<PAGE>
Registration Nos. 2-35602; 811-01916
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE / /
SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 39 /X/
AND/OR
REGISTRATION STATEMENT UNDER / /
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 26 /X/
[Check appropriate box or boxes]
___________________
AMERICAN NATIONAL INCOME FUND, INC.
[Exact Name of Registrant as Specified in Charter]
ONE MOODY PLAZA, GALVESTON, TEXAS 77550
[Address of Principal Executive Offices] [Zip Code]
Registrant's Telephone Number, Including Area Code: (409) 763-2767
NAME AND ADDRESS OF
AGENT FOR SERVICE: WITH COPY TO:
TERESA E. AXELSON JERRY L. ADAMS
ONE MOODY PLAZA GREER, HERZ & ADAMS, L.L.P.
GALVESTON, TEXAS 77550 ONE MOODY PLAZA
GALVESTON, TEXAS 77550
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
/ / on (date) pursuant to paragraph (b) of Rule 485
/X/ 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>
SM&R
LOGO
P R O S P E C T U S
DECEMBER 31, 1998
- 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
FUNDS' SHARES 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.................................... 3
SM&R Balanced Fund......................................... 5
Types of Investment Risk................................... 7
Bar Chart and Performance Table............................ 8
Table of Fees and Expenses................................. 12
SHARES OF THE FUNDS.......................................... 16
Sales Charges.............................................. 17
Sales Charge Reductions and Waivers........................ 18
Distribution and Shareholder Service (12b-1) Fees.......... 21
INVESTMENT OBJECTIVES AND POLICIES........................... 22
Growth Fund................................................ 22
Equity Income Fund......................................... 24
Balanced Fund.............................................. 26
RISK FACTORS................................................. 28
PURCHASES AND REDEMPTIONS.................................... 30
Purchasing Shares.......................................... 30
Pricing of Fund Shares..................................... 32
Special Purchase Plans and Services........................ 33
Retirement Plans........................................... 39
Dividends, Distributions, and Taxes........................ 39
Redeeming Shares........................................... 41
THE FUNDS AND MANAGEMENT..................................... 45
FINANCIAL HIGHLIGHTS......................................... 49
Growth Fund................................................ 49
Equity Income Fund......................................... 50
Balanced Fund.............................................. 51
APPENDIX..................................................... A-1
</TABLE>
ii
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND, INC.
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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, basic
materials, and communications services), 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.
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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
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.
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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
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.
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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 stocks of well-known
companies and the remainder in a combination of high-grade
bonds, 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 serve to
capture the benefits that ownership in corporate America
brings. 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). Common stocks
purchased by the fund will have a market capitalization of at
least $100 million and be listed on a national exchange.
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
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
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TYPES OF INVESTMENT RISK
As indicated above, each of the three funds may be subject to certain of the
following types of risks:
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.
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.
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.
MANAGEMENT RISK. The risk that a strategy used by a fund's management may fail
to produce the intended result. 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.
VALUATION RISK. The risk that a fund has valued certain securities at a higher
price than it can sell them for.
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 a
broad-based securities market index.
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. 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.
8
<PAGE>
RISK/RETURN SUMMARY SM&R GROWTH FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
<S> <C>
1988 -0.08%
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%
</TABLE>
During the ten year period shown in the bar chart, the Growth Fund's highest
return for a quarter was 17.47% achieved March 31, 1991 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, 1997) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
GROWTH FUND 15.25% 13.99% 12.65%
S&P 500* 33.36% 20.27% 18.05%
</TABLE>
* The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a widely
recognized, unmanaged index of common stock prices.
9
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
<S> <C>
1988 3.72%
1989 28.12%
1990 0.76%
1991 29.06%
1992 3.31%
1993 10.62%
1994 -0.61%
1995 29.12%
1996 16.47%
1997 22.72%
</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 5.64% for the quarter December 31,
1990.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1997) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
EQUITY INCOME FUND 15.66% 13.84% 13.74%
S&P 500* 33.36% 20.27% 18.05%
</TABLE>
* The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a widely
recognized, unmanaged index of common stock prices.
10
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
<S> <C>
1988 4.06%
1989 13.66%
1990 1.38%
1991 24.53%
1992 3.00%
1993 6.31%
1994 1.49%
1995 22.29%
1996 11.86%
1997 17.45%
</TABLE>
During the ten year period shown in the bar chart, the Balanced Fund's highest
return for a quarter was 9.59% achieved December 31, 1991 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, 1997) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
BALANCED FUND 10.71% 10.32% 10.30%
LEHMAN BROTHERS 7.86% 6.67% 18.05%
INTERMEDIATE
GOVERNMENT/CORPORATE*
</TABLE>
* The Lehman Brothers Intermediate Government/Corporate is [DESCRIPTION TO BE
INSERTED].
11
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
TABLE OF FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy shares of
the funds.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
GROWTH, EQUITY INCOME, AND
BALANCED FUNDS
---------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
MAXIMUM SALES CHARGE (TOTAL) 5.75% 5.00% 2.00%
Maximum Sales Load Imposed on Purchases (as
a percentage of offering price) 5.75%(1) None 1.00%
Maximum Deferred Sales Load (as a
percentage of offering price)(2) None(3) 5.00%(4) 1.00%(5)
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering
price) None None None
EXCHANGE FEES None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets BEFORE Fee Waivers and Expense
Reimbursements)
The "Management Fee" and "Other Expenses" shown below for the funds are for the
year ended December 31, 1997.
<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 Fee 0.60% 0.60% 0.60% 0.69% 0.69% 0.69%
Distribution and/or Service (12b-1) Fee 0.25% 0.75% 1.00% 0.25% 0.75% 1.00%
Other Expenses(6) 0.36% 0.36% 0.36% 0.36% 0.36% 0.36%
Total Annual Fund Operating Expenses(7) 1.21% 1.71% 1.96% 1.30% 1.80% 2.05%
</TABLE>
<TABLE>
<CAPTION>
BALANCED FUND
---------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Management Fee 0.75% 0.75% 0.75%
Distribution and/or Service (12b-1) Fee 0.25% 0.75% 1.00%
Other Expenses(6) 0.61% 0.61% 0.61%
Total Annual Fund Operating Expenses(7) 1.61% 2.11% 2.36%
</TABLE>
12
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
NOTES TO THE TABLE OF FEES AND EXPENSES
(1) You pay a sales charge of 5.75% 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
- 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) "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
13
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
Growth, Equity Income, and Balanced Fund for the fiscal year ended December
31, 1997.
(7) 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, 1997, SM&R waived
management fees of 0.10% 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.
14
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
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................
Class B................
Class C................
Equity Income Fund
Class A................
Class B................
Class C................
Balanced Fund
Class A................
Class B................
Class C................
</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................
Class B................
Class C................
Equity Income Fund
Class A................
Class B................
Class C................
Balanced Fund
Class A................
Class B................
Class C................
</TABLE>
15
<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
financial 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 chains. 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 TABLE OF FEES AND EXPENSES
EARLIER IN THIS PROSPECTUS.
16
<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 5.75% 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 but less than $1,000,000 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
17
<PAGE>
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.
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 SM&R. 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
18
<PAGE>
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, you may be able to receive a discount when you
buy additional shares. The amount you paid for the shares you already own may be
"accumulated"--I.E., combined together with the offering price of the new shares
you plan to buy--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 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 breakpoints. Breakpoints for the Program
differ from standard breakpoints in two respects: (1) investments in Class A
shares of less than $50,000 are subject to a lower initial sales charge, and (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
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<PAGE>
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) 10% FREE AMOUNT. We waive the CDSC on redemptions of Class B shares of up to
10% per year of the amount initially invested in Class B shares. (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 10% 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) 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;
(b) the redemptions are made within one year following death or initial
determination of disability; and
(c) the shares were held at the time of death or initial determination of
disability.
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<PAGE>
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 three types of
qualified retirement plans: IRAs, custodial accounts maintained pursuant to
Code Section 403(b), 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;
(b) in kind transfers of assets where the participant or beneficiary
notifies SM&R of such transfer before such transfer occurs;
(c) tax-free rollovers or transfers of assets to another IRA, Section 403(b)
plan, or Section 401 plan invested in Class B shares of one or more
funds managed by SM&R;
(d) tax-free returns of excess contributions or returns of excess deferral
amounts; and
(e) distributions upon the death or disability (as defined in the Code) of
the participant or beneficiary.
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>
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<PAGE>
The distribution fee is for services that are primarily intended to result in or
are primarily attributable to the sale of the Class A, B, and C shares. The
service fee is for providing ongoing servicing to shareholders of the Class A,
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.
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. 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
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<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% 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.
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<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.
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<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.
25
<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.
The Balanced Fund will only purchase common stocks and convertible securities of
corporations having a market capitalization of at least $100 million, an
operating history of at least three (3) years, and a listing on the New York
Stock Exchange, American Stock Exchange, or Over-The-Counter markets. 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
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<PAGE>
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.
The Balanced Fund's goal of preservation of capital while owning common stocks
depends on various factors, including the sustained long-term growth of the
United States economy. SM&R recognizes that recessions occur but also recognizes
that the economy historically has come back from those recessions. Therefore,
SM&R believes that the United States economy will continue to grow, that the
political environment will continue to be relatively stable, and that the
financial markets will continue to function in a reasonably orderly fashion. As
long as these factors occur, SM&R believes that there is a reasonable likelihood
the Balanced Fund can reach its goal of preservation of capital while at the
same time investing in common stock.
SM&R, through an ongoing program of asset allocation, will determine the
appropriate level of equity holding 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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<PAGE>
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.
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
28
<PAGE>
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
29
<PAGE>
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.
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 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"). SM&R will send you a monthly confirmation for any
month in which
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<PAGE>
your account is active. You should carefully review the monthly confirmation 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.
2450 South Shore Boulevard, Suite 400
League City, Texas 77573
Certificates are not normally issued for shares of the funds in an effort to
minimize the risk of loss or theft. 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. Furthermore, a lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond
is borne by the investor and can be 2% or more of the value of the lost, stolen
or destroyed certificate.
OPENING AN ACCOUNT: To purchase shares, you must submit an account application
which includes the purchaser suitability form. If you would like to take
advantage of the electronic services available, please complete the electronic
transfer options 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.
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<PAGE>
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 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 business day. 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).
Calculation of net asset value is made once each business day at the close of
the New York Stock Exchange (currently 3:00 p.m. Central Time). Accordingly, 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 business day, we will execute
purchases and redemptions at the applicable price determined THAT DAY if:
- SM&R receives your order in proper form prior to the close of the Exchange;
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<PAGE>
- a securities dealer having a dealer contract with SM&R receives your order
prior to the close of the Exchange and reports your order to SM&R prior to
SM&R's close of business (currently 4:30 p.m. Central Time) 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, on customary national
business holidays, or on an SM&R business holiday, 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.
SM&R BUSINESS HOLIDAYS. SM&R's business holidays are:
- Good Friday
- Memorial Day
- Independence Day
- Labor Day
- Thanksgiving Day
- the day after Thanksgiving
- Christmas Day
- New Years Day
In addition, SM&R business holidays include the weekday preceding Christmas Day,
or, if Christmas Day is a Saturday, the preceding Thursday and Friday. If
Christmas Day is a Sunday, the following Monday also will be a business holiday.
If New Years Day is a Saturday, the preceding Friday will be a business holiday,
and if New Years Day is a Sunday, the following Monday will be a business
holiday.
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 or
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<PAGE>
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 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
such plans.
TELEPHONE SERVICES. You can take advantage of this service by completing the
appropriate sections of the account application when opening your account.
Through this service, you will be able to purchase by ACH, 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
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<PAGE>
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.
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).
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.
WEALTH ACCUMULATION ACCOUNT. Shareholders having account balances of at least
$2,500 in SM&R Investments, Inc.'s Money Market Fund may open a Wealth
Accumulation Account, which will provide them with an automatic dollar cost
averaging plan. Automatic monthly purchases of the shares of other funds managed
by SM&R may be made by exchanges from the shareholder's Money Market Fund Wealth
Accumulation Account. Purchases of the other funds must be at least $50 and,
unless terminated by the shareholder, will continue as long as the balance of
the Money Market Fund Wealth Accumulation Account is sufficient. Additional
investments may be made to a Money Market Fund account designated as a Wealth
Accumulation Account to extend the purchase period under the plan. However, if
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<PAGE>
additional investments are received by SM&R less than ten (10) business days
prior to the 20th of the month, such investments will not be available for use
under the Wealth Accumulation Account until the 20th of the following month. If
the 20th of the month is an SM&R holiday, the purchase will be processed on the
next business day.
Purchases made will be subject to the applicable sales charge of the fund whose
shares are being purchased. Changes in amounts to be purchased, the funds being
purchased, and termination of a Wealth Accumulation Account will be made within
five (5) business days after written instructions are received by SM&R in proper
form (I.E., signed by the owner(s) of record exactly as registered).
Shareholders' rights to make additional investments, to exchange shares, and to
redeem shares in the Money Market Fund and any of the funds managed by SM&R are
not affected by a shareholder's participation in a Wealth Accumulation Account.
However, check writing privileges and expedited redemption by telephone are not
available for the Money Market Fund accounts designated as a part of the Wealth
Accumulation Account.
Shareholders of SM&R Investments, Inc.'s Primary Fund that opened a Primary Fund
Wealth Accumulation Account prior to December 31, 1998 will be permitted to
continue using the Account subject to the terms applicable to a Money Market
Fund Wealth Accumulation Account, described above.
EXCHANGE PRIVILEGE. As an investor in a fund, you are permitted to exchange
shares that you own in a fund with shares of another fund 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.
You may exchange Class A, B, or C 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 A, B, or
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<PAGE>
C 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.
Finally, you may exchange shares you own in any class of a fund for shares of
another class of that fund, provided that you pay any difference in sales
charges and any applicable CDSC period has expired on the shares you wish to
exchange.
You may acquire, through an exchange, shares of a class with a CDSC. If you
redeem those shares, the relevant CDSC, if any, will be calculated from the date
that you initially purchased the original shares, rather than from the date of
exchange.
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 having identical registrations
and addresses;
(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 the exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(d) SM&R must have received full payment for the shares being exchanged;
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<PAGE>
(e) 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);
(f) any shares that you wish to exchange must have been held for at least ten
(10) business days;
(g) certificates representing shares, if any, are returned before such shares
are exchanged; 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 converts Class B shares
of a fund 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.
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.
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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 be funded with 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, 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
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<PAGE>
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 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.
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<PAGE>
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., 2450 South Shore Boulevard, Suite 400, League City, Texas 77573.
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. 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 security procedures discussed under "Special Purchase Plans And
Services--Exchange Privilege" have been met; and
(e) the proceeds of the redemption do not exceed $25,000.
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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. 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. 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.
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.
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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 exchange, or registered
securities association. WITNESSING OR NOTARIZATION IS NOT SUFFICIENT.
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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 $100. 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 Board of Directors 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;
or
- to refuse to act on instructions not believed to be genuine.
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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
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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 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>
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SM&R received total advisory fees from the Growth, Equity Income, and Balanced
Funds for the fiscal year ended December 31, 1997 of 0.60%, 0.69%, 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
Under its Administrative Service Agreements with the funds, SM&R also 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.
SM&R received total administrative service fees of [ ]% for the Growth Fund;
[ ]% for the Equity Income Fund; and [ ]% for the Balanced Fund for the
fiscal year ended December 31, 1997 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.
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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.
