<PAGE>
REGISTRATION NOS. 33-44021; 811-6477
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 11 /X/
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 11 /X/
[Check appropriate box or boxes.]
------------------------
SM&R CAPITAL FUNDS, INC.
[Exact Name of Registrant as Specified in Charter]
ONE MOODY PLAZA, GALVESTON, TEXAS 77550
[Address of Principal Executive Offices] [Zip Code]
Registrant's Telephone Number, Including Area Code (409) 763-2767
NAME AND ADDRESS OF
AGENT FOR SERVICE: WITH COPY TO:
MICHAEL W. MCCROSKEY JERRY L. ADAMS
ONE MOODY PLAZA GREER, HERZ & ADAMS, L.L.P.
GALVESTON, TEXAS 77550 ONE MOODY PLAZA
GALVESTON, TEXAS 77550
FREDERICK R. BELLAMY
SUTHERLAND, ASBILL & BRENNAN, LLP
1275 PENNSYLVANIA AVE, NW
WASHINGTON, DC 20004-2415
------------------------
It is proposed that this filing will become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/ / on (date) pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on (date) pursuant to paragraph (a)(1) of Rule 485
/X/ 75 days after filing pursuant to paragraph (a)(2) Rule 485
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/ / this Post-Effective Amendment designates a new effective date for a
previously filed Post-Effective Amendment.
Title of Securities Being Registered: Common Stock, par value $.01 per share.
- --------------------------------------------------------------------------------
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<PAGE>
SM&R CAPITAL FUNDS, INC.
CROSS-REFERENCE SHEET
PURSUANT TO RULE 485
Showing Location in Prospectuses and Statement of Additional Information of
Information
Required by Parts A and B of Form N-1A Registration Statement
<TABLE>
<CAPTION>
PART A ITEM AND CAPTION PROSPECTUS CAPTION
- ------------------------------------------------------- -------------------------------------------------------
<S> <C>
Item 1. Cover Page
(a)(i)............................................. Front Cover
(ii)............................................. Front Cover
(iii)............................................ Front Cover; Back Cover
(iv)............................................. Front Cover; Back Cover
(v).............................................. Front Cover
(vi)............................................. Front Cover
(vii)............................................ Not Applicable
(viii)........................................... Front Cover
(b)................................................ Front Cover
Item 2. Synopsis
(a)(i)............................................. Table of Fees and Expenses
(ii)............................................. Not Applicable
(b)................................................ The Funds At A Glance
(c)................................................ The Funds At A Glance
Item 3. Condensed Financial Information
(a)................................................ Financial Highlights
(b)................................................ Not Applicable
(c)................................................ Performance and Advertising Data (in the Statement of
Additional Information)
(d)................................................ Financial Highlights;
Item 4. General Description of Registrant
(a)(i)............................................. The Funds At A Glance
(ii)............................................. The Funds At A Glance; Investment Objectives and
Policies; Additional Investment Policies and
Techniques
(b)................................................ Investment Objectives and Policies; Additional
Investment Policies and Techniques
(c)................................................ Investment Objectives and Policies; Additional
Investment Policies and Techniques
Item 5. Management of the Company
(a)................................................ The Funds and Management
(b)(i)............................................. The Funds and Management
(ii)............................................. The Funds and Management
(iii)............................................ The Funds and Management; Table of Fees and Expenses
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART A ITEM AND CAPTION PROSPECTUS CAPTION
- ------------------------------------------------------- -------------------------------------------------------
<S> <C>
(c)................................................ The Funds and Management
(d)................................................ The Funds and Management; Table of Fees and Expenses
(e)................................................ The Funds and Management; Table of Fees and Expenses
(f)................................................ The Funds and Management; Table of Fees and Expenses
(g)(i)............................................. Not Applicable
(ii)............................................. Not Applicable
Item 5A. Management's Discussion of Fund Performance... Not Applicable
Item 6. Capital Stock and Other Securities
(a)................................................ How To Redeem; Other Information Concerning The
Funds--Voting Rights
(b)................................................ The Funds and Management; Other Information Concerning
The Funds--Authorized Stock
(c)................................................ Not Applicable
(d)................................................ Not Applicable
(e)................................................ Other Information Concerning The Funds-- Additional
Information; Back Cover
(f)................................................ Dividends and Distributions
(g)................................................ Retirement Plans; Taxes
(h)................................................ The Funds at a Glance; Multi-Class Funds
Item 7. Purchase of Securities Being Offered
(a)................................................ Cover Page; The Funds and Management
(b)(i)............................................. Determination of Offering Price
(ii)............................................. When Are Purchases Effective; Determination of Offering
Price
(iii)............................................ Table of Fees and Expenses; Determination of Offering
Price
(iv)............................................. Determination of Offering Price
(v).............................................. How To Purchase Shares
(c)................................................ Special Purchase Plans
(d)................................................ The Funds At A Glance; How To Purchase Shares
(e)................................................ Determination of Offering Price
(f)................................................ Determination of Offering Price
(g)................................................ Determination of Offering Price
Item 8. Redemption or Repurchase
(a)................................................ How to Redeem
(b)................................................ Not Applicable
(c)................................................ How to Redeem
(d)................................................ How to Redeem
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
PART A ITEM AND CAPTION PROSPECTUS CAPTION
- ------------------------------------------------------- -------------------------------------------------------
<S> <C>
Item 9. Pending Legal Proceedings...................... Not Applicable
Part B: Information Required in
a Statement of Additional Information
PART B ITEM AND CAPTION STATEMENT OF ADDITIONAL INFORMATION CAPTION
- ------------------------------------------------------- -------------------------------------------------------
Item 10. Cover Page
(a)(i)............................................. Cover Page
(ii)............................................. Cover Page
(iii)............................................ Cover Page
(iv)............................................. Cover Page
(b)................................................ Cover Page
Item 11. Table of Contents............................. Table of Contents
Item 12. General Information and History............... The Company
Item 13. Investment Objective and Policies.............
(a)................................................ Investment Objectives and Policies
(b)................................................ Investment Objectives and Policies
(c)................................................ Investment Objectives and Policies
(d)................................................ Portfolio Turnover
Item 14. Management of the Fund
(a)................................................ Management of the Company
(b)................................................ Management of the Company
(c)................................................ Management of the Company
Item 15. Control Persons and Principal Holders of
Securities
(a)................................................ Cover Page; Control Persons and Principal Holders of
Securities
(b)................................................ Cover Page; Control Persons and Principal Holders of
Securities
(c)................................................ Cover Page; Control Persons and Principal Holders of
Securities
Item 16. Investment Advisory and Other Services
(a)(i)............................................. Control Persons and Principal Holders of
Securities--Control and Management of SM&R; Control
Persons and Principal Holders of
Securities--Investment Advisory Agreement
(ii)............................................. Control Persons and Principal Holders of
Securities--Control and Management of SM&R; Control
Persons and Principal Holders of
Securities--Investment Advisory Agreement
(iii)............................................ Control Persons and Principal Holders of
Securities--Investment Advisory Agreement
(b)................................................ Control Persons and Principal Holders of
Securities--Investment Advisory Agreement
(c)................................................ Not Applicable
</TABLE>
(iii)
<PAGE>
<TABLE>
<S> <C>
PART B ITEM AND CAPTION STATEMENT OF ADDITIONAL INFORMATION CAPTION
- ------------------------------------------------------- -------------------------------------------------------
(d)................................................ Control Persons and Principal Holders of
Securities--Administrative Service Agreement
(e)................................................ Not Applicable
(f)(i)............................................. The Underwriter
(ii)............................................. The Underwriter
(iii)............................................ The Underwriter
(g)................................................ Custodian
(h)................................................ Custodian; Auditors and Financial Statements
(i)................................................ Custodian, Transfer Agent and Dividend Paying Agent;
Investment Advisory Agreement; Administrative Service
Agreement
Item 17. Brokerage Allocation
(a)................................................ Portfolio Transactions and Brokerage Allocation
(b)(i)............................................. Not Applicable
(ii)............................................. Not Applicable
(iii)............................................ Not Applicable
(c)................................................ Portfolio Transactions and Brokerage Allocation
(d)................................................ Not Applicable
(e)................................................ Not Applicable
Item 18. Capital Stock and Other Securities
(a)(i)............................................. Capital Stock
(ii)............................................. Capital Stock
(b)................................................ Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered
(a)................................................ Purchase, Redemption and Pricing of Securities Being
Offered; Special Purchase Plans
(b)................................................ Purchase, Redemption and Pricing of Securities Being
Offered; Determination of Net Asset Value;
Determination of Offering Price
(c)................................................ Not Applicable
Item 20. Tax Status.................................... Not Applicable
Item 21. Underwriters
(a)(i)............................................. Underwriter
(ii)............................................. Underwriter
(iii)............................................ Underwriter
(b)................................................ Not Applicable
(c)................................................ Not Applicable
Item 22. Calculations of Performance Data.............. Performance and Advertising Data; Comparisons
Item 23. Financial Statements.......................... Statement of Additional Information
</TABLE>
PART C: OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
(iv)
<PAGE>
[SM&R Logo] SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
P R O S P E C T U S
CLASSES A, B, AND C
(PUBLIC RETAIL SALES)
SM&R INVESTMENTS, INC. - One Moody Plaza - Galveston, Texas 77550
Telephone Number: (409) 763-2767 - Toll Free: 1 (800) 231-4639
September 15, 1998
OFFICERS
Michael W. McCroskey, President and CEO
Brenda T. Koelemay, Vice President and Treasurer
Emerson V. Unger, Vice President
Teresa E. Axelson, Vice President and Secretary
<TABLE>
<S> <C>
INVESTMENT ADVISER AND MANAGER UNDERWRITER AND REDEMPTION AGENT
Securities Management and Research, Inc. Securities Management and Research, Inc.
One Moody Plaza One Moody Plaza
Galveston, Texas 77550 Galveston, Texas 77550
CUSTODIAN TRANSFER AND DIVIDEND PAYING AGENT
Securities Management and Research, Inc. Securities Management and Research, Inc.
One Moody Plaza One Moody Plaza
Galveston, Texas 77550 Galveston, Texas 77550
LEGAL COUNSEL INDEPENDENT AUDITORS
Greer, Herz & Adams, L.L.P. Tait, Weller & Baker, CPA
One Moody Plaza 8 Penn Center Plaza, Suite 800
Galveston, Texas 77550 Philadelphia, PA 19103-2108
</TABLE>
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This Prospectus offers four separate investment portfolios ("Funds") of SM&R
Investments, Inc. (the "Company"). Some of the Funds offer other share classes
with different sales charge and distribution and service fee structures. Each
Fund has its own investment objective designed to meet different investment
goals. The Funds' investment objectives, and suitability for particular types of
investors, are further described under "The Funds at a Glance" and "Investment
Objectives and Policies."
Please read this Prospectus carefully before making an investment and keep
it for future reference.
Shares of the Company and each Fund are not deposits or obligations of, or
guaranteed or endorsed by, any bank. Further, shares of the Company and each
Fund, including the Government Bond and Money Market Funds, are not federally
insured or guaranteed by the U.S. Government, the Federal Deposit Insurance
Corporation ("FDIC"), the Federal Reserve Board or any other agency. Investing
in shares of any Fund of the Company involves investment risks, including the
possible loss of principal.
Like all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
There can be no assurance that SM&R Money Market Fund will be able to
maintain a net asset value of $1.00 per share.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
TABLE OF FEES AND EXPENSES............................................................. 3
FINANCIAL HIGHLIGHTS................................................................... 7
INVESTMENT OBJECTIVES AND POLICIES..................................................... 10
ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES.......................................... 16
THE FUNDS AND MANAGEMENT............................................................... 17
HOW TO PURCHASE SHARES................................................................. 20
WHEN ARE PURCHASES EFFECTIVE?.......................................................... 21
DETERMINATION OF OFFERING PRICE........................................................ 22
MULTI-CLASS FUNDS...................................................................... 22
SPECIAL PURCHASE PLANS AND SERVICES.................................................... 26
RETIREMENT PLANS....................................................................... 28
DIVIDENDS AND DISTRIBUTIONS............................................................ 29
TAXES.................................................................................. 29
HOW TO REDEEM.......................................................................... 31
OTHER INFORMATION CONCERNING THE FUNDS................................................. 33
</TABLE>
i
<PAGE>
THE FUNDS AT A GLANCE
SM&R Investments, Inc., formerly known as SM&R Capital Funds, Inc. (the
"Company"), is a diversified, open-end management investment company that was
incorporated under the laws of Maryland on November 6, 1991. The Company offers
four separate investment portfolios (the "Funds"), each of which pursues a
different investment objective. The investment objective and investor
suitability profile of each Fund are summarized below.
SM&R GOVERNMENT BOND FUND ("GOVERNMENT BOND FUND")
OBJECTIVE: 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.
INVESTOR SUITABILITY PROFILE: The Government Bond Fund is for investors
desiring the security of investing primarily in the strength and stability of
the U.S. Government, its agencies, or instrumentalities in order to meet their
current needs. However, you should keep in mind that the Fund may invest in
other instruments in order to meet its objective.
SM&R TAX FREE FUND ("TAX FREE FUND")
OBJECTIVE: To provide as high a level of interest 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.
INVESTOR SUITABILITY PROFILE: The Tax Free Fund is for the investor
desiring income exempt from federal income tax and, under certain conditions,
exempt from state and local taxes. You should keep in mind that certain income
from the Fund may be subject to the federal alternative minimum tax ("AMT") and
investors in certain states may be subject to state taxation on all or a portion
of the income and capital gains realized by the Fund.
SM&R PRIMARY FUND ("PRIMARY FUND")
OBJECTIVE: To seek maximum current income consistent with capital
preservation and liquidity through investment primarily in commercial paper.
INVESTOR SUITABILITY PROFILE: The Primary Fund is for fixed income
investors who desire minimal investment risk yet may be looking to move
cautiously into the investment arena.
SM&R MONEY MARKET FUND ("MONEY MARKET FUND")
OBJECTIVE: To seek to achieve the highest current income consistent with
the preservation of capital and maintenance of liquidity. The Fund seeks to
achieve its objective by investing in high-quality short-term money market
instruments.
INVESTOR SUITABILITY PROFILE: The Money Market Fund is for investors who
are risk-averse, such as first-time investors who wish to move cautiously into
the investment arena. The Fund is designed to provide investors a relatively
safe and liquid investment alternative. The Money Market Fund also may be
appropriate for investors who wish to temporarily "park" funds during periods
when investment in the equity markets is unattractive.
The Company designates its capital stock as shares of the Funds. Each Fund
is, for investment purposes, considered a separate investment fund. Each share
of capital stock represents a pro-rata interest in the assets of a particular
Fund and has no interest in the assets of any other Fund. Each Fund bears its
own liabilities. YOU SHOULD KEEP IN MIND THAT INVESTMENTS IN THE FUNDS,
INCLUDING THE GOVERNMENT BOND AND MONEY MARKET FUNDS, ARE NOT INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT.
1
<PAGE>
PORTFOLIO TURNOVER RATES: Historical turnover rates for each Fund (except
the Money Market Fund) are included in the Financial Highlights tables. No Fund
expects its portfolio turnover rate to exceed eighty percent (80%). An
explanation of turnover rate calculations and brokerage fees can be found in the
Company's Statement of Additional Information.
MANAGEMENT: Securities Management and Research, Inc. ("SM&R") makes the
investment choices for the Funds. SM&R has served as adviser and distributor to
mutual funds since 1966. See "THE FUNDS AND MANAGEMENT" for additional
information.
PURCHASING SHARES: Shares of the Money Market Fund and the Primary Fund
(the "Single-Class Funds") consist of a single class of shares and are offered
at net asset value. Neither of these Single-Class Funds impose any sales charge
or distribution and service ("12b-1") fee.
The Government Bond Fund and the Tax Free Fund (the "Multi-Class Funds")
have multiple classes of shares. These classes of shares have different sales
charges and distribution and service ("12b-1") fee structures. The Company
offers three classes of shares (each, a "Class," and collectively, the
"Classes") of the Multi-Class Funds through this Prospectus. (The Company offers
three other classes of the Multi-Class Funds through separate prospectuses and
restricts purchase of such shares to specified types of investors or through
certain distribution chains.) You may select from among the following three
Classes of shares of the Multi-Class Funds:
CLASS A SHARES. The Multi-Class Funds offer Class A shares at their
respective net asset value plus a sales charge of 4.75% of the public offering
price. For amounts invested over certain levels, or "breakpoints" (beginning at
$50,000), you pay reduced sales charges. For investments of $1 million or more,
you do not pay any initial sales charge. Amounts invested above $1 million,
however, would be subject to a 1.00% contingent deferred sales charge if
redeemed within thirteen months from purchase. Although you may pay an initial
sales charge when you purchase Class A shares of the Multi-Class Funds, the
ongoing expenses of this Class are lower than the ongoing expenses of Class B
and Class C shares. (However, Class B and Class C both impose contingent
deferred sales charges on withdrawals within certain amounts of time from
purchase, as discussed below.)
CLASS B SHARES. The Multi-Class Funds offer Class B shares at their
respective net asset value, so you do not pay an initial sales charge when you
purchase Class B shares. As a result, 100% of your purchase is immediately
invested. However, Class B shares have higher ongoing expenses than Class A
shares. Moreover, depending on how long shares are owned, you may pay a
contingent deferred sales charge when you sell Class B shares. The contingent
deferred sales charge decreases from a maximum of 3.00% in the first year to
zero after three or more years from purchase. After eight years, Class B shares
automatically convert to Class A shares, which have lower ongoing expenses and
no contingent deferred sales charge applicable at that time.
CLASS C SHARES. The Multi-Class Funds offer Class C shares at their
respective net asset value plus an initial sales charge of 1.00% of the public
offering price and a contingent deferred sales charge of 1.00% if redeemed
within thirteen months from purchase. Although you may pay lower sales charges
than for Class A and Class B shares, the ongoing expenses for this Class are
higher than the ongoing expenses of Class A and Class B shares.
For the Government Bond and Tax Free Funds, your minimum initial investment is
$100 and all of your subsequent investments must be at least $20. For the Money
Market and Primary Funds, your minimum initial investment is $1,000 and all of
your subsequent investments must be at least $100. See "SPECIAL PURCHASE PLANS
AND SERVICES" and "HOW TO PURCHASE SHARES."
REDEMPTIONS: For information on redeeming shares, see "HOW TO REDEEM."
EXCHANGES: In general, you can exchange shares of a Fund for shares of
another fund in the SM&R Family of Funds (as defined herein) without the payment
of an exchange fee, subject to certain conditions. For information on exchanging
shares, see "Exchange Privilege" within the "SPECIAL PURCHASE PLANS AND
SERVICES" section.
2
<PAGE>
TABLE OF FEES AND EXPENSES
The purpose of the following table is to assist an investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. Investors should be aware that this table is not intended to reflect
in detail the fees and expenses associated with an individual shareholder's own
investment in any of the Funds or Classes listed. It is being provided to assist
investors in gaining a more complete understanding of fees, charges, and
expenses which are discussed in greater detail in the appropriate sections of
the Prospectus.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND
-----------------------------------
CLASS A CLASS B CLASS C PRIMARY FUND
--------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE (TOTAL)................................. 4.75% 3.00% 2.00% None
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price).......................................... 4.75%(1) None 1.00% None
Maximum Deferred Sales Load (as a percentage of offering
price)(2)................................................ None(3) 3.00%(4) 1.00%(5) None
Maximum Sales Load Imposed on Reinvested Dividends (as a
percentage of offering price)............................ None None None None
EXCHANGE FEES................................................ None None None None
</TABLE>
<TABLE>
<CAPTION>
TAX FREE FUND
----------------------------------- MONEY MARKET
CLASS A CLASS B CLASS C FUND
--------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE (TOTAL).............................. 4.75% 3.00% 2.00% None
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price).................................... 4.75%(1) None 1.00% None
Maximum Deferred Sales Load (as a percentage of offering
price)(2)............................................. None(3) 3.00%(4) 1.00%(5) None
Maximum Sales Load Imposed on Reinvested Dividends (as a
Percentage of offering price)......................... None None None None
EXCHANGE FEES............................................. None None None None
</TABLE>
3
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets Before Fee Waivers and Expense
Reimbursements)
The "Management Fee," "Other Expenses," and "Total Annual Fund Operating
Expenses" shown below for the Government Bond, Primary, and Tax Free Funds are
for the year ended August 31, 1997; for the Money Market Fund, they are
estimates for the first year of operation (ending August 31, 1999).
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND
-----------------------------------
CLASS A CLASS B CLASS C PRIMARY FUND
--------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Management Fee.......................................... 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service (12b-1) Fee................. 0.25% 0.75% 1.00% None
Other Expenses(6)....................................... 0.57% 0.57% 0.57% 0.51%
Total Annual Fund Operating Expenses(7)................. 1.32% 1.82% 2.07% 1.01%
</TABLE>
<TABLE>
<CAPTION>
TAX FREE FUND
----------------------------------- MONEY MARKET
CLASS A CLASS B CLASS C FUND
--------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Management Fee..................................... 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service (12b-1) Fee............ 0.25% 0.75% 1.00% None
Other Expenses(6).................................. 0.77% 0.77% 0.77% 0.75%
Total Annual Fund Operating Expenses(7)............ 1.52% 2.02% 2.27% 1.25%
</TABLE>
NOTES TO THE TABLE OF FEES AND EXPENSES
(1) A sales charge of 4.75% is imposed on initial investments in Class A shares
of less than $50,000. This sales charge is reduced at certain breakpoints,
as follows: 4.50% on initial investments of at least $50,000 but less than
$100,000; 3.50% on initial investments of at least $100,000 but less than
$250,000; 2.50% on initial investments of at least $250,000 but less than
$500,000; 1.50% on initial investments of at least $500,000 but less than $1
million; and zero on initial investments of $1 million or more.
(2) An $8.00 transaction fee is charged for each expedited wire redemption.
(3) During the first thirteen months after purchase of Class A shares, a
contingent deferred sales charge of 1.00% is assessed on any redemptions of
Class A shares that were purchased without an initial sales charge as part
of an investment of $1 million or more.
(4) The maximum 3.00% contingent deferred sales charge on Class B shares applies
to redemptions during the first year after purchase. The charge declines to
2.00% during the second year, 1.00% during the third year, and zero during
the fourth year and thereafter.
(5) A contingent deferred sales charge of 1.00% is assessed on all redemptions
of Class C shares during the first thirteen months after purchase.
(6) "Other Expenses" include the 0.25% Administrative Service Fee. Because Class
A, B, and C shares were not available prior to the date of this Prospectus,
"Other Expenses" for Class A, B, and C shares were based on the expenses and
average net assets of the Government Bond Fund and the Tax Free Fund,
respectively, for the fiscal year ended August 31, 1997. "Other Expenses"
shown for the Money Market Fund are estimated for the current fiscal year
ending August 31, 1999.
(7) The Fee Table does not reflect any fees waived or expenses assumed either
contractually or voluntarily by SM&R for the Funds during the fiscal year
ended August 31, 1997. Pursuant to the Administrative Service Agreement,
SM&R has agreed to pay (or to reimburse) each Fund for regular operating
expenses (including the advisory fee and administrative fee, but not
including the 12b-1 fee or Class-specific expenses) in excess of 1.25%
(0.35% for the Money Market Fund) per year of such Fund's
4
<PAGE>
average daily net assets. SM&R may also waive fees or assume expenses on a
voluntary basis. During the fiscal year ended August 31, 1997, SM&R
voluntarily waived management fees of 0.07%, 0.21%, and 0.50% for the
Government Bond Fund, Primary Fund, and Tax Free Fund, respectively, and
reimbursed expenses of 0.24% for the Tax Free Fund. SM&R intends to continue
to waive the advisory fee for the Tax Free Fund and reimburse expenses to
the extent that total regular operating expenses (not including any 12b-1
fee or Class-specific expenses) exceed average daily net assets as follows:
0.80% for the Primary Fund and 1.00% for the Government Bond Fund. SM&R may
discontinue or reduce any such waiver or assumption of expenses at any time
without notice. The following table is based on the "Management Fee," "Other
Expenses," and "Total Annual Fund Operating Expenses" for the Government
Bond, Primary, and Tax Free Funds for the year ended August 31, 1997 taking
into account fee waivers and expense reimbursements. For the Money Market
Fund, they are estimates taking into account fee waivers and expense
reimbursements for the year ending August 31, 1999.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets After Fee Waivers and Expense
Reimbursements)
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND
-----------------------------------
CLASS A CLASS B CLASS C PRIMARY FUND
--------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Management Fee........................................................ 0.43% 0.43% 0.43% 0.29%
Distribution and/or Service (12b-1) Fee............................... 0.25% 0.75% 1.00% None
Other Expenses........................................................ 0.57% 0.57% 0.57% 0.51%
Total Annual Fund Operating Expenses.................................. 1.25% 1.75% 2.00% 0.80%
</TABLE>
<TABLE>
<CAPTION>
TAX FREE FUND
----------------------------------- MONEY MARKET
CLASS A CLASS B CLASS C FUND
--------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Management Fee.................................................. 0.00% 0.00% 0.00% 0.00%
Distribution and/or Service (12b-1) Fee......................... 0.25% 0.75% 1.00% None
Other Expenses.................................................. 0.54% 0.54% 0.54% 0.35%
Total Annual Fund Operating Expenses............................ 0.79% 1.29% 1.54% 0.35%
</TABLE>
EXAMPLES OF EXPENSES
These Examples are intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds.
These Examples assume that you invest $10,000 in each Fund and applicable
Class thereof for the time periods indicated. These Examples also assume that
your investment has a 5% return each year and that the Fund's operating expenses
remain the same. Your actual costs may be higher or lower than shown.
