R
Age 53 Investments, Inc. since 1992, and
American National Investment Accounts,
Inc. since 1991.
- -----------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------
POSITIONS HELD
WITH PRINCIPAL OCCUPATIONS DURING PAST 5
NAME, ADDRESS, AND AGE THE FUNDS YEARS
- -----------------------------------------------------------------------------------------
<S> <C> <C>
BRENDA T. KOELEMAY Vice President Vice President and Treasurer of SM&R,
Age 44 and Treasurer SM&R Investments, Inc. and American
National Investment Accounts, Inc.
since 1992; Treasurer of Comprehensive
Investment Services, Inc. since 1997;
Senior Manager, KPMG Peat Marwick LLP,
July 1980 to April 1992.
- -----------------------------------------------------------------------------------------
TERESA E. AXELSON Vice President Vice President and Secretary of SM&R,
Age 51 and Secretary since 1983; Vice President and
Secretary of SM&R Investments, Inc.,
and American National Investment
Accounts, Inc., 1991 to present.
- -----------------------------------------------------------------------------------------
</TABLE>
- ------------------------
* "Interested persons" as defined by the 1940 Act.
(1) Members of the nominating committee.
(2) Members of the audit committee.
Directors of the Funds who are affiliated with SM&R receive no compensation
for attendance at Board or committee meetings. No officer receives compensation
from the Funds. Officers and directors of the Funds affiliated with SM&R may
receive indirect compensation from the Funds to the extent of underwriting
commissions and investment advisory and service fees paid to SM&R.
By resolution of the Boards of Directors, each Fund pays the fees and
expenses of only those directors who are not officers or employees of SM&R or
the Funds. During the fiscal year ended December 31, 1998, each Fund paid
$26,669 to such directors for fees and expenses in attending meetings of the
Boards of Directors.
REMUNERATION OF DIRECTORS
Each director is reimbursed for expenses incurred in connection with each
meeting of a Fund's Board of Directors or any Committee attended. Each director
receives a fee, allocated among the Funds for which he serves as a director,
which consists of an annual retainer component and a meeting fee component. Set
forth below is information regarding compensation paid or accrued during the
fiscal year ended December 31, 1998 for each director of each Fund.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
GROWTH FUND, EQUITY INCOME FUND, AND BALANCED FUND
- -------------------------------------------------------------------------------------------------
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ESTIMATED FROM ALL
COMPENSATION ACCRUED AS ANNUAL FUNDS
FROM EACH PART OF FUND BENEFITS UPON MANAGED BY
DIRECTOR FUND EXPENSES RETIREMENT SM&R
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ralph S. Clifford $ 3,667 None None $ 11,000
- -------------------------------------------------------------------------------------------------
Paul D. Cummings $ 4,167 None None $ 12,500
- -------------------------------------------------------------------------------------------------
Jack T. Currie $ 3,833 None None $ 11,500
- -------------------------------------------------------------------------------------------------
Michael W. McCroskey -- None None --
- -------------------------------------------------------------------------------------------------
Ira W. Painton $ 5,167 None None $ 15,500
- -------------------------------------------------------------------------------------------------
Donald P. Stevens $ 3,833 None None $ 11,500
- -------------------------------------------------------------------------------------------------
Steven H. Stubbs $ 3,833 None None $ 11,500
- -------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Directors, officers, full-time employees, and other affiliated persons of
the Funds, SM&R, or American National may purchase Class T shares of the Funds
at net asset value per share without the imposition of any sales charge. (For
more information, see "Eligible Purchasers of Class T Shares" and "Waiver of
Initial Sales Charge for Certain Purchasers" in the Prospectus for Class T
shares.) The sales charge is waived on shares sold to directors and affiliated
persons because SM&R does not pay commissions on sales of shares to these types
of purchasers.
POLICY REGARDING PERSONAL INVESTING
The following policies have been made a part of each Fund's Code of Ethics.
PERSONAL INVESTING BY PORTFOLIO MANAGERS
A portfolio manager must use extreme care to avoid even the appearance of a
conflict of interest in trading in any personal account (or an account in which
he has a beneficial interest). Accordingly, a portfolio manager may not trade in
(or otherwise acquire) any security for his personal account if that same
security is held in, or is being considered as a potential acquisition by, any
of the Funds. Any beneficial interest in a security held by a portfolio manager
must be sold at least 24 hours prior to any investment by the Funds. The
following exceptions apply:
1. Any beneficial interest in a security owned at the time of employment
may be held or traded at any time other than within 24 hours of a trade
in the Funds for the same or related security. Dividends in that security
may be re-invested in accordance with a formal plan offered by the
issuer.
2. Any beneficial interest in a security acquired by devise or bequeath may
be held or traded at any time other than within 24 hours of a trade in
the Funds for the same or related security.
3. Any beneficial interest in a security issued by the Government or any
Agency of the United States, a State, or any political subdivision
thereof may be traded or held.
4. Any beneficial interest in a security for which a written approval is
first obtained from the President and Chief Executive Officer may be
traded or held.
Furthermore, portfolio managers are prohibited from acquiring any security
of an initial public offering and must receive prior written approval from
SM&R's Chief Executive Officer before investing in any private placement
securities.
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES
Officers and employees of SM&R other than portfolio managers may trade in
(or otherwise acquire) or hold any security for his own account (or an account
in which he has beneficial interest). However, the trade must not occur within
24 hours of a trade in the Funds for the same or related security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 1, 1999, no person owned 5% or more of the outstanding shares of
the Growth Fund or the Equity Income Fund (either of record or beneficially). As
of April 1, 1999, American National Insurance Company ("American National") and
SM&R were the only shareholders known to the Balanced Fund to own five percent
(5%) or more of its outstanding shares. On that date, American National owned
approximately 15.94% and SM&R owned approximately 8.72% of the Balanced Fund's
common stock. While such ownership does not directly affect a shareholder's
voting rights, it obviously gives American National and SM&R a strong voice in
the Balanced Fund's affairs. As a practical
14
<PAGE>
matter, such ownership means that passage of a shareholder proposal is unlikely
without American National's or SM&R's vote therefor.
The officers and directors of each Fund as a group owned less than 1% of the
outstanding shares of each Fund as of April 1, 1999.
INVESTMENT ADVISORY AND OTHER SERVICES
CONTROL AND MANAGEMENT OF SM&R
SM&R has been the investment adviser, manager and underwriter of the Growth
Fund since 1966, of the Equity Income Fund since it began business in 1969, and
of the Balanced Fund since it began business in 1978. SM&R acts pursuant to a
written agreement periodically approved by the directors and shareholders of
each Fund. SM&R is also the investment adviser, manager and underwriter of
American National Investment Accounts, Inc. and SM&R Investments, Inc.
SM&R is a wholly-owned subsidiary of American National, a Texas life
insurance company with its principal offices at 2450 South Shore Boulevard,
League City, Texas 77573. As of April 1, 1999, the Moody Foundation, a
charitable foundation established for charitable and educational purposes, owned
approximately 23.7% of American National's common stock and the Libbie S. Moody
Trust, a private trust, owned approximately 37.6% of such shares. The trustees
of the Moody Foundation are Robert L. Moody, Frances Moody Newman, and Ross R.
Moody. The Moody National Bank of Galveston (the "Bank") is trustee of the
Libbie S. Moody Trust.
The Bank's controlling stockholder is Moody Bank Holding Company, Inc.
("MBHC"). Moody Bancshares, Inc. ("Bancshares") is the sole shareholder of MBHC.
As of April 1, 1999, the Three R Trusts (trusts established by Robert L. Moody
for the benefit of his children) owned 100% of Bancshares' Class B stock (which
elects a majority of Bancshares' and MBHC's Directors) and 47.5% of its Class A
stock. The trustee of the Three R Trusts is Irwin M. Herz, Jr., who is also a
director of American National and a partner in Greer, Herz & Adams, L.L.P.
Greer, Herz & Adams, L.L.P., 18th Floor, One Moody Plaza, Galveston, Texas acts
as General Counsel to American National, the Bank, Bancshares, MBHC, the Funds,
American National Investment Accounts, Inc., SM&R Investments, Inc., and SM&R.
Robert L. Moody is:
- Chairman of the Board of Directors, Chief Executive Officer, and President
of American National,
- Chairman of the Board of Directors and Chief Executive Officer of the
Bank,
- President and Director of Bancshares, and
- President and Director of MBHC, the Bank's controlling stockholder.
The following persons are affiliated with the Funds and SM&R in the
specified capacities:
- Michael W. McCroskey, President and Director of the Funds, is also
President, Chief Executive Officer, Director and a member of the executive
committee of SM&R, and President and Director of the American National
Investment Accounts, Inc. and SM&R Investments, Inc.;
- Gordon D. Dixon, Director, Senior Vice President, Chief Investment Officer
and a member of the investment and executive committees of SM&R, Vice
President, Portfolio Manager of the Growth Fund, and Portfolio Manager of
the Equity Income Fund, Balanced Fund, and Vice President and Portfolio
Manager of the American National Investment Accounts, Inc.--Growth and
Portfolio Manager of the Balanced and Managed Portfolios;
15
<PAGE>
- Emerson V. Unger, Vice President of the Funds, is also Vice President of
SM&R and Vice President of the American National Investment Accounts, Inc.
and SM&R Investments, Inc.;
- Teresa E. Axelson, Vice President and Secretary of the Funds, is also Vice
President and Secretary of SM&R, the American National Investment
Accounts, Inc. and the SM&R Investments, Inc.; and
- Brenda T. Koelemay, Vice President and Treasurer of the Funds, is also
Vice President and Treasurer of SM&R, the American National Investment
Accounts, Inc. and SM&R Investments, Inc.
INVESTMENT ADVISORY AGREEMENT
Under an Investment Advisory Agreement (an "Advisory Agreement") between
each Fund and SM&R dated November 30, 1989, SM&R acts as investment adviser for
and provides certain administrative services to the Funds.
As investment adviser, SM&R manages the investment and reinvestment of each
Fund's assets, including the placing of orders for the purchase and sale of
portfolio securities. SM&R provides and evaluates economic, statistical and
financial information to formulate and implement Fund investment programs. All
investments are reviewed quarterly by each Fund's Board of Directors to
determine whether or not such investments are within the policies, objectives
and restrictions of each Fund.
Each Fund's Advisory Agreement was effective on November 30, 1989 and will
continue in effect from year to year only so long as such continuance is
specifically approved at least annually by its Board of Directors or by vote of
a majority of the outstanding voting securities of the Fund, and, in either
case, by the specific approval of a majority of directors who are not parties to
the Advisory Agreement or not "interested" persons (as defined in the 1940 Act)
of any such parties, cast in person at a meeting called for the purpose of
voting on such approval. Absent proposed changes, it is the policy of Fund
management to submit continuation of the Advisory Agreements annually only to
the Funds' Boards of Directors for their approval or disapproval. Each Fund's
Advisory Agreement was most recently approved by its Board of Directors on
November 19, 1998, and by its shareholders on November 16, 1989. Each Fund's
Advisory Agreement may be terminated without penalty by vote of its Board of
Directors or by vote of the holders of a majority of the outstanding voting
securities of the Fund, or by SM&R, upon sixty (60) days written notice and will
automatically terminate if assigned.
As used herein, the term "majority" when referring to approval to be
obtained from shareholders means the vote of the lesser of (1) 67% of the Fund's
shares present at a meeting if the owners of more than 50% of the outstanding
shares are present in person or by proxy; or (2) more than 50% of the Fund's
outstanding shares.
Under the Advisory Agreement, SM&R receives from each Fund an investment
advisory fee (the "Basic Advisory Fee") for acting as investment adviser
computed by applying to the average daily net asset value of each Fund each
month one-twelfth of the annual rate as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
ON THE PORTION OF THE FUND'S BASIC ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ------------------------------------------------------------------------------
<S> <C>
Not exceeding $100,000,000 0.750%
- ------------------------------------------------------------------------------
Exceeding $100,000,000 but not exceeding $200,000,000 0.625%
- ------------------------------------------------------------------------------
Exceeding $200,000,000 but not exceeding $300,000,000 0.500%
- ------------------------------------------------------------------------------
Exceeding $300,000,000 0.400%
- ------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
In addition, the Advisory Agreement for the Growth Fund also provides for an
upward or downward adjustment of the Basic Advisory Fee based upon the
investment performance during the previous thirty-six (36) monthly periods of
the Growth Fund compared to the Lipper Growth Fund Index (the "Lipper Index")
published by Lipper Analytical Services, Inc., as discussed below.
The fees payable under each Fund's Advisory Agreement may be higher than the
fees paid by other mutual funds, but each Fund believes its fees are comparable
to those paid by funds with the same or similar investment objective.
The average daily net asset value of each Class of each Fund shall be
computed by adding the net asset values computed by SM&R each day during the
month and dividing the resulting total by the number of days in the month. The
net asset value per share of each Class of Fund shares shall be determined each
day by adding the market value of its portfolio securities and other assets,
subtracting liabilities and dividing the result by the number of Class shares
outstanding. Expenses and fees of each Fund, including the advisory and
administrative service fee, will be accrued daily and taken into account in
determining net asset value. The portfolio securities of each Fund will be
valued as of the close of trading on each day when the New York Stock Exchange
is open for regular trading. Securities listed on national securities exchanges
will be valued at the last sales price on such day, or if there is no sale, then
at the closing bid price therefor on such day on such exchange. The value of
unlisted securities will be determined on the basis of the latest bid prices
therefor on such day. If no quotations are available for a security or other
property, it will be valued at fair value as determined in good faith by SM&R on
a consistent basis.
PERFORMANCE ADJUSTMENT OF BASIC ADVISORY FEE FOR GROWTH FUND
Under the Growth Fund's Advisory Agreement, the Basic Advisory Fee annual
rate shown above will be adjusted each month by adding to or subtracting from
such rate, when appropriate, the applicable performance adjustment amount
percentage shown in the table below. The resulting advisory fee rate will then
be applied to the average daily net asset value of the Growth Fund for the
succeeding month. The advisory fee for such month will be one-twelfth ( 1/12th)
of the resulting dollar figure.
The performance adjustment amount shall vary with the Growth Fund's
performance as compared to the Lipper Index as shown by the following table:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PERFORMANCE COMPARED PERFORMANCE PERFORMANCE COMPARED TO PERFORMANCE
TO LIPPER INDEX ADJUSTMENT AMOUNT LIPPER INDEX ADJUSTMENT AMOUNT
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
0.10% to 0.99% above +0.02% 0.10% to 0.99% below -0.02%
- ---------------------------------------------------------------------------------------------
1.00% to 1.99% above +0.04% 1.00% to 1.99% below -0.04%
- ---------------------------------------------------------------------------------------------
2.00% to 2.99% above +0.06% 2.00% to 2.99% below -0.06%
- ---------------------------------------------------------------------------------------------
3.00% to 3.99% above +0.08% 3.00% to 3.99% below -0.08%
- ---------------------------------------------------------------------------------------------
4.00% to 4.99% above +0.10% 4.00% to 4.99% below -0.10%
- ---------------------------------------------------------------------------------------------
5.00% to 5.99% above +0.12% 5.00% to 5.99% below -0.12%
- ---------------------------------------------------------------------------------------------
6.00% to 6.99% above +0.14% 6.00% to 6.99% below -0.14%
- ---------------------------------------------------------------------------------------------
7.00% to 7.99% above +0.16% 7.00% to 7.99% below -0.16%
- ---------------------------------------------------------------------------------------------
8.00% to 8.99% above +0.18% 8.00% to 8.99% below -0.18%
- ---------------------------------------------------------------------------------------------
9.00% and above +0.20% 9.00% and below -0.20%
- ---------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
The performance period is calculated as of the last Thursday of each January
through November and the last business day of each December. The time period
between the last business day in December and the last Thursday in January, the
ten (10) time periods between the last Thursday in January through October and
the last Thursday of the immediately succeeding month, and the time period
between the last Thursday in November and the last business day in December
shall be referred to herein as the "Monthly Periods". The performance period
which forms the basis for each monthly fee adjustment calculation shall end on
each such last Thursday and last business day and shall be the immediately
preceding thirty-five (35) Monthly Periods plus the current Monthly Period.
To determine how the Growth Fund's performance compares to the Lipper Index,
SM&R will determine a monthly percentage change for the Growth Fund and for the
Lipper Index. These monthly percentage changes will be calculated for each
Monthly Period other than January by dividing the year-to-date percentage
changes through the end of each of the Monthly Periods by the year-to-date
percentage changes through the end of the preceding Monthly Period. The monthly
percentage and the year-to-date percentage change for January will always be the
same and will not have to be calculated separately. A cumulative percentage
change for the Performance Period will then be calculated by compounding the
monthly percentage changes for the preceding thirty-five (35) Monthly Periods
and multiplying that product by the current Monthly Period's percentage change.
After such cumulative percentage change has been calculated for the Growth Fund
and the Lipper Index, such percentage changes are then compared. If the
percentage differential resulting from such comparison is less than .10%, no
performance adjustment shall be made. If such percentage differential is .10%,
or more, such differential shall be the percentage used in the Percentage
Performance Compared To Lipper Index table above. For example, if the percentage
differential resulting from such comparison is .07%, no performance adjustment
shall be made and the advisory fee shall be equal to the Basic Advisory Fee
annual rate. If such percentage differential is 2.5% above the Lipper Index, a
performance adjustment equal to .06% shall be made and the Basic Advisory Fee
shall be increased from .75% to .81%. If such percentage differential is 2.5%
below the Lipper Index, a performance adjustment equal to .06% shall be made and
the Basic Advisory Fee shall be decreased from .75% to .69%.
Those shareholders who prefer to use basis points rather than percentage
points when analyzing the Growth Fund's performance compared to the Lipper Index
should convert each 1.00% in the Percentage Performance Compared To Lipper Index
column in the above table to 100 basis points.
The adjustment to the Basic Advisory Fee will not be cumulative. An
increased fee will result even though the performance of the Growth Fund over
some period of time shorter than the Performance Period has been behind that of
the Lipper Index and even if the net asset value of the Growth Fund's shares has
decreased. Conversely, a reduction in the Basic Advisory Fee will be made for a
month even though the performance of the Growth Fund over some period of time
shorter than the Performance Period has been ahead of that of the Lipper Index
and even if the net asset value of the Growth Fund's shares has increased.
As indicated above, the Growth Fund's expenses (including the monthly basic
advisory fee and administrative service fee) and the performance adjustment for
each performance fee period will be computed and accrued daily and taken into
account in computing the daily net asset value of a Growth Fund share. However,
expenses in excess of the maximum expense limitation shall not be accrued for
the purpose of computing the daily net asset value of a Growth Fund share.
In the case of termination of the Advisory Agreement during any Monthly
Period, the fee for that Monthly Period shall be reduced proportionately on the
basis of the number of calendar days during which it is in effect for that
Monthly Period. The fee rate will be computed on the basis of and applied to net
assets averaged over that Monthly Period ending on the last business day on
which the Advisory Agreement is in effect. The amount of any performance
adjustment to the Basic Advisory Fee will be computed on the basis of the
thirty-six (36) Monthly Periods ending on the last business day on which
18
<PAGE>
the Advisory Agreement is in effect provided that if the Advisory Agreement has
been in effect less than thirty-six (36) Monthly Periods, the computation will
be made on the basis of the period of time during which it has been in effect.
ADVISORY FEES PAID
For the past three fiscal years, SM&R received investment advisory fees from
each Fund as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
ADVISORY FEES ADVISORY FEES ADVISORY FEES
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED DECEMBER ENDED DECEMBER ENDED DECEMBER
31, 1996 31, 1997 31, 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund $1,093,421 $1,011,542 $ 922,010
- -----------------------------------------------------------------------------------------
Equity Income Fund $1,080,300 $1,270,994 $1,426,042
- -----------------------------------------------------------------------------------------
Balanced Fund $ 167,921 $ 186,693 $ 198,438
- -----------------------------------------------------------------------------------------
</TABLE>
ADMINISTRATIVE SERVICE AGREEMENT
Under an Administrative Service Agreement between each Fund and SM&R dated
November 30, 1989, as amended on November 19, 1998, SM&R provides all
non-investment related management, executive, administrative and operational
services to each Fund. Pursuant to the Administrative Service Agreement, SM&R
also acts as transfer agent for the Funds' authorized and issued shares and as
dividend disbursing agent.
