<PAGE>
PORTFOLIO MANAGER'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES
Over the past twelve months, we have experienced a number of global events
that have had an impact on our domestic bond market. In March 1997, the Federal
Reserve Board increased the Federal Funds rate (the rate on overnight loans
among banks) to 5.5%. Unemployment had fallen to a twenty year low and certain
commodity prices such as oil were inching up to levels not visited for ten
years. Then, the first major global event occurred in Southeast Asia when,
Thailand devalued its currency. Soon, many other countries began to develop
economic crises as foreign capital was taken out of these markets and invested
in U.S. securities such as stocks and bonds. The stock markets soared and
interest rates on the 30-year U.S. Treasury bond declined from 6.8% to a low of
5.4% over the last year. While the Federal Reserve remained resolute in keeping
the Federal Funds rate at 5.5% (with a bias towards tightening), events outside
of the United States continued to worsen. Investors turned a nervous eye toward
Japan whose economy had been deteriorating for years. Japan's economic problems
were exacerbated by the sharp reduction in exports to the now troubled Southeast
Asian countries. More recently, Russian economic woes have taken center stage on
the list of troubled economies and currencies. Russian officials announced a
proposal to swap about 250 billion rubles (or $32 billion) of short-term
government debt for bonds with longer maturities. By stretching out maturities
and cutting the value of total payments to investors, the Russian government
hopes to ease a cash crisis that forced it to seek emergency loans from the
International Monetary Fund.
As all of these events occurred, investors looked to America as a "safe
haven" for investments. The equity markets marched higher until mid-summer of
1998. Then, investors began to worry that foreign economic woes would drag down
the domestic economy. The major stock markets experienced corrections as
investors took funds from stocks and invested in U.S. Treasury securities. The
yield curve (the difference between short-term rates such as Treasury bills and
long-term rates such as the 30-year Treasury bond) flattened and then inverted,
with long-term interest rates lower than short-term rates. The inverted yield
curve suggests that the bond market anticipates a cut in the Federal Funds rate
as the Federal Reserve's concerns turn from fighting inflation to keeping the
domestic economy from sliding into a recession.
The American National Government Income Fund has provided investors with a
consistent dividend and a steadily increasing share price. We continue to
monitor domestic and global events that will enable us to meet our shareholders'
need for a fairly constant dividend as well as a relatively stable share price.
Because of the strong demand for Treasury securities, spreads on all other types
of fixed income investments (for example, the difference between the yield on a
corporate or agency bond relative to the yield on its respective Treasury) have
widened to levels not seen in a decade. We have taken this opportunity to invest
some of the Fund's assets in high-quality, non-callable corporate securities
with ten-year maturities. Bonds with maturities beyond ten years have had the
best price movement as investors are increasingly factoring in a cut in the
Federal Funds rate. The intermediate sector has lagged in performance and now
stands to be the biggest beneficiary of lower short-term rates. With interest
rates at historic low nominal levels, investors will be seeking investments with
the highest yields possible without having to sacrifice credit quality. The
continued, albeit muted, growth in the U. S. economy should give investors
confidence to invest in good quality corporate securities. Given this economic
backdrop, we feel confident that the recent transactions in the American
National Government Income Fund will buttress our shareholder's long-term
investment goals.
1
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN GOVERNMENT INCOME FUND
SERIES AND LEHMAN BROTHERS GOVERNMENT/MORTGAGE-BACKED SECURITIES INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GOVERNMENT INCOME FUND SERIES
<S> <C>
31-Mar-92 $10,000
31-Aug-92 $10,310
31-Aug-93 $11,365
31-Aug-94 $11,091
31-Aug-95 $12,405
31-Aug-96 $12,731
31-Aug-97 $13,924
31-Aug-98 $15,081
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
<CAPTION>
LEHMAN BROTHERS GOVERNMENT/MORTGAGE-BACKED SECURITIES INDEX
<S> <C>
31-Mar-92 $10,000
31-Aug-92 $10,711
31-Aug-93 $11,832
31-Aug-94 $11,670
31-Aug-95 $12,944
31-Aug-96 $13,483
31-Aug-97 $14,798
31-Aug-98 $16,409
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
</TABLE>
The Government Income Fund Series' performance figures are historical and
reflect reinvestment of all dividends and capital gains distributions, changes
in net asset value and consider the effect of the Fund's 4.50% maximum sales
charge. The Fund's operations began March 16, 1992. The Government Income Fund
Series' average annual total return was 3.44% for the twelve months ended August
31, 1998, 4.85% for the five years ended August 31, 1998 and 6.56% from
inception to August 31, 1998.
2
<PAGE>
PORTFOLIO MANAGER' DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
AMERICAN NATIONAL PRIMARY FUND SERIES
While yields on Treasury securities with maturities beyond one year have
declined an average of 100 basis points (or 1.0%), short-term rates have
remained fairly constant. Over the past twelve months, the yield on the 90-day
Treasury bill has ranged from 5.2% to 4.8% and the 1-year Treasury bill has
declined from 5.4% to 4.9%. A stable, but growing U.S. economy with relatively
low inflation has enabled the Federal Reserve to maintain the Federal Funds rate
(the rate banks charge each other for over-night loans) at 5.5% since March
1997. While economic concerns in Asia, Russia and Latin America have caused
investors to seek the safety of Treasury securities, these investments have
benefited only those securities with maturities beyond one year. This phenomenon
is due in large part to a conservative Federal Reserve policy that continues its
fight against possible inflation by keeping short-term interest rates high.
Concerns about a possible rise in inflation as a result of a robust domestic
economy rather than concerns about economies outside the U.S. borders have
driven the Federal Reserve's policy over the past twelve months.
The American National Primary Fund Series maintains a strategy of utilizing
short-term commercial paper. We continue to monitor domestic and international
economic and political developments in determining our investment strategy.
However, we continue our policy of managing a conservative fund.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
PRIMARY FUND SERIES AND LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PRIMARY SERIES-COMPRISED OF LEHMAN GOVERNMENT/CORPORATE
COMMERCIAL PAPER WITH INDEX-COMPRISED OF CORPORATE
MATURITIES UNDER 60 NOTES AND BONDS AND AGENCIES
DAYS AND AGENCIES WITH WITH ONE TO THREE YEAR
MATURITIES OF LESS THAN MATURITIES.
ONE YEAR TO THREE YEARS.