5
<PAGE>
You would pay the following expenses, based on these assumptions, if you
actually redeem all of your shares at the end of the period shown:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Government Bond Fund
Class A.......................................................... $ 603 $ 873 $ 1,164 $ 1,990
Class B.......................................................... 485 673 985 2,006
Class C.......................................................... 408 742 1,202 2,476
Tax Free Fund
Class A.......................................................... $ 622 $ 932 $ 1,265 $ 2,201
Class B.......................................................... 505 734 1,088 2,220
Class C.......................................................... 428 802 1,303 2,679
Primary Fund....................................................... $ 103 $ 322 $ 558 $ 1,236
Money Market Fund.................................................. $ 127 $ 397 N/A N/A
</TABLE>
However, you would pay the following expenses, based on these assumptions,
if you did not redeem your shares:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Government Bond Fund
Class A.......................................................... $ 603 $ 873 $ 1,164 $ 1,990
Class B.......................................................... 185 573 985 2,006
Class C.......................................................... 308 742 1,202 2,476
Tax Free Fund
Class A.......................................................... $ 622 $ 932 $ 1,265 $ 2,201
Class B.......................................................... 205 634 1,088 2,220
Class C.......................................................... 328 802 1,303 2,679
Primary Fund....................................................... $ 103 $ 322 $ 558 $ 1,236
Money Market Fund.................................................. $ 127 $ 397 N/A N/A
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS--GOVERNMENT BOND FUND
The following financial highlights table is intended to help you understand
the Government Bond Fund's financial performance for the past five years.
Certain information reflects financial results for a single Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions) prior to
addition of multiple classes of shares. This information is derived from the
financial statements of the Government Bond Fund, which for the years ended
through August 31, 1997 have been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the Fund's financial statements, are included
in Statement of Additional Information, which is available upon request, and
from unaudited financial statements of the Government Bond Fund for the six
month period ended February 28, 1998. If multiple classes of shares of the Fund
had been in existence during the past five years, the financial performance of
Class A, B, and C shares of the Fund would have been lower than depicted because
of the imposition of distribution and/or service (12b-1) fees.
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED YEAR ENDED AUGUST 31
------------ ---------------------------------------
FEB. 28,
1998 1997 1996 1995 1994 1993
------------ ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period............................. $10.42 $10.14 $10.51 $10.07 $10.87 $10.56
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........................... 0.32 0.67 0.65 0.70 0.54 0.50
Net Realized and Unrealized Gain (Loss) on
Securities.................................... 0.15 0.26 (0.37) 0.44 (0.79) 0.49
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS.................. 0.47 0.93 0.28 1.14 (0.25) 0.99
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income............ (0.34) (0.65) (0.65) (0.70) (0.55) (0.50)
Distributions from Capital Gains................ 0.00 0.00 0.00 0.00 0.00 (0.18)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS............................... (0.34) (0.65) (0.65) (0.70) (0.55) (0.68)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period.................... $10.55 $10.42 $10.14 $10.51 $10.07 $10.87
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN...................................... 4.58%(1) 9.37% 2.63% 11.85% (2.41)% 10.23%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED
------------ YEAR ENDED AUGUST 31
FEB. 28, -----------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's
omitted)................................. $23,915 $23,683 $21,127 $20,466 $19,790 $19,783
Ratio of Expenses to Average Net
Assets(3)................................ 0.97%(2) 1.00% 1.00% 0.70% 1.12% 1.07%
Ratio of Net Income to Average Net
Assets................................... 6.16%(2) 6.46% 6.17% 6.90% 5.11% 5.07%
Portfolio Turnover Rate.................... 0.92% 9.06% 30.17% 2.20% 45.48% 18.14%
</TABLE>
- ------------------------
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and 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.
7
<PAGE>
FINANCIAL HIGHLIGHTS--TAX FREE FUND
The following financial highlights table is intended to help you understand
the Tax Free Fund's financial performance for the past five years. Certain
information reflects financial results for a single Fund share outstanding
throughout each period shown. The total returns in the table represent the rate
that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions) prior to addition of
multiple classes of shares. This information is derived from the financial
statements of the Tax Free Fund, which for the years ended through August 31,
1997 have been audited by KPMG Peat Marwick LLP, independent auditors, whose
report, along with the Fund's financial statements, are included in Statement of
Additional Information, which is available upon request, and from unaudited
financial statements of the Tax Free Fund for the six month period ended
February 28, 1998. If multiple classes of shares of the Fund had been in
existence during the past five years, the financial performance of Class A, B,
and C shares of the Fund would have been lower than depicted because of the
imposition of distribution and/or service (12b-1) fees.
<TABLE>
<CAPTION>
SIX MONTH
PERIOD
ENDED YEAR ENDED AUGUST 31
----------- -------------------------------
FEB. 28, SEPT. 9,
1998 1997 1996 1995 1993
----------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........ $ 10.27 $ 9.93 $ 9.95 $ 9.62 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income..................... 0.26 0.51 0.53 0.51 0.24
Net Realized and Unrealized Gain (Loss) on
Securities.............................. 0.26 0.33 (0.02) 0.33 (0.38)
----------- --------- --------- --------- -----------
TOTAL FROM INVESTMENT OPERATIONS............ 0.52 0.84 0.51 0.84 (0.14)
----------- --------- --------- --------- -----------
LESS DISTRIBUTIONS
Dividends from Net Investment Income...... (0.26) (0.50) (0.53) (0.51) (0.24)
----------- --------- --------- --------- -----------
TOTAL DISTRIBUTIONS......................... (0.26) (0.50) (0.53) (0.51) (0.24)
----------- --------- --------- --------- -----------
Net Asset Value, End of Period.............. $ 10.53 $ 10.27 $ 9.93 $ 9.95 $ 9.62
----------- --------- --------- --------- -----------
----------- --------- --------- --------- -----------
TOTAL RETURN................................ 4.62%(1) 8.61% 5.18% 9.15% (1.49)%(1)
----------- --------- --------- --------- -----------
----------- --------- --------- --------- -----------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED SEPT. 9, 1993
------------ YEAR ENDED AUGUST 31 (DATE OPERATIONS
FEB. 28, --------------------------------- COMMENCED) THRU
1998 1997 1996 1995 AUG. 31, 1994
------------ --------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted)... $18,555 $10,700 $9,148 $8,399 $7,295
Ratio of Expenses to Average Net
Assets(3)................................. 0.73%(2) 0.54% -- -- 1.11%(2)
Ratio of Net Income to Average Net
Assets.................................... 4.75%(2) 4.97% 5.27% 5.43% 2.50%(2)
Portfolio Turnover Rate..................... 0.00% 22.15% 18.44% 12.63% 16.49%
</TABLE>
- ------------------------
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.23% (annualized), 1.27%,
1.18%, and 1.25% for the six month period ended February 28, 1998 and the
years ended August 31, 1997, 1996, and 1995, respectively.
8
<PAGE>
FINANCIAL HIGHLIGHTS--PRIMARY FUND
The following financial highlights table is intended to help you understand
the Primary Fund's financial performance for the past five years. Certain
information reflects financial results for a single Fund share outstanding
throughout each period shown. The total returns in the table represent the rate
that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information is
derived from the financial statements of the Primary Fund, which for the years
ended through August 31, 1997 have been audited by KPMG Peat Marwick LLP,
independent auditors, whose report, along with the Fund's financial statements,
are included in Statement of Additional Information, which is available upon
request, and from unaudited financial statements of the Primary Fund for the six
month period ended February 28, 1998.
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED YEAR ENDED AUGUST 31
------------- -----------------------------------------------------
FEB. 28, 1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.................. 0.03 0.05 0.05 0.05 0.03 0.02
------ --------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS......... 0.03 0.05 0.05 0.05 0.03 0.02
------ --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income... (0.03) (0.05) (0.05) (0.05) (0.03) (0.02)
------ --------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS...................... (0.03) (0.05) (0.05) (0.05) (0.03) (0.02)
------ --------- --------- --------- --------- ---------
Net Asset Value, End of Period........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- ---------
TOTAL RETURN............................. 2.55%(1) 4.98% 5.07% 5.01% 2.91% 2.59%
------ --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- ---------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED
------------ YEAR ENDED AUGUST 31
FEB. 28, -----------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted)... $ 32,578 $ 33,045 $ 37,465 $ 20,984 $ 15,208 $ 15,539
Ratio of Expenses to Average Net
Assets(3).................................. 0.80%(2) 0.80% 0.81% 0.84% 0.79% 0.85%
Ratio of Net Income to Average Net Assets... 5.05%(2) 4.86% 4.93% 4.91% 2.88% 2.47%
Portfolio Turnover Rate(4).................. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
- ------------------------
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement the ratio of
expenses to average net assets would have been 0.99% (annualized), 1.01%,
1.15%, 1.21%, 1.20%, and 1.23% for the six month period ended February 28,
1998 and the years ended August 31, 1997, 1996, 1995, 1994, and 1993,
respectively.
(4) The Primary Fund experienced no portfolio turnover because the majority of
securities held during such periods had maturities of one year or less at
the time of acquisition.
9
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund pursues its own investment objective through the investment
policies and techniques described below. These policies and techniques are not
fundamental and may be changed by the Board of Directors of the Company without
the approval of the shareholders. In addition, the Company has adopted certain
restrictions as fundamental policies for each Fund, which may not be changed
without shareholder approval. (See the Company's Statement of Additional
Information for a description of the investment restrictions adopted as
fundamental policies). Since each Fund has a different investment objective,
each should have different investment results and incur different market and
financial risks.
Because of the market risks inherent in any investment, the Funds may not
achieve their investment objectives. In addition, effective management of each
Fund is subject to general economic conditions and to the ability and investment
techniques of management. The net asset value of each Fund's shares will vary
and the redemption value of shares may be either higher or lower than the
shareholder's cost.
GOVERNMENT BOND FUND
(FORMERLY, AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES)
The investment objective of the Government Bond Fund is 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. The Government Bond Fund 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--It is anticipated that a substantial portion of
the Government Bond Fund's portfolio will consist of mortgage-backed securities
("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"), 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
10
<PAGE>
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.
The Government Bond Fund 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 Fund's securities will generally increase; however, it is
anticipated 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 proceeds to the Fund from such prepayments will have to be invested
at the then prevailing lower interest rates. On the other hand, if interest
rates increase, the value of the Fund'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 Fund 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 Fund 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 Fund may invest a
portion of its assets in collateralized mortgage obligations or "CMOs," which
are debt obligations collateralized by a portfolio or pool of mortgages,
mortgage-backed securities, or U.S. Government securities. Collateralized
obligations in which the Government Bond Fund may invest are issued or
guaranteed by a U.S. Government agency or instrumentality, such as the FHLMC. A
variety of types of collateralized obligations are currently available and
others may become available in the future. One should keep in mind that during
periods of rapid interest rate fluctuation, the price of a security, such as a
CMO, could either increase or decrease based on inherent interest rate risk.
Additionally, the risk of maturities shortening or lengthening in conjunction
with interest rate movement, could magnify the overall effect of the price
fluctuation.
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. A more complete description
of CMOs is contained in the Statement of Additional Information.
The Government Bond Fund 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.
ZERO COUPON BONDS--The Government Bond Fund may invest in zero coupon bonds,
which are debt obligations issued or purchased at a significant discount from
face value. The Government Bond Fund 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
11
<PAGE>
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 Fund 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 Fund's distribution obligations.
OTHER INVESTMENTS--The Government Bond Fund may also invest in commercial
paper, certificates of deposit, and repurchase agreements of the same type and
rating as the Primary and Money Market Funds may invest, and may invest in
corporate debt securities of the same type as the Primary Fund, which, at the
date of investment, are rated "A" or higher by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"). (See "Primary Fund" and
"Money Market Fund.") In addition, the Government Bond Fund may purchase debt
obligations of foreign corporations or financial institutions, such as Yankee
bonds (dollar-denominated bonds sold in the United States by non-U.S. issuers)
and Euro bonds (bonds not issued in the country (and possibly not the currency
of the country) of the issuer). (See "Foreign Debt Securities" in the Company's
Statement of Additional Information for a description of the risks associated
with investment in foreign securities.)
TAX FREE FUND (FORMERLY, AMERICAN NATIONAL TAX FREE FUND SERIES)
The investment objective of the Tax Free Fund is to provide as high a level
of interest 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. The Tax Free
Fund, as a matter of fundamental policy, will seek to achieve its objective by
investing at least 80% of the value of its net assets in municipal securities
the interest on which is exempt from federal income taxes.
The Tax Free Fund has no restrictions on the maturity of municipal
securities in which it may invest. Accordingly, it will seek to invest in
municipal securities of such maturities which, in the judgement of SM&R, the
adviser, will provide a high level of current income consistent with prudent
investment, with consideration given to market conditions.
The Tax Free Fund will invest, without percentage limitations, in municipal
securities having at the time of purchase one of the four highest municipal
ratings by Moody's, S&P, or Fitch Investors Service or in securities which are
not rated, provided that, in the opinion of SM&R, such securities are comparable
in quality to those within the four highest ratings. The rating agencies
consider that bonds rated in the fourth highest category may have some
speculative characteristics and that changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments on those bonds than is the case with higher grade bonds.
SM&R will only purchase bonds rated in such fourth category if it believes that
the purchase of such bonds is consistent with the Tax Free Fund's investment
objective. In the event the rating of an issue held by the Tax Free Fund is
changed by the rating service, such change will be considered by the Tax Free
Fund in its evaluation of the overall investment merits of that security but
such change will not necessarily result in an automatic sale of the security.
Any security held which is subsequently downgraded below BBB by S&P or Baa by
Moody's will be sold as soon as it is advantageous to do so after the downgrade.
A description of the ratings may be found in the Appendix to this Prospectus.
Purchasing unrated municipal securities, which may be less liquid than
comparably rated municipal securities, involves somewhat greater risk and
consequently the Tax Free Fund may not invest more than 20% of its net assets in
unrated municipal securities. To attempt to minimize the risk of such
investments, SM&R will, prior to acquiring unrated securities, consider the
terms of the offering and various other
12
<PAGE>
factors to determine the issuer's comparative credit rating and whether the
securities are consistent with the Tax Free Fund's investment objective and
policies.
During normal market conditions, the Tax Free Fund will have at least 80% of
its net assets invested in municipal securities the income of which is fully
exempt from federal income taxation. Furthermore, under normal market conditions
up to 20% of the Tax Free Fund's net assets, and as a temporary defensive
measure during abnormal market conditions, up to 50% of its net assets may be
invested in the following types of taxable fixed income obligations: (1)
obligations issued or guaranteed by the U.S. government, its agencies,
instrumentalities or authorities (See "Government Bond Fund" above for an
explanation of U.S. government obligations); (2) corporate debt securities which
at the date of the investment are rated A or higher by Moody's or by S&P; (3)
commercial paper which at the date of the investment is rated in one of the two
top categories by Moody's or by S&P or if not rated, is issued by a company
which at the date of the investment has an outstanding debt issue rated A or
higher by Moody's or A or higher by S&P; (4) certificates of deposit issued by
U.S. banks which at the date of the investment have capital surplus and
undivided profits of $1 billion as of the date of their most recently published
financial statements; and (5) repurchase agreements secured by U.S. government
securities, provided that no more than 15% of the Fund's net assets will be
invested in illiquid securities including repurchase agreements with maturities
in excess of seven days. To the extent income dividends include income from
taxable sources, a portion of a shareholder's dividend income may be taxable.
(See "DIVIDENDS AND DISTRIBUTIONS").
MUNICIPAL SECURITIES--The term "municipal securities," as used in this
Prospectus means obligations issued by or on behalf of states, territories, and
possessions of the U.S. and the District of Columbia and their political
subdivisions, agencies, and instrumentalities, the interest on which is exempt
from federal income tax. An opinion as to the tax-exempt status of a municipal
security generally is rendered to the issuer by the issuer's counsel at the time
of issuance of the security.
Municipal securities are used to raise money for various public purposes
such as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the Statement of
Additional Information.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Like other interest-bearing
securities, the value of municipal securities changes as interest rates
fluctuate. For example, if interest rates increase from the time a security is
purchased, the security's value and sales price generally will be less than its
purchase cost. Conversely, if interest rates decline from the time a security is
purchased, the security's value and sales price may be greater than its purchase
cost. Generally, municipal securities of longer maturities produce higher
current yields than municipal securities with shorter maturities but are subject
to greater price fluctuation due to changes in interest rates, tax laws and
other general market factors. Lower-rated municipal securities generally produce
a higher yield with shorter maturities than higher-rated municipal securities
due to the perception of a greater degree of risk as to the ability of the
issuer to pay principal and interest.
The Tax Free Fund may purchase municipal bonds for which the payments of
principal and interest are secured by an escrow account of securities backed by
the full faith and credit of the U.S. government ("defeased") and municipal
securities whose principal and interest payments are insured by a commercial
insurance company as long as the underlying credit is investment grade (BBB or
better by S&P and Fitch and Baa or better by Moody's) ("insured"). The Tax Free
Fund may also purchase unrated securities of issuers which SM&R believes would
have been rated BBB or Baa had the issuer requested a rating from S&P, Fitch or
Moody's. Such implied investment grade rating will be determined by SM&R upon
its performance of a credit analysis of the issue and the issuer. Such credit
analysis may consist of a review of such items as the issuer's debt
characteristics, financial information, structure of the issue, liquidity of the
13
<PAGE>
issue, quality of the issuer, current economic climate, financial adviser, and
underwriter. Insured and defeased bonds are further described in the Statement
of Additional Information. In general, these types of municipal securities will
not be treated as an obligation of the original municipality for purposes of
determining industry concentration.
OTHER INVESTMENTS--The Tax Free Fund may purchase "floating rate" and
"variable rate" obligations. These obligations bear interest at rates that are
not fixed, but vary with changes in specified market rates or indices on
pre-designated dates. See the Statement of Additional Information for details of
these types of investments.
The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed-delivery" basis (See "ADDITIONAL INVESTMENT POLICIES AND
TECHNIQUES--When Issued and Delayed Delivery Purchases" below). Zero coupon
bonds may also be purchased as part of the Tax Free Fund portfolio and are
explained above under the Government Bond Fund.
PRIMARY FUND (FORMERLY, AMERICAN NATIONAL PRIMARY FUND SERIES)
The investment objective of the Primary Fund is to seek maximum current
income consistent with capital preservation and liquidity through investment
primarily in commercial paper. Commercial paper is short-term unsecured
promissory notes issued by corporations to finance short-term credit needs.
Commercial paper is usually sold on a discount basis and has a maturity at the
time of issuance not exceeding nine months. The Primary Fund will invest only 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 ("NRSROs") (See the "Appendix" hereto for information about
such ratings and such rating organizations).
OTHER INVESTMENTS--The Primary Fund may invest in (i) U.S. Government
Obligations (See the "Government Bond Fund" above for an explanation of U.S.
Government Obligations); (ii) other corporate obligations, such as bonds,
debentures or notes maturing in five (5) years or less at the time of purchase
which at the date of the investment are rated "A" or higher by an NRSRO; and
(iii) negotiable certificates of deposit of banks (including U.S. dollar
denominated obligations of foreign branches of U.S. banks and U.S. branches of
foreign banks and savings and loan associations and banker's acceptances of U.S.
banks which banks and savings and loan associations have total assets at the
date of investment (as of the date of their most recent published financial
statements) of at least $1 billion (See "INVESTMENT OBJECTIVES AND POLICIES,"
"Certificates of Deposit" in the Statement of Additional Information for a
description of the securities) and (iv) repurchase agreements with respect to
any type of instrument in which the Primary Fund is authorized to invest even
though the underlying instrument may mature in more than two (2) years. (See
"Additional Investment Policies and Techniques--Repurchase Agreements.")
Obligations of foreign branches of U.S. banks are subject to somewhat
different risks than those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions which may
adversely affect payment of principal and interest on the obligations, foreign
withholding and other taxes on interest income, and difficulties in obtaining
and enforcing a judgement against a foreign branch of a domestic bank. In
addition, different risks may result from the fact that foreign branches of U.S.
banks and U.S. branches of foreign banks are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks. For instance,
such branches may not be subject to the types of requirements imposed on
domestic banks with respect to mandatory reserves, loan limitations,
examinations, accounting, auditing, record keeping, and the public availability
of information. Such obligations are not traded on any national securities
exchange. While the Primary Fund does not presently invest in obligations of
foreign branches of U.S. banks, it may do so in the future. Investments in such
obligations will not be made in excess of 5% of the Primary Fund's total assets
and will be made only when SM&R believes the risks described above are minimal.
14
<PAGE>
MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek to achieve the
highest current income consistent with the preservation of capital and
maintenance of liquidity. The Money Market Fund 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 Company's Board of
Directors. The Money Market Fund 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 United States Government or by its agencies and
instrumentalities. (See "Government Bond Fund" above for an explanation
of U.S. Government Obligations).
(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
Fund 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. As discussed above under "Primary Fund," commercial
paper is short-term unsecured promissory notes issued by corporations to
finance short-term credit needs.
(5) BONDS AND NOTES. The Money Market Fund may invest in corporate bonds or
notes with a remaining maturity of one year or less.
(6) COLLATERALIZED MORTGAGE OBLIGATIONS--As discussed above under
"Government Bond Fund," CMOs are debt obligations collateralized by a
portfolio or pool of mortgages, mortgage-backed securities, or U.S.
Government securities.
The Money Market Fund 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 Fund 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 Fund. 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 NRSROs. Currently, five organizations are NRSROs: Moody's Investor
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("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 Fund 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.
15
<PAGE>
- 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 Objectives and Policies" in the Statement of Additional
Information for a more detailed explanation of the investment categories.) The
Fund 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 Fund'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
Fund may be expected to be less than for any other Fund. By limiting its
investments to Eligible Securities, the Money Market Fund may not achieve as
high a level of current income as a fund investing in lower-rated securities.
ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES
The following investment policies and techniques are available to one or
more of the Funds:
LENDING OF SECURITIES. In order to increase the return on its investment,
the Government Bond Fund may lend portfolio securities to broker-dealers and
other financial institutions in amounts up to 10% of the value of that Fund's
net assets. Loans of portfolio securities will always be collateralized by cash
equal to at least 102% of the market value of the securities loaned including
accrued interest and will be made to borrowers deemed by SM&R to be
creditworthy. Lending portfolio securities involves risk of delay in the
recovery of the loaned securities and in some cases the loss of rights in the
collateral should the borrower fail financially (See the Statement of Additional
Information).
WHEN-ISSUED AND DELAYED DELIVERY PURCHASES. The Government Bond Fund and
Tax Free Fund 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 at a later date. Normally, the settlement date occurs within one
month of the purchase; during the period between purchase and settlement, no
payment is made by the Fund to the issuer and no interest accrues to the
Fund.These transactions are subject to market fluctuation; 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. While
awaiting delivery of the securities purchased on a when-issued and delayed
delivery basis, each of these Funds will hold in a segregated account cash,
short-term money market instruments, high quality debt securities, or portfolio
securities sufficient to cover any commitment or limit any potential risk. (See
"When Issued and Delayed Delivery Transactions" in the Statement of Additional
Information).
REPURCHASE AGREEMENTS. Each Fund may occasionally enter into repurchase
agreements. Under a repurchase agreement, the Fund will acquire and hold an
obligation (government security, certificate of deposit, or banker's acceptance)
for not more than seven days, subject to the agreement by the seller (a Federal
Reserve System member bank or a registered securities dealer) to repurchase the
obligation at an agreed upon repurchase price and date, thereby determining the
yield during the Fund's holding period. During the holding period, the seller
must provide additional collateral if the market value of the obligation falls
below the repurchase price. See the Statement of Additional Information for a
further explanation.
ILLIQUID SECURITIES. Each Fund (except the Money Market Fund) may invest up
to 15%, and the Money Market Fund may invest up to 10%, of its net assets in
illiquid securities, including foreign securities not listed on foreign or
domestic exchanges and repurchase agreements maturing in excess of seven days.
16
<PAGE>
If otherwise consistent with its investment objective and policies, a Fund
may purchase securities that are not registered under the Securities Act of
1933, as amended (the "1933 Act") but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act, or which
were issued under Section 4(2) of the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board, after considering
trading activity, availability of reliable price information and other relevant
information, that an adequate trading market exists for that security. To the
extent that, for a period of time, qualified institutional or other buyers may
cease purchasing such restricted securities, the level of illiquidity of a Fund
holding such securities may increase.
RISK FACTORS. The risk inherent in investing in any Fund of the Company is
a risk common to any security. That is, the value of a Fund's shares will
fluctuate in response to changes in economic conditions, interest rates and the
market's perception of the underlying portfolio securities held by that Fund.
Market prices of the securities in which a Fund invests will fluctuate and will
tend to vary inversely with changes in prevailing interest rates. If interest
rates increase from the time a security is purchased, such security might be
valued and/or sold at a price less than its purchase cost. Conversely, if
interest rates decline from the time a security is purchased, such security
might be valued and/or sold at a price greater than its purchase cost.
Substantial redemptions could require a Fund to sell portfolio securities at a
time when a sale might not be favorable.
Investments in U.S. Government Obligations are not all 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. The Primary Fund,
consistent with its investment objective, will attempt to maximize yield by
trying to take advantage of changing conditions and trends. It may also attempt
to take advantage of what are believed to be disparities in yield relationships
between different instruments. This procedure may increase or decrease the
portfolio yield depending upon the Primary Fund's ability to correctly time and
execute such transactions. Although the Primary Fund's assets will be invested
in securities with short maturities, the Primary Fund will manage its portfolio
as described above. (See "PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION" in
the Statement of Additional Information.)
The Tax Free Fund's ability to achieve its objective depends partially on
the prompt payment by issuers of the interest on and principal of the municipal
securities held. A moratorium, default, or other non-payment of interest or
principal when due could, in addition to affecting the market value and
liquidity of the particular security, affect the market value and liquidity of
other municipal securities. Additionally, the market for municipal securities is
often thin and can be temporarily affected by large purchases and sales. As a
result, the Tax Free Fund will attempt to minimize risk by diversifying its
investments by investing no more than 5% of its net assets in the securities of
any one issuer (this limitation does not apply to investments issued or
guaranteed by the U.S. Government or its instrumentalities) and by investing no
more than 25% of its net assets in municipal securities issued in any one state
or territory. Each political subdivision, agency, instrumentality, and each
multi-state agency of which a state is a member will be regarded as a separate
issuer for the purpose of determining diversification.
THE FUNDS AND MANAGEMENT
A Board consisting of nine directors has overall responsibility for
overseeing the affairs of the Company in a manner reasonably believed to be in
the best interest of shareholders. The Board has delegated to SM&R, the Fund's
investment adviser, the management of the Company's day-to-day business and
affairs. In addition, SM&R invests the Company's assets, provides administrative
services, and serves as transfer agent, custodian, dividend paying agent, and
underwriter.