In its capacity as administrator under the Administrative Service Agreement,
SM&R furnishes and pays for the services of all officers and employees necessary
to perform the executive, administrative, clerical and bookkeeping functions of
the Funds. SM&R's duties as administrator include, among other things:
administering the Funds' affairs; maintaining office facilities; processing
purchase orders and redemption requests; furnishing statistical and research
data; and providing clerical, accounting, data processing, bookkeeping and
certain other services required by each Fund.
In its capacity as transfer agent and dividend disbursing agent under the
Administrative Agreement, SM&R's duties include, but are not limited to:
dividend disbursements and transfer agency services; maintaining shareholder
accounts; preparing shareholder meeting lists and mailing and tabulating
proxies; mailing shareholder reports and other materials to shareholders; tax
withholding; and "blue sky" related services.
Under each Administrative Service Agreement, SM&R receives from each Fund an
administrative service fee for providing administrative services. The fee is
computed by applying to the average daily net asset value of the Fund each month
one-twelfth of the annual rate as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
ADMINISTRATIVE
ON THE PORTION OF THE SERVICE FEE ANNUAL
FUND'S AVERAGE DAILY NET ASSETS RATE
- ----------------------------------------------------------------------------------------------
<S> <C>
Not exceeding $100,000,000 0.25%
- ----------------------------------------------------------------------------------------------
Exceeding $100,000,000 but not exceeding $200,000,000 0.20%
- ----------------------------------------------------------------------------------------------
Exceeding $200,000,000 but not exceeding $300,000,000 0.15%
- ----------------------------------------------------------------------------------------------
Exceeding $300,000,000 0.10%
- ----------------------------------------------------------------------------------------------
</TABLE>
The administrative service fee is payable to SM&R whether or not the actual
expenses to SM&R for providing administrative services is more or less than the
amount of such fee.
19
<PAGE>
For the past three fiscal years, SM&R received administrative service fees
pursuant to the Administrative Service Agreement from each Fund as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
ADMINISTRATIVE ADMINISTRATIVE ADMINISTRATIVE
SERVICE FEES FOR SERVICE FEES FOR SERVICE FEES FOR
THE YEAR ENDED THE YEAR ENDED THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund $ 335,086 $ 387,654 $ 423,595
- --------------------------------------------------------------------------------------------
Equity Income Fund $ 355,696 $ 416,699 $ 465,270
- --------------------------------------------------------------------------------------------
Balanced Fund $ 55,974 $ 62,231 $ 66,146
- --------------------------------------------------------------------------------------------
</TABLE>
EXPENSES BORNE BY THE FUNDS
Each Fund has agreed to pay other expenses incurred in the operation of the
Fund, such as interest, taxes, commissions and other expenses incidental to
portfolio transactions, SEC fees, fees of the Custodian (see "CUSTODIAN"
herein), auditing and legal expenses, fees and expenses of qualifying Fund
shares for sale and maintaining such qualifications under the various state
securities laws where Fund shares are offered for sale, fees and expenses of
directors not affiliated with SM&R, costs of maintaining corporate existence,
costs of printing and mailing prospectuses and shareholder reports to existing
shareholders and expenses of shareholders' meetings.
SM&R has agreed in its Administrative Service Agreement with each Fund to
pay (or to reimburse each Fund for) each Fund's regular operating expenses of
any kind, exclusive of interest, taxes, commissions, Class Specific Expenses,
other expenses incidental to portfolio transactions, and extraordinary expenses
beyond SM&R's control, but including the basic advisory fee, in excess of 1.25%
per year of each Fund's average daily net assets. Such reimbursements, when
required, will be made monthly. No reimbursement to the Equity Income and Growth
Funds under the 1.25% expense limitation was required for the fiscal years ended
December 31, 1996, 1997 and 1998. During the fiscal years ended December 31,
1996, 1997, and 1998, SM&R reimbursed $29,344, $24,234 and $33,454,
respectively, in excess expenses to the Balanced Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
SM&R, which supervises each Fund's investments, is responsible for effecting
portfolio transactions through eligible securities brokers and dealers, subject
to the general supervision of each Fund's Board of Directors. Investment
decisions are made by an Investment Committee of SM&R, and orders are placed by
persons supervised by that committee.
There is no arrangement or intention to place orders with any specific
broker or group of brokers. The paramount factors considered by SM&R in placing
orders are efficiency in the execution of orders and obtaining the most
favorable prices for the Fund in both purchases and sales of portfolio
securities. In seeking the best prices and executions, purchases and sales of
securities which are not listed or traded on a securities exchange are generally
executed with a principal market maker acting as principal. SM&R evaluates the
brokerage fees paid by the Fund to any affiliated person by comparing such fees
to those paid by other investment companies for similar transactions as reported
in various industry surveys.
Whenever the primary consideration of best price and best execution is met
to the satisfaction of SM&R, the brokers and dealers selected will include those
who provide supplementary statistical and research services. Such research
services include advice as to the advisability of investing in, purchasing or
selling securities, as well as analyses and reports concerning securities,
economic factors and trends. Such services and information may be used by SM&R
in servicing any fund it manages. Not all of these services or information are
always used by SM&R in connection with the Funds. While SM&R is able to fulfill
its obligation to each Fund without such information, its expenses might be
materially
20
<PAGE>
increased if it had to obtain and assemble such information through its staff.
However, the value of such information is not determinable. SM&R also uses such
information when rendering investment advisory services to the American National
Investment Accounts, Inc., SM&R Investments, Inc., and to American National and
its other accounts.
SM&R will authorize each Fund to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another
broker-dealer would have charged only if it determines in good faith that such
amount of commission is reasonable in relation to the value of the brokerage and
research services provided by such broker-dealer. Generally, the Funds pay
higher than the lowest commission rates available.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, and subject to seeking the best price and execution, each Fund may give
consideration to sales of shares of each Fund as a factor in the selection of
brokers and dealers to execute Fund portfolio transactions. For the past three
fiscal years, SM&R paid brokerage fees on the purchase and sale of portfolio
securities for each Fund of the following approximate amounts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
BROKERAGE FEES BROKERAGE FEES BROKERAGE FEES
PAID FOR THE YEAR PAID FOR THE YEAR PAID FOR THE YEAR
ENDED DECEMBER ENDED DECEMBER ENDED DECEMBER
31, 1996 31, 1997 31, 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund $ 98,000 $ 416,000 $ 196,000
- --------------------------------------------------------------------------------------------
Equity Income Fund $ 132,000 $ 345,000 $ 147,000
- --------------------------------------------------------------------------------------------
Balanced Fund $ 11,000 $ 33,000 $ 16,000
- --------------------------------------------------------------------------------------------
</TABLE>
No brokerage commissions have been paid during the three most recent fiscal
years to: (i) any broker that is an affiliated person of the Funds or an
affiliated person of that person; or (ii) any broker an affiliated person of
which is an affiliated person of the Funds or SM&R.
The Funds, the American National Investment Accounts, Inc., and SM&R
Investments, Inc., for which SM&R is also investment adviser, may own securities
of the same companies from time to time. However, Each Fund's portfolio security
transactions will be conducted independently, except when decisions are made to
purchase or sell portfolio securities of the Funds, the American National
Investment Accounts, Inc., and SM&R Investments, Inc., simultaneously. In such
event, the transactions will be averaged as to price and allocated as to amount
(according to the proportionate share of the total combined commitment) in
accordance with the daily purchase or sale orders actually executed.
Each Fund's Board of Directors has determined that such ability to effect
simultaneous transactions may be in the best interests of each Fund. It is
recognized that in some cases these practices could have a detrimental effect
upon the price and volume of securities being bought and sold by the Funds,
which in other cases these practices could produce better executions.
DESCRIPTION OF FUND SHARES
Each of the Funds has authorized capital stock of two billion common shares
with a par value of $0.01 each. The Funds are each divided into six Classes of
shares of common stock designated as:
- Class A (front-end load);
- Class B (back-end load);
- Class C (level load);
- Class Y (institutional shareholders);
- Class J (network); and
- Class T (existing Class T shareholders and certain designated persons).
21
<PAGE>
The shares of each Fund, when issued, will be fully paid and non-assessable,
will have no conversion, preemptive, or other subscription rights, and will be
freely transferable and redeemable.
Each share of capital stock represents an interest in the assets of a
particular Fund and has no interest in the assets of any other Fund. Shares of a
Fund are equal with respect to distributions from income and capital gains,
except as described below. In the event of liquidation, each share of a Fund is
entitled to an equal portion of all the assets of that Fund after all debts and
expenses have been paid.
Each Class of a Fund represents an interest in the same portfolio of
investments and each Class has the same rights as the other Classes, except that
each Class bears its own expenses and its proportionate share of the general
liabilities of that Fund. The net income attributable to each Class and the
dividends payable on the shares of that Class will be reduced by the amount of
the service and distribution fees ("12b-1 fees") of that Class and any
Class-specific expenses. Class B and Class C shares are subject to higher 12b-1
fees, which will cause such Classes to have a higher expense ratio and pay lower
dividends than the Class A shares.
VOTING RIGHTS
Within the respective Funds, all shares have equal voting, participation,
and liquidation rights, but do not have cumulative voting rights. With respect
to election of directors, non-cumulative voting means that the holders of more
than 50% of the shares voting for the election of directors can elect 100% of
the directors if they so choose, and in such event, holders of the remaining
shares will not be able to elect any directors.
On certain matters, such as the election of directors or amendment of the
investment advisory contract, all shares of each Fund vote together, with each
share having one vote. On matters affecting a particular Class of a Fund, only
shares of that Class of the Fund are entitled to vote, and a majority of the
shares of that Class generally are required for approval of the proposal.
PURCHASE, REDEMPTION AND PRICING OF SHARES
PURCHASING SHARES
Shares of each Fund may be purchased at a public offering price which is
based on the net asset value of each share of the Fund next determined plus a
sales charge, if any. Remittances for additional investments may be submitted
directly to SM&R. Except for certain systematic investment programs (see
"SPECIAL PURCHASE PLANS" herein), the minimum initial investment is $100 and
additional shares may be purchased through investment of $20 or more at any time
thereafter.
Certificates representing shares purchased are not issued. Investors have
the same ownership rights with respect to shares purchased as if certificates
had been issued. A confirmation will be sent to the investor promptly after each
share purchase.
All purchases must be in (or payable in) U.S. dollars. All checks must be
drawn in U.S. dollars on a U.S. bank. Investors will be subject to a service
charge on dishonored checks. The Funds reserve the right to reject any order for
the purchase of its shares when in the judgment of management such rejection is
in the best interests of the applicable Funds.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Class of each Fund is determined by
adding the market value of the Class' portfolio securities and other assets,
subtracting liabilities, and dividing the result by the number of the Class
shares outstanding. Expenses and fees of each Class of a Fund, including the
advisory fee and the expense limitation reimbursement, if any, are accrued daily
and taken into account
22
<PAGE>
in determining net asset value. The portfolio securities of the Funds are valued
as of the close of trading on each day that the New York Stock Exchange is open
for trading. Securities listed on national securities exchanges are valued at
the last sales price on such day, or if there is no sale, then at the closing
bid price therefor on such day on such exchange. The value of unlisted
securities is determined on the basis of the latest bid prices therefor on such
day. If no quotations are available for a security or other property, it is
valued at fair value as determined in good faith by the Board of each Fund (or
their delegate) on a consistent basis.
DETERMINATION OF OFFERING PRICE
Full and fractional shares are purchased at the offering price, which is the
net asset value next determined after receipt of a purchase order plus the sales
charge. The sales charge is a percentage of the net asset value per share and
will vary as shown below. Purchases received by SM&R at its office in League
City, Texas prior to 3:00 p.m. Central Time, on any day that the New York Stock
Exchange is open for trading, will be executed at the applicable offering price
determined on that day. Purchases received by SM&R thereafter will be executed
at the offering price determined on the next day that the New York Stock
Exchange is open for trading.
SM&R is not in receipt of purchase (and redemption or transfer) orders given
to a dealer until the dealer transmits the order to SM&R and SM&R actually
receives the order at its League City office. It is the responsibility of any
such dealer and not SM&R to establish procedures to assure that orders received
before the close of the Exchange on an SM&R business day will be reported to
SM&R before SM&R's close of business on that same day.
CLASS T SHARES (EXISTING SHAREHOLDERS). The offering price of the Class T
shares is the net asset value per share plus an initial sales charge of up to
5.75% of the public offering price. For amounts invested over certain levels, or
"breakpoints" (beginning at $50,000), you pay reduced sales charges. Certain
purchasers of Class T shares may qualify for a reduction or waiver of initial
sales charges, as set forth in the chart below and under "Reduction and/or
Waiver of Initial Sales Charges" below and "Sales Charge Reductions and Waivers"
in the Prospectuses. If you invest $500,000 or more in Class T shares, there is
no initial sales charge.
The offering price of Class T shares is the next determined net asset value
plus a sales charge, if applicable (expressed as a percentage of the offering
price) shown in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SALES CHARGE AS DISCOUNT TO
SALES CHARGE AS A PERCENTAGE OF SELECTED DEALERS AS
A PERCENTAGE OF NET AMOUNT A PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE*
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 5.75% 6.1% 4.75%
- -------------------------------------------------------------------------------------------------
$50,000 but less than $100,000 4.5% 4.7% 4.0%
- -------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.5% 3.6% 3.0%
- -------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.5% 2.6% 2.0%
- -------------------------------------------------------------------------------------------------
$500,000 and over None None None
- -------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
* For Class T shares, SM&R may, in certain circumstances, provide compensation
(from its own profits and resources) to broker-dealers in addition to these
discounts.
CLASS A SHARES (FRONT-END LOAD). Class A shares are subject to an initial
sales charge of up to 5.00% of the public offering price and an annual 12b-1 fee
of 0.25% of the average daily net assets of the Class A shares. For amounts
invested over certain levels, or "breakpoints" (beginning at $50,000), you pay
reduced sales charges. If you invest $1 million or more in Class A shares, there
is no initial
23
<PAGE>
sales charge, but such shares will be subject to a contingent deferred sales
charge ("CDSC") of 1.00% of the offering price on redemptions within 13 months
of purchase. Certain purchasers of Class A shares may qualify for a reduction or
waiver of initial sales charges, as set forth in the chart below and under
"Reduction and/or Waiver of Initial Sales Charges" below and "Sales Charge
Reductions and Waivers" in the Prospectuses.
The offering price of Class A shares is the next determined net asset value
per share plus a sales charge (expressed as a percentage of the offering price)
shown in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SALES CHARGE AS DISCOUNT TO
SALES CHARGE AS A PERCENTAGE OF SELECTED DEALERS AS
A PERCENTAGE OF NET AMOUNT A PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE*
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 5.00% 5.3% 4.50%
- -------------------------------------------------------------------------------------------------
$50,000 but less than $100,000 4.5% 4.7% 4.0%
- -------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.5% 3.6% 3.0%
- -------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.5% 2.6% 2.0%
- -------------------------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.5% 1.5% 1.00%
- -------------------------------------------------------------------------------------------------
$1,000,000 and over None* None None
- -------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
* Subject to a CDSC of 1.00% on shares redeemed within 13 months of purchase.
CLASS B SHARES (BACK-END LOAD). An investor pays no initial sales charge
upon the purchase of Class B shares, but such shares are subject to a CDSC that
declines from 5.00% to zero, calculated as a percentage of the amount invested,
imposed on certain redemptions made within six years of purchase. Class B shares
are subject to an annual 12b-1 fee of 0.75% of the average daily net asset value
of the Class B shares.
Class B shares are sold at net asset value, but are subject to a contingent
deferred sales charge (expressed as a percentage of the offering price) shown in
the following table:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
CONTINGENT DEFERRED SALES CHARGE
YEARS SINCE PURCHASE (AS A PERCENTAGE OF OFFERING PRICE)
- ----------------------------------------------------------------------------
<S> <C>
Year 1 5%
- ----------------------------------------------------------------------------
Year 2 4%
- ----------------------------------------------------------------------------
Year 3 3%
- ----------------------------------------------------------------------------
Year 4 2%
- ----------------------------------------------------------------------------
Year 5 1%
- ----------------------------------------------------------------------------
Year 6+ 0%
- ----------------------------------------------------------------------------
</TABLE>
If the net asset value of shares being redeemed has increased above the
initial purchase price, no CDSC is imposed on amounts attributable to such
increase in net asset value. No CDSC is assessed on shares derived from
reinvestment of dividends or capital gain distributions. The Company will
minimize any applicable CDSC payable by assuming that an investor (i) first
redeems Class B shares owned through reinvested dividends and capital gains
distributions, and (ii) next redeems Class B shares held the longest.
Each Class B share converts automatically to Class A shares of equal dollar
value after the investor has owned Class B shares for eight (8) years. Dividends
and other distributions paid to an investor in the form of additional Class B
shares also will convert to Class A shares on a pro-rata basis.
24
<PAGE>
The conversion benefits shareholders because Class A shares are subject to a
lower ongoing Distribution Fee. If an investor converts Class B shares for Class
B shares of another fund managed by SM&R, the purchase date of the original
investment will be used to determine the appropriate conversion date.
CLASS C SHARES (LEVEL LOAD). The Funds offer Class C shares at their
respective net asset value plus an initial sales charge of 1.00% of the offering
price. A contingent deferred sales charge of 1.00% is also assessed on
redemptions of Class C shares during the first thirteen months after purchase.
Class C shares are subject to an annual 12b-1 fee of 1.00% of the average daily
net asset value of the Class C shares.
CLASS Y SHARES. Class Y shares are no-load shares of the Funds offered
through certain financial intermediaries (such as broker-dealers and investment
advisers) that have distribution agreements with SM&R. Class Y shares are
available to institutions and certain other investors, as described in the
Prospectus for the Class Y shares. Class Y shares are offered at net asset value
without the imposition of any sales charge on purchases or redemptions or any
distribution and service ("12b-1") fees. Accordingly, the Offering Price for
Class Y shares is that Class' net asset value.
CLASS J SHARES. Class J shares of the Funds are offered through mutual fund
"supermarkets" that have distribution agreements with SM&R. Class J shares are
offered at net asset value without the imposition of any sales charge on
purchases or redemptions. Accordingly, the Offering Price for Class J shares is
that Class' net asset value. Class J shares are subject to an annual 12b-1 fee
of 0.75% of the average daily net asset value of the Class J shares.
REDUCTION AND/OR WAIVER OF INITIAL SALES CHARGES (CLASS A AND CLASS T SHARES)
DISCOUNTS THROUGH CONCURRENT PURCHASES. Investors may qualify for a reduced
sales charge on Class T or Class A shares. To qualify, the investor may combine
concurrent purchases of Class T and Class A shares of a fund managed by SM&R at
the respective sales charges applicable to each. Investors that are eligible to
combine concurrent purchases to qualify for a reduced sales charge include: (1)
Any individual; (2) Any individual, his or her spouse, and trusts or custodial
agreements for their minor children; (3) A trustee or fiduciary of a single
trust estate or single fiduciary account; (4) Tax-exempt organizations specified
in Sections 501(c)(3) or (13) of the Internal Revenue Code, or employees'
trusts, pension, profit-sharing, or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code; and (5) Employees (or employers on
behalf of employees) under any employee benefit plan not qualified under Section
401 of the Internal Revenue Code.
Purchases by any "company" or employee benefit plans not qualified under
Section 401 of the Internal Revenue Code will qualify for the above quantity
discounts only if the Funds will realize economies of scale in sales effort and
sales related expenses as a result of the employer's or the plan's bearing the
expense of any payroll deduction plan, making the Funds' prospectuses available
to individual investors or employees, forwarding investments by such employees
to the Funds, and the like.
These discounts through concurrent purchases are applicable both to single,
lump sum purchases made under the provisions of the preceding paragraphs and to
qualified investments under a "Letter of Intent" or under the "Accumulation
Privilege" as described below.
THE EDUCATION FUNDING INVESTMENT ACCOUNT PROGRAM. The following sales
charge breakpoints apply to purchases made by individuals investing in Class A
or Class T shares of the Funds through the use of The Education Funding
Investment Account Program as well as the Education IRA. These breakpoints
differ from the standard breakpoints in two respects: (1) investments in Class A
or T shares of less than $100,000 are subject to a lower initial sales charge,
and (2) investments in Class A
25
<PAGE>
or T shares above $500,000 are not subject to an initial sales charge. The
applicable sales charges are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SALES CHARGE AS DISCOUNT TO
SALES CHARGE AS A PERCENTAGE OF SELECTED DEALERS AS
A PERCENTAGE OF NET AMOUNT A PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE*
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.5% 4.7% 4.0%
- -------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.5% 3.6% 3.0%
- -------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.5% 2.6% 2.0%
- -------------------------------------------------------------------------------------------------
$500,000 and over None* None None
- -------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
* Class A shares are subject to a CDSC of 1.00% on shares redeemed within 13
months of purchase.