<S> <C> <C>
31-Mar-92 $10,000 $10,000
31-Aug-92 $10,150 $10,495
31-Aug-93 $10,413 $11,094
31-Aug-94 $10,716 $11,292
31-Aug-95 $11,252 $12,140
31-Aug-96 $11,822 $12,781
31-Aug-97 $12,410 $13,688
31-Aug-98 $13,050 $14,681
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
</TABLE>
The Primary Fund Series' performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions and changes in net
asset value. The Fund's operations began March 16, 1992. The Primary Fund
Series' average annual total return, which reflects reinvestment of all
dividends and capital gain distributions, as well as changes in net asset value,
was 5.15% for the 12 months ended August 31, 1998, 4.62% for the five years
ended August 31, 1998 and 4.20% from inception to August 31, 1998.
3
<PAGE>
PORTFOLIO MANAGER' DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
AMERICAN NATIONAL TAX FREE FUND SERIES
Municipal bond yields have declined over the past twelve months, providing
investors with a total return of 8.65% as measured by the Lehman Brothers
Municipal Bond Index, and the American National Tax Free Series kept pace with
the municipal market's rate of return. Most investors, however, sought the
higher taxable yields and greater relative safety of the U.S. Treasury market.
In fact, while the yield on the 30-year U.S. Treasury Bond fell by 1.2% (from
6.6% to 5.4%), yields on 30-year AAA-rated municipal bonds only declined .4%,
from 5.3% to 4.9%.
Over the course of the past year, we continued in our strategy of remaining
fully invested in the American National Tax Free Series portfolio in order to
maximize tax free income for our shareholders. We also continued to extend the
weighted average maturity and duration while picking up yield. The municipal
yield curve remains upward sloping with yields on municipal securities maturing
in one year yielding only 3.4% and 30-year bonds yielding 4.8%. Investors,
therefore, gain 1.4% of yield by extending maturities. This compares favorably
to the "flat" yield curve of the U.S. Treasury market where one-year securities
yield 4.9% and 30-year bonds yield 5.3%, a meager difference of .4%. Yields on
long-term municipal bonds are currently 92% of comparable Treasury securities
compared to 80% of comparable Treasury securities in August 1997.
We are currently concentrating investments in high quality, general
obligation and essential service bonds. On a risk/return basis, these issues are
providing investors with the greatest value. Investments with lower credit
ratings or those outside of these sectors are not providing investors with
commensurate additional yield to compensate for the additional risk.
We continue to carefully monitor global economic and political events.
Economic or political turmoil affects interest rates. Municipal securities have
not benefited as extensively as U.S. Treasury securities, but long-term
securities have had a nice gain over the last twelve months as interest rates
have declined. A possible easing of the Federal Funds rate (the rate charged for
borrowing between banks) by the Federal Reserve as well as a decline in
borrowing needs by municipalities bodes well for the tax free market. Therefore,
we feel confident that with the continued fine tuning we are doing to the
American National Tax Free Series portfolio, we are well positioned to meet our
shareholders' long-term investment needs of consistent, tax-free income provided
from a portfolio of high quality securities.
4
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
TAX FREE FUND SERIES AND LEHMAN BROTHERS MUNICIPAL INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TAX FREE FUND SERIES LEHMAN BROTHERS MUNICIPAL INDEX
<S> <C> <C>
9-Sep-93 $10,000 $10,000
31-Aug-94 $9,411 $9,957
31-Aug-95 $10,272 $10,840
31-Aug-96 $10,805 $11,408
31-Aug-97 $11,735 $12,464
31-Aug-98 $12,742 $13,542
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
</TABLE>
The Tax Free Fund Series' performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions, changes in net
asset value and consider the effect of the Fund's 4.50% maximum sales charge.
The Fund's operations began September 9, 1993. The Tax Free Fund Series' average
annual total return was 3.69% for the twelve months ended August 31, 1998 and
4.99% from inception to August 31, 1998.
5
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1998
- --------------------------------------------------------------------------------
GOVERNMENT INCOME FUND SERIES
<TABLE>
<CAPTION>
INTEREST/
STATED
COMMERCIAL PAPER MATURITY DATE RATE (%) FACE AMOUNT VALUE
<S> <C> <C> <C> <C>
ELECTRIC POWER--1.38%
Commonwealth Edison Company 09/04/98 5.75 $ 140,000 $ 139,933
Indiana Michigan Power Company 09/02/98 5.82 192,000 191,969
-------------
331,902
UTILITY-ELECTRIC--0.94%
Illinois Power Company 09/03/98 5.67 226,000 225,929
-------------
TOTAL COMMERCIAL PAPER--2.32%
(Cost $557,831) 557,831
CORPORATE BONDS
AUTO & TRUCKS MANUFACTURERS--4.20%
General Motors Corporation 05/01/08 6.375 1,000,000 1,006,261
BANKS--4.20%
Chase Manhattan Corporation 02/15/08 6.375 1,000,000 1,006,190
FINANCIAL SERVICES--13.43%
Bear Stearns Companies, Incorporated 03/30/03 6.20 175,000 177,530
CNA Financial Corporation 01/15/08 6.45 1,000,000 992,119
Household Finance Corporation 06/17/08 6.40 1,000,000 1,006,383
Morgan Stanley, Dean Witter & Discover 03/01/07 6.875 1,000,000 1,044,059
-------------
3,220,091
MEDICAL SERVICES--4.37%
Aetna Services, Incorporated 08/15/36 6.97 1,000,000 1,048,404
-------------
TOTAL CORPORATE BONDS--26.20%
(Cost $6,273,766) 6,280,946
</TABLE>
6
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1998
- --------------------------------------------------------------------------------
GOVERNMENT INCOME FUND SERIES, CONTINUED
<TABLE>
<CAPTION>
INTEREST/
U.S. GOVERNMENT AGENCY AND STATED
U.S. GOVERNMENT SECURITIES MATURITY DATE RATE (%) FACE AMOUNT VALUE
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY SECURITIES--68.73%
Federal Home Loan Bank 08/05/04 7.38 $ 1,000,000 $ 1,099,001
Federal Home Loan Bank 08/19/04 7.57 1,000,000 1,109,176
Federal Home Loan Bank 10/25/05 6.23 150,000 155,787
Federal Home Loan Mortgage Corporation 07/27/04 7.81 1,000,000 1,021,225
Federal Home Loan Mortgage Corporation 08/01/05 6.75 165,000 176,255
Federal Home Loan Mortgage Corporation 09/15/06 7.00 277,628 282,646
Federal Home Loan Mortgage Corporation 11/15/06 7.00 1,500,000 1,538,632
Federal Home Loan Mortgage Corporation 03/15/07 7.00 1,000,000 1,032,067
Federal Home Loan Mortgage Corporation 09/15/07 7.00 1,000,000 1,040,343
Federal Home Loan Mortgage Corporation 08/15/08 7.00 1,600,000 1,647,437
Federal National Mortgage Association 02/11/02 7.50 1,585,000 1,692,350
Federal National Mortgage Association 04/22/02 7.55 200,000 214,456
Federal National Mortgage Association 09/12/05 6.55 100,000 105,678
Federal National Mortgage Association 06/07/06 7.85 1,000,000 1,004,699
Federal National Mortgage Association 02/02/07 7.50 1,500,000 1,533,713
Federal National Mortgage Association 02/07/07 7.49 250,000 256,144
Federal National Mortgage Association 04/10/07 7.70 300,000 309,479
Federal National Mortgage Association 07/25/07 7.00 1,000,000 1,032,069
Federal National Mortgage Association 11/18/15 6.35 909,311 920,175
Tennessee Valley Authority 12/15/17 6.25 300,000 310,947
-------------
16,482,279
U.S. GOVERNMENT SECURITIES--2.79%
U.S. Treasury Bonds 02/15/26 6.00 500,000 540,313
U.S. Treasury Bonds 08/15/28 5.50 125,000 128,750
-------------
669,063
-------------
TOTAL U.S. GOVERNMENT AGENCY and U.S. GOVERNMENT SECURITIES--71.52%
(Cost $16,317,915) 17,151,342
-------------
TOTAL INVESTMENTS--100.04%
(Cost $23,149,512) 23,990,119
LIABILITIES IN EXCESS OF OTHER ASSETS--(0.04%) (8,584)
-------------
TOTAL NET ASSETS--100.00% $ 23,981,535
-------------
-------------
</TABLE>
See notes to financial statements.
