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As filed with the Securities and Exchange Commission on January 31, 2000.
Registration No. 33-36423
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
[Check appropriate box or boxes.]
Post-Effective Amendment No. 12
AMERICAN NATIONAL INVESTMENT ACCOUNTS, INC.
[Exact Name of Registrant as Specified in Charter]
2450 SOUTH SHORE BOULEVARD, SUITE 400
LEAGUE CITY, TEXAS 77573
[Address of Principal Executive Offices] [Zip Code]
Registrant's Telephone Number, Including Area Code (281) 334-2469
TERESA E. AXELSON JERRY L. ADAMS
2450 SOUTH SHORE BOULEVARD WITH COPY TO: GREER, HERZ & ADAMS, L.L.P.
SUITE 400 ONE MOODY PLAZA
LEAGUE CITY, TEXAS 77573 GALVESTON, TEXAS 77550
[Name and Address of Agent for Service]
It is proposed that this filing will become effective (check appropriate box):
[ ] 75 days after filing pursuant to paragraph (a) Rule 485
[X] on May 1, 2000 pursuant to paragraph (a)(2) of rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) 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.
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AMERICAN NATIONAL INVESTMENT ACCOUNTS, INC.
CURRENTLY COMPRISED OF THE FOLLOWING PORTFOLIOS:
GROWTH PORTFOLIO
EQUITY INCOME PORTFOLIO
BALANCED PORTFOLIO
MONEY MARKET PORTFOLIO
GOVERNMENT BOND PORTFOLIO
SMALL-CAP/MID-CAP PORTFOLIO
HIGH YIELD BOND PORTFOLIO
INTERNATIONAL STOCK PORTFOLIO
PROSPECTUS, MAY 1, 2000
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
You cannot purchase shares of these portfolios directly, but only
through variable annuity and variable life insurance contracts
issued by American National Insurance Company.
An investment in the Fund is not a deposit in a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation
or any other government agency. Although the Money Market
Portfolio seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Money
Market Portfolio.
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
FUND SUMMARY............................... 1
Growth Portfolio........................... 1
Equity Income Portfolio.................... 2
Balanced Portfolio......................... 3
Money Market Portfolio..................... 4
Government Bond Portfolio.................. 5
Small-Cap/Mid-Cap Portfolio................ 6
High Yield Bond Portfolio.................. 7
International Stock Portfolio.............. 8
ADDITIONAL INFORMATION OF RISK FACTORS..... 9
PERFORMANCE................................ 12
GENERAL.................................... 15
INVESTMENT OBJECTIVES AND POLICIES ........ 16
Growth Portfolio........................... 16
Equity Income Portfolio.................... 17
Balanced Portfolio......................... 18
Money Market Portfolio..................... 19
Government Bond Portfolio.................. 20
Small-Cap/Mid-Cap Portfolio................ 22
High Yield Bond Portfolio.................. 24
International Stock Portfolio.............. 27
PRICING OF PORTFOLIO SHARES................ 30
TAXES...................................... 30
THE PORTFOLIOS AND THEIR MANAGEMENT........ 31
FINANCIAL HIGHLIGHTS....................... 33
Growth Portfolio........................... 34
Equity Income Portfolio.................... 35
Balanced Portfolio......................... 36
Money Market Portfolio..................... 37
APPENDIX................................... A-1
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WHY READING THIS PROSPECTUS IS IMPORTANT TO YOU
This prospectus explains the investment objectives, risks and strategies of
each of the SM&R Mutual Funds. Reading the prospectus will help you to decide
which SM&R Mutual Fund, if any, is the right investment for you. We suggest
that you keep this prospectus for future reference.
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FUND SUMMARY GROWTH PORTFOLIO
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INVESTMENT OBJECTIVE
The Growth Portfolio seeks to achieve capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Growth Portfolio normally invests at least 85% of its total assets in common
stocks. In selecting stocks, Securities Management and Research, Inc. ("SM&R"),
the Growth Portfolio's investment advisor:
- chooses stocks of financially sound companies that have a proven ability to
make and sustain a profit over time
- places an emphasis on companies with growth potential.
The Growth Portfolio 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 portfolio generally purchases a smaller proportion of
stocks (relative to their market weight) from sectors of the market with below
average growth characteristics (for example, utilities and basic materials),
referred to as "underweighting."
The Growth Portfolio may also invest in debt obligations (such as convertible
preferred stocks, debentures, and notes), including below investment grade bonds
("junk" bonds).
PRINCIPAL RISK FACTORS
The Growth Portfolio is subject to the risks common to all mutual funds that
invest in equity securities, and you could lose money investing in this
portfolio. The principal risks of investing in the Growth Portfolio are as
follows:
- the market value of the portfolio's securities could decline (market risk)
- SM&R's investment decisions (such as sector overweighting and underweighting
and individual stock selection) could fail to achieve the desired results
(investment style or management risk)
- growth stocks can have relatively wide price swings as a result of the high
valuations they carry (growth stock risk)
- interest rates could increase which can cause the value of a debt security
to decline (interest rate risk)
- issuers of debt obligations could default or be unable to pay amounts due
(credit risk).
WHO MAY WANT TO INVEST IN THE PORTFOLIO
This portfolio may be appropriate if you:
- have long-term investment goals (ten years or more)
- are willing to accept higher short-term risk along with higher potential
long-term returns
- want to diversify your portfolio
WHO MAY NOT WANT TO INVEST IN THE PORTFOLIO
This portfolio may NOT be appropriate:
- if you are investing with a shorter time horizon (less than ten years)
- if you are uncomfortable with an investment that will go up and down in
value
- as your complete portfolio
1
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FUND SUMMARY EQUITY INCOME PORTFOLIO
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INVESTMENT OBJECTIVE
The Equity Income Portfolio seeks to achieve growth of capital and/or current
income.
PRINCIPAL INVESTMENT STRATEGIES
Securities Management and Research, Inc. ("SM&R"), the portfolio's investment
advisor, normally invests at least 75% of the Equity Income Portfolio's assets
in equity securities. This portfolio may also invest 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 portfolio focuses on
companies with consistent and increasing dividend payment histories and future
earnings potential sufficient to continue such dividend payments. This
portfolio'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 Portfolio 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
portfolio generally purchases a smaller proportion of stocks (relative to their
market weight) from sectors of the market with below average dividend yields
(such as technology and consumer staples), referred to as "underweighting."
PRINCIPAL RISK FACTORS
The Equity Income Portfolio is subject to the risks common to all mutual funds
that invest in equity securities and you could lose money investing in this
portfolio. The principal risks of investing in the Equity Income Portfolio are
as follows:
- the market value of the portfolio's securities could decline (market risk)
- SM&R's investment decisions (such as sector overweighting and underweighting
and individual stock selection) could fail to achieve the desired results
(investment style or management risk)
- growth stocks can have relatively wide price swings as a result of the high
valuations they carry (growth stock risk)
- interest rates could increase which can cause the value of debt securities
to decline (interest rate risk)
- issuers of debt obligations could default or be unable to pay amounts due
(credit risk)
WHO MAY WANT TO INVEST IN THE PORTFOLIO
This portfolio may be appropriate if you:
- have medium-term investment goals (five years or more)
- are comfortable with moderate to aggressive risk
- are looking for a fund with both growth and income components
- are seeking to participate in the equity market
- are willing to accept higher short-term risk along with higher potential
long-term returns
WHO MAY NOT WANT TO INVEST IN THE PORTFOLIO
This portfolio may NOT be appropriate if you:
- are investing with a shorter-time horizon (less than five years)
- are investing for maximum return
- require a high degree of stability of your principal
2
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FUND SUMMARY BALANCED PORTFOLIO
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INVESTMENT OBJECTIVE
The Balanced Portfolio seeks to conserve principal, produce reasonable current
income, and achieve long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Securities Management and Research, Inc. ("SM&R"), the Balanced Portfolio's
investment advisor, uses a "balanced" approach by investing part of the assets
in common stocks and the remainder in a combination of U.S. Government bonds,
investment-grade corporate bonds, collateralized mortgage obligations,
mortgage-backed securities, convertible bonds, cash, and money market
instruments. The balance of stocks to bonds and money market instruments changes
in response to changing economic conditions. This flexibility may help to reduce
price volatility.
The stocks in this portfolio are diversified and are selected based upon two
models. One model is based on profitability measurements and the other model is
based on the corporation's return on invested cash. The bonds, meanwhile, may
serve as a stabilizing force during times of eroding stock market value, as well
as provide a fixed income payment stream. The portfolio invests at least 25% of
assets in fixed income securities, all of which are rated BBB or better
(investment grade).
PRINCIPAL RISK FACTORS
The Balanced Portfolio is subject to the risks common to all mutual funds that
invest in equity securities and you could lose money investing in this
portfolio. The principal risks of investing in the Balanced Portfolio are as
follows:
- the market value of the portfolio's securities could decline (market risk)
- SM&R's investment decisions (such as determining the ratio of stocks to
bonds and individual stock selection) could fail to achieve the desired
results (investment style or management risk)
- growth stocks can have relatively wide price swings as a result of the high
valuations they carry (growth stock risk)
- interest rates could increase which can cause the value of debt securities
to decline (interest rate risk)
- issuers of debt obligations could default or be unable to pay amounts due
(credit risk)
- the portfolio could be unable to find a buyer for its securities (liquidity
risk)
- the income you receive from the portfolio is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest
rates drop, your income from the portfolio may drop as well (income risk).
WHO MAY WANT TO INVEST IN THE PORTFOLIO
This portfolio may be appropriate if you:
- are seeking conservation of the purchasing power of your capital, but also
want to participate in equity investments
- are looking for a more conservative alternative to a growth-oriented
portfolio
- want a well-diversified and relatively stable investment allocation
- need a core investment
WHO MAY NOT WANT TO INVEST IN THE PORTFOLIO
This portfolio 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
3
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FUND SUMMARY MONEY MARKET PORTFOLIO
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INVESTMENT OBJECTIVE
The Money Market Portfolio seeks the highest current income consistent with the
preservation of capital and maintenance of liquidity.
PRINCIPAL INVESTMENT STRATEGIES
Securities Management and Research, Inc. ("SM&R"), the Money Market Portfolio's
investment advisor, seeks to achieve the portfolio's objective by investing in
high-quality short-term money market instruments, including: obligations of the
U.S. Government and its agencies, certificates of deposit, banker's acceptances,
commercial paper, collateralized mortgage obligations, and corporate bonds and
notes. This portfolio limits its investments to those short-term securities that
it determines present minimal credit risk and meet certain rating requirements
(in the two highest short-term rating categories).
PRINCIPAL RISK FACTORS
The principal risks of investing in the Money Market Portfolio are as follows:
- interest rates may rise which can cause the value of debt securities to
decline (interest rate risk)
- SM&R's investment decisions could fail to achieve the desired results
(investment style or management risk)
- issuers of debt obligation may default or be unable to pay amounts due
(credit risk)
- the portfolio could be unable to find a buyer for its securities (liquidity
risk)
- the income you receive from the portfolio is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest
rates drop, your income from the portfolio may drop as well (income risk).
The risks of investment in the Money Market Portfolio may be expected to be less
than for other mutual funds. By limiting its investments as described above,
this portfolio may not achieve as high a level of current income as a portfolio
investing in lower-rated securities. YOU SHOULD KEEP IN MIND THAT AN INVESTMENT
IN THE MONEY MARKET PORTFOLIO IS NOT AN INVESTMENT IN A BANK AND IS NOT INSURED
OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. ALTHOUGH THE MONEY MARKET PORTFOLIO SEEKS TO PRESERVE THE
VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN THE MONEY MARKET PORTFOLIO.
WHO MAY WANT TO INVEST IN THE PORTFOLIO
This portfolio may be appropriate if you:
- require stability of principal
- are more concerned with safety of principal than with investment returns
WHO MAY NOT WANT TO INVEST IN THE PORTFOLIO
This portfolio may NOT be appropriate if you:
- want federal deposit insurance
- are seeking an investment that is likely to outpace inflation
- are investing for retirement or other goals that are many years in the
future
- are investing for growth or maximum current income
4
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FUND SUMMARY GOVERNMENT BOND PORTFOLIO
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INVESTMENT OBJECTIVE
The Government Bond Portfolio seeks to provide as high a level of current
income, liquidity, and safety of principal as is consistent with prudent
investment risks through investment in a portfolio consisting primarily of
securities issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities
PRINCIPAL INVESTMENT STRATEGIES
Securities Management and Research, Inc. ("SM&R"), the Government Bond
Portfolio's investment advisor, normally invests at least 65% of the portfolio's
assets in securities issued or guaranteed by the U.S. Government, its agencies,
or instrumentalities. These may include Treasuries and mortgage-backed
securities, such as Ginnie Maes, Freddie Macs, and Fannie Maes. This portfolio
may also invest assets in collateralized mortgage obligations.
The Government Bond Portfolio generally invests primarily in medium and
long-term securities. The average portfolio maturity generally is expected to be
in the six to fifteen year range (some securities may have a longer or shorter
duration). The average portfolio maturity may be shorter when management
anticipates that interest rates will increase, and longer when management
anticipates interest rates will decrease.
PRINCIPAL RISK FACTORS
The Government Bond Portfolio is subject to certain investment risks, and you
could lose money investing in this portfolio. The principal risks of investing
in the Government Bond Portfolio are as follows:
- the market value of the portfolio's securities could decline (market risk)
- interest rates may rise which can cause the value of debt securities to
decline (interest rate risk)
- SM&R's investment decisions (such as determining average portfolio maturity
and selecting the best performing securities) could fail to achieve the
desired results (investment style or management risk)
- interest rates could fall enough to prompt an unexpected number of people to
refinance (or prepay) their mortgages before their maturity (call risk)
- interest rates could rise enough to cause fewer people than expected to
repay their mortgages early (extension risk)
- debt obligations not issued or guaranteed by the U.S. Government, its
agencies or instrumentalities could be downgraded in credit rating or go
into default (credit risk)
- the income you receive from the portfolio is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest
rates drop, your income from the portfolio may drop as well (income risk).
- the worldwide demand for U. S. government securities falls (global demand
risk)
WHO MAY WANT TO INVEST IN THE PORTFOLIO
This portfolio may be appropriate if you:
- are seeking a regular stream of income to meet current needs
- are seeking higher potential returns than money market funds and are willing
to accept moderate risk of volatility
- are retired or nearing retirement
WHO MAY NOT WANT TO INVEST IN THE PORTFOLIO
This portfolio may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require absolute stability of your principal
5
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FUND SUMMARY SMALL-CAP/MID-CAP PORTFOLIO
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INVESTMENT OBJECTIVE
The Small-Cap/Mid-Cap Portfolio seeks to provide long-term capital growth by
investing primarily in stocks of small to medium-sized companies.
PRINCIPAL INVESTMENT STRATEGIES
Securities Management and Research, Inc. ("SM&R"), the Small-Cap/Mid-Cap
Portfolio's investment advisor, will invest at least 80% of the portfolio's
total assets in stocks and equity-related securities of small to medium-sized
companies, which SM&R considers to be companies with market capitalizations from
$500 million to $30 billion. Stock selection may reflect either a growth or
value investment approach.
SM&R may also select stocks on certain growth or value considerations. A growth
stock would include a company whose price/earnings ratio is attractive relative
to the underlying earnings growth rate. An example of a value stock would be one
where the stock price appears undervalued in relation to earnings, projected
cash flow, or asset value per share.
Holdings will be widely diversified by industry and company; under most
circumstances, the average position will be less than 1.5% of the portfolio's
total assets. The portfolio will not sell a stock just because the company has
grown to a market capitalization of more than $30 billion, and it may, on
occasion, purchase companies with a market capitalization above $30 billion.
The portfolio may sell securities for a variety of reasons, such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.
PRINCIPAL RISK FACTORS
The Small-Cap/Mid-Cap Portfolio is subject to the risks common to all mutual
funds that invest in equity securities and you could lose money investing in
this portfolio. The principal risks of investing in the Small-Cap/Mid-Cap
Portfolio are as follows:
- the market value of the portfolio's securities could decline (market risk)
- SM&R's investment decisions (such as individual selection of stocks) could
fail to achieve the desired results (investment style or management risk)
- growth stocks can have relatively wide price swings as a result of the high
valuations they carry (growth stock risk)
- the portfolio could be unable to find a buyer for its securities (liquidity
risk)
In addition, investing in small companies generally involves more risks than
investing in more established larger companies. Stocks of small companies are
subject to more abrupt or erratic price movements than larger-company stocks.
Small companies often have limited product lines, markets, or financial
resources, and their management may lack depth and experience. Such companies
usually do not pay significant dividends that could cushion returns in a falling
market.
In general, stocks with growth characteristics can have relatively wide price
swings as a result of the high valuations they may carry. Stocks with value
characteristics carry the risk that investors won't recognize their intrinsic
value for a long time or that they are actually appropriately priced at a low
level. Because the Small-Cap/Mid-Cap Portfolio holds stocks with both growth and
value characteristics, its share price may be negatively affected by either set
of risks.
WHO MAY WANT TO INVEST IN THE PORTFOLIO
This portfolio may be appropriate if you:
- have long-term investment goals (ten years or more)
- are willing to accept higher short-term risk along with higher potential
long-term returns
- want an aggressive, long-term approach to capital growth through small
company stocks
- want to diversify your portfolio
WHO MAY NOT WANT TO INVEST IN THE PORTFOLIO
This portfolio may NOT be appropriate if you:
- are investing with a shorter time horizon
- are uncomfortable with an investment that will go up and down in value
This portfolio should not represent your complete investment program or be used
for short-term trading purposes.
6
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FUND SUMMARY HIGH YIELD BOND PORTFOLIO
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INVESTMENT OBJECTIVE
The High Yield Bond Portfolio seeks to provide a high level of current income.
As a secondary investment objective, the fund seeks capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Securities Management and Research, Inc. ("SM&R"), the High Yield Bond
Portfolio's investment advisor, will normally invest primarily in a diversified
portfolio of medium and lower-grade domestic corporate debt securities. The
portfolio may invest up to 35% of its total assets in debt securities of similar
quality issued by foreign governments or foreign corporations. The portfolio
invests in a broad range of debt securities represented by various companies and
industries and traded on various markets. The portfolio buys and sells
securities with a view to seeking a high level of current income and capital
appreciation over the long-term. Lower-grade securities are commonly referred to
as "junk bonds" (see the Appendix for an explanation of quality ratings.) The
portfolio's investments in medium- and lower-grade securities involve greater
risks as compared to higher-grade securities.
PRINCIPAL RISK FACTORS
The High Yield Bond Portfolio is subject to certain investment risks and you
could lose money investing in this portfolio. The principal risks of investing
in the High Yield Bond Portfolio are as follows:
- the market value of the portfolio's securities could decline (market risk).
Issuers of debt obligations could default or be unable to pay amounts due
(credit risk). Because the portfolio invests primarily in securities with
medium- and lower-credit quality, it is subject to a higher level of credit
risk than a fund that buys only investment-grade securities.
- interest rates could increase, which can cause the value of debt securities
to decline (interest rate risk). Such declines tend to be greater among
securities with longer maturities. The High Yield Bond Portfolio has no
policy limiting the maturities of its investments. To the extent the
portfolio invests in securities with longer maturities, the portfolio will
be subject to greater market risk than a fund investing solely in
shorter-term securities.
- the income you receive from the portfolio is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest
rates drop, your income from the portfolio may drop as well (income risk).
- SM&R's investment decisions (such as individual stock selection) could fail
to achieve the desired results (investment style or management risk)
- interest rates could fall enough to prompt an unexpected number of people to
refinance (or prepay) their obligations before their maturity (call risk)
- the portfolio could be unable to find a buyer for its securities (liquidity
risk)
- because the portfolio may own securities of foreign issuers, it may be
subject to risks not usually associated with owning securities of U.S.
issuers (foreign risk)
- there are greater risks associated with purchasing derivative investments
(derivative investment risk)
WHO MAY WANT TO INVEST IN THE PORTFOLIO
This portfolio may be appropriate if you:
- have a long-term time horizon
- seek a high level of current income and, secondarily, capital appreciation
- are willing to accept the substantially increased risks of medium- and
lower-rated securities in exchange for potentially higher income
- want to add to your total investment portfolio a fund that invests primarily
in medium- and lower-grade domestic debt securities
WHO MAY NOT WANT TO INVEST IN THE PORTFOLIO
This portfolio may NOT be appropriate if you:
- have a short-term time horizon
- are not comfortable with the additional risks associated with investments in
medium-and lower-grade securities
This portfolio should not represent your complete investment program or be used
for short-term trading purposes.
7
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FUND SUMMARY INTERNATIONAL STOCK PORTFOLIO
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INVESTMENT OBJECTIVE
The International Stock Portfolio seeks to obtain long-term growth of capital
through investments primarily in the equity securities of established, non-U.S.
companies.
PRINCIPAL INVESTMENT STRATEGIES
Securities Management and Research, Inc. ("SM&R"), the portfolio's investment
advisor, expects to invest at least 80% of the portfolio's assets in the equity
securities of foreign companies, including multi-national companies. The
portfolio primarily invests in American Depository Receipts ("ADRs"), but may
also invest directly in U.S. dollar denominated equity securities of foreign
companies. The portfolio seeks to invest in securities believed to offer the
best potential for growth at a reasonable price. While the portfolio invests
with an awareness of the global economic backdrop, and our outlook for
individual countries, SM&R uses a "bottom-up" quantitative and qualitative stock
selection process. A "bottom-up" approach to investing emphasizes the evaluation
of individual stocks more than the consideration of broader market and economic
trends. Country allocation is driven largely by stock selection, although the
portfolio may limit investments in markets that appear to have poor overall
prospects.
The portfolio may purchase shares of stocks of companies of any size, but will
normally focus on large- and, to a lesser extent, medium-sized companies.
Valuation factors often influence the fund's allocation among large-, mid-, or
small-cap companies.
PRINCIPAL RISK FACTORS
The International Stock Portfolio is subject to the risks common to all mutual
funds that invest in equity securities and you could lose money investing in
this portfolio. The principal risks of investing in the International Stock
Portfolio are as follows:
- the market value of the portfolio's securities could decline (market risk)
- SM&R's investment decisions (such as country allocation and individual
selection of stocks) could fail to achieve the desired results (investment
style or management risk)
- multi-national corporations are vulnerable to currency exchange and/or
political risks
- funds that invest overseas generally carry more risks than funds that invest
strictly in U.S. assets (foreign risk)
- growth stocks can have relatively wide price swings as a result of the high
valuations they carry (growth stock risk)
WHO MAY WANT TO INVEST IN THE PORTFOLIO
This portfolio may be appropriate if you:
- have long-term investment goals (ten years or more)
- want potential growth over time
- are willing to take more risk in the short-term for potentially higher gains
in the long-term
- want a portfolio comprised primarily of the securities of foreign issuers,
including multi-national companies
WHO MAY NOT WANT TO INVEST IN THE PORTFOLIO
This portfolio may NOT be appropriate if you:
- are investing for the short-term or need current income
- are not willing to take any risks that you may lose money on your investment
- want absolute stability of your investment principal
- want to invest in a particular sector or in particular industries,
countries, or regions
8
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ADDITIONAL EXPLANATION OF RISK FACTORS
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IMPORTANT
The following risk factors were referred to above in the "Principal Risk
Factors" sections of one or more of the portfolios.
MARKET RISK
Market risk is 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. You can lose money by investing in the fund,
especially if you sell your shares during a period of market volatility. Market
risk may affect a single issuer, industry, sector of the economy, or the market
as a whole. A security's market value may fluctuate in response to events
affecting an issuer's profitability or viability. MARKET RISK IS COMMON TO ALL
STOCKS AND BONDS AND THE MUTUAL FUNDS THAT INVEST IN THEM AND APPLIES TO ALL OF
THE PORTFOLIOS.
The prices of debt securities tend to fall as interest rates rise, and such
declines tend to be greater among securities with longer maturities. To the
extent a portfolio invests in securities with longer maturities, that portfolio
will be subject to greater market risk than a fund investing solely in
shorter-term securities. Likewise, Market risk is often greater among certain
types of debt securities, such as zero-coupon bonds (bonds which do not have a
cash-paying coupon) or pay-in-kind securities (bonds which pay investors with
additional bonds rather than cash). As interest rates change, these securities
often fluctuate more in price than traditional debt securities and therefore may
subject the portfolio to greater market risk than a fund that does not own these
types of securities.
Lower-grade securities, especially those with longer maturities or those that do
not make regular interest payments, may have more price volatility and may
decline more in response to negative issuer or general economic news than
higher-grade securities.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased, as well as any
portfolio securities held for payment of such commitments. The greater the
portfolio's outstanding commitments for these securities, the greater the
portfolio's exposure to market price fluctuation.
INVESTMENT STYLE OR MANAGEMENT RISK
Investment style or management risk is the risk that SM&R's investment strategy
may not produce the intended results or that securities that fit SM&R's
investment style do worse than securities that fit other investment manager's
investment styles. This risk also involves the possibility that SM&R will fail
to execute an investment strategy effectively. INVESTMENT STYLE OR MANAGEMENT
RISK IS COMMON TO ALL MUTUAL FUNDS AND APPLIES TO ALL OF THE PORTFOLIOS.
INTEREST RATE RISK
Interest rate risk is the risk that if the general level of interest rates rises
subsequent to the time an investment commitment is made in a fixed-income
security or portfolio, the market price of that security or portfolio will
decline until its yield becomes competitive with new, higher interest rate
securities. It is virtually certain that fluctuations in the general level of
interest rates cause long-term maturity bonds to fluctuate more in price than
shorter-term bonds. As the maturity increases, the price discount is being
amortized over an increasing number of years. Therefore, in order for the
discount to produce say an extra 1 percent per year, it must be progressively
larger in dollar amounts as maturity increases. Long maturity increases risk not
only because of the interest rate factor but also because it increases the time
available for unexpected occurrences. INTEREST RATE RISK AFFECTS ALL OF THE
PORTFOLIOS, BUT MAY HAVE LESS EFFECT ON THE MONEY MARKET PORTFOLIO.