The Education Funding Investment Account Program is a service expressly
created to help investors accumulate funds for their children's or
grandchildren's college education. The maximum sales charge is 4.5% on the
purchase of Class A or T shares of the Funds. To participate in this special
plan, investors must complete the special Education Funding Investment Account
application designed specifically for the Program.
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class T or
Class A shares of a fund managed by SM&R, on which you paid a front-end sales
load, you may be able to receive a discount when you buy additional shares. The
current net asset value of the shares you already own may be
"accumulated"--I.E., combined together with the dollar amount being invested--to
achieve quantities eligible for discount.
LETTER OF INTENT. You may qualify immediately for a reduced sales charge on
purchases of Class T and Class A shares of funds managed by SM&R by completing a
Letter of Intent (See "Letter of Intent" in the Prospectuses). A minimum initial
investment equal to 10% of the amount necessary for the applicable reduced sales
charge is required when a Letter of Intent is executed. Investments made under a
Letter of Intent will purchase shares at the total sales charge rate applicable
to the specified total investment. SM&R will hold in escrow from the initial
investment shares equal to 5% of the amount of the total intended investment.
Such escrow shares may not be exchanged for or reinvested in shares of another
fund and, subject to the right of early cancellation described below, will not
be released until the amount purchased equals the commitment set forth in the
Letter of Intent. If the intended investment is not completed during the
13-month period, the difference between the sales charge actually paid and the
sales charge applicable to the total of such purchases made will be deducted
from the escrow shares if not paid by the investor within twenty days after the
date notice thereof has been mailed to such investor.
A Letter of Intent agreement can be canceled prior to the end of the
13-month period and escrow shares released to the investor if the investor pays
the difference between the sales charge paid and the sales charge applicable to
the amount actually invested and agrees that such Letter of Intent agreement is
canceled and no longer in effect.
The offering value of the shares of funds managed by SM&R currently owned,
and previously subject to a front-end sales load, may also be included in the
aggregate amount of an investment covered by a Letter of Intent.
For example, if an investor owns Class A shares of one or more of the Funds
and/or another fund managed by SM&R currently valued at $80,000 and intends to
invest $25,000 over the next thirteen months in Class A shares of the Growth
Fund, such investor may execute a Letter of Intent and the entire $25,000 will
purchase shares of either or all of such funds at the reduced sales charge rate
applicable to an
26
<PAGE>
investment of $100,000 or more. A Letter of Intent does not represent a binding
obligation on the part of the investor to purchase or the Funds to sell the full
amount of shares specified.
WAIVER OF CLASS A AND CLASS T INITIAL SALES CHARGE FOR SPECIAL
PURCHASERS. After receipt of written request by SM&R, Class A and Class T
shares of the Funds may be purchased by certain purchasers designated in the
Class T and Class A Prospectuses at net asset value per share without the
imposition of any sales charge.
REDUCTION AND/OR WAIVER OF CONTINGENT DEFERRED SALES CHARGE (CLASS B SHARES)
The CDSC will be waived on the following redemptions of Class B shares:
(1) 12% FREE AMOUNT. We waive the CDSC on redemptions pursuant to a
systematic withdrawal plan of up to 12% of account value per year. We
apply this 12% waiver on a per fund basis to the account value determined
at the time you elect a systematic withdrawal plan (amounts not subject
to a CDSC, such as appreciation and reinvested dividends, are withdrawn
first).
(2) DEATH OR DISABILITY. We waive the CDSC on redemptions of Class B shares
following the shareholder's death or disability, so long as:
(a) the disability began after the shares were purchased;
(b) SM&R is notified of such death or disability at the time of the
redemption request and receives satisfactory evidence of such death
or disability;
(c) the redemptions are made within one year following death or initial
determination of disability; and
(d) the shares were held at the time of death or initial determination of
disability.
For purposes of this waiver, the death or disability must meet the
definition in Section 72(m)(7) of the Internal Revenue Code (the "Code").
If the shares are held in a joint account, then all registered joint
owners must be dead or disabled.
(3) MINIMUM REQUIRED DISTRIBUTIONS. We waive the CDSC on redemptions of
Class B shares in connection with certain distributions from four types
of qualified retirement plans: IRAs, custodial accounts maintained
pursuant to Code Section 403(b), deferred compensation plans qualified
under Code 457 and plans qualified under Code Section 401. To qualify for
the waiver, the redemptions must result from one of the following:
(a) required minimum distributions to plan participants or beneficiaries
who are age 70 1/2 or older to the extent it does not exceed 12%
annually of the participant's or beneficiary's account value;
(b) tax-free rollovers or transfers of assets to another IRA, Section
403(b) plan, Section 457 plan or Section 401 plan invested in Class B
shares of one or more funds managed by SM&R;
(c) tax-free returns of excess contributions or returns of excess
deferral amounts; and
(d) distributions upon the death or disability (as defined in the Code)
of the participant or beneficiary.
(4) SMALL ACCOUNTS. We waive the CDSC on redemptions by the funds of small
accounts (Accounts with a value less than $500).
(5) SM&R INVESTMENTS. We waive the CDSC on redemptions of shares owned by
SM&R or any of its affiliates.
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FUND AND CLASS EXPENSES
Expenses that are directly attributable to a particular Class of shares
("Class Expenses") will be borne solely by that Class. Class expenses include:
(1) asset-based 12b-1 fees; (2) transfer agency fees attributable to a
particular Class; (3) expenses related to preparing, printing, mailing, and
distributing materials such as shareholder reports, prospectuses, and proxy
statements to current shareholders of a specific Class; (4) state and federal
registration fees incurred by a specific Class; (5) litigation and other legal
expenses relating to a particular Class; (6) directors' fees and expenses
incurred as a result of issues relating solely to a particular Class; (7)
accounting, audit, and tax expenses relating to a specific Class; (8) the
expenses of administrative personnel and services required to support the
shareholders of a specific Class; and (9) fees and other payments made to
entities performing services for a particular Class, including account
maintenance, dividend disbursing, or subaccounting services.
Class Expenses may be waived or reimbursed by SM&R, the Fund's investment
adviser and distributor. Investment advisory fees, custodial fees, and other
expenses relating to the management of the Funds' assets shall not be allocated
on a class-specific basis. Income, realized and unrealized capital gains and
losses, and expenses that are not allocated to a specific Class shall be
allocated to each Class on the basis of the proportionate net assets of that
Class in relation to the net assets of the Fund.
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN
Each Fund adopted a Distribution and Shareholder Servicing Plan (the "12b-1
Plan") pursuant to Rule 12b-1 under the 1940 Act for the Class A, Class B, Class
C, and Class J shares. The 12b-1 Plan provides that SM&R will provide
distribution and/or shareholder services to the Class A, Class B, Class C, and
Class J shares of the Funds (the "12b-1 Classes").
For each 12b-1 Class, SM&R is entitled to receive a Distribution Fee and/or
Service Fee, as applicable, computed as an annual percentage of the value of the
average daily net assets of the Fund attributable to that Class, as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
DISTRIBUTION SERVICE TOTAL 12b-1
CLASS FEE FEE FEE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class T Shares: Existing Shareholders -0- -0- -0-
- ------------------------------------------------------------------------------------------------------
Class A Shares: Front-End Load 0.25% -0- 0.25%
- ------------------------------------------------------------------------------------------------------
Class B Shares: Back-End Load (CDSC) 0.50% 0.25% 0.75%
- ------------------------------------------------------------------------------------------------------
Class C Shares: Level Load 0.75% 0.25% 1.00%
- ------------------------------------------------------------------------------------------------------
Class J Shares: Network 0.75% -0- 0.75%
- ------------------------------------------------------------------------------------------------------
Class Y Shares: Institutional -0- -0- -0-
- ------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
(1) The Distribution Fee and/or Service Fee, as applicable, to be paid under the
12b-1 Plan will be calculated daily (as a percentage of average daily net
assets) and paid periodically.
The purpose of the Distribution Fee is to compensate SM&R, or enable SM&R to
compensate other persons, including any distributor of shares of the 12b-1
Classes, for services that are primarily intended to result in or primarily
attributable to the sale of the 12b-1 Classes ("Selling Services"). The purpose
of the Service Fee is to compensate SM&R, or enable SM&R to compensate other
persons, for providing ongoing servicing to shareholders of the Funds
("Shareholder Services").
"Selling Services" include the training and supervision of sales personnel;
advertising, marketing, and other promotional expenses, including the costs of
preparing and printing sales literature; printing prospectuses and statements of
additional information and distributing them to prospective investors in 12b-1
Classes; and distributing shares of the 12b-1 Classes. Payments for Selling
Services may include
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payment for overhead and other office expenses that are related to the
distribution of the 12b-1 Classes. SM&R also may reimburse the expenses of
persons who provide support services in connection with the distribution of the
12b-1 Classes, and may make payments to financial intermediaries that sell
shares of the 12b-1 Classes. "Shareholder Services" include all forms of
shareholder liaison services that SM&R deems appropriate, including maintaining
shareholder accounts, providing shareholder liaison services, responding to
customer inquiries, and providing shareholders with information on their
investments and about the 12b-1 Classes.
The 12b-1 Plan, and any related agreement, continues in effect with respect
to a 12b-1 Class only if such continuance is specifically approved at least
annually by either the Board or the shareholders of that 12b-1 Class and, in
either case, by a majority vote of those directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of this Plan or in such agreement (the "Independent Directors"), cast
in person at a meeting called for the purpose of voting on this Plan and/or the
related agreement. The 12b-1 Plan may be terminated with respect to any 12b-1
Class at any time, by vote of a majority of the Independent Directors or by a
vote of a majority of the outstanding voting securities of the relevant Class.
Any distribution and shareholder services agreement related to the 12b-1
Plan terminates automatically upon its assignment. Moreover, with respect to
each 12b-1 Class, any distribution and shareholder services agreement related to
that 12b-1 Class may be terminated at any time, without the payment of any
penalty, (1) by the Board or by a vote of the 12b-1 Class' outstanding
shareholders, on 60 days written notice to SM&R, or (2) by SM&R, on 60 days
written notice to the Fund.
The 12b-1 Plan provides that it may not be amended with respect to any 12b-1
Class to increase materially the amount of the fees described in such Plan
without approval of the shareholders of the relevant Class. All material
amendments to the Plan also must be approved by the Board in the manner
described above and in the 12b-1 Plan.
In each year during which this Plan remains in effect with respect to a
12b-1 Class, SM&R (and any other person authorized to direct the disposition of
monies paid or payable by the relevant Fund pursuant to the Plan or any related
agreement) will prepare and furnish to the Board, and the Board will review, at
least quarterly, written reports complying with the requirements of Rule 12b-1,
which set out the amounts expended under this Plan and the purposes for which
those expenditures were made. The obligations of each Fund under the 12b-1 Plan
will not be binding upon any of the directors, shareholders, nominees, officers,
employees or agents, whether past, present or future, of the Fund, individually,
but are binding only upon the assets and property of the relevant Fund or Funds,
as provided in the Funds' Articles of Incorporation.
SPECIAL PURCHASE PLANS
AUTOMATIC INVESTMENT PLAN AND ELECTRONIC TRANSFERS
Classes A, B and C provide a convenient, voluntary method of purchasing
their shares through the "Automatic Investment Plan." Classes A, B, C, T and Y
allow for the use of the "Electronic Transfers." These plans are referred to as
a "Plan" or "Plans." The principal purposes of such Plans are to encourage
thrift by enabling investors to make regular purchases in amounts less than
normally required, and, in the case of the Funds, to employ the principle of
dollar cost averaging described below. INVESTORS SHOULD BE AWARE THAT ANY
APPLICABLE SALES CHARGE WILL APPLY TO PURCHASES MADE THROUGH A PLAN.
By acquiring shares of the Funds on a regular basis pursuant to a Plan, or
investing regularly on any other systematic plan, the investor takes advantage
of the principle of Dollar Cost Averaging. Under Dollar Cost Averaging, if a
constant amount is invested at regular intervals at varying price levels, the
average cost of all the shares will be lower than the average of the price
levels. This is
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<PAGE>
because the same fixed number of dollars buys more shares when price levels are
low and fewer shares when price levels are high. It is essential that the
investor consider his or her financial ability to continue this investment
program during times of market decline as well as market rise. The principle of
Dollar Cost Averaging will not protect against loss in a declining market, as a
loss will result if the Plan is discontinued when the market value is less than
cost.
After the initial minimum investment of $100 has been met, a Plan may be
opened by indicating an intention to invest $20 or more (per individual) in the
Funds monthly for at least one year. The investor will receive a confirmation
showing the number of shares purchased, purchase price, and subsequent new
balance of shares accumulated.
An investor has no obligation to invest regularly or to continue
participating in a Plan, which may be terminated by the investor at any time
without penalty. Under a Plan, any distributions of income and realized capital
gains will be reinvested in additional shares at net asset value unless a
shareholder instructs SM&R in writing to pay them in cash. SM&R reserves the
right to increase or decrease the amount required to open and continue the Plan,
and to terminate any shareholder's right to participate in the Plan if after one
year the value of the amount invested is less than $100.
GROUP SYSTEMATIC INVESTMENT PLAN
A Group Systematic Investment Plan is available for purchases of Class A,
Class B, or Class C shares. This Plan provides employers and employees with a
convenient means for purchasing shares of the Funds under various types of
employee benefit and thrift plans, including payroll deduction and bonus
incentive plans. The Plan may be started with an initial cash investment of $100
($20 per individual) for a group consisting of five or more participants. The
shares purchased by each participant under the Plan will be credited to a
separate account in the name of each investor in which all dividends and capital
gains will be reinvested in additional shares of the applicable Fund at net
asset value (plus a sales charge, if applicable). Such reinvestments will be
made at the start of business on the day following the record date for such
dividends and capital gains distributions. To keep his or her account open,
subsequent payments in the amount of $20 or more must be made into each
participant's account monthly. If the group is reduced to less than five
participants, the minimums set forth under "Systematic Investment Plan and
Electronic Transfer Service" shall apply. The plan may be terminated by SM&R or
the shareholder at any time upon sixty (60) days prior written notice.
EXCHANGE PRIVILEGE
You may make exchanges without charge, between the corresponding Class of
funds managed by SM&R on terms described in the Prospectuses.
You may exchange shares you own in the SM&R Investments, Inc. Primary Fund
for shares of the SM&R Investment, Inc. Money Market Fund and vice versa.
You also may exchange your Class A, B, T, Y, and J shares for shares of the
Primary Fund and Money Market Fund, subject to two conditions:
- any applicable CDSC period has expired on the shares you wish to exchange
(I.E., 13 months in the case of Class A shares and 5 years in the case of
Class B shares), and
- you meet any minimum investment requirement for the shares you wish to
acquire.
You CANNOT exchange Class C shares for shares of the Money Market Fund or
Primary Fund.
You may exchange shares you own in the Primary Fund or Money Market Fund for
Class A, T, Y, and J shares of another fund managed by SM&R, provided you meet
any eligibility requirements and pay any sales charge applicable to the acquired
shares. You cannot exchange shares of the Money Market Fund or Primary Fund for
Class B or C shares of another fund.
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We waive any sales charges on Class A and Class T shares acquired through an
exchange if you previously paid a sales charge on amounts invested in those
shares. In other words, we will never impose a front-end sales charge on the
same investments twice. If the exchanged shares were acquired through
reinvestment of dividends or capital gains distributions while in a Class that
imposes a front-end sales charge, we deem those amounts invested in shares to
have previously paid a sales charge for purposes of the exchange privilege.
For example, you purchase Class T shares of the Growth Fund. You then
exchange all your Class T shares (including shares acquired through reinvestment
of dividends and capital gains distributions) for shares of the Money Market
Fund. Later, you re-exchange those shares of the Money Market Fund for Class T
shares of the Equity Income Fund. We would not impose any sales charge upon re-
exchange into Class T shares because you previously paid a sales charge on those
amounts invested in shares.
Shares of any fund held in escrow under a Letter of Intent are not eligible
for the exchange privilege. Such shares will not be released from escrow until
the balance invested during the period specified in the Letter of Intent equals
or exceeds the amount required to be invested under the Letter of Intent or the
shareholder requests, in writing, that the Letter of Intent be canceled and pays
any adjustments in sales charge. After release from escrow, shares may be
exchanged, provided all other applicable conditions are met.
The exchange privilege does not give an investor the option or right to
purchase securities, but is a revocable privilege permitted under the present
policies of each of the Funds. SM&R reserves the right to restrict the frequency
of or otherwise modify, condition, terminate or impose additional charges upon
the exchange privilege. ANY GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE
MAY BE RECOGNIZED FOR FEDERAL AND STATE INCOME TAX PURPOSES. YOU SHOULD CONSULT
YOUR TAX ADVISOR FOR THE TAX TREATMENT AND EFFECT OF EXCHANGES.
The minimum number of shares of a Fund that may be exchanged is the number
of shares of the Fund that have a net asset value on the date of such exchange
that is equal to the minimum initial or subsequent investment, as the case may
be, of the fund into which the exchange is being made.
REDEMPTION
GENERAL
Any shareholder may redeem all or any part of his shares by submitting a
written request to SM&R as the Funds' agent for such purpose. Such requests must
be duly executed by each registered owner, must be accompanied by certificates
endorsed for transfer (if certificates have been issued), and must contain a
signature guarantee. The signature guarantee carries with it certain statutory
warranties relied upon by the transfer agent. This guarantee is designed to
protect the investor, the funds, SM&R, and its representatives through the
signature verification of each investor wishing to redeem or exchange shares.
Signatures may be guaranteed by an "eligible guarantor institution" as
defined in rules adopted by the Securities and Exchange Commission. Eligible
guarantor institutions generally include banks, brokers, dealers, municipal
securities dealers or brokers, government securities dealers or brokers, credit
unions, national securities exchanges, registered securities associations and
institutions that participate in the Securities Transfer Agent Medallion Program
("STAMP") or other recognized signature guarantee medallion program or an SM&R
representative who has executed an agreement and received authorization from
SM&R. WITNESSING OR NOTARIZATION IS NOT SUFFICIENT.
No signature guarantees are required on the written request for redemption
by a shareholder of record when payment is to be made to such shareholder of
record at such shareholder's address of record and the value of the shares
redeemed is $25,000 or less. In all other cases the signatures on the
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<PAGE>
request for redemption, as well as on certificates being tendered, must be
guaranteed. On all redemption requests for joint accounts, the signatures of all
joint owners are required. Redemptions may also be requested by telephone, see
"Redeeming Shares" in the Prospectuses. Corporations, executors, divorced
persons, administrators, trustees or guardians will be required to submit
further documentation. Any applicable CDSC will be deducted upon redemption.
Shares are redeemed at the net asset value per share next computed after the
request and certificates, if any, are received in "Proper Form." (See "Redeeming
Shares" in the Prospectuses). A shareholder may receive more or less than he
paid for his shares, depending on the prevailing market value of the Fund's
portfolio securities and the applicable CDSC, if any. Redemption checks are
delivered as soon as practicable and normally will be sent to the investor
within seven days following the date on which redemption is made.
At various times a Fund may be requested to redeem shares for which it has
not yet received good payment for prior purchases of Fund shares. Accordingly,
proceeds of a Fund will not be paid until good payment has been received which
could be as much as ten (10) business days after the purchase, or until SM&R can
verify that good payment (for example, cash or certified check on a United
States bank) has been, or will be, collected for the purchase of such shares.
The right of redemption is subject to suspension and payment postponed
during any period when the New York Stock Exchange is closed other than
customary weekend or holiday closings, or during which trading on such Exchange
is restricted; for any period during which an emergency exists, as a result of
which disposal by a Fund of its securities is not reasonably practicable or it
is not reasonably practicable for a Fund to fairly determine the value of its
net assets; or for such other periods as the SEC has by order permitted such
suspension for the protection of a Fund's security holders.