48
<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 year ended through December 31, 1997 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. The information for the six month
period ended June 30, 1998 was derived from unaudited financial statements of
the Growth Fund. IF MULTIPLE CLASSES OF SHARES OF THE GROWTH FUND HAD BEEN IN
EXISTENCE DURING THE PAST FIVE YEARS, THE FINANCIAL PERFORMANCE OF CLASS A, B,
AND C 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>
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED -----------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 4.95 $ 4.39 $ 3.83 $ 4.15 $ 4.51
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.06 0.05 0.08 0.06 0.06
Net Realized and Unrealized Gain
(Loss) on Securities 1.03 0.73 0.88 0.15 0.31
------------- --------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 1.09 0.78 0.96 0.21 0.37
------------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.06) (0.05) (0.08) (0.06) (0.06)
Distributions from Capital Gains (0.74) (0.17) (0.32) (0.47) (0.67)
------------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.80) (0.22) (0.40) (0.53) (0.73)
------------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 5.24 $ 4.95 $ 4.39 $ 3.83 $ 4.15
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
TOTAL RETURN %(1) 22.24% 17.64% 25.20% 4.98% 8.17%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, End of Period (000's
omitted) $ 178,344 $ 152,758 $ 134,821 $ 113,250 $ 113,135
Ratio of Expenses to Average Net
Assets (2) .96 1.15 0.98 0.97 1.00
Ratio of Net Income to Average Net
Assets (2) 1.03 1.02 1.67 1.46 1.31
Portfolio Turnover Rate 46.79 18.72 37.00 46.26 59.67
Average Commission Rate Paid Per
Share $ .0700 $ .0700 -- -- --
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
49
<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 year ended through December 31, 1997 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. The information for the
six month period ended June 30, 1998 was derived from unaudited financial
statements of the Equity Income Fund. IF MULTIPLE CLASSES OF SHARES OF THE
EQUITY INCOME FUND HAD BEEN IN EXISTENCE DURING THE PAST FIVE YEARS, THE
FINANCIAL PERFORMANCE OF CLASS A, B, AND C 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>
SIX MONTH
PERIOD ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 25.05 $ 22.59 $ 18.90 $ 21.66 $ 22.09
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.63 0.58 0.62 0.62 0.56
Net Realized and Unrealized Gain
(Loss) on Securities 4.96 3.10 4.82 (0.75) 1.75
------------ -------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 5.59 3.68 5.44 (0.13) 2.31
------------ -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.64) (0.58) (0.63) (0.61) (0.60)
Distributions from Capital Gains (3.01) (0.64) (1.12) (2.02) (2.14)
------------ -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (3.65) (1.22) (1.75) (2.63) (2.74)
------------ -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 26.99 $ 25.05 $ 22.59 $ 18.90 $ 21.66
------------ -------- -------- -------- -------- --------
------------ -------- -------- -------- -------- --------
TOTAL RETURN %(1) 22.72% 16.46% 29.12% (0.61)% 10.63%
------------ -------- -------- -------- -------- --------
------------ -------- -------- -------- -------- --------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, End of Period (000's
omitted) $198,687 $165,786 $141,058 $114,231 $119,956
Ratio of Expenses to Average Net Assets (2) 1.05 1.10 1.12 1.12 1.17
Ratio of Net Income to Average Net
Assets (2) 2.28 2.42 2.89 2.86 2.51
Portfolio Turnover Rate 39.14 27.07 44.00 52.46 70.71
Average Commission Rate Paid Per Share $ .0700 $ .0700 -- -- --
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
50
<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 year ended through December 31, 1997 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. The information for the six month period
ended June 30, 1998 was derived from unaudited financial statements of the
Balanced Fund. IF MULTIPLE CLASSES OF SHARES OF THE BALANCED FUND HAD BEEN IN
EXISTENCE DURING THE PAST FIVE YEARS, THE FINANCIAL PERFORMANCE OF CLASS A, B,
AND C 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>
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED -----------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 17.90 $ 16.85 $ 14.32 $ 15.35 $ 15.81
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.57 0.49 0.49 0.45 0.41
Net Realized and Unrealized Gain
(Loss) on Securities 2.50 1.48 2.67 (0.22) 0.58
------------- --------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 3.07 1.97 3.16 0.23 0.99
------------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.59) (0.49) (0.49) (0.45) (0.41)
Distributions from Capital Gains (2.06) (0.43) (0.14) (0.81) (1.04)
------------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (2.65) (0.92) (0.63) (1.26) (1.45)
------------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 18.32 $ 17.90 $ 16.85 $ 14.32 $ 15.35
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
TOTAL RETURN %(1) 17.46% 11.86% 22.29% 1.49% 6.31%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, End of Period (000's
omitted) $ 25,838 $ 23,188 $ 21,757 $ 19,023 $ 20,469
Ratio of Expenses to Average Net
Assets(3) (2) 1.26 1.21 1.26 1.25 1.32
Ratio of Net Income to Average Net
Assets (2) 3.02 2.83 2.99 2.91 2.49
Portfolio Turnover Rate 27.52 23.78 16.39 46.95 70.98
Average Commission Rate Paid Per Share $ .0700 $ .0700 -- -- --
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) 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 1.36%, 1.34%, 1.46%, 1.45%,
and 1.39% for the years ended December 31, 1997, 1996, 1995, 1994, and 1993,
respectively.
51
<PAGE>
- -------------------------------------------------------------------
APPENDIX A
(Description of Ratings Used in Prospectus)
- -------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S BOND 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.
A-1
<PAGE>
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 BOND 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 greater than in 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
A-2
<PAGE>
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:
B Preferred stock rated "B" are regarded on balance, as predominately
speculative with respect to the issuer's capacity to pay preferred stock
obligations. 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:
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.
2450 SOUTH SHORE BOULEVARD, SUITE 400
LEAGUE CITY, TEXAS 77573
TELEPHONE:1-800-231-4639 (TOLL FREE) OR
1-409- (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
DECEMBER 31, 1998
- 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
FUNDS' SHARES 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
Table of Fees and Expenses................................. 12
SHARES OF THE FUNDS.......................................... 14
INVESTMENT OBJECTIVES AND POLICIES........................... 15
Growth Fund................................................ 15
Equity Income Fund......................................... 17
Balanced Fund.............................................. 18
RISK FACTORS................................................. 21
PURCHASES AND REDEMPTIONS.................................... 23
Purchasing Shares.......................................... 23
Pricing of Fund Shares..................................... 25
Special Purchase Plans and Services........................ 26
Retirement Plans........................................... 30
Dividends, Distributions, and Taxes........................ 31
Redeeming Shares........................................... 32
THE FUNDS AND MANAGEMENT..................................... 36
FINANCIAL HIGHLIGHTS......................................... 40
Growth Fund................................................ 40
Equity Income Fund......................................... 41
Balanced Fund.............................................. 42
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, basic
materials, and communications services), 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
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
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 stocks of well-known
companies and the remainder in a combination of high-grade
bonds, 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 serve to
capture the benefits that ownership in corporate America
brings. 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). Common stocks
purchased by the fund will have a market capitalization of at
least $100 million and be listed on a national exchange.
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
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 may be subject to certain of the
following types of risks:
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.
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.
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.
MANAGEMENT RISK. The risk that a strategy used by a fund's management may fail
to produce the intended result. 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.
VALUATION RISK. The risk that a fund has valued certain securities at a higher
price than it can sell them for.
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 a
broad-based securities market index.
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.
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>
1988 -0.08%
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%
</TABLE>
During the ten year period shown in the bar chart, the Growth Fund's highest
return for a quarter was 17.47% achieved March 31, 1991 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, 1997) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
GROWTH FUND 15.25% 13.99% 12.65%
S&P 500* 33.36% 20.27% 18.05%
</TABLE>
* The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a widely
recognized, unmanaged index of common stock prices.
9
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1988 3.72%
1989 28.12%
1990 0.76%
1991 29.06%
1992 3.31%
1993 10.62%
1994 -0.61%
1995 29.12%
1996 16.47%
1997 22.72%
</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 5.64% for the quarter December 31,
1990.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1997) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
EQUITY INCOME FUND 15.66% 13.84% 13.74%
S&P 500* 33.36% 20.27% 18.05%
</TABLE>
* The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a widely
recognized, unmanaged index of common stock prices.
10
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1988 4.06%
1989 13.66%
1990 1.38%
1991 24.53%
1992 3.00%
1993 6.31%
1994 1.49%
1995 22.29%
1996 11.86%
1997 17.45%
</TABLE>
During the ten year period shown in the bar chart, the Balanced Fund's highest
return for a quarter was 9.59% achieved December 31, 1991 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, 1997) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
BALANCED FUND 10.71% 10.32% 10.30%
LEHMAN BROTHERS 7.86% 6.67% 18.05%
INTERMEDIATE
GOVERNMENT/CORPORATE*
</TABLE>
* The Lehman Brothers Intermediate Government/Corporate is [DESCRIPTION TO BE
INSERTED].
11
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
TABLE OF FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy shares of
the funds.
SHAREHOLDER TRANSACTION EXPENSES
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
(As a Percentage of Average Net Assets Before Fee Waivers and Expense
Reimbursements)
The "Management Fee" and "Other Expenses" shown below for the funds are for the
year ended December 31, 1997. NO DISTRIBUTION OR SERVICE (12B-1) FEES ARE
<TABLE>
<CAPTION>
IMPOSED ON CLASS Y SHARES OF THE FUNDS.
<S> <C> <C> <C>
EQUITY BALANCED
GROWTH FUND INCOME FUND FUND
------------ ------------ ------------
<CAPTION>
CLASS Y CLASS Y CLASS Y
------------ ------------ ------------
<S> <C> <C> <C>
Management Fee 0.60% 0.69% 0.65%
Other Expenses(1) 0.36% 0.36% 0.61%
--- --- ---
Total Annual Fund Operating Expenses(2) 0.96% 1.05% 1.26%
</TABLE>
NOTES TO THE TABLE OF FEES AND EXPENSES
(1) "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, 1997.
(2) 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.
12
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
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, 1997, SM&R waived management fees of 0.10%
for the Balanced Fund. 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
<TABLE>
<CAPTION>
actually redeem all of your shares at the end of the period shown:
<S> <C> <C> <C> <C>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
----------- ------------- ----------- -----------
Growth Fund (Class Y) $ $ $ $
Equity Income Fund (Class
Y) $ $ $ $
Balanced Fund (Class Y) $ $ $ $
</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
- -------------------------------------------------------------------
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 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.
14
<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. 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
15
<PAGE>
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% 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 such investment, is rated in one of the two top
categories by one or
16
<PAGE>
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 process. We believe in evaluating each company's prospects as
17
<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 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
18
<PAGE>
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.
The Balanced Fund will only purchase common stocks and convertible securities of
corporations having a market capitalization of at least $100 million, an
operating history of at least three (3) years, and a listing on the New York
Stock Exchange, American Stock Exchange, or Over-The-Counter markets. 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
19
<PAGE>
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.
The Balanced Fund's goal of preservation of capital while owning common stocks
depends on various factors, including the sustained long-term growth of the
United States economy. SM&R recognizes that recessions occur but also recognizes
that the economy historically has come back from those recessions. Therefore,
SM&R believes that the United States economy will continue to grow, that the
political environment will continue to be relatively stable, and that the
financial markets will continue to function in a reasonably orderly fashion. As
long as these factors occur, SM&R believes that there is a reasonable likelihood
the Balanced Fund can reach its goal of preservation of capital while at the
same time investing in common stock.
SM&R, through an ongoing program of asset allocation, will determine the
appropriate level of equity holding 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 shares could require a fund to sell portfolio
securities at a time when a sale might not be favorable.
22
<PAGE>
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 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"). SM&R will send you a monthly confirmation for any
month in which your account is active. You should carefully review the monthly
confirmation 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.
2450 South Shore Boulevard, Suite 400
League City, Texas 77573
23
<PAGE>
Certificates are not normally issued for shares of the funds in an effort to
minimize the risk of loss or theft. 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. Furthermore, a lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond
is borne by the investor and can be 2% or more of the value of the lost, stolen
or destroyed certificate.
OPENING AN ACCOUNT: To purchase shares, you must submit an account application
which includes the purchaser suitability form. If you would like to take
advantage of the electronic services available, please complete the electronic
transfer options 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. If the investor is a group or institution specified above in
(a)-(d) of "Shares of the Funds," the minimum initial investment must only be
$[______]. All subsequent investments must be at least $[____]. 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 Y of the Growth Fund)
Fund Account Number (number appears on your confirmation
statement)
Investor's Name (E.G., First National Bank)
24
<PAGE>
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 business day. 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).
Calculation of net asset value is made once each business day at the close of
the New York Stock Exchange (currently 3:00 p.m. Central Time). Accordingly, 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 business day, we will execute
purchases and redemptions at the applicable price determined that day if:
- SM&R receives your order in proper form prior to the close of the Exchange;
- a securities dealer having a dealer contract with SM&R receives your order
prior to the close of the Exchange and reports your order to SM&R prior to
SM&R's close of business (currently 4:30 p.m. Central Time) 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, on customary national
business holidays, or on an SM&R business holiday, 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>
SM&R BUSINESS HOLIDAYS. SM&R's business holidays are:
- Good Friday
- Memorial Day
- Independence Day
- Labor Day
- Thanksgiving Day
- the day after Thanksgiving
- Christmas Day
- New Years Day
In addition, SM&R business holidays include the weekday preceding Christmas Day,
or, if Christmas Day is a Saturday, the preceding Thursday and Friday. If
Christmas Day is a Sunday, the following Monday also will be a business holiday.
If New Years Day is a Saturday, the preceding Friday will be a business holiday,
and if New Years Day is a Sunday, the following Monday will be a business
holiday.
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 registered representative 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 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
26
<PAGE>
established, it may be necessary for you to obtain a signature guarantee for all
individuals named on the account(s).
TELEPHONE SERVICES. You can take advantage of this service by completing the
appropriate sections of the account application when opening your account.
Through this service, you will be able to purchase by ACH, 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.
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).
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from your bank account and
27
<PAGE>
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.
WEALTH ACCUMULATION ACCOUNT. Shareholders having account balances of at least
$2,500 in SM&R Investments, Inc.'s Money Market Fund may open a Wealth
Accumulation Account, which will provide them with an automatic dollar cost
averaging plan. Automatic monthly purchases of the shares of other funds managed
by SM&R may be made by exchanges from the shareholder's Money Market Fund Wealth
Accumulation Account. Purchases of the other funds must be at least $50 and,
unless terminated by the shareholder, will continue as long as the balance of
the Money Market Fund Wealth Accumulation Account is sufficient. Additional
investments may be made to a Money Market Fund account designated as a Wealth
Accumulation Account to extend the purchase period under the plan. However, if
additional investments are received by SM&R less than ten (10) business days
prior to the 20th of the month, such investments will not be available for use
under the Wealth Accumulation Account until the 20th of the following month. If
the 20th of the month is an SM&R holiday, the purchase will be processed on the
next business day.
Purchases made will be subject to the applicable sales charge of the fund whose
shares are being purchased. Changes in amounts to be purchased, the funds being
purchased, and termination of a Wealth Accumulation Account will be made within
five (5) business days after written instructions are received by SM&R in proper
form (I.E., signed by the owner(s) of record exactly as registered).
Shareholders' rights to make additional investments, to exchange shares, and to
redeem shares in the Money Market Fund and any of the funds managed by SM&R are
not affected by a shareholder's participation in a Wealth Accumulation Account.
However, check writing privileges and expedited redemption by telephone are not
available for the Money Market Fund accounts designated as a part of the Wealth
Accumulation Account.
Shareholders of SM&R Investments, Inc.'s Primary Fund that opened a Primary Fund
Wealth Accumulation Account prior to December 31, 1998 will be permitted to
continue using the Account subject to the terms applicable to a Money Market
Fund Wealth Accumulation Account, described above.
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<PAGE>
EXCHANGE PRIVILEGE. As an investor in a fund, you are permitted to exchange
shares that you own in a fund with shares of another fund 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.
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. Finally, you may exchange Class Y shares of a fund for
shares of another class of the same fund, provided that you pay the applicable
sales charges.
You may acquire, through an exchange, shares of a class with a contingent
deferred sales charge. If you redeem those shares, the relevant contingent
deferred sales charge, if any, will be calculated from the date that you
initially purchased the original shares, rather than from the date of exchange.
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 having identical registrations
and addresses;
(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 the exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(d) SM&R must have received full payment for the shares being exchanged;
(e) 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);
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<PAGE>
(f) any shares that you wish to exchange must have been held for at least ten
(10) business days;
(g) certificates representing shares, if any, are returned before such shares
are exchanged; 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.
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 be funded with 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.
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<PAGE>
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, 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
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<PAGE>
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 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., 2450 South Shore
Boulevard, Suite 400, League City, Texas 77573.