7
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1998
- --------------------------------------------------------------------------------
PRIMARY FUND SERIES
<TABLE>
<CAPTION>
INTEREST/
STATED
COMMERCIAL PAPER MATURITY DATE RATE (%) FACE AMOUNT VALUE
<S> <C> <C> <C> <C>
AEROSPACE--3.13%
Lockheed Martin Corporation 09/28/98 5.68 $ 1,086,000 $ 1,081,373
APPAREL--4.92%
Levi Strauss & Company 09/09/98 5.72 1,705,000 1,702,819
AUTO PARTS MANUFACTURES--6.88%
Echlin, Incorporated 09/24/98 5.72 1,386,000 1,380,929
ITT Industries 09/18/98 5.70 1,000,000 997,302
-------------
2,378,231
CHEMICALS--7.48%
Engelhard Corporation 09/10/98 5.64 1,549,000 1,546,807
Hercules Incorporated 09/01/98 5.71 1,041,000 1,041,000
-------------
2,587,807
CONTAINERS--4.15%
Crown Cork & Seal Company, Incorporated 09/15/98 5.70 1,437,000 1,433,801
DIVERSIFIED--3.02%
Textron, Incorporated 09/08/98 5.70 1,047,000 1,045,834
FINANCIAL SERVICES--6.57%
Edison Funding Company 09/16/98 5.69 1,186,000 1,183,177
MCN Investment Corporation 09/14/98 5.78 1,091,000 1,088,716
-------------
2,271,893
FOODS--4.71%
ConAgra, Incorporated 09/25/98 5.65 1,636,000 1,629,832
FURNITURE/APPLIANCES--4.73%
Maytag Corporation 09/21/98 5.68 1,640,000 1,634,808
MEDICAL SERVICES--1.96%
Humana, Incorporated 10/06/98 5.70 682,000 678,218
NATURAL GAS TRANSMISSION--6.26%
Enron Corporation 09/03/98 5.62 1,130,000 1,129,645
Sonat Incorporated 09/22/98 5.68 1,036,000 1,032,559
-------------
2,162,204
OIL DOMESTIC--7.63%
Occidental Petroleum Corporation 10/02/98 5.71 1,622,000 1,614,008
Ultramar Diamond Shamrock 09/11/98 5.68 1,026,000 1,024,376
-------------
2,638,384
PAPER/FOREST PRODUCTS--4.15%
Potlatch Corporation 09/23/98 5.70 1,439,000 1,433,978
RAILROADS--2.94%
CSX Corporation 09/18/98 5.65 1,020,000 1,017,273
RETAIL-SPECIALTY--3.92%
Tandy Corporation 09/29/98 5.67 1,361,000 1,354,980
</TABLE>
8
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1998
- --------------------------------------------------------------------------------
PRIMARY FUND SERIES, CONTINUED
<TABLE>
<CAPTION>
INTEREST/
STATED
COMMERCIAL PAPER MATURITY DATE RATE (%) FACE AMOUNT VALUE
<S> <C> <C> <C> <C>
UTILITY-ELECTRIC HOLDING--12.12%
Central & South West Corporation 10/06/98 5.71 $ 946,000 $ 940,742
Cinergy Corporation 10/05/98 5.71 1,694,000 1,684,849
Hawaiian Electric Industries Incorporated 09/04/98 5.70 1,565,000 1,564,253
-------------
4,189,844
UTILITY-ELECTRIC/MISCELLANEOUS--15.47%
Entech Incorporated 09/17/98 5.72 1,347,000 1,343,565
Hawaiian Electric Company 09/02/98 5.70 1,393,000 1,392,778
Illinois Power Fuel Company 10/07/98 5.72 1,027,000 1,021,121
Texas Utilities Electric Company 10/01/98 5.72 1,600,000 1,592,358
-------------
5,349,822
-------------
TOTAL INVESTMENTS--100.04%
(Cost $34,591,101) 34,591,101
LIABILITIES IN EXCESS OF OTHER ASSETS--(0.04%) (14,219)
-------------
TOTAL NET ASSETS--100.00% $ 34,576,882
-------------
-------------
</TABLE>
See notes to financial statements.