The Funds have made an election under the 1940 Act to pay in cash all
requests for redemption by any shareholder of record, limited in amount with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000 or (ii) 1% of the net asset value of the Fund at the beginning of such
period. The Funds may pay the redemption price, if any, in excess of the amounts
described above in whole or in part in portfolio securities, at the market value
thereof determined as of the close of business next following receipt of the
request in proper form, if deemed advisable by the Board of Directors. In such
case a shareholder would incur brokerage costs if he sold the securities
received.
SYSTEMATIC WITHDRAWAL PLAN
As described in the Prospectus under "Systematic Withdrawal Plan," each Fund
has a Systematic Withdrawal Plan which allows shareholders having an account
value of $5,000 or more ($50,000 or more for Class Y) to automatically withdraw
a minimum of $50 monthly or quarterly. It may not be advisable for shareholders
to maintain a Withdrawal Account while concurrently purchasing shares of the
Funds because of the sales charge or CDSC (as applicable) involved in additional
purchases and withdrawals. A shareholder should carefully consider such
purchases and contact his or her financial adviser regarding their advisability.
A Systematic Withdrawal Plan provides for regular monthly or quarterly
payments to the account investor or his designee through redemption of a portion
of the shares held in the account. Some portion of each withdrawal may be
taxable gain or loss to the account investor at the time of the withdrawal, the
amount of the gain or loss being determined by the investment in the Funds'
shares. The minimum, though not necessarily recommended, withdrawal amount is
$50. Shares sufficient to provide the designated withdrawal payment are redeemed
each month or quarterly on the 20th, or the next succeeding business day, and
checks are mailed to reach the investor on or about the lst of the following
month. All income dividends and capital gains distributions are automatically
reinvested at net asset value, without sales charge. Since each withdrawal check
represents proceeds from the sale of sufficient shares equal to the withdrawal,
there can be a reduction of invested capital, particularly in a
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<PAGE>
declining market. If redemptions are consistently in excess of shares added
through reinvestment of distributions, the withdrawals will ultimately exhaust
the capital.
The shareholder may designate withdrawal payments for a fixed dollar amount,
as stated in the preceding paragraph, or a variable dollar amount based on (1)
redemption of a fixed number of shares at monthly or quarterly intervals, or (2)
redemption of a specified and increasing fraction of shares held at monthly or
quarterly intervals. To illustrate the latter option, if an investor wanted
quarterly payments for a ten-year period, the first withdrawal payment would be
the proceeds from redemption of 1/40th of the shares held in the account. The
second payment would be 1/39th of the remaining shares; the third payment would
be 1/38th of the remaining shares, etc. Under this option, all shares would be
redeemed over the ten-year period, and the payment amount would vary each
quarter, depending upon the number of shares redeemed and the redemption price.
No charge is made for a non-qualified Systematic Withdrawal Plan, and the
account investor may change the option or payment amount at any time upon
written request received by SM&R no later than the month prior to the month of a
scheduled redemption for a withdrawal payment. A Systematic Withdrawal Plan may
also be terminated at any time by the account investor or the Fund without
penalty.
Occasionally certain limited types of qualified retirement plans are
involved in making investments and withdrawals during the same year. Under such
an arrangement, it is possible for the plan to be, in effect, charged duplicate
sales charges. In order to eliminate this possibility, each Fund will permit
additional investments, without sales charge, equal to all sums withdrawn,
providing the additional investments are made during the next twelve months
following the withdrawal or redemption, and providing that all funds withdrawn
were for the specific purpose of satisfying plan benefits of participants who
have retired, become disabled or left the plan. Furthermore, for a qualified
plan to qualify under this provision, the plan must include at least one
participant who is a non-owner employee. The Funds and SM&R discourage
shareholders from maintaining a withdrawal account while concurrently and
regularly purchasing shares of the Funds, although such practice is not
prohibited.
TAX STATUS
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY
Each Fund is a separate entity for federal income tax purposes and each Fund
has elected to be treated as a regulated investment company under Subchapter M
of the Internal Revenue Code. Each Fund intends to distribute all of its net
investment income and net realized capital gains to shareholders in a timely
manner. Therefore, it is not expected that any Fund will be required to pay
federal income taxes.
In order to qualify as a regulated investment company, each Fund must meet
several requirements. These requirements include the following: (1) at least 90%
of the Fund's gross income must be derived from dividends, interest, payments
with respect to securities loans, gains from the sale or disposition of stock,
securities or foreign currencies or other income derived in connection with the
Fund's investment business and (2) at the close of each quarter of the Fund's
taxable year, (a) at least 50% of the value of the Fund's assets must consist of
cash, United States Government securities, securities of other regulated
investment companies and other securities (limited generally with respect to any
one issuer to not more than 5% of the total assets of the Fund and not more than
10% of the outstanding voting securities of such issuer) and (b) not more than
25% of the value of the Fund's assets may be invested in the securities of any
issuer (other than United States Government Securities or securities of other
regulated investment companies) or of two or more issuers which the Fund
controls and which are determined to be engaged in similar or related trades or
businesses. In addition, each Fund must distribute to its shareholders at least
90% of its net investment income and net tax-exempt income for each of its
taxable years. If a Fund fails to qualify as a regulated investment company, the
Fund will be
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<PAGE>
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to its shareholders will be taxed as ordinary
dividend income to the extent of such Fund's available earnings and profits.
EXCISE TAX
In order to avoid federal excise taxes, each Fund is required to distribute
to its shareholders at least 98% of its taxable ordinary income earned during
the calendar year and 98% of its capital gain net income earned during the
twelve month period ending on October 31 (in addition to undistributed amounts
from the prior year). The Funds intend to declare and pay sufficient dividends
in a manner that will comply with such distribution requirements but can give no
assurances that their distributions will be sufficient to eliminate all such
excise taxes.
DISTRIBUTIONS OF INVESTMENT INCOME AND CAPITAL GAINS
For federal income tax purposes, any income dividends derived from taxable
investments which the shareholder receives from any Fund, as well as any
distributions derived from net short-term capital gains, are treated as ordinary
income whether the shareholder has elected to receive them in cash or in
additional shares. Distributions derived from net long-term capital gains will
be taxable as long-term capital gains regardless of the length of time the
shareholder has owned the Fund's shares and regardless of whether such
distributions are received in cash or in additional shares. In determining the
amount of capital gains, if any, available for distribution, net capital gains
are offset against available net capital losses, if any, carried forward from
previous years. Distributions which are declared in October, November or
December and paid to shareholders in January of the following year will be
treated for tax purposes as if they had been received by the shareholders on
December 31 of the year in which they were declared.
A percentage of the dividends paid by each Fund to corporate shareholders
may in certain circumstances qualify for the dividends received deduction
available to corporations. The dividends received deduction will be available
only with respect to dividends designated by the Fund as eligible for such
treatment. Dividends so designated must be attributable to dividends earned by
the Fund from U.S. corporations and must not have been earned from investments
that were debt-financed or held by the Fund for less than the requisite period.
Similarly, the deduction may be reduced or eliminated if the investment in the
Fund by the corporate shareholder was debt-financed or held less than the
requisite period. All dividends from the Funds, including dividends eligible for
the dividends-received deduction, are included in a corporation's alternative
minimum taxable income calculation.
At the end of each calendar year, the Funds will advise shareholders about
the tax status of all distributions made during each taxable year, including the
portion of the dividends which comprise taxable income, exempt income and
interest income that is a tax preference item under the alternative minimum tax.
Shareholders should consult a tax advisor about the application of state and
local (as well as federal) tax laws to these distributions and redemption
proceeds received from the Fund.
Many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by the fund from direct obligations of
the U.S. Government, subject in some states to minimum investment requirements
that must be met within each Fund. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of the distributions may be exempt from
corporate income or franchise taxes.
Shareholders who are not U.S. persons for purposes of federal income
taxation should consult with their financial or tax advisors regarding the
applicability of U.S. withholding taxes to distributions received by them from
any Fund.
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<PAGE>
Shareholders are reminded that dividends are taxable whether received in
cash or reinvested and received in the form of additional shares. Furthermore,
any distribution received shortly after a purchase of shares by an investor will
have the effect of reducing the per share net asset value of his shares by the
amount of the distributions. Such distributions, although in effect a return of
capital, are subject to taxes. Furthermore, if the net asset value of each share
is reduced below the shareholder's cost as a result of a distribution, such
distribution would be a return of capital although taxed at applicable rates.
REDEMPTION OF FUND SHARES
Redemptions and exchanges of Fund shares are taxable transactions for
federal and state income tax purposes. The tax law generally requires that
shareholders recognize a gain or loss in an amount equal to the difference
between the amount received by the shareholder and the shareholder's tax basis.
If the Fund shares are held as a capital asset, the shareholder will realize
capital gain or loss and if the shares have been held for more than one year at
the time of the redemption or exchange, the shareholder will realize long term
gain or loss for federal income tax purposes. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long term capital loss to the extent of any long-term capital gains
distributed to the shareholder on those shares. In addition, all or a portion of
any loss realized upon the redemption of Fund shares will be disallowed to the
extent the shareholder buys other shares in the Fund (through reinvestment of
dividends or otherwise) within 30 days before or after the share redemption.
(Any loss disallowed under this rule will be added to the shareholder's tax
basis in the new Fund shares acquired during such period.) Shareholders should
consult with their tax advisor concerning the tax reporting requirements in
effect on the redemption or exchange of such shares.
Each Fund or the securities dealer effecting a redemption transaction is
required to file an information return (1099-B) with the IRS with respect to
each sale of Fund shares by a shareholder. The year-end statement provided to
each shareholder will serve as a substitute 1099-B for purposes of reporting any
gain or loss on the tax return filed by the shareholder. In addition, each Fund
is required by law and IRS regulations to withhold 31% of the dividends,
redemptions and other payments made to non-exempt accounts unless shareholders
have provided a corrected taxpayer identification number and made the
certifications required by the IRS as indicated in the shareholder application
when opening an account.
BACKUP WITHHOLDING
Each Fund may be required to report to the Internal Revenue Service ("IRS")
any taxable dividends or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number and made certain required certifications that appear in the Application.
A shareholder may also be subject to backup withholding if the IRS or a broker
notifies the Fund that the number furnished by the shareholder is incorrect or
that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
NON-U.S. INVESTORS
Ordinary dividends generally will be subject to U.S. income tax withholding.
The non-U.S. investor's home country may also tax ordinary dividends, capital
gain distributions and gains arising from redemptions and exchanges of fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. Non-U.S. investors may wish to contact their tax advisors to
determine the U.S. and non-U.S. tax consequences of an investment in the fund.
35
<PAGE>
THE UNDERWRITER
SM&R serves as principal underwriter of the shares of the Funds pursuant to
an agreement dated May 1, 1993, as amended on November 19, 1998 (the
"Underwriting Agreement"). Such Underwriting Agreement provides that it shall
continue in effect only so long as such continuance is specifically approved at
least annually by the Board of Directors of each Fund or by vote of a majority
of the outstanding voting securities of a Fund and, in either case, by the
specific approval of a majority of directors who are not parties to such
agreement or not "interested" persons (as defined in the 1940 Act) of any such
parties, cast in person at a meeting called for the purpose of voting on such
approval. The Underwriting Agreement was approved by the Board of Directors of
each Fund in accordance with such procedures at a meeting held on November 19,
1998. The Underwriting Agreement may be terminated without penalty by vote of
the Board of Directors or by vote of the holders of a majority of the
outstanding voting securities of a Fund, or by SM&R, upon sixty (60) days
written notice and will automatically terminate if assigned (as provided in the
1940 Act).
As principal underwriter, SM&R continuously offers and sells shares of each
Fund through its own sales representatives and broker-dealers. As compensation
for such services, SM&R receives the sales charge, which is the difference
between the offering price at which shares are issued and the net asset value
thereof.
Broker-dealers or other securities dealers that have entered into selling
agreements with SM&R may receive compensation from SM&R or an affiliated company
in connection with selling shares of funds managed by SM&R. Compensation may
include financial assistance for conferences, shareholder services, automation,
sales and training programs, or promotional activities. Registered
representatives and their families may be paid for travel expenses, including
lodging, in connection with business meetings or seminars. In some cases, this
compensation may only be available to securities dealers whose representatives
have sold or are expected to sell significant amounts of shares. Securities
dealers may not use certain sales to qualify for this compensation if prohibited
by the laws of any state or self-regulatory agency, such as the National
Association of Securities Dealers, Inc.
The sales charge allowance to broker-dealers ranges from a maximum of 6.1%
to a minimum of 2.6% of the net amount invested and from a maximum of 4.75% to a
minimum of 2.0% of the public offering price. In connection with certain
purchases of Class T shares of $500,000 or more, SM&R may pay broker-dealers
from its own profits and resources, a per annum percent of the amount invested
as follows: Year 1--0.35%, Year 2--0.25%, and, in the third and subsequent
years, 0.075% per annum, in quarterly installments, to those broker-dealers with
accounts in the aggregate totaling $1 million or more. Such allowances are the
same for all broker-dealers.
The aggregate amount of sales charge received by SM&R from the sale of Fund
shares for the past three fiscal years is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------
SALES CHARGES SALES CHARGES SALES CHARGES
RECEIVED BY SM&R RECEIVED BY SM&R RECEIVED BY SM&R
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund $ 256,481 $ 405,080 $ 441,976
- -------------------------------------------------------------------------------------------
Equity Income Fund $ 612,858 $ 697,920 $ 830,130
- -------------------------------------------------------------------------------------------
Balanced Fund $ 44,577 $ 54,962 $ 76,199
- -------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
Of such amounts received from the Funds during such periods, SM&R retained
approximately:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER YEAR ENDED DECEMBER YEAR ENDED DECEMBER
31, 1996 31, 1997 31, 1998
- ------------------------------------------------------------------------------------------------
AMOUNT AMOUNT AMOUNT
RETAINED AMOUNT RETAINED AMOUNT RETAINED AMOUNT
BY REALLOWED BY REALLOWED BY REALLOWED
SM&R TO DEALERS SM&R TO DEALERS SM&R TO DEALERS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth Fund $ 47,000 $ 6,066 $ 54,000 $ 5,433 $ 3,904 $ 5,175
- ------------------------------------------------------------------------------------------------
Equity Income Fund $ 55,000 $ 9,010 $ 48,000 $ 9,704 $ (1,159) $ 10,123
- ------------------------------------------------------------------------------------------------
Balanced Fund $ 6,000 $ 390 $ 2,000 $ 353 $ 732 $ 346
- ------------------------------------------------------------------------------------------------
</TABLE>
AUDITORS AND FINANCIAL STATEMENTS
Tait, Weller & Baker, 8 Penn Center, Philadelphia, PA 19103, are the Fund's
independent auditors and perform annual audits of the Fund's financial
statements.
The Board appointed Tait, Weller & Baker to serve as the independent
auditors to the Funds for the years ended December 31, 1997 and 1998.
Shareholders of the Funds ratified the selection of Tait, Weller & Baker for the
year ended December 31, 1998 at a meeting of the Shareholders held on May 28,
1998. Due to a concern over a potential conflict of interest, KPMG resigned as
auditors to the Funds on December 15, 1997. For the year ended December 31,
1996, and up to the date of resignation of KPMG, there were no disagreements
with KPMG on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of KPMG, would have caused it to make reference to the subject
matter of the disagreement in connection with its report. The independent
auditors' report on the 1996 financial statements did not contain an adverse
opinion or a disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope or accounting principles. Each of Tait, Weller & Baker
and KPMG has advised the Funds that neither it nor any present member or
associate of the relevant firm has any financial interest, direct or indirect,
in any of the Funds.
Each Fund's audited financial statements for the year ended December 31,
1998 are incorporated herein by reference from each Fund's Annual Report dated
December 31, 1998, filed with the SEC on March 9, 1999.
CUSTODIAN
The cash and securities of the Funds are held by SM&R, 2450 South Shore
Boulevard, Suite 400, League City, Texas 77573, pursuant to a Custodian
Agreement dated September 12, 1991. As custodian, SM&R will hold and administer
the Funds' cash and securities and maintain certain financial and accounting
books and records as provided for in such Custodian Agreement. The compensation
paid to the Custodian is paid by the Funds and is based upon and varies with the
number, type and amount of transactions conducted by the Custodian.
SM&R has entered into a sub-custodial agreement with Moody National Bank of
Galveston (the "Bank") effective July 1, 1991. Under the sub-custodian
agreement, the cash and securities of the Funds will be held by the Bank which
will be authorized to use the facilities of the Depository Trust Company and the
facilities of the book-entry system of the Federal Reserve Bank with respect to
securities of the Funds held by it on behalf of SM&R for the Funds.
COUNSEL
The Fund's General Counsel is Greer, Herz & Adams, L.L.P., 18th Floor, One
Moody Plaza, Galveston, Texas 77550.
37
<PAGE>
TRANSFER AGENT AND DIVIDEND PAYING AGENT
SM&R is the transfer agent and dividend paying agent for the Funds, the
American National Investments Accounts, Inc., and SM&R Investments, Inc. (See
"Administrative Service Agreement" herein.) A discussion of SM&R's duties as
transfer agent is set forth above under "Administrative Service Agreement."
PERFORMANCE AND ADVERTISING DATA
Quotations of performance may from time to time be used in advertisements,
sales literature, shareholder reports or other communications to shareholders or
prospective investors. Each Fund's total return fluctuates in response to market
conditions and other factors. Investment return and principal value will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost.
Each Fund's performance may be quoted in advertising in terms of total
return. All advertisements will disclose the maximum sales charge to which
investments in shares of that Fund may be subject. If any advertised performance
data does not reflect the maximum sales charge (if any), such advertisement will
disclose that the sales charge has not been deducted in computing the
performance data, and that, if reflected, the maximum sales charge would reduce
the performance quoted. An investor should keep in mind when reviewing
performance that past performance of a fund is not indicative of future results,
but is an indication of the return to the investor only for the limited
historical period.
With respect to those categories of investors who are permitted to purchase
shares of a Fund at net asset value, sales literature pertaining to the Fund may
quote a current distribution rate, total return, average annual total return and
other measures of performance as described elsewhere in this Statement of
Additional Information with the substitution of net asset value for the public
offering price.
Sales literature referring to the use of the Funds as a potential investment
for Individual Retirement Accounts ("IRAs"), and other tax-advantaged retirement
plans may quote a total return based upon compounding of dividends on which it
is presumed no federal income tax applies.
The Funds, annual reports contain additional performance information and
will be made available to you upon request and without charge.
TOTAL RETURN
Standardized total returns quoted in advertising and sales literature
reflect all aspects of a Fund's return, including the effect of reinvesting
dividends and capital gain distributions, any change in the Fund's net asset
value per share over the period and maximum sales charge, if any, applicable to
purchases of the Fund's shares. A cumulative total return reflects a Fund's
performance over a stated period of time. An average annual total return
reflects the hypothetical annually compounded return that would have produced
the same cumulative total return if the Fund's performance had been constant
over the entire period. Because average annual returns tend to even out
variations in a Fund's return, investors should recognize that such returns are
not the same as actual year-by-year results. To illustrate the components of
overall performance, a Fund may separate its cumulative and average annual
returns into income results and capital gain or loss.
38
<PAGE>
The average annual total returns for each Fund for the following periods
ended December 31, 1998 are:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING
DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SM&R Growth Fund 11.53% 16.10% 13.90%
- --------------------------------------------------------------------------------------------
SM&R Equity Income Fund 5.65% 14.15% 13.95%
- --------------------------------------------------------------------------------------------
SM&R Balanced Fund 7.28% 11.81% 10.64%
- --------------------------------------------------------------------------------------------
</TABLE>
The average annual total return figures for the Funds are computed for a
Class according to a formula prescribed by the SEC. The formula can be expressed
as follows:
P(1 + T)to the power of n = ERV
Where P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = Ending Redeemable Value of a hypothetical $1,000 investment made
at the beginning of the 1-, 5- or 10-year periods at the end of a
1-, 5- or 10-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period. The ERV assumes the deduction of all nonrecurring
charges deducted at the end of each period.
TOTAL RETURN FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCES.
A Fund's performance is a function of its portfolio management in selecting
the type and quality of portfolio securities and is affected by operating
expenses of the Fund and market conditions. A shareholder's investment in a Fund
is not insured or guaranteed. These factors should be carefully considered by
the investor before making any investment in any Fund.