17
<PAGE>
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of September , 1998, the Moody Foundation, a private
foundation, owned approximately [ ]% of American National's common stock and
the Libbie Shearn Moody Trust, a private trust, owned approximately [ ]% of
such shares. SM&R was incorporated in 1964 and has managed investment companies
since 1966. SM&R also is investment adviser to three other registered investment
companies: American National Growth Fund, Inc., American National Income Fund,
Inc., and American National Triflex Fund, Inc. (the "SM&R Equity Funds," and
collectively with SM&R Investments, Inc., the "SM&R Family of Funds"). SM&R also
serves as investment adviser to the American National Investment Accounts, Inc.,
an investment company used to fund benefits under contracts issued by American
National and for The Moody National Bank of Galveston (the "Bank"), a national
bank. SM&R does and may, from time to time, serve as investment adviser to other
clients including employee benefit plans, other investment companies, banks,
foundations and endowment funds.
The following persons are officers of both SM&R and the Company: Michael W.
McCroskey, Vera M. Young, Emerson V. Unger, Teresa E. Axelson and Brenda T.
Koelemay.
PORTFOLIO MANAGEMENT
While the following individuals are primarily responsible for the day-to-day
portfolio management of their respective Funds, all accounts are reviewed on a
regular basis by SM&R's Investment Committee to ensure that they are being
invested in accordance with investment polices.
VERA M. YOUNG, VICE PRESIDENT OF SECURITIES MANAGEMENT AND RESEARCH, INC.,
VICE PRESIDENT, PORTFOLIO MANAGER OF THE PRIMARY FUND AND THE MONEY MARKET
FUND. Ms. Young has served as Portfolio Manager of the Primary Fund and the
Money Market Fund since each such Fund's inception (1993 and 1998,
respectively). She also serves as Portfolio Manager of the Money Market
Portfolio of American National Investment Accounts, Inc., a series mutual fund
used exclusively for variable contracts issued by American National. Ms. Young
also serves as Assistant Vice President, Securities for American National. Ms.
Young has been managing fixed income investments for American National since
1987 and has served as portfolio manager for various funds for over ten years.
TERRY E. FRANK, VICE PRESIDENT, PORTFOLIO MANAGER OF THE GOVERNMENT BOND
FUND AND TAX FREE FUND. Ms. Frank has served as Portfolio Manager of the
Government Bond Fund since 1993 and the Tax Free Fund since its inception. 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.
ADVISORY AGREEMENT
Under the Advisory Agreements with the Company, SM&R is paid an investment
advisory fee, which is calculated separately for each Fund, as compensation for
its services. The Agreements provide that SM&R will receive advisory fees as set
forth below.
GOVERNMENT BOND FUND AND TAX FREE FUND--A monthly investment advisory fee is
computed by applying to the average daily net asset value of the Government Bond
Fund and the Tax Free Fund each month one-twelfth (1/12th) of the annual rate as
follows:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY
ON THE PORTION OF EACH FUND'S AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- -------------------------------------------------------------------------- -------------------
<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>
18
<PAGE>
MONEY MARKET FUND AND PRIMARY FUND--An investment advisory fee is computed
and paid monthly at the annual rate of 0.50% of the Money Market Fund's and
Primary Fund's average daily net asset value.
After applicable fee waivers, SM&R received total advisory fees from the
Government Bond Fund, Tax Free Fund, and Primary Fund for the fiscal year ended
August 31, 1998 which represented [ ]%, [ ]%, and [ ]%, respectively, of
each such Fund's average daily net assets. The Money Market Fund was not in
operation during the fiscal year ended August 31, 1998.
ADMINISTRATIVE SERVICE AGREEMENT
Under its Administrative Service Agreement with the Company, SM&R also
receives a management and administrative service fee from each Fund which is
computed by applying to the aggregate average daily net asset value of each Fund
each month one-twelfth (1/12th) of the annual rate as follows:
<TABLE>
<CAPTION>
ADMINISTRATIVE SERVICE
ON THE PORTION OF THE FUND'S FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
- -------------------------------------------------------------------- -------------------------
<S> <C>
Not exceeding $100,000,000.......................................... 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000............... 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000............... 0.15%
Exceeding $300,000,000.............................................. 0.10%
</TABLE>
SM&R has agreed to pay (or to reimburse each Fund for) each Fund's regular
operating expenses (including the advisory fee and administrative service fee,
if any, paid to SM&R, but exclusive of "12b-1 fees," Class-specific
expenses,interest, taxes, commissions , and other expenses incidental to
portfolio transactions) in excess of 1.25% (0.35% for the Money Market Fund) per
year of such Fund's average daily net assets. SM&R received administrative
service fees of [ ]% for the Government Bond Fund; [ ]% for the Primary
Fund; and [ ]% for the Tax Free Fund for the fiscal year ended August 31, 1998
of each Fund's average daily net assets. The Money Market Fund was not in
operation during the fiscal year ended August 31, 1998.
FEE WAIVERS
In order to improve the yield and total return of any Fund of the
Company,SM&R may from time to time voluntarily waive or reduce all or any
portion of its advisory fee, administrative fee, and/or assume certain or all
expenses of any Fund of the Company while retaining its ability to be reimbursed
for such fees prior to the end of the fiscal year. 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. SM&R has agreed to
continue to waive the advisory fee for the Tax Free Fund and reimburse regular
operating expenses incurred by the Government Bond and Primary Funds to the
extent that total expenses (exclusive of the "12b-1 fees" and Class-specific
expenses) exceed average daily net assets as follows: Primary Fund--.80% and
Government Bond Fund--1.00%.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
The Company adopted a Distribution and Shareholder Servicing Plan (the
"12b-1 Plan") pursuant to Rule 12b-1 under the 1940 Act for the Class A, Class
B, Class C, and Class J shares of the Government Bond Fund and the Tax Free Fund
(as defined above, the "Multi-Class Funds"). The 12b-1 Plan provides that SM&R
will provide distribution and/or shareholder services to the Class A, Class B,
and Class C shares of the Multi-Class Funds (the "12b-1 Classes").
19
<PAGE>
For each 12b-1 Class, SM&R is entitled to receive a Distribution Fee and/or
Service Fee, as applicable, computed as an annual percentage of the value of the
average daily net assets of the Multi-Class Fund attributable to that Class, as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION SERVICE TOTAL 12b-1
CLASS FEE(1) FEE(1) FEE
- ---------------------------------------------------------- ----------- --------- -----------
<S> <C> <C> <C>
Class A Shares: Front-End Load............................ (0) 0.25% 0.25%
Class B Shares: Back-End Load (CDSC)...................... 0.50% 0.25% 0.75%
Class C Shares: Level Load................................ 0.75% 0.25% 1.00%
</TABLE>
- ------------------------
(1) The Distribution Fee and/or Service Fee, as applicable, to be paid under the
12b-1 Plan will be calculated daily (as a percentage of average daily net
assets) and paid periodically.
The purpose of the Distribution Fee is to compensate SM&R, or enable SM&R to
compensate other persons, including any distributor of shares of the 12b-1
Classes, for services that are primarily intended to result in or primarily
attributable to the sale of the 12b-1 Classes ("Selling Services"). The purpose
of the Service Fee is to compensate SM&R, or enable SM&R to compensate other
persons, for providing ongoing servicing to shareholders of the Funds
("Shareholder Services"). "Selling Services" include the training and
supervision of sales personnel; advertising, marketing, and other promotional
expenses, including the costs of preparing and printing sales literature;
printing prospectuses and statements of additional information and distributing
them to prospective investors in 12b-1 Classes; and distributing shares of the
12b-1 Classes. Payments for Selling Services may include payment for overhead
and other office expenses that are related to the distribution of the 12b-1
Classes. SM&R also may reimburse the expenses of persons who provide support
services in connection with the distribution of the 12b-1 Classes, and may make
payments to financial intermediaries that sell shares of the 12b-1 Classes.
"Shareholder Services" include all forms of shareholder liaison services that
SM&R deems appropriate, including maintaining shareholder accounts, providing
shareholder liaison services, responding to customer inquiries, and providing
shareholders with information on their investments and about the 12b-1 Classes.
HOW TO PURCHASE SHARES
You may purchase shares of a Fund from registered representatives of SM&R,
from authorized broker-dealers, or directly from SM&R. Such purchases will be at
the offering price (the "Offering Price") for such shares determined as and when
provided below (See "DETERMINATION OF OFFERING PRICE"). SM&R will send you a
monthly confirmation for any month in which your account is active. You should
carefully review the monthly confirmation and promptly report any discrepancies
to SM&R. You may make initial and subsequent purchases directly through SM&R at
the following address:
Securities Management and Research, Inc.
One Moody Plaza, 14th Floor
Galveston, Texas 77550
Certificates are not normally issued for shares of each Fund in an effort to
minimize the risk of loss or theft. However, SM&R confirms investors' purchases
and credits such purchases to their accounts on the books maintained by SM&R.
Investors have the same rights of share ownership as they would if certificates
had been issued.
OPENING AN ACCOUNT: To purchase shares, you must submit an account
application(the "Account Application") which includes the purchaser suitability
form (the "Suitability Form"). If you would like to take advantage of the
electronic services available, please complete the Electronic Transfer Options
section of the Account Application. Special forms are required when establishing
an IRA or 403(b) plan. Please call Investor Services at (800) 231-4639 and
request special forms when establishing retirement plans. Keep in
20
<PAGE>
mind when opening an account that transactions by telephone between different
accounts will only be permitted if the accounts are registered in the identical
name.
MINIMUM PURCHASE REQUIREMENT: The minimum initial investment requirement is
$100 for the Government Bond Fund and the Tax Free Fund, and $1000 for the Money
Market Fund and the Primary Fund. The minimum amount of any subsequent purchase
is $20 for the Government Bond Fund and the Tax Free Fund, and $100 for the
Money Market Fund and the Primary Fund. These initial investment minimums are
waived when purchases are part of certain systematic investment programs (See
"SPECIAL PURCHASE PLANS AND SERVICES" for additional information on reduction of
the minimums). The Company reserves the right to reject any purchase.
PURCHASES BY MAIL: Make your check(s) payable to SM&R and send the check(s)
to the address indicated above. Please note that third party checks will not be
accepted to open a new account, except for IRA Rollover checks that are properly
endorsed. If you make subsequent investments by mail, you must indicate your
name, account number, and the name of the Class and the Fund being purchased.
You may use the remittance slip attached to the confirmation statement.
PURCHASES BY WIRE: To ensure proper crediting of a wire investment, you
must have an executed Account Application and Suitability Form on file with the
transfer agent. You may then wire your investment by providing the following
instructions to your bank:
The Moody National Bank of Galveston ABA #133100091
Securities Management and Research, Inc. #035 868 9
Name of Class and Fund (E.G., Class A of the Government Bond Fund)
Fund Account Number (number appears on your confirmation statement)
Your Name (E.G., Mary Smith)
If wires are received after 3:00 p.m. Central Time or during a Bank holiday
or SM&R business holiday, purchases will be made at the price determined on the
next business day. A wire fee in the amount of $8.00 will be charged the
investor for wires under $5,000.
PURCHASES BY EXCHANGE: Call Investor Services if you have established
telephone exchange privileges on your account. See "SPECIAL PURCHASE PLANS AND
SERVICES--Exchange Privilege" for procedures and additional information relating
to telephone exchanges. For limitations on exchanges see "Excessive Trading"
also under "SPECIAL PURCHASE PLANS AND SERVICES."
WHEN ARE PURCHASES EFFECTIVE?
Purchases received in proper form by SM&R prior to the close of the New York
Stock Exchange (currently 3:00 p.m. Central Time) (the "Exchange") on any SM&R
business day, or received prior thereto on any SM&R business day by a securities
dealer having a dealer contract with SM&R and reported to SM&R prior to SM&R's
close of business (currently 4:30 p.m. Central Time) on the same day, will be
effective and executed at the applicable Offering Price determined at the close
of the Exchange on that day. It is the responsibility of any such dealer and not
SM&R to establish procedures to assure that purchases received before the close
of the Exchange on an SM&R business day will be reported to SM&R before SM&R's
close of business on that same day. Purchases received after the close of the
Exchange, on customary national business holidays, or on an SM&R holiday will be
effective upon and made at the Offering Price determined as of the close of the
Exchange on SM&R's next business day that such Exchange is open for trading.
If payments for purchases are transmitted by bank wire to the Bank and
reported to SM&R prior to the close of the Exchange on any SM&R business day,
the investor will purchase at the Offering Price
21
<PAGE>
determined and become a shareholder as of the close of the Exchange on that same
day. Purchases by wire payments reported by the Bank to SM&R after the close of
the Exchange, on customary national business holidays, or on an SM&R holiday,
will be effective on and made at the Offering Price determined on SM&R's next
business day. Procedures for transmitting Federal Funds by wires are available
at any national bank or any state bank which is a member of the Federal Reserve
System.
SM&R's business holidays are Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, the Friday following Thanksgiving Day, two (2) days
at Christmas, and New Years Day. If Christmas Day is a weekday other than
Monday, Christmas Day and Christmas Eve Day are business holidays. If Christmas
Day is Monday, Christmas Day and the preceding Friday will be business holidays.
If Christmas Day is a Saturday, the preceding Thursday and Friday will be
business holidays. If Christmas Day is a Sunday, the preceding Friday and the
following Monday will be business holidays. If New Years Day is a Saturday, the
preceding Friday will be a business holiday, and if New Years Day is a Sunday,
the following Monday will be a business holiday.
DETERMINATION OF OFFERING PRICE
Each Fund's Offering Price is determined once each day and is comprised of
that Fund's net asset value plus the sales charge, if any, computed at the rate
set forth in the applicable tables for the Classes below. Shares of the
Single-Class Funds may be purchased without a sales charge. Accordingly, the
Offering Price for shares of each Single Class Fund is that Fund's net asset
value.
Net asset value per share is determined by dividing the market value of the
securities owned by the Fund or Class thereof, plus any cash or other assets
(including dividends accrued but not collected), less all liabilities of such
Fund or Class (including accrued expenses but excluding capital and surplus), by
the number of shares of the Fund or Class outstanding. Net asset value is
currently determined as of 3:00 p.m. Central Time on each business day. Although
the legal rights of the Classes of the Multi-Class Funds are substantially
identical, the different expenses borne by each Class will result in different
net asset values and dividends for each Class.
The Money Market Fund values all of its securities using the amortized cost
method, which does not take into account unrealized capital gains or losses. The
amortized cost method of valuation involves valuing an instrument 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
value of the instrument. (For a further discussion of the amortized cost method,
see the Statement of Additional Information.) The other Funds use the amortized
cost method only for valuing debt securities having maturities of 60 days or
less. Debt securities with maturities in excess of 60 days are valued on the
basis of prices provided by a pricing service or brokers.
Although the legal rights of the Class A, Class B, and Class C shares of the
Multi-Class Funds are substantially identical, the different expenses borne by
each Class will result in different net asset values and dividends. The net
asset value of the Class B and Class C shares generally will be lower than the
Class A shares as a result of respective service and distribution (12b-1) fees
charged.
For a more complete description of the procedures involved in valuing
various fund assets, see "Offering Price" in the Company's Statement of
Additional Information.
MULTI-CLASS FUNDS
The Government Bond Fund and the Tax Free Fund (as defined above, the
"Multi-Class Funds") offer six classes of shares, including Class T shares
(existing shareholders), Class A shares, Class B shares, Class C shares, Class Y
shares (institutional shareholders), and Class J shares (network). You are
encouraged to consider all of the Company's class alternatives and choose the
one that fits your individual
22
<PAGE>
circumstances at the lowest level of fees. FOR MORE INFORMATION ON THE OTHER
CLASSES OF SHARES OR TO REQUEST A PROSPECTUS FOR ANOTHER CLASS, INVESTORS MAY
CONTACT INVESTOR SERVICES AT (800) 231-4639.
Class A, B, and C shares are offered in this Prospectus. These Classes allow
you to choose a sales charge structure that best suits your circumstances and
preferences. You may purchase shares at the next determined net asset value
plus, at your election, (i) a sales charge imposed at the time of purchase (the
Class A "front-end load" shares); (ii) a contingent deferred sales charge and an
annual distribution fee (the Class B "back-end load" shares), or (iii) an
initial sales charge and an annual distribution fee and a 1.00% redemption fee
during the first 13 months (the Class C "level load" shares).
The Multi-Class Funds' other three classes of shares are offered through
separate prospectuses. Class T shares are sold only to investors that became
shareholders of the Company prior to September , 1998 and to certain
designated persons set forth from time to time in the prospectus for the Class T
shares. Class Y shares are offered to certain institutional shareholders, as set
forth from time to time in the prospectus for the Class Y shares. Class J shares
are offered pursuant to special "network" distribution arrangements that are set
forth in the prospectus for the Class J shares. Class T, Class Y, and Class J
shares are subject to different sales charges and other expenses. Accordingly,
Class T, Class Y, and Class J shares each may have an expense ratio and
performance that differs from those of the Company's other classes.
Each Class of shares of a Multi-Class Fund represents an interest in the
same portfolio of investments and each Class has the same rights as the other
Classes, except that each Class bears its own expenses. The net income
attributable to each Class and the dividends payable on the shares of that Class
will be reduced by the amount of the service and distribution (12b-1) fees of
that Class. Class B and Class C shares are subject to higher distribution fees,
which will cause such Classes to have a higher expense ratio and pay lower
dividends than the Class A shares.
Class A Shares (Front-End Load): Class A shares are subject to an initial
sales charge of up to 4.75% of the public offering price and an annual 12b-1 fee
of 0.25% of the average daily net assets of the Class A shares. Purchasers of
Class A shares may qualify for a reduction or waiver of initial sales charges,
as set forth in the chart below and under "Reduction and/or Waiver of Initial
Sales Charges." If you invest $1 million or more in Class A shares, there is no
initial sales charge, but such shares will be subject to a contingent deferred
sales charge ("CDSC") of 1.00% of the offering price on redemptions within 13
months of purchase.
The offering price of Class A shares is the next determined net asset value
plus a sales charge (calculated as a percentage of the offering price) shown in
the following table:
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS SALES CHARGE AS A SELECTED DEALERS AS
A PERCENTAGE OF PERCENTAGE OF NET A PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE*
- ------------------------------------ ---------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $50,000................... 4.75% [ ] 3.75%
$50,000 but less than $100,000...... 4.5% 4.7% 4.0%
$100,000 but less than $250,000..... 3.5% 3.6% 3.0%
$250,000 but less than $500,000..... 2.5% 2.6% 2.0%
$500,000 but less than
$100,000,000...................... 1.5% [ ] 1.00%
$1,000,000 and over................. None** None None
</TABLE>
- ------------------------
* For Class A shares (as well as for shares of the Primary and Money Market
Funds), SM&R may, in certain circumstances, provide compensation (from its
own profits and resources) to broker-dealers in addition to these discounts.
(See "OTHER INFORMATION CONCERNING THE FUNDS-Special Payments to
Broker-Dealers.")
** Subject to a CDSC of 1.00% on shares redeemed within 13 months of purchase.
23
<PAGE>
Class B Shares (Back-End Load): An investor pays no initial sales charge
upon the purchase of Class B shares, but such shares are subject to a CDSC that
declines from 3.00% to zero, calculated as a percentage of the amount invested,
imposed on redemptions made within four years of purchase. Class B shares are
subject to an annual 12b-1 fee of 0.75% of the average daily net asset value of
the Class B shares.
Class B shares are sold at net asset value subject to a CDSC (expressed as a
percentage of the offering price) shown in the following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEARS SINCE PURCHASE (AS A PERCENTAGE OF OFFERING PRICE)
- ------------------------------------------------------------- -----------------------------------
<S> <C>
Year 1....................................................... 3%
Year 2....................................................... 2%
Year 3....................................................... 1%
Year 4+...................................................... 0%
</TABLE>
If the net asset value of shares being redeemed has increased above the
initial purchase price, no CDSC is imposed on amounts attributable to such
increase in net asset value. No CDSC is assessed on shares derived from
reinvestment of dividends or capital gain distributions. The Company will
minimize any applicable CDSC payable by assuming that an investor (i) first
redeems Class B shares owned through reinvested dividends and capital gains
distributions, and (ii) next redeems Class B shares held the longest.
Class B shares convert automatically to the appropriate number of Class A
shares of equal dollar value after the investor has owned the Class B shares for
eight (8) years. Dividends and other distributions paid to an investor in the
form of additional Class B shares also will convert to Class A shares on a pro-
rata basis. The conversion benefits shareholders because Class A shares are
subject to a lower ongoing 12b-1 fee. If an investor converts Class B shares of
a Multi-Class Fund for Class B shares of another fund in the SM&R Family of
Funds, the purchase date of the original investment will be used to determine
the appropriate conversion date.
Class C Shares (Level Load): A sales charge of 1.00% is assessed on initial
investments in Class C shares as a percentage of offering price. A contingent
deferred sales charge of 1.00% is also assessed on redemptions of Class C shares
during the first thirteen months after purchase. Class C shares are subject to
an annual 12b-1 fee of 1.00% of the average daily net asset value of the Class C
shares.
REDUCTION AND/OR WAIVER OF INITIAL SALES CHARGES (CLASS A SHARES)
DISCOUNTS THROUGH CONCURRENT PURCHASES. To qualify for a reduced sales
charge on the Class A shares, you may combine concurrent purchases of Class A
shares of funds in the SM&R Family of Funds at the respective sales charges
applicable to each. Investors that are eligible to combine concurrent purchases
to qualify for a reduced sales charge include:
(1) Any individual;
(2) Any individual, his or her spouse, and trusts or custodial accounts for
their minor children;
(3) A trustee or fiduciary of a single trust estate or single fiduciary
account.
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class T or
Class A shares of another fund in the SM&R Family of Funds, you may be able to
receive a discount when you buy additional shares. The offering value of the
shares you already own may be "accumulated"--I.E., combined together with the
offering value of the new shares you plan to buy--to achieve quantities eligible
for discount. See "SPECIAL PURCHASE PLANS" in the Statement of Additional
Information for further information about certain rules that apply when taking
advantage of the right of accumulation.
24
<PAGE>
LETTER OF INTENT. You may qualify immediately for a reduced sales charge on
purchases of Class A shares of funds in the SM&R Family of Funds by completing
the Letter of Intent section of the Account Application. Under a Letter of
Intent, an investor expresses an intention to purchase, within 13 months of the
initial investment, a specified amount of Class A shares in the funds of the
SM&R Family of Funds which, if made concurrently, would qualify for a reduced
sales charge. Upon execution of the Letter of Intent, the investor must make a
minimum initial investment equal to ten percent (10%) of the amount necessary to
qualify for the applicable reduced sales charge. To assure that the full
applicable sales charge will be paid if the intended purchase is not completed,
five percent (5%) of the total intended purchase amount will be held in escrow
in shares of the funds of the SM&R Family of Funds registered in the investor's
name. Shares held in escrow under a Letter of Intent are not eligible for the
exchange privilege until the Letter of Intent is completed or canceled. A Letter
of Intent does not represent a binding obligation on the part of the investor to
purchase or the SM&R Family of Funds to sell the full amount of shares
specified. (See the Investor's Letter of Intent on the Account Application and
"SPECIAL PURCHASE PLANS" in the Statement of Additional Information.)
REDUCTION AND/OR WAIVER OF CONTINGENT DEFERRED SALES CHARGE (CLASS B SHARES)
Contingent deferred sales charges on Class B shares will be waived on
redemptions:
(1) following the shareholder's (or in the case of joint accounts, all
registered joint owners') death or disability, as defined in Section
72(m)(7) of the Internal Revenue Code (the "Code") (provided SM&R is
notified of such death or disability at the time of the redemption
request and is provided with satisfactory evidence of such death or
disability);
(2) in connection with certain distributions from IRAs, custodial accounts
maintained pursuant to Code Section 403(b), and plans qualified under
Code Section 401 (collectively, "Retirement Plans"); or
(3) not exceeding 10% per year of the amount otherwise subject to the CDSC
(amounts not subject to a CDSC, such as appreciation and reinvested
dividends, are withdrawn first).
WAIVER CATEGORY (1) ABOVE APPLIES ONLY TO REDEMPTIONS:
(a) made within one year following death or initial determination of
disability; and
(b) of Class B shares held at the time of death or initial determination of
disability.
WAIVER CATEGORY (2) ABOVE APPLIES ONLY TO REDEMPTIONS RESULTING FROM:
(a) required minimum distributions to plan participants or beneficiaries who
are age 70 1/2 or older;
(b) in kind transfers of assets where the participant or beneficiary
notifies SM&R of such transfer no later than the time such transfer
occurs;
(c) tax-free rollovers or transfers of assets to another Retirement Plan
invested in Class B shares of one or more funds in the SM&R Family of
Funds;
(d) tax-free returns of excess contributions or returns of excess deferral
amounts; and
(e) distributions upon the death or disability (as defined in the Code) of
the participant or beneficiary.
FUND AND CLASS EXPENSES
Expenses that are directly attributable to a particular Class of shares
("Class Expenses") will be borne solely by that Class. Class expenses include:
(1) asset-based distribution fees and shareholder service fees; (2) transfer
agency fees attributable to a particular Class; (3) expenses related to
preparing, printing,
25
<PAGE>
mailing, and distributing materials such as shareholder reports, prospectuses,
and proxy statements to current shareholders of a specific Class; (4) state and
federal registration fees incurred by a specific Class; (5) litigation and other
legal expenses relating to a particular Class; (6) directors' fees and expenses
incurred as a result of issues relating solely to a particular Class; (7)
accounting, audit, and tax expenses relating to a specific Class; (8) the
expenses of administrative personnel and services required to support the
shareholders of a specific Class; and (9) fees and other payments made to
entities performing services for a particular Class, including account
maintenance, dividend disbursing, or subaccounting services.
Class Expenses may be waived or reimbursed by SM&R, the Fund's investment
adviser and distributor. Investment advisory fees, custodial fees, and other
expenses relating to the management of the Company's assets shall not be
allocated on a class-specific basis. Income, realized and unrealized capital
gains and losses, and expenses that are not allocated to a specific Class shall
be allocated to each Class on the basis of the proportionate net assets of that
Class in relation to the net assets of the Multi-Class Fund.