CREDIT RISK
Credit risk is the risk that the issuer of a debt security, or a party to a
contract, will default or otherwise not honor a financial obligation. Such
default could include, for example, a failure to make timely payments of
principal or interest. CREDIT RISK APPLIES TO SOME DEGREE TO ALL OF THE
PORTFOLIOS, BUT MAY HAVE A GREATER IMPACT ON THE GOVERNMENT BOND PORTFOLIO,
EQUITY INCOME PORTFOLIO, THE BALANCED PORTFOLIO, AND THE HIGH YIELD BOND
PORTFOLIO.
The credit quality of "noninvestment" or "less than investment" grade securities
is considered speculative by recognized rating agencies with respect to the
issuer's continuing ability to pay interest and principal. Lower-grade
securities may have less liquidity and a higher incidence of default than
higher-grade securities. A portfolio may incur higher expenditures to protect
the portfolio's interest in such securities. The credit risks and market prices
of lower-grade securities generally are more sensitive to negative issuer
developments, such as
9
<PAGE>
ADDITIONAL EXPLANATION OF RISK FACTORS
--------------------------------------------------------------------------
reduced revenues or increased expenditures, or adverse economic conditions, such
as a recession, than are higher-grade securities.
UNDERSTANDING QUALITY RATINGS
Debt securities ratings are based on the issuer's ability to pay interest and
repay the principal. Securities rated BBB or better by Standard & Poor's
Corporation or Baa or better by Moody's Investor's Service, Inc. are considered
"investment-grade", while securities with lower ratings are regarded as
"non-investment-grade", or "junk bonds". A detailed explanation of these ratings
can be found in the Appendix to this prospectus.
LIQUIDITY RISK
Liquidity relates to the availability of a market in which a security can be
sold at or near its true value. Liquidity risk is the risk that certain
securities or other investments may be difficult or impossible to sell at the
time the portfolio would like to sell them or at the price the portfolio values
them. The portfolio 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 portfolio management or performance. The markets for high yield
securities may be more limited than markets for higher quality issues. The
effect of adverse publicity and investor perceptions may be more pronounced for
securities for which no market exists. Additionally, prices may decline sharply
in reaction to significant sales, adverse economic conditions, changes in
expectation regarding an individual issuer, or interest rate increases, thus
increasing the liquidity risk of these securities. LIQUIDITY RISK APPLIES ONLY
TO THE BALANCED PORTFOLIO, THE MONEY MARKET PORTFOLIO, THE SMALL-CAP/MID-CAP
PORTFOLIO, AND THE HIGH YIELD BOND PORTFOLIO.
GROWTH STOCK RISK
Growth stock risk reflects the risk that, generally, stocks with growth
characteristics can have relatively high price swings as a result of the high
valuations they carry. GROWTH STOCK RISK APPLIES PRIMARILY TO THE GROWTH
PORTFOLIO, THE SMALL-CAP/MID-CAP PORTFOLIO, THE INTERNATIONAL STOCK PORTFOLIO,
AND TO A LESSER EXTENT THE EQUITY INCOME PORTFOLIO.
CALL RISK
Call risk is the risk that an unexpected fall in prevailing interest rates will
shorten the life of an outstanding obligation by increasing the actual or
expected number of prepayments, thereby reducing the obligation's value. CALL
RISK APPLIES PRIMARILY TO THE GOVERNMENT BOND PORTFOLIO AND, TO A LESSER EXTENT,
TO THE BALANCED PORTFOLIO AND TO THE HIGH YIELD BOND PORTFOLIO.
EXTENSION RISK
Extension risk is the risk that an unexpected rise in prevailing interest rates
will extend the life of an outstanding obligation by reducing the actual or
expected number of prepayments, thereby reducing the obligation's value.
EXTENSION RISK APPLIES PRIMARILY TO THE GOVERNMENT BOND PORTFOLIO AND, TO A
LESSER EXTENT, TO THE BALANCED PORTFOLIO AND TO THE HIGH YIELD BOND PORTFOLIO.
INCOME RISK
Income risk is the risk that you may not make as much income from your
investment as you need. The income you receive from a portfolio is based
primarily on interest rates, which can vary widely over the short- and
long-term. If interest rates drop, your income from a portfolio will ordinarily
drop as well. INCOME RISK APPLIES PRIMARILY TO THE GOVERNMENT BOND PORTFOLIO AND
THE HIGH YIELD BOND PORTFOLIO, BUT ALSO APPLIES TO A LESSER DEGREE TO THE EQUITY
INCOME PORTFOLIO AND THE BALANCED PORTFOLIO.
FOREIGN RISK
Foreign risk is the risk that the value of securities of foreign companies could
be affected by factors not present in the U.S. These risks include fluctuations
in foreign currency exchange rates, political, economic or legal developments
(including war or other instability, expropriation of assets, nationalization
and confiscatory taxation), the imposition of foreign exchange limitations
(including currency blockage), withholding taxes on dividend or interest
payments or capital transactions or other restrictions, higher transaction costs
(including higher brokerage, custodial and settlement costs and currency
translation costs) and possible difficulty in enforcing contractual obligations
or taking judicial action. Also, foreign securities may not be as liquid and may
be more volatile than comparable domestic securities.
In addition, there often is less publicly available information about many
foreign issuers, and issuers of foreign securities are subject to different,
often less comprehensive, auditing, accounting, financial reporting and
disclosure requirements than domestic issuers. There is generally less
government regulation of stock exchanges, brokers and listed companies abroad
than in the U.S., and, with respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or
10
<PAGE>
ADDITIONAL EXPLANATION OF RISK FACTORS
--------------------------------------------------------------------------
diplomatic developments which could affect investment in those countries.
Because there is usually less supervision and governmental regulation of
exchanges, brokers and dealers than there is in the U.S., the portfolio may
experience settlement difficulties or delays not usually encountered in the U.S.
Delays in making trades in foreign securities relating to volume constraints,
limitations or restrictions, clearance or settlement procedures, or otherwise
could impact yields and result in temporary periods when assets are not fully
invested or attractive investment opportunities are foregone.
In addition to the increased risks of investing in foreign issuers, there are
often increased transactions costs associated with investing in foreign
securities including the costs incurred in connection with converting
currencies, higher foreign brokerage or dealer costs, and higher settlement
costs or custodial costs.
The introduction on January 1, 1999 of a single currency, the euro, by the
participating nations in the European Economic and Monetary Union may present
unique uncertainties for securities denominated in (or whose value is linked to)
currencies that have become components of the euro. Foreign risk applies
primarily to the International Stock Portfolio, but also applies to a lesser
extent to the High Yield Bond Portfolio.
Investing in emerging markets involves risks in addition to and greater than
those generally associated with investing in more developed foreign markets. The
extent of foreign development; political stability; market depth,
infrastructure, capitalization, and regulatory oversight are generally less than
in more developed markets. Emerging market economies can be subject to greater
social, economic, regulatory and political uncertainties. All of these factors
can make emerging market securities more volatile and potentially less liquid
than securities issued in more developed markets.
Portfolio securities may be listed on foreign exchanges that are open on days
when the portfolios do not compute share prices. As a result, a portfolio's net
asset value may be significantly affected by trading on days when shareholders
cannot make transactions.
OTHER RISKS
In addition to the risk factors discussed above, investors should keep in mind
that all investments in U.S. Government Obligations are not backed by the "full
faith and credit" of the United States Government. Some are backed only by the
rights of the issuer to borrow from the U.S. Treasury and others are supported
only by the credit of the issuing instrumentality. No assurance can be given
that the U.S. Government would lend money to or otherwise provide financial
support to U.S. Government sponsored instrumentalities.
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.
PLEASE REMEMBER THAT PORTFOLIO SHARES ARE:
- - NOT GUARANTEED TO ACHIEVE THEIR INVESTMENT GOAL
- - NOT INSURED, ENDORSED OR GUARANTEED BY THE FDIC, A BANK OR ANY GOVERNMENT
AGENCY
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF YOUR ORIGINAL
INVESTMENT
11
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
PERFORMANCE
The bar charts and performance tables shown below provide some indication of the
risks of investing in the portfolios and the variability of returns by:
- - showing each portfolio's performance for each full calendar year since its
inception, and
- - showing how each portfolio's average annual returns for certain periods
compare to those of both a broad-based securities market index and an index of
funds with similar investment objectives.
The returns shown are net of expenses, but do not reflect additional fees and
expenses that are deducted by the variable annuity or variable life insurance
product through which you invest. If the additional fees and expenses that are
deducted in connection with the variable annuity and variable life insurance
contracts were included, the performance shown would be lower.
A PORTFOLIO'S PAST PERFORMANCE IS NOT
NECESSARILY AN INDICATION OF HOW IT WILL
PERFORM IN THE FUTURE.
GROWTH PORTFOLIO
YEAR-BY-YEAR TOTAL RETURN (%)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1992 -2.82%
1993 7.10%
1994 6.91%
1995 28.50%
1996 17.98%
1997 20.72%
1998 18.62%
1999
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter:
Worst Quarter:
</TABLE>
The next table lists the Growth Portfolio's average annual total return for the
past one and five year periods and since inception on February 20, 1990. The
table also contains the average total returns for such same periods of the
S&P 500-Registered Trademark- and the Lipper Growth Fund Index.
The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices which
does not take into consideration the deduction of fees commonly charged by
mutual fund companies. Standard & Poor's, S&P, and S&P 500-Registered Trademark-
are registered trademarks of Standard & Poor's Corporation.
The Lipper Growth Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 30 largest open-end funds which invest in companies whose long
term earnings are expected to grow significantly faster than the earnings of the
stocks represented in the major unmanaged stock indices. Lipper Inc. has
announced a new classification structure changing the Lipper Growth Fund Index
to the Lipper Multi-Cap Core Index. Lipper further announced that it would
continuously review fund portfolios and initiate reclassification when it deemed
that a fund's characteristics had changed considerably from those of its current
peer group.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending 12/31/99)
<TABLE>
<CAPTION>
SINCE
PAST PAST INCEPTION
ONE YEAR 5 YEARS 02/20/90
<S> <C> <C> <C>
Growth Portfolio 18.62% 18.34% 13.43%
S&P 500-Registered Trademark- 28.61% 24.05% 19.50%
Lipper Growth Fund Index 25.69% 19.82% 16.86%
Lipper Multi-Cap Core Index
</TABLE>
12
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO
YEAR-BY-YEAR TOTAL RETURN (%)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1992 -0.03%
1993 10.97%
1994 1.35%
1995 27.19%
1996 17.69%
1997 22.41%
1998 15.85%
1999
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter:
Worst Quarter:
</TABLE>
The next table lists the Equity Income Portfolio's average annual total return
over the past one and five year periods and since inception on February 20,
1990. The table also contains the average total returns for such same periods of
the S&P 500-Registered Trademark- and the Lipper Equity Income Fund Fund Index.
The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices.
Standard & Poor's, S&P, and S&P 500-Registered Trademark- are registered
trademarks of Standard & Poor's Corporation.
The Lipper Equity Income Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 10 largest open-end funds which seek relatively high current
income and growth of income through investing 60% or more of their portfolios in
equities.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending 12/31/99)
<TABLE>
<CAPTION>
SINCE
PAST PAST INCEPTION
ONE YEAR 5 YEARS 02/20/90
<S> <C> <C> <C>
Equity Income Portfolio 15.85% 16.56% 12.73%
S&P 500-Registered Trademark- 28.61% 24.05% 19.50%
Lipper Equity Income Fund Index 11.78% 16.62% 15.36%
</TABLE>
BALANCED PORTFOLIO
YEAR-BY-YEAR TOTAL RETURN (%)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1992 -0.02%
1993 4.58%
1994 0.15%
1995 22.80%
1996 12.23%
1997 18.80%
1998 16.58%
1999
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter:
Worst Quarter:
</TABLE>
The next table lists the Balanced Portfolio's average annual total return over
the past one and five year periods and since inception February 20, 1990. The
table also contains the average total returns for such same periods of the
Lehman Brothers Intermediate Government/Corporate Index and the Lipper Balanced
Fund Index.
The Lehman Brothers Intermediate Government/ Corporate Index is an unmanaged
index generally representative of the performance of the bond market as a whole.
The Lipper Balanced Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 30 largest open-end funds whose primary objective is to
conserve principal by maintaining a balanced portfolio of stocks and bonds. The
stock/bond ratio typically ranges around 60%/40%.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending 12/31/99)
<TABLE>
<CAPTION>
SINCE
PAST PAST INCEPTION
ONE YEAR 5 YEARS 02/20/90
<S> <C> <C> <C>
Balanced Portfolio 16.58% 13.84% 13.84%
Lehman Brothers Intermediate
Government/Corporate Index 8.44% 6.60% 6.99%
Lipper Balanced Fund Index 15.09% 13.88% 12.66%
</TABLE>
13
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
YEAR-BY-YEAR TOTAL RETURN (%)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1992 2.21%
1993 2.13%
1994 3.31%
1995 5.11%
1996 4.61%
1997 4.78%
1998 4.65%
1999
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter:
Worst Quarter:
</TABLE>
The next table lists the Money Market Portfolio's average annual total return
and yield over the past one and five year periods and since inception on
February 20, 1990. The table also contains the average total returns for such
same periods of the Lipper Money Market Fund Index. The Lipper Money Market Fund
Index is a widely recognized performance index of high quality financial
instruments rated in top two grades with dollar weighted average maturities of
less than 90 days that intend to keep constant net asset value.
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending 12/31/99)
<TABLE>
<CAPTION>
SINCE
PAST PAST INCEPTION
ONE YEAR 5 YEARS 02/20/90 YIELD
<S> <C> <C> <C> <C>
Money Market Portfolio 4.65% 4.50% 4.36%
Lipper Money Market Fund
Index 5.10% 4.90% 4.38%
</TABLE>
GOVERNMENT BOND PORTFOLIO, SMALL-CAP/MID-CAP PORTFOLIO, HIGH YIELD BOND
PORTFOLIO, INTERNATIONAL STOCK PORTFOLIO
The Government Bond Portfolio, Small-Cap/Mid-Cap Portfolio, High Yield Bond
Portfolio and International Stock Portfolio are new portfolios of the fund which
have inception dates of May 1, 2000. Accordingly, no bar charts or average total
return information is available for such portfolios at this time.
14
<PAGE>
GENERAL
--------------------------------------------------------------------------
American National Investment Accounts, Inc. ("we" or the "Fund") consists of
eight separate portfolios (each a "portfolio" and collectively, the
"portfolios"). Securities Management and Research, Inc. ("SM&R") is the Fund's
investment advisor and manages each of the portfolios.
These portfolios are used solely as investment options for variable annuity and
variable life insurance contracts offered by American National Insurance Company
("American National"). THIS MEANS THAT YOU CANNOT PURCHASE SHARES OF THESE
PORTFOLIOS DIRECTLY, AND CAN ONLY DO SO THROUGH AMERICAN NATIONAL VARIABLE
ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS. The portfolios may sell their
shares to other insurance companies or for other purposes, such as tax qualified
retirement plans.
These portfolios are entirely separate from other mutual funds in the SM&R
complex of funds, even when they have the same investment objectives and
principal investment strategies. The investment performance of these portfolios
will differ from the performance of such other mutual funds because of
differences in size, securities held, and administrative and insurance costs
associated with separate accounts in variable annuity and variable life
insurance contracts.
A NOTE ABOUT FEES AND EXPENSES
AS AN INDIRECT INVESTOR IN THE PORTFOLIOS, YOU WILL INCUR VARIOUS OPERATING
COSTS, INCLUDING MANAGEMENT, ADVISORY, AND ADMINISTRATIVE EXPENSES. YOU WILL
ALSO INCUR FEES ASSOCIATED WITH THE VARIABLE ANNUITY OR VARIABLE LIFE
INSURANCE CONTRACT THROUGH WHICH YOU INVEST. ALTHOUGH THE PORTFOLIOS DO NOT
IMPOSE A SALES CHARGE UPON THE PURCHASE OR REDEMPTION OF THEIR SHARES, EACH
SEPARATE ACCOUNT TO WHICH THE PORTFOLIOS OFFER THEIR SHARES MAY IMPOSE A SALES
OR REDEMPTION CHARGE. DETAILED INFORMATION ABOUT THE COST OF INVESTING IN EACH
OF THESE PORTFOLIOS IS PRESENTED IN THE "FEE TABLE" SECTION OF THE
ACCOMPANYING PROSPECTUS FOR THE VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE
CONTRACT THROUGH WHICH PORTFOLIO SHARES ARE OFFERED.
15
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
--------------------------------------------------------------------------
Each portfolio pursues its own investment objective through various investment
policies and techniques. ONLY THE PRINCIPAL INVESTMENT STRATEGIES OF EACH
PORTFOLIO AND THE PRINCIPAL TYPES OF SECURITIES EACH PORTFOLIO PLANS TO PURCHASE
ARE DESCRIBED BELOW. MORE INVESTMENT INFORMATION CAN BE FOUND IN THE STATEMENT
OF ADDITIONAL INFORMATION, INCLUDING A DESCRIPTION OF FUNDAMENTAL POLICIES,
WHICH MAY BE CHANGED ONLY WITH SHAREHOLDER APPROVAL. The policies and techniques
discussed below are not fundamental and may be changed by the Board of Directors
without shareholder approval. However, significant changes are discussed with
shareholders in fund reports. The portfolio adheres to applicable investment
restrictions and policies at the time it makes an investment. A later change in
circumstances will not require the sale of an investment if it was proper at the
time it was made.
Changes in a portfolio's holdings, a portfolio's performance, and the
contribution of various investments are discussed in the shareholder reports
sent to you.
- - SM&R HAS CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND SELECTING
SECURITIES IT BELIEVES WILL HELP THE PORTFOLIOS ACHIEVE THEIR OBJECTIVES.
Because of the market risks inherent in any investment, the portfolios may not
achieve their investment objectives. In addition, effective management of each
portfolio is subject to general economic conditions and to the ability and
investment techniques of management. The net asset value of each portfolio's
shares will vary and the redemption value of shares may be either higher or
lower than the shareholder's cost. Since each portfolio has a different
investment objective, each will have different investment results and incur
different market, financial, and other risks.
During unfavorable market conditions, each portfolio may, but is not required
to, make temporary investments that are not consistent with a portfolio's
investment objectives and principal strategies. Such defensive measures may
include increasing cash, investing more assets in bonds or money market
instruments, and where permitted by the individual portfolio discussions that
follow, investing in derivatives or other instruments. If a portfolio takes such
defensive measures, it may not achieve its investment objectives.
A portfolio may trade actively and frequently to achieve its investment
objective. A high turnover rate may increase transaction costs, affecting the
portfolio's performance over time. A high turnover rate may also result in
higher capital gains distributions, increasing your tax liability.
GROWTH PORTFOLIO
The Growth Portfolio considers its portfolio investments and the composition of
its total portfolio from the viewpoint of potential capital appreciation. The
Growth Portfolio adjusts this composition from time to time in light of current
conditions. Under normal conditions, the Growth Portfolio invests at least 85%
of its total assets in common stocks.
The Growth Portfolio invests in the stocks of financially sound companies that
have a proven ability to make and sustain a profit over time. SM&R places an
emphasis on companies with growth potential. The Growth Portfolio does not
employ exotic investment strategies, such as using options and futures.
SM&R identifies candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then, SM&R evaluates 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. SM&R utilizes this combination of disciplines and human judgement to
drive our stock selection process. SM&R believes in evaluating each company's
prospects as opposed to relying on broad forecasts of industry prospects. SM&R
does 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. SM&R
believes in never having less than half or more than double the market weighting
in any one sector. The Growth Portfolio limits cash to 15% of its assets unless
circumstances dictate otherwise.
Because of the Growth Portfolio's goal of seeking long-term capital growth,
certain sectors of the market will have greater weight in the Growth Portfolio's
16
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
--------------------------------------------------------------------------
portfolio while other sectors of the market will have lower representation. For
example, the Growth Portfolio generally overweights the technology sector, which
represents approximately 15% to 20% of the Standard & Poor's 500 Index, in the
portfolio relative to its market weight. This overweighting reflects the higher
growth prospects of technology companies relative to the average company in the
market. At varying times, SM&R may also overweight other sectors of the market
providing above average growth prospects, like healthcare and consumer staples.
Conversely, SM&R 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
Portfolio'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 Portfolio 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. The Growth Portfolio may (but is not required to) take temporary
defensive positions inconsistent with the Portfolio's principal investment
strategies in response to adverse market, economic, political or other
conditions. For example, the Growth Portfolio may, on a temporary basis, 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. If the portfolio takes such defensive measures, the portfolio may
not achieve its investment objective.
EQUITY INCOME PORTFOLIO
The Equity Income Portfolio 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.
SM&R adjusts this composition of portfolio investments from time to time to best
accomplish the Equity Income Portfolio's investment objectives under current
conditions. In pursuit of the Equity Income Portfolio's objectives, SM&R 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 Portfolio will invest at least 75% of its assets
in equity securities rather than debt securities.
SM&R views 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.
SM&R identifies candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then, SM&R evaluates 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. SM&R utilizes this combination of disciplines and human judgement to
drive our stock selection process. SM&R believes in evaluating each company's
prospects as opposed to relying on broad forecasts of
17
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
--------------------------------------------------------------------------
industry prospects. SM&R does 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. SM&R believes in never having less than half or more than double the
market weighting in any one sector. Cash is limited to 15% of the portfolio
unless circumstances dictate otherwise.
Certain sectors of the market will have greater weight in the Equity Income
Portfolio's portfolio while other sectors of the market will have lower
representation. For example, the Equity Income Portfolio generally overweights
the finance sector in its portfolio relative to that sector's market weight.
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, SM&R may also overweight other
sectors of the market that provide above average dividend prospects, like
utilities and energy.
Conversely, SM&R generally underrepresents certain sectors of the market tending
to have below average dividend yields, such as technology. As a result of such
strategic overweighting and underweighting, the Equity Income Portfolio's
performance may differ substantially from broad market indexes like the
S&P 500.
Corporate debt obligations purchased by the Equity Income Portfolio 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.
BALANCED PORTFOLIO
The Balanced Portfolio uses a "balanced" approach by investing part of its
assets in stocks of well-known companies and the remainder in a combination of
U.S. government and high-grade corporate bonds, bonds convertible into the
common stock of the issuing corporations, collateralized mortgage obligations,
mortgage-backed securities, cash, and money market instruments. SM&R changes the
ratio of stocks to bonds in response to changing economic conditions. This
flexibility helps to reduce price volatility.
The Balanced Portfolio'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.
SM&R identifies candidate stock investments based on (1) low equity valuation
(price) and (2) improving earnings. Then, SM&R evaluates 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. SM&R utilizes this combination of disciplines and human judgement to
drive its stock selection process. SM&R believes in evaluating each company's
prospects as opposed to relying on broad forecasts of industry prospects. SM&R
does 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. SM&R believes
in never having less than half or more than double the market weighting in any
one sector. Cash is limited to 15% of the portfolio unless circumstances dictate
otherwise.
The Balanced Portfolio 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 Portfolio may also invest
in repurchase agreements. This balanced investment policy is intended to reduce
risk and to obtain results in keeping with the Balanced Portfolio's objectives.
The Balanced Portfolio invests at least 25% of assets in investment grade fixed
income securities.
The Balanced Portfolio will invest in fixed-income securities and equity
securities as described above.
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However, the Balanced Portfolio 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 SM&R's appraisal of market and economic
conditions. SM&R believes that a portfolio 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
Portfolio's shareholders assuming no change in its current investment objective
and portfolio. Diversifying the Balanced Portfolio'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 the general level of interest rates, economic and political
developments, and other factors which impact individual companies or specific
types of companies. Such market risks cannot be avoided but can be limited
through a program of diversification and a careful and consistent evaluation of
trends in the capital market and fundamental analysis of individual equity
holdings.
SM&R, through an ongoing program of asset allocation, will determine the
appropriate level of equity and debt holdings consistent with SM&R's outlook and
evaluation of trends in the economy and the financial markets. The Balanced
Portfolio 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 occurs
coincidentally with accelerating growth and profitability of the companies.
MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to achieve its objective by investing in
short-term money market instruments determined to be of high quality by SM&R
pursuant to guidelines established by the Board of Directors. The Money Market
Portfolio may invest in the following types of high quality debt obligations:
1. U.S. GOVERNMENT OBLIGATIONS. U.S. Government Obligations consist of
marketable securities issued or guaranteed as to both principal and
interest by the U.S. Government, its agencies, or instrumentalities. U.S.
Government Obligations include U.S. Treasury Bonds, Notes and Bills and
securities issued by instrumentalities of the U.S. Government.
2. CERTIFICATES OF DEPOSIT. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank for a
definite period of time and earning a specified return. The Money Market
Portfolio will invest only in certificates of deposit of U.S. banks that
have total assets in excess of $1 billion at the time of investment.
3. BANKER'S ACCEPTANCES. Banker's acceptances are short-term instruments
issued by banks, generally for the purpose of financing imports or
exports. An acceptance is a time draft drawn on a bank by the importer or
exporter to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" and is an irrevocable obligation
of the issuing bank.
4. 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.
5. BONDS AND NOTES. The Money Market Portfolio may invest in corporate bonds
or notes with a remaining maturity of one year or less.
6. COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
or "CMOs" are
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debt obligations collateralized by a portfolio or pool of mortgages,
mortgage-backed securities, or U.S. Government securities.