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<PAGE>
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. 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 security procedures discussed under "Special Purchase Plans And
Services--Exchange Privilege" have been met; and
(e) the proceeds of the redemption do not exceed $25,000.
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. 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
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<PAGE>
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 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;
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<PAGE>
(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.
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 $[____]. 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 Board of Directors 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;
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<PAGE>
- 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;
or
- to refuse to act on instructions not believed to be genuine.
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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<PAGE>
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
- ------------------------------------------------- --------------------
Not exceeding $100,000,000 0.750%
<S> <C>
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%
<CAPTION>
</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>
<S> <C>
PERFORMANCE
PERFORMANCE COMPARED ADJUSTMENT
TO LIPPER INDEX AMOUNT
- -------------------------------- -------------------
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%
<CAPTION>
</TABLE>
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<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>
<S> <C>
ON THE PORTION OF THE FUND'S BASIC ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- -------------------------------------------- -------------------------
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%
<CAPTION>
</TABLE>
SM&R received total advisory fees from the Growth, Equity Income, and Balanced
Funds for the fiscal year ended December 31, 1997 of 0.60%, 0.69%, 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
Under its Administrative Service Agreements with the funds, SM&R also receives
an administrative service fee from each fund at the annual rate of average daily
net asset values as follows:
<TABLE>
<CAPTION>
<S> <C>
ON THE PORTION OF THE FUND'S ADMINISTRATIVE SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
- -------------------------------------------- --------------------------
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%
<CAPTION>
</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.
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<PAGE>
SM&R received total administrative service fees of [___]% for the Growth Fund;
[___]% for the Equity Income Fund; and [___]% for the Balanced Fund for the
fiscal year ended December 31, 1997 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.
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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 year ended through December 31, 1997 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. The information for the six month period ended June
30, 1998 was derived from unaudited financial statements of the Growth Fund.
<TABLE>
<CAPTION>
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED -----------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 4.95 $ 4.39 $ 3.83 $ 4.15 $ 4.51
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.06 0.05 0.08 0.06 0.06
Net Realized and Unrealized Gain
(Loss) on Securities 1.03 0.73 0.88 0.15 0.31
------------- --------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 1.09 0.78 0.96 0.21 0.37
------------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.06) (0.05) (0.08) (0.06) (0.06)
Distributions from Capital Gains (0.74) (0.17) (0.32) (0.47) (0.67)
------------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.80) (0.22) (0.40) (0.53) (0.73)
------------- --------- --------- --------- --------- ---------
Net Asset Value,
End of Period $ 5.24 $ 4.95 $ 4.39 $ 3.83 $ 4.15
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
TOTAL RETURN %(1) 22.24% 17.64% 25.20% 4.98% 8.17%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, End of Period (000's
omitted) $ 178,344 $ 152,758 $ 134,821 $ 113,250 $ 113,135
Ratio of Expenses to Average Net
Assets (2) .96 1.15 0.98 0.97 1.00
Ratio of Net Income to Average Net
Assets (2) 1.03 1.02 1.67 1.46 1.31
Portfolio Turnover Rate 46.79 18.72 37.00 46.26 59.67
Average Commission Rate Paid Per
Share $ .0700 $ .0700 -- -- --
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
40
<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 year ended through December 31, 1997 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. The information for the six month period
ended June 30, 1998 was derived from unaudited financial statements of the
Equity Income Fund.
<TABLE>
<CAPTION>
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED -----------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 25.05 $ 22.59 $ 18.90 $ 21.66 $ 22.09
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.63 0.58 0.62 0.62 0.56
Net Realized and Unrealized Gain
(Loss) on Securities 4.96 3.10 4.82 (0.75) 1.75
------------- --------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 5.59 3.68 5.44 (0.13) 2.31
------------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.64) (0.58) (0.63) (0.61) (0.60)
Distributions from Capital Gains (3.01) (0.64) (1.12) (2.02) (2.14)
------------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (3.65) (1.22) (1.75) (2.63) (2.74)
------------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 26.99 $ 25.05 $ 22.59 $ 18.90 $ 21.66
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
TOTAL RETURN %(1) 22.72% 16.46% 29.12% (0.61)% 10.63%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, End of Period (000's
omitted) $ 198,687 $ 165,786 $ 141,058 $ 114,231 $ 119,956
Ratio of Expenses to Average Net
Assets (2) 1.05 1.10 1.12 1.12 1.17
Ratio of Net Income to Average Net
Assets (2) 2.28 2.42 2.89 2.86 2.51
Portfolio Turnover Rate 39.14 27.07 44.00 52.46 70.71
Average Commission Rate Paid Per
Share $ .0700 $ .0700 -- -- --
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
41
<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 year ended
through December 31, 1997 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. The
information for the six month period ended June 30, 1998 was derived from
unaudited financial statements of the Balanced Fund.
<TABLE>
<CAPTION>
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED -----------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 17.90 $ 16.85 $ 14.32 $ 15.35 $ 15.81
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.57 0.49 0.49 0.45 0.41
Net Realized and Unrealized Gain
(Loss) on Securities 2.50 1.48 2.67 (0.22) 0.58
------------- --------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 3.07 1.97 3.16 0.23 0.99
------------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.59) (0.49) (0.49) (0.45) (0.41)
Distributions from Capital Gains (2.06) (0.43) (0.14) (0.81) (1.04)
------------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (2.65) (0.92) (0.63) (1.26) (1.45)
------------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 18.32 $ 17.90 $ 16.85 $ 14.32 $ 15.35
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
TOTAL RETURN %(1) 17.46% 11.86% 22.29% 1.49% 6.31%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, End of Period (000's
omitted) $ 25,838 $ 23,188 $ 21,757 $ 19,023 $ 20,469
Ratio of Expenses to Average Net
Assets(3) (2) 1.26 1.21 1.26 1.25" 1.32
Ratio of Net Income to Average Net
Assets (2) 3.02 2.83 2.99 2.91 2.49
Portfolio Turnover Rate 27.52 23.78 16.39 46.95 70.98
Average Commission Rate Paid Per
Share $ .0700 $ .0700 -- -- --
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) 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 1.36%, 1.34%, 1.46%, 1.45%,
and 1.39% for the years ended December 31, 1997, 1996, 1995, 1994, and 1993,
respectively.
42
<PAGE>
- -------------------------------------------------------------------
APPENDIX A
(Description of Ratings Used in Prospectus)
- -------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S BOND 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
A-1
<PAGE>
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 BOND 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 greater than in 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
A-2
<PAGE>
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:
B Preferred stock rated "B" are regarded on balance, as predominately
speculative with respect to the issuer's capacity to pay preferred stock
obligations. 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:
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.
2450 SOUTH SHORE BOULEVARD, SUITE 400
LEAGUE CITY, TEXAS 77573
TELEPHONE:1-800-231-4639 (TOLL FREE) OR
1-409- (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
DECEMBER 31, 1998
- 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
FUNDS' SHARES 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
Table of Fees and Expenses................................. 12
SHARES OF THE FUNDS.......................................... 14
INVESTMENT OBJECTIVES AND POLICIES........................... 15
Growth Fund................................................ 15
Equity Income Fund......................................... 17
Balanced Fund.............................................. 18
RISK FACTORS................................................. 21
PURCHASES AND REDEMPTIONS.................................... 23
Purchasing Shares.......................................... 23
Pricing of Fund Shares..................................... 25
Special Purchase Plans and Services........................ 26
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
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, basic
materials, and communications services), 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
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
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 stocks of well-known
companies and the remainder in a combination of high-grade
bonds, 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 serve to
capture the benefits that ownership in corporate America
brings. 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). Common stocks
purchased by the fund will have a market capitalization of at
least $100 million and be listed on a national exchange.
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
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 may be subject to certain of the
following types of risks:
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.
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.
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.
MANAGEMENT RISK. The risk that a strategy used by a fund's management may fail
to produce the intended result. 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.
VALUATION RISK. The risk that a fund has valued certain securities at a higher
price than it can sell them for.
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 a
broad-based securities market index.
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. 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>
1988 -0.08%
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%
</TABLE>
During the ten year period shown in the bar chart, the Growth Fund's highest
return for a quarter was 17.47% achieved March 31, 1991 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, 1997) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
GROWTH FUND 15.25% 13.99% 12.65%
S&P 500* 33.36% 20.27% 18.05%
</TABLE>
* The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a widely
recognized, unmanaged index of common stock prices.
9
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1988 3.72%
1989 28.12%
1990 0.76%
1991 29.06%
1992 3.31%
1993 10.62%
1994 -0.61%
1995 29.12%
1996 16.47%
1997 22.72%
</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 5.64% for the quarter December 31,
1990.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1997) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
EQUITY INCOME FUND 15.66% 13.84% 13.74%
S&P 500* 33.36% 20.27% 18.05%
</TABLE>
* The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a widely
recognized, unmanaged index of common stock prices.
10
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1988 4.06%
1989 13.66%
1990 1.38%
1991 24.53%
1992 3.00%
1993 6.31%
1994 1.49%
1995 22.29%
1996 11.86%
1997 17.45%
</TABLE>
During the ten year period shown in the bar chart, the Balanced Fund's highest
return for a quarter was 9.59% achieved December 31, 1991 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, 1997) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
BALANCED FUND 10.71% 10.32% 10.30%
LEHMAN BROTHERS 7.86% 6.67% 18.05%
INTERMEDIATE
GOVERNMENT/CORPORATE*
</TABLE>
* The Lehman Brothers Intermediate Government/Corporate is [DESCRIPTION TO BE
INSERTED].
11
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
TABLE OF FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy shares of
the funds.
SHAREHOLDER TRANSACTION EXPENSES
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
(As a Percentage of Average Net Assets BEFORE Fee Waivers and Expense
Reimbursements)
The "Management Fee" and "Other Expenses" shown below for the funds are for the
year ended December 31, 1997.
<TABLE>
<CAPTION>
EQUITY
INCOME BALANCED
GROWTH FUND FUND FUND
----------- -------- --------
CLASS J CLASS J CLASS J
----------- -------- --------
<S> <C> <C> <C>
Management Fee 0.60% 0.69% 0.65%
Distribution and/or Service (12b-1) Fee 0.75% 0.75% 0.75%
Other Expenses(1) 0.36% 0.36% 0.61%
--- --- ---
Total Annual Fund Operating Expenses(2) 1.71% 1.80% 2.01%
</TABLE>
NOTES TO THE TABLE OF FEES AND EXPENSES
(1) "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, 1997.
(2) 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.
12
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
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, 1997, SM&R waived management fees of 0.10%
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 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) $ $ $ $
Equity Income Fund (Class
J) $ $ $ $
Balanced Fund (Class J) $ $ $ $
</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 financial intermediaries that have
distribution agreements with SM&R. These financial intermediaries may include
broker-dealers, investment advisers, and mutual fund "marketplaces," and may
charge you separately for their services.
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.
The distribution fee is for services that are primarily intended to result in or
are primarily attributable to the sale 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.
14
<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. 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.
15
<PAGE>
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% 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 such investment, is rated in one of the two top
categories by one or more of the nationally recognized statistical rating
organizations, in
16
<PAGE>
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 process. We believe in evaluating each company's prospects as
opposed to relying on broad forecasts of industry prospects. We do
17
<PAGE>
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
18
<PAGE>
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.
The Balanced Fund will only purchase common stocks and convertible securities of
corporations having a market capitalization of at least $100 million, an
operating history of at least three (3) years, and a listing on the New York
Stock Exchange, American Stock Exchange, or Over-The-Counter markets. 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
19
<PAGE>
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.
The Balanced Fund's goal of preservation of capital while owning common stocks
depends on various factors, including the sustained long-term growth of the
United States economy. SM&R recognizes that recessions occur but also recognizes
that the economy historically has come back from those recessions. Therefore,
SM&R believes that the United States economy will continue to grow, that the
political environment will continue to be relatively stable, and that the
financial markets will continue to function in a reasonably orderly fashion. As
long as these factors occur, SM&R believes that there is a reasonable likelihood
the Balanced Fund can reach its goal of preservation of capital while at the
same time investing in common stock.
SM&R, through an ongoing program of asset allocation, will determine the
appropriate level of equity holding 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.
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 J shares of a fund through certain financial
intermediaries (such as broker-dealers, investment advisers, and mutual fund
"marketplaces") that have distribution agreements with SM&R. Such purchases will
be at the offering price for such shares determined as and when provided below
(See "Pricing of Fund Shares"). SM&R will send you a monthly confirmation for
any month in which your account is active. You should carefully review the
monthly confirmation and promptly report any discrepancies to
23
<PAGE>
SM&R. You may make subsequent purchases through your registered representative
or directly through SM&R at the following address:
Securities Management and Research, Inc.
2450 South Shore Boulevard, Suite 400
League City, Texas 77573
Certificates are not normally issued for shares of the funds in an effort to
minimize the risk of loss or theft. 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. Furthermore, a lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond
is borne by the investor and can be 2% or more of the value of the lost, stolen
or destroyed certificate.
OPENING AN ACCOUNT: To purchase shares, you must submit an account application
which includes the purchaser suitability form. If you would like to take
advantage of the electronic services available, please complete the electronic
transfer options section of the account application. Special forms are required
when establishing an IRA/ SEP or 403(b) plan.
MINIMUM PURCHASE REQUIREMENT: The minimum initial investment is $100 and all
subsequent investments must be at least $20. We reserve the right to reject any
purchase. Please note that third party checks will not be accepted to open a new
account, except for IRA Rollover checks that are properly endorsed.
SUBSEQUENT PURCHASES BY MAIL: Make your check(s) payable to SM&R and send the
check(s) to the address indicated above. 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
24
<PAGE>
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 J 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 business day. The offering price equals a fund's net asset value plus the
sales charge, if any. You may purchase Class J shares without a sales charge.
Accordingly, the offering price for Class J shares of a fund is that class' net
asset value.
EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS (WHEN SHARES ARE PRICED).
Calculation of net asset value is made once each business day at the close of
the New York Stock Exchange (currently 3:00 p.m. Central Time). Accordingly, 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 business day, we will execute
purchases and redemptions at the applicable price determined THAT DAY if:
- SM&R receives your order in proper form prior to the close of the Exchange;
- a securities dealer having a dealer contract with SM&R receives your order
prior to the close of the Exchange and reports your order to SM&R prior to
SM&R's close of business (currently 4:30 p.m. Central Time) 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.
25
<PAGE>
If we receive your order after the close of the Exchange, on customary national
business holidays, or on an SM&R business holiday, 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.
SM&R BUSINESS HOLIDAYS. SM&R's business holidays are:
- Good Friday
- Memorial Day
- Independence Day
- Labor Day
- Thanksgiving Day
- the day after Thanksgiving
- Christmas Day
- New Years Day
In addition, SM&R business holidays include the weekday preceding Christmas Day,
or, if Christmas Day is a Saturday, the preceding Thursday and Friday. If
Christmas Day is a Sunday, the following Monday also will be a business holiday.
If New Years Day is a Saturday, the preceding Friday will be a business holiday,
and if New Years Day is a Sunday, the following Monday will be a business
holiday.
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 registered representative. 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 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
26
<PAGE>
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 take advantage of this service by completing the
appropriate sections of the account application when opening your account.
Through this service, you will be able to purchase by ACH, 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.
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
27
<PAGE>
resulting from unauthorized or fraudulent telephone transactions on your
account(s).
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.
GROUP SYSTEMATIC INVESTMENT PLAN. A group of 5 or more 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.
WEALTH ACCUMULATION ACCOUNT. Shareholders having account balances of at least
$2,500 in SM&R Investments, Inc.'s Money Market Fund may open a Wealth
Accumulation Account, which will provide them with an automatic dollar cost
averaging plan. Automatic monthly purchases of the shares of other funds managed
by SM&R may be made by exchanges from the shareholder's Money Market Fund Wealth
Accumulation Account. Purchases of the other funds must be at least $50 and,
unless terminated by the shareholder, will continue as long as the balance of
the Money Market Fund Wealth Accumulation Account is sufficient. Additional
investments may be made to a Money Market Fund account designated as a Wealth
Accumulation Account to extend the purchase period under the plan. However, if
additional investments are received by SM&R less than ten (10) business days
prior to the 20th of the month, such investments will not be available for use
under the Wealth Accumulation Account until the 20th of the following month. If
the 20th of the month is an SM&R holiday, the purchase will be processed on the
next business day.