CUMULATIVE TOTAL RETURN
The cumulative return reflects each year's hypothetical annually compounded
return that would equate a ten thousand dollar investment on January 1, 1988 to
the redeemable value on December 31 of each of the next ten years by adding one
to the computed average annual total return multiplied by:
1. the $10,000 hypothetical investment for the first year, or
2. the redeemable value of the $10,000 investment as of December 31 of the
preceding year for years two through ten.
The total return percentage calculations assume the maximum sales charge was
deducted from the initial amount invested and that all income dividends and
capital gain distributions are reinvested on the reinvestment dates at the net
asset value.
The income return percentage reflects the income dividends paid during the
year divided by:
1. the $10,000 hypothetical investment for the first year, or
39
<PAGE>
2. the redeemable value of the $10,000 investment as of December 31 of the
preceding year for years two through ten.
The appreciation percentage represents the change in the net asset value
during the year less the income dividends paid during the year divided by:
1. the $10,000 hypothetical investment for the first year, or
2. the redeemable value of the $10,000 investment as of December 31 of the
preceding year for years two through ten.
The total return on the net amount invested reflects the hypothetical return
that would equate a January 1, 1989 initial ten thousand dollar investment less
the maximum $575 sales load to the redeemable value on December 31, 1989 by
adding one to the computed total return and multiplying the result by $9,425
(the initial ten thousand dollar investment less the maximum sales load).
MULTI-CLASS PERFORMANCE
The Funds converted from a single-class to a multi-class structure. That
single class of outstanding shares was converted to Class T shares, effective
December 31, 1998. Existing shareholders of a Fund as of December 31, 1998
became shareholders in Class T of that Fund.
The performance calculations for the Classes of the Funds, other than the
Class T shares, and any Classes that might later be created, may be stated so as
to include the performance of the Fund's Class T shares. For these purposes, the
inception of the Class T shares is the inception of the Funds. For standardized
total return calculations, the current maximum initial sales load for Class A
shares would be used in determining the total return of Class A shares as if
assessed at the inception of Class T shares.
COMPARISONS
To help investors better evaluate how an investment in the Funds might
satisfy their investment objective, advertisements and other materials regarding
the Funds may discuss various measures of the performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
The following publications, indices, and averages may be used:
DOW JONES COMPOSITE AVERAGE OR ITS COMPONENT AVERAGES--an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
STANDARD & POOR'S 500 STOCK INDEX OR ITS COMPONENT INDICES--an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
THE NEW YORK STOCK EXCHANGE COMPOSITE OR COMPONENT INDICES--unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
WILSHIRE 5000 EQUITY INDEX--represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
LIPPER--MUTUAL FUND PERFORMANCE ANALYSIS AND LIPPER--FIXED INCOME FUND
PERFORMANCE ANALYSIS--measure total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
40
<PAGE>
CDA MUTUAL FUND REPORT, PUBLISHED BY CDA INVESTMENT TECHNOLOGIES, INC.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
MUTUAL FUND SOURCE BOOK, PUBLISHED BY MORNINGSTAR, INC.--analyzes price,
yield, risk and total return for equity funds.
FINANCIAL PUBLICATIONS: THE WALL STREET JOURNAL AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES provide performance
statistics over specified time periods.
CONSUMER PRICE INDEX (OR COST OF LIVING INDEX), PUBLISHED BY THE U.S. BUREAU
OF LABOR STATISTICS--a statistical measure of change, over time, in the price of
goods and services in major expenditure groups.
SALOMON BROTHERS BROAD BOND INDEX OR ITS COMPONENT INDICES--The Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee bonds.
STANDARD & POOR'S BOND INDICES--measures yield and price of Corporate,
Municipal, and Government bonds.
In assessing such comparisons of performance, an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the portfolio of the Funds, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by the Funds to calculate its
figures. In addition there can be no assurance that the Funds will continue this
performance as compared to such other averages.
41
<PAGE>
EXHIBIT 1
SCHEDULE OF INVESTMENTS December 31, 1998
- --------------------------------------------------------------------------------
SM&R GROWTH FUND
<TABLE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
AUTO & TRUCK
MANUFACTURERS--1.64%
DaimlerChrysler AG * 8,541 $ 820,470
Ford Motor Company 24,800 1,455,450
General Motors Corporation 14,700 1,051,969
-----------
3,327,889
BANKS--6.83%
Banc One Corporation 38,500 1,965,906
BankAmerica Corporation 40,000 2,405,000
Comerica, Incorporated 40,000 2,727,500
Dime Bancorp, Incorporated 67,000 1,771,313
First Union Corporation 30,000 1,824,375
Morgan (J.P.) & Company 15,000 1,575,937
Wells Fargo Company 40,000 1,597,500
-----------
13,867,531
BEVERAGES--2.18%
Anheuser-Busch Companies,
Incorporated 37,000 2,428,125
Coca-Cola Company 30,000 2,006,250
-----------
4,434,375
CHEMICALS--1.52%
Cabot Corporation 30,000 838,125
Hercules, Incorporated 30,600 837,675
Praxair, Incorporated 40,000 1,410,000
-----------
3,085,800
COMMUNICATIONS EQUIPMENT--4.34%
Ascend Communications
Incorporated* 41,250 2,712,187
Lucent Technologies, Incorporated 40,000 4,400,000
Northern Telecom Limited 34,000 1,704,250
-----------
8,816,437
COMPUTER RELATED--4.24%
Cisco Systems, Incorporated* 37,500 3,480,469
Sun Microsystems, Incorporated* 60,000 5,137,500
-----------
8,617,969
COMPUTER SOFTWARE--10.63%
BMC Software, Incorporated* 80,000 3,565,000
HBO & Co 62,000 1,778,625
MAPICS, Incorporated* 80,000 1,320,000
Microsoft Corporation* 56,000 7,766,500
Network Associates, Incorporated* 22,500 1,490,625
Novell, Incorporated* 166,000 3,008,750
Synopsys, Incorporated* 49,000 2,658,250
-----------
21,587,750
CONSTRUCTION--0.62%
Centex Corporation 27,700 1,248,231
COSMETICS & TOILETRIES--2.70%
Procter & Gamble Company 60,000 5,478,750
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
DIVERSIFIED--1.22%
AlliedSignal, Incorporated 23,000 $ 1,019,187
Coltec Industries, Incorporated* 40,000 780,000
U.S. Industries, Incorporated 36,000 670,500
-----------
2,469,687
DRUGS--1.45%
Merck & Company, Incorporated 20,000 2,953,750
ELECTRICAL EQUIPMENT--3.97%
General Electric Company 63,000 6,429,938
York International Corporation 40,000 1,632,500
-----------
8,062,438
ELECTRONICS/INSTRUMENTS--1.19%
Avnet, Incorporated 40,000 2,420,000
ENVIRONMENTAL--1.33%
Waste Management, Incorporated 58,000 2,704,250
EXPLORATION & DRILLING--0.45%
Global Marine, Incorporated* 32,000 294,000
Tidewater, Incorporated 17,000 394,188
Union Pacific Resources Group,
Incorporated 25,408 230,260
-----------
918,448
FINANCIAL SERVICES--2.96%
Associates First Capital
Corporation 12,998 550,790
Countrywide Credit Industries,
Incorporated 44,000 2,208,250
Morgan Stanley, Dean Witter,
Discover and Company 20,000 1,420,000
Reliance Group Holdings,
Incorporated 142,000 1,828,250
-----------
6,007,290
FOOD PRODUCERS--5.11%
IBP, Incorporated 58,000 1,689,250
Interstate Bakeries Corporation 66,000 1,744,875
McCormick & Company, Incorporated 58,000 1,961,125
Smithfield Foods, Incorporated* 47,500 1,609,063
Tyson Foods, Incorporated 30,000 637,500
Universal Foods Corporation 100,000 2,743,750
-----------
10,385,563
FOOD RETAILERS--2.85%
Albertson's, Incorporated 40,000 2,547,500
Safeway, Incorporated* 53,000 3,229,688
-----------
5,777,188
</TABLE>
42
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1998
- --------------------------------------------------------------------------------
SM&R GROWTH FUND, CONTINUED
<TABLE>
<CAPTION>
COMMON STOCK SHARES VALUE
INSURANCE COMPANIES--3.96%
<S> <C> <C>
American General Corporation 20,000 $ 1,560,000
CIGNA Corporation 33,000 2,551,312
Citigroup, Incorporated 79,500 3,935,250
-----------
8,046,562
LEISURE TIME--0.70%
Brunswick Corporation 57,000 1,410,750
MACHINERY & EQUIPMENT--1.27%
Flowserve Corporation 47,000 778,437
Pall Corporation 71,000 1,797,187
-----------
2,575,624
MEDICAL PRODUCTS &
SUPPLIES--7.17%
Abbott Laboratories 100,000 4,900,000
Beckman Coulter, Incorporated 18,000 976,500
Bergen Brunswig Corporation (Class
A) 82,500 2,877,188
Biomet, Incorporated 82,000 3,300,500
Johnson & Johnson 30,000 2,516,250
-----------
14,570,438
MEDICAL SERVICES--2.83%
Aetna, Incorporated 23,000 1,808,375
PacifiCare Health Systems,
Incorporated (Class B)* 30,000 2,385,000
United Healthcare Corporation 36,000 1,550,250
-----------
5,743,625
METALS & MINING--0.27%
Kinross Gold Corporation* 240,120 555,277
NATURAL GAS--1.29%
Enron Corporation 46,000 2,624,875
OIL DOMESTIC--3.51%
Amoco Corporation 50,000 3,018,750
Kerr-McGee Corporation 13,000 497,250
Murphy Oil Corporation 17,000 701,250
Unocal Corporation 100,000 2,918,750
-----------
7,136,000
OIL INTERNATIONAL--3.39%
Chevron Corporation 42,000 3,483,375
Elf Aquitaine ADR 60,000 3,397,500
-----------
6,880,875
PAPER/FOREST PRODUCTS--0.41%
Caraustar Industries, Incorporated 29,000 828,313
PHOTOGRAPHY/IMAGING--1.40%
Xerox Corporation 24,000 2,832,000
PRINTING/PUBLISHING--0.78%
Banta Corporation 58,000 1,587,750
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
PROFESSIONAL SERVICE--1.07%
Service Corporation International 57,000 $ 2,169,563
RETAIL DISCOUNT--1.20%
Wal-Mart Stores, Incorporated 30,000 2,443,125
RETAIL GENERAL--1.56%
Federated Department Stores,
Incorporated* 37,000 1,611,812
J. C. Penney Company, Incorporated 33,200 1,556,250
-----------
3,168,062
RETAIL SPECIALTY--1.87%
Group 1 Automotive, Incorporated* 70,000 1,820,000
Officemax, Incorporated* 60,500 741,125
Tiffany & Company 24,000 1,245,000
-----------
3,806,125
SEMICONDUCTORS--2.92%
Intel Corporation 50,000 5,928,125
STEEL--1.52%
Allegheny Teledyne, Incorporated 53,000 1,083,188
LTV Corporation 180,000 1,046,250
USX-U. S. Steel Group 42,000 966,000
-----------
3,095,438
TELECOM--CELLULAR--1.64%
U S West, Incorporated New 51,365 3,319,463
TELEPHONE--2.54%
Alltel Corporation 47,000 2,811,187
MediaOne Group, Incorporated* 50,000 2,350,000
-----------
5,161,187
TRUCKING & SHIPPING--1.17%
Republic Services, Incorporated
(Class A)* 80,000 1,475,000
USFreightways Corporation 31,000 902,875
-----------
2,377,875
-----------
TOTAL COMMON STOCK--97.70%
(Cost $133,057,982) 198,424,398
-----------
<CAPTION>
FACE
COMMERCIAL PAPER AMOUNT
<S> <C> <C>
ELECTRIC POWER--1.00%
Kentucky Power Company, 6.25%,
01/05/99 $2,038,000 2,036,582
FINANCIAL SERVICES--0.50%
Dana Credit Corporation, 6.10%,
01/04/99 448,000 447,772
Ford Motor Credit Company, 6.00%,
01/07/99 565,000 564,435
-----------
1,012,207
</TABLE>
43
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1998
- --------------------------------------------------------------------------------
SM&R GROWTH FUND, CONTINUED
<TABLE>
<CAPTION>
FACE
COMMERCIAL PAPER AMOUNT VALUE
UTILITY--MISCELLANEOUS--0.77%
<S> <C> <C>
Orange & Rockland Utilities
Incorporated, 6.55%, 01/08/99 $1,569,000 $ 1,566,998
-----------
TOTAL COMMERCIAL PAPER--2.27%
(Cost $4,615,787) 4,615,787
-----------
TOTAL INVESTMENTS--99.97%
(Cost $137,673,769) 203,040,185
CASH AND OTHER ASSETS, LESS
LIABILITIES--0.03% 69,023
-----------
NET ASSETS--100.00% $203,109,208
-----------
-----------
ABBREVIATIONS
ADR -- American Depository Receipt
* -- Non-income producing securities
</TABLE>
See notes to financial statements.
44
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1998
- --------------------------------------------------------------------------------
SM&R EQUITY INCOME FUND
<TABLE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
AUTO & TRUCK
MANUFACTURERS--6.01%
DaimlerChrysler AG* 34,292 $ 3,294,175
Ford Motor Company 133,881 7,857,141
General Motors Corporation 28,000 2,003,750
-----------
13,155,066
BANKS--8.90%
Banc One Corporation 77,000 3,931,812
BankAmerica Corporation 60,000 3,607,500
Comerica, Incorporated 34,500 2,352,469
First Union Corporation 33,400 2,031,137
Morgan (J.P.) & Company 9,500 998,094
TCF Financial Corporation 90,000 2,176,875
Wells Fargo Company 110,000 4,393,125
-----------
19,491,012
BEVERAGES--1.50%
Anheuser-Busch Companies,
Incorporated 50,000 3,281,250
CHEMICALS--2.33%
Goodrich (B.F.) Company 75,000 2,690,625
Hercules, Incorporated 32,600 892,425
Praxair, Incorporated 43,000 1,515,750
-----------
5,098,800
DIVERSIFIED--0.85%
AlliedSignal, Incorporated 25,000 1,107,813
U.S. Industries, Incorporated 40,000 745,000
-----------
1,852,813
DRUGS--6.06%
Schering-Plough Corporation 240,000 13,260,000
ELECTRIC POWER--2.11%
Baltimore Gas & Electric Company 26,300 812,013
DTE Energy Company 65,000 2,786,875
UtiliCorp United, Incorporated 28,000 1,027,250
-----------
4,626,138
ELECTRICAL EQUIPMENT--0.80%
York International Corporation 43,000 1,754,937
ELECTRONICS/INSTRUMENTS--1.22%
Raytheon Company (Class B) 50,000 2,662,500
ENVIRONMENTAL--0.77%
Waste Management, Incorporated 36,250 1,690,156
EXPLORATION & DRILLING--0.67%
Tidewater, Incorporated 40,000 927,500
Union Pacific Resources Group,
Incorporated 60,000 543,750
-----------
1,471,250
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
FINANCIAL SERVICES--6.04%
Associates First Capital
Corporation 70,176 $ 2,973,708
Morgan Stanley, Dean Witter,
Discover and Company 90,000 6,390,000
Omega Healthcare Investors,
Incorporated 60,000 1,811,250
Omega Worldwide, Incorporated* 19,893 87,032
Reliance Group Holdings,
Incorporated 152,000 1,957,000
-----------
13,218,990
FOODS PRODUCERS--3.79%
ConAgra, Incorporated 40,000 1,260,000
Interstate Bakeries Corporation 73,000 1,929,937
McCormick & Company, Incorporated 70,000 2,366,875
Universal Foods Corporation 99,600 2,732,775
-----------
8,289,587
FOODS RETAILERS--1.60%
Albertson's, Incorporated 55,000 3,502,813
FURNITURE/APPLIANCES--1.52%
Whirlpool Corporation 60,000 3,322,500
INSURANCE--3.13%
CIGNA Corporation 36,600 2,829,638
Citigroup, Incorporated 81,500 4,034,250
-----------
6,863,888
LEISURE TIME--0.71%
Brunswick Corporation 63,200 1,564,200
MACHINERY & EQUIPMENT--3.17%
Aeroquip-Vickers, Incorporated 25,000 748,437
Deere & Company 100,000 3,312,500
Flowserve Corporation 51,000 844,687
Foster Wheeler Corporation 30,000 395,625
Pall Corporation 65,000 1,645,312
-----------
6,946,561
MEDICAL PRODUCTS &
SUPPLIES--4.70%
Abbott Laboratories 130,000 6,370,000
Bergen Brunswig Corporation (Class
A) 112,500 3,923,438
-----------
10,293,438
METALS & MINING--0.41%
Cyprus Amax Minerals Company 90,000 900,000
NATURAL GAS--1.28%
Enron Corporation 49,000 2,796,063
OIL DOMESTIC--1.76%
Amoco Corporation 35,600 2,149,350
Kerr-McGee Corporation 27,200 1,040,400
Murphy Oil Corporation 16,100 664,125
-----------
3,853,875
</TABLE>
45
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1998
- --------------------------------------------------------------------------------
SM&R EQUITY INCOME FUND, CONTINUED
<TABLE>
<CAPTION>
COMMON STOCK SHARES VALUE
OIL INTERNATIONAL--9.57%
<S> <C> <C>
Chevron Corporation 30,000 $ 2,488,125
Elf Aquitaine ADR 72,000 4,077,000
Exxon Corporation 40,000 2,925,000
Royal Dutch Petroleum Company 100,000 4,787,500
Schlumberger Limited 90,000 4,151,250
Texaco, Incorporated 48,000 2,538,000
-----------
20,966,875
PAPER/FOREST PRODUCTS--1.85%
Caraustar Industries, Incorporated 30,000 856,875
Glatfelter (P.H.) Company 94,000 1,163,250
Weyerhaeuser Company 40,000 2,032,500
-----------
4,052,625
PHOTOGRAPHY/IMAGING--1.40%
Xerox Corporation 26,000 3,068,000
PRINTING & PUBLISHING--1.62%
Banta Corporation 63,000 1,724,625
Deluxe Corporation 50,000 1,828,125
-----------
3,552,750
PROFESSIONAL SERVICE--1.11%
Service Corporation International 64,000 2,436,000
REAL ESTATE/REITS--3.69%
CenterPoint Properties Corporation 63,000 2,130,188
Crescent Real Estate Equities
Company 65,000 1,495,000
Health & Retirement Properties
Trust 100,000 1,406,250
Hospitality Properties Trust 50,000 1,206,250
Liberty Trust Properties 75,000 1,846,875
-----------
8,084,563
RESTAURANTS--0.34%
Applebee's International,
Incorporated 36,000 742,500
RETAIL GENERAL--1.42%
J. C. Penney Company, Incorporated 66,400 3,112,500
STEEL--1.60%
Allegheny Teledyne, Incorporated 60,000 1,226,250
LTV Corporation 200,000 1,162,500
USX-U. S. Steel Group 48,000 1,104,000
-----------
3,492,750
TELECOM--CELLULAR--3.26%
GTE Corporation 60,000 3,900,000
U S West Incorporated New 50,000 3,231,250
-----------
7,131,250
TELEPHONE UTILITY--1.39%
Alltel Corporation 51,000 3,050,438
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
TOBACCO--1.59%
RJR Nabisco Holdings Corporation 41,248 $ 1,224,550
UST, Incorporated 65,000 2,266,875
-----------
3,491,425
TRUCKING & SHIPPING--0.45%
USFreightways Corporation 34,000 990,250
-----------
TOTAL COMMON STOCK--88.62%
(Cost $133,388,708) 194,067,763
-----------
<CAPTION>
CONVERTIBLE PREFERRED STOCK
<S> <C> <C>
FINANCIAL SERVICES--0.57%
ProLogis Trust 47,000 1,239,625
INSURANCE COMPANIES--0.59%
St Paul Capital LLC 20,000 1,290,000
OIL DOMESTIC--1.36%
Unocal Capital Trust 61,000 2,981,375
-----------
TOTAL CONVERTIBLE PREFERRED STOCK--2.52%
(Cost $5,414,752) 5,511,000
-----------
<CAPTION>
FACE
COMMERCIAL PAPER AMOUNT
<S> <C> <C>
CONSTRUCTION--0.43%
Centex Corporation, 6.55%,
01/22/99 $ 945,000 944,140
ELECTRIC POWER--0.88%
Kentucky Power Company, 6.25%,
01/05/99 1,936,000 1,934,653
FINANCIAL SERVICES--5.73%
Ford Motor Credit Company, 6.00%,
01/07/99 1,843,000 1,841,156
Kerr-McGee Credit Corporation,
6.05%, 01/08/99 1,500,000 1,498,223
PS Colorado Credit Corporation,
6.00%, 01/14/99 2,645,000 2,639,242
Penn Power & Light Energy Trust,
6.10%, 01/12/99 3,061,000 3,055,257
Textron Financial Corporation,
6.05%, 01/04/99 1,298,000 1,297,340
Textron Financial Corporation,
5.92%, 01/15/99 2,215,000 2,209,882
-----------
12,541,100
METAL PRODUCTS--0.68%
Reynolds Metals Company, 5.83%,
01/06/99 1,487,000 1,485,794
</TABLE>
46
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1998
- --------------------------------------------------------------------------------
SM&R EQUITY INCOME FUND, CONTINUED
<TABLE>
<CAPTION>
FACE
COMMERCIAL PAPER AMOUNT VALUE
OIL DOMESTIC--1.06%
<S> <C> <C>
Anadarko Petroleum Corporation,
5.07%, 01/22/99 $1,976,000 $ 1,970,155
Questar Corporation, 5.65%,
01/19/99 350,000 349,010
-----------
2,319,165
-----------
TOTAL COMMERCIAL PAPER--8.78%
(Cost $19,224,852) 19,224,852
-----------
TOTAL INVESTMENTS--99.92%
(Cost $158,028,312) 218,803,615
CASH AND OTHER ASSETS, LESS
LIABILITIES--0.08% 176,356
-----------
NET ASSETS--100.00% $218,979,971
-----------
-----------
ABBREVIATIONS
ADR -- American Depository Receipt
REIT -- Real Estate Investment Trust
* -- Non-income producing securities
</TABLE>
See notes to financial statements.