The Money Market Portfolio does not currently intend to invest in unrated
securities, securities subject to demand features, floating rate instruments,
securities subject to guarantees, and variable rate instruments.
The Money Market Portfolio limits its investments to those short-term securities
that the Board determines present minimal credit risk and that are "Eligible
Securities" when acquired by the Portfolio. As used in this Prospectus,
"Eligible Securities" means securities that are:
(a) rated in one of the two highest short-term rating categories, or
(b) whose issuer has another class of debt obligations rated in one of the
two highest short-term rating categories.
To rely on a rating assigned to other debt obligations, those obligations must
be of comparable priority and security. All ratings must have been issued by the
requisite nationally recognized statistical rating organizations ("NRSROs").
Currently, five organizations are NRSROs: Moody's, S&P, Fitch Investors Service,
Inc., Duff and Phelps, Inc., and Thomson BankWatch, Inc. A discussion of the
ratings categories of S&P and Moody's is contained in the Appendix.
The Money Market Portfolio generally limits its investments in securities, as
follows:
- It will not invest in securities issued by any one issuer, other than the
U.S. Government, its agencies, or instrumentalities, in an amount that
exceeds 5% of its total assets.
- It will not invest more than 5% of its total assets in securities relying on
ratings in the second highest rating category.
- It will not invest more than 1% of its total assets in securities of any one
issuer that rely on ratings in the second highest rating category.
(See "Investment Techniques and Policies" in the Statement of Additional
Information for a more detailed explanation of the investment categories.) The
Portfolio will maintain a dollar-weighted average portfolio maturity of 90 days
or less, and will not invest in any security with a remaining maturity of over
397 days (13 months). Investments in money market instruments are subject to the
ability of the issuer to make payment at maturity. In addition, the Money Market
Portfolio's performance will vary depending on changes in short-term interest
rates. However, both the financial and market risks of investment in the Money
Market Portfolio may be expected to be less than for any other portfolio. By
limiting its investments to Eligible Securities, the Money Market Portfolio may
not achieve as high a level of current income as a fund investing in lower-rated
securities.
GOVERNMENT BOND PORTFOLIO
The Government Bond Portfolio seeks to achieve its objective through investment
of 65% or more of its total assets in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities ("U.S. Government
Obligations") which include, but are not limited to, U.S. Treasury Bonds, Notes
and Bills and securities issued by instrumentalities of the U.S. Government.
U.S. GOVERNMENT OBLIGATIONS -- There are two broad categories of U.S. Government
Obligations:
(1) direct obligations of the U.S. Treasury, and
(2) obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government are backed by the full faith and credit of the United States
(such as Government National Mortgage Association Certificates); others, by
the agency or instrumentality with limited rights of the issuer to borrow from
the U.S. Treasury (such as Federal National Mortgage Association Bonds); and
others, only by the credit of the issuer. No assurance can be given that the
U.S. Government would lend money to or otherwise provide financial support to
U.S. Government sponsored instrumentalities; it is not obligated by law to do
so.
MORTGAGE-BACKED SECURITIES -- SM&R anticipates that a portion of the Government
Bond Portfolio's portfolio will consist of mortgage-backed securities issued
or guaranteed by the U. S. Government, its agencies or instrumentalities.
These securities represent part ownership of pools of mortgage loans secured
by real property, such as certificates issued by the Government National
Mortgage Association ("GNMA" or "Ginnie Mae"), the Federal National Mortgage
Association ("FNMA" or "Fannie Mae"),
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and the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac").
Mortgage-backed securities also include mortgage pass-through certificates
representing participation interests in pools of mortgage loans originated by
the U. S. Government and guaranteed by U. S. Government agencies such as GNMA,
FNMA, or FHLMC. Such certificates, which are ownership interests in the
underlying mortgage loans, differ from conventional debt securities which
provide for periodic payment of interest in fixed amounts and principal
payments at maturity or on specified dates. With pass-through certificates,
both principal and interest payments, including prepayments, are passed
through to the holder of the certificate and provide for monthly payments of
interest and principal. GNMA, a federal agency, issues pass-through
certificates that are guaranteed as to timely payment of principal and
interest. FNMA, a federally chartered and privately owned corporation, issues
mortgage pass-through securities and guarantees them as to timely payment of
principal and interest. FHLMC, a corporate instrumentality of the United
States, issues participation certificates that represent an interest in
mortgages from FHLMC's portfolio. FHLMC guarantees the timely payment of
interest and the ultimate collection of principal. FNMA and FHLMC are not
backed by the full faith and credit of the United States, although FNMA and
FHLMC are authorized to borrow from the U. S. Treasury to meet their
obligations. Those mentioned are but a few of the mortgage-backed securities
currently available that SM&R currently anticipates purchasing for the
Government Bond Portfolio. The Government Bond Portfolio will not purchase
interest-only or principal-only mortgage-backed securities.
The yield characteristics of mortgage-backed securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans
generally may be prepaid at any time. The average mortgage in a pool may be
expected to be repaid within about twelve (12) years. If mortgage interest
rates decrease, the value of the Government Bond Portfolio's securities will
generally increase. However, SM&R anticipates that the average life of the
mortgages in the pool will decrease as borrowers refinance and prepay
mortgages to take advantage of lower interest rates. The Government Bond
Portfolio invests the proceeds from such prepayments at the then prevailing
lower interest rates. On the other hand, if interest rates increase, the value
of the portfolio's securities generally will decrease while it is anticipated
that borrowers will not refinance and, therefore, the average life of the
mortgages in the pool will be longer. In addition, if the Government Bond
Portfolio purchases such a security at a premium, a prepayment rate faster
than expected will reduce yield to maturity, while a prepayment rate slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if the Government Bond Portfolio purchases these securities at a
discount, faster than expected prepayments will increase yield to maturity,
while slower than expected prepayments will reduce yield to maturity.
COLLATERALIZED MORTGAGE OBLIGATIONS -- The Government Bond Portfolio 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 Government Bond Portfolio may invest are issued or
guaranteed by a U. S. Government agency or instrumentality, such as the FHLMC.
A variety of types of collateralized obligations are currently available and
others may become available in the future. One should keep in mind that during
periods of rapid interest rate fluctuation, the price of a security, such as a
CMO, could either increase or decrease based on inherent interest rate risk.
Additionally, the risk of maturities shortening or lengthening in conjunction
with interest rate movement, could magnify the overall effect of the price
fluctuation.
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
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greater control over the characteristics of the investment in a changing
interest rate environment. A more complete description of CMOs is contained in
the Statement of Additional Information.
The Government Bond Portfolio may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
Bonds generally require payments of a specified amount of principal on each
payment date. PAC Bonds are always parallel pay CMOs with the required
principal payment on such securities having the highest priority after
interest has been paid to all classes.
The Government Bond Portfolio may also invest in securities issued by private
issuers that represent an interest in or are secured by mortgage-backed
securities issued or guaranteed by the U. S. government or one of its agencies
or instrumentalities. In addition, the portfolio may invest in securities
issued by private issuers that represent an interest in or are secured by
mortgage loans or mortgage-backed securities without a government guarantee
but usually have some form of private credit enhancement.
ZERO COUPON BONDS -- The Government Bond Portfolio may invest in zero coupon
bonds, which are debt obligations issued or purchased at a significant
discount from face value. The Government Bond Portfolio will only purchase
zero coupon bonds which are U.S. Government Obligations. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
Zero coupon bonds do not entitle the holder to any periodic payments of
interest prior to maturity. Its value as an investment consists of the
difference between its face value at the time of maturity and the price for
which it was acquired which is generally an amount significantly less than
face value (sometimes referred to as a "deep discount" price). Zero coupon
bonds require a higher rate of return to attract investors who are willing to
defer receipt of cash. Accordingly, although not providing current income,
SM&R believes that zero coupon bonds can be effectively used to lock in a
higher rate of return in a declining interest environment. Such investments
may experience greater volatility in market value than debt obligations which
make regular payments of interest. The portfolio will accrue income on such
investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the portfolio's distribution obligations.
SMALL-CAP/MID-CAP PORTFOLIO
The Small-Cap/Mid-Cap Portfolio considers its portfolio investments and the
composition of its total portfolio from the viewpoint of providing long-term
capital growth by investments primarily in stocks of small to medium-sized
companies. SM&R adjusts this composition from time to time in light of economic
conditions. Under normal conditions, the Small-Cap/ Mid-Cap Portfolio invests at
least 80% of its total assets in stocks and equity related securities of small
companies ($30 billion or less in market capitalization). SM&R may also, from
time to time, purchase companies with a market capitalization above $30 billion.
Stock selection may reflect either a growth or value investment approach.
When choosing stocks, SM&R generally looks for the following characteristics:
- capable management
- attractive business niches
- pricing flexibility
- sound financial and accounting practices
- a demonstrated ability to grow revenues, earnings, and cash flow
consistently
- the potential for some catalyst (such as increased investor attention, asset
sales, or a change in management) to cause the stock's price to rise
In seeking to meet the portfolio's investment objective, SM&R may invest in any
type of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the portfolio's investment program. The following pages describe
various types of portfolio securities and investment management practices of the
portfolio.
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The portfolio invests primarily in common stocks and may, to a lesser degree,
purchase other types of securities described below.
COMMON AND PREFERRED STOCKS
Stocks represent shares of ownership in a company. Generally, preferred stock
has a specified dividend and ranks after bonds and before common stocks in its
claim on income for dividend payments and on assets should the company be
liquidated. After other claims are satisfied, common stockholders participate in
company profits on a pro rata basis; profits may be paid out in dividends or
reinvested in the company to help it grow. Increases and decreases in earnings
are usually reflected in a company's stock price, so common stocks generally
have the greatest appreciation and depreciation potential of all corporate
securities.
While most preferred stocks pay a dividend, the portfolio may purchase preferred
stock where the issuer has omitted, or is in danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
CONVERTIBLE SECURITIES AND WARRANTS
SM&R may invest in debt or preferred equity securities convertible into, or
exchangeable for, equity securities. Traditionally, convertible securities have
paid dividends or interest at rates higher than common stocks but lower than
nonconvertible securities. They generally participate in the appreciation or
depreciation of the underlying stock into which they are convertible, but to a
lesser degree. In recent years, convertibles have been developed which combine
higher or lower current income with options and other features. Warrants are
options to buy a stated number of shares of common stock at a specified price
anytime during the life of the warrants (generally, two or more years).
FIXED INCOME SECURITIES
From time to time, the portfolio may invest in debt securities of any type,
including municipal securities, without regard to quality or rating. Such
securities would be purchased in companies, municipalities, or entities which
meet the investment criteria for the portfolio. The price of a bond fluctuates
with changes in interest rates, rising when interest rates fall and falling when
interest rates rise.
HIGH-YIELD, HIGH-RISK INVESTING
The total return and yield of lower-quality (high-yield, high-risk) bonds,
commonly referred to as "junk" bonds, can be expected to fluctuate more than the
total return and yield of higher-quality, shorter-term bonds, but not as much as
those of common stocks. Junk bonds (those rated below BBB or in default) are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. SM&R may purchase any type of
noninvestment-grade debt security (or junk bond) including those in default.
SM&R will not purchase this type of security if immediately after such purchase
the portfolio would have more than 10% of its total assets invested in such
securities. The investments in convertible securities are not subject to this
limit.
HYBRID INSTRUMENTS
These instruments (a type of potentially high-risk derivative) can combine the
characteristics of securities, futures, and options. For example, the principal
amount, redemption, or conversion terms of a security could be related to the
market price of some commodity, currency, or securities index. Such securities
may bear interest or pay dividends at below market or even relatively nominal
rates. Under certain conditions, the redemption value of such an investment
could be zero.
- - HYBRIDS CAN HAVE VOLATILE PRICES AND LIMITED LIQUIDITY, AND THEIR USE BY THE
PORTFOLIO MAY NOT BE SUCCESSFUL.
SM&R may invest up to 10% of the portfolio's total assets in hybrid instruments.
PRIVATE PLACEMENTS
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered with
the SEC. Although certain of these securities may be readily sold, for example,
under Rule 144A under the Securities Act of 1933, others may be illiquid, and
their sale may involve substantial delays and additional costs. SM&R may invest
up to 15% of the portfolio's net assets in illiquid securities.
TYPES OF INVESTMENT MANAGEMENT PRACTICES
RESERVE POSITION
The portfolio will hold a certain portion of its assets in cash. Such cash will
primarily be invested in money
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market funds. Short-term, high-quality U.S. and foreign dollar-denominated money
market securities, including repurchase agreements, may also be held. For
temporary, defensive purposes, the portfolio may invest without limitation in
money market reserves. The effect of taking such a position is that the
portfolio may not achieve its investment objective. The reserve position
provides flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve as a short-term defense during periods of unusual
market volatility.
LENDING OF PORTFOLIO SECURITIES
Like other mutual funds, the portfolio may lend securities to broker-dealers,
other institutions, or other persons to earn additional income. The principal
risk is the potential insolvency of the broker-dealer or other borrower. In this
event, the portfolio could experience delays in recovering its securities and
possible capital losses.
HIGH YIELD BOND PORTFOLIO
Under normal market conditions, SM&R seeks to achieve the High Yield Bond
Portfolio's investment objectives by investing primarily in a diversified
portfolio of medium- and lower-grade domestic corporate debt securities. SM&R
also may invest up to 35% of the portfolio's total assets in debt securities of
similar quality issued by foreign governments and foreign corporations. Under
normal market conditions, SM&R invests primarily in securities rated at the time
of purchase BBB or lower by Standard & Poor's ("S&P") or rated Baa or lower by
Moody's Investors Service, Inc. ("Moody's") or comparably rated short-term
securities and unrated securities determined by SM&R to be of comparable quality
at the time of purchase. With respect to such investments, the portfolio has not
established any limit on the percentage of its total assets which may be
invested in securities in any one rating category. Securities rated BB or lower
by S&P or rated Ba or lower by Moody's or comparably rated short-term securities
and unrated securities of comparable quality are commonly referred to as "junk
bonds" and involve special risks as compared to investments in higher-grade
securities. See "Risks of Investing in Medium- and Lower-Grade Securities"
below.
SM&R invests in a broad range of debt securities represented by various
companies and industries and traded in various markets. SM&R buys and sells
securities with a view to seeking a high level of current income and capital
appreciation over the long-term. The higher yields for current income and the
potential for capital appreciation sought by the portfolio are generally
obtainable from securities in the medium- and lower-credit quality range. Such
securities tend to offer higher yields than higher-grade securities with the
same maturities because the historical conditions of the issuers of such
securities may not have been as strong as those of other issuers. These
securities may be issued in connection with corporate restructurings such as
leveraged buyouts, mergers, acquisitions, debt recapitalization or similar
events. These securities are often issued by smaller, less creditworthy
companies or companies with substantial debt and may include financially
troubled companies or companies in default or in restructuring. Such securities
often are subordinated to the prior claims of banks and other senior lenders.
Lower-grade securities are regarded by the rating agencies as predominately
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. The ratings of S&P and Moody's represent their opinions
of the quality of the debt securities they undertake to rate, but not the market
risk of such securities. It should be emphasized however, that ratings are
general and are not absolute standards of quality.
SM&R seeks to minimize the risks involved in investing in medium- and
lower-grade securities through diversification, careful investment analysis and
attention to current developments and trends in the economy and financial and
credit markets. In purchasing and selling securities, SM&R evaluates the issuers
of such securities based on a number of factors, including but not limited to
the issuer's financial resources, its sensitivity to changing economic
conditions and trends, its revenues or earnings potential, its operating
history, its current borrowing requirements and debt maturities, the quality of
its management, regulatory matters and its potential for capital appreciation.
SM&R may consider the ratings from S&P and Moody's in evaluating securities but
it does not rely primarily on such ratings. SM&R continuously monitors the
issuers of debt securities held by the portfolio.
SM&R may invest in preferred stocks, convertible securities, zero coupon
securities and payment-in-kind securities. SM&R also may invest up to 5% of the
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portfolio's assets in warrants and common stocks. For more information on these
types of investments, see "Investment Techniques and Policies" in the Statement
of Additional Information.
RISKS OF INVESTING IN MEDIUM- OR
LOWER-GRADE SECURITIES
Securities which are in the medium- or lower-grade categories generally offer
higher yields than are offered by higher-grade securities of similar maturities.
However, such medium- or lower-grade securities also generally involve
materially greater risks, such as greater credit risk, greater market risk and
volatility, greater liquidity concerns and potentially greater manager risk.
INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS OF OWNING SHARES OF A PORTFOLIO
WHICH INVESTS IN MEDIUM- OR LOWER-GRADE SECURITIES BEFORE INVESTING IN THE HIGH
YIELD BOND PORTFOLIO.
Increases in interest rates or changes in the economy may significantly affect
the ability of issuers of medium- or lower-grade debt securities to pay interest
and to repay principal, to meet projected financial goals or to obtain
additional financing. In the event an issuer of securities held by the portfolio
experiences difficulties in the timely payment of principal and interest and
such issuer seeks to restructure the terms of its borrowings, the portfolio may
incur additional expenses and may determine to invest additional assets with
respect to such issuer or the project or projects to which the portfolio's
investment relate. Further, the portfolio may incur additional expenses to the
extent that it is required to seek recovery upon a default in the payment of
interest or the repayment of principal on its portfolio holdings, and the
portfolio may be unable to obtain full recovery on such amounts.
A significant increase in interest rates or a general economic downturn could
severely disrupt the market for medium- or lower-grade securities and adversely
affect the market value of such securities. Such events also could lead to a
higher incidence of default by issuers of medium- or lower-grade securities as
compared with higher-grade securities. In addition, changes in credit risks,
interest rates, the credit markets or periods of general economic uncertainty
can be expected to result in materially increased volatility in the market price
of the medium- or lower-grade securities in the portfolio and thus in the net
asset value of the portfolio. Adverse publicity and investor perceptions,
whether or not based on rational analysis, may affect the value, volatility and
liquidity of medium- or lower-grade securities.
SM&R, the portfolio's investment advisor, is responsible for determining the net
asset value of the Fund, subject to the supervision of the Fund's Board of
Trustees. During periods of reduced market liquidity or in the absence of
readily available market quotations for medium- or lower-grade securities held
in the High Yield Bond Portfolio's portfolio, the ability of SM&R to value the
portfolio's securities becomes more difficult and SM&R's judgment may play a
greater role in the valuation of the portfolio's securities due to the reduced
availability of reliable objective data.
SM&R may invest in securities not producing immediate cash income, including
securities in default, zero coupon securities or pay-in-kind securities, when
their effective yield over comparable instruments producing cash income make
these investments attractive. Prices on non-cash-paying instruments may be more
sensitive to changes in the issuer's financial condition, fluctuation in
interest rates and market demand/supply imbalances than cash-paying securities
with similar credit ratings, and thus may be more speculative. In addition, the
accrued interest income earned on such instruments is included in investment
company taxable income, thereby increasing the required minimum distributions to
shareholders without providing the corresponding cash flow with which to pay
such distributions. SM&R will weigh these concerns against the expected total
returns from such instruments.
The portfolio's investments in lower-grade securities may include securities
rated D by S&P or C by Moody's (the lowest-grade assigned) and unrated
securities of comparable quality. Securities assigned such ratings include those
of companies that are in default or are in bankruptcy or reorganization.
Securities of such companies are regarded by the rating agencies as having
extremely poor prospects of ever attaining any real investment standing and are
usually available at deep discounts from the face values of the instruments. A
security purchased at a deep discount may currently pay a very high effective
yield. In addition, if the financial condition of the issuer improves, the
underlying value of the security may increase, resulting in capital
appreciation. If the
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company defaults on its obligations or remains in default, or if the plan of
reorganization does not provide sufficient payments for debtholders, the deep
discount securities may stop generating income and lose value or become
worthless. SM&R will balance the benefits of deep discount securities with their
risks. While a diversified portfolio may reduce the overall impact of a deep
discount security that is in default or loses its value, the risk cannot be
totally eliminated.
Many medium- and lower-grade debt securities are not listed for trading on any
national securities exchange, and many issuers of medium- and lower-grade debt
securities choose not to have a rating assigned to their obligations by any
nationally recognized statistical rating organization. As a result, the High
Yield Bond Portfolio's portfolio may consist of a higher portion of unlisted or
unrated securities as compared with an investment company that invests primarily
in higher-grade securities. Unrated securities are usually not as attractive to
as many buyers as are rated securities, a factor which may make unrated
securities less marketable. These factors may have the effect of limiting the
availability of the securities for purchase by the portfolio and may also limit
the ability of the portfolio to sell such securities at their fair value either
to meet redemption requests or in response to changes in the economy or the
financial markets. Further, to the extent the portfolio owns or may acquire
illiquid or restricted medium- or lower-grade securities, these securities may
involve special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties.
The portfolio will rely on SM&R's judgment, analysis and experience in
evaluating the creditworthiness of an issue. The amount of available information
about the financial condition of certain medium- or lower-grade issuers may be
less extensive than other issuers. In its analysis, SM&R may consider the credit
ratings of S&P and Moody's in evaluating securities although SM&R does not rely
primarily on these ratings. Ratings evaluate only the safety of principal and
interest payments, not the market risk. Additionally, ratings are general and
not absolute standards of quality, and credit ratings are subject to the risk
that the creditworthiness of an issuer may change and the rating agencies may
fail to change such ratings in a timely fashion. A rating downgrade does not
require the portfolio to dispose of a security. SM&R continuously monitors the
issuers of securities held in the portfolio. Additionally, since most foreign
debt securities are not rated, the portfolio will invest in such securities
based on SM&R's analysis without any guidance from published ratings. Because of
the number of investment considerations involved in investing in medium- or
lower-grade securities and foreign debt securities, achievement of the
portfolio's investment objectives may be more dependent upon SM&R's credit
analysis than is the case with investing in higher-grade securities.
New or proposed laws may have an impact on the market for medium- or lower-grade
securities. SM&R is unable at this time to predict what effect, if any,
legislation may have on the market for medium- or lower-grade securities.
Special tax considerations are associated with investing in certain medium- or
lower-grade securities, such as zero coupon or pay-in-kind securities. The
portfolio accrues income on these securities prior to the receipt of cash
payments. The portfolio must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment under federal income tax law
and may, therefore, have to dispose of its portfolio securities to satisfy
distribution requirements.
The percentages of the portfolio's assets invested in securities of various
grades may vary from time to time.
RISKS OF INVESTING IN SECURITIES
OF FOREIGN ISSUERS
SM&R may invest up to 35% of the portfolio's total assets in debt securities of
similar quality as the securities described above issued by foreign governments
and foreign corporations. Securities of foreign issuers may be denominated in
U.S. dollars or in currencies other than U.S. dollars. Investments in foreign
securities present certain risks not ordinarily associated with investments in
securities of U.S. issuers.
Since the portfolio invests in securities denominated or quoted in currencies
other than the U.S. dollar, the portfolio will be affected by changes in foreign
currency exchange rates (and exchange control regulations) which affect the
value of investments in the
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INVESTMENT OBJECTIVES AND POLICIES
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portfolio and the accrued income and unrealized appreciation or depreciation of
the investments. Changes in foreign currency exchange ratios relative to the
U.S. dollar will affect the U.S. dollar value of the portfolio's assets
denominated in that currency and the portfolio's yield on such assets. In
addition, the portfolio will incur costs in connection with conversions between
various currencies.
THE RISKS OF FOREIGN INVESTMENTS SHOULD BE CONSIDERED CAREFULLY BY AN INVESTOR
PLANNING TO INVEST IN THE HIGH YIELD BOND PORTFOLIO.
STRATEGIC TRANSACTIONS.
SM&R may, but is not required to, use various investment strategic transactions
described below to earn income, facilitate portfolio management and mitigate
risks. Such strategic transactions are generally accepted under modern portfolio
management and are regularly used by many mutual funds and other institutional
investors. Although SM&R seeks to use the practices to further the portfolio's
investment objective, no assurance can be given that these practices will
achieve this result.
SM&R may purchase and sell derivative instruments such as exchange-listed and
over-the-counter put and call options on securities, financial futures, equity,
fixed-income and interest rate indices, and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currency or currency
futures when SM&R determines that such activities are consistent with the
portfolio's investment objectives. Collectively, all of the above are referred
to as "Strategic Transactions."
SM&R generally seeks to use Strategic Transactions as a portfolio management or
hedging technique to seek to protect against possible adverse changes in the
market value of securities held in or to be purchased for the High Yield Bond
Portfolio's portfolio, protect the portfolio's unrealized gains, facilitate the
sale of certain securities for investment purposes, manage the effective
interest rate exposure of the portfolio, protect against changes in currency
exchange rates, manage the effective maturity or duration of the portfolio, or
establish positions in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. SM&R may sell options on securities
the portfolio owns or has the right to acquire without additional payments in an
amount up to 25% of the portfolio's total assets for non-hedging purposes.
Strategic Transactions have risks including the imperfect correlation between
the value of such instruments and the underlying assets, the possible default of
the other party to the transaction or illiquidity of the derivative instruments.
Furthermore, the ability to successfully use Strategic Transactions depends on
SM&R's ability to predict pertinent market movements, which cannot be assured.
Thus, the use of Strategic Transactions may result in losses greater than if
they had not been used, may require SM&R to sell or purchase portfolio
securities at inopportune times or for prices other than current market values,
may limit the amount of appreciation the portfolio can realize on an investment,
or may cause the portfolio to hold a security that it might otherwise sell. The
use of currency transactions can result in the portfolio incurring losses as a
result of the imposition of exchange controls, suspension of settlements or the
inability to deliver or receive a specified currency. The use of currency
transactions can result in the portfolio incurring losses as a result of the
imposition of exchange controls, suspension of settlements or the inability of
the portfolio to deliver or receive a specified currency. Additionally, amounts
paid by the portfolio as premium and cash or other assets held in margin
accounts with respect to Strategic Transactions are not otherwise available to
the portfolio for investment purposes.