Purchases made will be subject to the applicable sales charge of the fund whose
shares are being purchased. Changes in amounts to be purchased, the funds being
purchased, and termination of a Wealth Accumulation Account will be made within
five (5) business days after written instructions are received by SM&R in proper
form (I.E., signed by the owner(s) of record exactly as registered).
Shareholders' rights to make additional investments, to exchange shares, and to
redeem shares in the Money Market Fund and any of
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<PAGE>
the funds managed by SM&R are not affected by a shareholder's participation in a
Wealth Accumulation Account. However, check writing privileges and expedited
redemption by telephone are not available for the Money Market Fund accounts
designated as a part of the Wealth Accumulation Account.
Shareholders of SM&R Investments, Inc.'s Primary Fund that opened a Primary Fund
Wealth Accumulation Account prior to December 31, 1998 will be permitted to
continue using the Account subject to the terms applicable to a Money Market
Fund Wealth Accumulation Account, described above.
EXCHANGE PRIVILEGE. As an investor in a fund, you are permitted to exchange
shares that you own in a fund with shares of another fund 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.
You may exchange Class J shares of a fund, without an exchange fee, for Class J
shares 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. Finally, you may exchange Class J shares you own in any
class of a fund for shares of another class of the same fund, provided that you
pay the applicable sales charges.
You may acquire, through an exchange, shares of a class with a contingent
deferred sales charge. If you redeem those shares, the relevant contingent
deferred sales charge, if any, will be calculated from the date that you
initially purchased the original shares, rather than from the date of exchange.
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 having identical registrations
and addresses;
(b) the shares of the fund acquired through exchange must be qualified for sale
in the state in which you reside;
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<PAGE>
(c) the dollar amount of the exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(d) SM&R must have received full payment for the shares being exchanged;
(e) 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);
(f) any shares that you wish to exchange must have been held for at least ten
(10) business days;
(g) certificates representing shares, if any, are returned before such shares
are exchanged; 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.
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.
30
<PAGE>
RETIREMENT PLANS
The following retirement plans may be funded with 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 registered
representative or calling SM&R. 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.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS. The Equity Income and Balanced Funds will pay dividends from
investment income, if any, quarterly, 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
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<PAGE>
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
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<PAGE>
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. A redemption request must be
addressed to Securities Management and Research, Inc., 2450 South Shore
Boulevard, Suite 400, League City, Texas 77573.
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. 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 security procedures discussed under "Special Purchase Plans And
Services--Exchange Privilege" have been met; and
(e) the proceeds of the redemption do not exceed $25,000.
SYSTEMATIC WITHDRAWAL PLAN. Each fund has 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. 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 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.
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<PAGE>
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.
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 $100. 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
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required minimum. The Board of Directors 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;
or
- to refuse to act on instructions not believed to be genuine.
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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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SM&R received total advisory fees from the Growth, Equity Income, and Balanced
Funds for the fiscal year ended December 31, 1997 of 0.60%, 0.69%, 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
Under its Administrative Service Agreements with the funds, SM&R also 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 [___]% for the Growth Fund;
[___]% for the Equity Income Fund; and [___]% for the Balanced Fund for the
fiscal year ended December 31, 1997 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.
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<PAGE>
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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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 year ended through December 31, 1997 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. The information for the six month period ended June
30, 1998 was derived from unaudited financial statements of the Growth Fund. 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>
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED -----------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 4.95 $ 4.39 $ 3.83 $ 4.15 $ 4.51
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.06 0.05 0.08 0.06 0.06
Net Realized and Unrealized Gain
(Loss) on Securities 1.03 0.73 0.88 0.15 0.31
------------- --------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 1.09 0.78 0.96 0.21 0.37
------------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.06) (0.05) (0.08) (0.06) (0.06)
Distributions from Capital Gains (0.74) (0.17) (0.32) (0.47) (0.67)
------------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.80) (0.22) (0.40) (0.53) (0.73)
------------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 5.24 $ 4.95 $ 4.39 $ 3.83 $ 4.15
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
TOTAL RETURN %(1) 22.24% 17.64% 25.20% 4.98% 8.17%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, End of Period (000's
omitted) $ 178,344 $ 152,758 $ 134,821 $ 113,250 $ 113,135
Ratio of Expenses to Average Net
Assets (2) .96 1.15 0.98 0.97 1.00
Ratio of Net Income to Average Net
Assets (2) 1.03 1.02 1.67 1.46 1.31
Portfolio Turnover Rate 46.79 18.72 37.00 46.26 59.67
Average Commission Rate Paid Per
Share $ .0700 $ .0700 -- -- --
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
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 year ended through December 31, 1997 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. The information for the six month period
ended June 30, 1998 was derived from unaudited financial statements of the
Equity Income Fund. 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>
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED -----------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 25.05 $ 22.59 $ 18.90 $ 21.66 $ 22.09
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.63 0.58 0.62 0.62 0.56
Net Realized and Unrealized Gain
(Loss) on Securities 4.96 3.10 4.82 (0.75) 1.75
------------- --------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 5.59 3.68 5.44 (0.13) 2.31
------------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.64) (0.58) (0.63) (0.61) (0.60)
Distributions from Capital Gains (3.01) (0.64) (1.12) (2.02) (2.14)
------------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (3.65) (1.22) (1.75) (2.63) (2.74)
------------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 26.99 $ 25.05 $ 22.59 $ 18.90 $ 21.66
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
TOTAL RETURN % (1) 22.72% 16.46% 29.12% (0.61)% 10.63%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, End of Period (000's
omitted) $ 198,687 $ 165,786 $ 141,058 $ 114,231 $ 119,956
Ratio of Expenses to Average Net
Assets (2 ) 1.05 1.10 1.12 1.12 1.17
Ratio of Net Income to Average Net
Assets (2 ) 2.28 2.42 2.89 2.86 2.51
Portfolio Turnover Rate 39.14 27.07 44.00 52.46 70.71
Average Commission Rate Paid Per
Share $ .0700 $ .0700 -- -- --
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
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 year ended
through December 31, 1997 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. The
information for the six month period ended June 30, 1998 was derived from
unaudited financial statements of the Balanced Fund. 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>
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED -----------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 17.90 $ 16.85 $ 14.32 $ 15.35 $ 15.81
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.57 0.49 0.49 0.45 0.41
Net Realized and Unrealized Gain
(Loss) on Securities 2.50 1.48 2.67 (0.22) 0.58
------------- --------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 3.07 1.97 3.16 0.23 0.99
------------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.59) (0.49) (0.49) (0.45) (0.41)
Distributions from Capital Gains (2.06) (0.43) (0.14) (0.81) (1.04)
------------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (2.65) (0.92) (0.63) (1.26) (1.45)
------------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 18.32 $ 17.90 $ 16.85 $ 14.32 $ 15.35
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
TOTAL RETURN %(1) 17.46% 11.86% 22.29% 1.49% 6.31%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, End of Period (000's
omitted) $ 25,838 $ 23,188 $ 21,757 $ 19,023 $ 20,469
Ratio of Expenses to Average Net
Assets(3) (2) 1.26 1.21 1.26 1.25 1.32
Ratio of Net Income to Average Net
Assets (2) 3.02 2.83 2.99 2.91 2.49
Portfolio Turnover Rate 27.52 23.78 16.39 46.95 70.98
Average Commission Rate Paid Per Share $ .0700 $ .0700 -- -- --
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) 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 1.36%, 1.34%, 1.46%, 1.45%,
and 1.39% for the years ended December 31, 1997, 1996, 1995, 1994, and 1993,
respectively.
43
<PAGE>
- -------------------------------------------------------------------
APPENDIX A
(Description of Ratings Used in Prospectus)
- -------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S BOND 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.
A-1
<PAGE>
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 BOND 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 greater than in 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
A-2
<PAGE>
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:
B Preferred stock rated "B" are regarded on balance, as predominately
speculative with respect to the issuer's capacity to pay preferred stock
obligations. 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:
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.
2450 SOUTH SHORE BOULEVARD, SUITE 400
LEAGUE CITY, TEXAS 77573
TELEPHONE:1-800-231-4639 (TOLL FREE) OR
1-409- (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
DECEMBER 31, 1998
- 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
FUNDS' SHARES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
CLASS T (EXISTING OWNERS)
<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
Table of Fees and Expenses................................. 12
SHARES OF THE FUNDS.......................................... 15
Eligible Purchasers of Class T Shares...................... 15
Class T Sales Charges...................................... 17
Sales Charge Reductions and Waivers........................ 17
INVESTMENT OBJECTIVES AND POLICIES........................... 20
Growth Fund................................................ 20
Equity Income Fund......................................... 22
Balanced Fund.............................................. 23
RISK FACTORS................................................. 26
PURCHASES AND REDEMPTIONS.................................... 28
Purchasing Shares.......................................... 28
Pricing of Fund Shares..................................... 30
Special Purchase Plans and Services........................ 31
Retirement Plans........................................... 36
Dividends, Distributions, and Taxes........................ 36
Redeeming Shares........................................... 38
THE FUNDS AND MANAGEMENT..................................... 42
FINANCIAL HIGHLIGHTS......................................... 46
Growth Fund................................................ 46
Equity Income Fund......................................... 47
Balanced Fund.............................................. 48
APPENDIX..................................................... A-1
</TABLE>
ii
<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, basic
materials, and communications services), 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
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
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 stocks of well-known
companies and the remainder in a combination of high-grade
bonds, 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 serve to
capture the benefits that ownership in corporate America
brings. 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). Common stocks
purchased by the fund will have a market capitalization of at
least $100 million and be listed on a national exchange.
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
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 may be subject to certain of the
following types of risks:
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.
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.
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.
MANAGEMENT RISK. The risk that a strategy used by a fund's management may fail
to produce the intended result. 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.
VALUATION RISK. The risk that a fund has valued certain securities at a higher
price than it can sell them for.
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 a
broad-based securities market index.
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.
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>
1988 -0.08%
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%
</TABLE>
* During the ten year period shown in the bar chart, the Growth Fund's highest
return for a quarter was 17.47% achieved March 31, 1991 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, 1997) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
GROWTH FUND 15.25% 13.99% 12.65%
S&P 500* 33.36% 20.27% 18.05%
</TABLE>
* The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a widely
recognized, unmanaged index of common stock prices.
9
<PAGE>
RISK/RETURN SUMMARY SM&R EQUITY INCOME FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1988 3.72%
1989 28.12%
1990 0.76%
1991 29.06%
1992 3.31%
1993 10.62%
1994 -0.61%
1995 29.12%
1996 16.47%
1997 22.72%
</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 5.64% for the quarter December 31,
1990.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1997) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
EQUITY INCOME FUND 15.66% 13.84% 13.74%
S&P 500* 33.36% 20.27% 18.05%
</TABLE>
* The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a widely
recognized, unmanaged index of common stock prices.
10
<PAGE>
RISK/RETURN SUMMARY SM&R BALANCED FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1988 4.06%
1989 13.66%
1990 1.38%
1991 24.53%
1992 3.00%
1993 6.31%
1994 1.49%
1995 22.29%
1996 11.86%
1997 17.45%
</TABLE>
During the ten year period shown in the bar chart, the Balanced Fund's highest
return for a quarter was 9.59% achieved December 31, 1991 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, 1997) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
BALANCED FUND 10.71% 10.32% 10.30%
LEHMAN BROTHERS 7.86% 6.67% 18.05%
INTERMEDIATE
GOVERNMENT/CORPORATE*
</TABLE>
* The Lehman Brothers Intermediate Government/Corporate is [description to be
inserted].
11
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------------------------------------
TABLE OF FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy shares of
the funds.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
GROWTH,
EQUITY
INCOME, AND
BALANCED
FUNDS
-----------
CLASS T
-----------
<S> <C>
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price) 5.75%(1)
Maximum Deferred Sales Load (as a percentage
of offering price)(2) None(3)
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering
price) None
Exchange Fees None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets BEFORE Fee Waivers and Expense
Reimbursements)
The "Management Fee" and "Other Expenses" shown below for the funds are for the
year ended December 31, 1997. NO DISTRIBUTION OR SERVICE (12b-1) FEES ARE
IMPOSED ON CLASS T SHARES OF THE FUNDS.
<TABLE>
<CAPTION>
EQUITY
INCOME BALANCED
GROWTH FUND FUND FUND
----------- -------- --------
CLASS T CLASS T CLASS T
----------- -------- --------
<S> <C> <C> <C>
Management Fee 0.60% 0.69% 0.65%
Other Expenses(4) []% []% []%
Total Annual Fund Operating Expenses(5) 0.96% 1.05% 1.26%
</TABLE>
12
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
NOTES TO THE TABLE OF FEES AND EXPENSES
(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) "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, 1997.
(4) 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, 1997, SM&R waived
management fees of 0.10% 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
13
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
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)
Equity Income Fund (Class
T)
Balanced Fund (Class T)
</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.
14
<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 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;
(b) present and retired directors, officers, registered representatives, and
full-time employees of SM&R and their spouses;
(c) present and retired officers, directors, insurance agents, and full-time
employees (and their spouses) of: (1) American National Insurance Company
("American National"), (2) its subsidiaries, (3) its "affiliated persons,"
as defined in the Investment Company Act of 1940, and (4) any corporation or
partnership for which any of American National's present directors serve as
a director or partner;
(d) present and retired partners and full-time employees of legal counsel to
SM&R (and officers and directors of any professional
15
<PAGE>
corporations which are partners of such legal counsel) and their spouses;
(e) any child, step-child, grandchild, parent, grandparent, brother, or sister
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);
(i) persons receiving refunded amounts through CA$HBACK FROM
ANPAC-REGISTERED TRADEMARK- to the extent the proceeds represent the amount
of the refund;
(j) policyholders of American National subsidiaries who have entered into a net
asset value agreement with SM&R; and
(k) registered representatives and employees of securities dealers with whom
SM&R has a selling agreement.
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.
16
<PAGE>
- If you are a designated person listed in (a)-(k) 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.
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. 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
17
<PAGE>
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, you may be able to receive a discount when you
buy additional shares. The amount you paid for the shares you already own may be
"accumulated"--I.E., combined together with the offering price of the new shares
you plan to buy--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
18
<PAGE>
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>
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)-(k) above may purchase
Class T shares of the funds at net asset value per share without the imposition
of any sales charge.
19
<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. 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.
20
<PAGE>
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% 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 such investment, is rated in one of the two top
categories by one or more of the nationally recognized statistical rating
organizations, in
21
<PAGE>
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 process. We believe in evaluating each company's prospects as
opposed to relying on broad forecasts of industry prospects. We do
22
<PAGE>
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
23
<PAGE>
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.
The Balanced Fund will only purchase common stocks and convertible securities of
corporations having a market capitalization of at least $100 million, an
operating history of at least three (3) years, and a listing on the New York
Stock Exchange, American Stock Exchange, or Over-The-Counter markets. 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
24
<PAGE>
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.
The Balanced Fund's goal of preservation of capital while owning common stocks
depends on various factors, including the sustained long-term growth of the
United States economy. SM&R recognizes that recessions occur but also recognizes
that the economy historically has come back from those recessions. Therefore,
SM&R believes that the United States economy will continue to grow, that the
political environment will continue to be relatively stable, and that the
financial markets will continue to function in a reasonably orderly fashion. As
long as these factors occur, SM&R believes that there is a reasonable likelihood
the Balanced Fund can reach its goal of preservation of capital while at the
same time investing in common stock.
SM&R, through an ongoing program of asset allocation, will determine the
appropriate level of equity holding 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.
25
<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
26
<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
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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.
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 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"). SM&R will send you a monthly
confirmation for any month in which your account is active. You should carefully
review the monthly confirmation and promptly report any discrepancies to SM&R.
You
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may make initial and subsequent purchases directly through SM&R at the following
address:
Securities Management and Research, Inc.