All direct sales expenses for the Primary Fund and the Money Market Fund,
including the cost of prospectuses for prospective shareholders, are paid by
SM&R, and no sales expense is borne by those Funds.
For additional information about the expenses of the Funds, see the
Statement of Additional Information.
SPECIAL PURCHASE PLANS AND SERVICES
In addition to the special plans, described above, that permit you to reduce
the initial sales charge assessed on Class A shares, the Company offers other
services and plans that are designed to facilitate investment in the Funds. At
this time, there is no charge to you for these services. The Company may impose
fees for such services in the future. Be aware, however, that if you elect to
participate in the ACH plan described below, you should check with your
financial institution for any additional charges imposed for this service. For
additional information contact your registered representative or SM&R.
ELECTRONIC TRANSFERS (ACH). The electronic transfer option allows you to
move money between your Fund account(s) and your bank, savings and loan, or
credit union account using the Automated Clearing House ("ACH") network. To
arrange for electronic transfers, complete the relevant section of the Account
Application at the time you open your account and specify the type of service or
services desired. Attach a voided, pre-printed check or deposit slip from your
checking, savings and loan or credit union account. PASSBOOK SAVINGS ACCOUNTS
ARE NOT ELIGIBLE FOR THE ELECTRONIC TRANSFER OPTION. ADDITIONALLY, YOUR BANK
MUST BE A MEMBER OF THE AUTOMATED CLEARING HOUSE (ACH) NETWORK FOR YOU TO TAKE
ADVANTAGE OF THIS SERVICE. You will receive a confirmation verifying
initialization of the electronic transfer option and may begin conducting
transactions in your account(s) under this option three (3) weeks after receipt
of the verification notice from SM&R. If you elect this option after your
account is established, it may be necessary for you to obtain a signature
guarantee for all individuals named on the account(s).
GROUP SYSTEMATIC INVESTMENT PLAN. SM&R can establish a Group Systematic
Investment Plan with an employer having 5 or more participants under a single
payroll deduction arrangement. The Minimum Initial Investment amount requirement
per account is waived for such plans. However, all other investment amount
minimums apply. Contact SM&R for further information regarding such plans.
TELEPHONE SERVICES. You can take advantage of this service by completing
the appropriate sections of the Account Application when opening your account.
Through this service, you will be able to purchase by ACH, redeem and exchange
shares on those accounts for which you have an executed Account Application on
file, and have received written verification from SM&R that the service has been
initialized as explained under Electronic Transfers above. If this option is
elected after your account is established, it may be necessary for you to obtain
a signature guarantee for all individuals named on the account(s). PLEASE NOTE
THAT THE TELEPHONE REDEMPTION OPTION IS NOT AVAILABLE TO RETIREMENT PLANS.
26
<PAGE>
The Funds have implemented the following security procedures intended to
protect your account from losses resulting from unauthorized or fraudulent
telephone instructions: The caller will be required to know (i) the name of the
Fund or Funds; (ii) all digits of the account number; (iii) the exact name and
address used in the registration(s); and (iv) the Social Security or Employer
Identification Number listed on the account(s). Additionally, all telephone
transactions will be recorded for your protection.
Neither the Funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone which comply with the current
security procedures and other requirements. SM&R believes that such security
procedures and other requirements are reasonable and, if followed, you should
bear the risk of any losses resulting from unauthorized or fraudulent telephone
transactions on your account(s).
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from your bank account and invested
monthly, bi-monthly, quarterly, or annually into the designated fund(s) at the
applicable offering price determined on the date of the electronic transfer.
WEALTH ACCUMULATION ACCOUNT. Shareholders having account balances of at
least $2,500 in the Money Market Fund may open a Wealth Accumulation Account,
which will provide them with an automatic dollar cost averaging plan. Automatic
monthly purchases of the shares of other funds in the SM&R Family of Funds may
be made by exchanges from the shareholder's Money Market Fund Wealth
Accumulation Account. Purchases of the other funds must be at least $50 and,
unless terminated by the shareholder, will continue as long as the balance of
the Money Market Fund Wealth Accumulation Account is sufficient. Additional
investments may be made to a Money Market Fund account designated as a Wealth
Accumulation Account to extend the purchase period under the plan. However, if
additional investments are received by SM&R less than ten (10) days prior to the
20th of the month, such investments will not be available for use under the
Wealth Accumulation Account until the 20th of the following month. If the 20th
of the month is an SM&R holiday, the purchase will be processed on the next
business day.
Purchases made will be subject to the applicable sales charge of the fund
whose shares are being purchased. Changes in amounts to be purchased, the funds
being purchased, and termination of a Wealth Accumulation Account will be made
within five (5) business days after written instructions are received by SM&R in
proper form (I.E., signed by the owner(s) of record exactly as registered).
Shareholders' rights to make additional investments, to exchange shares, and
to redeem shares in the Money Market Fund and any of the funds in the SM&R
Family of Funds are not affected by a shareholder's participation in a Wealth
Accumulation Account. However, check writing privileges and expedited redemption
by telephone are not available for the Money Market Fund accounts designated as
a part of the Wealth Accumulation Account.
Primary Fund shareholders that opened a Primary Fund Wealth Accumulation
Account prior to September , 1998 will be permitted to continue using the
Account subject to the terms applicable to a Money Market Fund Wealth
Accumulation Account, described above.
EXCHANGE PRIVILEGE. As an investor in a Fund, you are permitted to exchange
shares that you own in a Fund with shares of another fund in the SM&R Family of
Funds without the payment of an exchange fee, subject to certain conditions.
Exchanges between a Fund and another fund in the SM&R Family of Funds are
available only in states where the applicable funds are registered and the
exchange may be legally made.
MULTI-CLASS FUNDS (GOVERNMENT BOND FUND AND TAX FREE FUND). You may
exchange Class A, Class B, or Class C shares that you own in a Multi-Class Fund,
without an exchange fee, for shares of the corresponding Class of another fund
in the SM&R Family of Funds. You also may exchange your Class A, Class B, or
Class C shares for shares of a Single-Class Fund, provided that any applicable
CDSC period has expired on the shares you wish to exchange (I.E.,13 months in
the case of Class A and Class C shares and 3 years in the
27
<PAGE>
case of Class B shares) and you meet any minimum investment requirement for the
shares you wish to acquire. Finally, you may exchange shares you own in any
Class of a Multi-Class Fund for shares of another Class of that Fund, provided
that you pay any difference in sales charges and any applicable CDSC period has
expired on the shares you wish to exchange.
SINGLE-CLASS FUNDS (PRIMARY FUND AND MONEY MARKET FUND). You may exchange
shares you own in a Single-Class Fund for shares of the other Single-Class Fund
or for shares of a Class of another fund in the SM&R Family of Funds, provided
you pay any sales charge applicable to the acquired shares.
You may acquire, through an exchange, shares of a Class with a CDSC. If you
redeem those shares, the relevant CDSC, if any, will be calculated from the date
that you initially purchased the original shares, rather than from the date of
exchange.
Shares of any fund in the SM&R Family of Funds held in escrow under a Letter
of Intent are not eligible for the exchange privilege. Such shares will not be
released from escrow until the balance invested during the period specified in
the Letter of Intent equals or exceeds the amount required to be invested under
the Letter of Intent or the shareholder requests, in writing, that the Letter of
Intent be canceled and pays any adjustments in sales charge. After release from
escrow, shares may be exchanged, provided all other applicable conditions are
met.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met: (a) the exchange must be made
between accounts having identical registrations and addresses; (b) the shares of
the fund of the SM&R Family of Fund acquired through exchange must be qualified
for sale in the state in which you reside; (c) the dollar amount of the exchange
must meet the minimum investment requirement applicable to the shares of the
fund in the SM&R Family of Funds that you would acquire through the exchange;
(d) SM&R must have received full payment for the shares being exchanged; (e)
your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal Revenue
Service Form W-8 (certificate of foreign status) or Form W-9 (certifying exempt
status); (f) any shares that you wish to exchange must have been held for at
least ten (10) business days; (g) certificates representing shares, if any, are
returned before such shares are exchanged; and (h) you have received a
prospectus for the shares you receive in the exchange.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time. ANY
GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE INCOME TAX PURPOSES. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR
THE TAX TREATMENT AND EFFECT OF EXCHANGES.
EXCESSIVE TRADING. Frequent trades, involving either substantial fund
assets or a substantial portion of your account or accounts controlled by you,
can disrupt management of the Company and raise the Company's expenses. We
define "excessive trading" as exceeding one purchase and sale involving the same
fund within any 120-day period.
For example, you are in Fund X. You can move substantial assets from Fund X
to Fund Y and, within the next 120 days, sell your shares in Fund Y to return to
Fund X or move to Fund Z. If you exceed the number of trades described above,
you may be barred indefinitely from further transactions between the
participating funds.
There are two types of transactions exempted from the excessive trading
guidelines. They are (1) redemptions that are not part of exchanges and (2)
systematic purchases or redemptions.
RETIREMENT PLANS
The following retirement plans may be funded with shares of the Government
Bond Fund, the Primary Fund, and the Money Market Funds: Individual Retirement
Accounts (IRAs); Simplified
28
<PAGE>
Employee Pension Plans (SEPs); 403(b) Custodial Accounts (TSAs), and corporate
retirement plans. Information concerning IRAs and TSAs, and the forms necessary
to adopt such plans, can be obtained by contacting your registered
representative or calling SM&R. A regular Fund application should be used when
establishing a corporate retirement plan. In connection with retirement plans,
the minimum initial purchase for each Fund is $100. The minimum subsequent
purchase is $20 for the Government Bond Fund and $100 for the Money Market and
Primary Funds. SM&R acts as trustee or custodian for IRAs, SEPs, and TSAs for
the Company. An annual custodial fee of $7.50 will be charged for any part of a
calendar year in which an investor has an IRA, SEP, or TSA in the Company and
will be automatically deducted from each account. An individual considering a
retirement plan may wish to consult with an attorney or tax adviser.
Because IRAs, SEPs, TSAs, and other qualified plans are exempt from federal
income tax, they will be unable to benefit from the general tax-exempt nature of
the Tax Free Fund. Accordingly, the Tax Free Fund is not generally considered to
be suited for such plans or persons.
DIVIDENDS AND DISTRIBUTIONS
The Government Bond Fund and Tax Free Fund will declare and pay dividends
from net investment income monthly and net realized short-term or long-term
capital gains, if any, annually.
At 3:00 p.m. Central Time, on each day that the Exchange is open for trading
other than SM&R's business holidays described above, the Primary Fund and the
Money Market Fund each will declare a dividend of all of its net investment
income to shareholders already of record. Such dividends will be paid monthly.
Dividends and capital gains will be automatically reinvested at net asset
value in additional shares of the Fund making such distribution unless SM&R is
instructed otherwise in writing. Distributions not reinvested are paid by check
or transmitted to your bank account through an ACH transaction, if elected. If
the Postal Service cannot deliver your check, or if your check remains uncashed
for six months, the Company reserves the right to reinvest your distribution
check in your account at the net asset value on the business day of the
reinvestment and to reinvest all future distributions in shares of the Company.
Dividends and capital gains declared in December to shareholders of record in
December and paid the following January will be taxable to shareholders as if
received in December. This is a convenient way to accumulate additional shares
and maintain or increase the shareholder's earning base. Of course, any shares
so acquired remain at market risk.
Shareholders have the right to change their election with respect to the
receipt of distributions by notifying SM&R in writing, but any such change will
be effective only as to distributions for which the record date is seven or more
business days after SM&R has received the shareholder's written request.
In order to be entitled to a dividend, an investor must have acquired shares
of a Fund prior to the close of business on the record date. A shareholder
should be cautioned, however, before purchasing shares of a Fund immediately
prior to a distribution. Dividends and distributions paid by the Company have
the effect of reducing net asset value per share on the record date by the
amount of the payment. Therefore, a dividend or distribution of record shortly
after the purchase of shares by an investor represents in substance, a return of
capital.
TAXES
Each Fund of the Company is treated as a separate entity for federal income
tax purposes. The Company has elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code. The Company 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 the Company
will be required to pay federal income taxes.
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<PAGE>
In order to qualify as a regulated investment company, each Fund of the
Company must meet several requirements. These requirements include the
following: (1) at least 90% of the Fund's gross income must be derived from
dividends, interest, payments with respect to securities loans, gains from the
sale or disposition of stock, securities or foreign currencies or other income
(including gains from options, futures or forward contracts) derived in
connection with the Fund's investment business and (2) at the close of each
quarter of the Fund's taxable year, (a) at least 50% of the value of the Fund's
assets must consist of cash, United States Government securities, securities of
other regulated investment companies and other securities (limited generally
with respect to any one issuer to not more than 5% of the total assets of the
Fund and not more than 10% of the outstanding voting securities of such issuer)
and (b) not more than 25% of the value of the Fund's assets may be invested in
the securities of any issuer (other than United States Government Securities or
securities of other regulated investment companies) or of two or more issuers
which the Fund controls and which are determined to be engaged in similar or
related trades or businesses.
For federal income tax purposes, any income dividends derived from taxable
investments which the shareholder receives from such Fund of the Company, as
well as any distributions derived from net short-term capital gains are treated
as ordinary income whether the shareholder has elected to receive them in cash
or in additional shares. Distributions derived from net long-term capital gains
will be taxable as long-term capital gains regardless of the length of time the
shareholder has owned such Fund's shares and regardless of whether such
distributions are received in cash or in additional shares. In determining the
amount of capital gains, if any, available for distribution, net capital gains
are offset against available net capital losses, if any, carried forward from
previous years.
Dividends paid by the Tax Free Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be "exempt-interest" dividends
that shareholders may exclude from their gross income for federal income tax
purposes if the Fund satisfies certain quarterly asset percentage requirements.
To the extent that the Tax Free Fund invests in bonds, the interest on which is
a specific tax preference item for federal income tax purposes ("AMT-Subject
Bonds"), any exempt-interest dividends derived from interest on AMT-Subject
bonds will be a specific tax preference item for purposes of the federal
individual and corporate alternative minimum taxes. All exempt-interest
dividends will be a component of the "current earnings" adjustment item for
purposes of the federal corporate alternative minimum income tax. Current
federal tax law limits the types and volume of securities qualifying for the
federal income tax exemption of interest and may also affect the availability of
municipal obligations for investment by the Fund and the value of the Fund's
portfolio.
Redemptions and exchanges of shares in each Fund of the Company are taxable
events on which a shareholder may realize a gain or loss. Shareholders of the
Tax Free Fund should be careful about redeeming shares immediately prior to the
record date of an "exempt-interest dividend" because the redemption may cause
the shareholder to realize a taxable gain even though a portion of the
redemption proceeds may represent a pro rata share of tax exempt interest earned
by the Fund. In addition, a loss on the sale or redemption of shares held by the
shareholder of the Tax Free Fund for six months or less will be disallowed to
the extent of any exempt-interest dividend received by the shareholder with
respect to those shares. Shareholders should consult with their tax advisor
concerning the tax reporting requirements in effect on the redemption or
exchange of such shares.
The Company may be required to report to the Internal Revenue Service
("IRS") any taxable dividends or other reportable payment (including share
redemption proceeds) and withhold 31% of any such payments made to individuals
and other non-exempt shareholders who have not provided a correct taxpayer
identification number and made certain required certifications that appear in
the Application. A shareholder may also be subject to backup withholding if the
IRS or a broker notifies the Company that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
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<PAGE>
Shareholders who are not U.S. persons for purposes of federal income
taxation should consult with their financial or tax advisors regarding the
applicability of U.S. withholding taxes to distributions received by them from
the Company.
Many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by the fund from direct obligations of
the U.S. Government, subject in some states to minimum investment requirements
that must be met within the fund.
At the end of each calendar year, the Company will advise shareholders about
the tax status of all distributions made during each taxable year, including the
portion of the dividends which comprise taxable income, exempt income and
interest income that is a tax preference item under the alternative minimum tax.
Shareholders should consult a tax advisor about the application of state and
local tax laws to these distributions and redemption proceeds received from the
Company.
IMPORTANT: The Company reserves the right to (1) refuse to open an account
for any person failing to provide a taxpayer identification number, certified as
correct and (2) close an account by redeeming its shares in full, at the then
current net asset value, upon receipt of notice from the IRS that the taxpayer
identification number certified as correct by the shareholder is in fact
incorrect.
HOW TO REDEEM
Shares of the Company will be redeemed at net asset value, plus any
applicable CDSC. Net asset value is determined on the date the request is
received by SM&R in "Proper Form," as defined in "PROPER FORM" below. There is
no charge for redemptions. A redemption request must be addressed to Securities
Management and Research, Inc., One Moody Plaza, 14th Floor, Galveston, Texas
77550.
If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as practicable and normally
within seven days after receipt of a redemption request in Proper Form.
If the shares being redeemed were purchased by wire, certified check, money
order, or other immediately available funds, redemption proceeds will be mailed
no later than the seventh calendar day following receipt. For shares purchased
by a personal check or ACH transfer, SM&R will process your redemption but will
generally delay sending you the proceeds for up to ten (10) business days to
allow the check or transfer to clear.
TELEPHONE REDEMPTIONS. You may request redemptions by telephone if you have
completed the Account Application and requested this option. This redemption
feature can only be used if: (a) the redemption proceeds are to be mailed to the
address of record or wired to the pre-authorized bank account indicated on the
Account Application; (b) there has been no change of address of record or pre-
authorized bank account within the preceding 30 business days; (c) the shares to
be redeemed are not in certificate form; (d) the security procedures discussed
under "SPECIAL PURCHASE PLANS AND SERVICES Exchange Privilege" have been met;
and (e) the proceeds of the redemption do not exceed $25,000.
SYSTEMATIC WITHDRAWAL PLAN. The Company has a Systematic Withdrawal Plan
("Withdrawal Account"), which permits shareholders having an account value of
$5,000 or more to automatically withdraw a minimum of $50 monthly or each
calendar quarter on or about the 20th of the applicable month. Shareholders
maintaining a Withdrawal Account may elect to have the withdrawal proceeds
automatically deposited in their pre-authorized bank account via an ACH
transaction. This is accomplished by completing the relevant section of the
Account Application and returning it to SM&R. See "SPECIAL PURCHASE PLANS AND
SERVICES--Electronic Transfers" for additional information. It may not be
advisable for shareholders to maintain a Withdrawal Account while concurrently
purchasing shares of the Government Bond Fund or the Tax Free Fund because of
the sales charge or CDSC (as applicable) involved in additional purchases. You
should carefully consider such purchases and contact
31
<PAGE>
your financial adviser regarding their advisability. Dividends and capital gains
distributions will automatically be reinvested in additional shares at net asset
value. As with other redemptions, a withdrawal is a sale for federal income tax
purposes. The Systematic Withdrawal Plan will automatically terminate if all
shares are liquidated or withdrawn from the account. Certificates are not issued
for shares held in a Withdrawal Account and certificates held, if any, must be
surrendered when shares are transferred to a Withdrawal Account. No account
covered by a Letter of Intent can be changed to a Systematic Withdrawal Plan
until such time as the Letter of Intent is fulfilled or terminated, nor can an
account under a Systematic Withdrawal Plan be placed under a Letter of Intent.
REINVESTMENT PRIVILEGE. Within ninety (90) days of a redemption of Class A
shares of a Fund, a shareholder may reinvest all or part of the proceeds in
Class A shares of that same Fund at the net asset value next computed after
receipt of the proceeds to be reinvested by SM&R. The shareholder must ask the
transfer agent for this privilege at the time of reinvestment. Prior to
reinvestment of redemption proceeds, a shareholder is encouraged to consult with
his or her accountant or tax advisor to determine any possible tax ramifications
of such a transaction. Each fund managed by SM&R may amend, suspend, or cease
offering this privilege at any time as to shares redeemed after the date of the
amendment, suspension, or cessation.
For further information about the "Systematic Withdrawal Plan" and
"Reinvestment Privilege," contact a registered representative or SM&R.
"PROPER FORM" means the request for redemption must include: (1) your share
certificates, if issued; (2) your letter of instruction or a stock assignment
specifying the Fund, account number, and number of shares or dollar amount to be
redeemed. Both share certificates and stock powers, if any, must be endorsed and
executed exactly as the Fund shares are registered. It is suggested that
certificates be returned by certified mail for your protection; (3) any required
signature guarantees (see "Signature Guarantees" below); and (4) other
supporting legal documents, if required in the case of estates, trusts,
guardianships, divorce, custodianships, corporations, partnerships, pension or
profit sharing plans, retirement plans, and other organizations.
Please keep in mind that as a shareholder, it is your responsibility to
ensure that all requests are submitted to the Company's transfer agent in Proper
Form for processing.
SIGNATURE GUARANTEES. This guarantee carries with it certain statutory
warranties relied upon by the transfer agent. This guarantee is designed to
protect the investor, the Company, SM&R, and its representatives through the
signature verification of each investor wishing to redeem or exchange shares.
Signature guarantees are required when: (1) the proceeds of the redemption
exceed $25,000; (2) the proceeds (in any amount) are to be paid to someone OTHER
THAN the registered owner(s) of the account; (3) the proceeds (in any amount)
are to be sent to any address OTHER THAN the shareholder's address of record,
pre-authorized bank account or exchanged to one of the other funds managed by
SM&R; or (4) the Company or its transfer agent believes a signature guarantee
would protect against potential claims based on the transfer instructions,
including, when the authority of a representative of a corporation, partnership,
association, or other entity has not been established to the satisfaction of the
Company or transfer agent.
Acceptable guarantees can be obtained from an "eligible guarantor
institution" as defined in rules adopted by the Securities and Exchange
Commission. Eligible guarantor institutions include banks, brokers, dealers,
municipal securities dealers or brokers, government securities dealers or
broker, credit unions (if authorized under state law), national securities
exchanges, registered securities associations and institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program or an SM&R representative who has executed
an agreement and received authorization from SM&R. IMPORTANT: Witnessing or
notarization is not sufficient.
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<PAGE>
TEXAS OPTIONAL RETIREMENT PROGRAM. Government Bond Fund, Primary Fund, and
Money Market Fund shares in any account established under the Texas Optional
Retirement Program may not be redeemed unless satisfactory evidence is received
by SM&R from the state that one of the following conditions exist: (1) death of
the employee; (2) termination of service with the employer; or (3) retirement of
employee.
CHECK WRITING OPTION. Check writing is available in the Money Market Fund
to investors having an account value of $1,000 or more. $250 is the minimum
check amount under the check writing option. This option is not available on
IRAs or TSAs. Shareholders wishing to avail themselves of this option must
complete the check writing option signature card in the Prospectus. After
obtaining specimen signatures and the fully executed card, SM&R will order
checks and arrange for the shareholder's checks to be honored by a bank.
Investments made by personal check or third party check will be held for fifteen
(15) business days following the investment during which time checks may not be
drawn on the amount of such investment. This service may be terminated or
suspended or additional charges may be imposed for this service. Shareholders
will be provided the initial checkbook free of charge. There will be a $5 fee
for re-orders. Shareholders will be allowed to write ten (10) checks free each
calendar quarter.
When a check is presented for payment, SM&R, as the shareholder's agent,
will cause each Fund to redeem a sufficient number of full and fractional shares
to cover the amount of the check. Shareholders will continue to be entitled to
dividends on their shares up to the time the check is presented to SM&R for
payment. If the amount of the check is greater than the value of the shares held
in the shareholder's account for more than fifteen (15) business days at the
time the check is presented for payment, the check will be returned to the payee
as not being covered by sufficient funds, and the shareholder will be subject to
extra charges as a result.
Primary Fund shareholders that had check writing privileges prior to
September , 1998 will be permitted to continue writing checks on the Primary
Fund subject to the terms applicable to the Money Market Fund described above.
Shareholders using the Primary Fund check writing option should be aware that
writing a check is a redemption of shares. Those shares may be worth less when
the check is presented for payment than when the check was written.
REDEMPTION OF SMALL ACCOUNTS. The Company reserves the right to redeem
shares in any account (which will be promptly paid to the shareholder) if, due
to your redemptions, the value of the account falls below $100 in the case of
the Government Bond Fund and Tax Free Fund or $1,000 in the case of the Primary
Fund and Money Market Fund. You will be notified that the value of your account
is less than the required minimum indicated above and allowed at least 60 days
to make an additional investment to increase the value of your account above the
required minimum. The Board of Directors may, from time to time, change such
required minimum investment.
RIGHTS RESERVED BY THE COMPANY. The Company, acting through its transfer
agent, reserves the right to waive or lower investment minimums; to accept
initial purchases by telephone from a registered representative; to refuse any
purchase order; to cancel or rescind any purchase or exchange at any time prior
to receipt by the shareholder of written confirmation or, if later, within five
(5) business days of the transaction; to freeze an account and suspend account
services when notice has been received of a dispute involving the account owners
or other parties or there is reason to believe a fraudulent transaction may
occur; to restrict or refuse the use of faxed redemptions where there is a
question as to the validity of the request or proper documents have not been
received; to otherwise modify the conditions of purchase and any services at any
time; or to act on instructions not believed to be genuine.
OTHER INFORMATION CONCERNING THE FUNDS
SHARING OF FUND EXPENSES. Each Fund bears its proportionate share of the
Company's general expenses not susceptible of direct allocation. Such general
expenses include the Company's organizational expenses, directors' fees and
joint fidelity bonds, which are pro-rated based on the relative amount of each
Fund's
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<PAGE>
assets, and prospectus and shareholder report expenses, which are pro-rated
based on the relative number of each Fund's shareholders. Organizational
expenses for the Tax Free Fund and the Money Market Fund were paid by the
adviser.
AUTHORIZED STOCK. The shares of each Fund, when issued, will be fully paid
and non-assessable, will have no conversion or similar rights, and will be
freely transferable. Each share of stock will have a pro-rata interest in the
assets of the Fund to which the stock of that class relates and will have no
interest in the assets of any other Fund.