Further information about investment practices that may be used by SM&R and the
risk of such practices is contained in the Statement of Additional Information.
INTERNATIONAL STOCK PORTFOLIO
In seeking to meet its investment objective, the International Stock Portfolio
may invest in any type of security or instrument (including certain potentially
high-risk derivatives described in this section) whose investment
characteristics are consistent with the International Stock Portfolio's
investment objective. Under normal conditions, the International Stock Portfolio
will invest at least 80% of the portfolio's assets in the equity securities of
foreign companies, including multi-
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national companies. Such investment will be made primarily by purchasing
American Depository Receipts ("ADRs"), but, the International Stock Portfolio
may, to a lesser degree, invest directly in U.S. dollar denominated equity
securities of foreign companies.
SM&R identifies candidate investments that are believed to offer the best
potential for growth at a reasonable price. SM&R's investment selection
emphasizes the evaluation of individual investments more than the consideration
of broader market and economic trends. In selecting securities, SM&R generally
favors companies with one or more of the following characteristics: leading
market position, attractive business niche, strong franchise or natural
monopoly, technological leadership or proprietary advantages, seasoned
management, earnings growth and cash flow sufficient to support growing
dividends, and healthy balance sheet with relatively low debt.
AMERICAN DEPOSITORY RECEIPTS (ADRS). ADRs are U.S. Dollar denominated
securities that represent ownership of a specified number of shares of a foreign
security. ADRs are issued by domestic U.S. banks, and they are traded in the
U.S. on national securities exchanges and over-the-counter. The banks act as
custodians of the shares of the foreign stock and collect dividends on the
stock, which are either reinvested or distributed by the bank to the ADR holder
in U.S. dollars. While ADRs are not considered foreign securities, ADR
investments do entail the foreign risks associated with international investing.
ADRs may be issued under sponsored or unsponsored programs. In sponsored
programs, an issuer has made arrangements to have its securities traded in the
form of ADRs. In unsponsored programs, the issuer may not be directly involved
in the creation of the program. Although regulatory requirements with respect to
sponsored and unsponsored programs are generally similar, in some cases it may
be easier to obtain financial information from an issuer that has participated
in the creation of a sponsored program. Accordingly, there may be less
information available regarding issuers of securities underlying unsponsored
programs, and there may not be a correlation between such information and the
market value of the ADRs.
ADRs reduce but do not eliminate all the risk inherent in investing in the
securities of foreign issuers. To the extent that the International Stock
Portfolio acquires ADRs through banks which do not have a contractual
relationship with the foreign issuer of the security underlying the ADR to issue
and service such ADRs, there may be an increased possibility that the portfolio
would not become aware of and be able to respond to corporate actions such as
stock splits or rights offerings involving the foreign issuer in a timely
manner.
COMMON AND PREFERRED STOCKS. Stocks represent shares of ownership in a company.
Generally, preferred stock has a specified dividend and ranks after bonds and
before common stocks in its claim on income for dividend payments and on assets
should the company be liquidated. After other claims are satisfied, common
stockholders participate in company profits on a pro-rata basis. Profits may be
paid out in dividends or reinvested in the company to help it grow. Increases
and decreases in earnings are usually reflected in a company's stock price, so
common stocks generally have the greatest appreciation and depreciation
potential of all corporate securities. While most preferred stocks pay a
dividend, the International Stock Portfolio may purchase preferred stock where
the issuer has omitted, or is in the danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
FIXED INCOME SECURITIES. The International Stock Portfolio may invest in any
type of investment-grade security. It may invest up to 5% of its total assets in
below investment-grade bonds, commonly referred to as "junk bonds." Such
securities would be purchased in companies that meet the investment criteria for
the International Stock Portfolio. The price of a bond fluctuates with changes
in interest rates, rising when interest rates fall and falling when interest
rates rise. Junk bond prices can be much more volatile and have a greater risk
of default than investment-grade bonds.
HYBRID INVESTMENTS. These instruments (a type of potentially high-risk
derivative) can combine the characteristics of securities, futures, and options.
For example, the principal amount, redemption, or conversion terms of a security
could be related to the market price of some commodity, currency, or securities
index. Such securities may bear interest or pay dividends at below market or
even relatively nominal rates. Under certain conditions, the redemption value of
such an investment could be zero. HYBRIDS CAN
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HAVE VOLATILE PRICES AND LIMITED LIQUIDITY, AND THEIR USE BY THE INTERNATIONAL
STOCK PORTFOLIO MAY NOT BE SUCCESSFUL. The International Stock Portfolio may
invest up to 10% of its total assets in hybrid instruments.
PRIVATE PLACEMENTS. These securities are sold directly to a small number of
investors, usually institutions. Unlike public offerings, such securities are
not registered with the SEC. Although certain of these securities may be readily
sold, for example, under Rule 144A of the Securities Act of 1933, others may be
illiquid, and their sale may involve substantial delays and additional costs.
The International Stock Portfolio has determined that it may invest up to 15% of
its net assets in illiquid securities.
WEBS (World Equity Benchmark Shares) are designed to give U.S. investors
exposure to specific international equity markets through a diversified
portfolio of stocks for each foreign country selected. This type of security
represents 17 country-specific series of securities that are listed and traded
on the American Stock Exchange. WEBS represent an investment in an optimized
portfolio of ordinary foreign shares that seeks to provide investment results
that track the price and yield performance of a specific Morgan Stanley Capital
International (MSCI) country index. This type of security is not considered to
be a derivative security.
WEBS are subject to foreign currency risk since they do not hedge currencies.
Additionally, because they are investments in international markets, investment
returns may be more volatile than those of the U.S. Market. Furthermore, they
involve normal foreign investment risks, such as market fluctuations, due to
changes in the economic and political developments in the countries with which
they are associated.
"World Equity Benchmark Shares" and "WEBS" are service marks of Morgan Stanley,
Dean Witter & Co. "MSCI" and "MSCI Indices" are service marks of Morgan
Stanley & Co. Incorporated.
TYPES OF INVESTMENT MANAGEMENT PRACTICES
FUTURES, OPTIONS AND FORWARDS. Futures (a type of potentially high-risk
derivative) are often used to manage or hedge risk because they enable the
investor to buy or sell an asset in the future at an agreed-upon price. Options
(another type of potentially high-risk derivative) give the investor the right
(where the investor purchases the option ), or the obligation (where the
investor writes (sells) the option), to buy or sell an asset at a predetermined
price in the future. The International Stock Portfolio may buy and sell futures
and options contracts for any number of reasons, including: as a way to manage
its exposure to changes in securities prices and foreign currencies; as an
efficient means of adjusting its overall exposure to certain markets; in an
effort to enhance income; as a cash management tool; and as protection of the
value of portfolio securities. The Portfolio may purchase, sell or write call
and put options on securities, financial indices, and foreign currencies. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specified currency at a future
date, which may be any fixed number of days from the date of the contract agreed
upon by the parties, at a price set at the time of the contract.
Futures contracts, options and forwards may not always be successful hedges.
Their prices can be highly volatile, and using them could lower the Portfolio's
total return. The potential loss from the use of futures can exceed the
Portfolio's initial investment in such contracts.
AS A MATTER OF POLICY. Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the International
Stock Portfolio's net asset value. Options on securities: The total market value
of securities against which the Portfolio writes call or put options may not
exceed 25% of its total assets. No more than 5% of the Portfolio's total assets
will be committed to premiums when purchasing call or put options.
TAX CONSEQUENCE OF HEDGING. Under applicable tax law, the portfolio may be
required to limit its gains from hedging in futures and options. Hedging may
also result in the application of the mark-to-market and straddle provisions of
the Internal Revenue Code. These provisions could result in an increase (or
decrease) in the amount of taxable dividends paid by the portfolio and could
affect whether dividends paid by the portfolio are classified as capital gains
or ordinary income.
DEFENSIVE INVESTING. During unfavorable market conditions, the International
Stock Portfolio may invest "defensively," that is, make temporary investments
that
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are not consistent with the portfolio's investment objective and principal
strategies. For example, the portfolio may, on a temporary basis, build up cash
reserves, invest more assets in bonds or money market instruments, or invest in
derivative instruments to protect our investments. If the portfolio takes such
defensive measures, the portfolio may not achieve its investment objective.
PRICING OF PORTFOLIO SHARES
GENERAL (HOW SHARES ARE PRICED). SM&R determines each portfolio's offering
price once each business day. The offering price equals a portfolio's net asset
value.
Each portfolio (other than the Money Market Portfolio) prices investments at
their market value when market quotations are readily available. When these
quotations are not readily available, portfolios price investments at their fair
value, calculated in accordance with procedures adopted by the Fund's Board of
Directors.
The Money Market Portfolio values all of its securities using the amortized cost
method, which does not take into account unrealized capital gains or losses. The
other portfolios may use the amortized cost method only for valuing debt
securities having maturities of 60 days or less.
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). SM&R generally
bases purchase and redemption orders for each portfolio on the portfolio's net
asset value next computed after you submit a request in good order to American
National, but only if American National sends us the required information on a
timely basis. In unusual circumstances, any portfolio 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.
PLEASE REFER TO YOUR VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE PRODUCT
PROSPECTUS FOR INFORMATION ON HOW TO PURCHASE OR INVEST, AND ON HOW YOU CAN
WITHDRAW MONEY AND OBTAIN OTHER BENEFITS FROM YOUR CONTRACT. THOSE PROSPECTUSES
DESCRIBE CERTAIN LIMITS AND RESTRICTIONS AND ALL APPLICABLE FEES AND CHARGES,
INCLUDING SALES CHARGES AND WITHDRAWAL (SURRENDER) CHARGES.
TAXES
The tax consequences of your investment depend upon the provisions of the
variable annuity or variable life insurance contract through which you invest.
For more information on taxes, please refer to the accompanying prospectus of
the insurance company separate account that offers your variable annuity or
variable life insurance contract.
It is expected that shares of the portfolios will be held by insurance company
separate accounts under the terms of variable annuity and variable life
insurance contracts. Under current tax law, dividends or capital gains
distributions from a portfolio are not currently taxable to holders of variable
annuity and variable life insurance contracts when left to accumulate within a
variable contract. Depending on the variable contract, withdrawals from the
contract may be subject to ordinary income tax and, in addition, to a 10%
penalty tax on withdrawals before age 59 1/2.
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THE PORTFOLIOS AND THEIR MANAGEMENT
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INVESTMENT ADVISER
The Fund's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the portfolios' investment adviser, the management of
the portfolios' day-to-day business and affairs. In addition, SM&R invests the
portfolios' assets, provides administrative services, and serves as transfer
agent, custodian, dividend paying agent, and underwriter. SM&R's address is 2450
South Shore Boulevard, Suite 400, League City, Texas 77573.
SM&R is a wholly-owned subsidiary of American National Insurance Company. SM&R
was incorporated in 1964 and has managed mutual fund portfolios 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 portfolios.
The Fund pays SM&R an investment advisory fee, which is calculated separately
for each portfolio, as compensation for its services. We deduct an investment
advisory fee from the value of the shares each month. We calculate the
investment advisory fee at the annual rate of 0.50% of each portfolio's average
daily net asset value.
ADMINISTRATIVE SERVICES
The Fund pays SM&R an administrative service fee for non-investment related
management, executive, administrative, transfer agent, and operational services
to the portfolios. Each portfolio is subject to an administrative service fee at
the annual rate of 0.25% of the average daily net asset value of the portfolios
computed each month.
In its Administrative Service Agreement with the Fund, SM&R has agreed to pay
(or to reimburse each portfolio for) each portfolio's regular operating expenses
in excess of 1.50% per year of the portfolio'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 interest, taxes, commissions, and other
expenses incidental to portfolio transactions.
In order to improve the yield and total return, SM&R may from time to time
voluntarily waive or reduce all or any portion of any portfolio's advisory fee,
administrative fee, and/or expenses. Currently, SM&R has agreed to reimburse:
- THE GROWTH PORTFOLIO FOR TOTAL OPERATING EXPENSES IN EXCESS OF 0.87% OF
AVERAGE DAILY NET ASSETS;
- THE MONEY MARKET PORTFOLIO FOR TOTAL OPERATING EXPENSES IN EXCESS OF 0.87%
OF AVERAGE DAILY NET ASSETS;
- THE BALANCED PORTFOLIO FOR TOTAL OPERATING EXPENSES IN EXCESS OF 0.90% OF
AVERAGE DAILY NET ASSETS; AND
- THE EQUITY INCOME PORTFOLIO FOR TOTAL OPERATING EXPENSES IN EXCESS OF 0.93%
OF AVERAGE DAILY NET ASSETS.
SM&R may rescind fee waivers and/or reductions, other than those stated in the
Administrative Service Agreement, at any time without notice to investors.
After applicable fee waivers, SM&R received the following compensation from the
portfolios named below (as a percentage of average daily net assets) for the
year ended December 31, 1999:
<TABLE>
<CAPTION>
PORTFOLIO ADVISORY FEE ADMINISTRATIVE FEE
<S> <C> <C>
Growth Portfolio 0.36% 0.25%
Equity Income Portfolio 0.44% 0.25%
Balanced Portfolio 0.16% 0.25%
Money Market Portfolio -- 0.25%
</TABLE>
The Government Bond Fund, Small Cap Portfolio, High Yield Bond Portfolio and
International Stock Portfolio were not in existence during the year ended
December 31, 1999.
PORTFOLIO MANAGEMENT
SM&R's portfolio management team uses a disciplined, team approach in providing
investment advisory services to the portfolios. While the following individuals
are primarily responsible for the day-to-day portfolio management of the
portfolios, all accounts are reviewed on a regular basis by SM&R's Investment
Committee to ensure that they are being invested in accordance with the various
portfolio's investment objectives and policies.
GORDON D. DIXON, DIRECTOR, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER OF
SECURITIES MANAGEMENT AND RESEARCH, INC., VICE PRESIDENT, PORTFOLIO MANAGER.
Mr. Dixon joined SM&R 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
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THE PORTFOLIOS AND THEIR MANAGEMENT
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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.
TERRY E. FRANK, VICE PRESIDENT, PORTFOLIO MANAGER. Ms. Frank serves as
Portfolio Manager of the Government Bond Portfolio and the Money Market
Portfolio. Ms. Frank has served as Portfolio Manager of the SM&R Government
Bond Fund series of SM&R Investments, Inc., since 1993 and the SM&R Tax Free
Fund series of SM&R Investments, Inc. since 1993. She has served as Portfolio
Manager of the SM&R Primary Fund series of SM&R Investments, Inc. since
November 1998 and the Money Market Fund series since its inception
(January 1, 1999). She joined SM&R's investment staff in 1991 and prior to
that time she held positions with American Capital Asset Management and
Gibraltar Savings Association as a securities analyst and Equitable Investment
Services as a research analyst.
JOHN S. MAIDLOW, ASSISTANT PORTFOLIO MANAGER. Mr. Maidlow serves as Assistant
Portfolio Manager of the Money Market Portfolio. He has served as the
Assistant Portfolio Manager of the SM&R Primary Fund series of SM&R
Investments, Inc. since November, 1998 and the SM&R Money Market Fund series
of SM&R Investments, Inc. since its inception (January 1, 1999). He joined
SM&R's staff in 1998 and prior to that time he held positions with American
Industries Trust Companies as a trust officer, Texas Department of Insurance
and the Texas Department of Banking as an examiner, Landmark Group as Vice
President of Investments, MBank as a trust officer and Rotan-Mosle, Inc. and
Eppler, Guerin & Turner as an investment broker.
ANDREW R. DUNCAN, SR. SECURITIES ANALYST PORTFOLIO MANAGER. Mr. Duncan joined
SM&R's staff in 1997 as Sr. Securities Analyst/Portfolio Manager. Mr. Duncan
serves as the Portfolio Manager of the SM&R Equity Income Fund, SM&R Balanced
Fund, the Equity Income Portfolio, the Balanced Portfolio, and the
International Stock Portfolio. He graduated from West Virginia University in
1995 with a BS/BA degree in Finance and from Texas A&M University in 1996 with
an MS in Finance.
ANDRE J. HODLEWSKY, SECURITIES ANALYST/PORTFOLIO MANAGER. Mr. Hodlewsky joined
SM&R in 1998 as Securities Analyst. Mr. Hodlewsky serves as a Portfolio
Manager of the Small-Cap/Mid-Cap Portfolio. He graduated from the University
of Wisconsin in 1990 with a BA in Graphic Design and Industrial Design and
from the University of Wisconsin in 1999 with an MBA in Marketing and Finance.
Prior to joining SM&R's staff, he held a position at Rockwell from 1995 to
1997 in their Internet and Multi-Media Design Group and Mandel Company in
Milwaukee, Wisconsin, from 1993 to 1995 in the Drawing and Prepress Technology
Division.
EDWARD R. MOORE. Mr. Moore joined SM&R in May, 2000 as a Portfolio Manager of
the Small-Cap/Mid-Cap Portfolio. Mr. Moore graduated from the Univeristy of
the South in Sewanee, Tennessee with Honors in English in 1961. After serving
in the armed forces, Mr. Moore graduated from the University of Virginia
School of Law in 1966. Following graduation, Mr. Moore became a member of the
Georgia Bar and practiced law with a large Atlanta law firm for two years
before entering the securities business in 1968 as a retail stock broker with
Eastman, Dillon, Union Securities and Company. Mr. Moore joined Clark,
Dodge & Company in 1972 in order to enter the institutional equity side of the
securities business. Kidder, Peabody & Company purchased Clark, Dodge &
Company in 1974, and Mr. Moore continued his role in the institutional equity
business as a vice-president of Kidder, Peabody & Company until General
Electric sold Kidder, Peabody in 1994. Before the purchase of Kidder,
Peabody & Company by General Electric, Mr. Moore had been a stockholder in
Kidder, Peabody & Company. Mr. Moore has been managing his personal
investments on a full time basis since the closure of Kidder, Peabody &
Company in late 1994. Mr. Moore has been a general partner of Rutledge
Partners since 1996.
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FINANCIAL HIGHLIGHTS
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UNDERSTANDING THE FINANCIAL HIGHLIGHTS
The condensed financial information on the following pages reflects all of the
fees and expenses imposed by each of the named portfolios which contributed to
the changes in the share price during the period. It also shows the changes in
share price for this period in comparison to changes over the last five fiscal
years or less, if the portfolio is not five years old. However, this data does
not reflect the fees and charges deducted by American National under your
variable annuity or variable life insurance contract.
On a per share basis, the condensed financial information includes as
appropriate
- share price at the beginning of the period
- investment income and capital gains or losses
- distributions of income and capital gains paid to shareholders
- share price at the end of the period
The condensed financial information also includes some key statistics for the
period as appropriate
- Total Return -- the overall percentage of return of the portfolio assuming
the reinvestment of all distributions
- Expense Ratio -- operating expenses as a percentage of average net assets
- Net Income Ratio -- net investment income as a percentage of average net
assets
- Portfolio Turnover -- the percentage of the funds' buying and selling
activity
The Financial Highlights have been audited by the Fund's independent auditors,
Tait, Weller & Baker. Their Independent Auditor's Report is included in the
Fund's annual report for the year ended December 31, 1999, which is incorporated
by reference into the Statement of Additional Information and is available upon
request.
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FINANCIAL HIGHLIGHTS
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GROWTH PORTFOLIO
The following financial highlights table is intended to help you understand the
Growth Portfolio'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 Portfolio
(assuming reinvestment of all dividends and distributions). This information has
been audited by Tait, Weller & Baker for the years ended December 31, 1999, 1998
and 1997. Their report, along with the Growth Portfolio's financial statements,
are included in 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 Portfolio's former independent auditors.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 1.60 $ 1.45
====== ====== ======
- ------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.03
- ------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Securities 0.27 0.27
- ------------------------------------------------------------------------------------------------------------
Total from investment operations 0.29 0.30
- ------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.02) (0.03)
- ------------------------------------------------------------------------------------------------------------
Distributions from Capital Gains (0.06) (0.12)
- ------------------------------------------------------------------------------------------------------------
Total distributions (0.08) (0.15)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.81 $ 1.60
====== ====== ======
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN 18.62% 20.72%
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (000'S OMITTED) $15,702 $11,127
- ------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets with reimbursements 0.87% 0.87%
- ------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets without
reimbursements 1.01% 1.09%
- ------------------------------------------------------------------------------------------------------------
Ratio of Net Income to Average Net Assets 1.00% 1.69%
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 25.75% 45.37%
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 1.27 $ 1.04
====== ======
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.02
- ------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Securities 0.21 0.27
- ------------------------------------------------------------
Total from investment operations 0.23 0.29
- ------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.02) (0.02)
- ------------------------------------------------------------
Distributions from Capital Gains (0.03) (0.04)
- ------------------------------------------------------------
Total distributions (0.05) (0.06)
- ------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.45 $ 1.27
====== ======
- ------------------------------------------------------------
TOTAL RETURN 17.98% 28.50%
- ------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (000'S OMITTED) $7,278 $4,781
- ------------------------------------------------------------
Ratio of Expenses to Average Net Assets with reimbursements 0.87% 0.87%
- ------------------------------------------------------------
Ratio of Expenses to Average Net Assets without
reimbursements 1.25% 1.32%
- ------------------------------------------------------------
Ratio of Net Income to Average Net Assets 1.84% 1.99%
- ------------------------------------------------------------
PORTFOLIO TURNOVER RATE 21.24% 42.06%
- ------------------------------------------------------------
</TABLE>
34
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO
The following financial highlights table is intended to help you understand the
Equity Income Portfolio's financial performance for the past five years. Certain
information reflects financial results for a single Equity Income Portfolio
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 Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by Tait, Weller & Baker for
the years ended December 31, 1999, 1998 and 1997. Their report, along with the
Equity Income Portfolio's financial statements, are included in 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
Portfolio's former independent auditors.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 1.56 $ 1.37
====== ====== ======
- ------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.02 0.03
- ------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Securities 0.22 0.28
- ------------------------------------------------------------------------------------------------------------
Total from investment operations 0.24 0.31
- ------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.02) (0.03)
- ------------------------------------------------------------------------------------------------------------
Distributions from Capital Gains (0.03) (0.09)
- ------------------------------------------------------------------------------------------------------------
Total distributions (0.05) (0.12)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.75 $ 1.56
====== ====== ======
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN 15.85% 22.41%
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (000'S OMITTED) $15,051 $9,783
- ------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets with reimbursements 0.93% 0.93%
- ------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets without
reimbursements 0.99% 1.10%
- ------------------------------------------------------------------------------------------------------------
Ratio of Net Income to Average Net Assets 1.44% 1.91%
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 24.83% 35.08%
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 1.21 $ 1.00
====== ======
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.03 0.03
- ------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Securities 0.19 0.24
- ------------------------------------------------------------
Total from investment operations 0.22 0.27
- ------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.03) (0.03)
- ------------------------------------------------------------
Distributions from Capital Gains (0.03) (0.03)
- ------------------------------------------------------------
Total distributions (0.06) (0.06)
- ------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.37 $ 1.21
====== ======
- ------------------------------------------------------------
TOTAL RETURN 17.69% 27.19%
- ------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (000'S OMITTED) $6,273 $4,028
- ------------------------------------------------------------
Ratio of Expenses to Average Net Assets with reimbursements 0.93% 0.93%
- ------------------------------------------------------------
Ratio of Expenses to Average Net Assets without
reimbursements 1.14% 1.26%
- ------------------------------------------------------------
Ratio of Net Income to Average Net Assets 2.29% 2.57%
- ------------------------------------------------------------
PORTFOLIO TURNOVER RATE 20.79% 30.87%
- ------------------------------------------------------------
</TABLE>
35
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
BALANCED PORTFOLIO
The following financial highlights table is intended to help you understand the
Balanced Portfolio's financial performance for the past five years. Certain
information reflects financial results for a single Balanced Portfolio 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 Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by Tait, Weller & Baker for
the years ended December 31, 1999, 1998 and 1997. Their report, along with the
Balanced Portfolio's financial statements, are included in 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
Portfolio's former independent auditors.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 1.39 $ 1.27
====== ====== ======
- ------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04 0.04
- ------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Securities 0.19 0.20
- ------------------------------------------------------------------------------------------------------------
Total from investment operations 0.23 0.24
- ------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.04) (0.05)
- ------------------------------------------------------------------------------------------------------------
Distributions from Capital Gains (0.04) (0.07)
- ------------------------------------------------------------------------------------------------------------
Total distributions (0.08) (0.12)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.54 $ 1.39
====== ====== ======
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN 16.58% 18.80%
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (000'S OMITTED) $7,827 $5,595
- ------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets with reimbursements 0.90% 0.90%
- ------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets without
reimbursements 1.24% 1.30%
- ------------------------------------------------------------------------------------------------------------
Ratio of Net Income to Average Net Assets 2.79% 3.43%
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 14.14% 23.02%
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 1.18 $ 0.99
====== ======
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.04 0.04
- ------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Securities 0.10 0.19
- ------------------------------------------------------------
Total from investment operations 0.14 0.23
- ------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.04) (0.04)
- ------------------------------------------------------------
Distributions from Capital Gains (0.01)
----
- ------------------------------------------------------------
Total distributions (0.05) (0.04)
- ------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.27 $ 1.18
====== ======
- ------------------------------------------------------------
TOTAL RETURN 12.23% 22.80%
- ------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (000'S OMITTED) $4,281 $3,399
- ------------------------------------------------------------
Ratio of Expenses to Average Net Assets with reimbursements 0.90% 0.90%
- ------------------------------------------------------------
Ratio of Expenses to Average Net Assets without
reimbursements 1.48% 1.37%
- ------------------------------------------------------------
Ratio of Net Income to Average Net Assets 3.25% 3.19%
- ------------------------------------------------------------
PORTFOLIO TURNOVER RATE 16.71% 15.97%
- ------------------------------------------------------------
</TABLE>
36
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
The following financial highlights table is intended to help you understand the
Money Market Portfolio's financial performance for the past five years. Certain
information reflects financial results for a single Money Market Portfolio 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 Money Market Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by Tait, Weller & Baker for
the years ended December 31, 1999, 1998 and 1997. Their report, along with the
Money Market Portfolio's financial statements, are included in 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 Money Market
Portfolio's former independent auditors.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00
====== ====== ======
- ------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.05 0.05
- ------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Securities
- ------------------------------------------------------------------------------------------------------------
Total from investment operations 0.05 0.05
- ------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.05) (0.05)
- ------------------------------------------------------------------------------------------------------------
Distributions from Capital Gains (0.04) (0.07)
- ------------------------------------------------------------------------------------------------------------
Total distributions (0.05) (0.05)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00
====== ====== ======
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN 4.65% 4.78%
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (000'S OMITTED) $4,354 $2,821
- ------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets with reimbursements 0.87% 0.87%
- ------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets without
reimbursements 1.24% 1.30%
- ------------------------------------------------------------------------------------------------------------
Ratio of Net Income to Average Net Assets 1.37% 1.23%
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 4.55% 4.62%
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
<S> <C> <C>
- ------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00
====== ======
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.08 0.05
- ------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Securities
- ------------------------------------------------------------
Total from investment operations 0.08 0.05
- ------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.08) (0.05)
- ------------------------------------------------------------
Distributions from Capital Gains (0.01)
----
- ------------------------------------------------------------
Total distributions (0.08) (0.05)
- ------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00
====== ======
- ------------------------------------------------------------
TOTAL RETURN 4.61% 5.11%
- ------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR (000'S OMITTED) $2,532 $2,398
- ------------------------------------------------------------
Ratio of Expenses to Average Net Assets with reimbursements 0.87% 0.87%
- ------------------------------------------------------------
Ratio of Expenses to Average Net Assets without
reimbursements 1.48% 1.37%
- ------------------------------------------------------------
Ratio of Net Income to Average Net Assets 1.22% 1.21%
- ------------------------------------------------------------
PORTFOLIO TURNOVER RATE 4.51% 5.03%
- ------------------------------------------------------------
</TABLE>
The Government Bond Portfolio, Small Cap Portfolio, High Yield Bond Portfolio
and International Stock Portfolio were not in existence at December 31, 1999.