2450 South Shore Boulevard, Suite 400
League City, Texas 77573
Certificates are not normally issued for shares of the funds in an effort to
minimize the risk of loss or theft. 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. Furthermore, a lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond
is borne by the investor and can be 2% or more of the value of the lost, stolen
or destroyed certificate.
OPENING AN ACCOUNT: To purchase shares, you must submit an account application
which includes the purchaser suitability form. If you would like to take
advantage of the electronic services available, please complete the electronic
transfer options 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 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
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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 business day. 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).
Calculation of net asset value is made once each business day at the close of
the New York Stock Exchange (currently 3:00 p.m. Central Time). Accordingly, 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 business day, we will execute
purchases and redemptions at the applicable price determined THAT DAY if:
- SM&R receives your order in proper form prior to the close of the Exchange;
- a securities dealer having a dealer contract with SM&R receives your order
prior to the close of the Exchange and reports your order to SM&R prior to
SM&R's close of business (currently 4:30 p.m. Central Time) 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.
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If we receive your order after the close of the Exchange, on customary national
business holidays, or on an SM&R business holiday, 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.
SM&R BUSINESS HOLIDAYS. SM&R's business holidays are:
- Good Friday
- Memorial Day
- Independence Day
- Labor Day
- Thanksgiving Day
- the day after Thanksgiving
- Christmas Day
- New Years Day
In addition, SM&R business holidays include the weekday preceding Christmas Day,
or, if Christmas Day is a Saturday, the preceding Thursday and Friday. If
Christmas Day is a Sunday, the following Monday also will be a business holiday.
If New Years Day is a Saturday, the preceding Friday will be a business holiday,
and if New Years Day is a Sunday, the following Monday will be a business
holiday.
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 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 section of the account application
at the time you open your account and specify the type of service or services
desired. Attach a
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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 take advantage of this service by completing the
appropriate sections of the account application when opening your account.
Through this service, you will be able to purchase by ACH, 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.
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
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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).
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.
WEALTH ACCUMULATION ACCOUNT. Shareholders having account balances of at least
$2,500 in SM&R Investments, Inc.'s Money Market Fund may open a Wealth
Accumulation Account, which will provide them with an automatic dollar cost
averaging plan. Automatic monthly purchases of the shares of other funds managed
by SM&R may be made by exchanges from the shareholder's Money Market Fund Wealth
Accumulation Account. Purchases of the other funds must be at least $50 and,
unless terminated by the shareholder, will continue as long as the balance of
the Money Market Fund Wealth Accumulation Account is sufficient. Additional
investments may be made to a Money Market Fund account designated as a Wealth
Accumulation Account to extend the purchase period under the plan. However, if
additional investments are received by SM&R less than ten (10) business days
prior to the 20th of the month, such investments will not be available for use
under the Wealth Accumulation Account until the 20th of the following month. If
the 20th of the month is an SM&R holiday, the purchase will be processed on the
next business day.
Purchases made will be subject to the applicable sales charge of the fund whose
shares are being purchased. Changes in amounts to be purchased, the funds being
purchased, and termination of a Wealth Accumulation Account will be made within
five (5) business days after written instructions are received by SM&R in proper
form (I.E., signed by the owner(s) of record exactly as registered).
Shareholders' rights to make additional investments, to exchange shares, and to
redeem shares in the Money Market Fund and any of the funds managed by SM&R are
not affected by a shareholder's participation in a Wealth Accumulation Account.
However, check writing privileges and expedited redemption by telephone are not
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available for the Money Market Fund accounts designated as a part of the Wealth
Accumulation Account.
Shareholders of SM&R Investments, Inc.'s Primary Fund that opened a Primary Fund
Wealth Accumulation Account prior to December 31, 1998 will be permitted to
continue using the Account subject to the terms applicable to a Money Market
Fund Wealth Accumulation Account, described above.
EXCHANGE PRIVILEGE. As an investor in a fund, you are permitted to exchange
shares that you own in a fund with shares of another fund 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.
You may exchange Class T shares of a fund, without an exchange fee, 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. Finally, you may exchange your Class T shares for shares of
another class of the same fund, provided that you pay any difference in sales
charges.
You may acquire, through an exchange, shares of a class with a contingent
deferred sales charge. If you redeem those shares, the relevant contingent
deferred sales charge, if any, will be calculated from the date that you
initially purchased the original shares, rather than from the date of exchange.
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.
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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 having identical registrations
and addresses;
(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 the exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(d) SM&R must have received full payment for the shares being exchanged;
(e) 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);
(f) any shares that you wish to exchange must have been held for at least ten
(10) business days;
(g) certificates representing shares, if any, are returned before such shares
are exchanged; 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.
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
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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 be funded with 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, 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.
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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 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
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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. A redemption request must be
addressed to Securities Management and Research, Inc., 2450 South Shore
Boulevard, Suite 400, League City, Texas 77573.
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. 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;
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(d) the security procedures discussed under "Special Purchase Plans And
Services--Exchange Privilege" have been met; and
(e) the proceeds of the redemption do not exceed $25,000.
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. 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.
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.
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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 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.
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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 $100. 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 Board of Directors 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;
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- 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;
or
- to refuse to act on instructions not believed to be genuine.
THE FUNDS AND MANAGEMENT
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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>
42
<PAGE>
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>
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
43
<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, 1997 of 0.60%, 0.69%, 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
Under its Administrative Service Agreements with the funds, SM&R also 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.
SM&R received total administrative service fees of [ ]% for the Growth Fund;
[ ]% for the Equity Income Fund; and [ ]% for the Balanced Fund for the
fiscal year ended December 31, 1997 of each fund's average daily net assets.
44
<PAGE>
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.
45
<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 year ended through December 31, 1997 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. The information for the six month
period ended June 30, 1998 was derived from unaudited financial statements of
the Growth Fund.
<TABLE>
<CAPTION>
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED -----------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 4.95 $ 4.39 $ 3.83 $ 4.15 $ 4.51
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.06 0.05 0.08 0.06 0.06
Net Realized and
Unrealized Gain (Loss)
on Securities 1.03 0.73 0.88 0.15 0.31
------------- --------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT
OPERATIONS 1.09 0.78 0.96 0.21 0.37
------------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.06) (0.05) (0.08) (0.06) (0.06)
Distributions from
Capital Gains (0.74) (0.17) (0.32) (0.47) (0.67)
------------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.80) (0.22) (0.40) (0.53) (0.73)
------------- --------- --------- --------- --------- ---------
Net Asset Value, End of
Period $ 5.24 $ 4.95 $ 4.39 $ 3.83 $ 4.15
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
TOTAL RETURN %(1) 22.24% 17.64% 25.20% 4.98% 8.17%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
</TABLE>
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net Assets, End of Period
(000's omitted) $ 178,344 $ 152,758 $ 134,821 $ 113,250 $ 113,135
Ratio of Expenses to
Average Net Assets (2) .96 1.15 0.98 0.97 1.00
Ratio of Net Income to
Average Net Assets (2) 1.03 1.02 1.67 1.46 1.31
Portfolio Turnover Rate 46.79 18.72 37.00 46.26 59.67
Average Commission Rate
Paid Per Share $ .0700 $ .0700 -- -- --
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
46
<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 year ended through December 31, 1997 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. The information for the
six month period ended June 30, 1998 was derived from unaudited financial
statements of the Equity Income Fund.
<TABLE>
<CAPTION>
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED -----------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 25.05 $ 22.59 $ 18.90 $ 21.66 $ 22.09
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.63 0.58 0.62 0.62 0.56
Net Realized and
Unrealized Gain
(Loss) on Securities 4.96 3.10 4.82 (0.75) 1.75
------------- --------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT
OPERATIONS 5.59 3.68 5.44 (0.13) 2.31
------------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.64) (0.58) (0.63) (0.61) (0.60)
Distributions from
Capital Gains (3.01) (0.64) (1.12) (2.02) (2.14)
------------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (3.65) (1.22) (1.75) (2.63) (2.74)
------------- --------- --------- --------- --------- ---------
Net Asset Value, End of
Period $ 26.99 $ 25.05 $ 22.59 $ 18.90 $ 21.66
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
TOTAL RETURN %(1) 22.72% 16.46% 29.12% (0.61)% 10.63%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
</TABLE>
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net Assets, End of Period
(000's omitted) $ 198,687 $ 165,786 $ 141,058 $ 114,231 $ 119,956
Ratio of Expenses to
Average Net Assets (2) 1.05 1.10 1.12 1.12 1.17
Ratio of Net Income to
Average Net Assets (2) 2.28 2.42 2.89 2.86 2.51
Portfolio Turnover Rate 39.14 27.07 44.00 52.46 70.71
Average Commission Rate
Paid Per Share $ .0700 $ .0700 -- -- --
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
47
<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 year ended through December 31, 1997 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. The information for the six month period
ended June 30, 1998 was derived from unaudited financial statements of the
Balanced Fund.
<TABLE>
<CAPTION>
SIX MONTH YEAR ENDED DECEMBER 31,
PERIOD ENDED -----------------------------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 17.90 $ 16.85 $ 14.32 $ 15.35 $ 15.81
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.57 0.49 0.49 0.45 0.41
Net Realized and Unrealized
Gain (Loss) on Securities 2.50 1.48 2.67 (0.22) 0.58
------------- --------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT
OPERATIONS 3.07 1.97 3.16 0.23 0.99
------------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.59) (0.49) (0.49) (0.45) (0.41)
Distributions from Capital
Gains (2.06) (0.43) (0.14) (0.81) (1.04)
------------- --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (2.65) (0.92) (0.63) (1.26) (1.45)
------------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 18.32 $ 17.90 $ 16.85 $ 14.32 $ 15.35
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
TOTAL RETURN %(1) 17.46% 11.86% 22.29% 1.49% 6.31%
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
</TABLE>
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net Assets, End of Period
(000's omitted) $ 25,838 $ 23,188 $ 21,757 $ 19,023 $ 20,469
Ratio of Expenses to Average
Net Assets(3) (2) 1.26 1.21 1.26 1.25 1.32
Ratio of Net Income to Average
Net Assets (2) 3.02 2.83 2.99 2.91 2.49
Portfolio Turnover Rate 27.52 23.78 16.39 46.95 70.98
Average Commission Rate Paid
Per Share $ .0700 $ .0700 -- -- --
</TABLE>
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) 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 1.36%, 1.34%, 1.46%, 1.45%,
and 1.39% for the years ended December 31, 1997, 1996, 1995, 1994, and 1993,
respectively.
48
<PAGE>
- -------------------------------------------------------------------
APPENDIX A
(Description of Ratings Used in Prospectus)
- -------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S BOND 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
A-1
<PAGE>
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 BOND 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 greater than in 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
A-2
<PAGE>
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:
B Preferred stock rated "B" are regarded on balance, as predominately
speculative with respect to the issuer's capacity to pay preferred stock
obligations. 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:
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.
2450 SOUTH SHORE BOULEVARD, SUITE 400
LEAGUE CITY, TEXAS 77573
TELEPHONE:1-800-231-4639 (TOLL FREE) OR
1-409- (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
DECEMBER 31, 1998
------------------------
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 and Street Address: Telephone Number: (409)
2450 South Shore Boulevard, Suite 400 Toll Free: 1-(800) 231-4639
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 December 31, 1998
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 or Securities Management and Research, Inc.
("SM&R"), 2450 South Shore Boulevard, Suite 400, League City, Texas 77573
(Telephone No. (409) 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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")................................... 9
PORTFOLIO TURNOVER........................................................ 10
MANAGEMENT OF THE FUNDS................................................... 10
OFFICERS AND DIRECTORS OF THE FUNDS..................................... 11
REMUNERATION OF DIRECTORS............................................... 13
POLICY REGARDING PERSONAL INVESTING....................................... 13
PERSONAL INVESTING BY PORTFOLIO MANAGERS................................ 13
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES................. 14
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 14
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 14
CONTROL AND MANAGEMENT OF SM&R.......................................... 14
INVESTMENT ADVISORY AGREEMENT........................................... 15
PERFORMANCE ADJUSTMENT OF BASIC ADVISORY FEE FOR GROWTH FUND............ 17
ADVISORY FEES PAID...................................................... 18
ADMINISTRATIVE SERVICE AGREEMENT........................................ 18
EXPENSES BORNE BY THE FUNDS............................................. 19
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......................................... 22
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)............................................................... 26
FUND AND CLASS EXPENSES................................................. 27
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN............................... 27
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SPECIAL PURCHASE PLANS.................................................... 29
SYSTEMATIC INVESTMENT PLAN AND ELECTRONIC TRANSFER SERVICE.............. 29
GROUP SYSTEMATIC INVESTMENT PLAN........................................ 29
EXCHANGE PRIVILEGE...................................................... 30
REDEMPTION................................................................ 30
GENERAL................................................................. 30
SYSTEMATIC WITHDRAWAL PLAN.............................................. 31
TAX STATUS................................................................ 32
THE UNDERWRITER........................................................... 34
FINANCIAL STATEMENTS...................................................... 35
CUSTODIAN................................................................. 35
COUNSEL AND AUDITORS...................................................... 36
TRANSFER AGENT AND DIVIDEND PAYING AGENT.................................. 36
PERFORMANCE AND ADVERTISING DATA.......................................... 36
YIELD................................................................... 37
TOTAL RETURN............................................................ 37
CUMULATIVE TOTAL RETURN................................................. 38
AVERAGE ANNUAL RETURN................................................... 39
CLASS PERFORMANCE....................................................... 39
COMPARISONS............................................................... 39
</TABLE>
ii
<PAGE>
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 as
the American National Growth Fund, Inc. The Equity Income Fund was originally
incorporated in Texas on July 15, 1969 as the American National Income Fund,
Inc. The Balanced Fund was originally incorporated in Texas on January 9, 1978
as the American National Bond Fund, Inc. In November 1987, it changed its name
to the Triflex Fund, Inc. and altered its investment objective.
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 make loans to other persons except certain call loans
upon collateral security (the Fund does not intend to make such loans;
the acquisition of publicly distributed bonds, debentures and other
debt securities is not considered a loan).
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7. The Fund will not engage in underwriting securities issued by other
persons.
8. The Fund will not purchase or sell commodities or commodity contracts
including future contracts.
9. The Fund will not issue senior securities.
10. 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.
11. 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.
12. The Fund does not engage in the strategy of short sales of securities.
13. The Fund will not invest in other companies for the purpose of
exercising control of management.
14. 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.
15. 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.
16. The Fund will not purchase any securities as to which it would be
deemed a statutory underwriter under the Securities Act of 1933.
17. 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).
18. 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.
19. 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
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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.
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,
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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.
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
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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
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.
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 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
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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:
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YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund 47% 19% 37%
- -----------------------------------------------------------------------------------------------------------
Equity Income Fund 39% 27% 44%
- -----------------------------------------------------------------------------------------------------------
Balanced Fund 28% 24% 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 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.
10
<PAGE>
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 54 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,
June 1994 to present; Executive Vice
President, American National Insurance
Company ("American National"), 1996 to
present; Senior Vice President, Amer-
ican 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 Presi-
dent, 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 82 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.
- -----------------------------------------------------------------------------------------
PAUL D. CUMMINGS(2) Director since Retired President and Director of Globe
Age 83 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 69 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.
- -----------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------
POSITIONS HELD
WITH PRINCIPAL OCCUPATIONS DURING PAST 5
NAME, ADDRESS, AND AGE THE FUNDS YEARS
- -----------------------------------------------------------------------------------------
<S> <C> <C>
IRA W. PAINTON, C.L.U.(1) Chairman of the Retired President of the Funds, 1968 to
Age 80 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 50 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 59 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 52 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, SM&R
Age 52 Investments, Inc., and American
National Investment Accounts since
1983.
- -----------------------------------------------------------------------------------------
BRENDA T. KOELEMAY Vice President Vice President and Treasurer of SM&R,
Age 43 and Treasurer SM&R Investments, Inc. and American
National Investment Accounts 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 of SM&R, 1991 to
Age 50 and Secretary present; Secretary of SM&R, SM&R
Investments, Inc., and American
National Investment Accounts, 1983 to
present.
- -----------------------------------------------------------------------------------------
</TABLE>
- ------------------------
* "Interested persons" as defined by the 1940 Act.