47
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1998
- --------------------------------------------------------------------------------
SM&R BALANCED FUND
<TABLE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
AUTO & TRUCK
MANUFACTURERS--1.92%
DaimlerChrysler AG* 1,621 $ 155,717
Ford Motor Company 3,300 193,669
General Motors Corporation 3,000 214,687
----------
564,073
BANKS--4.18%
Banc One Corporation 3,410 174,123
BankAmerica Corporation 5,000 300,625
Comerica, Incorporated 3,750 255,703
Dime Bancorp, Incorporated 5,400 142,762
First Union Corporation 3,200 194,600
Wells Fargo Company 4,000 159,750
----------
1,227,563
BEVERAGES--0.67%
Anheuser-Busch Companies,
Incorporated 3,000 196,875
CHEMICALS--0.68%
Hercules, Incorporated 2,800 76,650
Praxair, Incorporated 3,500 123,375
----------
200,025
COMMUNICATIONS EQUIPMENT--1.49%
Lucent Technologies, Incorporated 3,300 363,000
Northern Telecom Limited 1,500 75,187
----------
438,187
COMPUTER RELATED--2.26%
Cisco Systems, Incorporated* 3,000 278,437
Sun Microsystems, Incorporated* 4,500 385,312
----------
663,749
COMPUTER SOFTWARE--4.35%
HBO & Company 2,700 77,456
Microsoft Corporation* 4,600 637,963
Network Associates, Incorporated* 3,000 198,750
Novell, Incorporated* 7,200 130,500
Synopsys, Incorporated* 4,300 233,275
----------
1,277,944
CONSTRUCTION--0.34%
Centex Corporation 2,200 99,137
COSMETICS & TOILETRIES--2.36%
Procter & Gamble Company 7,600 693,975
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
DIVERSIFIED--1.15%
AlliedSignal, Incorporated 3,100 $ 137,369
Coltec Industries, Incorporated* 5,600 109,200
U.S. Industries, Incorporated 4,900 91,263
----------
337,832
DRUGS--3.07%
Warner-Lambert Company 12,000 902,250
ELECTRIC POWER--1.12%
Allegheny Energy, Incorporated 2,100 72,450
DTE Energy Company 4,000 171,500
UtiliCorp United, Incorporated 2,300 84,381
----------
328,331
ELECTRICAL EQUIPMENT--2.36%
General Electric Company 5,400 551,137
York International Corporation 3,500 142,844
----------
693,981
ELECTRONICS/INSTRUMENTS--0.62%
Avnet, Incorporated 3,000 181,500
ENVIRONMENTAL--1.04%
Waste Management, Incorporated 6,525 304,228
EXPLORATION & DRILLING--0.26%
Global Marine, Incorporated* 2,800 25,725
Tidewater, Incorporated 1,500 34,781
Union Pacific Resources Group,
Incorporated 1,693 15,343
----------
75,849
FINANCIAL SERVICES--2.20%
Associates First Capital
Corporation 1,728 73,224
Countrywide Credit Industries,
Incorporated 6,000 301,125
Morgan Stanley, Dean Witter,
Discover and Company 1,600 113,600
Reliance Group Holdings,
Incorporated 12,400 159,650
----------
647,599
FOOD PRODUCERS--2.10%
IBP, Incorporated 5,500 160,187
Interstate Bakeries Corporation 9,000 237,936
Universal Foods Corporation 8,000 219,500
----------
617,623
FOOD RETAILERS--2.19%
Albertson's, Incorporated 3,100 197,431
Safeway, Incorporated* 7,300 444,844
----------
642,275
</TABLE>
48
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1998
- --------------------------------------------------------------------------------
SM&R BALANCED FUND, CONTINUED
<TABLE>
<CAPTION>
COMMON STOCK SHARES VALUE
INSURANCE COMPANIES--2.45%
<S> <C> <C>
American General Corporation 1,800 $ 140,400
CIGNA Corporation 3,000 231,938
Citigroup, Incorporated 7,000 346,500
----------
718,838
LEISURE TIME--0.42%
Brunswick Corporation 5,000 123,750
MACHINERY & EQUIPMENT--0.95%
Flowserve Corporation 4,200 69,563
Foster Wheeler Corporation 3,500 46,156
Pall Corporation 6,500 164,531
----------
280,250
MEDICAL PRODUCTS &
SUPPLIES--5.09%
Abbott Laboratories 6,000 294,000
Beckman Coulter, Incorporated 1,700 92,225
Bergen Brunswig Corporation (Class
A) 11,500 401,063
Biomet, Incorporated 7,100 285,775
Johnson & Johnson 5,000 419,375
----------
1,492,438
MEDICAL SERVICES--1.30%
Aetna, Incorporated 2,100 165,113
PacifiCare Health Systems,
Incorporated (Class B)* 1,000 79,500
United Healthcare Corporation 3,200 137,800
----------
382,413
NATURAL GAS--0.78%
Enron Corporation 4,000 228,250
OIL DOMESTIC--1.20%
Amoco Corporation 4,000 241,500
Kerr-McGee Corporation 1,200 45,900
Murphy Oil Corporation 1,600 66,000
----------
353,400
OIL INTERNATIONAL--2.44%
Chevron Corporation 4,400 364,925
Elf Aquitaine ADR 6,200 351,075
----------
716,000
PAPER/FOREST PRODUCTS--0.71%
Caraustar Industries, Incorporated 2,300 65,694
Weyerhaeuser Company 2,800 142,275
----------
207,969
PRINTING/PUBLISHING--0.51%
Banta Corporation 5,500 150,563
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
PROFESSIONAL SERVICES--0.65%
Service Corporation International 5,000 $ 190,313
RETAIL DISCOUNT--0.17%
Toys "R" Us, Incorporated* 3,000 50,625
RETAIL GENERAL--0.89%
Federated Department Stores,
Incorporated* 3,000 130,688
J. C. Penney Company, Incorporated 2,800 131,250
----------
261,938
RETAIL SPECIALTY--0.58%
Officemax, Incorporated* 4,900 60,025
Tiffany & Company 2,100 108,938
----------
168,963
SEMICONDUCTORS--1.61%
Intel Corporation 4,000 474,250
STEEL--0.91%
Allegheny Teledyne, Incorporated 4,000 81,750
LTV Corporation 16,000 93,000
USX-U. S. Steel Group 4,000 92,000
----------
266,750
TELECOM--CELLULAR--2.06%
GTE Corporation 4,000 260,000
U S West, Incorporated New 5,342 345,227
----------
605,227
TELEPHONE--1.73%
Alltel Corporation 4,400 263,175
MediaOne Group, Incorporated* 5,200 244,400
----------
507,575
TRUCKING & SHIPPING--0.27%
USFreightways Corporation 2,700 78,638
----------
TOTAL COMMON STOCK--59.08%
(Cost $11,331,157) 17,351,146
----------
<CAPTION>
CONVERTIBLE PREFERRED STOCK
<S> <C> <C>
OIL DOMESTIC--0.58%
Unocal Capital Trust 3,500 171,063
----------
TOTAL CONVERTIBLE PREFERRED STOCK--0.58%
(Cost $185,787) 171,063
----------
</TABLE>
49
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1998
- --------------------------------------------------------------------------------
SM&R BALANCED FUND, CONTINUED
<TABLE>
<CAPTION>
FACE
BONDS AND NOTES AMOUNT VALUE
FINANCIAL SERVICES--2.06%
<S> <C> <C>
Ford Motor Credit Company, 6.375%,
09/15/99 $ 600,000 $ 603,716
GOVERNMENT AGENCIES--20.01%
Federal Home Loan Mortgage
Corporation, 7.70%, 05/17/06 1,000,000 1,009,487
Federal Home Loan Mortgage
Corporation, 7.00%, 09/15/07 1,000,000 1,027,944
Federal Home Loan Mortgage
Corporation, Pool #284839, 8.50%,
01/01/17 45,780 47,942
Federal Home Loan Mortgage
Corporation, Pool #302886, 8.00%,
05/01/17 16,395 16,985
Federal Home Loan Mortgage
Corporation, Pool #298759, 8.00%,
08/01/17 106,123 109,940
Federal National Mortgage
Association, 7.55%, 04/22/02 685,000 734,708
Federal National Mortgage
Association, 7.55%, 06/10/04 1,250,000 1,263,286
Federal National Mortgage
Association, 7.70%, 04/10/07 1,500,000 1,540,539
Federal National Mortgage
Association, Pool #041669, 8.00%,
02/01/17 18,043 18,792
Federal National Mortgage
Association, Pool #48974, 8.00%,
06/01/17 103,666 107,971
----------
5,877,594
<CAPTION>
FACE
BONDS AND NOTES AMOUNT VALUE
<S> <C> <C>
U S TREASURY SECURITIES--12.33%
U S Treasury Bond, 6.000%, 02/15/26 $2,350,000 $2,564,438
U S Treasury Note, 5.875%, 02/15/04 1,000,000 1,055,313
----------
3,619,751
----------
TOTAL BONDS AND NOTES--34.40%
(Cost $9,293,376) 10,101,061
----------
<CAPTION>
COMMERCIAL PAPER
<S> <C> <C>
ELECTRIC POWER--0.41%
Indiana Michigan Power Company,
6.20%, 01/05/99 120,000 119,917
FINANCIAL SERVICES--1.70%
Ford Motor Credit, 6.00%, 01/06/99 500,000 499,583
FOOD PRODUCERS--2.96%
ConAgra, Incorporated, 5.87%,
01/04/99 870,000 869,574
----------
TOTAL COMMERCIAL PAPER--5.07%
(Cost $1,489,074) 1,489,074
----------
TOTAL INVESTMENTS--99.13%
(Cost $22,299,394) 29,112,344
CASH AND OTHER ASSETS, LESS LIABILITIES--0.87% 254,760
----------
NET ASSETS--100.00% $29,367,104
----------
----------
ABBREVIATIONS
ADR -- American Depository Receipt
* -- Non-income producing securities
</TABLE>
See notes to financial statements.
50
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH EQUITY INCOME BALANCED
<S> <C> <C> <C>
ASSETS
Investments in securities, at value $ 203,040,185 $ 218,803,615 $ 29,112,344
Cash 27,608 39,242 60,061
Receivable for:
Capital stock sold 534,098 475,554 56,089
Investment securities sold - - 33,081
Dividends 163,233 369,199 14,152
Interest - - 145,314
Other assets 122,086 95,016 22,238
-------------- -------------- ------------
TOTAL ASSETS 203,887,210 219,782,626 29,443,279
LIABILITIES
Capital stock reacquired 634,614 613,031 30,161
Accrued:
Investment advisory fee 77,886 121,718 16,976
Service fee 35,902 39,700 5,659
Other liabilities 29,600 28,206 23,379
-------------- -------------- ------------
TOTAL LIABILITIES 778,002 802,655 76,175
-------------- -------------- ------------
NET ASSETS $ 203,109,208 $ 218,979,971 $ 29,367,104
-------------- -------------- ------------
-------------- -------------- ------------
Shares of capital stock outstanding 35,722,663 7,813,950 1,496,411
-------------- -------------- ------------
-------------- -------------- ------------
Net asset value per share $ 5.69 $ 28.02 $ 19.63
-------------- -------------- ------------
-------------- -------------- ------------
Offering price per share
(Net asset value per share / 94.25%) $ 6.04 $ 29.73 $ 20.83
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
STATEMENTS OF OPERATIONS Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY
GROWTH INCOME BALANCED
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 2,338,773 $ 4,780,046 $ 259,664
Interest 526,397 2,075,598 756,839
------------ ------------ -----------
TOTAL INVESTMENT INCOME 2,865,170 6,855,644 1,016,503
EXPENSES
Investment advisory fee 922,010 1,426,042 198,438
Service fee 423,595 465,270 66,146
Insurance expenses 48,583 51,818 7,386
Directors' fees and expenses 26,669 26,669 26,669
Custody and transaction fees 76,335 84,113 24,919
Audit fees 13,500 13,500 10,000
Qualification fees 29,115 34,581 21,564
Shareholder reporting expenses 40,822 42,682 11,268
Other 1,865 1,246 1,246
------------ ------------ -----------
TOTAL EXPENSES 1,582,494 2,145,921 367,636
LESS EXPENSES REIMBURSED - - (33,454)
------------ ------------ -----------
NET EXPENSES 1,582,494 2,145,921 334,182
------------ ------------ -----------
INVESTMENT INCOME, NET 1,282,676 4,709,723 682,321
------------ ------------ -----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 8,728,659 7,281,961 482,000
Change in unrealized appreciation of investments for the year 21,620,022 11,740,055 2,417,733
------------ ------------ -----------
NET GAIN ON INVESTMENTS 30,348,681 19,022,016 2,899,733
------------ ------------ -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 31,631,357 $ 23,731,739 $ 3,582,054
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
See notes to financial statements.
51
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income, net $ 1,282,676 $ 1,741,364
Net realized gain on investments 8,728,659 24,950,387
Change in unrealized appreciation 21,620,022 6,796,148
-------------- --------------
Net increase in net assets resulting from operations 31,631,357 33,487,899
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income, net (1,255,603) (1,757,095)
Capital gains (13,647,821) (21,864,218)
-------------- --------------
Total distributions to shareholders (14,903,424) (23,621,313)
CAPITAL SHARE TRANSACTIONS, NET 8,037,187 15,719,205
-------------- --------------
TOTAL INCREASE 24,765,120 25,585,791
NET ASSETS
Beginning of year 178,344,088 152,758,297
-------------- --------------
End of year $ 203,109,208 $ 178,344,088
-------------- --------------
-------------- --------------
</TABLE>
SM&R EQUITY INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income, net $ 4,709,723 $ 4,185,807
Net realized gain on investments 7,281,961 23,033,015
Change in unrealized appreciation 11,740,055 10,366,823
-------------- --------------
Net increase in net assets resulting from operations 23,731,739 37,585,645
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income, net (4,712,876) (4,220,053)
Capital gains (10,909,343) (19,927,051)
-------------- --------------
Total distributions to shareholders (15,622,219) (24,147,104)
CAPITAL SHARE TRANSACTIONS, NET 12,183,537 19,462,475
-------------- --------------
TOTAL INCREASE 20,293,057 32,901,016
NET ASSETS
Beginning of year 198,686,914 165,785,898
-------------- --------------
End of year $ 218,979,971 $ 198,686,914
-------------- --------------
-------------- --------------
</TABLE>
See notes to financial statements.
52
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
SM&R BALANCED FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income, net $ 682,321 $ 751,773
Net realized gain on investments 482,000 2,950,385
Change in unrealized appreciation 2,417,733 277,845
------------- -------------
Net increase in net assets resulting from operations 3,582,054 3,980,003
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income, net (663,775) (756,610)
Capital gains (908,074) (2,597,856)
------------- -------------
Total distributions to shareholders (1,571,849) (3,354,466)
CAPITAL SHARE TRANSACTIONS, NET 1,518,827 2,024,691
------------- -------------
TOTAL INCREASE 3,529,032 2,650,228
NET ASSETS
Beginning of year 25,838,072 23,187,844
------------- -------------
End of year $ 29,367,104 $ 25,838,072
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
53
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
SM&R GROWTH FUND 1998 1997 1996 1995 1994
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 5.24 $ 4.95 $ 4.39 $ 3.83 $ 4.15
Investment income, net 0.04 0.06 0.05 0.08 0.06
Net realized and unrealized gain on investments
during the year 0.85 1.03 0.73 0.88 0.15
------------- --------- --------- --------- ---------
Total from Investment Operations 0.89 1.09 0.78 0.96 0.21
Less distributions from
Investment income, net (0.04) (0.06) (0.05) (0.08) (0.06)
Capital gains (0.40) (0.74) (0.17) (0.32) (0.47)
------------- --------- --------- --------- ---------
Total distributions (0.44) (0.80) (0.22) (0.40) (0.53)
------------- --------- --------- --------- ---------
Net Asset Value, End of Year $ 5.69 $ 5.24 $ 4.95 $ 4.39 $ 3.83
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Total return 18.35% 22.24% 17.64% 25.20% 4.98%
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 203,109 $ 178,344 $ 152,758 $ 134,821 $ 113,250
Ratio of expenses to average net assets 0.85% 0.96% 1.15% 0.98% 0.97%
Ratio of net investment income to average net assets 0.69% 1.03% 1.02% 1.67% 1.46%
Portfolio turnover rate 27.31% 46.79% 18.72% 37.00% 46.26%
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
SM&R EQUITY INCOME FUND 1998 1997 1996 1995 1994
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 26.99 $ 25.05 $ 22.59 $ 18.90 $ 21.66
Investment income, net 0.62 0.63 0.58 0.62 0.62
Net realized and unrealized gain/(loss) on
investments during the year 2.50 4.96 3.10 4.82 (0.75)
------------- --------- --------- --------- ---------
Total from Investment Operations 3.12 5.59 3.68 5.44 (0.13)
Less distributions from
Investment income, net (0.62) (0.64) (0.58) (0.63) (0.61)
Capital gains (1.47) (3.01) (0.64) (1.12) (2.02)
------------- --------- --------- --------- ---------
Total distributions (2.09) (3.65) (1.22) (1.75) (2.63)
------------- --------- --------- --------- ---------
Net Asset Value, End of Year $ 28.02 $ 26.99 $ 25.05 $ 22.59 $ 18.90
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Total return 12.11% 22.72% 16.46% 29.12% (0.61)%
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 218,980 $ 198,687 $ 165,786 $ 141,058 $ 114,231
Ratio of expenses to average net assets 1.01% 1.05% 1.10% 1.12% 1.12%
Ratio of net investment income to average net assets 2.22% 2.28% 2.42% 2.89% 2.86%
Portfolio turnover rate 19.29% 39.14% 27.07% 44.00% 52.46%
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
SM&R BALANCED FUND 1998 1997 1996 1995 1994
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 18.32 $ 17.90 $ 16.85 $ 14.32 $ 15.35
Investment income, net 0.48 0.57 0.49 0.49 0.45
Net realized and unrealized gain/(loss) on
investments during the year 1.96 2.50 1.48 2.67 (0.22)
------------- --------- --------- --------- ---------
Total from Investment Operations 2.44 3.07 1.97 3.16 0.23
Less distributions from
Investment income, net (0.47) (0.59) (0.49) (0.49) (0.45)
Capital gains (0.66) (2.06) (0.43) (0.14) (0.81)
------------- --------- --------- --------- ---------
Total distributions (1.13) (2.65) (0.92) (0.63) (1.26)
------------- --------- --------- --------- ---------
Net Asset Value, End of Year $ 19.63 $ 18.32 $ 17.90 $ 16.85 $ 14.32
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Total return 13.83% 17.46% 11.86% 22.29% 1.49%
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 29,367 $ 25,838 $ 23,188 $ 21,757 $ 19,023
Ratio of expenses to average net assets(1) 1.25% 1.26% 1.21% 1.26% 1.25%
Ratio of net investment income to average net assets 2.55% 3.02% 2.83% 2.99% 2.91%
Portfolio turnover rate 16.01% 27.52% 23.78% 16.39% 46.95%
</TABLE>
(1) Expenses for these calculations are net of a reimbursement from Securities
Management and Research, Inc. Without these reimbursements, the ratio of
expenses to average net assets would have been 1.37%, 1.36%, 1.34%, 1.46%
and 1.45% for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
See notes to financial statements.