37
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUSES)
- --------------------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND
(BONDS THAT EXTEND LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S LONG-TERM BOND
(BONDS THAT EXTEND LONGER THAN ONE YEAR) RATINGS:
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities, fluctuation
of protective elements may be of greater amplitude, or there may be other
elements present which make the long-term risks appear somewhat larger than
the Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
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.
A-1
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUSES)
- --------------------------------------------------------------------------------
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
DESCRIPTION OF FITCH IBCA BOND RATINGS:
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
A-2
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUSES)
- --------------------------------------------------------------------------------
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF FITCH IBCA SHORT-TERM DEBT RATINGS (INCLUDES COMMERCIAL PAPER):
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "v" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
DESCRIPTION OF DUFF & PHELP'S HIGHEST COMMERCIAL RATINGS:
HIGH GRADE
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
TBW-1 The highest category; indicates a very high likelihood that principal and
interest will be paid on a timely basis.
+-
TBW-2 The second-highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
PREFERRED STOCK RATING
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S PREFERRED STOCK RATING:
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations is
very strong, although not as overwhelmingly as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay preferred stock
obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
A-3
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUSES)
- --------------------------------------------------------------------------------
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the A
category.
BB, B,
CCC Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest. While such issues will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S PREFERRED STOCK RATING:
aaa An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "'a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
ba An issue which is rated "ba" is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
A-4
<PAGE>
FOR MORE INFORMATION ABOUT THE PORTFOLIOS
--------------------------------------------------------------------------
The following documents contain more information about the portfolios and are
available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI).
The SAI contains additional information about all aspects of the portfolios. A
current SAI has been filed with the Securities and Exchange Commission and is
incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS.
The portfolios' annual and semi-annual reports provide additional information
about the portfolios' investments. The annual report for the fiscal year ended
December 31, 1999 contains a discussion of the market conditions and investment
strategies that significantly affected each portfolio's performance during the
last fiscal year.
REQUESTING DOCUMENTS.
You may request a free copy of the SAI and these reports, make shareholder
inquiries, or request further information about the portfolios either by
contacting your broker or by contacting the portfolios at:
AMERICAN NATIONAL INVESTMENT ACCOUNTS, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE: 1-800-231-4639 (TOLL FREE) OR
1-281-334-2469 (COLLECT)
You can review and copy information about the portfolios, 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 portfolios 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.
GROWTH PORTFOLIO
EQUITY INCOME PORTFOLIO
BALANCED PORTFOLIO
MONEY MARKET PORTFOLIO
GOVERNMENT BOND PORTFOLIO
SMALL-CAP/MID-CAP PORTFOLIO
HIGH YIELD BOND PORTFOLIO
INTERNATIONAL STOCK PORTFOLIO
Investment Company
File No. 811-06155
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
AMERICAN NATIONAL INVESTMENT ACCOUNTS, INC.
GROWTH PORTFOLIO
EQUITY INCOME PORTFOLIO
BALANCED PORTFOLIO
MONEY MARKET PORTFOLIO
GOVERNMENT BOND PORTFOLIO
SMALL-CAP/MID-CAP PORTFOLIO
HIGH YIELD BOND PORTFOLIO
INTERNATIONAL STOCK
PORTFOLIO
2450 South Shore Boulevard, Suite 400
League City, Texas 77573
1-281-231-4639
Toll Free 1-800-526-8346
This Statement of Additional Information is NOT a prospectus, but should be
read in conjunction with the prospectus dated May 1, 2000 (the "Prospectus"). A
copy of the Prospectus is available without charge upon written request to
American National Investment Accounts, Inc., 2450 South Shore Boulevard, Suite
400, League City, Texas 77573, or by phoning 281-334-2469 or (Toll Free)
800-231-4639. Terms not defined herein have the same meaning as given to them in
the Prospectus.
Shares of American National Investment Accounts, Inc. (the "Fund") are
currently sold only to separate accounts (the "Separate Accounts") of American
National Insurance Company ("American National") to fund benefits under variable
life insurance policies and variable annuity contracts (all of such insurance
policies and variable annuity contracts are referred to as the "Contract" or
"Contracts") issued by American National. The Separate Accounts invest in shares
of the Fund through subaccounts that correspond to each of the portfolios. The
Separate Accounts will redeem shares of the Fund to the extent necessary to
provide benefits under the Contracts or for such other purposes as may be
consistent with the Contracts. Securities Management and Research, Inc. ("SM&R")
is the investment adviser for the Fund.
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 Prospectus, and if given or
made, such information or representations must not be relied upon as having been
authorized by the Fund. No Prospectus or Statement of Additional Information
constitutes an offer or solicitation by anyone in any state in which such offer
or solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation.
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TABLE OF CONTENTS
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THE FUND.................................................... 1
INVESTMENT OBJECTIVES AND POLICIES.......................... 2
FUNDAMENTAL INVESTMENT LIMITATIONS...................... 2
NON-FUNDAMENTAL OPERATING POLICIES.......................... 3
INVESTMENT TECHNIQUES....................................... 4
U. S. TREASURY SECURITIES............................... 4
U.S. GOVERNMENT OBLIGATIONS............................. 4
MORTGAGE-BACKED U.S. GOVERNMENT OBLIGATIONS............. 5
INFLATION INDEXED BONDS................................. 6
COLLATERALIZED MORTGAGE OBLIGATIONS..................... 6
MORTGAGE PASS-THROUGH SECURITIES........................ 8
OTHER ASSET-BACKED SECURITIES........................... 8
REPURCHASE AGREEMENTS................................... 8
REVERSE REPURCHASE AGREEMENTS........................... 9
RATINGS................................................. 10
LENDING OF SECURITIES................................... 10
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS........... 10
FOREIGN DEBT SECURITIES................................. 11
FOREIGN CURRENCY TRANSACTIONS........................... 12
ILLIQUID SECURITIES..................................... 12
144A SECURITIES AND SECTION 4(2) COMMERCIAL PAPER....... 12
CERTIFICATE OF DEPOSITS AND BANKERS ACCEPTANCES......... 13
MONEY MARKET PORTFOLIO INVESTMENTS...................... 13
INVESTMENTS IN OTHER INVESTMENT COMPANIES............... 14
CONVERTIBLE SECURITIES.................................. 15
WARRANTS................................................ 16
STRATEGIC TRANSACTIONS...................................... 16
PORTFOLIO TURNOVER.......................................... 26
MANAGEMENT OF THE FUND...................................... 27
OFFICERS AND DIRECTORS OF THE FUND...................... 27
REMUNERATION OF DIRECTORS............................... 31
POLICY REGARDING PERSONAL INVESTING......................... 33
PERSONAL INVESTING BY PORTFOLIO MANAGERS................ 33
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND
EMPLOYEES............................................. 33
INVESTMENT ADVISORY AND OTHER SERVICES...................... 34
CONTROL AND MANAGEMENT OF SM&R.......................... 34
INVESTMENT ADVISORY AGREEMENT........................... 35
ADVISORY FEES PAID...................................... 36
ADMINISTRATIVE SERVICE AGREEMENT........................ 37
EXPENSES BORNE BY THE PORTFOLIOS........................ 38
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UNDERWRITER................................................. 39
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION............. 39
FUND SHARES................................................. 41
CAPITAL STOCK........................................... 41
VOTING RIGHTS........................................... 42
PURCHASE, REDEMPTION AND PRICING OF SHARES.................. 42
PURCHASING AND REDEEMING SHARES......................... 42
DETERMINATION OF NET ASSET VALUE........................ 42
MONEY MARKET PORTFOLIO.................................. 43
GROWTH BALANCED, AND EQUITY INCOME PORTFOLIOS........... 44
TAX STATUS.................................................. 44
SUBCHAPTER M............................................ 44
SECTION 817(h).......................................... 45
CUSTODIAN................................................... 46
TRANSFER AGENT AND DIVIDEND PAYING AGENT.................... 46
COUNSEL AND AUDITORS........................................ 46
FINANCIAL STATEMENTS........................................ 46
PERFORMANCE AND ADVERTISING DATA............................ 46
MONEY MARKET PORTFOLIO--YIELD........................... 47
TOTAL RETURN............................................ 48
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THE FUND
American National Investment Accounts, Inc. (the "Fund") provides a range of
investment alternatives through its eight separate portfolios (each a
"Portfolio"; collectively, the "Portfolios"). It currently offers the following
portfolios:
- GROWTH PORTFOLIO
- EQUITY INCOME PORTFOLIO;
- BALANCED PORTFOLIO
- MONEY MARKET PORTFOLIO;
- GOVERNMENT BOND PORTFOLIO
- SMALL-CAP/MID-CAP PORTFOLIO
- HIGH YIELD BOND PORTFOLIO, and
- INTERNATIONAL STOCK PORTFOLIO
Each Portfolio is in effect a separate mutual fund. A separate class of
capital stock is issued for each Portfolio.
The Fund was incorporated under the laws of the State of Maryland on March
14, 1988. The Fund is registered under the Investment Company Act of 1940, as
amended (the "1940 Act" or the "Act") as a diversified, open-end management
investment company commonly known as a "mutual fund". A mutual fund is a company
in which a number of persons invest which in turn invests in the securities of
other companies. The Fund is an open-end investment company because it generally
must redeem an investor's shares upon request. The 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 Fund's management or investment
policies or practices.
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INVESTMENT OBJECTIVES AND POLICIES
As noted in the Prospectus under "Investment Objectives and Policies," each
Portfolio has its own investment objective and follows policies and techniques
designed to achieve that objective.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Portfolio's investment objective and the following fundamental
investment limitations cannot be changed in any material way without the
approval of a majority of the Fund's shares. For these purposes, a "majority"
means 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.
DIVERSIFICATION. With respect to 75% of each Portfolio's total assets, each
such Portfolio 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 each Portfolio'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
each Portfolio.
INDUSTRY CONCENTRATION. Each Portfolio 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).
BORROWING. Each Portfolio may not borrow money, except (a) each Portfolio
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) each Portfolio may, to the extent permitted by applicable law,
borrow up to an additional 5% of its total assets for temporary purposes, (c)
each Portfolio may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities, (d) each Portfolio may
purchase securities on margin to the extent permitted by applicable law, and (e)
each Portfolio may engage in transactions in mortgage dollar rolls which are
accounted for as financing.
LOANS. Each Portfolio may not make loans, except through (a) the purchase
of debt obligations in accordance with the Portfolio'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.
UNDERWRITING. Each Portfolio may not underwrite securities issued by
others, except to the extent that the sale of portfolio securities by each
Portfolio may be deemed to be an underwriting.
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REAL ESTATE. Each Portfolio may not purchase, hold or deal in real estate,
although each Portfolio 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
each Portfolio as a result of the ownership of securities.
COMMODITIES. Each Portfolio may not invest in commodities or commodity
contracts, except that each Portfolio may invest in currency and financial
instruments and contracts that are commodities or commodity contracts.
SENIOR SECURITIES. Each Portfolio may not issue senior securities to the
extent such issuance would violate applicable law.
The above mentioned investment limitations are considered at the time
investment securities are purchased.
NON-FUNDAMENTAL OPERATING POLICIES
In addition to the fundamental investment limitations and the operating
policies, or non-fundamental investment restrictions, described elsewhere in
this Statement of Additional Information and in the Prospectus, each Portfolio
has the operating policies described below. These operating policies can be
changed by the Board of Directors without approval from the shareholders. Each
Portfolio will not:
1. Purchase additional securities when outstanding borrowing by the
Portfolio exceeds 5% of the Portfolio's total assets.
2. Invest in companies for the purpose of exercising management or control.
3. Purchase a futures contract or an option thereon, if, with respect to
positions in futures or options on futures that do not represent bona
fide hedging, the aggregate initial margin and premiums on such futures
or options would exceed 5% of the Portfolio's net asset value.
4. Purchase securities of other investment companies or portfolios or
series of such companies except (i) in compliance with the 1940 Act, or
(ii) for shares of the Money Market Portfolio in accordance with any SEC
orders or exemptions permitting such purchases.
5. Mortgage, pledge, hypothecate or, in any manner, transfer any security
owned by the Portfolio as security for indebtedness, except as may be
necessary in connection with borrowing specifically permitted under the
fundamental investment limitations. In no event shall any such
mortgaging, pledging or hypothecating exceed 33 1/3% of the Portfolio's
total assets at the time of borrowing.
6. Purchase participations or other direct interests in, or enter into
leases with respect to oil, gas, or other mineral exploration or
development programs.
7. Invest in puts, calls, straddles, spreads, or any combination thereof,
except currency, interest rate, and financial instrument contracts.
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8. Engage in the strategy of short sales of securities.
9. Invest more than 5% of the value of the Portfolio's total assets in
securities of companies having a record of less than three years
continuous operations.
10. Purchase or retain securities of an issuer if any officer or director of
the Company or of its investment advisor individually owns more than
one-half of one percent (0.5%) of the securities of that issuer or if
such officers and directors of the Company and of its investment advisor
together own more than 5% of the securities of that issuer.
11. Purchase securities on margin, except as permitted by applicable law and
in accordance with the Portfolio's fundamental investment limitations on
borrowing.
12. Invest in variable amount master demand notes.
INVESTMENT TECHNIQUES
U.S. TREASURY SECURITIES. Each Portfolio may invest in U.S. Treasury
securities, including bills, notes and bonds issued by the U.S. Treasury. These
instruments are direct obligations of the U.S. Government and, as such, are
backed by the full faith and credit of the United States. They differ primarily
in their interest rates, the lengths of their maturities, and the dates of their
issuances.
U.S. GOVERNMENT OBLIGATIONS. Each Portfolio may invest in direct or implied
debt obligations of the U.S. Government, its agencies or instrumentalities
("U.S. Government Obligations"). Such obligations include, but are not limited
to, Government National Mortgage Association ("GNMA" or "Ginnie Mae"), the
Farmers Home Administration, the Export-Import Bank, the Tennessee Valley
Authority, the Resolution Trust Corporation, the Federal National Mortgage
Association ("FNMA" or "Fannie Mae"), the Federal Home Loan Mortgage Corporation
("FHLMC" or "Freddie Mac"), the United States Postal Service, the Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks, and
Federal Land Banks. Some obligations of U.S. Government agencies, authorities
and other instrumentalities are supported by the full faith and credit of the
U.S. Treasury; others by the rights of the issuer to borrow from the Treasury;
and others only by the credit of the issuer. No assurance can be given that the
U.S. Government would lend money to or otherwise provide financial support to
U.S. Government sponsored instrumentalities.
In the case of U.S. Government Obligations not backed by the full faith and
credit of the United States, the Fund must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the U.S. if the agency or instrumentality does
not meet its commitments. There is no guarantee that the U.S. Government will
support securities not backed by its full faith and credit. Accordingly,
although these securities have historically involved little risk of
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loss of principal if held to maturity, they may involve more risk than
securities backed by the U.S. Government's full faith and credit.
The Portfolios 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. Except in the case of the Money Market Portfolio, the Portfolios do not
presently intend to invest any significant amount in such obligations and would
do so in the future only to increase a Portfolio's liquidity on a short-term
basis during adverse and unusual market conditions.
MORTGAGE-BACKED U.S. GOVERNMENT OBLIGATIONS. The Government Bond Portfolio
and Balanced Portfolio may invest in mortgage-backed securities issued or
guaranteed by U.S. Government agencies such as GNMA, FNMA or FHLMC and
representing undivided ownership interest in pools of mortgages. The mortgages
backing these securities may include conventional 30-year fixed rate mortgages,
15-year fixed rate mortgages, graduated payment mortgages and adjustable rate
mortgages.
The U.S. Government or the issuing agency guarantees the payment of the
interest on and principal of these securities. However, the guarantees do not
extend to the securities' yield or value, which are likely to vary inversely
with fluctuations in interest rates, nor do the guarantees extend to the yield
or value of the Government Bond and Balanced Portfolio's shares. These
securities are in most cases "pass-through" instruments, through which the
holders receive a share of all interest and principal payments from the
mortgages underlying the securities, net of certain fees. Because the principal
amounts of such underlying mortgages may generally be prepaid in whole or in
part by the mortgages at any time without penalty and the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of pass-through securities.
Mortgage-backed securities are subject to more rapid repayment than their stated
maturity date would indicate as a result of the pass-through of prepayments on
the underlying mortgage obligations. The remaining maturity of a mortgage-backed
security will be deemed to be equal to the average maturity of the mortgages
underlying such security determined by SM&R on the basis of assumed prepayment
rates with respect to such mortgages. The remaining expected average life of a
pool of mortgages underlying a mortgage-backed security is a prediction of when
the mortgages will be repaid and is based upon a variety of factors such as the
demographic and geographic characteristics of the borrowers and the mortgaged
properties, the length of time that each of the mortgages has been outstanding,
the interest rates payable on the mortgages and the current interest rate
environment. While the timing of prepayments of graduated payment mortgages
differs somewhat from that of conventional mortgages, the prepayment experience
of graduated payment mortgages is basically the same as that of the conventional
mortgages of the same maturity dates over the life of the pool. During periods
of declining interest rates, prepayment of mortgages underlying mortgage-backed
securities can be expected to accelerate. When the mortgage obligations are
prepaid, the Government Bond Portfolio and Balanced Portfolio reinvests the
prepaid amounts in other income producing securities, the yields of which
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reflect interest rates prevailing at the time. Therefore, the Government Bond
and Balanced Portfolios ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities that have lower yields
than the prepaid mortgage-backed securities. Moreover, prepayments of mortgages
which underlie securities purchased by the Government Bond and Balanced
Portfolios at a premium would result in capital losses.
INFLATION INDEXED BONDS. The Government Bond Portfolio may invest in
inflation-indexed bonds, which are fixed income securities whose principal value
is periodically adjusted according to the rate of inflation. The interest rate
on these bonds is generally fixed at issuance at a rate lower than typical
bonds. Over the life of an inflation-indexed bond, however, interest will be
paid based on a principal value that is adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially have
maturities of five or ten years, although it is anticipated that securities with
other maturities will be issued in the future. The securities will pay interest
on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted
principal amount.
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation falls, the principal value of inflation-indexed bonds will be
adjusted downward, and consequently the interest payable on these securities
(calculated with respect to a smaller principal amount) will be reduced.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed and will fluctuate.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although such
a market is expected to develop. Lack of a liquid market may impose the risk of
higher transaction costs and the possibility the portfolio may be forced to
liquidate positions when it would not be advantageous to do so.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Balanced Portfolio, Government
Bond Portfolio and the Money Market Portfolio each 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. The issuer's obligation to make
interest and principal payments is secured by the underlying pool or portfolio
of securities. Collateralized obligations in which the Balanced, Government Bond
Portfolio and Money Market Portfolios 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
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of rapid interest rate fluctuation, the price of a security, such as a CMO,
could either increase or decrease based on inherent interest rate risk.
Additionally, the risk of maturities shortening or lengthening in conjunction
with interest rate movement, could magnify the overall effect of the price
fluctuation.
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.
The Money Market Portfolio will not invest in any CMOs that are not fully
collateralized obligations. "Fully collateralized" means that the collateral
will generate cash flows sufficient to meet obligations to holders of the
collateralized obligations under even the most conservative prepayment and
interest rate projections. Thus, the collateralized obligations are structured
to anticipate a worst case prepayment condition and to minimize the reinvestment
rate risk for cash flows between coupon dates for the collateralized
obligations. A worst case prepayment condition generally assumes immediate
prepayment of all securities purchased at a premium and zero prepayment of all
securities purchased at a discount. Reinvestment rate risk may be minimized by
assuming very conservative reinvestment rates and by other means such as by
maintaining the flexibility to increase principal distributions in a low
interest rate environment. The requirements as to collateralization are
determined by the issuer or sponsor of the collateralized obligation in order to
satisfy the U.S. Government agency or instrumentality guaranteeing the
obligation.
Collateralized obligations are designed to be retired as the underlying
securities are repaid. In the event of prepayment on or call of such securities,
the class of collateralized obligations first to mature generally will be paid
down first. Therefore, although in most cases the issuer of collateralized
obligations will not supply additional collateral in the event of such
prepayment, there will be sufficient collateral to secure collateralized
obligations that remain outstanding.
The Government Bond Portfolio may also invest in securities issued by
private issuers that represent an interest in or are secured by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities. In addition, the Government Bond Portfolio may invest in
securities issued by private issuers that represent an interest in or are
secured by mortgage loans or mortgage-backed securities without a government
guarantee but usually have some form of private credit enhancement.
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MORTGAGE PASS-THROUGH SECURITIES. Additionally, the Government Bond
Portfolio may invest in mortgage pass-through securities that do not contain
government guarantees. Commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers also create pass-through pools of conventional residential mortgage
loans. Such issuers may, in addition, be the originators and/or servicers of the
underlying mortgage loans as well as the guarantors of the mortgage-related
securities. Pools created by such non-governmental issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in
the former pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers
and the entities creating the mortgage pools. Such insurance and guarantees, and
the creditworthiness of the issuers thereof, will be considered in determining
whether a mortgage-related security meets the Government Bond Portfolio's
investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements.
OTHER ASSET-BACKED SECURITIES. It is expected that new types of
asset-backed securities (unrelated to mortgage loans) may be available for
investment in the future and may be purchased by the funds that may invest in
mortgage-related securities. Several types of asset-backed securities have
already been offered to investors, such as home equity loan receivables.
Traditional home equity loans (HELs) are very similar to residential mortgages
which pass through principal payments (or amortize) over a time period.
Generally these securities have maturities of 10 to 20 years, which is modestly
shorter than a traditional 30-year first mortgage. Although some HELs evidence a
first lien on the underlying property, usually a first mortgage is in place
concurrently with a HEL. Another asset-backed security is a home equity line of
credit (HELOC), which is a line of credit extended to a property owner that can
be drawn upon, and paid down and then re-drawn upon until the line's final
maturity. This revolving feature results in HELOC cash flows looking very
similar to credit card cash flows. As with other pass-through securities, an
investor's return may be affected by early prepayment of principal on the
underlying loan.
Consistent with the Government Bond Portfolio's investment objectives and
policies, the portfolio manager may invest in other types of asset-backed
securities.
REPURCHASE AGREEMENTS. Each Portfolio 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 Portfolio will
acquire and hold a security (government security, certificate of deposit, or
banker's acceptance) subject to the seller's agreement to repurchase the
securities at a predetermined price within a specified time (normally one day to
one week), thereby determining the yield during the Portfolio's holding period.
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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 Portfolio and is
unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by a Portfolio (including accrued interest
earned thereon) must have a total value in excess of the value of the repurchase
agreement and are held by the Portfolio'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 Portfolio purchasing such agreement will take title to, or actual
delivery of the security. A default by the seller might cause a Portfolio to
experience a loss or delay in the liquidation of the collateral securing the
repurchase agreement. A Portfolio might also incur disposition costs in
liquidating the collateral.
The Portfolios will enter into repurchase agreements only with sellers who
are believed to present minimal credit risks and will monitor the value of the
collateral during the holding period. Credit risks are evaluated pursuant to
guidelines adopted and regularly reviewed by the Board which set forth credit
worthiness standards for the banks and registered government security dealers
with whom the Portfolios may enter into such repurchase agreements. Such
arrangements permit each Portfolio to keep all of its assets at work while
retaining flexibility in pursuit of investments of a longer-term nature. No
Portfolio will purchase repurchase agreements maturing more than seven (7) days
after such purchase.