As of September 1, 1998, SM&R and its parent, American National Insurance
Company, owned [ ]% and [ ]%, respectively, of the outstanding shares of the
Company; [ ]% and [ ]%, respectively of the outstanding shares of the
Government Bond Fund; [ ]% and [ ]%, respectively of the outstanding shares
of the Primary Fund; and [ ]% and [ ]%, respectively of the outstanding
shares of the Tax Free Fund. In addition, SM&R provided the initial capital for
the Money Market Fund, and as of the date of this Prospectus owns 100% of the
outstanding shares of such Fund. Any person who owns directly or indirectly more
than 25% of the outstanding voting securities of the Company or a Fund is
presumed by the Investment Company Act of 1940 to "control" the Company or the
Fund, and may be able to significantly influence the outcome of any shareholder
vote. For purposes of voting on matters submitted to shareholders, any person
who owns more than 50% of the outstanding shares of the Company or a Fund
generally would be able to cast the deciding vote. By virtue of their stock
ownership, SM&R and American National control the Company's operations,
including the ability to make changes in the fundamental investment objectives
and restrictions of each Fund of the Company, as well as the ability to increase
investment advisory fees, notwithstanding other shareholders' votes to the
contrary. Holders of shares of any Fund are entitled to redeem their shares as
set forth under "HOW TO REDEEM."
YEAR 2000 RISKS. Many services provided to the Funds and their shareholders
depend on the smooth functioning of computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated, referred to as the "Year 2000
Problem." The Year 2000 Problem could have a negative impact on handling
securities trades, payment of interest and dividends, pricing, and account
services. Like other mutual funds, financial and business organizations, and
individuals around the world, the Funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and transfer agent) do not properly process and
calculate date-related information and data from and after January 1, 2000. SM&R
is taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by any other service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Funds and their shareholders.
VOTING RIGHTS. Within the respective Funds, all shares have equal voting,
participation and liquidation rights, but have no subscription, preemptive,
conversion, or cumulative voting rights.
On certain matters, such as the election of directors, all shares of each
Fund vote together, with each share having one vote. On other matters affecting
a particular Fund, such as the Investment Advisory Contract or fundamental
investment policies, only shares of that Fund are entitled to vote, and a
majority of the shares of that Fund are required for approval of the proposal.
On matters affecting a particular Class of a Fund, only shares of that Class of
the Fund are entitled to vote, and a majority of the shares of that Class are
required for approval of the proposal.
SPECIAL PAYMENTS TO BROKER-DEALERS. Broker-dealers or other securities
dealers that have entered into selling agreements with SM&R may receive
compensation from SM&R or an affiliated company in connection with selling
shares of the SM&R Family of Funds. Compensation may include financial
assistance for conferences, shareholder services, automation, sales and training
programs, or promotional activities. Registered representatives and their
families may be paid for travel expenses, including lodging,
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<PAGE>
in connection with business meetings or seminars. In some cases, this
compensation may only be available to securities dealers whose representatives
have sold or are expected to sell significant amounts of shares. Securities
dealers may not use certain sales to qualify for this compensation if prohibited
by the laws of any state or self-regulatory agency, such as the National
Association of Securities Dealers, Inc.
Securities laws of states in which the Fund offers its shares may differ
from federal law. Banks and financial institutions that sell shares of the Fund
may be required to register as securities dealers pursuant to state law.
For purchases of $1 million or more of Class A shares, SM&R intends to pay
its representatives and broker-dealers from its own profits and resources. The
amount (expressed as a per annum percentage of the amount invested) which SM&R
might pay such representatives and broker-dealers is as follows for Class A
shares of the Government Income and Tax Free Funds, respectively: Year 1 -
[ ]% and [ ]%; Year 2 - [ ]% and [ ]%; and Year 3 and subsequent years,
[ ]% (for each Fund).
ADDITIONAL INFORMATION. This Prospectus and the Statement of Additional
Information referred to on the cover page do not contain all the information set
forth in the registration statement, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The omitted information may be obtained from the Commission's principal office
in Washington, D.C., upon payment of the fees prescribed by the Commission.
For further information, shareholders may also contact SM&R, whose address
and phone number are set forth on the cover of this Prospectus.
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<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S BOND RATING:
<TABLE>
<S> <C>
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 that 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 like 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, if 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.
</TABLE>
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S BOND RATINGS:
<TABLE>
<S> <C>
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-edge".
Interest payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the long-term
risks appear somewhat greater than in Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Baa Bonds which are rated "Baa" are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
</TABLE>
DESCRIPTION OF FITCH INVESTORS SERVICE BOND RATINGS:
<TABLE>
<S> <C>
AAA Obligations which have the highest rating assigned by Fitch IBCA on its national
rating scale for that country. This rating is automatically assigned to all
obligations issued or guaranteed by the sovereign state. Capacity for timely
repayment of principal and interest is extremely strong, relative to other obligors
in the same country.
AA Obligations for which capacity for timely repayment of principal and interest is very
strong relative to other obligors in the same country. The risk attached to these
obligations differs only slightly from the country's highest rated debt.
A Obligations for which capacity for timely repayment of principal and interest is
strong relative to other obligors in the same country. However, adverse changes in
business, economic or financial conditions are more likely to affect the capacity for
timely repayment than for obligations in higher rated categories.
BBB Obligations for which capacity for timely repayment of principal and interest is
adequate relative to other obligors in the same country. However, adverse changes in
business, economic or financial conditions are more likely to affect the capacity for
timely repayment than for obligations in higher rated categories.
</TABLE>
MUNICIPAL NOTE RATINGS
DESCRIPTION OF MOODY'S INVESTOR SERVICE INC.'S MUNICIPAL NOTE RATINGS:
<TABLE>
<S> <C>
MIG 1/VMIG 1 This designation denotes best quality. There is present strong protection
by established cash flows, superior liquidity support or demonstrated
broad-based access to the market refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access
for refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly regarded as
required of an investment security is present and although not distinctly
or predominantly speculative, there is specific risk.
</TABLE>
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<PAGE>
DESCRIPTION OF STANDARD AND POOR'S MUNICIPAL NOTE RATINGS:
Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or less
the ratings below usually will be assigned. Notes maturing beyond three years
will most likely receive a bond rating of the type recited above.
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very
strong capacity to pay debt service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
</TABLE>
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
Commercial paper rated "A" by Standard & Poor's Corporation has the
following characteristics: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is generally rated "A" or better. The issuer
has access to at least two additional channels of borrowing. Basic earnings and
cash flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated as follows:
<TABLE>
<S> <C>
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".
</TABLE>
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
Among the factors considered by Moody's Investors Service, Inc. is assigning
commercial paper ratings are the following: (1) evaluation of the management of
the issuer; (2) economic evaluation of the issuer's industry or industries and
an appraisal of the risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition of the management
of obligations which may be present or may arise as a result of public interest
questions and proportions to meet such obligations. Relative differences in
strength and weakness in respect to these criteria would establish a rating in
one of three classifications; "P-1", "P-2" or "P-3". "P-1" is the highest
commercial paper rating assigned by Moody's Investors Service, Inc. "P-2" is the
second highest of such ratings.
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<PAGE>
DESCRIPTION OF FITCH INVESTORS SERVICE COMMERCIAL PAPER, MEDIUM-TERM NOTES, AND
MUNICIPAL AND INVESTMENT NOTES.
<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as
having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than issues rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for issues
assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics suggesting that
the degree of assurance for timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below investment grade.
F-5 Weak Credit Quality. Issues assigned this rating have characteristics suggesting a
minimal degree of assurance for timely payment and are vulnerable to near-term
adverse changes in financial and economic conditions.
</TABLE>
DESCRIPTION OF DUFF & PHELP'S TWO HIGHEST COMMERCIAL RATINGS:
Duff & Phelp's commercial paper ratings place emphasis on liquidity,
considering not only cash from operations, but access to alternative sources of
funds, including trade credit, bank lines and capital markets. Relative
differences in strength and weakness is rated by Duff & Phelp's as Duff-1 or
Duff-2; Duff-1 being the highest commercial paper rating and Duff-2 being the
second highest rating.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
Thomson Bankwatch, Inc.'s ratings of United States commercial banks,
thrifts, and non-bank banks, non-United States banks, and broker-dealers are
based upon among other things, five years's financial information and the
issuer's most recent regulatory filings. Relative differences in strength and
weakness are rated by Thomson Bankwatch, Inc.
<TABLE>
<S> <C>
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.
</TABLE>
FEDERAL FUNDS
As used in this Prospectus and in the Fund's Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.
39
<PAGE>
<TABLE>
<S> <C>
Securities Management & Research, Inc. BULK RATE
One Moody Plaza U.S. POSTAGE PAID
Galveston, TX 77550 PERMIT NO. 89
GALVESTON, TEXAS
</TABLE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
September , 1998
A Statement of Additional Information dated September , 1998 containing
additional information about the Company was filed with the Securities and
Exchange Commission and is incorporated herein by reference. Additional
information about the Company's investments also is available in the Company's
annual and semi-annual reports to shareholders. In the Company's annual report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Company's performance during the last fiscal
year.
The Company's Statement of Additional Information, annual report, and
semi-annual reports are available, without charge, upon request. You may make
shareholder inquiries, request further information about the Company and the
Funds, or obtain copies of the Statement of Additional Information, annual
report, and semi-annual report, by writing Securities Management and Research,
Inc., One Moody Plaza, 14th Floor, Galveston, Texas 77550, or by calling (Toll
Free) 1-800-231-4639 or (Collect) 1-409-763-2767.
Information about the Company and the Funds may be reviewed and copied 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 Company also are available on the Commission's Internet site at
http://www.sec.gov, and 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.
811-6477
<PAGE>
[SM&R Logo] SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
P R O S P E C T U S
CLASS Y
(INSTITUTIONAL SALES)
SM&R INVESTMENTS, INC. - One Moody Plaza - Galveston, Texas 77550
Telephone Number: (409) 763-2767 - Toll Free: 1 (800) 231-4639
September 15, 1998
OFFICERS
Michael W. McCroskey, President and CEO
Brenda T. Koelemay, Vice President and Treasurer
Emerson V. Unger, Vice President
Teresa E. Axelson, Vice President and Secretary
<TABLE>
<S> <C>
INVESTMENT ADVISER AND MANAGER UNDERWRITER AND REDEMPTION AGENT
Securities Management and Research, Inc. Securities Management and Research, Inc.
One Moody Plaza One Moody Plaza
Galveston, Texas 77550 Galveston, Texas 77550
CUSTODIAN TRANSFER AND DIVIDEND PAYING AGENT
Securities Management and Research, Inc. Securities Management and Research, Inc.
One Moody Plaza One Moody Plaza
Galveston, Texas 77550 Galveston, Texas 77550
LEGAL COUNSEL INDEPENDENT AUDITORS
Greer, Herz & Adams, L.L.P. Tait, Weller & Baker, CPA
One Moody Plaza 8 Penn Center Plaza, Suite 800
Galveston, Texas 77550 Philadelphia, PA 19103-2108
</TABLE>
- --------------------------------------------------------------------------------
This Prospectus offers no-load shares of four separate investment portfolios
("Funds") of SM&R Investments, Inc. (the "Company") to institutions and certain
other investors. Class Y shares of the Government Bond and Tax Free Funds and
all shares of the Primary and Money Market Funds are sold at net asset value,
without imposition of any sales charge or 12b-1 fee.
Each Fund has its own investment objective designed to meet different
investment goals. The Funds' investment objectives, and suitability for
particular types of investors, are further described under "The Funds at a
Glance" and "Investment Objectives and Policies."
Please read this Prospectus carefully before making an investment and keep
it for future reference.
Shares of the Company and each Fund are not deposits or obligations of, or
guaranteed or endorsed by, any bank. Further, shares of the Company and each
Fund, including the Government Bond and Money Market Funds, are not federally
insured or guaranteed by the U.S. Government, the Federal Deposit Insurance
Corporation ("FDIC"), the Federal Reserve Board or any other agency. Investing
in shares of any Fund of the Company involves investment risks, including the
possible loss of principal.
Like all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
There can be no assurance that SM&R Money Market Fund will be able to
maintain a net asset value of $1.00 per share.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
TABLE OF FEES AND EXPENSES............................................................. 3
FINANCIAL HIGHLIGHTS................................................................... 5
INVESTMENT OBJECTIVES AND POLICIES..................................................... 8
ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES.......................................... 14
THE FUNDS AND MANAGEMENT............................................................... 15
HOW TO PURCHASE SHARES................................................................. 17
WHEN ARE PURCHASES EFFECTIVE?.......................................................... 18
DETERMINATION OF OFFERING PRICE........................................................ 19
MULTI-CLASS FUNDS...................................................................... 20
SPECIAL PURCHASE PLANS AND SERVICES.................................................... 21
RETIREMENT PLANS....................................................................... 23
DIVIDENDS AND DISTRIBUTIONS............................................................ 23
TAXES.................................................................................. 24
HOW TO REDEEM.......................................................................... 26
OTHER INFORMATION CONCERNING THE FUNDS................................................. 28
</TABLE>
i
<PAGE>
THE FUNDS AT A GLANCE
SM&R Investments, Inc., formerly known as SM&R Capital Funds, Inc. (the
"Company"), is a diversified, open-end management investment company that was
incorporated under the laws of Maryland on November 6, 1991. The Company offers
four separate investment portfolios (the "Funds"), each of which pursues a
different investment objective. The investment objective and investor
suitability profile of each Fund are summarized below.
SM&R GOVERNMENT BOND FUND ("GOVERNMENT BOND FUND")
OBJECTIVE: 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.
INVESTOR SUITABILITY PROFILE: The Government Bond Fund is for investors
desiring the security of investing primarily in the strength and stability of
the U.S. Government, its agencies, or instrumentalities in order to meet their
current needs. However, investors should keep in mind that the Fund may invest
in other instruments in order to meet its objective.
SM&R TAX FREE FUND ("TAX FREE FUND")
OBJECTIVE: To provide as high a level of interest 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.
INVESTOR SUITABILITY PROFILE: The Tax Free Fund is for the investor
desiring income exempt from federal income tax and, under certain conditions,
exempt from state and local taxes. Investors should keep in mind that certain
income from the Fund may be subject to the federal alternative minimum tax
("AMT") and investors in certain states may be subject to state taxation on all
or a portion of the income and capital gains realized by the Fund.
SM&R PRIMARY FUND ("PRIMARY FUND")
OBJECTIVE: To seek maximum current income consistent with capital
preservation and liquidity through investment primarily in commercial paper.
INVESTOR SUITABILITY PROFILE: The Primary Fund is for fixed income
investors who desire minimal investment risk yet may be looking to move
cautiously into the investment arena.
SM&R MONEY MARKET FUND ("MONEY MARKET FUND")
OBJECTIVE: To seek to achieve the highest current income consistent with
the preservation of capital and maintenance of liquidity. The Fund seeks to
achieve its objective by investing in high-quality short-term money market
instruments.
INVESTOR SUITABILITY PROFILE: The Money Market Fund is for investors who
are risk-averse, such as first-time investors who wish to move cautiously into
the investment arena. The Fund is designed to provide investors a relatively
safe and liquid investment alternative. The Money Market Fund also may be
appropriate for investors who wish to temporarily "park" funds during periods
when investment in the equity markets is unattractive.
The Company designates its capital stock as shares of the Funds. Each Fund
is, for investment purposes, considered a separate investment fund. Each share
of capital stock represents a pro-rata interest in the assets of a particular
Fund and has no interest in the assets of any other Fund. Each Fund bears its
1
<PAGE>
own liabilities. Investors should keep in mind that investments in the Funds,
including the Government Bond and Money Market Funds, are not insured or
guaranteed by the U.S. Government.
PORTFOLIO TURNOVER RATES: Historical turnover rates for each Fund (except
the Money Market Fund) are included in the Financial Highlights tables. No Fund
expects its portfolio turnover rate to exceed eighty percent (80%). An
explanation of turnover rate calculations and brokerage fees can be found in the
Company's Statement of Additional Information.
MANAGEMENT: Securities Management and Research, Inc. ("SM&R") makes the
investment choices for the Funds. SM&R has served as adviser and distributor to
mutual funds since 1966. See "THE FUNDS AND MANAGEMENT" for additional
information.
PURCHASING SHARES: No-load shares of the Funds are available through this
Prospectus to institutions and certain other investors. Class Y shares of the
Government Bond and Tax Free Funds and all shares of the Primary and Money
Market Funds are offered at net asset value without the imposition of any sales
charge on purchases or redemptions or any distribution and service ("12b-1")
fees. Some of the Funds offer other share classes with different sales charge
and distribution and service ("12b-1") fee structures, as described in "MULTI-
CLASS FUNDS."
For Class Y shares of the Government Bond and Tax Free Funds, the minimum
initial investment requirement generally is $500,000, except as described in
"HOW TO PURCHASE SHARES." For the Money Market and Primary Funds, the minimum
initial investment is $1,000. See "HOW TO PURCHASE SHARES."
REDEMPTIONS: For information on redeeming shares, see "HOW TO REDEEM."
EXCHANGES: In general, shareholders can exchange shares of a Fund for
shares of another fund in the SM&R Family of Funds (as defined herein) without
the payment of an exchange fee, subject to certain conditions. For information
on exchanging shares, see "Exchange Privilege" within "SPECIAL PURCHASE PLANS
AND SERVICES."
2
<PAGE>
TABLE OF FEES AND EXPENSES
The purpose of the following table is to assist an investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. Investors should be aware that this table is not intended to reflect
in detail the fees and expenses associated with an individual shareholder's own
investment in any of the Funds, or Class thereof, listed. It is being provided
to assist investors in gaining a more complete understanding of fees, charges,
and expenses which are discussed in greater detail in the appropriate sections
of the Prospectus.
THERE ARE NO SHAREHOLDER TRANSACTION CHARGES IN CONNECTION WITH PURCHASES OR
REDEMPTIONS OF CLASS Y SHARES OF THE GOVERNMENT BOND FUND AND THE TAX FREE FUND,
OR OF ANY SHARES OF THE PRIMARY FUND AND MONEY MARKET FUND, OTHER THAN AN $8.00
TRANSACTION FEE CHARGED FOR EACH EXPEDITED WIRE REDEMPTION.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets Before Fee Waivers and Expense
Reimbursements)
The "Management Fee," "Other Expenses," and "Total Annual Fund Operating
Expenses" shown below for the Government Bond, Primary, and Tax Free Funds are
for the year ended August 31, 1997; for the Money Market Fund, they are
estimates for the first year of operation (ending August 31, 1999). NO
DISTRIBUTION OR SERVICE (12B-1) FEES ARE IMPOSED ON CLASS Y SHARES OF THE
GOVERNMENT BOND FUND AND THE TAX FREE FUND, OR ON ANY SHARES OF THE PRIMARY FUND
AND MONEY MARKET FUND.
<TABLE>
<CAPTION>
MONEY
GOVERNMENT TAX FREE PRIMARY MARKET
BOND FUND FUND FUND FUND
---------- -------- ------- ------
CLASS Y CLASS Y
<S> <C> <C> <C> <C>
Management Fee................ 0.50% 0.50% 0.50% 0.50%
Other Expenses(1)............. 0.57% 0.77% 0.51% 0.75%
Total Annual Fund Operating
Expenses(2)................. 1.07% 1.27% 1.01% 1.25%
</TABLE>
NOTES TO THE TABLE OF FEES AND EXPENSES
(1) "Other Expenses" include the 0.25% Administrative Service Fee. Because Class
Y shares were not available prior to the date of this Prospectus, "Other
Expenses" for Class Y shares were based on the expenses and average net
assets of the Government Bond Fund and the Tax Free Fund, respectively, for
the fiscal year ended August 31, 1997. "Other Expenses" shown for the Money
Market Fund are estimated for the current fiscal year ending August 31,
1999.
(2) The Fee Table does not reflect any fees waived or expenses assumed either
contractually or voluntarily by SM&R for the Funds during the fiscal year
ended August 31, 1997. Pursuant to the Administrative Service Agreement,
SM&R has agreed to pay (or to reimburse) each Fund for regular operating
expenses (including the advisory fee and administrative fee, but not
including any 12b-1 fee or Class-specific expenses) in excess of 1.25%
(0.35% for the Money Market Fund) per year of such Fund's average daily net
assets.
SM&R may also waive fees or assume expenses on a voluntary basis. During the
fiscal year ended August 31, 1997, SM&R voluntarily waived management fees of
0.07%, 0.21%, and 0.50% for the Government Bond Fund, Primary Fund, and Tax Free
Fund, respectively, and reimbursed expenses of 0.24% for the Tax Free Fund. SM&R
intends to continue to voluntarily waive the advisory fee for the Tax Free Fund
and reimburse expenses to the extent that total regular operating expenses (not
including any 12b-1 fee or Class-specific expenses) exceed average daily net
assets as follows: 0.80% for the Primary Fund and 1.00% for the Government Bond
Fund. SM&R may discontinue or reduce any such waiver or assumption of expenses
at any time without notice.
3
<PAGE>
The following table is based on the "Management Fee," "Other Expenses," and
"Total Annual Fund Operating Expenses" for the Government Bond, Primary, and Tax
Free Funds for the year ended August 31, 1997 taking into account fee waivers
and expense reimbursements. For the Money Market Fund, they are estimates taking
into account fee waivers and expense reimbursements for the year ending August
31, 1999.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets After Fee Waivers and Expense
Reimbursements)
<TABLE>
<CAPTION>
GOVERNMENT TAX FREE MONEY MARKET
BOND FUND FUND PRIMARY FUND FUND
---------- -------- ------------ ------------
CLASS Y CLASS Y
<S> <C> <C> <C> <C>
Management Fee.......................... 0.43% 0.00% 0.29% 0.00%
Other Expenses.......................... 0.57% 0.54% 0.51% 0.35%
Total Annual Fund Operating Expenses.... 1.00% 0.54% 0.80% 0.35%
</TABLE>
EXAMPLES OF EXPENSES
These Examples are intended to help investors compare the cost of investing
in the Funds with the cost of investing in other mutual funds. These Examples
assume that an investor invests $10,000 in a Fund (and applicable Class thereof)
for the time periods indicated. These Examples also assume that the investment
has a 5% return each year and that the Fund's operating expenses remain the
same. An investor's actual costs may be higher or lower than shown.
An investor would pay the following expenses, based on these assumptions, if
all shares were redeemed at the end of the period shown:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Government Bond Fund (Class Y)............................. $ $ $ $
Tax Free Fund (Class Y).................................... $ $ $ $
Primary Fund............................................... $ $ $ $
Money Market Fund.......................................... $ $ N/A N/A
</TABLE>
An investor would pay the same expenses, based on these assumptions, if the
shares were not redeemed, since there are no sales charges or redemption fees.
4
<PAGE>
FINANCIAL HIGHLIGHTS--GOVERNMENT BOND FUND
The following financial highlights table is intended to help an investor
understand the Government Bond Fund's financial performance for the past five
years. Certain information reflects financial results for a single Government
Bond Fund share outstanding throughout each period shown. The total returns in
the table represent the rate that an investor would have earned (or lost) on an
investment in the Government Bond Fund (assuming reinvestment of all dividends
and distributions) prior to addition of multiple classes of shares. This
information is derived from the financial statements of the Government Bond
Fund, which for the years ended through August 31, 1997 have been audited by
KPMG Peat Marwick LLP, independent auditors, whose report, along with the
Government Bond Fund's financial statements, are incorporated by reference into
in Statement of Additional Information, which is available upon request, and
from unaudited financial statements of the Government Bond Fund for the six
month period ended February 28, 1998.
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED YEAR ENDED AUGUST 31
FEB. 28, ------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $10.42 $10.14 $10.51 $10.07 $10.87 $10.56
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income....... 0.32 0.67 0.65 0.70 0.54 0.50
Net Realized and Unrealized
Gain (Loss) on
Securities................ 0.15 0.26 (0.37) 0.44 (0.79) 0.49
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS.................. 0.47 0.93 0.28 1.14 (0.25) 0.99
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income......... (0.34) (0.65) (0.65) (0.70) (0.55) (0.50)
Distributions from Capital
Gains..................... 0.00 0.00 0.00 0.00 0.00 (0.18)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS........... (0.34) (0.65) (0.65) (0.70) (0.55) (0.68)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period...................... $10.55 $10.42 $10.14 $10.51 $10.07 $10.87
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN.................. 4.58%(1) 9.37% 2.63% 11.85% (2.41)% 10.23%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED YEAR ENDED AUGUST 31
FEB. 28, -------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Assets, End of Period
(000's omitted)............. $23,915 $23,683 $21,127 $20,466 $19,790 $19,783
Ratio of Expenses to Average
Net Assets(3)............... 0.97%(2) 1.00% 1.00% 0.70% 1.12% 1.07%
Ratio of Net Income to Average
Net Assets.................. 6.16%(2) 6.46% 6.17% 6.90% 5.11% 5.07%
Portfolio Turnover Rate....... 0.92% 9.06% 30.17% 2.20% 45.48% 18.14%
</TABLE>
- ------------------------
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and 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.
5
<PAGE>
FINANCIAL HIGHLIGHTS--TAX FREE FUND
The following financial highlights table is intended to help an investor
understand the Tax Free Fund's financial performance since inception. Certain
information reflects financial results for a single Tax Free Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Tax Free Fund (assuming reinvestment of all dividends and distributions)
prior to addition of multiple classes of shares. This information is derived
from the financial statements of the Tax Free Fund, which for the years ended
through August 31, 1997 have been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the Fund's Tax Free financial statements, are
incorporated by reference into the in Statement of Additional Information, which
is available upon request, and from unaudited financial statements of the Tax
Free Fund for the six month period ended February 28, 1998.