54
<PAGE>
NOTES TO FINANCIAL STATEMENTS December 31, 1998
- --------------------------------------------------------------------------------
SM&R EQUITY FUNDS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The SM&R Equity Funds (formerly the American National Funds Group) (the "Funds")
are diversified open-end management investment companies registered under the
Investment Company Act of 1940, as amended. The Funds are comprised of the SM&R
Growth Fund, Inc. (formerly American National Growth Fund, Inc.), SM&R Equity
Income Fund, Inc. (formerly American National Income Fund, Inc.) and SM&R
Balanced Fund, Inc. (formerly the Triflex Fund, Inc.). The following is a
summary of significant accounting policies consistently followed by the Funds in
the preparation of financial statements. The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
INVESTMENT VALUATIONS:
Investments listed on national exchanges are valued at the last sales price of
the day, or if there were no sales, then at the last bid price. Debt obligations
that are issued or guaranteed by the U.S. Government, its agencies, authorities,
and instrumentalities are valued on the basis of prices provided by an
independent pricing service. Prices provided by the pricing service may be
determined without exclusive reliance on quoted prices and may reflect
appropriate factors such as yield, type of issue, coupon rate, maturity and
seasoning differential. Securities for which market quotations are not readily
available are valued at fair value as determined by the Board of Directors.
Commercial paper is stated at amortized cost, which is equivalent to fair value.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME:
Investment transactions are accounted for on the trade date (date order to buy
or sell is executed). Dividend income is recognized on the ex-dividend date, and
interest income is recognized on an accrual basis. Realized gains and losses
from security transactions are reported on the basis of specific identification
for financial reporting and federal income tax purposes.
FEDERAL INCOME TAXES:
For federal income tax purposes, each fund is treated as a separate entity. The
Funds intend to comply with requirements of the Internal Revenue Code relating
to regulated investment companies and intend to distribute substantially all of
its taxable income to its shareholders. Therefore, no provision for federal
income taxes is recorded in the accompanying financial statements.
CAPITAL STOCK TRANSACTIONS AND DISTRIBUTIONS TO SHAREHOLDERS:
Fund shares are sold in a continuous public offering at net asset value plus a
sales charge. The Funds repurchase shares at net asset value. Dividends and
other distributions are recorded by the Funds on the ex-dividend date and may be
reinvested at net asset value.
EXPENSES:
Operating expenses not directly attributable to a Fund's operations are prorated
among the Funds based on the relative net assets or shareholders of each Fund.
NOTE 2--INVESTMENT ADVISORY AND SERVICE FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
Securities Management and Research, Inc. ("SM&R") is the investment advisor and
principal underwriter for the Funds. Investment advisory and service fees paid
to SM&R are computed as a percentage of the average daily net assets as follows:
<TABLE>
<CAPTION>
INVESTMENT
ADVISORY
FEE SERVICE FEE
<S> <C> <C>
Net Assets
Not exceeding $100,000,000 0.750% 0.250%
Exceeding $100,000,000 but not exceeding $200,000,000 0.625% 0.200%
Exceeding $200,000,000 but not exceeding $300,000,000 0.500% 0.150%
Exceeding $300,000,000 0.400% 0.100%
</TABLE>
The investment advisory agreement for the Growth Fund provides for incentive
fees that will increase or decrease the basic investment advisory fee, based on
the performance of the fund in relation to a specified industry index for the
funds with similar objectives over a rolling 36-month period. For the period
ended December 31, 1998 the investment advisory fee was decreased by
approximately $370,400.
55
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R EQUITY FUNDS
SM&R has agreed to reimburse the Funds for all expenses, other than taxes,
interest, and expenses directly related to the purchase and sale of investment
securities, in excess of 1.25% per annum of the average daily net assets.
During the period ended December 31, 1998, SM&R, as principal underwriter,
received as sales charges on sale of shares of capital stock of the Funds and
made reallowances to dealers as follows:
<TABLE>
<CAPTION>
SALES CHARGES
SALES CHARGES REALLOWED TO
RECEIVED BY SM&R DEALERS
<S> <C> <C>
Growth $ 441,976 $ 5,175
Equity Income 830,130 10,123
Balanced 76,199 346
</TABLE>
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of December 31, 1998, SM&R and American National had
the following ownership in the Funds:
<TABLE>
<CAPTION>
AMERICAN NATIONAL
SM&R ----------------------------
------------------------------ PERCENT OF
PERCENT OF SHARES
SHARES SHARES OUTSTANDING SHARES OUTSTANDING
<S> <C> <C> <C> <C>
Growth 356,504 1.00% 1,262,169 3.53%
Equity Income 17,408 0.22% -- --
Balanced 127,405 8.51% 213,182 14.25%
</TABLE>
NOTE 3--COST, PURCHASES AND SALES OF INVESTMENTS
Investments have the same cost for tax and financial statement purposes.
Aggregate purchases and sales of investments in securities, other than
commercial paper and short-term bonds and notes, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
<S> <C> <C>
Growth $58,419,623 $48,282,938
Equity Income 45,582,329 33,752,421
Balanced 4,722,637 4,082,106
</TABLE>
Gross unrealized appreciation and depreciation as of December 31, 1998, were as
follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION
<S> <C> <C>
Growth 7$3,458,373 $8,091,957
Equity Income 69,066,864 8,291,561
Balanced 7,507,420 694,470
</TABLE>
56
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R EQUITY FUNDS
NOTE 4--CAPITAL STOCK
SM&R GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Sales of capital shares 3,216,790 $17,622,633 2,618,034 $14,523,030
Investment income dividends reinvested 218,060 1,223,816 319,910 1,712,682
Distributions from net realized gains reinvested 2,698,983 13,324,090 4,145,887 21,351,396
--------- ----------- --------- -----------
Subtotals 6,133,833 32,170,539 7,083,831 37,587,108
Redemptions of capital shares (4,442,745) (24,133,352) (3,923,677) (21,867,903)
--------- ----------- --------- -----------
Net increase in capital shares outstanding 1,691,088 $ 8,037,187 3,160,154 $15,719,205
----------- -----------
----------- -----------
Shares outstanding at beginning of year 34,031,575 30,871,421
--------- ---------
Shares outstanding at end of year 35,722,663 34,031,575
--------- ---------
--------- ---------
The components of net assets at December 31, 1998, are as
follows:
Capital Stock--35,722,663 shares of $1.00 par value
outstanding (2,000,000,000 authorized) (par and
additional paid-in capital) $137,691,667
Accumulated net realized gain on investments 51,125
Net unrealized appreciation of investments 65,366,416
-----------
Net Assets $203,109,208
-----------
-----------
</TABLE>
SM&R EQUITY INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Sales of capital shares 1,059,139 $29,994,912 767,255 $20,997,880
Investment income dividends reinvested 161,711 4,549,911 149,320 4,073,432
Distributions from net realized gains reinvested 404,882 10,559,672 729,218 19,360,438
--------- ----------- --------- -----------
Subtotals 1,625,732 45,104,495 1,645,793 44,431,750
Redemptions of capital shares (1,172,234) (32,920,958) (903,658) (24,969,275)
--------- ----------- --------- -----------
Net increase in capital shares outstanding 453,498 $12,183,537 742,135 $19,462,475
----------- -----------
----------- -----------
Shares outstanding at beginning of year 7,360,452 6,618,317
--------- ---------
Shares outstanding at end of year 7,813,950 7,360,452
--------- ---------
--------- ---------
The components of net assets at December 31, 1998, are as
follows:
Capital Stock--7,813,950 shares of $1.00 par value
outstanding (2,000,000,000 authorized) (par and
additional paid-in capital) $158,143,459
Accumulated net realized gain on investments 61,209
Net unrealized appreciation of investments 60,775,303
-----------
Net Assets $218,979,971
-----------
-----------
</TABLE>
57
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R EQUITY FUNDS
SM&R BALANCED FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Sales of capital shares 204,284 $3,794,519 96,421 $1,864,777
Investment income dividends reinvested 33,827 644,627 38,357 728,301
Distributions from net realized gains reinvested 50,226 901,681 139,275 2,529,231
--------- ---------- --------- ----------
Subtotals 288,337 5,340,827 274,053 5,122,309
Redemptions of capital shares (202,186) (3,822,000) (159,550) (3,097,618)
--------- ---------- --------- ----------
Net increase in capital shares outstanding 86,151 $1,518,827 114,503 $2,024,691
---------- ----------
---------- ----------
Shares outstanding at beginning of year 1,410,260 1,295,757
--------- ---------
Shares outstanding at end of year 1,496,411 1,410,260
--------- ---------
--------- ---------
The components of net assets at December 31, 1998, are as
follows:
Capital Stock--1,496,411 shares of $1.00 par value
outstanding (2,000,000,000 authorized) (par and additional
paid-in capital) $22,542,755
Accumulated net realized gain on investments 11,399
Net unrealized appreciation of investments 6,812,950
----------
Net Assets $29,367,104
----------
----------
</TABLE>
58
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
SM&R Equity Funds
We have audited the accompanying statements of assets and liabilities of SM&R
Equity Funds (formerly American National Funds Group) comprised of SM&R Growth
Fund, Inc. (formerly American National Growth Fund, Inc.), SM&R Equity Income
Fund, Inc. (formerly American National Income Fund, Inc.) and SM&R Balanced
Fund, Inc. (formerly the Triflex Fund, Inc.), including the schedule of
investments as of December 31, 1998, the related statements of operations for
the year then ended, the statements of changes in net assets and the financial
highlights for each of the two years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits. The financial
highlights for each of the three years in the period ended December 31, 1996
were audited by other auditors whose report dated February 7, 1997 issued an
unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of SM&R
Equity Funds as of December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets and the financial highlights for each
of the two years in the periods then ended, in conformity with generally
accepted accounting principles.
Tait, Weller & Baker, CPA
Philadelphia, Pennsylvania
January 29, 1999
DISTRIBUTIONS
- --------------------------------------------------------------------------------
Distributions per share for the year ended December 31, 1998.
<TABLE>
<CAPTION>
LONG-TERM SHORT-TERM
RECORD INVESTMENT CAPITAL CAPITAL
DATE INCOME GAIN GAIN
<S> <C> <C> <C> <C>
SM&R Growth Fund, Inc. 6/22/98 $ 0.02500
9/14/98 $ 0.3364 $ 0.0171
12/21/98 $ 0.01180 $ 0.0514
SM&R Equity Income Fund, Inc. 3/23/98 $ 0.14000
6/22/98 $ 0.16800
9/14/98 $ 1.0035 $ 0.3587
9/22/98 $ 0.16300
12/21/98 $ 0.15000 $ 0.0835 $ 0.0207
SM&R Balanced Fund, Inc. 3/23/98 $ 0.12400
6/22/98 $ 0.13000
9/14/98 $ 0.5571 $ 0.1004
9/22/98 $ 0.11300
12/21/98 $ 0.10200
</TABLE>
59
<PAGE>
PART C - OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) 1.a. Registrant's Amended and Restated Articles of Incorporation are
incorporated herein by Reference to Exhibit (a) to Post-Effective
Amendment No. 33 to this Form N-1A Registration Statement.
(a) 1.b. Registrant's Articles of Amendment dated December 7, 1998 are
incorporated herein by Reference to Exhibit (a) to Post-Effective
Amendment No. 33 to this Form N-1A Registration Statement.
2. Registrant's Articles Supplementary are incorporated herein by
Reference to Exhibit (a) to Post-Effective Amendment No. 33 to this
Form N-1A Registration Statement.
(b) Registrant's By-Laws are incorporated herein by reference to Exhibit 2 to
Post-Effective Amendment No. 27 to this Form N-1A Registration Statement.
(c) A specimen of Registrant's stock certificate is incorporated herein by
reference to Exhibit 4 to Post-Effective Amendment No. 27 to this Form N-1A
Registration Statement.
(d) Registrant's Investment Advisory Agreement is incorporated herein by
reference to Exhibit 5 to Post-Effective Amendment No. 27 to this Form N-1A
Registration Statement.
(e) Registrant's Underwriting Agreement is incorporated herein by Reference to
Exhibit (e) to Post-Effective Amendment No. 33 to this Form N-1A
Registration Statement.
(f) Not Applicable.
(g) 1. Registrant's Custodian Agreement is incorporated herein by reference
to Exhibit 8a to Post-Effective Amendment No. 27 to this Form N-1A
Registration Statement.
2. Registrant's Sub-Custodian Agreement is incorporated herein by
reference to Exhibit 8b to Post-Effective Amendment No. 27 to this
Form N-1A Registration Statement.
(h) Not Applicable.
(i) Consent and Opinion of Registrant's counsel, Greer, Herz & Adams, L.L.P.,
is filed herewith.
(j) Consent of Tait, Weller and Baker, independent accountant of Registrant,
is filed herewith.
(k) Not Applicable.
(l) Not Applicable.
C-1
<PAGE>
(m) Registrant's Distribution and Shareholder Servicing Plan is incorporated
herein by Reference to Exhibit (m) to Post-Effective Amendment No. 33 to
this Form N-1A Registration Statement.
(n) Financial Data Schedule is filed herewith.
(o) Registrant's Multiple Class Plan is incorporated herein by Reference to
Exhibit (o) to Post-Effective Amendment No. 33 to this Form N-1A
Registration Statement.
(p) List of persons controlled by or under common control with Registrant is
filed herewith.
(q) Power of Attorney is incorporated herein by reference to Exhibit 17 to
Post-Effective Amendment No. 27 to this Form N-1A Registration Statement.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
All persons under common control with Registrant are shown on the list
attached hereto as Exhibit (p).
ITEM 25. INDEMNIFICATION.
Registrant has agreed to indemnify its directors to the maximum extent
permitted by applicable law against all costs and expenses (including, but not
limited to, counsel fees, amounts of judgments paid, and amounts paid in
settlement) reasonably incurred in connection with the defense of any actual or
threatened claim, action, suit or proceeding, whether civil, criminal,
administrative, or other, in which he or she may be involved by virtue of such
person being or having been such director. Such indemnification is pursuant to
Section 3.15 of Registrant's By-Laws, a copy of which is attached as Exhibit 2
to Post-Effective Amendment No. 27 to Form N-1A.
Registrant, together with SM&R Equity Income Fund, Inc. and SM&R Growth
Fund (collectively referred to as the "SM&R Equity Funds"), has purchased a
directors' and officers' liability policy. At a Joint Boards of Directors'
Meeting of Registrant and the other funds in the SM&R Equity Funds held on May
29, 1998, the Boards of Directors authorized the renewal of an ICI Mutual
Insurance Company Directors and Officers/Errors and Omissions Liability
Insurance policy. The ICI Mutual Insurance Company is located at 1600 M Street,
5th Floor, Washington, D.C. 20036. The policy contains a $5,000 per individual
insured per loss deductible, a $25,000 aggregate all individual insureds, each
claim deductible, $100,000 company reimbursement, each claim deductible and
$100,000 company coverage, each claim deductible. The aggregate limit of
liability is $5,000,000. The annual premium for 1998 for all three funds in the
SM&R Equity Funds is $111,444. Registrant's share of such fee, based upon the
proportion of its total assets to those of the other SM&R Equity Funds, is
$5,617.
Additionally, Registrant is required to maintain a secured letter of
credit. However, due to the restrictions on the making of loans, Registrant and
Securities Management and Research, Inc. ("SM&R") have entered into an
undertaking whereby SM&R has secured a letter of credit from U.S. National Bank
of Galveston, Texas for the benefit of Registrant. Pursuant to this
arrangement, Registrant will reimburse SM&R for its proportionate share of any
expenses
C-2
<PAGE>
incurred by SM&R in the procurement of the letter of credit and for any annual
renewal premiums paid on behalf of Registrant by SM&R.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
SM&R serves as investment adviser to Registrant and the other funds in the
SM&R Equity Funds, American National Investment Accounts, Inc. ("Investment
Accounts"), and SM&R Investments, Inc. See "The Funds and Management" in Part A
and "INVESTMENT ADVISORY AGREEMENT" and "MANAGEMENT OF THE COMPANY" in Part B.
The address of SM&R is 2450 South Shore Boulevard, Suite 400, League City, Texas
77573.
DIRECTORS AND OFFICERS OF SM&R
ROBERT A. FRUEND, CLU
DIRECTOR OF SM&R
Executive Vice President and Director of Ordinary Agencies of American
National Insurance Company ("American National") and Director and Vice President
of American National Life Insurance Company of Texas, both located at One Moody
Plaza, Galveston, Texas; Director and Chairman of the Board of American National
Property and Casualty Company; Director and Chairman of the Board of American
National General Insurance Company; Director of American National Insurance
Service Company; Director of American National Lloyds Insurance Company;
Director and Chairman of the Board, Pacific Property and Casualty, Inc., all
located at 1949 East Sunshine Street, Springfield, Missouri.
R. EUGENE LUCAS
DIRECTOR AND MEMBER OF EXECUTIVE COMMITTEE OF SM&R
Director of American National, One Moody Plaza, Galveston, Texas;
President and Director of Gal-Tex Hotel Corporation, 504 Moody National Bank
Tower, Galveston, Texas, Gal-Tenn Hotel Corporation, 504 Moody National Bank
Tower, Galveston, Texas; Director of ANREM Corporation, One Moody Plaza,
Galveston, Texas.
MICHAEL W. MCCROSKEY
DIRECTOR, PRESIDENT, CHIEF EXECUTIVE OFFICER
AND MEMBER OF THE EXECUTIVE COMMITTEE OF SM&R
President and Director of Registrant; President and Director of each of
the other SM&R Equity Funds; President and Director of Investment Accounts;
President and Director of SM&R Investments, Inc.; Director, Comprehensive
Investment Services, all located at 2450 South Shore Boulevard, Suite 400,
League City, Texas; Executive Vice President, American National; Director and
President, ANREM Corporation; Director and President, ANTAC Corporation;
Assistant Secretary of American National Life Insurance Company of Texas; all
located at One Moody Plaza, Galveston, Texas; Vice President, American
National
C-3
<PAGE>
Property and Casualty; Vice President, American National General Insurance
Company; Vice President, Pacific Property and Casualty, Inc., all located at
1949 East Sunshine Street, Springfield, Missouri. Vice President of Standard
Life and Accident Insurance Company, 201 Robert S. Kerr Avenue, Oklahoma City,
Oklahoma; Vice President of Garden State Life Insurance Company, 2450 South
Shore Blvd., League City, Texas.
G. RICHARD FERDINANDTSEN
DIRECTOR AND MEMBER OF EXECUTIVE COMMITTEE OF SM&R
Director, Senior Executive Vice President and Chief Operating Officer,
American National; Director, Chairman of the Board, President and Chief
Executive Officer, American National Life Insurance Company of Texas all
located at One Moody Plaza, Galveston, Texas; Director, Comprehensive
Investment Services, all located at 2450 South Shore Boulevard, Suite 400,
League City, Texas; Director, Vice Chairman of the Board, American National
General Insurance Company; Director, Vice Chairman of the Board, American
National Property and Casualty; Director and Vice Chairman of the Board,
Pacific Property & Casualty Company; Underwriter, American National Lloyds
Insurance Company, all located at 1949 East Sunshine Street, Springfield,
Missouri. Director and Chairman of the Board, Standard Life and Accident
Insurance Company, 201 Robert S. Kerr Avenue, Oklahoma City, Oklahoma;
Director, Garden State Life Insurance Company, 2450 South Shore Boulevard,
League City, Texas.