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
Portfolio 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 Portfolio not within the
control of that Portfolio and therefore the realization by that Portfolio on
such collateral may be automatically stayed. Finally, it is possible that a
Portfolio 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 Portfolios' management acknowledges these risks, it is
expected that they can be controlled through careful monitoring procedures.
REVERSE REPURCHASE AGREEMENTS. Although the Fund has no current intention
of engaging in reverse repurchase agreements, the Fund reserves the right to do
so. Reverse repurchase agreements are ordinary repurchase agreements in which a
portfolio is the seller of, rather than the investor in, securities, and agrees
to repurchase them at an agreed upon time and price. Use of a reverse repurchase
agreement may be preferable to a regular sale and later repurchase of the
securities because it avoids certain market risks
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and transaction costs. A reverse repurchase agreement may be viewed as a type of
borrowing by the Fund, which will be subject to the Fund's fundamental
restrictions.
RATINGS. If the rating of a security purchased by a Portfolio is
subsequently reduced below the minimum rating required for purchase or a
security purchased by the Portfolio ceases to be rated, neither event will
require the sale of the security. However, SM&R will consider any such event in
determining whether the Portfolio should continue to hold the security. For
subsequent downgrades of securities purchased by the Money Market Portfolio,
steps shall be taken to reassess promptly whether such security continues to
present minimal credit risks and the Portfolio shall take such action as is
determined to be in the best interests of the Portfolio and its shareholders.
LENDING OF SECURITIES. Although there is no present intent to do so, the
Portfolios may lend their portfolio securities to qualified brokers, dealers,
banks and other financial institutions 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 their
portfolio securities, the Portfolios attempt to increase their 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 Portfolios. The Portfolios may lend their 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 Portfolios collateral
consisting of cash, a letter of credit issued by a domestic United
States bank, or securities issued or guaranteed by the United States
Government having a value at all times not less than 100% of the value
of the securities loans,
(b) the borrower add to such collateral whenever the price of the securities
loaned rises (i.e., the borrower "marks to the market" on a daily
basis),
(c) the loans be made subject to termination by the Portfolios at any time,
and
(d) the Portfolios receive reasonable interest on the loans (which may
include the Portfolios investing any cash collateral in interest bearing
short-term investments), any distribution on the loaned securities and
any increase in their market value.
The principal risk of lending is the potential insolvency of the borrower.
In this event, the portfolio could experience delays in recovering its
securities and possible capital losses.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Government Bond
Portfolio and the High Yield Bond Portfolio may purchase and sell portfolio
securities on a "when issued" and "delayed delivery" basis. The price of such
securities is fixed at the time the commitment to purchase is made, but delivery
and payment for such securities take place
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at a later date. Normally, the settlement date occurs within one month of the
purchase. During the period between purchase and settlement, generally no
payment is made by the Government Bond and High Yield Portfolios to the issuer
and no interest accrues to the Portfolios. These transactions are subject to
market fluctuations; the value of the securities at delivery may be more or less
than their purchase price, and yields generally available on comparable
securities when delivery occurs may be higher than yields on the securities
obtained pursuant to such transactions.
Because the Government Bond Portfolio or High Yield Bond Portfolio relies on
the buyer or seller, as the case may be, to consummate the transactions, failure
by the other party to complete a transaction may result in the Portfolio missing
the opportunity of obtaining a price or yield considered advantageous. When the
Government Bond Portfolio or the High Yield Bond Portfolio is the buyer in such
transactions, however, it will maintain, in a segregated account with its
custodian, cash, short-term money market instruments, high quality debt
securities or portfolio securities having an aggregate value equal to the amount
of such purchase commitments until payment is made. The Government Bond
Portfolio and the High Yield Bond Portfolio will make commitments to purchase
securities on such basis only with the intention of actually acquiring these
securities, but it may sell such securities prior to the settlement date if such
sale is considered to be advisable. No specific limitation exists as to the
percentage of the Government Bond Portfolio's or the High Yield Bond Portfolio's
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis. To the extent the Government Bond Portfolio or the High Yield
Bond Portfolio engages in "when issued" and "delayed delivery transactions, it
will do so for the purpose of acquiring securities for its portfolio consistent
with its investment objective and policies and not for the purpose of investment
leverage.
FOREIGN DEBT SECURITIES. The Government Bond Portfolio may invest up to 5%
of its assets in debt obligations of foreign corporations or financial
institutions, such as Yankee Bonds and Eurodollar Bonds. Yankee Bonds are U.S.
dollar-denominated obligations of foreign issuers that are issued in the United
States. Eurodollar Bonds are U.S. dollar-denominated obligations of U.S. or
foreign issuers that are traded outside the U.S., primarily in Europe.
Yankee Bonds involve certain risks associated with investing in a foreign
issuer. Such risks may include nationalization of the issuer, confiscatory
taxation by the foreign government, establishment of controls by the foreign
government that would inhibit the remittance of amounts due the Portfolio, lack
of comparable publicly-available information concerning foreign issuers, lack of
comparable accounting and auditing practices in foreign countries and difficulty
in enforcing claims against foreign issuers in the event of default. Eurodollar
Bonds are subject to the same risks as domestic issues, in particular, credit
risk, market risk and liquidity risk. Eurodollar Bonds are subject to sovereign
risk, including the risk that a foreign government might prevent
dollar-denominated funds from leaving the country. Eurodollar Bonds that are
issued by foreign issuers are subject to the same risks as Yankee Bonds.
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FOREIGN CURRENCY TRANSACTIONS. The International Stock Portfolio will
normally conduct its foreign currency exchange transactions either on a spot (ie
cash) basis at the spot rate prevailing in the foreign currency exchange market,
or through entering into forward contracts to purchase or sell foreign
currencies. The International Stock Portfolio will generally not enter into a
forward contract with a term greater than one year.
The International Stock Portfolio will generally enter into forward foreign
currency exchange contracts only under two circumstances. First, when the
Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. Second, when it is believed that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the former
foreign currency (or another currency which acts as a proxy for that currency),
approximating the value of some or all of the International Stock Portfolio's
securities denominated in such foreign currency. Under certain circumstances, a
fund may commit a substantial portion or the entire value of its portfolio to
consummation of these contracts. SM&R will consider the effect such a commitment
of its portfolio to forward contracts would have on the investment program of
the International Stock Portfolio and the flexibility of the International Stock
Portfolio to purchase additional securities.
ILLIQUID SECURITIES. Each Portfolio may invest up to 15% (10% of the Money
Market Portfolio) of its net assets in illiquid securities, including domestic
or foreign securities not listed on domestic or foreign exchanges and repurchase
agreements maturing in excess of seven days. Non-publicly traded securities may
be less liquid than publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by a Portfolio. In addition,
companies whose securities are not publicly traded are not subject to the
disclosure and other investor protection requirements that may be applicable if
their securities were publicly traded. A Portfolio's investments in illiquid
securities are subject to the risk that should the Portfolio desire to sell any
of these securities when a ready buyer is not available at a price that SM&R
deems representative of their value, the value of the Portfolio's net assets
could be adversely affected.
144A SECURITIES AND SECTION 4(2) COMMERCIAL PAPER. If otherwise consistent
with its investment objective and policies, a Portfolio 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
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other buyers may cease purchasing such restricted securities, the level of
illiquidity of a Portfolio 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 Portfolios are subject to regulation and examination by the Office of
Thrift Supervision. Such certificates of deposit held by a Portfolio do not
benefit materially from insurance from the Federal Deposit Insurance
Corporation.
The Money Market Portfolio may not invest in any certificate of deposit or
bankers' acceptance of a commercial bank unless: the bank is organized and
operating in the United States, has total assets of at least $1 billion and is a
member of the Federal Deposit Insurance Corporation; or the bank is a foreign
branch of a United States bank or a United States branch of a foreign bank which
bank has $1 billion of total assets.
MONEY MARKET PORTFOLIO INVESTMENTS. Pursuant to the 1940 Act, the Money
Market Portfolio may invest only in United States dollar-denominated instruments
that present minimal credit risks, have a remaining maturity of 397 calendar
days or less, and which are at the time of acquisition "eligible securities" as
defined in Rule 2a-7 under the 1940 Act. Generally, an eligible security is:
A security with a remaining maturity of 397 calendar days or less
("Short-term") that has received a rating from two nationally recognized
statistical rating organizations ("NRSROs"), or if rated by only one NRSRO, from
that NRSRO, in one of the two highest rating categories ("Acceptable Rating")
for debt obligations; or
A security with a remaining maturity of 397 calendar days or less issued by
an issuer that has received an Acceptable Rating from at least two NRSROs, or if
rated by only one NRSRO, from that NRSRO, with respect to a class of debt
obligations (or any debt obligation within that class) that is comparable in
priority and security with the security (a "Comparable Security").
If a security is acquired based on the rating of only one NRSRO, such
acquisition must be ratified by the Board. While Rule 2a-7 permits money market
funds to invest in certain unrated securities of comparable quality to eligible
rated securities, the Money Market Portfolio currently does not intend to invest
in unrated securities.
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SM&R has the responsibility of determining that each investment by the Money
Market Portfolio presents minimal credit risks. SM&R's determination of minimal
credit risk will be based on an analysis of the issuer's (and, if applicable,
any guarantor's) capacity to repay its Short-term debt obligations. The analysis
cannot rely on ratings alone, but must be made on factors pertaining to credit
quality in addition to any rating that the security or the issuer may have been
assigned. The extensiveness of the evaluation may vary with the type and
maturity of the instrument involved and the SM&R's familiarity with the issuer.
The Money Market Portfolio will maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable net asset value
per share; provided, however, that the Portfolio will not (1) purchase any
instrument with a remaining maturity at the date of acquisition of greater than
397 calendar days, or (2) maintain a dollar-weighted average portfolio Maturity
that exceeds 90 days. The "maturity" of a portfolio instrument is the period
remaining (calculated from the trade date or such other date on which the
Portfolio's interest in the security is subject to market action) until the date
on which, in accordance with the terms of the security, the principal amount
must unconditionally be paid, or in the case of a security called for
redemption, the date on which the redemption must be made.
The Money Market Portfolio will maintain a diversified portfolio in
accordance with the provisions of Rule 2a-7. In meeting diversification
requirements of the Rule, SM&R classifies securities into First and Second Tier
Securities, as defined in the 1940 Act. A "First Tier Security" is an Eligible
Security that (1) has been rated by at least two NRSROs (or if rated by only one
NRSRO, by that NRSRO) in the highest rating category for Short-term debt
obligations; (2) has been issued by an issuer that is rated with respect to a
Comparable Security, by at least two NRSROs (or if rated by only one NRSRO, by
that NRSRO) in the highest rating category for Short-term debt obligations; (3)
has been issued by a registered investment company that is a money market fund;
or (4) is a "Government Security," as defined in Section 2(a)(16) of the 1940
Act. A "Second Tier Security" is an Eligible Security that is not a First Tier
Security.
Immediately after the acquisition of any security (other than a Government
Security), SM&R shall confirm that the Portfolio has not invested more than 5%
of its total assets in securities issued by any one issuer; provided, however,
that the Portfolio may invest up to 25% of its total assets in the First Tier
Securities of a single issuer for a period of up to three (3) business days
after the purchase; provided, further, that the Portfolio may not make more than
one investment in accordance with the foregoing provision at any time.
Immediately after the acquisition of a Second Tier Security, SM&R shall confirm
that the Portfolio has not invested more than (1) the greater of 1% of its total
assets or one million dollars in securities issued by that issuer that are
Second Tier Securities, and (2) 5% of its total assets in securities which, when
acquired were, or have become, Second Tier Securities.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. From time to time, investments
in other investment companies (mutual funds) may be the most effective available
means by
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which the portfolios may invest in securities of issuers in certain countries.
Such investments may include, for example, investments by the International
Stock Portfolio in World Equity Benchmark Shares-SM- (commonly known as "WEBS"),
which are exchange-traded shares of investment company series that are designed
to replicate the composition and performance of publicly traded issuers in
particular foreign countries. Investment in such investment companies may
involve the payment of management expenses and, in connection with some
purchases, sales loads, and payment of substantial premiums above the value of
such companies' portfolio securities. At the same time, the International Stock
Portfolio would continue to pay its own management fees and other expenses. The
International Stock Portfolio may make these investments when, in the judgment
of SM&R, the potential benefits outweigh the payment of any applicable premium,
sales load and expenses. The International Stock Portfolio's investments in
other investment companies are subject to the provisions of the Investment
Company Act of 1940, except that a portfolio will not purchase securities of
registered open-end investment companies or registered unit in investment trusts
in reliance on section 12(d)(1)(F) or (12)(d)(1)(G) of the 1940 Act.
CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures,
notes, preferred stocks or other securities that may be converted into or
exchanged for a specified amount of common stock or other security of the same
or a different issuer within a particular period of time and at a specified
price or formula. A convertible security generally entitles the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks, but lower yields than
comparable non-convertible income securities, (ii) are less subject to
fluctuation in value than the underlying stock since they have fixed income
characteristics, and (iii) provide the potential for capital appreciation if the
market price of the underlying common stock increases. Most convertible
securities currently are issued by domestic companies, although a substantial
Eurodollar convertible securities market has developed, and the markets for
convertible securities denominated in local currencies are increasing.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally
the conversion value decreases as the
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convertible security approaches maturity. To the extent the market price of the
underlying common stock approaches or exceeds the conversion price, the price of
the convertible security will be increasingly influenced by its conversion
value. A convertible security generally will sell at a premium over its
conversion value by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security.
WARRANTS. The Fund may acquire warrants. Warrants are pure speculation in
that they have no voting rights, pay no dividends, and have no rights with
respect to the assets of the corporation issuing them. Warrants basically are
options to purchase equity securities at a specific price valid for a specific
period of time. They do not represent ownership of the securities, but only the
right to buy them. Warrants differ from call options in that warrants are issued
by the issuer of the security which may be purchased on their exercise, whereas
call options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the Funds may invest in these
securities.
STRATEGIC TRANSACTIONS
To the extent described below, the High Yield Bond Portfolio and the
International Stock Portfolio (each a "portfolio" and collectively the
"portfolios" for purposes of this section ONLY) may, but are not required to,
use various investment strategies as described below to earn income, facilitate
portfolio management, and mitigate risks. Such strategies are generally accepted
under modern portfolio management and are regularly used by many mutual funds
and other institutional investors. Techniques and instruments may change over
time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing these investment strategies, the High Yield Bond
Portfolio may purchase and sell derivative securities such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income and interest rate indices and other financial instruments, purchase
and sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currency or currency futures
(collectively, all the above are called "Strategic Transactions"). Among other
things, Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the portfolio resulting from securities markets or currency exchange
markets, to protect the portfolio's unrealized gains in the value of its
portfolio's securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the portfolio's
securities, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. The International
Stock Portfolio may purchase and sell futures contracts, forward contracts and
options on securities, financial indices, and foreign currencies.
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The portfolios may sell options on securities the portfolios own or have the
right to purchase without additional payments, up to 25% of each portfolio's net
assets, for non-hedging purposes. When a portfolio sells an option, if the
underlying securities do not increase (in the case of a call option) or decrease
(in the case of a put option) to a price level that would make the exercise of
the option profitable to the holder of the option, the option generally will
expire without being exercised and the portfolio will realize as profit the
premium received for such option. When a call option of which a portfolio is the
writer is exercised, the option holder purchases the underlying security at the
strike price and the portfolio does not participate in any increase in the price
of such securities above the strike price. In addition, the portfolio would need
to replace the underlying securities at prices which may not be advantageous to
the portfolio. When a put option of which a portfolio is the writer is
exercised, the portfolio will be required to purchase the underlying securities
at the strike price, which may be in excess of the market value of such
securities.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of a portfolio to utilize these
Strategic Transactions successfully will depend on SM&R's ability to predict
pertinent market movements, which cannot be assured. The portfolios will comply
with applicable regulatory requirements when implementing these strategies,
techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
SM&R's view as to certain market movements is incorrect, the risk that the use
of such Strategic Transactions could result in losses greater than if they had
not been used. Use of put and call options may result in losses to a portfolio,
force the sale or purchase of portfolio securities at inopportune times or for
prices other than current market values, limit the amount of appreciation a
portfolio can realize on its investments or cause a portfolio to hold a security
it might otherwise sell. The use of currency transactions can result in a
portfolio's incurring losses as a result of a number of factors including the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of a portfolio creates the possibility that
losses on the hedging instrument may be greater than gains in the value of the
portfolio's position. In addition, futures and options markets may not be liquid
in all circumstances and certain over-the-counter options may have no markets.
As a result, in certain markets, a portfolio might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
these futures contracts and options transactions for hedging should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk
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than would purchases of options, where the exposure is limited to the cost of
the initial premium. Losses resulting from the use of Strategic Transactions
would reduce net asset value, and possibly income, and such losses can be
greater than if the Strategic Transactions had not been utilized. Income earned
or deemed to be earned, if any, by a portfolio from its Strategic Transactions
will generally be taxable.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of a portfolio's assets in special
accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a portfolio's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the portfolio the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A portfolio's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the portfolio against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. The portfolios are authorized to purchase and sell
exchange listed options and over-the-counter options ("OTC options"). Exchange
listed options are issued by a regulated intermediary such as the Options
Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to such options. The discussion below uses the OCC as
a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
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The portfolios' ability to close out their positions as a purchaser or
seller of an OCC or exchange listed put or call option is dependent, in part,
upon the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, a portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, SM&R must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
A portfolio will engage in OTC option transactions only with U.S. government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from Standard &
Poor's ("S&P") or "P-1" from Moody's Investors Service, Inc. ("Moody's") or an
equivalent rating from any other nationally recognized statistical rating
organization ("NRSRO"). Certain OTC options may be illiquid and subject to the
portfolios' limitation on illiquid securities.
If a portfolio sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the
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underlying securities or instruments in the portfolio or will increase the
portfolio's income. The sale of put options can also provide income. A portfolio
may purchase and sell call or put options on securities, including U.S. Treasury
and agency securities, foreign sovereign debt, mortgage-backed securities,
corporate debt securities, Eurodollar instruments and foreign debt securities
that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and related futures on such securities, indices,
currencies and futures. All calls sold by a portfolio must be "covered" (i.e.,
the portfolio must own the securities or futures contract subject to the call)
or must meet the asset segregation requirements described below as long as the
call is outstanding. Even though the portfolio will receive the option premium
to help protect it against loss, a call sold by the portfolio exposes the
portfolio during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument and may require the portfolio to hold a security or instrument which
it might otherwise have sold. In selling put options, there is a risk that a
portfolio may be required to buy the underlying security at a disadvantageous
price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. A portfolio may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or currency market changes, for duration
management and for risk management purposes. Futures generally are bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by a portfolio, as purchaser, to take delivery from
the seller the specific type of financial instrument called for in the contract
at a specific future time for a specified price. The sale of a futures contract
creates a firm obligation by a portfolio, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
A portfolio's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission ("CFTC") and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires a portfolio to deposit
with a financial intermediary as security for its obligations an amount of cash
or other specified assets (initial margin) which initially is typically 1% to
10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of options on financial futures involves
payment of a premium for the option without any further obligation on the part
of the portfolio. If a portfolio exercises an option on a futures contract it
will be obligated to post initial margin (and potential subsequent variation
margin) for the resulting futures position just
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as it would for any position. Futures contracts and options thereon are
generally settled by entering into an offsetting transaction but there can be no
assurance that the position can be offset prior to settlement at an advantageous
price nor that delivery will occur.
A portfolio will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the portfolio's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The portfolios
also may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives they
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
CURRENCY TRANSACTIONS. The portfolios may engage in currency transactions
with Counterparties in order to hedge the value of currencies against
fluctuations in relative value. Currency transactions include forward currency
contracts, exchange listed currency futures, exchange listed and OTC options on
currencies, and currency swaps.
A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. A
currency swap is an agreement to exchange cash flows based on the notional
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. The portfolios may enter into currency
transactions with Counterparties rated A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from an NRSRO or (except for OTC
options) are determined to be of equivalent credit quality by SM&R.
21
<PAGE>
The portfolios' dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a portfolio, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency. The portfolios will not enter into a
transaction to hedge currency exposure to an extent greater, after netting all
transactions intended to wholly or partially offset other transactions, than the
aggregate market value (at the time of entering into the transaction) of the
securities held in its portfolio that are denominated or generally quoted in or
currently convertible into such currency other than with respect to cross-
hedging or proxy hedging as described below.
A portfolio may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the portfolio has or in which the
portfolio expects to have exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the High Yield Bond Portfolio and
the International Stock Portfolio may also engage in proxy hedging. Proxy
hedging is often used when the currency to which the portfolio is exposed is
difficult to hedge or to hedge against the dollar. Proxy hedging entails
entering into a forward contract to sell a currency whose changes in value are
generally considered to be linked to a currency or currencies in which some or
all of the portfolio's securities are or are expected to be denominated, and to
buy U.S. dollars. The amount of the contract would not exceed the value of the
High Yield Bond Portfolio's and the International Stock Portfolio's securities
denominated in linked currencies. For example, if SM&R considers the Austrian
schilling is linked to the German deutschemark (the "D-mark"), the portfolio
holds securities denominated in Austrian schillings and SM&R believes that the
value of schillings will decline against the U.S. dollar, SM&R may enter into a
contract to sell D-marks and buy dollars. Currency hedging involves some of the
same risks and considerations as other transactions with similar instruments.
Currency transactions can result in losses to a portfolio if the currency being
hedged fluctuates in value to a degree or in a direction that is not
anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Portfolio is engaging in proxy hedging. If a portfolio
enters into a currency hedging transaction, the portfolio will comply with the
asset segregation requirements described below.
RISKS OF CURRENCY TRANSACTIONS. Currency transactions are subject to risks
different from other transactions. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be
negatively affected by government exchange
22
<PAGE>
controls, blockages, and manipulations or exchange restrictions imposed by
governments. These can result in losses to a portfolio it is unable to deliver
or receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures is relatively new, and the ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market which may not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy.
COMBINED TRANSACTIONS. A portfolio may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple currency transactions (including forward currency contracts), multiple
interest rate transactions and any combination of futures, options, currency and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of SM&R, it is in the best interests of the portfolio to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on SM&R's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which the High Yield Bond Portfolio may enter are interest rate, currency and
index swaps and the purchase or sale of related caps, floors and collars. The
High Yield Bond Portfolio expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities the
portfolio anticipates purchasing at a later date. The High Yield Bond Portfolio
intends to use these transactions as hedges and not as speculative investments
and will not sell interest rate caps or floors where it does not own securities
or other instruments providing the income stream the portfolio may be obligated
to pay. Interest rate swaps involve the exchange by the High Yield Bond
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of
23
<PAGE>
a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.
The High Yield Bond Portfolio may enter into swaps, caps, floors and collars
on either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities and will usually enter into swaps on a net
basis, i.e., the two payment streams are netted out in a cash settlement on the
payment date or dates specified in the instrument, with the portfolio receiving
or paying, as the case may be, only the net amount of the two payments. Inasmuch
as these swaps, caps, floors and collars are entered into for good faith hedging
purposes, SM&R and the High Yield Bond Portfolio believe such obligations do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to its borrowing restrictions. The High Yield Bond
Portfolio will not enter into any swap, cap, floor or collar transaction unless,
at the time of entering into such transaction, the unsecured long-term debt of
the Counterparty, combined with any credit enhancements, is rated at least "A"
by S&P or Moody's or has an equivalent rating from an NRSRO or is determined to
be of equivalent credit quality by SM&R. If there is a default by the
Counterparty, the High Yield Bond Portfolio may have contractual remedies
pursuant to the agreements related to the transaction. A large number of banks
and investment banking firms now act both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in a portfolio's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lower trading volume
and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that a portfolio segregate cash or
liquid securities with its custodian to the extent portfolio obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the portfolios to pay or deliver securities or assets must be covered at all
times by the securities, instruments or currency required to be delivered, or,
subject to any regulatory restrictions, an amount of cash or liquid securities
24
<PAGE>
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by a portfolio will require
the portfolio to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate cash or liquid securities sufficient to purchase and deliver the
securities if the call is exercised. A call option sold by a portfolio on an
index will require the portfolio to own securities which correlate with the
index or to segregate cash or liquid securities equal to the excess of the index
value over the exercise price on a current basis. A put option written by a
portfolio requires the portfolio to segregate cash or liquid securities equal to
the exercise price. A currency contract which obligates a portfolio to buy or
sell currency will generally require the portfolio to hold an amount of that
currency or liquid securities denominated in that currency equal to the
portfolio's obligations or to segregate cash or liquid securities equal to the
amount of the portfolio's obligation.
OTC options entered into by a portfolio, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, swaps, caps, floors and collars will generally provide for cash
settlement. As a result, when a portfolio sells these instruments it will only
segregate an amount of assets equal to its accrued net obligations, as there is
no requirement for payment or delivery of amounts in excess of the net amount.
These amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold by the
portfolio, or the in-the-money amount plus any sell-back formula amount in the
case of a cash-settled put or call. In addition, when a portfolio sells a call
option on an index at a time when the in-the-money amount exceeds the exercise
price, the portfolio will segregate, until the option expires or is closed out,
cash or liquid securities equal in value to such excess. OCC issued and exchange
listed options sold by a portfolio other than those above generally settle with
physical delivery, and the portfolio will segregate an amount of assets equal to
the full value of the option. OTC options settling with physical delivery, or
with an election of either physical delivery or cash settlement, will be treated
the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, a portfolio must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash or liquid
securities. With respect to swaps, the High yield Bond Portfolio will accrue the
net amount of the excess, if any, of its obligations over its entitlements with
respect to each swap on a daily basis and will segregate an amount of cash or
liquid securities having a value equal to the accrued excess. Caps, floors and
collars require segregation of assets with a value equal to the High Yield Bond
Portfolio's net obligation, if any.