<TABLE>
<CAPTION>
SEPT. 9, 1993
SIX MONTH YEAR ENDED AUGUST 31 (DATE OPERATIONS
PERIOD ENDED ------------------------ COMMENCED) THRU
FEB. 28, 1998 1997 1996 1995 AUG. 31, 1994
------------- ------ ------ ------ ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 10.27 $ 9.93 $ 9.95 $ 9.62 $ 10.00
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income....... 0.26 0.51 0.53 0.51 0.24
Net Realized and Unrealized
Gain (Loss) on
Securities................ 0.26 0.33 (0.02) 0.33 (0.38)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS.................. 0.52 0.84 0.51 0.84 (0.14)
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income......... (0.26) (0.50) (0.53) (0.51) (0.24)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS........... (0.26) (0.50) (0.53) (0.51) (0.24)
------ ------ ------ ------ ------
Net Asset Value, End of
Period...................... $ 10.53 $10.27 $ 9.93 $ 9.95 $ 9.62
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN.................. 4.62%(1) 8.61% 5.18% 9.15% (1.49)%(1)
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SEPT. 9, 1993
SIX MONTH (DATE
PERIOD ENDED YEAR ENDED AUGUST 31 OPERATIONS
FEB. 28, --------------------------- COMMENCED) THRU
1998 1997 1996 1995 AUG. 31, 1994
------------ ------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period
(000's omitted)............. $18,555 $10,700 $9,148 $8,399 $7,295
Ratio of Expenses to Average
Net Assets(3)............... 0.73%(2) 0.54% -- -- 1.11%(2)
Ratio of Net Income to Average
Net Assets.................. 4.75%(2) 4.97% 5.27% 5.43% 2.50%(2)
Portfolio Turnover Rate....... 0.00% 22.15% 18.44% 12.63% 16.49%
</TABLE>
- ------------------------
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.23% (annualized), 1.27%,
1.18%, and 1.25% for the six month period ended February 28, 1998 and the
years ended August 31, 1997, 1996, and 1995, respectively.
6
<PAGE>
FINANCIAL HIGHLIGHTS--PRIMARY FUND
The following financial highlights table is intended to help an investor
understand the Primary Fund's financial performance for the past five years.
Certain information reflects financial results for a single Primary Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Primary Fund (assuming reinvestment of all dividends and distributions).
This information is derived from the financial statements of the Primary Fund,
which for the years ended through August 31, 1997 have been audited by KPMG Peat
Marwick LLP, independent auditors, whose report, along with the Primary Fund's
financial statements, are incorporated by reference into in Statement of
Additional Information, which is available upon request, and from unaudited
financial statements of the Primary Fund for the six month period ended February
28, 1998.
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED YEAR ENDED AUGUST 31
FEB. 28, ------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income....... 0.03 0.05 0.05 0.05 0.03 0.02
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS.................. 0.03 0.05 0.05 0.05 0.03 0.02
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income......... (0.03) (0.05) (0.05) (0.05) (0.03) (0.02)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS........... (0.03) (0.05) (0.05) (0.05) (0.03) (0.02)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN.................. 2.55(1) 4.98% 5.07% 5.01% 2.91% 2.59%
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED YEAR ENDED AUGUST 31
FEB. 28, -----------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Assets, End of Period
(000's omitted)............. $32,578 $33,045 $37,465 $20,984 $15,208 $15,539
Ratio of Expenses to Average
Net Assets(3)............... 0.80%(2) 0.80% 0.81% 0.84% 0.79% 0.85%
Ratio of Net Income to Average
Net Assets.................. 5.05%(2) 4.86% 4.93% 4.91% 2.88% 2.47%
Portfolio Turnover Rate(4).... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
- ------------------------
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement the ratio of
expenses to average net assets would have been 0.99% (annualized), 1.01%,
1.15%, 1.21%, 1.20%, and 1.23% for the six month period ended February 28,
1998 and the years ended August 31, 1997, 1996, 1995, 1994, and 1993,
respectively.
(4) The Primary Fund experienced no portfolio turnover because the majority of
securities held during such periods had maturities of one year or less at
the time of acquisition.
7
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund pursues its own investment objective through the investment
policies and techniques described below. These policies and techniques are not
fundamental and may be changed by the Board of Directors of the Company without
the approval of the shareholders. In addition, the Company has adopted certain
restrictions as fundamental policies for each Fund, which may not be changed
without shareholder approval. (See the Company's Statement of Additional
Information for a description of the investment restrictions adopted as
fundamental policies). Since each Fund has a different investment objective,
each should have different investment results and incur different market and
financial risks.
Because of the market risks inherent in any investment, the Funds may not
achieve their investment objectives. In addition, effective management of each
Fund is subject to general economic conditions and to the ability and investment
techniques of management. The net asset value of each Fund's shares will vary
and the redemption value of shares may be either higher or lower than the
shareholder's cost.
GOVERNMENT BOND FUND (FORMERLY, AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES)
The investment objective of the Government Bond Fund is 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. The Government Bond Fund 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--It is anticipated that a substantial portion of
the Government Bond Fund's portfolio will consist of mortgage-backed securities
("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"), 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
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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. The Government Bond Fund 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 Fund's securities will generally increase; however, it is
anticipated 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 proceeds to the Fund from such prepayments will have to be invested
at the then prevailing lower interest rates. On the other hand, if interest
rates increase, the value of the Fund'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 Fund 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 Fund 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 Fund may invest a
portion of its assets in collateralized mortgage obligations or "CMOs," which
are debt obligations collateralized by a portfolio or pool of mortgages,
mortgage-backed securities, or U.S. Government securities. Collateralized
obligations in which the Government Bond Fund may invest are issued or
guaranteed by a U.S. Government agency or instrumentality, such as the FHLMC. A
variety of types of collateralized obligations are currently available and
others may become available in the future. One should keep in mind that during
periods of rapid interest rate fluctuation, the price of a security, such as a
CMO, could either increase or decrease based on inherent interest rate risk.
Additionally, the risk of maturities shortening or lengthening in conjunction
with interest rate movement, could magnify the overall effect of the price
fluctuation.
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. A more complete description
of CMOs is contained in the Statement of Additional Information.
The Government Bond Fund 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.
ZERO COUPON BONDS--The Government Bond Fund may invest in zero coupon bonds,
which are debt obligations issued or purchased at a significant discount from
face value. The Government Bond Fund 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
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declining interest environment. Such investments may experience greater
volatility in market value than debt obligations which make regular payments of
interest. The Fund 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 Fund's distribution obligations.
OTHER INVESTMENTS--The Government Bond Fund may also invest in commercial
paper, certificates of deposit, and repurchase agreements of the same type and
rating as the Primary and Money Market Funds may invest, and may invest in
corporate debt securities of the same type as the Primary Fund, which, at the
date of investment, are rated "A" or higher by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"). (See "Primary Fund" and
"Money Market Fund.") In addition, the Government Bond Fund may purchase debt
obligations of foreign corporations or financial institutions, such as Yankee
bonds (dollar-denominated bonds sold in the United States by non-U.S. issuers)
and Euro bonds (bonds not issued in the country (and possibly not the currency
of the country) of the issuer). (See "Foreign Debt Securities" in the Company's
Statement of Additional Information for a description of the risks associated
with investment in foreign securities.)
TAX FREE FUND (FORMERLY, AMERICAN NATIONAL TAX FREE FUND SERIES)
The investment objective of the Tax Free Fund is to provide as high a level
of interest 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. The Tax Free
Fund, as a matter of fundamental policy, will seek to achieve its objective by
investing at least 80% of the value of its net assets in municipal securities
the interest on which is exempt from federal income taxes.
The Tax Free Fund has no restrictions on the maturity of municipal
securities in which it may invest. Accordingly, it will seek to invest in
municipal securities of such maturities which, in the judgement of SM&R, the
adviser, will provide a high level of current income consistent with prudent
investment, with consideration given to market conditions.
The Tax Free Fund will invest, without percentage limitations, in municipal
securities having at the time of purchase one of the four highest municipal
ratings by Moody's, S&P, or Fitch Investors Service or in securities which are
not rated, provided that, in the opinion of SM&R, such securities are comparable
in quality to those within the four highest ratings. The rating agencies
consider that bonds rated in the fourth highest category may have some
speculative characteristics and that changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments on those bonds than is the case with higher grade bonds.
SM&R will only purchase bonds rated in such fourth category if it believes that
the purchase of such bonds is consistent with the Tax Free Fund's investment
objective. In the event the rating of an issue held by the Tax Free Fund is
changed by the rating service, such change will be considered by the Tax Free
Fund in its evaluation of the overall investment merits of that security but
such change will not necessarily result in an automatic sale of the security.
Any security held which is subsequently downgraded below BBB by S&P or Baa by
Moody's will be sold as soon as it is advantageous to do so after the downgrade.
A description of the ratings may be found in the Appendix to this Prospectus.
Purchasing unrated municipal securities, which may be less liquid than
comparably rated municipal securities, involves somewhat greater risk and
consequently the Tax Free Fund may not invest more than 20% of its net assets in
unrated municipal securities. To attempt to minimize the risk of such
investments, SM&R will, prior to acquiring unrated securities, consider the
terms of the offering and various other factors to determine the issuer's
comparative credit rating and whether the securities are consistent with the Tax
Free Fund's investment objective and policies.
During normal market conditions, the Tax Free Fund will have at least 80% of
its net assets invested in municipal securities the income of which is fully
exempt from federal income taxation. Furthermore, under normal market conditions
up to 20% of the Tax Free Fund's net assets, and as a temporary defensive
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measure during abnormal market conditions, up to 50% of its net assets may be
invested in the following types of taxable fixed income obligations: (1)
obligations issued or guaranteed by the U.S. government, its agencies,
instrumentalities or authorities (See "Government Bond Fund" above for an
explanation of U.S. government obligations); (2) corporate debt securities which
at the date of the investment are rated A or higher by Moody's or by S&P; (3)
commercial paper which at the date of the investment is rated in one of the two
top categories by Moody's or by S&P or if not rated, is issued by a company
which at the date of the investment has an outstanding debt issue rated A or
higher by Moody's or A or higher by S&P; (4) certificates of deposit issued by
U.S. banks which at the date of the investment have capital surplus and
undivided profits of $1 billion as of the date of their most recently published
financial statements; and (5) repurchase agreements secured by U.S. government
securities, provided that no more than 15% of the Fund's net assets will be
invested in illiquid securities including repurchase agreements with maturities
in excess of seven days. To the extent income dividends include income from
taxable sources, a portion of a shareholder's dividend income may be taxable.
(See "DIVIDENDS AND DISTRIBUTIONS").
MUNICIPAL SECURITIES--The term "municipal securities," as used in this
Prospectus means obligations issued by or on behalf of states, territories, and
possessions of the U.S. and the District of Columbia and their political
subdivisions, agencies, and instrumentalities, the interest on which is exempt
from federal income tax. An opinion as to the tax-exempt status of a municipal
security generally is rendered to the issuer by the issuer's counsel at the time
of issuance of the security.
Municipal securities are used to raise money for various public purposes
such as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the Statement of
Additional Information.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Like other interest-bearing
securities, the value of municipal securities changes as interest rates
fluctuate. For example, if interest rates increase from the time a security is
purchased, the security's value and sales price generally will be less than its
purchase cost. Conversely, if interest rates decline from the time a security is
purchased, the security's value and sales price may be greater than its purchase
cost. Generally, municipal securities of longer maturities produce higher
current yields than municipal securities with shorter maturities but are subject
to greater price fluctuation due to changes in interest rates, tax laws and
other general market factors. Lower-rated municipal securities generally produce
a higher yield with shorter maturities than higher-rated municipal securities
due to the perception of a greater degree of risk as to the ability of the
issuer to pay principal and interest.
The Tax Free Fund may purchase municipal bonds for which the payments of
principal and interest are secured by an escrow account of securities backed by
the full faith and credit of the U.S. government ("defeased") and municipal
securities whose principal and interest payments are insured by a commercial
insurance company as long as the underlying credit is investment grade (BBB or
better by S&P and Fitch and Baa or better by Moody's) ("insured"). The Tax Free
Fund may also purchase unrated securities of issuers which SM&R believes would
have been rated BBB or Baa had the issuer requested a rating from S&P, Fitch or
Moody's. Such implied investment grade rating will be determined by SM&R upon
its performance of a credit analysis of the issue and the issuer. Such credit
analysis may consist of a review of such items as the issuer's debt
characteristics, financial information, structure of the issue, liquidity of the
issue, quality of the issuer, current economic climate, financial adviser, and
underwriter. Insured and defeased bonds are further described in the Statement
of Additional Information. In general, these types of municipal securities will
not be treated as an obligation of the original municipality for purposes of
determining industry concentration.
OTHER INVESTMENTS--The Tax Free Fund may purchase "floating rate" and
"variable rate" obligations. These obligations bear interest at rates that are
not fixed, but vary with changes in specified market rates
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or indices on pre-designated dates. See the Statement of Additional Information
for details of these types of investments.
The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed-delivery" basis (See "ADDITIONAL INVESTMENT POLICIES AND
TECHNIQUES--When Issued and Delayed Delivery Purchases" below). Zero coupon
bonds may also be purchased as part of the Tax Free Fund portfolio and are
explained above under the Government Bond Fund.
PRIMARY FUND (FORMERLY, AMERICAN NATIONAL PRIMARY FUND SERIES)
The investment objective of the Primary Fund is to seek maximum current
income consistent with capital preservation and liquidity through investment
primarily in commercial paper. Commercial paper is short-term unsecured
promissory notes issued by corporations to finance short-term credit needs.
Commercial paper is usually sold on a discount basis and has a maturity at the
time of issuance not exceeding nine months. The Primary Fund will invest only 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 ("NRSROs") (See the "Appendix" hereto for information about
such ratings and such rating organizations).
OTHER INVESTMENTS--The Primary Fund may invest in (i) U.S. Government
Obligations (See the "Government Bond Fund" above for an explanation of U.S.
Government Obligations); (ii) other corporate obligations, such as bonds,
debentures or notes maturing in five (5) years or less at the time of purchase
which at the date of the investment are rated "A" or higher by an NRSRO; and
(iii) negotiable certificates of deposit of banks (including U.S. dollar
denominated obligations of foreign branches of U.S. banks and U.S. branches of
foreign banks and savings and loan associations and banker's acceptances of U.S.
banks which banks and savings and loan associations have total assets at the
date of investment (as of the date of their most recent published financial
statements) of at least $1 billion (See "INVESTMENT OBJECTIVES AND POLICIES,"
"Certificates of Deposit" in the Statement of Additional Information for a
description of the securities) and (iv) repurchase agreements with respect to
any type of instrument in which the Primary Fund is authorized to invest even
though the underlying instrument may mature in more than two (2) years. (See
"Additional Investment Policies and Techniques--Repurchase Agreements.")
Obligations of foreign branches of U.S. banks are subject to somewhat different
risks than those of domestic banks. These risks include foreign economic and
political developments, foreign governmental restrictions which may adversely
affect payment of principal and interest on the obligations, foreign withholding
and other taxes on interest income, and difficulties in obtaining and enforcing
a judgement against a foreign branch of a domestic bank. In addition, different
risks may result from the fact that foreign branches of U.S. banks and U.S.
branches of foreign banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks. For instance, such
branches may not be subject to the types of requirements imposed on domestic
banks with respect to mandatory reserves, loan limitations, examinations,
accounting, auditing, record keeping, and the public availability of
information. Such obligations are not traded on any national securities
exchange. While the Primary Fund does not presently invest in obligations of
foreign branches of U.S. banks, it may do so in the future. Investments in such
obligations will not be made in excess of 5% of the Primary Fund's total assets
and will be made only when SM&R believes the risks described above are minimal.
MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek to achieve the
highest current income consistent with the preservation of capital and
maintenance of liquidity. The Money Market Fund 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 Company's Board of
Directors.
The Money Market Fund may invest in the following types of high quality debt
obligations:
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(1) U.S. GOVERNMENT OBLIGATIONS. U.S. Government Obligations consist of
marketable securities issued or guaranteed as to both principal and
interest by the United States Government or by its agencies and
instrumentalities. (See "Government Bond Fund" above for an explanation
of U.S. Government Obligations).
(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
Fund 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. As discussed above under "Primary Fund," commercial
paper is short-term unsecured promissory notes issued by corporations to
finance short-term credit needs.
(5) BONDS AND NOTES. The Money Market Fund may invest in corporate bonds or
notes with a remaining maturity of one year or less.
(6) COLLATERALIZED MORTGAGE OBLIGATIONS--As discussed above under
"Government Bond Fund," CMOs are debt obligations collateralized by a
portfolio or pool of mortgages, mortgage-backed securities, or U.S.
Government securities.
The Money Market Fund 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 Fund 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 Fund. 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 NRSROs. Currently, five organizations are NRSROs: Moody's Investor
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("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 Fund 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 Objectives and Policies" in the Statement of Additional
Information for a more detailed explanation of the investment categories.) The
Fund 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).
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Investments in money market instruments are subject to the ability of the
issuer to make payment at maturity. In addition, the Money Market Fund'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
Fund may be expected to be less than for any other Fund. By limiting its
investments to Eligible Securities, the Money Market Fund may not achieve as
high a level of current income as a fund investing in lower-rated securities.
ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES
The following investment policies and techniques are available to one or
more of the Funds:
LENDING OF SECURITIES. In order to increase the return on its investment,
the Government Bond Fund may lend portfolio securities to broker-dealers and
other financial institutions in amounts up to 10% of the value of that Fund's
net assets. Loans of portfolio securities will always be collateralized by cash
equal to at least 102% of the market value of the securities loaned including
accrued interest and will be made to borrowers deemed by SM&R to be
creditworthy. Lending portfolio securities involves risk of delay in the
recovery of the loaned securities and in some cases the loss of rights in the
collateral should the borrower fail financially (See the Statement of Additional
Information).
WHEN-ISSUED AND DELAYED DELIVERY PURCHASES. The Government Bond Fund and
Tax Free Fund 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 at a later date. Normally, the settlement date occurs within one
month of the purchase; during the period between purchase and settlement, no
payment is made by the Fund to the issuer and no interest accrues to the Fund.
These transactions are subject to market fluctuation; 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. While
awaiting delivery of the securities purchased on a when-issued and delayed
delivery basis, each of these Funds will hold in a segregated account cash,
short-term money market instruments, high quality debt securities, or portfolio
securities sufficient to cover any commitment or limit any potential risk. (See
"When Issued and Delayed Delivery Transactions" in the Statement of Additional
Information).
REPURCHASE AGREEMENTS. Each Fund may occasionally enter into repurchase
agreements. Under a repurchase agreement, the Fund will acquire and hold an
obligation (government security, certificate of deposit, or banker's acceptance)
for not more than seven days, subject to the agreement by the seller (a Federal
Reserve System member bank or a registered securities dealer) to repurchase the
obligation at an agreed upon repurchase price and date, thereby determining the
yield during the Fund's holding period. During the holding period, the seller
must provide additional collateral if the market value of the obligation falls
below the repurchase price. See the Statement of Additional Information for a
further explanation.
ILLIQUID SECURITIES. Each Fund (except the Money Market Fund) may invest up
to 15%, and the Money Market Fund may invest up to 10%, of its net assets in
illiquid securities, including foreign securities not listed on foreign or
domestic exchanges and repurchase agreements maturing in excess of seven days.
If otherwise consistent with its investment objective and policies, a Fund
may purchase securities that are not registered under the Securities Act of
1933, as amended (the "1933 Act") but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act, or which
were issued under Section 4(2) of the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board, after considering
trading activity, availability of reliable price information and other relevant
information, that an adequate trading market exists for that security. To the
extent that, for a period of time, qualified Institutional or other buyers may
cease purchasing such restricted securities, the level of illiquidity of a Fund
holding such securities may increase.
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RISK FACTORS. The risk inherent in investing in any Fund of the Company is
a risk common to any security. That is, the value of a Fund's shares will
fluctuate in response to changes in economic conditions, interest rates and the
market's perception of the underlying portfolio securities held by that Fund.
Market prices of the securities in which a Fund invests will fluctuate and will
tend to vary inversely with changes in prevailing interest rates. If interest
rates increase from the time a security is purchased, such security might be
valued and/or sold at a price less than its purchase cost. Conversely, if
interest rates decline from the time a security is purchased, such security
might be valued and/or sold at a price greater than its purchase cost.
Substantial redemptions could require a Fund to sell portfolio securities at a
time when a sale might not be favorable.
Investments in U.S. Government Obligations are not all 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.
The Primary Fund, consistent with its investment objective, will attempt to
maximize yield by trying to take advantage of changing conditions and trends. It
may also attempt to take advantage of what are believed to be disparities in
yield relationships between different instruments. This procedure may increase
or decrease the portfolio yield depending upon the Primary Fund's ability to
correctly time and execute such transactions. Although the Primary Fund's assets
will be invested in securities with short maturities, the Primary Fund will
manage its portfolio as described above. (See "PORTFOLIO TRANSACTIONS AND
BROKERAGE ALLOCATION" in the Statement of Additional Information.)
The Tax Free Fund's ability to achieve its objective depends partially on
the prompt payment by issuers of the interest on and principal of the municipal
securities held. A moratorium, default, or other non-payment of interest or
principal when due could, in addition to affecting the market value and
liquidity of the particular security, affect the market value and liquidity of
other municipal securities. Additionally, the market for municipal securities is
often thin and can be temporarily affected by large purchases and sales. As a
result, the Tax Free Fund will attempt to minimize risk by diversifying its
investments by investing no more than 5% of its net assets in the securities of
any one issuer (this limitation does not apply to investments issued or
guaranteed by the U.S. Government or its instrumentalities) and by investing no
more than 25% of its net assets in municipal securities issued in any one state
or territory. Each political subdivision, agency, instrumentality, and each
multi-state agency of which a state is a member will be regarded as a separate
issuer for the purpose of determining diversification.
THE FUNDS AND MANAGEMENT
A Board consisting of nine directors has overall responsibility for
overseeing the affairs of the Company in a manner reasonably believed to be in
the best interest of shareholders. The Board has delegated to SM&R, the Fund's
investment adviser, the management of the Company's day-to-day business and
affairs. In addition, SM&R invests the Company's assets, provides administrative
services , and serves as transfer agent, custodian, dividend paying agent, and
underwriter.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of September , 1998, the Moody Foundation, a private
foundation, owned approximately [ ]% of American National's common stock and
the Libbie Shearn Moody Trust, a private trust, owned approximately [ ]% of
such shares. SM&R was incorporated in 1964 and has managed investment companies
since 1966. SM&R also is investment adviser to three other registered investment
companies: American National Growth Fund, Inc., American National Income Fund,
Inc., and American National Triflex Fund, Inc. (the "SM&R Equity Funds," and
collectively with SM&R Investments, Inc., the "SM&R Family of Funds"). SM&R also
serves as investment adviser to the American National Investment Accounts, Inc.,
an investment company used to fund benefits under contracts issued by American
National and for The Moody National Bank of Galveston (the "Bank"), a national
bank. SM&R does and may,
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from time to time, serve as investment adviser to other clients including
employee benefit plans, other investment companies, banks, foundations and
endowment funds.
The following persons are officers of both SM&R and the Company: Michael W.
McCroskey, Vera M. Young, Emerson V. Unger, Teresa E. Axelson and Brenda T.
Koelemay.
PORTFOLIO MANAGEMENT
While the following individuals are primarily responsible for the day-to-day
portfolio management of their respective Funds, all accounts are reviewed on a
regular basis by SM&R's Investment Committee to ensure that they are being
invested in accordance with investment polices.
VERA M. YOUNG, VICE PRESIDENT OF SECURITIES MANAGEMENT AND RESEARCH, INC.,
VICE PRESIDENT, PORTFOLIO MANAGER OF THE PRIMARY FUND AND THE MONEY MARKET
FUND. Ms. Young has served as Portfolio Manager of the Primary Fund and the
Money Market Fund since each such Fund's inception (1993 and 1998,
respectively). She also serves as Portfolio Manager of the Money Market
Portfolio of American National Investment Accounts, Inc., a series mutual fund
used exclusively for variable contracts issued by American National. Ms. Young
also serves as Assistant Vice President, Securities for American National. Ms.
Young has been managing fixed income investments for American National since
1987 and has served as portfolio manager for various funds for over ten years.
TERRY E. FRANK, VICE PRESIDENT, PORTFOLIO MANAGER OF THE GOVERNMENT BOND
FUND AND TAX FREE FUND. Ms. Frank has served as Portfolio Manager of the
Government Bond Fund since 1993 and the Tax Free Fund since its inception. 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.
ADVISORY AGREEMENT
Under the Advisory Agreements with the Company, SM&R is paid an investment
advisory fee, which is calculated separately for each Fund, as compensation for
its services. The Agreements provide that SM&R will receive advisory fees as set
forth below.
GOVERNMENT BOND FUND AND TAX FREE FUND--A monthly investment advisory fee is
computed by applying to the average daily net asset value of the Government Bond
Fund and the Tax Free Fund each month one-twelfth ( 1/12th) of the annual rate
as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF EACH FUND'S INVESTMENT ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ------------------------------------------------------------------------------------ -------------------
<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>
MONEY MARKET FUND AND PRIMARY FUND--An investment advisory fee is computed
and paid monthly at the annual rate of 0.50% of the Money Market Fund's and
Primary Fund's average daily net asset value.
After applicable fee waivers, SM&R received total advisory fees from the
Government Bond Fund, Tax Free Fund, and Primary Fund for the fiscal year ended
August 31, 1998 which represented [ ]%, [ ]%, and [ ]%, respectively, of
each such Fund's average daily net assets. The Money Market Fund was not in
operation during the fiscal year ended August 31, 1998.
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<PAGE>
ADMINISTRATIVE SERVICE AGREEMENT
Under its Administrative Service Agreement with the Company, SM&R also
receives a management and administrative service fee from each Fund which is
computed by applying to the aggregate average daily net asset value of each Fund
each month one-twelfth ( 1/12th) of the annual rate as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S ADMINISTRATIVE SERVICE
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ------------------------------------------------------------------------------ -------------------------
<S> <C>
Not exceeding $100,000,000.................................................... 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000......................... 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000......................... 0.15%
Exceeding $300,000,000........................................................ 0.10%
</TABLE>
SM&R has agreed to pay (or to reimburse each Fund for) each Fund's regular
operating expenses (including the advisory fee and administrative service fee,
if any, paid to SM&R, but exclusive of "12b-1 fees," Class-specific expenses,
interest, taxes, commissions , and other expenses incidental to portfolio
transactions) in excess of 1.25% (0.35% for the Money Market Fund) per year of
such Fund's average daily net assets. SM&R received administrative service fees
of [ ]% for the Government Bond Fund; [ ]% for the Primary Fund; and [ ]%
for the Tax Free Fund for the fiscal year ended August 31, 1998 of each Fund's
average daily net assets. The Money Market Fund was not in operation during the
fiscal year ended August 31, 1998.