RONALD J. WELCH
DIRECTOR OF SM&R
Executive Vice President and Chief Actuary of American National; Senior
Vice President of American National Life Insurance Company of Texas, all located
at One Moody Plaza, Galveston, Texas; Director and Chairman of the Board of
Garden State Life Insurance Company, 2450 South Shore Boulevard, League City,
Texas; Director of Standard Life and Accident Insurance Company, 201 Robert S.
Kerr Avenue, Oklahoma City, Oklahoma; Director of American National Property and
Casualty Company; Director of American National General Insurance Company;
Director of American National Insurance Service Company; Director of Pacific
Property and Casualty Company, all located at 1949 East Sunshine Street,
Springfield, Missouri.
GORDON DIXON
DIRECTOR, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER AND
MEMBER OF INVESTMENT AND EXECUTIVE COMMITTEES OF SM&R
Portfolio Manager of Registrant; Vice President and Portfolio Manager of
SM&R Growth Fund, Inc.; Vice President of Investment Accounts; Portfolio
Manager of SM&R Equity Income Fund, Inc. and the Growth, Managed, and
Balanced Portfolios of Investment Accounts; Director and President,
Comprehensive Investment Services, all located at 2450 South Shore Boulevard,
Suite 400, League City, Texas; Vice President of Stocks for American National,
located at One Moody Plaza, Galveston, Texas; Vice President of Investments
for Garden State Life Insurance Company, 2450 South Shore Boulevard, League
City, Texas;
C-4
<PAGE>
Former Director of Equity Strategy Research and Trading for C&S/Sovran Bank (now
NationsBank) Atlanta, Georgia.
K. DAVID WHEELER
SENIOR VICE PRESIDENT, INSTITUTIONAL SALES AND PRIVATE CLIENT
SERVICES OF SM&R
2450 South Shore Boulevard, Suite 400, League City, Texas; Senior
Institutional Consultant, Bank South, Atlanta, Georgia.
EMERSON V. UNGER, C.L.U.
VICE PRESIDENT OF SM&R
Vice President of the SM&R Equity Funds, Investment Accounts, and SM&R
Investments, Inc., all located at 2450 South Shore Boulevard, Suite 400,
League City, Texas;
BRENDA T. KOELEMAY
VICE PRESIDENT AND TREASURER OF SM&R
Vice President and Treasurer of the SM&R Equity Funds, Investment Accounts,
and SM&R Investments, Inc.; Treasurer, Comprehensive Investment Services, all
located at 2450 South Shore Boulevard, Suite 400, League City, Texas.
TERESA E. AXELSON
VICE PRESIDENT AND SECRETARY OF SM&R
Vice President and Secretary of the SM&R Equity Funds, Investment
Accounts, and SM&R Investments, Inc., all located at 2450 South Shore
Boulevard, Suite 400, League City, Texas;
WILLIAM J. KEARNS, JR.
SENIOR VICE PRESIDENT, NATIONAL MARKETING AND SALES DIRECTOR OF SM&R
2450 South Shore Boulevard, Suite 400, League City, Texas; Vice President
for Private Label Funds for Standish, Ayers & Wood in Boston, Massachusetts.
C-5
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) SM&R serves as the principal underwriter and investment adviser for
Registrant, the other SM&R Equity Funds, Investment Accounts, and SM&R
Investments, Inc. See "The Funds and Management" in Part A.
<TABLE>
<CAPTION>
(b)
POSITIONS AND POSITIONS AND
NAME AND PRINCIPAL OFFICES WITH OFFICES WITH
BUSINESS ADDRESS UNDERWRITER REGISTRANT
<S> <C> <C>
Robert A. Fruend, C.L.U. Director None
One Moody Plaza
Galveston, Texas
R. Eugene Lucas Director None
Moody National Bank Tower
Galveston, Texas
Michael W. McCroskey Director and President President and
2450 South Shore Boulevard Chief Executive Officer Director
Suite 400
League City, Texas
G. Richard Ferdinandtsen Director None
One Moody Plaza
Galveston, Texas
Ronald J. Welch Director None
One Moody Plaza
Galveston, Texas
Gordon D. Dixon Director, Senior Vice Portfolio Manager
2450 South Shore Boulevard President, Chief
Suite 400 Investment Officer
League City, Texas
K. David Wheeler Senior Vice President None
2450 South Shore Boulevard Institutional Sales
Suite 400 and Private Client
League City, Texas Services
C-6
<PAGE>
Emerson V. Unger, C.L.U. Vice President Vice President
2450 South Shore Boulevard
Suite 400
League City, Texas
Brenda T. Koelemay Vice President and Vice President and
2450 South Shore Boulevard Treasurer Treasurer
Suite 400
League City, Texas
Teresa E. Axelson Vice President and Vice President and
2450 South Shore Boulevard Secretary Secretary
Suite 400
League City, Texas
William J. Kearns, Jr. Senior Vice President None
2450 South Shore Boulevard
Suite 400
League City, Texas
</TABLE>
(c) Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder will be maintained at the office of SM&R at 2450 South Shore
Boulevard, Suite 400, League City, Texas 77573.
ITEM 29. MANAGEMENT SERVICES.
There are no management-related service contracts to which Registrant is a
party not discussed under Part A or Part B of this Post-Effective Amendment No.
34 to Registration Statement.
ITEM 30. UNDERTAKINGS.
TEXAS OPTIONAL RETIREMENT PROGRAM. Registrant and the other SM&R Equity
Funds offer shares as investments for custodial accounts that meet the
requirements of Section 403(b)(7) of the Internal Revenue Code of 1986, as
amended (the "Code"), in connection with the Texas Optional Retirement Program
(the "Program"). Under the Program, a custodial account for each participating
employee ("Participant") is established in the name of State Street
C-7
<PAGE>
Bank and Trust Company. The Program, as interpreted by the Texas Attorney
General, imposes certain restrictions on early withdrawals from custodial
accounts. Section 22(e) prohibits a registered investment company from
suspending a shareholder's right of redemption or postponing payment on
redemption of any redeemable security for more than seven days after tender of
the security.
The Staff of the Securities and Exchange Commission took a no-action
position under section 22(e) of the 1940 Act permitting the SM&R Equity Funds to
offer shares in connection with the Program as contemplated above (See American
National Fund Group, pub. avail. Apr 27, 1987 (the "No-Action Letter")). The
Staff took its position based on Registrant's representation that Registrant and
SM&R would comply with conditions set forth in the No-Action Letter. In this
regard, Registrant and SM&R has complied with the following provisions of the
No-Action Letter:
(a) Appropriate disclosure regarding the restrictions on redemption
imposed by the Program is included in this Registration Statement on
Form N-1A and the applicable Prospectuses included in this
Registration Statement.
(b) Appropriate disclosure regarding the restrictions on redemption
imposed by the Program is included in any sales literature used in
connection with the offer of Registrant's shares to Participants in
connection with the Program.
(c) Registrant and SM&R instruct salespeople who solicit Participants to
purchase Registrant's shares specifically to bring the restrictions on
redemption imposed by the Program to the attention of the potential
Participants.
(d) Registrant and SM&R obtain from each Participant who purchases
Registrant's shares in connection with the Program, prior to or at the
time of purchase, a signed statement acknowledging the restrictions on
redemption imposed by the Program.
C-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, Registrant, SM&R BALANCED FUND, INC., certifies that it
meets all of the requirements for effectiveness of this POST-EFFECTIVE
AMENDMENT NO. 34 to the Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused it to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of League City and
State of Texas, on the 28 day of April, 1999.
SM&R BALANCED FUND, INC.
By: /s/ Michael W. McCroskey
-------------------------------------------
Michael W. McCroskey, President
Pursuant to the requirements of the Securities Act of 1933, this POST-EFFECTIVE
AMENDMENT NO. 34 has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER: PRINCIPAL ACCOUNTING OFFICER:
<S> <C>
/s/ Michael W. McCroskey /s/ Brenda T. Koelemay
- ---------------------------------- ---------------------------------------
Michael W. McCroskey, President Brenda T. Koelemay, Treasurer
Date: April 28, 1999 Date: April 28, 1999
<CAPTION>
DIRECTORS
<S> <C>
/s/ Ralph S. Clifford /s/ Paul D. Cummings
- --------------------------------------- ---------------------------------------
* Ralph S. Clifford by * Paul D. Cummings by
Michael W. McCroskey, Power of Attorney Michael W. McCroskey, Power of Attorney
Date: April 28, 1999 Date: April 28, 1999
/s/ Jack T. Currie /s/ Ira W. Painton
- --------------------------------------- ---------------------------------------
* Jack T. Currie by * Ira W. Painton by
Michael W. McCroskey, Power of Attorney Michael W. McCroskey, Power of Attorney
Date: April 28, 1999 Date: April 28, 1999
/s/ Donald P. Stevens /s/ Steven H. Stubbs
- --------------------------------------- ---------------------------------------
* Donald P Stevens by * Steven H. Stubbs by
Michael W. McCroskey, Power of Attorney Michael W. McCroskey, Power of Attorney
Date: April 28, 1999 Date: April 28, 1999
/s/ Michael W. McCroskey
- ---------------------------------------
Michael W. McCroskey
</TABLE>
* PURSUANT TO A POWER OF ATTORNEY EXECUTED BY THE BOARD OF DIRECTORS DATED
DECEMBER 16, 1994. ATTACHED AS EXHIBIT 99.B17 TO POST-EFFECTIVE AMENDMENT NO.
10.
<PAGE>
EXHIBIT INDEX
99.B(i) Consent and Opinion of Registrant's Counsel, Greer, Herz &
Adams, L.L.P.
99.B(j) Consent of Tait, Weller & Baker, independent accountant of
the Registrant.
99.B(n) Financial Data Schedule
99.B(p) List of persons controlled by or under common control with
Registrant.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000275039
<NAME> SM&R BALANCED FUND, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 22299394
<INVESTMENTS-AT-VALUE> 29112344
<RECEIVABLES> 248636
<ASSETS-OTHER> 22238
<OTHER-ITEMS-ASSETS> 60061
<TOTAL-ASSETS> 29443279
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 76175
<TOTAL-LIABILITIES> 76175
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1046344
<SHARES-COMMON-STOCK> 1496411
<SHARES-COMMON-PRIOR> 1410260
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11399
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6812950
<NET-ASSETS> 29367104
<DIVIDEND-INCOME> 259664
<INTEREST-INCOME> 756839
<OTHER-INCOME> 0
<EXPENSES-NET> 334182
<NET-INVESTMENT-INCOME> 682321
<REALIZED-GAINS-CURRENT> 482000
<APPREC-INCREASE-CURRENT> 2417733
<NET-CHANGE-FROM-OPS> 3582054
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 663775
<DISTRIBUTIONS-OF-GAINS> 908074
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 204284
<NUMBER-OF-SHARES-REDEEMED> 202186
<SHARES-REINVESTED> 84053
<NET-CHANGE-IN-ASSETS> 1518827
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 418927
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 198438
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 367636
<AVERAGE-NET-ASSETS> 26743048
<PER-SHARE-NAV-BEGIN> 18.32
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> 1.96
<PER-SHARE-DIVIDEND> 0.47
<PER-SHARE-DISTRIBUTIONS> 0.66
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.63
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
Exhibit (i)
April 28, 1999
SM&R Balanced Fund, Inc.
(formerly Triflex Fund, Inc.)
2450 South Shore Boulevard, Suite 400
League City, Texas 77573
RE: SM&R Balanced Fund, Inc. (the "Company") Post-Effective Amendment
No. 34 under the Securities Act of 1933 (the "33 Act") and
Post-Effective Amendment No. 30 to the Investment Company Act of 1940
(the "40 Act")
Gentlemen:
We have assisted you in preparing the above referenced post-effective
amendments to your '33 Act and '40 Act Registration Statements referenced above.
In connection therewith, we have examined the Company's Articles of
Incorporation and such other corporate records, prospectuses and other material
we deemed appropriate. On the basis of such examination, we are of the opinion
that the Company's shares, when sold, will be legally issued, fully paid and
non-assessable. We, of course, assume that the Company will not sell more than
the 2,000,000,000 shares authorized by its Articles of Incorporation, and that
all sales will be for full value received at the time of sale.
We consent to the attachment of this opinion to and its use in connection
with the above referenced post-effective amendments.
Yours very truly,
/S/ JERRY L. ADAMS
Jerry L. Adams
<PAGE>
Exhibit (j)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our report dated January 29, 1999 on the financial
statements and financial highlights of SM&R Balanced Fund, Inc. (formerly
Triflex Fund, Inc.). Such financial statements and financial highlights
appear in the 1998 Annual Report to Shareholders which appears in the
Statement of Additional Information filed in the Post-Effective Amendment to
the Registration Statement on Form N-1A of SM&R Balanced Fund, Inc. We also
consent to the references to our Firm in the Registration Statement and
Prospectus.
TAIT, WELLER & BAKER
PHILADELPHIA, PENNSYLVANIA
APRIL 28, 1999
<PAGE>
EXHIBIT (p)
CONTROL LIST
The Registrant, SM&R Balanced Fund, Inc., is advised and managed by
Securities Management & Research, Inc. ("SM&R"), a Florida corporation and
registered investment adviser and broker-dealer. SM&R is a wholly-owned
subsidiary of American National Insurance Company, a Texas insurance company.
The Libbie Shearn Moody Trust owns approximately 37.58% of the outstanding stock
of American National Insurance Company. The Moody Foundation, which has a 75%
contingent remainder interest in the Libbie Shearn Moody Trust, owns
approximately 23.7% of the outstanding stock of American National Insurance
Company.
The Trustees of The Moody Foundation are Mrs. Frances Moody Newman, Robert
L. Moody and Ross Rankin Moody. Robert L. Moody is a life income beneficiary of
the Libbie Shearn Moody Trust and Chairman of the Board, Director, President and
Chief Executive Officer of American National Insurance Company. Robert L. Moody
has assigned his interest in the Libbie Shearn Moody Trust to National Western
Life Insurance Company, a Colorado insurance company of which he is also
Chairman of the Board, a Director and controlling shareholder.
The Moody National Bank of Galveston is the trustee of the Libbie Shearn
Moody Trust and various other trusts which, in the aggregate, own approximately
44% of the outstanding stock of American National Insurance Company. Moody Bank
Holding Company, Inc. owns approximately 97% of the outstanding shares of The
Moody National Bank of Galveston. Moody Bank Holding Company, Inc. is a wholly
owned subsidiary of Moody Bancshares, Inc. The Three R Trusts, trusts created
by Robert L. Moody for the benefit of his children, are controlling stockholders
of Moody Bancshares, Inc.
The Moody Foundation owns 33.0% and the Libbie Shearn Moody Trust owns
51.0% of the outstanding stock of Gal-Tex Hotel Corporation, a Texas
corporation. Gal-Tex Hotel Corporation has the following wholly-owned
subsidiaries, listed in alphabetical order:
Gal-Tenn Hotel Corporation
Gal-Tex Management Company
Gal-Tex Woodstock, Inc.
GTG Corporation
New Paxton Hotel Corporation
American National owns a direct or indirect interest in the following
entities, listed in alphabetical order:
ENTITY: Alternative Benefit Management, Inc.
ENTITY FORM: a Nevada corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: ANTAC, Inc. owns all of the outstanding
common stock.
ENTITY: American Hampden Joint Venture
ENTITY FORM: a Texas joint venture
<PAGE>
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
98% interest.
ENTITY: American National of Delaware Corporation
ENTITY FORM: a Delaware corporation (inactive)
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company
ENTITY: American National Financial Corporation
ENTITY FORM: a Texas corporation (inactive)
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company
ENTITY: American National Financial Corporation (Delaware)
ENTITY FORM: a Delaware corporation (inactive)
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: American National Financial Corporation (Nevada)
ENTITY FORM: a Nevada corporation (inactive)
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: American National General Insurance Company
ENTITY FORM: a Missouri insurance company
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company.
ENTITY: American National Insurance Service Company
ENTITY FORM: a Missouri corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company.
2
<PAGE>
ENTITY: American National Investment Accounts, Inc.
ENTITY FORM: a Maryland corporation - registered investment company
OWNERSHIP OR OTHER BASIS OF CONTROL: Investment Advisory Agreement with
Securities Management and Research, Inc. Also, American National Insurance
Company and Securities Management and Research, Inc. own all of the outstanding
stock of the Company.
ENTITY: American National Life Insurance Company of Texas
ENTITY FORM: a Texas insurance company
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company
ENTITY: American National Lloyds Insurance Company
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS FOR CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company
ENTITY: American National Property and Casualty Company
ENTITY FORM: a Missouri insurance company
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: ANDV 97, Inc.
ENTITY FORM: a Texas company
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of ANTAC, Inc.
ENTITY: ANMEX International, Inc.
ENTITY FORM: a Nevada corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: ANMEX International Services, Inc.
ENTITY FORM: a Nevada corporation
3
<PAGE>
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: ANPAC General Agency of Texas
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company.
ENTITY: ANPAC Lloyds Insurance Management, Inc.
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS FOR CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company
ENTITY: ANREM Corporation
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of Securities
Management and Research, Inc.
ENTITY: ANTAC, Inc.
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: Beechwood Business Park Joint Venture.
ENTITY FORM: a Texas limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: ANDV 97, Inc. owns a 50% limited
partnership interest.
ENTITY: Comprehensive Investment Services, Inc.
ENTITY FORM: a Nevada corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: Fairway Plaza Associates, L.P.
4
<PAGE>
ENTITY FORM: a Texas limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: ANREM Corporation owns a 50% limited
partnership interest.
ENTITY: Galveston Health Network, Inc.
ENTITY FORM: a Texas corporation (inactive)
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: Garden State Life Insurance Company
ENTITY FORM: a New Jersey insurance company
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: Gateway Park Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: South Shore Harbour Development, Ltd. has
a 50% interest.
ENTITY: Harbour Title Company
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: South Shore Harbour Development, Ltd. owns
50% of the outstanding stock.
ENTITY: IAH 97 Joint Venture
ENTITY FORM: a Texas general partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: ANDV 97, Inc. has a 50% interest.
ENTITY: Kearns Building Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: American National owns a 85% interest.
ENTITY: MR/SA Partnership
5
<PAGE>
ENTITY FORM: a Nevada general partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: ANTAC, Inc. owns a 50% interest.
ENTITY: Pacific Property and Casualty Company
ENTITY FORM: a California corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company
ENTITY: Panther Creek Limited Partnership
ENTITY FORM: a Texas limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
99% limited partnership interest
ENTITY: Rutledge Partners, L.P.
ENTITY FORM: a Texas limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
50% interest.
ENTITY: Securities Management and Research, Inc.
ENTITY FORM: a Florida corporation - a registered broker-dealer and investment
adviser
OWNERSHIP OR OTHER BASIS OF CONTROL: wholly-owned subsidiary of American
National Insurance Company
ENTITY: SM&R Equity Income Fund, Inc.
ENTITY FORM: a Maryland corporation - registered investment company
OWNERSHIP OR OTHER BASIS OF CONTROL: Investment Advisory Agreement with
Securities Management and Research, Inc. Also, American National Insurance
Company and Securities Management and Research, Inc. own stock of the Company.
ENTITY: SM&R Growth Fund, Inc.
ENTITY FORM: a Maryland corporation - registered investment company
6
<PAGE>
OWNERSHIP OR OTHER BASIS OF CONTROL: Investment Advisory Agreement with
Securities Management and Research, Inc. Also, American National Insurance
Company and Securities Management and Research, Inc. own stock of the Company.
ENTITY: SM&R Investments, Inc.
ENTITY FORM: a Maryland corporation - a registered investment company
OWNERSHIP OR OTHER BASIS OF CONTROL: Investment Advisory Agreement with
Securities Management and Research, Inc. Also, American National Insurance
Company and Securities Management and Research, Inc. own stock of the Company.
ENTITY: South Shore Harbour Development, Ltd.
ENTITY FORM: a Texas limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: ANTAC, Inc. owns a 95% limited partnership
interest. ANREM Corp. owns a 5% general partnership interest.
ENTITY: Standard Life and Accident Insurance Company
ENTITY FORM: an Oklahoma insurance company
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: Terra Venture Bridgeton Project Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned by American National
Insurance Company.
ENTITY: Third and Catalina, Ltd.
ENTITY FORM: a Texas limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
49% limited partnership interest.
ENTITY: Timbermill, Ltd.
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
99% limited partnership interest.
7
<PAGE>
ENTITY: Town and Country Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: ANDV 97, Inc. owns a 99% limited
partnership interest.
8