25
<PAGE>
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. A portfolio also may enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a portfolio could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the portfolio. Moreover, instead of segregating assets if the portfolio
held a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions also may be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, assets equal to any remaining obligation would need to be
segregated.
The portfolios' activities involving Strategic Transactions may be limited
by the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
PORTFOLIO TURNOVER
Portfolio turnover for a Portfolio is calculated by dividing the lesser of
annual purchases or sales of portfolio securities by the monthly average of the
value of the Portfolio'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 Portfolio's portfolio
securities were replaced within one year. In general, it is intended that
portfolio changes in the Portfolios 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 Portfolio
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 Portfolio and its shareholders must bear such
higher expenses.
The portfolio turnover rates for the Portfolios for past three fiscal years
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Growth Portfolio............. 45.37% 25.75%
Equity Income Portfolio...... 35.08% 24.83%
Balanced Portfolio........... 23.02% 14.14%
</TABLE>
The Money Market Portfolio experienced no portfolio turnover because it
invests only in short-term money market instruments. Additionally, there is no
portfolio turnover for the Government Bond Portfolio, the Small-Cap/Mid-Cap
Portfolio, the High
26
<PAGE>
Yield Bond Portfolio or the International Stock Portfolio as these portfolios
began operations on May 1, 2000.
No brokerage commissions have been paid during the Portfolios' three most
recent periods to any broker which is an affiliated person of the Portfolios,
which is an affiliated person of a broker which is an affiliated person of the
Portfolios or an affiliated person of which is an affiliated person of the
Portfolios, American National, or SM&R.
MANAGEMENT OF THE FUND
The Board of Directors of the Fund has the responsibility for the overall
management of the Fund, including general supervision and review of investment
activities. The directors, in turn, elect the officers of the Fund who are
responsible for administering day-to-day operations of the Fund.
OFFICERS AND DIRECTORS OF THE FUND
Information about each of the officers and directors of the Fund 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. 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 Portfolios, as defined in the 1940 Act, are
indicated by an asterisk(*).
27
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE FUND DURING PAST 5 YEARS
- ---------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Ernest S. Barratt, Ph.D.(1) Director Marie B Gale Professor in Psychiatry
Age 74 Professor and Chief, Psychodiagnostic
Department of Psychiatry Service and Cognitive Neuroscopic
and Behavioral Sciences, Laboratory, Department of Psychiatry and
University of Texas Medical Behavioral Sciences, University of Texas
Branch, Medical Branch, a medical school and
Galveston, Texas 77555-0189 hospital system, 1962 to present; Director
of the SM&R Investments, Inc. ("Investment
Accounts"), another investment company
advised by SM&R, 1990 to present.
Michael W. McCroskey* Director and President President, Chief Executive Officer,
Age 56 Director and member of the Executive
Committee of SM&R, June 1994 to present;
President and Director of the Fund, June
1994 to present; President and Director of
SM&R Growth Fund, Inc., SM&R Equity Income
Fund, Inc., and SM&R Balanced Fund, Inc.
(hereinafter referred to as the "SM&R
Equity Funds"), June 1994 to present;
President, Chief Executive Officer, and
Director of SM&R Investments, Inc., June
1994 to present; Executive Vice President,
American National, 1996 to present; Senior
Vice President, American National, 1991 to
1996; Vice President of Standard Life and
Accident Insurance Company, 1988 to
present; Assistant Secretary of American
National Life Insurance Company of Texas,
1986 to present; Vice President,
Investments of American National Property
and Casualty Company, 1994 to present;
Vice President, Investments of American
National General Insurance Company, 1994
to present; Vice President, Pacific
Property and Casualty, 1996 to present,
life, health and accident insurance
subsidiaries of American National; Vice
President, Garden State Life Insurance
Company, 1994 to Present; Director and
president, ANREM corporation, 1977 to
present; President and Director of ANTAC
Corporation, 1995 to Present; Director,
Comprehensive Investment Services, Inc.,
1997 to present.
Allan W. Matthews*(1)(2) Director since 1997 Program Officer, The Moody Foundation (a
Age 34 charitable foundation), April 1991 to
7114 Youpon present; Director of Investments Accounts,
Galveston, Texas 77551 1997 to present.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE FUND DURING PAST 5 YEARS
- ---------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Lea McLeod Matthews*(2) Director Communications Consultant, Texas
Age 37 Association of School Boards, 1999 to
#8 Kern Ramble present; Publications Editor, National
Austin, Texas 78722 Western Life Insurance Co., 1990 to 1999;
Associate in Customer Service Designation
(ACS); Director of Investment Accounts.,
1994 to present; Director of Garden State
Life Insurance Company, 1993 to present;
Director of Kids Exchange of Austin (a
non-profit corporation), 1996 to 1998;
Consultant to Austin Writers League.
Ann McLeod Moody*(2) Director Director of Moody Gardens, Inc., 1994 to
Age 62 present; Director of The Westcap
5 Colony Park Drive Corporation, 1990 to present; Director of
Galveston, Texas 77551 Seal Fleet, Inc., 1972 to 1996; Director
of SM&R Investments, Inc., 1997 to
present.
Edwin K. Nolan (1) Director Investor and Attorney, Law Offices, Edwin
Age 56 K. Nolan, P. C., Canyon Lake, Texas, 1977
1271 Jonas Drive to present; Director/Owner, Canyon Lake
Canyon Lake, Texas 78133 Aviation, Inc. (Aviation Service), Canyon
Lake, Texas, 1986 to present;
Director/Owner, Canyon Lake Airport, Inc.
(Airport), Canyon Lake, Texas, 1985 to
1995; Director, Hancock Mini Mart, Inc.,
1995 to present; Director of Investments
Accounts, 1997 to present.
Robert V. Shattuck, Jr. Director Attorney, Law Offices of Robert V.
Age 58 Shattuck, Jr., Galveston, Texas, 1986 to
1013 23rd Street present; Director of Investments Accounts,
Galveston, Texas 77550 1997 to present.
Jamie G. Williams Director Academic Language Therapist and
Age 53 Educational Consultant, 1974 to present;
3328 Stanford Director of The Learning Therapist
Dallas, Texas 75225 Graduate Certificate Program, 1986 to
1995; Adult Assessment Clinic and
Adolescent Academic Development Programs,
Division of Evening, Summer and Continuing
Studies, Southern Methodist University,
1994 to 1995; Adjunct Instructor in
Department of Psychology, Dedman College,
Southern Methodist University, 1988 to
1995; Director of Investments Accounts,
1997 to present.
Frank P. Williamson Director Retired; Owner of Professional Pharmacy,
Age 67 1964 to 1998; Director of SM&R Investments
301 Barracuda Accounts, 1997 to present.
Galveston, Texas 77550
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE FUND DURING PAST 5 YEARS
- ---------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Gordon D. Dixon Vice President, Director, Senior Vice President, Chief
Age 53 Portfolio Manager of Investment Officer of SM&R and a member of
the Growth, Equity the investment and executive committees of
Income, and Balanced SM&R, 1993 to present; Vice President,
Portfolios Portfolio Manager of the SM&R Growth Fund;
Portfolio Manager of the SM&R Equity
Income Fund, October 1998 to present;
Portfolio Manager of the SM&R Balanced
Fund, October 1998 to present; Vice
President of Stocks for American National,
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.
Emerson V. Unger, CLU Vice President Vice President of SM&R, SM&R Equity Funds
Age 53 since 1983; and Vice President of the
Investment Accounts since 1991.
Brenda T. Koelemay Vice President and Vice President and Treasurer of SM&R, the
Age 45 Treasurer SM&R Equity Funds, and 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 and Vice President and Secretary of SM&R and
Age 52 Secretary the SM&R Equity Funds since 1983; Vice
President and Secretary of the Investment
Accounts since 1991.
Terry E. Frank Vice President and Vice President and Portfolio Manager of
Age 44 Portfolio Manager the Government Bond Fund, Tax Free Fund,
Primary Fund and Money Market Fund and
member of the Fixed Income Investment
Committee of SM&R since 1991; Former
research analyst, Equitable Investment
Services, Des Moines, Iowa; Former
securities analyst, Gibraltar Savings
Association, Houston, Texas; Former Senior
Money Market Trader, American Capital
Asset Management, Houston, Texas.
John S. Maidlow Assistant Portfolio Assistant Portfolio Manager of SM&R
Age 52 Manager of the Money Investments, Inc.'s Primary Fund since
Market Portfolio November 1998; Assistant Portfolio Manager
of SM&R Investments, Inc.'s Money Market
Fund since January 1999; trust officer
with American Industries Trust Companies,
from 1992 to 1996.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE FUND DURING PAST 5 YEARS
- ---------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Andrew R. Duncan Portfolio Manager of Sr. Securities Analyst/Portfolio Manager
Age 28 the Equity Income, and a member of the investment committee
Balanced and of SM&R since 1997.
International Stock
Portfolios
Andre J. Hodlewsky Portfolio Manager of Securities Analyst/Portfolio Manager and
Age 33 the Small-Cap/ Mid-Cap member of the Investment Committee since
Portfolio 1998; Internet web designer at Rockwell,
Milwaukee, Wisconsin.
Edward R. Moore Portfolio Manager of Portfolio Manager of SM&R since May, 2000;
Age the Small-Cap/ Mid-Cap General Partner of Rutledge Partners since
Portfolio 1996.
</TABLE>
- ------------------------
* "Interested persons" as defined by the 1940 Act.
(1) Members of the audit committee.
(2) Mr. Matthews and Ms. Matthews are children of Mrs. Ann Moody. Mrs. Moody is
the wife of Robert L. Moody. (See "Control and Management of SM&R" below.)
Directors of the Fund who are affiliated with SM&R receive no compensation
for attendance at Board or Committee meetings. No officer receives compensation
from the Fund. Officers and directors of the Fund affiliated with SM&R may
receive indirect compensation from the Fund to the extent of underwriting
commissions and investment advisory and service fees paid to SM&R.
By resolution of the Boards of Directors, the Fund pays the fees and
expenses of only those directors who are not officers or employees of SM&R or
the Fund. During the fiscal year ended December 31, 1999, the Fund paid $
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 the Board of Directors or any Committee attended. Each director
receives a fee, allocated among the funds of American National for which he
serves as a director, which consists of an annual retainer component and a
meeting fee component. Set forth below
31
<PAGE>
is information regarding compensation paid or accrued during the fiscal year
ended December 31, 1999 for each director.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT *TOTAL
BENEFITS ESTIMATED COMPENSATION
AGGREGATE ACCRUED AS ANNUAL FROM ALL FUNDS
COMPENSATION PART OF FUND BENEFITS UPON MANAGED BY
DIRECTOR FROM FUND EXPENSES RETIREMENT SM&R
- -------- ------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Ernest S. Barratt, Ph.D........ $ None None $
Allan W. Matthews.............. $ None None $
Lea McLeod Matthews............ $ None None $
Michael W. McCroskey........... -- None None --
Ann McLeod Moody............... $ None None $
Edwin K. Nolan................. $ None None $
Robert V. Shattuck, Jr......... $ None None $
Jamie G. Williams.............. $ None None $
Frank P. Williamson............ $ None None $
</TABLE>
- ---------------------
* Mr. McCroskey serves as a director for five other funds managed by SM&R. All
other directors serve on the board of one other fund managed by SM&R.
32
<PAGE>
POLICY REGARDING PERSONAL INVESTING
The following policies have been made a part of the 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 Portfolios. Any beneficial interest in a security held by a portfolio
manager must be sold at least 24 hours prior to any investment by the
Portfolios. 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 Portfolios 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 Portfolios for the same or related security.
(3) Any beneficial interest in a security issued by the Government or any
Agency of the United States, a State, or any political subdivision
thereof may be traded or held.
(4) Any beneficial interest in a security for which a written approval is
first obtained from the President and Chief Executive Officer may be
traded or held.
Furthermore, portfolio managers are prohibited from acquiring any security
of an initial public offering and must receive prior written approval from
SM&R's Chief Executive Officer before investing in any private placement
securities.
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES
Officers and employees of SM&R other than portfolio managers may trade in
(or otherwise acquire) or hold any security for his own account (or an account
in which he has beneficial interest). However, the trade must not occur within
24 hours of a trade in the Portfolios for the same or related security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 1, 2000, no officer or director of the Fund owned shares of the
Portfolios.
As of April 1, 2000, American National and SM&R owned % and % of the
outstanding shares of the Growth Portfolio; % and % of the outstanding
shares of the Equity Income Portfolio; % and % of the outstanding shares
of the Balanced
33
<PAGE>
Portfolio; and % and % of the outstanding shares of the Money Market
Portfolio, % and % of the Government Bond Portfolio; % and % of the
Small-Cap/ Mid-Cap Portfolio; % and % of the High Yield Bond Portfolio;
and % and % of the International Stock Portfolio, respectively. See
"Control and Management of SM&R" below.
INVESTMENT ADVISORY AND OTHER SERVICES
CONTROL AND MANAGEMENT OF SM&R
SM&R has been the investment adviser, manager and underwriter of the Fund
since the Fund began business in 1990. SM&R acts pursuant to a written agreement
periodically approved by the directors and shareholders of the Fund. SM&R is
also the investment adviser, manager and underwriter of the SM&R Equity Funds
and SM&R Investments, Inc. SM&R's address is 2450 South Shore Boulevard, Suite
400, League City, Texas 77573.
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 April 1, 2000, the Moody Foundation, a charitable foundation
established for charitable and educational purposes, owned approximately 23.7%
of American National's common stock and the Libbie S. Moody Trust, a private
trust, owned approximately 37.6% of such shares. The trustees of the Moody
Foundation are Robert L. Moody, Frances Moody Newman, and Ross R. Moody. Ross R.
Moody is Robert L. Moody's son. Ms. Newman is Robert L. Moody's mother. The
Moody National Bank of Galveston (the "Bank") is trustee of the Libbie S. Moody
Trust. Other trusts for which the Bank serves as trustee own approximately 6.2%
of American National's common stock.
The Bank's controlling stockholder is Moody Bank Holding Company, Inc.
("MBHC"). Moody Bancshares, Inc. ("Bancshares") is the sole shareholder of MBHC.
As of April 1, 2000, 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 49.6% 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 Fund,
SM&R Equity Funds, 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.
34
<PAGE>
The following persons are affiliated with the Fund and SM&R in the specified
capacities:
- Michael W. McCroskey, President and Director of the Fund, is also
President, Chief Executive Officer, Director and a member of the executive
committee of SM&R, and President and Director of the SM&R Equity Funds and
SM&R Investments, Inc.;
- Gordon D. Dixon, Vice President, Portfolio Manager of the Growth,
Balanced, and Equity Income Portfolios, is also 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
SM&R Growth Fund, Inc.; and Portfolio Manager of the SM&R Equity Income
Fund, Inc. and SM&R Balanced Fund, Inc.;
- Emerson V. Unger, Vice President of the Fund, is also Vice President of
SM&R and Vice President of the SM&R Equity Funds and SM&R Investments,
Inc.;
- Teresa E. Axelson, Vice President and Secretary of the Fund, is also Vice
President and Secretary of SM&R, the SM&R Equity Funds, and SM&R
Investments, Inc.; and
- Brenda T. Koelemay, Vice President and Treasurer of the Fund, is also Vice
President and Treasurer of SM&R, the SM&R Equity Funds, and SM&R
Investments, Inc.
INVESTMENT ADVISORY AGREEMENT
Under an Investment Advisory Agreement (an "Advisory Agreement") between the
Fund and SM&R dated February 8, 1991, SM&R acts as investment adviser for and
provides certain administrative services to the Fund.
As investment adviser, SM&R manages the investment and reinvestment of each
Portfolio'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 Portfolio investment programs.
All investments are reviewed quarterly by the Board of Directors to determine
whether or not such investments are within the policies, objectives and
restrictions of each Portfolio.
The Advisory Agreement will continue in effect from year to year only so
long as such continuance is specifically approved at least annually by the Board
of Directors or by vote of a majority of the outstanding voting securities of
the Fund, and, in either case, by the specific approval of a majority of
directors who are not parties to the Advisory Agreement or not "interested"
persons (as defined in the 1940 Act) of any such parties, cast in person at a
meeting called for the purpose of voting on such approval. Absent proposed
changes, it is the policy of management to submit continuation of the Advisory
Agreements annually only to the Fund's Board of Directors for their approval or
disapproval. The Advisory Agreement was most recently approved by the Board of
35
<PAGE>
Directors on February , 1999, and by the shareholders on April 1, 1992. The
Advisory 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 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
Portfolio'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 Portfolio's outstanding shares.
Under the Advisory Agreement, SM&R is paid a monthly advisory fee. The fee
is computed by applying to the average daily net asset value of the Fund each
month one-twelfth (1/12th) of the annual rate of 0.50%. Such monthly fee is
allocated among the Portfolios based on the percentage of each Portfolios'
respective net assets to the total net assets of the Fund.
The average daily net asset value of each Portfolio 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 Portfolio's 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 shares
outstanding. Expenses and fees of each Portfolio, 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 Portfolio 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.
ADVISORY FEES PAID
For the past three fiscal years, SM&R received investment advisory fees from
each Portfolio as follows:
<TABLE>
<CAPTION>
ADVISORY FEES ADVISORY FEES ADVISORY FEES
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Growth Portfolio............. $46,499 $63,214
Equity Income Portfolio...... $40,851 $57,632
Balanced Portfolio........... $24,587 $30,684
Money Market Portfolio....... $13,299 $16,655
</TABLE>
36
<PAGE>
ADMINISTRATIVE SERVICE AGREEMENT
Under an Administrative Service Agreement between the Fund and SM&R dated
February 8, 1991, SM&R provides all non-investment related management,
executive, administrative and operational services to each Portfolio. Pursuant
to the Administrative Service Agreement, SM&R also acts as transfer agent for
the Fund's authorized and issued shares and as dividend disbursing agent.
In its capacity as administrator under the Administrative Service Agreement,
SM&R furnishes and pays for the services of all officers and employees necessary
to perform the executive, administrative, clerical and bookkeeping functions of
the Portfolios. SM&R's duties as administrator include, among other things:
administering the Portfolios' 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 Portfolio.
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 the Administrative Service Agreement, SM&R receives from each
Portfolio 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 (1/12th) of the annual rate of 0.25%. Such monthly fee is
allocated among the Portfolios based on the percentage of each Portfolios'
respective net assets to the total net assets of the Fund. 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 Portfolio as follows:
<TABLE>
<CAPTION>
ADMINISTRATIVE ADMINISTRATIVE ADMINISTRATIVE
SERVICE FEES SERVICE FEES SERVICE FEES
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Growth Portfolio............. $23,249 $31,607
Equity Income Portfolio...... $20,425 $28,816
Balanced Portfolio........... $12,294 $15,342
Money Market Portfolio....... $ 6,650 $ 8,328
</TABLE>
The Government Bond Portfolio, Small-Cap/Mid-Cap Portfolio, High Yield Bond
Portfolio, and International Stock Portfolio did not commence operations until
May 1, 2000.
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<PAGE>
EXPENSES BORNE BY THE PORTFOLIOS
The 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 and 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 for 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 the Fund to pay
(or to reimburse the Fund for) the Fund's regular operating expenses of any
kind, exclusive of interest, taxes, commissions, and other expenses incidental
to portfolio transactions (and, with the prior approval of any state securities
commissioner deemed by the Fund's counsel to be required by law, extraordinary
expenses beyond SM&R's control), but including the advisory fee, in excess of
1.50% per year of the Fund's average daily net assets.
SM&R intends to voluntarily reimburse the Growth Portfolio and the Money
Market Portfolio for expenses in excess of 0.87%; the Balanced Portfolio for
expenses in excess of 0.90% and the Equity Income Portfolio for expenses in
excess of 0.93%, of each of such Portfolio's average daily net assets. Fee
waivers and/or reductions, other than those stated in the Administrative Service
Agreement, may be rescinded by SM&R at any time without notice to investors.
Such reimbursement obligation is more restrictive than required by California,
the only State having an expense reimbursement provision applicable to the Fund.
Such reimbursements, when required, will be made monthly.
For the years ended December 31, 1996, 1997, 1998, and 1999, expense
reimbursements made to each Portfolio were: Growth Portfolio $23,213, $20,044,
$19,150 and $ ; Equity Income Portfolio $10,783, $13,886, $8,529, and
$ ; Balanced Portfolio $22,510, $19,877, $22,488 and $ ; and Money
Market Portfolio $8,646, $9,686, $19,062, and $ , respectively.
The Government Bond Portfolio, Small-Cap/Mid-Cap Portfolio, High Yield Bond
Portfolio, and International Stock Portfolio did not commence operations until
May 1, 2000.
In practice, American National reimburses SM&R for all Portfolio expenses
that SM&R waives or reimburses.
Each daily charge for the fees is divided among each of the Portfolios in
proportion to their net assets on that day.
SM&R has entered into a Service Agreement with American National pursuant to
which American National will furnish certain services and facilities required by
SM&R from time to time for the conduct of its business. Such services will not
include
38
<PAGE>
investment advice or personnel. SM&R will reimburse American National for the
costs of such services.
UNDERWRITER
SM&R serves as the principal underwriter of the Fund's shares and
continuously offers and sells the shares to insurance company separate accounts.
SM&R does not receive any additional compensation for its services as an
underwriter.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
SM&R, which supervises each Portfolio's investments, is responsible for
effecting portfolio transactions through eligible securities brokers and
dealers, subject to the general supervision of the Board of Directors.
Investment decisions are made by an Investment Committee of SM&R, and orders are
placed by persons supervised by that committee.
SM&R is responsible for the selection of brokers and dealers to effect the
transactions and the negotiation of brokerage commissions, if any. Transactions
on a stock exchange in equity securities will be executed primarily through
brokers that will receive a commission paid by the Portfolio. The Money Market
Portfolio, on the other hand, will not normally incur any brokerage commissions.
Fixed income securities, as well as equity securities traded in the
Over-The-Counter market, are generally traded on a "net" basis with dealers
acting as principals for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price that includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. Certain of these securities may also be
purchased directly from an issuer, in which case neither commissions nor
discounts are paid. The Fund may not engage in any transactions in which SM&R or
its affiliates act as principal, including over-the-counter purchases and
negotiated trades in which such a party acts as a principal.
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 Portfolio 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 Portfolio 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 considerations of best price and best execution are 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
39
<PAGE>
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
Portfolios. While SM&R is able to fulfill its obligation to each Portfolio
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 SM&R Equity Funds, SM&R
Investments, Inc., and to American National and its other accounts.
SM&R will authorize each Portfolio 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 Portfolios 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 Portfolio may
give consideration to sales of shares of each Portfolio as a factor in the
selection of brokers and dealers to execute Portfolio transactions. For the
years ended December 31, 1996, 1997, 1998 and 1999, SM&R paid brokerage fees on
the purchase and sale of portfolio securities for the Fund of $11,495, $35,534,
$35,608 and $ , respectively. No brokerage commissions have been paid
during the three most recent fiscal years to: (i) any broker that is an
affiliated person of the Fund or an affiliated person of that person; or (ii)
any broker an affiliated person of which is an affiliated person of the Fund or
SM&R.
The Fund, the SM&R Equity Funds, 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 Fund, the SM&R Equity Funds, 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.
The Fund's Board of Directors has determined that such ability to effect
simultaneous transactions may be in the best interests of each Portfolio. 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 Portfolios,
which in other cases these practices could produce better executions.
40
<PAGE>
FUND SHARES
CAPITAL STOCK
The authorized Capital Stock of the Fund consists of Two Billion
(2,000,000,000) shares, par value $.01 per share. The shares of Capital Stock
are divided into eight portfolios: Growth Portfolio Capital Stock (115,000,000
shares); Money Market Portfolio Capital Stock (1,050,000,000 shares); Balanced
Portfolio Capital Stock (115,000,000 shares); Equity Income Portfolio Capital
Stock (120,000,000 shares), Government Bond Portfolio Capital Stock
( shares), Small-Cap/Mid-Cap Portfolio Capital Stock (
shares), High Yield Bond Portfolio Capital Stock ( shares), and the
International Stock Portfolio Capital Stock ( shares).
Prior to the Fund's offering of any shares to the Separate Accounts, SM&R
provided the Fund with initial capital by purchasing 100,000 shares of each
Portfolio at a purchase price of $1.00 per share. In addition, American National
purchased 1,750,000 shares of each Portfolio at a price of $1.00 per share. Such
shares were acquired by American National in connection with the formation of
the Fund, were acquired for investment and can be disposed of only by
redemption. Both SM&R's and American National's shares will be redeemed only
when permitted by the 1940 Act and when the other assets of the Portfolios are
large enough that such redemption will not have a material adverse effect upon
investment performance. SM&R and American National will vote their shares in the
same manner and in the same proportion as the other shares held in the Separate
Accounts are voted. The Fund will offer all other shares only to the Separate
Accounts.
The assets received by the Fund for the issuance or sale of shares of each
Portfolio and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such Portfolio. They
constitute the underlying assets of each Portfolio, are required to be
segregated on the books of account and are to be charged with the expenses of
such Portfolio. Any general expenses not readily identifiable as belonging to a
particular Portfolio shall be allocated among all Portfolios by or under the
direction of the directors in such manner as the directors determine to be fair
and equitable.
All shares, when issued, will be fully paid and non-assessable, will have no
conversion, exchange, preemptive, or other subscription rights, will be freely
transferable and redeemable, and will have one vote and equal rights to share in
dividends and assets. Cumulative voting is not authorized. 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.