9
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1998
- --------------------------------------------------------------------------------
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
FACE
MUNICIPAL BONDS RATING(a) AMOUNT VALUE
<S> <C> <C> <C>
CALIFORNIA--5.21%
California State General Obligation Bonds Unlimited, 5.250%,
06/01/11 A1/A+ $ 100,000 $ 105,697
Sacramento, California Municipal Utility District Electric
Revenue Bonds, Series I, 5.750%, 01/01/15 Aaa/AAA 200,000 213,992
San Francisco, California City and County Sewer Revenue
Refunding Bonds, 5.375%, 10/01/16 Aaa/AAA 250,000 256,700
----------
576,389
----------
FLORIDA--8.82%
Dade County, Florida Water & Sewer System Revenue Bonds,
5.375%, 10/01/16 Aaa/AAA 400,000 421,332
Orlando, Florida Utilities Commonwealth Water & Electric
Revenue Bonds, 5.125%, 10/01/19 Aa1/AA 400,000 400,956
State of Florida- State Board of Education, Public Education
Capital Outlay Bonds, 1992 Series E, 5.750%, 06/01/19 Aa2/AA+ 145,000 153,107
----------
975,395
----------
GEORGIA--1.67%
Municipal Electric Authority of Georgia-Power Revenue Bonds,
Series AA, 5.400%, 01/01/07 A3/A 175,000 184,571
----------
ILLINOIS--9.45%
Chicago, Illinois-General Obligation Bonds Unlimited,
5.125%, 01/01/25 Aaa/AAA 100,000 100,325
Illinois Health Facilities Authority-Revenue Bonds, Series
A, (Northwestern Memorial Hospital), 6.000%, 08/15/24 Aa2/AA 100,000 107,820
Illinois Health Facilities Authority-Revenue Bonds, Series
1994A, (Northwestern Memorial Hospital), 6.100%, 08/15/14 Aa2/AA 200,000 219,398
Illinois State Toll Highway Authority-Highway Priority
Revenue Bonds, Series A-FGIC, 5.750%, 01/01/17 Aaa/AAA 175,000 183,197
Regional Transportation Authority of Illinois Revenue Bonds,
Refunding MBIA, 5.500%, 06/01/18 Aaa/AAA 200,000 208,730
State of Illinois- Build Illinois Bonds, Sales Tax Revenue
Bonds, Series V, 6.375%, 06/15/17 Aa2/AAA 200,000 225,170
----------
1,044,640
----------
LOUISIANA--3.58%
Louisiana Public Facilities Authority Hospital Revenue
Bonds, Series C, 5.00%, 07/01/19 Aaa/AAA 400,000 395,888
----------
MASSACHUSETTS--4.25%
Massachusetts State Water Revenues Authority, General
Purpose - Series A, 5.500%, 11/01/21 Aaa/AAA 450,000 470,066
----------
NEW MEXICO--0.95%
Central Consolidated School District No. 22 San Juan County,
New Mexico General Obligation School Building Bonds,
5.300%, 08/15/09 Aaa/AAA 100,000 105,181
----------
</TABLE>
10
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1998
- --------------------------------------------------------------------------------
TAX FREE FUND SERIES, CONTINUED
<TABLE>
<CAPTION>
FACE
MUNICIPAL BONDS RATING(a) AMOUNT VALUE
NEW YORK--5.92%
<S> <C> <C> <C>
New York City, New York-General Obligation Bonds Unlimited,
Series J, 5.000%, 08/01/18 A3/A- $ 200,000 $ 196,772
New York City, New York- General Obligation Bonds Unlimited,
Series J, 5.000%, 02/15/07 Aaa/AAA 100,000 104,844
Triborough Bridge & Tunnel Authority, New York, Revenue
Bonds, General Purpose -Series B, 5.200%, 01/01/27 Aa3/A+ 350,000 352,478
----------
654,094
----------
NORTH CAROLINA--1.96%
City of Charlotte, North Carolina-General Obligation Public
Improvement Bonds, Series 1994, 5.700%, 02/01/08 Aaa/AAA 100,000 109,919
North Carolina Eastern Municipal Power Agency- Power System
Revenue Bonds, Refunding Series 1993 B, 6.250%, 01/01/12 Baa1/BBB 100,000 106,302
----------
216,221
----------
OHIO--3.87%
Franklin County, Ohio- General Obligation Bonds Limited,
5.100%, 12/01/08 Aaa/AAA 300,000 321,450
Franklin County, Ohio- General Obligation Bonds Limited,
5.300%, 12/01/11 Aaa/AAA 100,000 106,709
----------
428,159
----------
OKLAHOMA--1.18%
Oklahoma Housing Finance Agency-Single Family Mortgage
Revenue Bonds (Homeownership Loan Program), 1994 Series
A-1, 6.250%, 09/01/07 (b) Aaa/NR 125,000 130,427
----------
OREGON--2.03%
City of Portland, Oregon- Sewer System Revenue Bonds, 1994
Series A, 6.250%, 06/01/15 A1/A+ 200,000 224,598
----------
PENNSYLVANIA--0.95%
Pennsylvania State General Obligation Bonds Unlimited,
Refunding & Projects-First Series, 5.000%, 04/15/06 Aa3/AA- 100,000 104,648
----------
PUERTO RICO--2.21%
Commonwealth of Puerto Rico- Public Improvement Refunding
Bonds, Series 1992A, General Obligation Bonds, 6.000%,
07/01/14 Baa1/A 100,000 106,996
Puerto Rico Electric Power Authority-Power Revenue Bonds,
Series R, 6.250%, 07/01/17 Baa1/BBB+ 125,000 137,162
----------
244,158
----------
RHODE ISLAND--0.96%
Rhode Island Housing & Mortgage Financial Corporation,
Homeownership Opportunity, Series 20-A, 6.150%, 04/01/17 Aa2/AA+ 100,000 106,711
----------
TENNESSEE--1.87%
Tennessee Housing Development Agency-Mortgage Finance
Program Bonds, 1994 Series B, 6.200%, 01/01/09 (b) A1/A+ 200,000 206,764
----------
</TABLE>
See notes to financial statements.