FEE WAIVERS
In order to improve the yield and total return of any Fund of the Company,
SM&R may from time to time voluntarily waive or reduce all or any portion of its
advisory fee, administrative fee, and/or assume certain or all expenses of any
Fund of the Company while retaining its ability to be reimbursed for such fees
prior to the end of the fiscal year. 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. SM&R has agreed to continue to waive
the advisory fee for the Tax Free Fund and reimburse regular operating expenses
incurred by the Government Bond and Primary Funds to the extent that total
expenses (exclusive of the "12b-1 fees" and Class-specific expenses) exceed
average daily net assets as follows: Primary Fund-.80% and Government Bond Fund
1.00%.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
The Company adopted a Distribution and Shareholder Servicing Plan (the
"12b-1 Plan") pursuant to Rule 12b-1 under the 1940 Act for certain classes of
the Government Bond Fund and the Tax Free Fund (the "Multi-Class Funds"). No
Distribution Fee or Service Fee is imposed on Class Y shares of the Multi-Class
Funds. A 12b-1 Plan has not been adopted for the Primary Fund or Money Market
Fund (the "Single-Class Funds").
HOW TO PURCHASE SHARES
An investor may purchase shares of a Fund from registered representatives of
SM&R, from authorized broker-dealers, or directly from SM&R. Such purchases will
be at the offering price (the "Offering Price") for such shares determined as
and when provided below (See "DETERMINATION OF OFFERING PRICE"). SM&R will send
a monthly confirmation for any month in which the account is active. An investor
should carefully review the monthly confirmation and promptly report any
discrepancies to SM&R. Initial and subsequent purchases may be made directly
through SM&R at the following address:
Securities Management and Research, Inc.
One Moody Plaza, 14th Floor
Galveston, Texas 77550
17
<PAGE>
Certificates are not normally issued for shares of each Fund in an effort to
minimize the risk of loss or theft. However, SM&R confirms investors' purchases
and credits such purchases to their accounts on the books maintained by SM&R.
Investors have the same rights of share ownership as they would if certificates
had been issued.
OPENING AN ACCOUNT: To purchase shares, an investor must submit an account
application (the "Account Application") which includes the purchaser suitability
form (the "Suitability Form"). If an investor would like to take advantage of
the electronic services available, that investor must complete the Electronic
Transfer Options section of the Account Application. Special forms are required
when establishing an IRA/SEP or 403(b) plan. Please call Investor Services at
(800) 231-4639 and request the special forms when establishing retirement plans.
Keep in mind when opening an account that transactions by telephone between
different accounts will only be permitted if the accounts are registered in the
identical name.
MINIMUM PURCHASE REQUIREMENT: For Class Y shares of the Government Bond
Fund and the Tax Free Fund, the minimum initial investment requirement is
$500,000. If the investor is a group or institution specified in (a)-(d) of
"MULTI-CLASS FUNDS," the minimum initial investment must only be $[ ]. All
subsequent investments must be at least $[ ]. For the Primary Fund and the
Money Market Fund, the minimum initial investment requirement is $[ ] and
the minimum amount of any subsequent purchase is $[ ]. The Company reserves
the right to reject any purchase.
PURCHASES BY MAIL: An investor should make the check(s) payable to SM&R and
send the check(s) to the address indicated above. Please note that third party
checks will not be accepted to open a new account, except for IRA Rollover
checks that are properly endorsed. Investors making subsequent investments by
mail must indicate their name, account number, and the name of the Fund, and the
Class if applicable, being purchased. The investor may use the remittance slip
attached to the confirmation statement.
PURCHASES BY WIRE: To ensure proper crediting of a wire investment, an
investor must have an executed Account Application and Suitability Form on file
with the transfer agent. The investor may then wire his investment by providing
the following instructions to his bank:
The Moody National Bank of Galveston ABA #133100091
Securities Management and Research, Inc. #035 868 9
Name of Class, if applicable, and Fund (E.G., Class Y of the Government Bond
Fund)
Fund Account Number (number appears on confirmation statement)
Investor's Name (E.G., First National Bank)
If wires are received after 3:00 p.m. Central Time or during a Bank holiday
or SM&R business holiday, purchases will be made at the price determined on the
next business day. A wire fee in the amount of $8.00 will be charged the
investor for wires under $5,000.
PURCHASES BY EXCHANGE: An investor may call Investor Services if he has
established telephone exchange privileges on his account. See "SPECIAL PURCHASE
PLANS AND SERVICES--Exchange Privilege" for procedures and additional
information relating to telephone exchanges. For limitations on exchanges see
"Excessive Trading" also under "SPECIAL PURCHASE PLANS AND SERVICES."
WHEN ARE PURCHASES EFFECTIVE?
Purchases received in proper form by SM&R prior to the close of the New York
Stock Exchange (currently 3:00 p.m. Central Time) (the "Exchange") on any SM&R
business day, or received prior thereto on any SM&R business day by a securities
dealer having a dealer contract with SM&R and reported to SM&R prior to SM&R's
close of business (currently 4:30 p.m. Central Time) on the same day, will be
18
<PAGE>
effective and executed at the applicable Offering Price determined at the close
of the Exchange on that day. It is the responsibility of any such dealer and not
SM&R to establish procedures to assure that purchases received before the close
of the Exchange on an SM&R business day will be reported to SM&R before SM&R's
close of business on that same day. Purchases received after the close of the
Exchange, on customary national business holidays, or on an SM&R holiday will be
effective upon and made at the Offering Price determined as of the close of the
Exchange on SM&R's next business day that such Exchange is open for trading.
If payments for purchases are transmitted by bank wire to the Bank and
reported to SM&R prior to the close of the Exchange on any SM&R business day,
the investor will purchase at the Offering Price determined and become a
shareholder as of the close of the Exchange on that same day. Purchases by wire
payments reported by the Bank to SM&R after the close of the Exchange, on
customary national business holidays, or on an SM&R holiday, will be effective
on and made at the Offering Price determined on SM&R's next business day.
Procedures for transmitting Federal Funds by wires are available at any national
bank or any state bank which is a member of the Federal Reserve System.
SM&R's business holidays are Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, the Friday following Thanksgiving Day, two (2) days
at Christmas, and New Years Day. If Christmas Day is a weekday other than
Monday, Christmas Day and Christmas Eve Day are business holidays. If Christmas
Day is Monday, Christmas Day and the preceding Friday will be business holidays.
If Christmas Day is a Saturday, the preceding Thursday and Friday will be
business holidays. If Christmas Day is a Sunday, the preceding Friday and the
following Monday will be business holidays. If New Years Day is a Saturday, the
preceding Friday will be a business holiday, and if New Years Day is a Sunday,
the following Monday will be a business holiday.
DETERMINATION OF OFFERING PRICE
Each Fund's Offering Price is determined once each day and is comprised of
that Fund's net asset value plus the sales charge, if any. Shares of the
Single-Class Funds and Class Y shares of the Multi-Class Funds may be purchased
without a sales charge. Accordingly, the Offering Price for shares of each
Single Class Fund is that Fund's net asset value; the Offering Price for Class Y
shares of each Multi-Class Fund is that Class's net asset value.
Net asset value per share is determined by dividing the market value of the
securities owned by the Fund or Class thereof, plus any cash or other assets
(including dividends accrued but not collected), less all liabilities of such
Fund or Class (including accrued expenses but excluding capital and surplus), by
the number of shares of the Fund or Class outstanding. Net asset value is
currently determined as of 3:00 p.m. Central Time on each business day. Although
the legal rights of the Classes of the Multi-Class Funds are substantially
identical, the different expenses borne by each Class will result in different
net asset values and dividends for each Class.
The Money Market Fund values all of its securities using the amortized cost
method, which does not take into account unrealized capital gains or losses. The
amortized cost method of valuation involves valuing an instrument 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
value of the instrument. (For a further discussion of the amortized cost method,
see the Statement of Additional Information.) The other Funds use the amortized
cost method only for valuing debt securities having maturities of 60 days or
less. Debt securities with maturities in excess of 60 days are valued on the
basis of prices provided by a pricing service or brokers.
For a more complete description of the procedures involved in valuing
various fund assets, see "Offering Price" in the Company's Statement of
Additional Information.
19
<PAGE>
MULTI-CLASS FUNDS
The Government Bond Fund and the Tax Free Fund (as defined above, the
"Multi-Class Funds") offer six classes of shares. Each Class of shares of a
Multi-Class Fund represents an interest in the same portfolio of investments and
each Class has the same rights as the other Classes, except that each Class
bears its own expenses and charges. The net income attributable to each Class
and the dividends payable on the shares of that Class will be reduced by the
amount of the service and distribution (12b-1) fees of that Class, if any.
This Prospectus offers Class Y shares of the Multi-Class Funds to
institutions and certain individuals. Class Y shares may be purchased by:
(a) institutional investors, such as insurance companies, banks, investment
companies, retirement plans, and other institutional investors approved
by SM&R;
(b) trust companies and bank trust departments for funds over which they
exercise exclusive discretionary investment authority or they serve as a
directed trustee and which are held in a fiduciary, agency, advisory,
custodial or similar capacity;
(c) accounts managed by SM&R;
(d) officers, directors, trustees, employees and members of any non-profit
business, trade, professional charitable, civic or similar associations
and clubs with an active membership of at least 100 persons who have
entered into an NAV agreement with SM&R; and
(e) other investors, including individuals, with initial investments of
$500,000 or more.
Neither the Funds nor SM&R are responsible for determining whether or not a
prospective investor qualifies under any of the above categories for receipt of
net asset value. Notifying SM&R of an intent to qualify under one of these
categories is the sole responsibility of the prospective investor.
Five other Classes of shares of the Multi-Class Funds are available through
separate prospectuses: (1) Class A "front-end load" shares; (2) Class B "back-
end load" shares; (3) Class C "level load" shares; (4) Class T shares sold only
to investors that became shareholders of the Company prior to September ,
1998 and certain designated persons; and (5) Class J shares sold only through
special "network" distribution arrangements. Class A, Class B, Class C, Class T,
and Class J shares are subject to different sales charges and other expenses
and, accordingly, may have expense ratios and performance that differs from
those of Class Y shares. FOR MORE INFORMATION ON THE OTHER CLASSES OF SHARES OR
TO REQUEST A PROSPECTUS FOR ANOTHER CLASS, INVESTORS MAY CONTACT INVESTOR
SERVICES AT (800) 231-4639.
FUND AND CLASS EXPENSES
For the Multi-Class Funds, expenses that are directly attributable to a
particular Class of shares ("Class Expenses") will be borne solely by that
Class. Class expenses include: (1) asset-based distribution fees and shareholder
service fees; (2) transfer agency fees attributable to a particular Class; (3)
expenses related to preparing, printing, mailing, and distributing materials
such as shareholder reports, prospectuses, and proxy statements to current
shareholders of a specific Class; (4) state and federal registration fees
incurred by a specific Class; (5) litigation and other legal expenses relating
to a particular Class; (6) directors' fees and expenses incurred as a result of
issues relating solely to a particular Class; (7) accounting, audit, and tax
expenses relating to a specific Class; (8) the expenses of administrative
personnel and services required to support the shareholders of a specific Class;
and (9) fees and other payments made to entities performing services for a
particular Class, including account maintenance, dividend disbursing, or
subaccounting services.
Class Expenses may be waived or reimbursed by SM&R, the Fund's investment
adviser and distributor. Investment advisory fees, custodial fees, and other
expenses relating to the management of the Company's assets shall not be
allocated on a class-specific basis. Income, realized and unrealized capital
20
<PAGE>
gains and losses, and expenses that are not allocated to a specific Class shall
be allocated to each Class on the basis of the proportionate net assets of that
Class in relation to the net assets of the Multi-Class Fund.
All direct sales expenses for the Primary and the Money Market Fund,
including the cost of prospectuses for prospective shareholders, are paid by
SM&R, and no sales expense is borne by those Funds. Similarly, all direct sales
expenses for the Class Y shares of the Government Bond and Tax Free Funds are
paid by SM&R, and no sales expense is borne by those Classes.
For additional information about the expenses of the Funds, see the
Statement of Additional Information.
SPECIAL PURCHASE PLANS AND SERVICES
The Company offers services and plans that are designed to facilitate
investment in the Funds. At this time, there is no charge to shareholders for
these services. The Company may impose fees for such services in the future. Be
aware, however, that shareholders electing to participate in the ACH plan
described below should check with their financial institution for any additional
charges imposed for this service. For additional information contact your
registered representative or SM&R.
ELECTRONIC TRANSFERS (ACH). The electronic transfer option allows
shareholders to move money between their Fund account(s) and their bank, savings
and loan, or credit union account using the Automated Clearing House ("ACH")
network. To arrange for electronic transfers, investors should complete the
relevant section of the Account Application at the time they open the account
and specify the type of service or services desired. Shareholders should also
attach a voided, pre-printed check or deposit slip from their checking, savings
and loan, or credit union account. PASSBOOK SAVINGS ACCOUNTS ARE NOT ELIGIBLE
FOR THE ELECTRONIC TRANSFER OPTION. ADDITIONALLY, AN INVESTOR'S BANK MUST BE A
MEMBER OF THE AUTOMATED CLEARING HOUSE (ACH) NETWORK FOR THE INVESTOR TO TAKE
ADVANTAGE OF THIS SERVICE. Shareholders will receive a confirmation verifying
initialization of the electronic transfer option and may begin conducting
transactions in their account(s) under this option three (3) weeks after receipt
of the verification notice from SM&R. If this option is elected after the
account is established, it may be necessary for the shareholder to obtain a
signature guarantee for all individuals named on the account(s).
TELEPHONE SERVICES. Investors can take advantage of this service by
completing the appropriate sections of the Account Application when opening
their account. Through this service, investor will be able to purchase by ACH,
redeem, and exchange shares on those accounts for which they have an executed
Account Application on file and have received written verification from SM&R
that the service has been initialized as explained under Electronic Transfers
above. If this option is elected after the account is established, it may be
necessary for the shareholder to obtain a signature guarantee for all
individuals named on the account(s). PLEASE NOTE THAT THE TELEPHONE REDEMPTION
OPTION IS NOT AVAILABLE TO RETIREMENT PLANS.
The Funds have implemented the following security procedures intended to
protect shareholder accounts from losses resulting from unauthorized or
fraudulent telephone instructions: The caller will be required to know (i) the
name of the Fund or Funds; (ii) all digits of the account number; (iii) the
exact name and address used in the registration(s); and (iv) the Social Security
or Employer Identification Number listed on the account(s). Additionally, all
telephone transactions will be recorded for the shareholder's protection.
Neither the Funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone which comply with the current
security procedures and other requirements. SM&R believes that such security
procedures and other requirements are reasonable and, if followed, shareholders
should bear the risk of any losses resulting from unauthorized or fraudulent
telephone transactions on their accounts.
21
<PAGE>
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from a shareholder's bank account and
invested monthly, bi-monthly, quarterly, or annually into the designated fund(s)
at the applicable offering price determined on the date of the electronic
transfer.
WEALTH ACCUMULATION ACCOUNT. Shareholders having account balances of at
least $2,500 in the Money Market Fund may open a Wealth Accumulation Account,
which will provide them with an automatic dollar cost averaging plan. Automatic
monthly purchases of the shares of other funds in the SM&R Family of Funds may
be made by exchanges from the shareholder's Money Market Fund Wealth
Accumulation Account. Purchases of the other funds must be at least $50 and,
unless terminated by the shareholder, will continue as long as the balance of
the Money Market Fund Wealth Accumulation Account is sufficient. Additional
investments may be made to a Money Market Fund account designated as a Wealth
Accumulation Account to extend the purchase period under the plan. However, if
additional investments are received by SM&R less than ten (10) days prior to the
20th of the month, such investments will not be available for use under the
Wealth Accumulation Account until the 20th of the following month. If the 20th
of the month is an SM&R holiday, the purchase will be processed on the next
business day.
Purchases made will be subject to the applicable sales charge of the fund
whose shares are being purchased. Changes in amounts to be purchased, the funds
being purchased, and termination of a Wealth Accumulation Account will be made
within five (5) business days after written instructions are received by SM&R in
proper form (I.E., signed by the owner(s) of record exactly as registered).
Shareholders' rights to make additional investments, to exchange shares, and
to redeem shares in the Money Market Fund and any of the funds in the SM&R
Family of Funds are not affected by a shareholder's participation in a Wealth
Accumulation Account. However, check writing privileges and expedited redemption
by telephone are not available for the Money Market Fund accounts designated as
a part of the Wealth Accumulation Account.
Primary Fund shareholders that opened a Primary Fund Wealth Accumulation
Account prior to September , 1998 will be permitted to continue using the
Account subject to the terms applicable to a Money Market Fund Wealth
Accumulation Account, described above.
EXCHANGE PRIVILEGE. Shareholders in a Fund are permitted to exchange shares
that they own in a Fund with shares of another fund in the SM&R Family of Funds
without the payment of an exchange fee, subject to certain conditions. Exchanges
between a Fund and another fund in the SM&R Family of Funds are available only
in states where the applicable funds are registered and the exchange may be
legally made.
MULTI-CLASS FUNDS (GOVERNMENT BOND FUND AND TAX FREE FUND ). Shareholders
may exchange Class Y shares that they own in a Multi-Class Fund, without an
exchange fee, for corresponding Class Y shares of the another fund in the SM&R
Family of Funds. Shareholders also may exchange their Class Y shares for shares
of a Single-Class Fund, provided that the shareholder meets any minimum
investment requirement for the shares they wish to acquire.
SINGLE-CLASS FUNDS (PRIMARY FUND AND MONEY MARKET FUND). Shareholders may
exchange shares they own in a Single-Class Fund for shares of the other
Single-Class Fund or for shares of a Class of another fund in the SM&R Family of
Funds, provided the shareholder pays any sales charge applicable to the acquired
shares.
You may acquire, through an exchange, shares of a Class with a contingent
deferred sales charge ("CDSC"). If you redeem those shares, the relevant CDSC,
if any, will be calculated from the date that you initially purchased the
original shares, rather than from the date of exchange.
Shares of any fund in the SM&R Family of Funds held in escrow under a Letter
of Intent are not eligible for the exchange privilege. Such shares will not be
released from escrow until the balance invested during the period specified in
the Letter of Intent equals or exceeds the amount required to be invested under
the Letter of Intent or the shareholder requests, in writing, that the Letter of
Intent be canceled and
22
<PAGE>
pays any adjustments in sales charge. After release from escrow, shares may be
exchanged, provided all other applicable conditions are met.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met: (a) the exchange must be made
between accounts having identical registrations and addresses; (b) the shares of
the fund of the SM&R Family of Fund acquired through exchange must be qualified
for sale in the state in which you reside; (c) the dollar amount of the exchange
must meet the minimum investment requirement applicable to the shares of the
fund in the SM&R Family of Funds that you would acquire through the exchange;
(d) SM&R must have received full payment for the shares being exchanged; (e)
your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal Revenue
Service Form W-8 (certificate of foreign status) or Form W-9 (certifying exempt
status); (f) any shares that you wish to exchange must have been held for at
least ten (10) business days; (g) certificates representing shares, if any, are
returned before such shares are exchanged; and (h) you have received a
prospectus for the shares you receive in the exchange.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time. ANY
GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE INCOME TAX PURPOSES. SHAREHOLDERS SHOULD CONSULT A TAX ADVISOR
FOR THE TAX TREATMENT AND EFFECT OF EXCHANGES.
EXCESSIVE TRADING. Frequent trades, involving either substantial fund
assets or a substantial portion of an account or accounts controlled by a
shareholder, can disrupt management of the Company and raise the Company's
expenses. The Company defines "excessive trading" as exceeding one purchase and
sale involving the same fund within any 120-day period.
For example, a shareholder is in Fund X. He can move substantial assets from
Fund X to Fund Y and, within the next 120 days, sell his shares in Fund Y to
return to Fund X or move to Fund Z. If the shareholder exceeds the number of
trades described above, he may be barred indefinitely from further transactions
between the participating funds.
There are two types of transactions exempted from the excessive trading
guidelines. They are (1) redemptions that are not part of exchanges and (2)
systematic purchases or redemptions.
RETIREMENT PLANS
The following retirement plans may be funded with Class Y shares of the
Government Bond Fund or with shares of the Primary and Money Market Funds:
Individual Retirement Accounts (IRAs); Simplified Employee Pension Plans (SEPs);
403(b) Custodial Accounts (TSAs), and corporate retirement plans. Information
concerning IRAs and TSAs, and the forms necessary to adopt such plans, can be
obtained by contacting your registered representative or calling SM&R. A regular
Fund application should be used when establishing a corporate retirement plan.
(See "HOW TO PURCHASE SHARES" for the minimum initial and subsequent purchase
requirements.) SM&R acts as trustee or custodian for IRAs, SEPs and TSAs for the
Company. An annual custodial fee of $7.50 will be charged for any part of a
calendar year in which an investor has an IRA, SEP or TSA in the Company and
will be automatically deducted from each account. An individual considering a
retirement plan may wish to consult with an attorney or tax adviser.
Because IRAs, SEPs, TSAs, and other qualified plans are exempt from federal
income tax, they will be unable to benefit from the general tax-exempt nature of
the Tax Free Fund. Accordingly, the Tax Free Fund is not generally considered to
be suited for such plans or persons.
DIVIDENDS AND DISTRIBUTIONS
The Government Bond Fund and Tax Free Fund will declare and pay dividends
from net investment income monthly and net realized short-term or long-term
capital gains, if any, annually.
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<PAGE>
At 3:00 p.m. Central Time, on each day that the Exchange is open for trading
other than SM&R's business holidays described above, the Primary Fund and the
Money Market Fund each will declare a dividend of all of its net investment
income to shareholders already of record. Such dividends will be paid monthly.
Dividends and capital gains will be automatically reinvested at net asset
value in additional shares of the Fund making such distribution unless SM&R is
instructed otherwise in writing. Distributions not reinvested are paid by check
or transmitted to your bank account through an ACH transaction, if elected. If
the Postal Service cannot deliver your check, or if your check remains uncashed
for six months, the Company reserves the right to reinvest your distribution
check in your account at the net asset value on the business day of the
reinvestment and to reinvest all future distributions in shares of the Company.
Dividends and capital gains declared in December to shareholders of record in
December and paid the following January will be taxable to shareholders as if
received in December. This is a convenient way to accumulate additional shares
and maintain or increase the shareholder's earning base. Of course, any shares
so acquired remain at market risk.
Shareholders have the right to change their election with respect to the
receipt of distributions by notifying SM&R in writing, but any such change will
be effective only as to distributions for which the record date is seven or more
business days after SM&R has received the shareholder's written request.
In order to be entitled to a dividend, an investor must have acquired shares
of a Fund prior to the close of business on the record date. A shareholder
should be cautioned, however, before purchasing shares of a Fund immediately
prior to a distribution. Dividends and distributions paid by the Company have
the effect of reducing net asset value per share on the record date by the
amount of the payment. Therefore, a dividend or distribution of record shortly
after the purchase of shares by an investor represents in substance, a return of
capital.
TAXES
Each Fund of the Company is treated as a separate entity for federal income
tax purposes. The Company has elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code. The Company 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 the Company
will be required to pay federal income taxes.
In order to qualify as a regulated investment company, each Fund of the
Company must meet several requirements. These requirements include the
following: (1) at least 90% of the Fund's gross income must be derived from
dividends, interest, payments with respect to securities loans, gains from the
sale or disposition of stock, securities or foreign currencies or other income
(including gains from options, futures or forward contracts) derived in
connection with the Fund's investment business and (2) at the close of each
quarter of the Fund's taxable year, (a) at least 50% of the value of the Fund's
assets must consist of cash, United States Government securities, securities of
other regulated investment companies and other securities (limited generally
with respect to any one issuer to not more than 5% of the total assets of the
Fund and not more than 10% of the outstanding voting securities of such issuer)
and (b) not more than 25% of the value of the Fund's assets may be invested in
the securities of any issuer (other than United States Government Securities or
securities of other regulated investment companies) or of two or more issuers
which the Fund controls and which are determined to be engaged in similar or
related trades or businesses.
For federal income tax purposes, any income dividends derived from taxable
investments which the shareholder receives from such Fund of the Company, as
well as any distributions derived from net short-term capital gains are treated
as ordinary income whether the shareholder has elected to receive them in cash
or in additional shares. Distributions derived from net long-term capital gains
will be taxable as long-term capital gains regardless of the length of time the
shareholder has owned such Fund's shares and
24
<PAGE>
regardless of whether such distributions are received in cash or in additional
shares. In determining the amount of capital gains, if any, available for
distribution, net capital gains are offset against available net capital losses,
if any, carried forward from previous years.
Dividends paid by the Tax Free Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be "exempt-interest" dividends
that shareholders may exclude from their gross income for federal income tax
purposes if the Fund satisfies certain quarterly asset percentage requirements.
To the extent that the Tax Free Fund invests in bonds, the interest on which is
a specific tax preference item for federal income tax purposes ("AMT-Subject
Bonds"), any exempt-interest dividends derived from interest on AMT-Subject
bonds will be a specific tax preference item for purposes of the federal
individual and corporate alternative minimum taxes. All exempt-interest
dividends will be a component of the "current earnings" adjustment item for
purposes of the federal corporate alternative minimum income tax. Current
federal tax law limits the types and volume of securities qualifying for the
federal income tax exemption of interest and may also affect the availability of
municipal obligations for investment by the Fund and the value of the Fund's
portfolio.
Redemptions and exchanges of shares in each Fund of the Company are taxable
events on which a shareholder may realize a gain or loss. Shareholders of the
Tax Free Fund should be careful about redeeming shares immediately prior to the
record date of an "exempt-interest dividend" because the redemption may cause
the shareholder to realize a taxable gain even though a portion of the
redemption proceeds may represent a pro rata share of tax exempt interest earned
by the Fund. In addition, a loss on the sale or redemption of shares held by the
shareholder of the Tax Free Fund for six months or less will be disallowed to
the extent of any exempt-interest dividend received by the shareholder with
respect to those shares. Shareholders should consult with their tax advisor
concerning the tax reporting requirements in effect on the redemption or
exchange of such shares.
The Company may be required to report to the Internal Revenue Service
("IRS") any taxable dividends or other reportable payment (including share
redemption proceeds) and withhold 31% of any such payments made to individuals
and other non-exempt shareholders who have not provided a correct taxpayer
identification number and made certain required certifications that appear in
the Application. A shareholder may also be subject to backup withholding if the
IRS or a broker notifies the Company that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
Shareholders who are not U.S. persons for purposes of federal income
taxation should consult with their financial or tax advisors regarding the
applicability of U.S. withholding taxes to distributions received by them from
the Company.