(1) Members of the nominating committee.
(2) Members of the audit committee.
12
<PAGE>
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, 1997, each Fund paid
$22,722 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, 1997 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 $ 3,533 None None $ 10,600
- -------------------------------------------------------------------------------------------------
Paul D. Cummings $ 3,533 None None $ 10,600
- -------------------------------------------------------------------------------------------------
Jack T. Currie $ 2,833 None None $ 8,499
- -------------------------------------------------------------------------------------------------
Michael W. McCroskey -- None None --
- -------------------------------------------------------------------------------------------------
Ira W. Painton $ 4,667 None None $ 14,000
- -------------------------------------------------------------------------------------------------
Donald P. Stevens $ 3,533 None None $ 10,600
- -------------------------------------------------------------------------------------------------
Steven H. Stubbs $ 3,333 None None $ 10,000
- -------------------------------------------------------------------------------------------------
</TABLE>
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 "Who Can Purchase Class T Shares?" and "Waiver of Initial
Sales Charge for Special 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
13
<PAGE>
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.
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 December , 1998, 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 December , 1998, 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 [ ]% and SM&R owned approximately [ ]%
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 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 December , 1998.
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 One Moody Plaza, Galveston,
Texas 77550. As of December ,1998, the Moody Foundation, a charitable
foundation established for charitable and educational purposes, owned
approximately [ ]% of American National's common stock and the Libbie S. Moody
Trust, a private trust, owned approximately [ ]% 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.
14
<PAGE>
The Bank's controlling stockholder is Moody Bank Holding Company, Inc.
("MBHC"). Moody Bancshares, Inc. ("Bancshares") is the sole shareholder of MBHC.
As of December , 1998, 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 [ ]% 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 American National Investment
Accounts, Inc.--Growth, Balanced, and Managed Portfolios;
- 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
15
<PAGE>
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
August 21, 1997, 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>
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 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.
16
<PAGE>
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>
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
17
<PAGE>
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 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 FOR THE YEAR FOR THE YEAR
THE YEAR ENDED ENDED DECEMBER ENDED DECEMBER
DECEMBER 31, 1995 31, 1996 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund $ 732,251 $1,093,421 $1,011,542
- ------------------------------------------------------------------------------------------
Equity Income Fund $ 927,331 $1,080,300 $1,270,994
- ------------------------------------------------------------------------------------------
Balanced Fund $ 153,930 $ 167,921 $ 186,693
- ------------------------------------------------------------------------------------------
</TABLE>
ADMINISTRATIVE SERVICE AGREEMENT
Under an Administrative Service Agreement between each Fund and SM&R dated
November 30, 1989, as amended on November , 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,
18
<PAGE>
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.
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, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund $ 301,526 $ 335,086 $ 387,654
- --------------------------------------------------------------------------------------------
Equity Income Fund $ 306,746 $ 355,696 $ 416,699
- --------------------------------------------------------------------------------------------
Balanced Fund $ 51,310 $ 55,974 $ 62,231
- --------------------------------------------------------------------------------------------
</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
19
<PAGE>
required for the fiscal years ended December 31, 1995, 1996 and 1997. During the
fiscal years ended December 31, 1995, 1996, and 1997, SM&R reimbursed $40,894,
$29,344, and $24,234, 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 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, 1995 31, 1996 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund $ 198,000 $ 98,000 $ 416,000
- --------------------------------------------------------------------------------------------
Equity Income Fund $ 165,000 $ 132,000 $ 345,000
- --------------------------------------------------------------------------------------------
Balanced Fund $ 13,000 $ 11,000 $ 33,000
- --------------------------------------------------------------------------------------------
</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.
20
<PAGE>
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).
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.
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.
21
<PAGE>
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. Shares may be purchased through agents of American
National who are also registered representatives of SM&R, through certain other
authorized broker-dealers or directly from SM&R. 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.
In the interest of economy, certificates representing shares purchased are
not ordinarily issued. Most investors do not choose to receive certificates for
their shares as this eliminates the problem of safekeeping and facilitates
redemptions and transfers. However, a monthly confirmation will be sent to the
investor reflecting all activity during the month. The investor will have the
same ownership rights with respect to shares purchased as if certificates had
been issued. Investors may receive a certificate representing shares by making a
written request to SM&R. If a certificate is requested, it will normally be
forwarded to the investor within 14 days after receipt of the request. SM&R
reserves the right to charge a small administrative fee for issuance of any
certificates. Certificates will not be issued for fractional shares (although
fractional shares remain in your account on the books of the Funds). Lost,
stolen, or destroyed certificates cannot be replaced without first obtaining a
sufficient indemnity bond. The cost of such a bond is borne by the investor and
can be 2% or more of the current market value of the lost, stolen, or destroyed
certificate.
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 in determining net asset value. The portfolio securities
of the Funds are valued as of the close of trading on each day when the New York
Stock Exchange is open for trading other than SM&R's business holidays described
below. 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 Directors 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, if any. The sales charge, if applicable, 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 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 business day.
22
<PAGE>
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 sales charge on Class T shares is 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>
CLASS A SHARES (FRONT-END LOAD). Class A shares are subject to an initial
sales charge of up to 5.75% 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 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 net asset value per share plus
the applicable sales charge 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 but less than $1,000,000 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.
23
<PAGE>
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 that Class B share 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. The
conversion benefits shareholders because Class A shares are subject to a lower
ongoing 12b-1 fee. If an investor exchanges 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 that 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 certain
financial intermediaries (such as broker-dealers, investment advisers, and
mutual fund "marketplaces") 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.
24
<PAGE>
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. The "breakpoints," which reduce
the applicable sales charge rates at certain levels of investment, set forth in
the tables above for Class A and Class T shares apply to purchases of Class T or
Class A shares of a Fund, either singly or in combination with purchases of
shares of another Fund or a fund managed by SM&R at the respective sales charges
applicable to each, made at one time by: (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 $50,000 are subject to a lower initial sales charge,
and (2) investments in Class A 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, you may be able to receive a discount
when you buy additional shares. The
25
<PAGE>
offering value of the shares you already own may be "accumulated"--I.E.,
combined together with the offering value of the new shares you plan to buy--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
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 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 INITIAL SALES CHARGE FOR SPECIAL PURCHASERS. After receipt of
written request by SM&R, Class T shares of the Funds may be purchased by certain
purchasers designated in the Class T Prospectus 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) 10% FREE AMOUNT. We waive the CDSC on redemptions of Class B shares of
up to 10% per year of the amount initially invested in Class B shares.
(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 10% 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) 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;
(b) the redemptions are made within one year following death or initial
determination of disability; and
(c) the shares were held at the time of death or initial determination of
disability.
26
<PAGE>
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 three types
of qualified retirement plans: IRAs, custodial accounts maintained
pursuant to Code Section 403(b), 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;
(b) in kind transfers of assets where the participant or beneficiary
notifies SM&R of such transfer before such transfer occurs;
(c) tax-free rollovers or transfers of assets to another IRA, Section
403(b) plan, or Section 401 plan invested in Class B shares of one or
more funds managed by SM&R;
(d) tax-free returns of excess contributions or returns of excess
deferral amounts; and
(e) distributions upon the death or disability (as defined in the Code)
of the participant or beneficiary.
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").
27
<PAGE>
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 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
28
<PAGE>
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
SYSTEMATIC INVESTMENT PLAN AND ELECTRONIC TRANSFER SERVICE
All Funds provide a convenient, voluntary method of purchasing their shares
through the "Systematic Investment Plan and Electronic Transfer Service" (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 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, Class C, or Class J 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 $20
per participant 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
29
<PAGE>
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
Exchanges shall be permitted, without charge, between each Class of shares
of a Fund and the corresponding Class of another fund managed by SM&R on terms
described in the Prospectuses. Investors also may exchange shares of a Class of
a Fund for shares of SM&R Investment, Inc.'s Primary and Money Market Funds, and
visa-versa, and may exchange shares of one Class of a Fund for shares of another
Class of that Fund. An investor exchanging shares must meet any minimum
investment requirement for any shares the investor wishes to acquire, and must
pay any applicable sales charge.
Investors may acquire, through an exchange, shares of a Class with a CDSC.
For purposes of determining any CDSC an investor must pay if the investor
redeems those acquired shares, the length of time such acquired shares have been
held will be calculated from the date that the investor initially purchased
shares in the relevant fund, rather from the date the investor exchanged those
shares for the shares subject to a CDSC. In determining the applicability of any
CDSC, it will be assumed that a redemption is made first from shares
representing capital appreciation, next from shares representing the
reinvestment of dividends and capital gain distributions, and finally from other
shares held by the shareholders for the longest period. For Federal income tax
purposes, the amount of the CDSC will reduce the gain or increase the loss, as
the case may be, on the amount realized on redemption.
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
30
<PAGE>
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 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 must be paid 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 fifteen (15) 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 to automatically withdraw a minimum of $50 monthly or
quarterly. It may not be advisable for shareholders to maintain
31
<PAGE>
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 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
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
32
<PAGE>
from dividends, interest, payments with respect to securities loans, gains from
the sale or disposition of stock, securities or foreign currencies or other
income (including gains from options, futures or forward contracts) 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.
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.
Redemptions and exchanges of shares in each Fund are taxable events on which
a shareholder may realize a gain or loss. Shareholders should consult with their
tax advisor concerning the tax reporting requirements in effect on the
redemption or exchange of such shares.
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.
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.
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.
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.
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.
33
<PAGE>
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.
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 [ ], 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 August 21,
1997. 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. In connection with
certain purchases of Class A shares of $1,000,000 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--[ ]%, Year 2--[ ]%, and, in the third
and subsequent years, [ ]%. Such allowances are the same for all
broker-dealers.
34
<PAGE>
The amount of such 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, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Fund $ 244,914 $ 256,481 $ 405,080
- -------------------------------------------------------------------------------------------
Equity Income Fund $ 327,908 $ 612,858 $ 697,920
- -------------------------------------------------------------------------------------------
Balanced Fund $ 33,172 $ 44,577 $ 54,962
- -------------------------------------------------------------------------------------------
</TABLE>
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, 1995 31, 1996 31, 1997
- ------------------------------------------------------------------------------------------------
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 $ 58,000 $ 4,393 $ 47,000 $ 6,066 $ 54,000 $ 5,433
- ------------------------------------------------------------------------------------------------
Equity Income Fund $ 67,000 $ 5,830 $ 55,000 $ 9,010 $ 48,000 $ 9,704
- ------------------------------------------------------------------------------------------------
Balanced Fund $ 6,000 $ 295 $ 6,000 $ 390 $ 2,000 $ 353
- ------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL STATEMENTS
The Growth Fund's Schedule of Investments and audited financial statements
for the year ended December 31, 1997, and the Independent Auditors' Report of
Tait, Weller & Baker dated January 30, 1998 are incorporated herein by reference
to post-effective amendment number 93 to the Growth Fund's registration
statement filed with the SEC on April 22, 1998.
The Equity Income Fund's Schedule of Investments and audited financial
statements for the year ended December 31, 1997, and the Independent Auditors'
Report of Tait, Weller & Baker dated January 30, 1998 are incorporated herein by
reference to post-effective amendment number 37 to the Equity Income Fund's
registration statement filed with the SEC on April 22, 1998.
The Balanced Fund's Schedule of Investments and audited financial statements
for the year ended December 31, 1997, and the Independent Auditors' Report of
Tait, Weller & Baker dated January 30, 1998 are incorporated herein by reference
to post-effective amendment number 29 to the Balanced Fund's registration
statement filed with the SEC on April 22, 1998.
Each Fund's unaudited financial statements for the six-month period ended
June 30, 1998 are incorporated herein by reference from each Fund's Semi-Annual
Report dated [ ], 1998, filed with the SEC on [ ], 1998.
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
35
<PAGE>
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 AND AUDITORS
The Fund's General Counsel is Greer, Herz & Adams, L.L.P., 18th Floor, One
Moody Plaza, Galveston, Texas 77550. 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.
Due to a concern over a potential conflict of interest, KPMG resigned as
auditors to the Funds. The Board appointed Tait, Weller & Baker to serve as the
independent auditors to the Funds for the year ended December 31, 1997.
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. 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.
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.)
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 yield and total return fluctuate 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 yield or
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, yield, 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.
36
<PAGE>
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.
YIELD
Standardized yield for each Fund is computed by dividing the Fund's interest
income (in accordance with specific standardized rules) for a given 30-day or
one month period, net of expenses, by the average number of shares entitled to
receive distributions during the period, dividing this figure by the Fund's net
asset value per share at the end of the period and annualizing the result
(assuming compounding of income in accordance with specific standardized rules)
in order to arrive at an annual percentage rate. The 30-day yield figure is
calculated for each Class of each Fund according to a formula prescribed by the
SEC. The formula can be expressed as follows:
Yield = 2[(a-b + 1)to the power of 6-1]
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest rates, the
yield will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yield will tend to be somewhat lower. In
addition, when interest rates are falling, moneys received by the Fund from the
continuous sale of its shares will likely be invested in portfolio instruments
producing lower yields than the balance of the Fund's portfolio, thereby
reducing the current yield of the Fund. In periods of rising interest rates, the
opposite result can be expected to occur.
Yield information is useful in reviewing the performance of a Fund, but
because yields fluctuate, this information cannot necessarily be used to compare
an investment in shares of the Fund with bank deposits, savings accounts and
similar investment alternatives that often provide an agreed or guaranteed fixed
yield for a stated period of time. Shareholders of a Fund should remember that
yield is a function of the kind and quality of the instruments in the Fund's
portfolio, portfolio maturity, operating expenses and market conditions.
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
37
<PAGE>
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.
The average annual total return figures for the Funds described in the
Prospectuses 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 aggregate total return figures described in the Prospectuses represent
the cumulative change in the value of an investment in a class for the specified
period are computed by the following formula:
Aggregate Total Return = ERV - P
--------
P
Where P = a hypothetical initial payment of $1,000; and
ERV = Ending Redeemable Value of a hypothetical $1,000 investment made
at the beginning of a 1-, 5- or 10-year period at the end of the
1-, 5- or 10-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
YIELD AND 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.
38
<PAGE>
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
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, 1988 initial ten thousand dollar investment less
the maximum $575 sales load to the redeemable value on December 31, 1988 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).
AVERAGE ANNUAL RETURN
The Funds' average annual return during specified time periods reflects the
hypothetical annually compounded return that would equate an initial one
thousand dollar investment to the ending redeemable value of such investment by
adding one to the compounded average annual total return, raising the sum to a
power equal to the number of years covered by the computation and multiplying
the result by the one thousand dollar initial investment. The calculation
assumes deduction of the maximum sales charge from the initial amount invested
and reinvestment of all investment income dividends and capital gains
distributions on the reinvestment dates at the net asset value.
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. Generally,
performance of the Class T shares will not be restated to reflect the expenses
or expense ratio of another class. For example, the inception of performance for
the Class A shares will be deemed to be the inception date of the Class T shares
and the performance of the Class T shares (based on the Class T shares' actual
expenses) from the inception of Class T shares to the inception of Class A
shares will be deemed to be the performance of the Class A shares for that
period. 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
39
<PAGE>
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.
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.
40
<PAGE>
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) Registrant's Articles of Incorporation are incorporated herein by reference
to Exhibit 1 to Post-Effective Amendment No. 35 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. 35 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. 35 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. 35 to this Form N-1A
Registration Statement.
(e) Registrant's Underwriting Agreement is incorporated herein by reference to
Exhibit 6 to Post-Effective Amendment No. 35 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. 35 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. 35 to this
Form N-1A Registration Statement.
(h) Not applicable.
(i) Consent and Opinion of Registrant's counsel, Greer, Herz & Adams, L.L.P.,
will be filed by amendment.
(j) Consent of KPMG Peat Marwick LLP and Tait, Weller and Baker, independent
accountants of Registrant, will be filed by amendment.
(k) Not applicable.
(l) Not applicable.
(m) Registrant's Distribution and Shareholder Servicing Plan is filed herewith.
(n) Financial Data Schedules will be filed by amendment.
C-1
<PAGE>
(o) Registrant's Multiple Class Plan is filed herewith.