11
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1998
- --------------------------------------------------------------------------------
TAX FREE FUND SERIES, CONTINUED
<TABLE>
<CAPTION>
FACE
MUNICIPAL BONDS RATING(a) AMOUNT VALUE
TEXAS--25.07%
<S> <C> <C> <C>
Baytown, Texas- Water and Sewer Revenue Bonds, 5.950%,
02/01/14 Aaa/AAA $ 100,000 $ 108,405
Board of Regents of The University of Texas System- Permanent
University Fund, Refunding Bonds Series 1992A, 6.250%,
07/01/13 Aaa/AAA 200,000 214,876
City of Austin, Texas-Combined Utility Systems Revenue
Refunding Bonds, Series 1994, 6.25%, 05/15/16 Aaa/AAA 100,000 111,412
City of Dallas, Texas-Waterworks and Sewer System Revenue
Bonds, Series 1994, 5.600%, 04/01/07 Aa2/AA 100,000 104,511
Collin County, Texas- Community College District,
Consolidated Fund, Revenue Bonds, 5.250%, 02/01/15 Aaa/AAA 400,000 414,288
Dallas-Fort Worth International Airport-Dallas-Fort Worth
Regional Airport, Joint Revenue Refunding Bonds, Series
1994A, 6.000%, 11/01/10 Aaa/AAA 100,000 109,116
Denton, Texas- General Obligation Bonds Limited, 5.500%,
02/15/08 Aaa/AAA 130,000 139,858
Denton, Texas- General Obligation Bonds Limited, 5.600%,
02/15/09 Aaa/AAA 120,000 129,224
Flower Mound, Texas- Refunding and Improvement, General
Obligation Unlimited, 5.500%, 03/01/17 Aaa/NR 200,000 209,820
Galveston Independent School District-Unlimited Tax
Schoolhouse Bonds, Series 1994, 5.200%, 02/01/07 Aaa/AAA 100,000 104,451
Harris County, Texas- Tax and Revenue Certificates of
Obligation, Series 1994, 6.100%, 10/01/12 Aa2/AA 135,000 149,861
Harris County, Texas- Tax and Revenue Certificates of
Obligation, Series 1994, 6.100%, 10/01/13 Aa2/AA 125,000 138,760
Laredo, Texas- General Obligation Bonds Unlimited, 5.250%,
02/15/11 Aaa/AAA 100,000 104,446
Mission Texas Consolidated Independent School
District-General Obligation Bonds Unlimited, 4.500%,
02/15/18 Aaa/AAA 200,000 188,360
Tarrant County Health Facilities Development Corporation-
Health System Revenue Bonds, (Harris Methodist Health
System), Series 1994, 6.000%, 09/01/14 (c) Aaa/AAA 200,000 226,294
Texas Turnpike Authority- Dallas North Tollway System
Revenue Bonds, Series 1995 (President George Bush
Turnpike), 5.400%, 01/01/15 Aaa/AAA 100,000 104,909
West University Place, Texas- General Obligation Bonds
Limited, Permanent Improvement, 5.650%, 02/01/14 Aaa/AAA 100,000 106,453
Weslaco, Texas Independent School District General
Obligation Bonds, 5.650%, 02/15/13 Aaa/NR 100,000 106,796
----------
2,771,840
----------
UTAH--1.40%
Utah Housing Finance Agency- Single Family Mortgage Bonds,
1995 Issue A, (Federally Insured or Guaranteed Mortgage
Loans), 7.150%, 07/01/12 (b) Aa2/AA 55,000 59,314
Utah State Housing Financial Agency-Single Family Mortgage
Bonds, Series F1, 6.000%, 07/01/13 Aa2/NR 90,000 95,122
----------
154,436
----------
VIRGINIA--0.97%
Virginia State Housing Development Authority Commonwealth
Mortgage Bonds, Series A, Subseries A-4, 6.300%, 07/01/15
(b) Aaa/AAA 100,000 107,737
----------
</TABLE>
12
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1998
- --------------------------------------------------------------------------------
TAX FREE FUND SERIES, CONTINUED
<TABLE>
<CAPTION>
FACE
MUNICIPAL BONDS RATING(a) AMOUNT VALUE
WASHINGTON--9.66%
<S> <C> <C> <C>
City of Richland, Washington- Water and Sewer Improvement
Revenue Bonds, 1993, 5.550%, 04/01/07 Aaa/AAA $ 300,000 $ 318,036
King County, Washington- Department of Metropolitan
Services, Limited Tax General Obligation Bonds, 1994 Series
A, 5.800%, 01/01/08 Aa1/AA+ 200,000 217,338
King County, Washington- Limited Tax General Obligation and
Refunding Bonds, 1993 Series A, 6.000%, 12/01/10 Aa1/AA+ 100,000 109,121
Municipality of Metropolitan Seattle Sewer Refunding Revenue
Bonds, Series X, 5.400%, 01/01/15 Aaa/AAA 100,000 103,446
Port of Seattle, Washington-General Obligation Bonds,
5.750%, 05/01/14 (b) Aa1/AA+ 100,000 105,960
State of Washington- General Obligation Bonds, Series 1994B,
5.750%, 05/01/09 Aa1/AA+ 100,000 107,477
State of Washington- General Obligation Bonds, Series 1994B,
6.000%, 09/01/16 Aa1/AA+ 100,000 107,214
----------
1,068,592
----------
WISCONSIN--2.91%
City of Green Bay- General Obligation Refunding Bonds,
Series 1994B, 5.900%, 04/01/09 Aa2/AA 200,000 215,068
State of Wisconsin- General Obligation Bonds Unlimited,
Series C, 5.400%, 05/01/09 Aa2/AA 100,000 107,224
----------
322,292
----------
TOTAL MUNICIPAL BONDS--94.89%
(Cost $9,790,032) 10,492,807
----------
GOVERNMENT AGENCIES
Federal Home Loan Mortgage Company, 5.48%, 09/09/98 160,000 159,805
Federal Home Loan Mortgage Company, 5.48%, 09/10/98 125,000 124,828
----------
TOTAL GOVERNMENT AGENCIES--2.58%
(Cost $284,633) 284,633
----------
COMMERCIAL PAPER
FINANCIAL SERVICES--
Pennsylvania Power & Light Energy Trust 249,000 248,961
----------
TOTAL COMMERCIAL PAPER--2.25%
(Cost $248,961) 248,961
----------
TOTAL INVESTMENTS--99.72%
(Cost $10,323,626) 11,026,401
----------
ASSETS IN EXCESS OF OTHER LIABILITIES--0.28% 31,263
----------
TOTAL NET ASSETS--100.00% $11,057,664
----------
----------
</TABLE>
Notes to Schedule of Investments
(a) Ratings assigned by Moody's Investor's Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P"). Ratings are unaudited.
(b) Security subject to the alternative minimum tax.
(c) Issuer has defeased these bonds, collateral for such defeasance is U.S.
Government obligations.
See notes to financial statements.