Each share of capital stock represents an interest in the assets of a
particular Portfolio and has no interest in the assets of any other Portfolio.
Shares of a Portfolio are equal with respect to distributions from income and
capital gains, except as described
41
<PAGE>
below. In the event of liquidation, each share of a Portfolio is entitled to an
equal portion of all the assets of that Portfolio after all debts and expenses
have been paid.
VOTING RIGHTS
The voting rights of Contract owners, and limitations on those rights, are
explained in the accompanying prospectuses for the Contracts. American National,
as the owner of the assets in the Separate Accounts, is entitled to vote all of
the shares of the Fund, but it will generally do so in accordance with the
instructions of Contract owners. American National has agreed to vote shares of
the Fund held in the Separate Accounts for which no timely voting instructions
from Contract owners are received, as well as shares it owns, in the same
proportion as those shares for which voting instructions are received. A meeting
may be called by the Board of Directors in their discretion or by Contract
owners holding at least ten (10%) percent of the outstanding shares of any
Portfolio. Contract owners will receive assistance in communicating with other
Contract owners in connection with the election or removal of directors similar
to the provisions contained in Section 16(c) of the 1940 Act. Under certain
circumstances, however, American National may disregard voting instructions
received from Contract owners. For additional information describing how
American National will vote the shares of the Fund, see "Voting Rights" in the
accompanying prospectuses for the Contracts.
PURCHASE, REDEMPTION AND PRICING OF SHARES
PURCHASING AND REDEEMING SHARES
Shares of each Portfolio are sold only to the corresponding subaccount of
the Separate Accounts. Shares are sold and redeemed at their net asset value as
next determined following receipt of a net premium or a surrender request by
American National without the addition of any selling commission or sales load
or redemption charge. The redemption price may be more or less than the
shareholder's cost.
The Portfolios' shares are also sold and redeemed as a result of transfer
requests, loans, loan repayments and similar Separate Account transactions, in
each case without any sales load or commission and at the net asset value per
share computed for the day as of which such Separate Account's transactions are
effected.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined by adding the
value of all Portfolio assets, deducting all Portfolio liabilities and dividing
by the number of outstanding shares of such Portfolio. Expenses and fees of each
Portfolio, 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 Portfolios are 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 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
42
<PAGE>
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 (or their delegate)
on a consistent basis.
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 Portfolio of its securities is not reasonably practicable or
it is not reasonably practicable for a Portfolio 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 Portfolio's security holders.
MONEY MARKET PORTFOLIO
All Money Market Portfolio securities are valued by the basis of the
amortized cost valuation technique. This involves valuing a security at its cost
and, thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
instrument. During periods of declining interest rates, the daily yield on
shares of the Money Market Portfolio may tend to be higher than a like
computation made by funds with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Money Market
Portfolio resulted in a lower aggregate portfolio value on a particular day, a
prospective investor in the Portfolio would be able to obtain a somewhat higher
yield than would result from investment in a fund with identical investments
utilizing solely market values, and existing investors in the Money Market
Portfolio would receive less investment income. The converse would apply in a
period of rising interest rates.
The valuation of the Money Market Portfolio instruments based upon their
amortized cost is subject to the Portfolio's adherence to certain conditions
with respect to its operation. The Portfolio must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase instruments having
remaining maturities of one year or less only, and invest only in securities
determined by the directors to be of high quality with minimal credit risks.
The Money Market Portfolio follows procedures established by the directors
that are designed to stabilize, to the extent reasonably possible, the Money
Market Portfolio price per share as computed for the purpose of sales and
redemptions at $1.00. There can be no assurance that the Money Market Portfolio
will at all times be able to maintain a continuous $1.00 net asset value per
share. Procedures to be followed will include review of the Money Market
Portfolio's holdings by the directors at such intervals as it may deem
appropriate to determine whether the Money Market Portfolio's net asset value
calculated by using available market quotations deviates from $1.00 per share
and, if so, whether such deviation may result in material dilution or is
otherwise unfair to existing shareholders. In the event the directors determine
that such a deviation exists, it must take such corrective action as it regards
as necessary and appropriate, including the
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<PAGE>
sale of portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity, withholding dividends, or
establishing a net asset value per share by using available market quotations.
GROWTH, BALANCED AND EQUITY INCOME PORTFOLIOS
The value of these Portfolios' securities is determined by one or more of
the following methods:
The securities traded on the New York Stock Exchange ("NYSE") or American
Stock Exchange ("ASE") are valued at the closing sale price on that day, or if
there were no sales during the day, at the last previous sale or bid price
reported.
The securities which are not listed on the NYSE or ASE, but are listed on
other national securities exchanges, are valued in a manner similar to that
described in the preceding paragraph, using values reported by the principal
exchange on which the securities are traded, except that the prices are taken at
the time trading closes on the NYSE.
Over-The-Counter securities are valued at the bid prices.
Debt securities having maturities of 60 days or less are valued using the
amortized cost technique. Debt securities with maturities in excess of 60 days
are valued on the basis of prices provided by an independent pricing service or
brokers. Prices provided by the pricing service may be determined without
exclusive reliance on quoted prices, and may reflect appropriate factors such as
yield, type of issue, coupon rate, maturity and seasoning differential.
Securities in corporate short-term notes are valued at cost plus amortized
discount, which approximates market value. If no quotations are available,
securities and all other assets are valued in good faith at fair value, using
the methods determined by the directors on consistent basis.
TAX STATUS
SUBCHAPTER M
Each Portfolio is a separate entity for federal income tax purposes and each
Portfolio has elected to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 (the "Code"). Each Portfolio
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
Portfolio will be required to pay federal income taxes.
In order to qualify as a regulated investment company, each Portfolio must
meet several requirements. These requirements include the following: (1) at
least 90% of the Portfolio's gross income must be derived from dividends,
interest, payments with respect to securities loans, gains from the sale or
disposition of stock, securities or foreign currencies or other income
(including gains from options, futures or forward contracts)
44
<PAGE>
derived in connection with the Portfolio's investment business and (2) at the
close of each quarter of the Portfolio's taxable year, (a) at least 50% of the
value of the Portfolio'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 Portfolio and not more than 10% of the outstanding
voting securities of such issuer) and (b) not more than 25% of the value of the
Portfolio'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 Portfolio controls and which are
determined to be engaged in similar or related trades or businesses.
SECTION 817(h)
Each Portfolio intends to comply with Section 817(h) of the Code and the
regulations issued thereunder. Pursuant to that Section, the only shareholders
of the Fund and its Portfolios will be SM&R, American National, and the Separate
Accounts. The prospectus that describes the variable insurance policies issued
through the Separate Accounts provides additional discussion of the taxation of
the Separate Accounts and of the owner of the variable insurance policy.
In addition, Section 817(h) of the Code and Treasury Department temporary
regulations thereunder impose certain diversification requirements on the
Separate Accounts. These requirements, which are in addition to the
diversification requirements applicable to the Portfolios under Subchapter M and
the 1940 Act, may affect the securities in which the Portfolios may invest. The
consequences of failure to meet the requirements of Section 817(h) could result
in taxation of the insurance company offering the variable insurance policy and
immediate taxation of the owner of the policy to the extent of appreciation on
investment under the policy.
The Secretary of the Treasury is expected to issue additional regulations
that will prescribe the circumstances in which a policyowner's control of the
investments of the Separate Accounts may cause the policyowner, rather than
American National, to be treated as the owner of the assets of the Separate
Accounts.
The Fund may therefore find it necessary to take action to assure that the
variable insurance policies continue to qualify as a variable insurance policy
under federal tax laws. The Fund, for example, may be required to alter the
investment objectives of any Portfolio or substitute the shares of one Portfolio
for those of another. No such change of investment objectives or substitution of
securities will take place without notice to the shareholders of the affected
Portfolio and the approval of a majority of such shareholders and without prior
approval of the SEC, to the extent legally required.
THE PRECEDING IS A BRIEF SUMMARY OF SOME OF THE RELEVANT TAX CONSIDERATIONS.
IT IS NOT INTENDED AS A COMPLETE EXPLANATION OR A SUBSTITUTE FOR CAREFUL TAX
PLANNING AND CONSULTATION WITH INDIVIDUAL TAX ADVISORS.
45
<PAGE>
CUSTODIAN
The cash and securities of the Fund are held by SM&R, 2450 South Shore
Boulevard, Suite 400, League City, Texas 77573, pursuant to a Custodian
Agreement dated August 1, 1995. As custodian, SM&R will hold and administer the
Fund's 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 Fund 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 effective August 1, 1995. Under the sub-custodian agreement, the cash
and securities of the Fund 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
Fund held by it on behalf of SM&R for the Fund.
TRANSFER AGENT AND DIVIDEND PAYING AGENT
SM&R, 2450 South Shore Boulevard, Suite 400, League City, Texas 77573, is
the transfer agent and dividend paying agent for the Fund, the SM&R Equity
Funds, and SM&R Investments, Inc. (See "Administrative Service Agreement"
herein.)
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, is the Fund's independent auditor and performs annual
audits of the Fund's financial statements.
FINANCIAL STATEMENTS
Audited financial statements dated December 31, 1999 are attached as
"Exhibit 1."
PERFORMANCE AND ADVERTISING DATA
A Portfolio'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 Portfolio and market conditions. A shareholder's
investment in a Portfolio is not insured or guaranteed. These factors should be
carefully considered by the investor before making any investment in any
Portfolio.
Quotations of performance may from time to time be used in advertisements,
sales literature, shareholder reports or other communications to shareholders or
prospective investors. Performance information for each Portfolio may be
compared in advertisements, sales literature, shareholder reports or other
communications to the Standard & Poor's 500 Composite Stock Price Index ("S&P
500") and to other investment products
46
<PAGE>
tracked by Lipper Analytical Services, Lehman Brothers or Morningstar. Each
Portfolio's performance may be quoted in advertising in terms of yield or total
return. Total returns, yields and other performance information may be quoted
numerically or in a table, graph or similar illustration for each of the
Portfolios.
Each Portfolio'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. There can be no assurance that the Money Market Portfolio will be
able to maintain a stable net asset value of $1.00 per share.
Total returns and yields quoted for the Portfolios include each Portfolio's
expenses and charges and expenses attributable to the American National Separate
Accounts. Inclusion of the variable universal life and variable annuity separate
account charges have the effect of reducing each Portfolio's performance quoted
for the product. When reviewing performance, you should keep in mind the effect
the inclusion or exclusion of the variable products charges has on performance
quoted when comparing the performance of the Portfolios with other portfolios or
funds.
An investor should keep in mind when reviewing performance that past
performance of a Portfolio is not indicative of future results, but is an
indication of the return to the investor only for the limited historical period.
MONEY MARKET PORTFOLIO--YIELD
The Money Market Portfolio will attempt, consistent with safety of
principal, to achieve the highest possible yield from its investments. The Money
Market Portfolio's yield is its current investment income expressed in
annualized terms. Yield quotations for the Money Market Portfolio will include
an annualized historical yield, carried at least to the nearest hundredth of one
percent, based on a specific seven-calendar-day period. Yield quotations are
calculated by (1) determining the net change (exclusive of capital changes and
income other than investment income) in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from shareholder
accounts, (2) dividing the difference by the value of the account at the
beginning of the base period to get the base period return, then (3) multiplying
the base period return by the quotient obtained by dividing 365 by 7. The
resulting yield figure is carried to the nearest hundredth of one percent.
The Money Market Portfolio's effective yield for a specified
seven-calendar-day period is computed by
(1) determining the net change (exclusive of capital changes) in the value
of a hypothetical pre-existing account having a balance of one share at
the beginning of the period,
(2) subtracting a hypothetical charge reflecting deductions from shareholder
accounts;
47
<PAGE>
(3) dividing the difference by the value of the account at the beginning of
the base period to get the base period return, and then (4) compounding
the base period return by adding 1, raising the sum to a power equal to
365 divided by 7 and subtracting 1 from the result according to the
following formula: EFFECTIVE YIELD = [(BASE PERIOD RETURN +
1)/356/7/]-1. The resulting yield figure is carried to the nearest
hundredth of one percent.
The calculations include (1) the value of additional shares purchased with
dividends declared on the original shares and dividends declared on both the
original shares and any additional shares, and (2) all fees (other than
nonrecurring fees or sales charges) charged to all shareholder accounts, in
proportion to the length of the base period and the Money Market Portfolio's
average account size. The calculations do not reflect any realized gains or
losses from the sale of securities or any unrealized appreciation or
depreciation on portfolio securities. Income other than investment income is
excluded. The yield computation may be of limited use for comparative purposes
as charges at the account level will decrease the yield. The amount or specific
rate of any nonrecurring sales charge not included in the calculation of yield
will be disclosed.
Current and compounded yields fluctuate daily and will vary with factors
such as interest rates, the quality and length of maturities and the type of
investments in the Money Market Portfolio's portfolio. Neither principal nor
interest is insured or guaranteed.
TOTAL RETURN
Standardized total returns quoted in advertising and sales literature
reflect all aspects of a Portfolio's return, including the effect of reinvesting
dividends and capital gain distributions, any change in the Portfolio's net
asset value per share over the period and maximum sales charge, if any,
applicable to purchases of the Portfolio's shares.
Total return is the change in value of an investment in a Portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual 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 Portfolio's performance had been constant over the entire period. Because
average annual returns tend to even out variations in a Portfolio's return,
investors should recognize that such returns are not the same as actual year-by-
year results.
48
<PAGE>
The average annual total returns for the Portfolios for the periods ended
December 31, 1999 are:
<TABLE>
<CAPTION>
SINCE INCEPTION ON
PAST ONE YEAR PAST 5 YEARS FEBRUARY 20, 1990
------------- ------------ ------------------
<S> <C> <C> <C>
Growth Portfolio.................... 18.62% 18.34% 13.43%
Equity Income Portfolio............. 15.85% 16.56% 12.73%
Balanced Portfolio.................. 16.58% 13.84% 10.12%
Money Market Portfolio.............. 4.65% 4.50% 4.36%
</TABLE>
The average annual total return figures for the Portfolios 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
<TABLE>
<S> <C> <C>
Where P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of the 1-, 5-or 10-year periods at the
end of a 1-, 5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions. The ERV assumes complete redemption of the
hypothetical investment at the end of the measuring period.
The ERV assumes the deduction of all nonrecurring charges
deducted at the end of each period.
</TABLE>
Yield and total return figures are based on historical earnings and are not
intended to INDICATE FUTURE PERFORMANCES. A Portfolio'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 Portfolio and
market conditions. A shareholder's investment in a Portfolio is not insured or
guaranteed. These factors should be carefully considered by the investor before
making any investment in any Portfolio.
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American National Investment Accounts, Inc.
We have audited the accompanying statements of assets and liabilities of
American National Investment Accounts, Inc. (comprised of Growth, Equity Income,
Balanced and Money Market portfolios), including the schedule of investments as
of December 31, 1998, the related statements of operations for the year then
ended, the statements of changes in net assets and the financial highlights for
each of the two years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the three years in the period ended December 31, 1996 were audited by other
auditors whose report dated February 7, 1997, issued an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
American National Investment Accounts, Inc. as of December 31, 1998, the results
of its operations, the changes in its net assets and the financial highlights
for each of the periods indicated, in conformity with generally accepted
accounting principles.
Tait, Weller & Baker, CPA
Philadelphia, Pennsylvania
January 29, 1999
50
<PAGE>
PART C OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) See Exhibit 1 to Post-Effective Amendment No. 7 to Form N-1A for a copy of
Registrant's Articles of Incorporation.
(b) See Exhibit 2 to Post-Effective Amendment No. 7 to Form N-1A for a copy of
Registrant's By-Laws.
(c) See Exhibit 4 to Post-Effective Amendment No. 7 to Form N-1A for a specimen
of Registrant's stock certificate.
(d) See Exhibit 5 to Post-Effective Amendment No. 7 to Form N-1A for a copy of
Registrant's Investment Advisory Agreement.
(e) See Exhibit 6a to Post-Effective Amendment No. 7 to Form N-1A for a copy of
Registrant's Fund Participation Agreement with the American National Variable
Annuity Separate Account and Exhibit 6b with the American National Variable Life
Separate Account.
(f) None.
(g) See Exhibit 8a and Exhibit 8b to Post-Effective Amendment No. 7 to Form N-1A
for a copy of Registrant's current Custodian Agreement and Sub-Custodian
Agreement.
(h) None.
(i) Exhibit i to Form N-1A, for the consent and opinion of Registrant's counsel,
Greer, Herz & Adams, L.L.P. will be filed by admendment.
(j) Exhibit j to Form N-1A, for the consent of independent auditor, Tait, Weller
& Baker, CPA, will be filed by admendment.
(k) Not Applicable.
(l) See Exhibit 13 to Post-Effective Amendment No. 7 to Form N-1A for copies of
the stock purchase letters.
(m) None.
(n) Financial Data Schedules will be filed by admendment.
(o) None.
(p) Control List will be filed by admendment.
(q) See Exhibit 17 to Post-Effective Amendment No. 9 to Form N-1A, for a revised
Power of Attorney.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
All persons under common control with the Registrant are shown on the list as
Exhibit (p), which will be filed by Amendment.
ITEM 25. INDEMNIFICATION.
The 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 the Registrant's By-Laws, a copy of which is attached as Exhibit
2 to Post-Effective Amendment No. 7 to Form N-1A.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question
C-1
<PAGE>
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Securities Management and Research, Inc. ("SM&R") serves as investment adviser
to Registrant, the American National Growth Fund, Inc., the American National
Income Fund, Inc., and the Triflex Fund, Inc., (collectively herein referred to
as the "American National Funds Group") and the SM&R Capital Funds, Inc. See
"Investment Adviser" in Part A and "Investment Advisory and Other Services" in
Part B.
ROBERT A. FRUEND, C.L.U.
Director of SM&R, 2450 South Shore Boulevard, Suite 400, League City,
Texas; Executive Vice President and Director of Ordinary Agencies of American
National Insurance Company; Vice President and Director of American National
Life Insurance Company of Texas, all 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, Springfield, Missouri.
R. EUGENE LUCAS
Director and Member of the Executive Committee of SM&R, 2450 South
Shore Boulevard, Suite 400, League City, Texas; Director of American National
Insurance Company; Director of ANREM Corporation, both located at One Moody
Plaza, Galveston, Texas; President and Director of Gal-Tex Hotel Corporation;
Gal-Tenn Hotel Corporation, both located at 504 Moody National Bank Tower,
Galveston, Texas.
RONALD J. WELCH
Director of SM&R, 2450 South Shore Boulevard, Suite 400, League City,
Texas; Executive Vice President and Chief Actuary of American National Insurance
Company; 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,
2450 South Shore Boulevard, Suite 500, League City, Texas; 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, Inc., all located at 1949 East
Sunshine Street, Springfield, Missouri.
G. RICHARD FERDINANDSTEN
Director and Member of Executive Committee of SM&R, 2450 South Shore
Boulevard, Suite 400, League City, Texas; Director, Senior Vice President and
Chief Operating Officer, American National Insurance Company; Director, Chairman
of the Board, President and Chief Executive Officer, American National Life
Insurance Company of Texas, all located at One Moody Plaza, Galveston, Texas;
Director, Comprehensive Investment Services, 2450 South Shore Boulevard, Suite
400, League City, Texas; Director and Vice Chairman of the Board, American
National Property and Casualty; Director and Vice Chairman of the Board, Pacific
Property & Casualty, Inc.; Underwriter, American National Lloyds Insurance
Company, all located at 1949 East Sunshine, Springfield, Missouri; Director and
Chairman of the Board, Standard Life and Accident Insurance Company, 2450 South
Shore Boulevard, Suite 500, League City, Texas; Director, Garden State Life
Insurance Company, 2450 South Shore Boulevard, League City, Texas.
MICHAEL W. MCCROSKEY
Director, President, Chief Executive Officer and member of the Executive
Committee of SM&R; President and Director of the Fund; President and Director of
the SM&R Growth Fund, Inc., SM&R Income Fund, Inc., and SM&R Balanced Fund, Inc.
(hereinafter referred to as the "SM&R Equity Funds"); President and Director of
the SM&R Investments, Inc. all located at 2450 South Shore Boulevard, Suite 400,
League City, Texas; Executive Vice President, American National; Assistant
Secretary of American National Life Insurance Company of Texas; President and
Director, ANREM Corporation; Director and President, ANTAC Corporation;
Director, all located at One Moody Plaza, Galveston, Texas; Comprehensive
Investment Services 2450 South Shore Boulevard, Suite 400, League City, Texas;
Vice President of Standard Life and Accident Insurance Company, 2450 South Shore
Boulevard, Suite 500, League City, Texas; Vice President, Garden State Life
Insurance Company, 2450 South Shore Boulevard, League City, 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, Springfield, Missouri.
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 American National Investment Accounts-Growth, Equity Income and Balanced
Portfolios, SM&R Growth Fund, Inc., SM&R Income Fund, Inc., and SM&R Balanced
Fund, Inc., all located at 2450 South Shore Boulevard, Suite 400, League City,
Texas; Vice President, Stocks of American National Insurance Company, One Moody
C-2
<PAGE>
Plaza, Galveston, Texas; Director and President, Comprehensive Investment
Services, 2450 South Shore Boulevard, Suite 400, League City, Texas; Vice
President, Investments for Garden State Life Insurance Company, 2450 South Shore
Boulevard, Suite 301, League City, Texas.
K. DAVID WHEELER
Senior Vice President, Institutional Sales and Private Client Services
of SM&R, 2450 South Shore Boulevard, Suite 400, League City, Texas; Senior
Institutional Consultant, Bank South, Atlanta, Georgia.
EMERSON V. UNGER, C.L.U.
Vice President of SM&R; Vice President of the SM&R Equity Funds and the
SM&R Investments, Inc., 2450 South Shore Boulevard, Suite 400, League City,
Texas.
BRENDA T. KOELEMAY
Vice President and Treasurer of SM&R; Vice President and Treasurer of
the SM&R Equity Funds and the SM&R Investments, Inc.; Treasurer and director,
Comprehensive Investment Services, 2450 South Shore Boulevard, Suite 400, League
City, Texas.
TERESA E. AXELSON
Vice President and Secretary of SM&R, the SM&R Equity Funds and the
SM&R Investments, Inc., 2450 South Shore Boulevard, Suite 400, League City,
Texas.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Not applicable.
(b) Not applicable.
(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 the Registrant is a
party not discussed under Part A or Part B of this Registration Statement.
ITEM 30. UNDERTAKINGS.
The Fund undertakes to furnish each person to whom a prospectus is delivered a
copy of its latest Annual Report to shareholders, without charge, upon request.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, AMERICAN NATIONAL INVESTMENT ACCOUNTS,
INC., certifies that it meets all of the requirements for effectiveness of this
POST-EFFECTIVE AMENDMENT NO. 12 to Registration Statement, pursuant to Rule
485(a) under the Securities Act of 1933 and has duly caused this POST-EFFECTIVE
AMENDMENT NO. 12 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 31st day of January, 2000.
AMERICAN NATIONAL INVESTMENT ACCOUNTS, 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. 12 to the registration statement has been signed below by the
following persons in the capacities and on the dates indicated:
<TABLE>
<S><C>
- ------------------------------------------------------- -----------------------------------------------------
PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER PRINCIPAL ACCOUNTING OFFICER:
- ------------------------------------------------------- -----------------------------------------------------
/s/ MICHAEL W. McCROSKEY /s/ BRENDA T. KOELEMAY
- ------------------------------------------------------- -----------------------------------------------------
Michael W. McCroskey, President Brenda T. Koelemay, Treasurer
Date: January 31, 2000 Date: January 31, 2000
- ------------------------------------------------------- -----------------------------------------------------
DIRECTORS
- ------------------------------------------------------- -----------------------------------------------------
/s/ ERNEST S. BARRATT, PH.D. /s/ EDWIN K. NOLAN
*Ernest S. Barratt, Ph.D. *Edwin K. Nolan
By: Michael W. McCroskey By: Michael W. McCroskey
Date: January 31, 2000 Date: January 31, 2000
- ------------------------------------------------------- -----------------------------------------------------
/s/ ALLAN W. MATTHEWS /s/ ROBERT B. SHATTUCK, JR.
*Allan W. Matthews *Robert V. Shattuck, Jr.
By: Michael W. McCroskey By: Michael W. McCroskey
Date: January 31, 2000 Date: January 31, 2000
- ------------------------------------------------------- -----------------------------------------------------
/s/ LEA MCLEOD MATTHEWS /s/ JAMIE G. WILLIAMS
*Lea McLeod Matthews *Jamie G. Williams
By: Michael W. McCroskey By: Michael W. McCroskey
Date: January 31, 2000 Date: January 31, 2000
- ------------------------------------------------------- -----------------------------------------------------
/s/ MICHAEL W. MCCROSKEY /s/ FRANK P. WILLIAMSON
*Michael W. McCroskey *Frank P. Williamson
By: Michael W. McCroskey By: Michael W. McCroskey
Date: January 31, 2000 Date: January 31, 2000
- ------------------------------------------------------- -----------------------------------------------------
/s/ ANN MCLEOD MOODY
*Ann McLeod Moody
By: Michael W. McCroskey
Date: January 31, 2000
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
*Pursuant to a Power of Attorney executed by the Board of Directors dated
December 4, 1997, attached as Exhibit 99.B17 to Post-Effective Amendment No. 9.
C-4
<PAGE>
EXHIBIT INDEX
TO
POST-EFFECTIVE AMENDMENT NO. 12
UNDER THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 12
UNDER THE INVESTMENT COMPANY ACT OF 1940
FOR
AMERICAN NATIONAL INVESTMENT ACCOUNTS, INC.
("Registrant")
PART C ITEM AND CAPTION
None being filed.
C-5