(p) List of persons controlled by or under common control with Registrant is
filed herewith.
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. 35 to Form N-1A.
Registrant, together with SM&R Growth Fund, Inc. and the SM&R Balanced
Fund, Inc. (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 SM&R Equity
Funds is __________ . Registrant's share of such fee, based upon the proportion
of its total assets to those of the other SM&R Equity Funds, is ___________.
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 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.
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<PAGE>
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 "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 EXECUTIVE COMMITTEE OF SM&R
President and Director of Registrant; President and Director of each of the
other funds in the SM&R Equity Funds; President and Director of Investment
Accounts; President and Director of SM&R Investments, Inc.; 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; Director, Comprehensive Investment
Services, all located at One Moody Plaza, Galveston, Texas; Vice President,
American National 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.
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<PAGE>
G. RICHARD FERDINANDSTEN
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; Director,
Comprehensive Investment Services, all located at One Moody Plaza, Galveston,
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.; Portfolio Manager of SM&R Balanced Fund, Inc.; Vice
President of Investment Accounts; Portfolio Manager of the Growth, Managed, and
Balanced Portfolios of Investment Accounts; Vice President of Stocks for
American National; Director and President, Comprehensive Investment Services,
all located at One Moody Plaza, Galveston, Texas; Vice President of Investments
for Garden State Life Insurance Company, 2450 South Shore Boulevard, League
City, Texas; 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
Senior Institutional Consultant, Bank South, Atlanta, Georgia.
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<PAGE>
VERA M. YOUNG
VICE PRESIDENT, PORTFOLIO MANAGER OF SM&R
Vice President of Investment Accounts and SM&R Investments, Inc.; Portfolio
Manager of the Money Market Portfolio of Investment Accounts and the Primary
Fund and Money Market Fund of SM&R Investments, Inc., all located at One Moody
Plaza, Galveston, Texas; Assistant Vice President, Securities of American
National, located at One Moody Plaza, Galveston, Texas.
EMERSON V. UNGER, C.L.U.
VICE PRESIDENT OF SM&R
Vice President of the funds in the SM&R Equity Funds, Investment Accounts,
and SM&R Investments, Inc., all located at One Moody Plaza, Galveston, Texas.
BRENDA T. KOELEMAY
VICE PRESIDENT AND TREASURER OF SM&R
Vice President and Treasurer of the funds in the SM&R Equity Funds,
Investment Accounts, and SM&R Investments, Inc.; Treasurer, Comprehensive
Investment Services, all located at One Moody Plaza, Galveston, Texas.
TERESA E. AXELSON
VICE PRESIDENT AND SECRETARY OF SM&R
Vice President and Secretary of the funds in the SM&R Equity Funds,
Investment Accounts, and SM&R Investments, Inc., all located at One Moody Plaza,
Galveston, Texas.
WILLIAM J. KEARNS, JR.
SENIOR VICE PRESIDENT, NATIONAL MARKETING AND SALES DIRECTOR OF SM&R
Vice President for Private Label Funds for Standish, Ayers & Wood in
Boston, Massachusetts.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) SM&R also serves as the principal underwriter for Registrant, the
other funds in the SM&R Equity Funds, Investment Accounts, and SM&R Investments,
Inc.. See "The Funds and Management" in Part A.
C-5
<PAGE>
<TABLE>
<CAPTION>
(b)
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH 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 Director
2450 South Shore Chief Executive Officer
Boulevard
Suite 400
League City, Texas
G. Richard Ferdinandsten 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 President, Chief
Boulevard Investment Officer
Suite 400
League City, Texas
K. David Wheeler Senior Vice President None
2450 South Shore Institutional Sales and
Boulevard Private Client Services
Suite 400
League City, Texas
Vera M. Young Vice President, None
2450 South Shore Portfolio Manager
Boulevard
Suite 400
League City, Texas
Emerson V. Unger, C.L.U. Vice President Vice President
2450 South Shore
Boulevard
Suite 400
League City, Texas
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<PAGE>
Brenda T. Koelemay Vice President and Vice President and
2450 South Shore Treasurer Treasurer
Boulevard
Suite 400
League City, Texas
Teresa E. Axelson Vice President and Vice President and
2450 South Shore Secretary Secretary
Boulevard
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.
39 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 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
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<PAGE>
representation Registrant and SM&R would comply with conditions set forth in the
No-Action Letter. In this regard, each such fund 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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, Registrant, AMERICAN NATIONAL INCOME FUND, INC., certifies
that it meets all of the requirements for effectiveness of this POST-EFFECTIVE
AMENDMENT NO. 39 to Registration Statement, pursuant to Rule 485(a) under the
Securities Act of 1933 and has duly caused this POST-EFFECTIVE AMENDMENT NO. 26
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Galveston and State of Texas, on the
6th day of October, 1998.
AMERICAN NATIONAL INCOME 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. 39 has been signed below by the following persons in the
capacities and on the dates indicated:
PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER: PRINCIPAL ACCOUNTING OFFICER:
<TABLE>
<S> <C>
/s/ Michael W. McCroskey /s/ Brenda T. Koelemay
- --------------------------------- ------------------------------
Michael W. McCroskey, President Brenda T. Koelemay, Treasurer
Date: October 6, 1998 Date: October 6, 1998
---------------------------- -------------------------
<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: October 6, 1998 Date: October 6, 1998
---------------------------------- ----------------------------------
/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: October 6, 1998 Date: October 6, 1998
---------------------------------- ----------------------------------
/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: October 6, 1998 Date: October 6, 1998
---------------------------------- ----------------------------------
/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.
35.
<PAGE>
EXHIBIT INDEX
99.B(m) Registrant's Distribution and Shareholder Servicing Plan
99.B(o) Registrant's Multiple Class Plan
99.B(p) List of persons controlled by or under common control with Registrant
<PAGE>
EXHIBIT 99.B(m)
AMERICAN NATIONAL INCOME FUND, INC.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
May 29, 1998
This Distribution and Shareholder Servicing Plan (the "Plan") is adopted by
American National Income Fund, Inc., a corporation organized under the laws of
the State of Maryland (the "Fund") which currently offers a single series, or
portfolio, pursuant to Rule 12b-1 ("Rule 12b-1") under the Investment Company
Act of 1940, as amended (the "1940 Act").
The Fund currently has a single class of shares, but it is intended that
five new classes will be established so there will be six classes of shares of
common stock (the "Shares"), designated as the Class T Shares (existing
shareholders), the Class A Shares, the Class B Shares, the Class C Shares, the
Class Y Shares (institutional shareholders) and the Class J Shares (network),
respectively. This Plan describes distribution services and shareholder
servicing to be provided by Securities Management and Research, Inc. ("SM&R")
(the Fund's investment adviser and principal underwriter), any person providing
ongoing servicing to shareholders of the Fund (each, a "Service Provider"), or
any distributor of the Fund's Shares (each, a "Distributor") in connection with
the Class A, Class B, Class C and Class J Shares. The Plan also specifies the
deductions from Fund assets to pay for such services.
SECTION 1. AMOUNT OF PAYMENTS: DISTRIBUTION AND SHAREHOLDER SERVICE FEES
(a) The Fund will pay distribution fees (the "Distribution Fees") and/or
shareholder service fees (the "Service Fees") with respect to each of the Class
A, Class B, Class C and Class J Shares of the Fund (the "12b-1 Classes") for
distribution-related services and shareholder services, respectively, provided
to each such Class of Shares. The Distribution Fee and Service Fee, as
applicable, for each Class of Shares shall be computed as an annual percentage
of the value of the average daily net assets of the Fund attributable to such
Class, as follows:
- --------------------------------------------------------------------------------
DISTRIBUTION SERVICE TOTAL 12b-1
CLASS FEE FEE FEE
- --------------------------------------------------------------------------------
Class T Shares: Existing Shareholders. . -0- -0- -0-
- --------------------------------------------------------------------------------
Class A Shares: Front-End Load . . . . . -0- .25% 0.25%
- --------------------------------------------------------------------------------
Class B Shares: Back-End Load (CDSC) . . .50% .25% 0.75%
- --------------------------------------------------------------------------------
Class C Shares: Level Load . . . . . . . .75% .25% 1.00%
- --------------------------------------------------------------------------------
Class Y Shares: Institutional. . . . . . -0- -0- -0-
- --------------------------------------------------------------------------------
Class J Shares: Network. . . . . . . . . .75% -0- 0.75%
- --------------------------------------------------------------------------------
<PAGE>
(b) The Distribution Fees to be paid under this Plan will be calculated
daily (as a percentage of average daily net assets) and paid periodically by the
Fund with respect to the Shares of the relevant 12b-1 Classes of the Fund at the
annual rates indicated above.
(c) The Service Fees to be paid under this Plan will be calculated daily
(as a percentage of average daily net assets) and paid periodically by the Fund
with respect to the Shares of the relevant 12b-1 Classes of the Fund at the
annual rates indicated above.
(d) Payments under this Plan are not tied exclusively to shareholder
services or distribution expenses actually incurred by SM&R or any Service
Provider or Distributor; the payments may exceed or be less than expenses
actually incurred by SM&R, a Service Provider and/or a Distributor.
SECTION 2. DISTRIBUTION AND SHAREHOLDER SERVICES PROVIDED.
The Distribution Fees payable with respect to Class B, Class C and Class J
Shares of the Fund are intended to compensate SM&R, or enable SM&R to compensate
other persons, including Distributors, for services that are primarily intended
to result in, or that are primarily attributable to, the sale of such respective
Classes of Shares of the Fund ("Selling Services"). The Service Fees payable
with respect to the Class A, Class B and Class C Shares of the Fund are intended
to compensate SM&R, or enable SM&R to compensate Service Providers, for
providing ongoing servicing to shareholders of the Fund ("Shareholder
Services").
"Selling Services" when used in this Plan include, but are not limited to:
compensation of sales personnel, training and supervision of sales personnel,
advertising, marketing, and other promotional expenses (including the
preparation of, printing, and making of sales literature), and the printing and
distribution to prospective investors in the Fund of prospectuses and statements
of additional information, that are used in connection with sales of the
relevant 12b-1 Classes of the Fund and distributing such Classes of Shares of
the Fund. In providing compensation for Selling Services in accordance with
this Plan, SM&R is expressly authorized (i) to make, or cause to be made,
payments reflecting an allocation of overhead and other office expenses related
to the distribution of the relevant 12b-1 Classes of the Fund; (ii) to make, or
cause to be made, payments, or to provide for the reimbursement of expenses of,
persons who provide support services in connection with the distribution of the
relevant 12b-1 Classes of the Fund; and (iii) to make, or cause to be made,
payments to financial intermediaries who have sold the Shares of the relevant
12b-1 Classes.
"Shareholder Services" as used in this Plan mean all forms of shareholder
liaison services, as SM&R deems appropriate for functions such as maintaining
shareholder accounts, providing shareholder liaison services, responding to
customer inquiries, and providing shareholders with information on their
investments and about the Fund.
- 2 -
<PAGE>
SECTION 3. APPROVAL OF PLAN AND RELATED AGREEMENTS.
(a) SHAREHOLDER APPROVAL. Neither this Plan nor any related agreements
will take effect with respect to a 12b-1 Class of the Fund, and no fee will be
deducted or payable in accordance with Section 1 of this Plan, with respect to
the Shares of such 12b-1 Class of the Fund, until this Plan has been approved by
a vote of at least a majority of the outstanding voting securities represented
by that Class, if adopted after any public offering of the Shares of that Class
or the sale of such Shares to persons who are not affiliated persons of the Fund
or affiliated persons of such persons. This Plan will be deemed to have been
approved by shareholders of a 12b-1 Class of the Fund so long as a majority of
the outstanding voting securities of the shareholders of such 12b-1 Class vote
for the approval of the Plan, notwithstanding that: (i) the Plan has not been
approved by a majority of the outstanding voting securities represented by any
other Class or (ii) the Plan has not been approved by a majority of the
outstanding voting securities of the Fund.
(b) DIRECTOR APPROVAL. Neither this Plan nor any related agreements will
take effect with respect to any Class of Shares of the Fund until approved by:
(i) a majority vote of the full Board of Directors of the Fund (the
"Board"), and
(ii) 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 any agreements related to it (the "Independent
Directors"),
cast in person at a meeting called for the purpose of voting on this Plan
and the related agreements. In voting to approve the implementation or
continuance of this Plan (see Section 4 below), the directors must conclude, in
exercise of reasonable business judgment and in light of their fiduciary duties,
that there is a reasonable likelihood that the Plan will benefit the Fund and
its shareholders.
SECTION 4. CONTINUANCE OF PLAN.
This Plan will continue in effect with respect to a 12b-1 Class of Shares
of the Fund from year to year so long as its continuance is specifically
approved annually by vote of the Board in the manner described in Section 3(b)
above. The Board will evaluate the appropriateness of this Plan with respect to
the Shares of each of the respective 12b-1 Classes of the Fund and its payment
terms on a continuing basis and in doing so will consider all relevant factors,
including the types and extent of Shareholder Services and/or Selling Services
provided by SM&R, Service Providers and/or Distributors and amounts SM&R,
Service Providers and/or Distributors receive under this Plan.
SECTION 5. TERMINATION.
This Plan may be terminated with respect to any 12b-1 Class of the Fund 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 of the Fund.
- 3 -
<PAGE>
SECTION 6. AMENDMENTS.
This Plan may not be amended with respect to any 12b-1 Class of the Fund to
increase the amount of the fees described in Section 1 above without approval of
the shareholders of the relevant Class as contemplated in Section 3(a) above.
In addition, all material amendments to this Plan must be approved in the manner
described in Section 3(b) above.
SECTION 7. SELECTION OF INDEPENDENT DIRECTORS.
While this Plan is in effect with respect to any 12b-1 Class of the Fund,
the selection and nomination of the Fund's Directors who are not interested
persons of the Fund will be committed to the discretion of the Directors then in
office who are not interested persons of the Fund.
SECTION 8. QUARTERLY WRITTEN REPORTS.
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 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.
SECTION 9. RECORDKEEPING.
The Fund will preserve copies of this Plan, any agreement relating to this
Plan and any report made pursuant to Section 8 above, for a period of not less
than six years (the first two years in an easily accessible place) from the date
of this Plan, the agreement or the report, or for such other periods as may be
required by applicable law.
SECTION 10. FILING.
This Plan shall be filed as an exhibit to the Fund's Registration Statement
on Form N-1A with the U.S. Securities and Exchange Commission, with the next
amendment of such Registration Statement filed after the date hereof.
SECTION 11. INTERPRETATION; MEANING OF CERTAIN TERMS.
(a) This Plan shall be interpreted in accordance with the 1940 Act and Rule
12b-1 thereunder.
(b) As used in this Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act and the rules and regulations under the 1940
Act, subject to any exemption that may be granted to the Fund under the 1940 Act
by the Securities and Exchange Commission.
- 4 -
<PAGE>
(c) The provisions of this Plan are severable for each Class.
SECTION 12. LIMITATION OF LIABILITY.
The obligations of the Fund under this 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 Fund, as provided in the Fund's Articles of
Incorporation. The execution and delivery of this Plan have been authorized by
the directors of the Fund, and signed by an authorized officer of the Fund,
acting as such, and neither the authorization by the directors nor the execution
and delivery by the officer will be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but will bind
only the property of the Fund.
SECTION 13. DATE OF EFFECTIVENESS.
This Plan has been executed by the Fund as of the ______ day of _________,
1998 and will become effective with respect to the Class A, Class B, Class C or
Class J Shares of the Fund as of the date on which interests in the Class A,
Class B, Class C or Class J Shares, as applicable, are first offered to or held
by the public (subject to approvals as provided for in Section 3 above).
AMERICAN NATIONAL INCOME FUND, INC.
By: ________________________________
Michael M. McCroskey
President
-5-
<PAGE>
EXHIBIT 99.B(o)
AMERICAN NATIONAL INCOME FUND, INC.
MULTIPLE CLASS PLAN
May 29, 1998
This Multiple Class Plan (the "Multi-Class Plan") is adopted by American
National Income Fund, Inc., a corporation organized under the laws of the State
of Maryland (the "Fund"), pursuant to Rule 18f-3 of the under the Investment
Company Act of 1940, as amended (the "1940 Act").