13
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT PRIMARY TAX FREE
INCOME FUND FUND FUND
SERIES SERIES SERIES
<S> <C> <C> <C>
ASSETS
Investment in securities, at value $ 23,990,119 $ 34,591,101 $ 11,026,401
Cash -- 524,507 --
Prepaid expenses 6,861 8,722 5,524
Receivable for:
Capital stock sold 3,460 105,369 3,552
Interest 207,758 -- 141,218
Expense reimbursement -- 5,603 4,537
Other assets 2,782 2,782 3,212
------------- ------------- -------------
TOTAL ASSETS 24,210,980 35,238,084 11,184,444
------------- ------------- -------------
LIABILITIES
Distribution payable 4,857 2,683 1,072
Capital stock reacquired 11,616 631,909 --
Investment securities purchased 181,023 -- 100,502
Accrued:
Investment advisory fee 10,187 13,989 4,537
Service fee 5,094 6,994 2,269
Other liabilities 16,668 5,627 18,400
------------- ------------- -------------
TOTAL LIABILITIES 229,445 661,202 126,780
------------- ------------- -------------
NET ASSETS $ 23,981,535 $ 34,576,882 $ 11,057,664
------------- ------------- -------------
------------- ------------- -------------
Shares of capital stock outstanding, (6,000,000,000 shares
authorized, $.01 par value per share) 2,262,725 34,582,655 1,038,994
------------- ------------- -------------
------------- ------------- -------------
Net asset value $ 10.60 $ 1.00 $ 10.64
------------- ------------- -------------
------------- ------------- -------------
Offering price per share:
(Net asset value / 95.5%) $ 11.10 $ 11.14
------------- -------------
------------- -------------
Offering price per share $ 1.00
-------------
-------------
</TABLE>
STATEMENTS OF OPERATIONS For Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT PRIMARY TAX FREE
INCOME FUND FUND FUND
SERIES SERIES SERIES
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 1,696,829 $ 2,049,686 $ 571,797
EXPENSES
Investment advisory fees 120,397 174,328 53,102
Service fees 60,199 87,164 26,551
Professional fees 12,662 12,662 12,661
Custody and transaction fees 13,906 26,284 10,674
Directors' fees 13,405 13,305 13,427
Qualification fees 12,265 19,679 13,381
Shareholder reporting expenses 3,411 3,476 711
Insurance expenses 2,411 2,820 1,880
Other 990 5,519 872
------------- ------------- -------------
TOTAL EXPENSES 239,646 345,237 133,259
LESS EXPENSES REIMBURSED -- (63,359) (53,102)
------------- ------------- -------------
NET EXPENSES 239,646 281,878 80,157
------------- ------------- -------------
INVESTMENT INCOME--NET 1,457,183 1,767,808 491,640
------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 103,599 -- 28,603
Change in unrealized appreciation of investments for the period 340,609 -- 363,642
------------- ------------- -------------
NET GAIN ON INVESTMENTS 444,208 -- 392,245
------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,901,391 $ 1,767,808 $ 883,885
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to financial statements.
14
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GOVERNMENT INCOME FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,457,183 $ 1,462,594
Net realized gain (loss) on investments 103,599 (2,446)
Change in unrealized appreciation (depreciation) 340,609 562,324
------------- -------------
Net increase in net assets resulting from operations 1,901,391 2,022,472
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (1,500,708) (1,419,091)
CAPITAL SHARE TRANSACTIONS--NET (102,449) 1,952,455
------------- -------------
TOTAL INCREASE 298,234 2,555,836
NET ASSETS
Beginning of Year 23,683,301 21,127,465
------------- -------------
End of Year $ 23,981,535 $ 23,683,301
------------- -------------
------------- -------------
</TABLE>
PRIMARY FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,767,808 $ 1,712,208
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (1,767,808) (1,712,208)
CAPITAL SHARE TRANSACTIONS--NET 1,532,007 (4,420,149)
------------- -------------
TOTAL INCREASE (DECREASE) 1,532,007 (4,420,149)
NET ASSETS
Beginning of Year 33,044,875 37,465,024
------------- -------------
End of Year $ 34,576,882 $ 33,044,875
------------- -------------
------------- -------------
</TABLE>
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 491,640 $ 499,113
Net realized gain on investments 28,603 12,803
Change in unrealized appreciation (depreciation) 363,642 314,617
------------- -------------
Net increase in net assets resulting from operations 883,885 826,533
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (499,989) (492,984)
CAPITAL SHARE TRANSACTIONS--NET (26,401) 1,218,423
------------- -------------
TOTAL INCREASE 357,495 1,551,972
NET ASSETS
Beginning of Year 10,700,169 9,148,197
------------- -------------
End of Year $ 11,057,664 $ 10,700,169
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
15
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
GOVERNMENT INCOME FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.42 $ 10.14 $ 10.51 $ 10.07 $ 10.87
Investment income--net 0.64 0.67 0.65 0.70 0.54
Net realized and unrealized gain (loss) on
investments 0.20 0.26 (0.37) 0.44 (0.79)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations 0.84 0.93 0.28 1.14 (0.25)
Less distributions from
Investment income--net (0.66) (0.65) (0.65) (0.70) (0.55)
---------- ---------- ---------- ---------- ----------
Total Distributions (0.66) (0.65) (0.65) (0.70) (0.55)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year $ 10.60 $ 10.42 $ 10.14 $ 10.51 $ 10.07
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total Return 8.31% 9.37% 2.63% 11.85% (2.41)%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 23,982 $ 23,683 $ 21,127 $ 20,466 $ 19,790
Ratio of expenses to average net assets 1.00% 1.00%(1) 1.00%(1) 0.70%(1) 1.12%
Ratio of net investment income to average
net assets 6.08% 6.46% 6.17% 6.90% 5.11%
Portfolio turnover rate 32.71% 9.06% 30.17% 2.20% 45.48%
</TABLE>
(1) Expenses for the calculation are net of a reimbursement from Securities
Management & Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.07%, 1.20% and 1.06% for
the years ended August 31, 1997, 1996 and 1995, respectively.
See notes to financial statements.
16
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
PRIMARY FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment income--net 0.05 0.05 0.05 0.05 0.03
---------- ---------- ---------- ---------- ----------
Total from Investment Operations 0.05 0.05 0.05 0.05 0.03
Less distributions from
Investment income--net (0.05) (0.05) (0.05) (0.05) (0.03)
---------- ---------- ---------- ---------- ----------
Total Distributions (0.05) (0.05) (0.05) (0.05) (0.03)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total Return 5.15% 4.98% 5.07% 5.01% 2.91%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 34,577 $ 33,045 $ 37,465 $ 20,984 $ 15,208
Ratio of expenses to average net assets (1) 0.80% 0.80% 0.81% 0.84% 0.79%
Ratio of net investment income to average
net assets 5.02% 4.86% 4.93% 4.91% 2.88%
</TABLE>
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED AUGUST 31, ENDED
AUGUST 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.27 $ 9.93 $ 9.95 $ 9.62 $ 10.00
Investment income--net 0.49 0.51 0.53 0.51 0.24
Net realized and unrealized gain (loss) on
investments 0.37 0.33 (0.02) 0.33 (0.38)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations 0.86 0.84 0.51 0.84 (0.14)
Less distributions from
Investment income--net (0.49) (0.50) (0.53) (0.51) (0.24)
---------- ---------- ---------- ---------- ----------
Total Distributions (0.49) (0.50) (0.53) (0.51) (0.24)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year $ 10.64 $ 10.27 $ 9.93 $ 9.95 $ 9.62
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total Return 8.58% 8.61% 5.18% 9.15% (1.49)%**
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 11,058 $ 10,700 $ 9,148 $ 8,399 $ 7,295
Ratio of expenses to average net assets 0.75%(2) 0.54%(2) --(2) --(2) 1.11%*
Ratio of net investment income to average
net assets 4.60% 4.97% 5.27% 5.43% 2.50%*
Portfolio turnover rate 12.77% 22.15% 18.44% 12.63% 16.49%
</TABLE>
* Ratios annualized
** Returns are not annualized
(1) Expenses for the calculation are net of a reimbursement from Securities
Management & Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 0.98%, 1.01%, 1.15%, 1.21%
and 1.20% for the years ended August 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
(2) Expenses for the calculation are net of a reimbursement from Securities
Management & Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.25%, 1.27%, 1.18% and 1.25%
for the years ended August 31, 1998, 1997, 1996 and 1995, respectively.
See notes to financial statements.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS August 31, 1998
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The SM&R Capital Funds, Inc. (the "Funds") is a diversified open-end management
investment company registered as a series fund under the Investment Company Act
of 1940, as amended. The Funds are comprised of the American National Government
Income Fund Series ("Government Income Fund Series"), American National Primary
Fund Series ("Primary Fund Series"), and American National Tax Free Fund Series
("Tax Free Fund Series"). Operations commenced March 16, 1992, for the
Government Income Fund Series and Primary Fund Series. The Tax Free Fund Series
began operations September 9, 1993.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
SECURITY VALUATION:
Investments in securities are valued based on market quotations or at fair value
as determined by a pricing service approved by the Board of Directors. Prices
provided by the pricing service represent valuations at bid prices or on a basis
determined without exclusive reliance on quoted prices and may reflect
appropriate factors such as institution-size trading in similar groups of
securities, yield quality, coupon rate, maturity, type of issue, individual
trading characteristics and other market data. Securities for which market
quotations are not readily available are valued as determined by the Board of
Directors. Commercial paper is stated at amortized cost, which is equivalent to
value.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME:
Investment transactions are accounted for on the trade date (date order to buy
or sell is executed). Dividend income is recognized on the ex-dividend date, and
interest income is recognized on an accrual basis. Realized gains and losses
from security transactions are reported on the basis of identified cost for
financial reporting and federal income tax purposes.
FEDERAL INCOME TAXES:
For federal income tax purposes, each series is treated as a separate entity.
The Funds intend to comply with requirements of the Internal Revenue Code
relating to regulated investment companies and intend to distribute
substantially all of its taxable income to its shareholders. Therefore, no
provision for federal income taxes is recorded in the accompanying financial
statements. At December 31, 1997, the funds' tax year-end, the Government Income
Fund Series, Primary Fund Series and the Tax Free Fund Series had capital loss
carryforwards that will expire in 2004 of approximately $373,000, $6,000 and
$45,000, respectively.
CAPITAL STOCK TRANSACTIONS AND DISTRIBUTIONS TO SHAREHOLDERS:
Fund shares are sold in a continuous public offering and may be redeemed on any
business day.
AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES
The Government Income Fund Series invest primarily in the agencies or
instrumentalities of the U.S. Government. Dividends to shareholders from net
investment income are declared and paid monthly.
AMERICAN NATIONAL PRIMARY FUND SERIES
The Primary Fund Series' objective is to seek maximum current income
consistent with capital preservation and liquidity through investment
primarily in commercial paper. All capital stock transactions are made at
net asset value. Distributions are computed daily and distributed monthly.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.
AMERICAN NATIONAL TAX FREE SERIES
The Tax Free Series' objective is to provide as high a level of income
largely exempt from federal income taxes as is consistent with preservation
of capital through investment of at least 80% of its net assets in
tax-exempt securities during normal market conditions. Dividends to
shareholders from net investment income are declared and paid monthly.
EXPENSES:
Operating expenses not directly attributable to a series' shares are prorated
among the series based on the relative amount of each series' net assets or
shareholders. Organization expenses have been deferred and are being amortized
over a five-year period. All organization expenses for the Tax Free Fund Series
were paid by Securities Management & Research, Inc.
NOTE 2--INVESTMENT ADVISORY AND SERVICE FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
Securities Management & Research, Inc. ("SM&R") is the investment advisor and
principal underwriter for the Funds. Investment advisory fees paid to SM&R are
computed as a percentage of the average daily net assets as follows:
GOVERNMENT INCOME FUND SERIES
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
INVESTMENT
ADVISORY
NET ASSETS FEE
<S> <C>
Not exceeding $100,000,000 0.50%
Exceeding $100,000,000 but not exceeding $300,000,000 0.45%
Exceeding $300,000,000 0.40%
</TABLE>
PRIMARY FUND SERIES
<TABLE>
<S> <C>
All average daily net assets 0.50%
</TABLE>
Administrative fees paid to SM&R by the Funds are computed as a percentage of
average daily net assets as follows:
<TABLE>
<CAPTION>
SERVICE
NET ASSETS FEES
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
SM&R has agreed to reimburse the Funds for all expenses, other than taxes,
interest and expenses directly related to the purchase and sale of investment
securities, in excess of 1.25% per annum of the average daily net assets. SM&R
has voluntarily agreed to reimburse the Primary Fund Series for expenses in
excess of 0.80% per annum of average daily net assets and the Government Income
Fund Series for expenses in excess of 1.00% per annum of average daily net
assets for the year ended August 31, 1998.
The Tax Free Fund Series has voluntarily agreed to waive investment advisory
fees leaving the Tax Free Fund responsible for all other expenses.
For the year ended August 31, 1998, SM&R, as principal underwriter, received as
sales charges on sales of shares of capital stock of the Funds as follows:
<TABLE>
<CAPTION>
SALES CHARGES
RECEIVED BY SM&R
<S> <C>
Government Income $ 15,030
Tax Free $ 15,357
</TABLE>
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of August 31, 1998, SM&R and American National had the
following ownership in the Funds:
<TABLE>
<CAPTION>
SM&R AMERICAN NATIONAL
------------------------------ ---------------------------------
PERCENT OF SHARES PERCENT OF SHARES
SHARES OUTSTANDING SHARES OUTSTANDING
<S> <C> <C> <C> <C>
Government Income 481,769 21% 660,766 29%
Primary 560,841 2% 15,345,869 44%
Tax Free 125,404 12% 627,022 60%
</TABLE>
NOTE 3--COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
Investments have the same cost for tax and financial statement purposes.