The Fund currently has a single class of shares, but it is intended that
five new classes will be established so there will be six classes of shares of
common stock (the "Shares"), designated as the Class T Shares (existing
shareholders), the Class A Shares, the Class B Shares, the Class C Shares, the
Class J Shares (network), and the Class Y Shares (institutional shareholders).
These classes of Shares have different sales charges and distribution and
service ("12b-1") fee structures.
SECTION 1: DISTRIBUTION ARRANGEMENTS AND SERVICE FEES
(a) INTRODUCTION.
Each Class of Shares of the Fund will have the same relative rights and
privileges, except that, as set forth in this Plan, they shall differ with
respect to (i) sales, distribution and shareholder services and other charges
and expenses as initially provided for in Section 1 of this Plan and as
subsequently provided for in the Fund's prospectus and statement of additional
information, as the same may be amended from time to time (each a "Prospectus"
and "SAI," and collectively, the "Prospectus" and "SAI"); (ii) the exclusive
right of each Class of Shares to vote on matters submitted to shareholders that
relate solely to that Class or for which the interests of one Class differ from
the interests of another Class or Classes; (iii) such differences relating to
eligible investors as may be set forth in the Prospectus and SAI; (iv) the
designation of each Class of Shares; and (v) conversion features.
The board of directors of the Fund (the "Board") may determine in the
future that other distribution arrangements, allocations of expenses (whether
ordinary or extraordinary) or services to be provided to a Class of Shares are
appropriate and amend this Plan accordingly without the approval of shareholders
of any Class to the extent permitted by law.
(b) DISTRIBUTION AND SHAREHOLDER SERVICES FEES: As discussed below, the
Class A, Class B, Class C and Class J Shares (the "12b-1 Classes") shall be
offered by the Fund pursuant to a Distribution and Shareholder Servicing Plan,
adopted pursuant to Rule 12b-1 under the 1940
<PAGE>
Act ("Rule 12b-1 Plan"), providing for a distribution fee (the "Distribution
Fee") and a shareholder services fee (the "Service Fee") at annual rates
computed based on the value of the average daily net assets of the Fund
attributable to the relevant Classes of Shares. Such fees shall be calculated
daily and paid periodically by the Fund. The Distribution Fee is intended to
compensate Securities Management and Research, Inc. ("SM&R"), or enable SM&R to
compensate other persons, including any distributor of Shares, for services that
are primarily intended to result in, or that are primarily attributable to, the
sale of Shares attributable to the relevant 12b-1 Class. The Service Fee
payable under the Plan is intended to compensate SM&R, or enable SM&R to
compensate other persons ("Service Providers"), for providing ongoing servicing
and/or maintenance of the accounts of shareholders of the applicable Class of
the Fund ("Shareholder Services").
(c) ADMINISTRATIVE SERVICE FEE. As discussed below, all six Classes of
Shares of the Fund shall be subject to an administrative service fee (the
"Administrative Fee") at an annual rate computed based on the value of the
average daily net assets of the Fund. The Administrative Fee declines with
respect to higher asset levels, as set forth in the Prospectus and/or SAI (as
revised from time to time) and an administrative services agreement between the
Fund and SM&R (the "Administrative Agreement"). Pursuant to the Administrative
Agreement, SM&R has agreed(1) to pay the Fund or to reimburse the Fund for the
expenses attributable to all Classes (including the advisory fee and
Administrative Fee paid to SM&R and any other fees allocated to all Classes of
shares of the Fund based on average daily net assets, but exclusive of interest,
taxes, the Service Fee, the Distribution Fee, commissions and other expenses
incidental to portfolio transactions and any other Class Expenses, as defined
below) in excess of 1.25% per year of such Class' average daily net assets.
(d) CONTINGENT DEFERRED SALES CHARGE. As discussed below, some Class A
Shares and all Class B and Class C Shares shall be subject to a contingent
deferred sales charge ("CDSC") calculated as a specified percentage of the
offering price of the Shares of the relevant Class at the time of purchase. No
CDSC shall be imposed on Shares of a Class unless so provided in the Prospectus.
No CDSC shall be imposed on increases in the net asset value of the Shares being
redeemed above the initial purchase price. No CDSC shall be assessed on Shares
derived from reinvestment of dividends or capital gain distributions. SM&R, in
its discretion, may waive a CDSC otherwise due upon the redemption of Shares on
terms disclosed in the Prospectus or SAI and as allowed under Rule 6c-10 and
other applicable rules of the 1940 Act.
- -----------------
(1) As of the date hereof, the Administrative Agreement does not provide
for multiple classes and therefore provides for the 1.25% expense limit on a
Fund-wide basis, and does not provide for the Service or Distribution Fee. It
is anticipated that the Administrative Agreement will be revised to provide for
multiple classes, in accordance with this Multi-Class Plan, before this Plan is
implemented.
- 2 -
<PAGE>
(e) EXCHANGE PRIVILEGES. Exchanges shall be permitted, without charge,
between each Class of Shares of the Fund and corresponding classes of other
investment funds advised by SM&R, including American National Growth Fund, Inc.
and Triflex Fund, Inc., on terms described in the Prospectus. Exchanges also
are permitted, without charge, between (i) each Class of Shares, except Class B
Shares, and the corresponding class of SM&R Government Bond Fund and SM&R Tax
Free Fund, each a multi-class investment portfolio of SM&R Investments, Inc.
(ii) each Class and SM&R Money Market Fund and SM&R Primary Fund, each a single-
class investment portfolio of SM&R Investments, Inc., on terms described in the
Prospectus. Each class or series of shares that may be exchanged for Shares of
any of the Classes is referred to herein as a "Portfolio."
(f) CLASS-SPECIFIC ARRANGEMENTS.
The Classes of Shares have the following service and distribution fee
arrangements:
CLASS T SHARES (EXISTING SHAREHOLDERS). Class T Shares shall be (i)
offered only to existing shareholders (I.E., accounts in the Fund prior to
the implementation of this Plan; (ii) subject to an Administrative Fee at
the maximum annual rate of .25% of the value of the average daily net
assets attributable to Class T Shares; (iii) not subject to any Service
Fee; and (iv) not subject to any Distribution Fee. Class T Shares shall be
subject to a front-end sales charge is that is reduced at certain
breakpoints as set forth on attached Appendix A - Multi-Class Structure and
is eventually eliminated with respect to investments in the Fund in an
amount of Five Hundred Thousand Dollars ($500,000.00) or more.
CLASS A SHARES. Class A Shares shall be sold subject to a front-end sales
charge as approved from time to time by the Board and set forth in the
Prospectus. The front-end sales charge is reduced for investments made in
amounts over certain levels, or "breakpoints," and is eventually eliminated
with respect to investments in Class A Shares in an amount of One Million
Dollars ($1,000,000.00) or more. The currently proposed front-end sales
charges and corresponding breakpoints for the Class A Shares are set forth
in Appendix A - Multi-Class Structure. Shares that are not subject to a
front-end sales charge because a purchaser invests $1,000,000.00 or more in
Class A Shares shall be subject to a CDSC of 1% for a period of 13 months.
Class A Shares also shall be (i) subject to a Service Fee of .25% of the
value of the average daily net assets attributable to Class A Shares; (ii)
subject to an Administrative Fee at a maximum annual rate of .25% of the
value of the average daily net assets attributable to Class A Shares; and
(iii) not subject to any Distribution Fee. Class A Shares may be exchanged
for Class A Shares of another Portfolio at their relative net asset values,
on terms described in the Prospectus.
CLASS B SHARES: Class B Shares shall be subject to a CDSC on Shares
redeemed as follows:
- 3 -
<PAGE>
YEARS SINCE PURCHASE OF
CLASS B SHARES CDSC
-------------- ----
Year 1 5%
Year 2 4%
Year 3 3%
Year 4 2%
Year 5 1%
Year 6+ 0%
Class B Shares also shall be (i) subject to an Administrative Fee at a
maximum annual rate of .25% of the average daily net assets attributable to
Class B Shares; (ii) subject to a Service Fee of .25%, of the value of the
average daily net assets attributable to Class B Shares; and (iii) subject
to a Distribution Fee of .50%, of the value of the average daily net assets
attributable to Class B Shares. Class B Shares automatically convert to
Class A Shares after eight years. Such conversion will occur at the
relative net asset value per Share of each Class without the imposition of
any sales charge, fee or other charge. Class B Shares may be exchanged for
Class B Shares of another Portfolio at their relative net asset values, on
terms described in the Prospectus.
CLASS C SHARES: Class C Shares shall be: (i) sold subject to a front-end
sales charge of 1.00% of the offering price; (ii) subject to a 1.00% CDSC
for a period of 13 months, (iii) subject to an Administrative Fee at a
maximum annual rate of .25% of the value of the average daily net assets
attributable to Class C Shares; (iv) subject to a Service Fee of .25% of
the value of the average daily net assets attributable to Class C Shares;
and (v) subject to a Distribution Fee of .75% of the value of the average
daily net assets attributable to Class C Shares. Class C Shares will not
convert to any other Class of Shares. Class C Shares may be exchanged for
Class C Shares of another Portfolio at their relative net asset values, on
terms described in the Prospectus.
CLASS J SHARES (NETWORK CLASS). Class J Shares shall be (i) offered only
pursuant to certain distribution arrangements approved from time to time
and as set forth in the Prospectus; (ii) subject to an Administrative Fee
at the maximum annual rate of .25% of the value of the average daily net
assets attributable to Class J Shares; (iii) subject to a Distribution Fee
of .75% of the value of the average daily net assets attributable to
Class J Shares; and (iv) not subject to any Service Fee. Class J Shares
may be exchanged for Class J Shares of another Portfolio at their relative
net asset values, on terms described in the Prospectus.
- 4 -
<PAGE>
CLASS Y SHARES (INSTITUTIONAL CLASS). Class Y Shares shall be (i) offered
only to certain categories of institutional investors as approved from time
to time and as set forth in the Prospectus; (ii) subject to an
Administrative Fee at a maximum annual rate of .25% of the value of the
average daily net assets attributable to Class Y Shares; (iii) not subject
to any Service Fee; and (iv) not subject to any Distribution Fee. Class Y
Shares may be exchanged for Class Y Shares of another Portfolio at their
relative net asset values, on terms described in the Prospectus.
SECTION 2: ALLOCATION OF CLASS EXPENSES
Each Class of Shares of the Fund represents interests in the Fund, and each
has the same rights, preferences, voting powers, restrictions and limitations,
as the other Classes, except as follows:
(1) expenses related to the distribution of a Class of Shares or to the
services provided to shareholders of a Class of Shares shall be borne
solely by such Class;
(2) each Class will bear different Class Expenses (as defined below);
(3) each Class will have exclusive voting rights with respect to matters
that exclusively affect such Class; and
(4) each Class will bear a different name or designation.
Expenses that are directly attributable to a particular Class of Shares
will be incurred by that Class of Shares. The Board, acting in its sole
discretion, has determined that the following expenses attributable to the
Shares of a particular Class ("Class Expenses") will be borne solely by the
Class to which they are attributable:
(1) asset-based distribution fees and shareholder service 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
- 5 -
<PAGE>
(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 proportionately and on a pro
rata basis between Classes of a Fund 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.
SECTION 3: ALLOCATION OF FUND INCOME AND EXPENSES
Income, realized and unrealized capital gains and losses, and expenses that
are not allocated to a specific Class pursuant to Section 2 above, shall be
allocated to each Class of the Fund on the basis of the proportionate net assets
of that Class in relation to the net assets of the Fund. On a daily basis, the
total income, dividends, other income accrued and Fund-level expenses incurred
are multiplied by the proportionate value of the Fund's net assets attributable
to each Class to determine the income and expenses attributable to that Class
for the day. Expenses properly attributable to each Class are recorded
separately and charged to that Class. Net income for each Class is then
determined for the day and segregated on the Fund's general ledger. Dividends
are calculated in the same manner for each Class and declared and paid on all
Classes of Shares on the same days and at the same times.
SECTION 4: AMENDMENTS
This Multi-Class Plan may not be amended to change any material provision
unless such amendment is approved by a vote of the majority of the Board,
including a majority of the Directors who are not interested persons of the Fund
(as defined in Section 2(a)(19) of the 1940 Act) (the "Independent Directors"),
based on its finding that the amendment is in the best interest of each Class
individually and the Fund as a whole.
SECTION 5: TERMINATION
This Multi-Class Plan shall remain in effect until such time as the Board
terminates this Multi-Class Plan or makes a material change to this Multi-Class
Plan. Any material change to this Multi-Class Plan must be approved by the
Board, including a majority of the Independent Directors, as being in the best
interests of each Class of Shares and the Fund as a whole.
SECTION 6: RECORD KEEPING
The Fund shall preserve copies of this Multi-Class Plan and any related
agreements for a period of not less than six years from the date of this Multi-
Class Plan or agreement, the first two years in an easily accessible place, or
for such other periods as may be required by applicable law.
- 6 -
<PAGE>
SECTION 7: FILING
This Plan shall be filed as an exhibit to the Fund's Registration Statement
on Form N-1A with the U.S. Securities and Exchange Commission, with the next
amendment of such Registration Statement filed after the date hereof.
SECTION 8: INTERPRETATION; MEANING OF CERTAIN TERMS.
(a) This Plan shall be interpreted in accordance with the 1940 Act and Rule
18f-3 thereunder.
(b) As used in this Plan, the term "interested person" shall have the same
meaning that such term has under the 1940 Act and the rules and regulations
under the 1940 Act, subject to any exemption that may be granted to the Fund
under the 1940 Act by the Securities and Exchange Commission.
(c) The provisions of this Plan are severable for each Class.
SECTION 9. DATE OF EFFECTIVENESS.
This Plan has been executed by the Fund as of the ______ day of _________,
1998 and will become effective with respect to each Class of Shares of the Fund
as of the date on which interests in that Class are first offered to or held by
the public, subject to approval by the Board as required by Rule 18f-3 under the
1940 Act.
IN WITNESS WHEREOF, the Fund has executed this Multi-Class Plan on the day
and year set forth below.
Date:___________________
AMERICAN NATIONAL INCOME FUND, INC.
________________________ By: _________________________________
________________________ Title: ______________________________
Attest:
- 7 -
<PAGE>
EXHIBIT 99.B(p)
CONTROL LIST
The Registrant, American National Income 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
46.87% 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: American Hampden Joint Venture
ENTITY FORM: a Texas joint venture
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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 Growth Fund, Inc.
ENTITY FORM: a Maryland corporation - registered investment company
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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. collectively own less than
five percent of the outstanding stock of the 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.
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, Securities Management and
Research, Inc. owns approximately 6.94% of the outstanding stock of the Company,
and American National Insurance Company owns approximately 93.24% 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: ANPAC General Agency of Texas
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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: Comprehensive Investment Services, Inc.
ENTITY FORM: a Texas corporation
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
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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: Kearns Building Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: American National owns a 85% 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: Ridgedale Festival Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
50% 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.
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ENTITY: SM&R Capital Funds, 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, Company consists of three (3)
different series: Government Income Fund Series, Primary Fund Series, and Tax
Free Fund Series. Securities Management and Research, Inc. owns approximately
20.01% of the outstanding stock of the Government Income Fund Series, and
American National Insurance Company owns approximately 27.44% of the outstanding
stock of the Government Income Fund Series. Securities Management and Research,
Inc. owns approximately 2.23% of the outstanding stock of the Primary Fund
Series, and American National Insurance Company owns approximately 67.40% of the
outstanding stock of the Primary Fund Series. Securities Management and
Research, Inc. owns approximately 11.71% of the outstanding stock of the Tax
Free Fund Series, and American National Insurance Company owns approximately
58.53% of the outstanding stock of the Tax Free Fund Series.
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
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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.
ENTITY: Town and Country Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
99% limited partnership interest.
ENTITY: Triflex Fund, 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, Securities Management and
Research, Inc. owns approximately 8.5% of the outstanding stock of the Company,
and American National Insurance Company owns approximately 14.23% of the
outstanding stock of the Company.
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