Aggregate purchases and sales of investments in securities, other than
commercial paper, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Government Income $ 7,618,884 $ 7,643,966
Tax Free $ 1,300,728 $ 1,375,923
</TABLE>
Gross unrealized appreciation and depreciation as of August 31, 1998, were as
follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION
------------ ------------
<S> <C> <C>
Government Income $852,256 $11,649
Tax Free $702,775 $0
</TABLE>
NOTE 4--CAPITAL STOCK
GOVERNMENT INCOME FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1998 AUGUST 31, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sale of capital shares 107,893 $ 1,143,207 291,016 $ 3,010,920
Investment income dividends reinvested 148,408 1,562,712 127,868 1,322,811
------------- ------------- ------------- -------------
Subtotals 256,301 2,705,919 418,884 4,333,731
Redemptions of capital shares (265,757) (2,808,368) (229,580) (2,381,276)
------------- ------------- ------------- -------------
Net increase (decrease) in capital shares outstanding (9,456) $ (102,449) 189,304 $ 1,952,455
------------- -------------
------------- -------------
Shares outstanding at beginning of year 2,272,181 2,082,877
------------- -------------
Shares outstanding at end of year 2,262,725 2,272,181
------------- -------------
------------- -------------
Net assets as of August 31, 1998 are comprised of the
following:
Capital (par value and additional paid-in) $ 23,410,410
Accumulated net realized loss on investments (269,482)
Net unrealized appreciation of investments 840,607
-------------
Net Assets $ 23,981,535
-------------
-------------
</TABLE>
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.
PRIMARY FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1998 AUGUST 31, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sale of capital shares 35,251,969 $ 35,251,969 37,131,503 $ 37,131,503
Investment income dividends reinvested 1,891,922 1,891,922 1,614,059 1,614,059
------------- ------------- ------------- -------------
Subtotals 37,143,891 37,143,891 38,745,562 38,745,562
Redemptions of capital shares (35,611,884) (35,611,884) (43,165,711) (43,165,711)
------------- ------------- ------------- -------------
Net increase (decrease) in capital shares outstanding 1,532,007 $ 1,532,007 (4,420,149) $ (4,420,149)
------------- -------------
------------- -------------
Shares outstanding at beginning of year 33,050,648 37,470,797
------------- -------------
Shares outstanding at end of year 34,582,655 33,050,648
------------- -------------
------------- -------------
Net assets as of August 31, 1998 are comprised of the
following:
Capital (par value and additional paid-in) $ 34,582,637
Accumulated net realized loss on sales of investments (5,755)
-------------
Net Assets $ 34,576,882
-------------
-------------
</TABLE>
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1998 AUGUST 31, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sale of capital shares 59,089 $ 621,304 95,379 $ 964,391
Investment income dividends reinvested 51,288 536,758 47,765 482,300
------------- ------------- ------------- -------------
Subtotals 110,377 1,158,062 143,144 1,446,691
Redemptions of capital shares (113,023) (1,184,463) (22,454) (228,268)
------------- ------------- ------------- -------------
Net increase (decrease) in capital shares outstanding (2,646) $ (26,401) 120,690 $ 1,218,423
------------- -------------
------------- -------------
Shares outstanding at beginning of year 1,041,640 920,950
------------- -------------
Shares outstanding at end of year 1,038,994 1,041,640
------------- -------------
------------- -------------
Net assets as of August 31, 1998 are comprised of the
following:
Capital (par value and additional paid-in) $ 10,376,327
Accumulated net realized loss on sales of investments (21,438)
Net unrealized appreciation of investments 702,775
-------------
Net Assets $ 11,057,664
-------------
-------------
</TABLE>
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
SM&R Capital Funds, Inc.
We have audited the accompanying statements of assets and liabilities of SM&R
Capital Funds, Inc. (comprised of Government Income Fund Series, Primary Fund
Series, and Tax Free Fund Series), including the schedule of investments as of
August 31, 1998, the related statements of operations, the statements of changes
in net assets and the financial highlights. 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 statement of changes for the year
ended August 31, 1997 and the financial highlights for each of the four years in
the period ended August 31, 1997 were audited by other auditors whose report
dated October 10, 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
August 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of SM&R
Capital Funds, Inc. as of August 31, 1998, the results of its operations, the
changes in its net assets and the financial highlights, in conformity with
generally accepted accounting principles.
Tait, Weller & Baker, CPA
Philadelphia, Pennsylvania
October 2, 1998
22
<PAGE>
SM&R CAPITAL FUNDS, INC. One Moody Plaza, Galveston, Texas 77550
- --------------------------------------------------------------------------------
DIRECTORS
Ernest S. Barratt, Ph.D.
Allan W. Matthews
Lea McLeod Matthews
Michael W. McCroskey
Ann McLeod Moody
Edwin K. Nolan
Robert V. Shattuck, Jr.
Jamie G. Williams
Frank P. Williamson
OFFICERS
Michael W. McCroskey, President
Brenda T. Koelemay, Vice President and Treasurer
Emerson V. Unger, Vice President
Teresa E. Axelson, Vice President and Secretary
Vera M. Young, Vice President and Portfolio Manager--
Primary Fund Series
Terry E. Frank, Vice President and Portfolio Manager--
Government Income Fund Series and Tax Free Fund Series
INVESTMENT ADVISOR AND MANAGER
Securities Management and Research, Inc.
One Moody Plaza
Galveston, Texas 77550
CUSTODIAN
Securities Management and Research, Inc.
One Moody Plaza
Galveston, Texas 77550
LEGAL COUNSEL
Greer, Herz & Adams, L.L.P.
One Moody Plaza
Galveston, Texas 77550
UNDERWRITER AND REDEMPTION AGENT
Securities Management and Research, Inc.
One Moody Plaza
Galveston, Texas 77550
TRANSFER AGENT, REGISTRAR AND DIVIDEND PAYING AGENT
Securities Management and Research, Inc.
One Moody Plaza
Galveston, Texas 77550
INDEPENDENT AUDITORS
Tait, Weller & Baker, CPA
8 Penn Center Plaza, Suite 800
Philadelphia, Pennsylvania 19103-2108
<PAGE>
BULK RATE
Securities Management & Research U.S. POSTAGE
One Moody Plaza PAID
Galveston, TX 77550 PERMIT NO. 89
GALVESTON, TEXAS
- --------------------------------------------------------------------------------
A N N U A L R E P O R T
[LOGO]
GOVERNMENT
INCOME
FUND
PRIMARY
FUND
TAX FREE
FUND
August 31, 1998
[LOGO]
"These discussions and the financial
statements contained herein are
included for the general information
of our shareholders. This annual
report is not authorized for
distribution to prospective
investors unless preceded or
accompanied by an effective
prospectus."
FORM 9202