Many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by the fund from direct obligations of
the U.S. Government, subject in some states to minimum investment requirements
that must be met within the fund.
At the end of each calendar year, the Company will advise shareholders about
the tax status of all distributions made during each taxable year, including the
portion of the dividends which comprise taxable income, exempt income and
interest income that is a tax preference item under the alternative minimum tax.
Shareholders should consult a tax advisor about the application of state and
local tax laws to these distributions and redemption proceeds received from the
Company.
IMPORTANT: The Company reserves the right to (1) refuse to open an account
for any person failing to provide a taxpayer identification number, certified as
correct and (2) close an account by redeeming its shares in full, at the then
current net asset value, upon receipt of notice from the IRS that the taxpayer
identification number certified as correct by the shareholder is in fact
incorrect.
25
<PAGE>
HOW TO REDEEM
Shares of the Company will be redeemed at the net asset value determined on
the date the request is received by SM&R in "Proper Form," as defined in "PROPER
FORM" below, at no charge. A redemption request must be addressed to Securities
Management and Research, Inc., One Moody Plaza, 14th Floor, Galveston, Texas
77550.
If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as practicable and normally
within seven days after receipt of a redemption request in Proper Form.
If the shares being redeemed were purchased by wire, certified check, money
order, or other immediately available funds, redemption proceeds will be mailed
no later than the seventh calendar day following receipt. For shares purchased
by a personal check or ACH transfer, SM&R will process the redemption but will
generally delay sending the proceeds for up to ten (10) business days to allow
the check or transfer to clear.
TELEPHONE REDEMPTIONS. Shareholders may request redemptions by telephone if
they have completed the Account Application and requested this option. This
redemption feature can only be used if: (a) the redemption proceeds are to be
mailed to the address of record or wired to the pre-authorized bank account
indicated on the Account Application; (b) there has been no change of address of
record or pre-authorized bank account within the preceding 30 business days; (c)
the shares to be redeemed are not in certificate form; (d) the security
procedures discussed under the "Exchange Privilege" have been met; and (e) the
proceeds of the redemption do not exceed $25,000.
SYSTEMATIC WITHDRAWAL PLAN. The Company has a Systematic Withdrawal Plan
("Withdrawal Account"), which permits shareholders having an account value of
$5,000 or more to automatically withdraw a minimum of $50 monthly or each
calendar quarter on or about the 20th of the applicable month. Shareholders
maintaining a Withdrawal Account may elect to have the withdrawal proceeds
automatically deposited in their pre-authorized bank account via an ACH
transaction. This is accomplished by completing the relevant section of the
Account Application and returning it to SM&R. See "SPECIAL PURCHASE PLANS AND
SERVICES Electronic Transfers" for additional information. Dividends and capital
gains distributions will automatically be reinvested in additional shares at net
asset value. As with other redemptions, a withdrawal is a sale for federal
income tax purposes. The Systematic Withdrawal Plan will automatically terminate
if all shares are liquidated or withdrawn from the account. Certificates are not
issued for shares held in a Withdrawal Account and certificates held, if any,
must be surrendered when shares are transferred to a Withdrawal Account. No
account covered by a Letter of Intent can be changed to a Systematic Withdrawal
Plan until such time as the Letter of Intent is fulfilled or terminated, nor can
an account under a Systematic Withdrawal Plan be placed under a Letter of
Intent.
For further information about the Systematic Withdrawal Plan, contact a
registered representative or SM&R.
"PROPER FORM" means the request for redemption must include: (1) your share
certificates, if issued; (2) your letter of instruction or a stock assignment
specifying the Fund, account number, and number of shares or dollar amount to be
redeemed. Both share certificates and stock powers, if any, must be endorsed and
executed exactly as the Fund shares are registered. It is suggested that
certificates be returned by certified mail for your protection; (3) any required
signature guarantees (see "Signature Guarantees" below); and (4) other
supporting legal documents, if required in the case of estates, trusts,
guardianships, divorce, custodianships, corporations, partnerships, pension or
profit sharing plans, retirement plans, and other organizations.
Please keep in mind that as a shareholder, it is your responsibility to
ensure that all requests are submitted to the Company's transfer agent in Proper
Form for processing.
26
<PAGE>
SIGNATURE GUARANTEES. This guarantee carries with it certain statutory
warranties relied upon by the transfer agent. This guarantee is designed to
protect the investor, the Company, SM&R, and its representatives through the
signature verification of each investor wishing to redeem or exchange shares.
Signature guarantees are required when: (1) the proceeds of the redemption
exceed $25,000; (2) the proceeds (in any amount) are to be paid to someone OTHER
THAN the registered owner(s) of the account; (3) the proceeds (in any amount)
are to be sent to any address OTHER THAN the shareholder's address of record,
pre-authorized bank account or exchanged to one of the other funds managed by
SM&R; or (4) the Company or its transfer agent believes a signature guarantee
would protect against potential claims based on the transfer instructions,
including, when the authority of a representative of a corporation, partnership,
association, or other entity has not been established to the satisfaction of the
Company or transfer agent.
Acceptable guarantees can be obtained from an "eligible guarantor
institution" as defined in rules adopted by the Securities and Exchange
Commission. Eligible guarantor institutions include banks, brokers, dealers,
municipal securities dealers or brokers, government securities dealers or
broker, credit unions (if authorized under state law), national securities
exchanges, registered securities associations and institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program or an SM&R representative who has executed
an agreement and received authorization from SM&R. IMPORTANT: Witnessing or
notarization is not sufficient.
TEXAS OPTIONAL RETIREMENT PROGRAM. Government Bond Fund, Primary Fund, and
Money Market Fund shares in any account established under the Texas Optional
Retirement Program may not be redeemed unless satisfactory evidence is received
by SM&R from the state that one of the following conditions exist: (1) death of
the employee; (2) termination of service with the employer; or (3) retirement of
employee.
CHECK WRITING OPTION. Check writing is available in the Money Market Fund
to investors having an account value of $1,000 or more. $250 is the minimum
check amount under the check writing option. This option is not available on
IRAs, SEPs, or TSAs. Shareholders wishing to avail themselves of this option
must complete the check writing option signature card in the Prospectus. After
obtaining specimen signatures and the fully executed card, SM&R will order
checks and arrange for the shareholder's checks to be honored by a bank.
Investments made by personal check or third party check will be held for fifteen
(15) business days following the investment during which time checks may not be
drawn on the amount of such investment. This service may be terminated or
suspended or additional charges may be imposed for this service. Shareholders
will be provided the initial checkbook free of charge. There will be a $5 fee
for re-orders. Shareholders will be allowed to write ten (10) checks free each
calendar quarter.
When a check is presented for payment, SM&R, as the shareholder's agent,
will cause each Fund to redeem a sufficient number of full and fractional shares
to cover the amount of the check. Shareholders will continue to be entitled to
dividends on their shares up to the time the check is presented to SM&R for
payment. If the amount of the check is greater than the value of the shares held
in the shareholder's account for more than fifteen (15) business days at the
time the check is presented for payment, the check will be returned to the payee
as not being covered by sufficient funds, and the shareholder will be subject to
extra charges as a result.
Primary Fund shareholders that had check writing privileges prior to
September , 1998 will be permitted to continue writing checks on the Primary
Fund subject to the terms applicable to the Money Market Fund described above.
Shareholders using the Primary Fund check writing option should be aware that
writing a check is a redemption of shares. Those shares may be worth less when
the check is presented for payment than when the check was written.
REDEMPTION OF SMALL ACCOUNTS. The Company reserves the right to redeem
shares in any account (which will be promptly paid to the shareholder) if, due
to your redemptions, the value of the account falls below
27
<PAGE>
$100 in the case of the Government Bond Fund and Tax Free Fund or $1,000 in the
case of the Primary Fund and Money Market Fund. Shareholders will be notified
that the value of their account is less than the required minimum indicated
above and allowed at least 60 days to make an additional investment to increase
the value of their account above the required minimum. The Board of Directors
may, from time to time, change such required minimum investment.
RIGHTS RESERVED BY THE COMPANY. The Company, acting through its transfer
agent, reserves the right to waive or lower investment minimums; to accept
initial purchases by telephone from a registered representative; to refuse any
purchase order; to cancel or rescind any purchase or exchange at any time prior
to receipt by the shareholder of written confirmation or, if later, within five
(5) business days of the transaction; to freeze an account and suspend account
services when notice has been received of a dispute involving the account owners
or other parties or there is reason to believe a fraudulent transaction may
occur; to restrict or refuse the use of faxed redemptions where there is a
question as to the validity of the request or proper documents have not been
received; to otherwise modify the conditions of purchase and any services at any
time; or to act on instructions not believed to be genuine.
OTHER INFORMATION CONCERNING THE FUNDS
SHARING OF FUND EXPENSES. Each Fund bears its proportionate share of the
Company's general expenses not susceptible of direct allocation. Such general
expenses include the Company's organizational expenses, directors' fees and
joint fidelity bonds, which are pro-rated based on the relative amount of each
Fund's assets, and prospectus and shareholder report expenses, which are
pro-rated based on the relative number of each Fund's shareholders.
Organizational expenses for the Tax Free Fund and the Money Market Fund were
paid by the adviser.
AUTHORIZED STOCK. The shares of each Fund, when issued, will be fully paid
and non-assessable, will have no conversion or similar rights, and will be
freely transferable. Each share of stock will have a pro-rata interest in the
assets of the Fund to which the stock of that class relates and will have no
interest in the assets of any other Fund.
As of September 1, 1998, SM&R and its parent, American National Insurance
Company, owned [ ]% and [ ]%, respectively, of the outstanding shares of the
Company; [ ]% and [ ]%, respectively of the outstanding shares of the
Government Bond Fund; [ ]% and [ ]%, respectively of the outstanding shares
of the Primary Fund; and [ ]% and [ ]%, respectively of the outstanding
shares of the Tax Free Fund. In addition, SM&R provided the initial capital for
the Money Market Fund, and as of the date of this Prospectus owns 100% of the
outstanding shares of such Fund. Any person who owns directly or indirectly more
than 25% of the outstanding voting securities of the Company or a Fund is
presumed by the Investment Company Act of 1940 to "control" the Company or the
Fund, and may be able to significantly influence the outcome of any shareholder
vote. For purposes of voting on matters submitted to shareholders, any person
who owns more than 50% of the outstanding shares of the Company or a Fund
generally would be able to cast the deciding vote. By virtue of their stock
ownership, SM&R and American National control the Company's operations,
including the ability to make changes in the fundamental investment objectives
and restrictions of each Fund of the Company, as well as the ability to increase
investment advisory fees, notwithstanding other shareholders' votes to the
contrary. Holders of shares of any Fund are entitled to redeem their shares as
set forth under "HOW TO REDEEM."
YEAR 2000 RISKS. Many services provided to the Funds and their shareholders
depend on the smooth functioning of computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated, referred to as the "Year 2000
Problem." The Year 2000 Problem could have a negative impact on handling
securities trades, payment of interest and dividends, pricing, and account
services. Like other mutual funds, financial and business organizations, and
individuals around the world, the Funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and
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<PAGE>
transfer agent) do not properly process and calculate date-related information
and data from and after January 1, 2000. SM&R is taking steps to address the
Year 2000 Problem with respect to the computer systems that it uses and to
obtain assurances that comparable steps are being taken by any other service
providers. At this time, however, there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the Funds and their
shareholders.
VOTING RIGHTS. Within the respective Funds, all shares have equal voting,
participation and liquidation rights, but have no subscription, preemptive,
conversion, or cumulative voting rights.
On certain matters, such as the election of directors, all shares of each
Fund vote together, with each share having one vote. On other matters affecting
a particular Fund, such as the Investment Advisory Contract or fundamental
investment policies, only shares of that Fund are entitled to vote, and a
majority of the shares of that Fund are required for approval of the proposal.
On matters affecting a particular Class of a Fund, only shares of that Class of
the Fund are entitled to vote, and a majority of the shares of that Class are
required for approval of the proposal.
SPECIAL PAYMENTS TO BROKER-DEALERS. Broker-dealers or other securities
dealers that have entered into selling agreements with SM&R may receive
compensation from SM&R or an affiliated company in connection with selling
shares of the SM&R Family of Funds. Compensation may include financial
assistance for conferences, shareholder services, automation, sales and training
programs, or promotional activities. Registered representatives and their
families may be paid for travel expenses, including lodging, in connection with
business meetings or seminars. In some cases, this compensation may only be
available to securities dealers whose representatives have sold or are expected
to sell significant amounts of shares. Securities dealers may not use certain
sales to qualify for this compensation if prohibited by the laws of any state or
self-regulatory agency, such as the National Association of Securities Dealers,
Inc.
Securities laws of states in which the Fund offers its shares may differ
from federal law. Banks and financial institutions that sell shares of the Fund
may be required to register as securities dealers pursuant to state law.
ADDITIONAL INFORMATION. This Prospectus and the Statement of Additional
Information referred to on the cover page do not contain all the information set
forth in the registration statement, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The omitted information may be obtained from the Commission's principal office
in Washington, D.C., upon payment of the fees prescribed by the Commission.
For further information, shareholders may also contact SM&R, whose address
and phone number are set forth on the cover of this Prospectus.
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<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S BOND RATING:
<TABLE>
<S> <C>
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 that 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 like 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, if 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.
</TABLE>
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S BOND RATINGS:
<TABLE>
<S> <C>
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-edge".
Interest payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the long-term
risks appear somewhat greater than in Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Baa Bonds which are rated "Baa" are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
</TABLE>
DESCRIPTION OF FITCH INVESTORS SERVICE BOND RATINGS:
<TABLE>
<S> <C>
AAA Obligations which have the highest rating assigned by Fitch IBCA on its national
rating scale for that country. This rating is automatically assigned to all
obligations issued or guaranteed by the sovereign state. Capacity for timely
repayment of principal and interest is extremely strong, relative to other obligors
in the same country.
AA Obligations for which capacity for timely repayment of principal and interest is very
strong relative to other obligors in the same country. The risk attached to these
obligations differs only slightly from the country's highest rated debt.
A Obligations for which capacity for timely repayment of principal and interest is
strong relative to other obligors in the same country. However, adverse changes in
business, economic or financial conditions are more likely to affect the capacity for
timely repayment than for obligations in higher rated categories.
BBB Obligations for which capacity for timely repayment of principal and interest is
adequate relative to other obligors in the same country. However, adverse changes in
business, economic or financial conditions are more likely to affect the capacity for
timely repayment than for obligations in higher rated categories.
</TABLE>
MUNICIPAL NOTE RATINGS
DESCRIPTION OF MOODY'S INVESTOR SERVICE INC.'S MUNICIPAL NOTE RATINGS:
<TABLE>
<S> <C>
MIG 1/VMIG 1 This designation denotes best quality. There is present strong protection
by established cash flows, superior liquidity support or demonstrated
broad-based access to the market refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access
for refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly regarded as
required of an investment security is present and although not distinctly
or predominantly speculative, there is specific risk.
</TABLE>
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<PAGE>
DESCRIPTION OF STANDARD AND POOR'S MUNICIPAL NOTE RATINGS:
Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or less
the ratings below usually will be assigned. Notes maturing beyond three years
will most likely receive a bond rating of the type recited above.
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very
strong capacity to pay debt service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
</TABLE>
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
Commercial paper rated "A" by Standard & Poor's Corporation has the
following characteristics: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is generally rated "A" or better. The issuer
has access to at least two additional channels of borrowing. Basic earnings and
cash flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated as follows:
<TABLE>
<S> <C>
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".
</TABLE>
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
Among the factors considered by Moody's Investors Service, Inc. is assigning
commercial paper ratings are the following: (1) evaluation of the management of
the issuer; (2) economic evaluation of the issuer's industry or industries and
an appraisal of the risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition of the management
of obligations which may be present or may arise as a result of public interest
questions and proportions to meet such obligations. Relative differences in
strength and weakness in respect to these criteria would establish a rating in
one of three classifications; "P-1", "P-2" or "P-3". "P-1" is the highest
commercial paper rating assigned by Moody's Investors Service, Inc. "P-2" is the
second highest of such ratings.
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<PAGE>
DESCRIPTION OF FITCH INVESTORS SERVICE COMMERCIAL PAPER, MEDIUM-TERM NOTES, AND
MUNICIPAL AND INVESTMENT NOTES.
<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as
having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than issues rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for issues
assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics suggesting that
the degree of assurance for timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below investment grade.
F-5 Weak Credit Quality. Issues assigned this rating have characteristics suggesting a
minimal degree of assurance for timely payment and are vulnerable to near-term
adverse changes in financial and economic conditions.
</TABLE>
DESCRIPTION OF DUFF & PHELP'S TWO HIGHEST COMMERCIAL RATINGS:
Duff & Phelp's commercial paper ratings place emphasis on liquidity,
considering not only cash from operations, but access to alternative sources of
funds, including trade credit, bank lines and capital markets. Relative
differences in strength and weakness is rated by Duff & Phelp's as Duff-1 or
Duff-2; Duff-1 being the highest commercial paper rating and Duff-2 being the
second highest rating.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
Thomson Bankwatch, Inc.'s ratings of United States commercial banks,
thrifts, and non-bank banks, non-United States banks, and broker-dealers are
based upon among other things, five years's financial information and the
issuer's most recent regulatory filings. Relative differences in strength and
weakness are rated by Thomson Bankwatch, Inc.
<TABLE>
<S> <C>
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.
</TABLE>
FEDERAL FUNDS
As used in this Prospectus and in the Fund's Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.
33
<PAGE>
<TABLE>
<S> <C>
Securities Management & Research, Inc. BULK RATE
One Moody Plaza U.S. POSTAGE PAID
Galveston, TX 77550 PERMIT NO. 89
GALVESTON, TEXAS
</TABLE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
September , 1998
A Statement of Additional Information dated September , 1998 containing
additional information about the Company was filed with the Securities and
Exchange Commission and is incorporated herein by reference. Additional
information about the Company's investments also is available in the Company's
annual and semi-annual reports to shareholders. In the Company's annual report,
investors will find a discussion of the market conditions and investment
strategies that significantly affected the Company's performance during the last
fiscal year.
The Company's Statement of Additional Information, annual report, and
semi-annual reports are available, without charge, upon request. Investors may
make inquiries, request further information about the Company and the Funds, or
obtain copies of the Statement of Additional Information, annual report, and
semi-annual report, by writing Securities Management and Research, Inc., One
Moody Plaza, 14th Floor, Galveston, Texas 77550, or by calling (Toll Free)
1-800-231-4639 or (Collect) 1-409-763-2767.
Information about the Company and the Funds may be reviewed and copied at
the Securities and Exchange Commission's Public Reference Room in Washington
D.C. Investors 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 Company also are available on the Commission's Internet site at
http:// www.sec.gov, and investors 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.
811-6477
<PAGE>
[SM&R Logo] SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
P R O S P E C T U S
CLASS J
SM&R INVESTMENTS, INC. - One Moody Plaza - Galveston, Texas 77550
Telephone Number: (409) 763-2767 - Toll Free: 1 (800) 231-4639
September 15, 1998
OFFICERS
Michael W. McCroskey, President and CEO
Brenda T. Koelemay, Vice President and Treasurer
Emerson V. Unger, Vice President
Teresa E. Axelson, Vice President and Secretary
<TABLE>
<S> <C>
INVESTMENT ADVISER AND MANAGER UNDERWRITER AND REDEMPTION AGENT
Securities Management and Research, Inc. Securities Management and Research, Inc.
One Moody Plaza One Moody Plaza
Galveston, Texas 77550 Galveston, Texas 77550
CUSTODIAN TRANSFER AND DIVIDEND PAYING AGENT
Securities Management and Research, Inc. Securities Management and Research, Inc.
One Moody Plaza One Moody Plaza
Galveston, Texas 77550 Galveston, Texas 77550
LEGAL COUNSEL INDEPENDENT AUDITORS
Greer, Herz & Adams, L.L.P. Tait, Weller & Baker, CPA
One Moody Plaza 8 Penn Center Plaza, Suite 800
Galveston, Texas 77550 Philadelphia, PA 19103-2108
</TABLE>
- --------------------------------------------------------------------------------
This Prospectus offers shares of four separate investment portfolios
("Funds") of SM&R Investments, Inc. (the "Company") through certain financial
intermediaries that have distribution agreements with SM&R. Some of the Funds
offer other share classes with different sales charge and distribution and
service fee structures. Each Fund has its own investment objective designed to
meet different investment goals. The Funds' investment objectives, and
suitability for particular types of investors, are further described under "The
Funds at a Glance" and "Investment Objectives and Policies."
Please read this Prospectus carefully before making an investment and keep
it for future reference.
Shares of the Company and each Fund are not deposits or obligations of, or
guaranteed or endorsed by, any bank. Further, shares of the Company and each
Fund, including the Government Bond and Money Market Funds, are not federally
insured or guaranteed by the U.S. Government, the Federal Deposit Insurance
Corporation ("FDIC"), the Federal Reserve Board or any other agency. Investing
in shares of any Fund of the Company involves investment risks, including the
possible loss of principal.
Like all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
There can be no assurance that SM&R Money Market Fund will be able to
maintain a net asset value of $1.00 per share.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
TABLE OF FEES AND EXPENSES............................................................. 3
FINANCIAL HIGHLIGHTS................................................................... 5
INVESTMENT OBJECTIVES AND POLICIES..................................................... 8
ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES.......................................... 14
THE FUNDS AND MANAGEMENT............................................................... 16
HOW TO PURCHASE SHARES................................................................. 18
WHEN ARE PURCHASES EFFECTIVE?.......................................................... 20
DETERMINATION OF OFFERING PRICE........................................................ 20
MULTI-CLASS FUNDS...................................................................... 21
SPECIAL PURCHASE PLANS AND SERVICES.................................................... 21
RETIREMENT PLANS....................................................................... 24
DIVIDENDS AND DISTRIBUTIONS............................................................ 24
TAXES.................................................................................. 25
HOW TO REDEEM.......................................................................... 26
OTHER INFORMATION CONCERNING THE FUNDS................................................. 29
</TABLE>
i
<PAGE>
THE FUNDS AT A GLANCE
SM&R Investments, Inc., formerly known as SM&R Capital Funds, Inc. (the
"Company"), is a diversified, open-end management company that was incorporated
under the laws of Maryland on November 6, 1991. The Company offers four separate
investment portfolios (the "Funds"), each of which pursues a different
investment objective. The investment objective and investor suitability profile
of each Fund are summarized below.
SM&R GOVERNMENT BOND FUND ("GOVERNMENT BOND FUND")
OBJECTIVE: 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.
INVESTOR SUITABILITY PROFILE: The Government Bond Fund is for investors
desiring the security of investing primarily in the strength and stability of
the U.S. Government, its agencies, or instrumentalities in order to meet their
current needs. However, you should keep in mind that the Fund may invest in
other instruments in order to meet its objective.
SM&R TAX FREE FUND ("TAX FREE FUND")
OBJECTIVE: To provide as high a level of interest 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.
INVESTOR SUITABILITY PROFILE: The Tax Free Fund is for the investor
desiring income exempt from federal income tax and, under certain conditions,
exempt from state and local taxes. You should keep in mind that certain income
from the Fund may be subject to the federal alternative minimum tax ("AMT") and
investors in certain states may be subject to state taxation on all or a portion
of the income and capital gains realized by the Fund.
SM&R PRIMARY FUND ("PRIMARY FUND")
OBJECTIVE: To seek maximum current income consistent with capital
preservation and liquidity through investment primarily in commercial paper.
INVESTOR SUITABILITY PROFILE: The Primary Fund is for fixed income
investors who desire minimal investment risk yet may be looking to move
cautiously into the investment arena.
SM&R MONEY MARKET FUND ("MONEY MARKET FUND")
OBJECTIVE: To seek to achieve the highest current income consistent with
the preservation of capital and maintenance of liquidity. The Fund seeks to
achieve its objective by investing in high-quality short-term money market
instruments.
INVESTOR SUITABILITY PROFILE: The Money Market Fund is for investors who
are risk-averse, such as first-time investors who wish to move cautiously into
the investment arena. The Fund is designed to provide investors a relatively
safe and liquid investment alternative. The Money Market Fund also may be
appropriate for investors who wish to temporarily "park" funds during periods
when investment in the equity markets is unattractive.
The Company designates its capital stock as shares of the Funds. Each Fund
is, for investment purposes, considered a separate investment fund. Each share
of capital stock represents a pro-rata interest in the assets of a particular
Fund and has no interest in the assets of any other Fund. Each Fund bears its
1
<PAGE>
own liabilities. YOU SHOULD KEEP IN MIND THAT INVESTMENTS IN THE FUNDS,
INCLUDING THE GOVERNMENT BOND AND MONEY MARKET FUNDS, ARE NOT INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT.
PORTFOLIO TURNOVER RATES: Historical turnover rates for each Fund (except
the Money Market Fund) are included in the Financial Highlights tables. No Fund
expects its portfolio turnover rate to exceed eighty percent (80%). An
explanation of turnover rate calculations and brokerage fees can be found in the
Company's Statement of Additional Information.
MANAGEMENT: Securities Management and Research, Inc. ("SM&R") makes the
investment choices for the Funds. SM&R has served as adviser and distributor to
mutual funds since 1966. See "THE FUNDS AND MANAGEMENT" for additional
information.
PURCHASING SHARES: This Prospectus offers Class J shares of the Government
Bond Fund and the Tax Free Fund and shares of the Money Market Fund and the
Primary Fund through certain financial intermediaries (such as broker-dealers,
investment advisers, and mutual fund "marketplaces") that have distribution
agreements with SM&R. Class J shares of the Government Bond and Tax Free Funds
and shares of the Money Market and Primary Funds are offered at their respective
net asset values, without the imposition of any sales charge on their purchase
or redemption. As a result, 100% of your purchase is immediately invested. Class
J shares of the Government Bond and Tax Free Funds, however, have higher ongoing
expenses because of the imposition of a distribution ("12b-1") fee. Additional
Classes of the Government Bond and Tax Free Funds are offered through separate
prospectuses and have different sales charges and 12b-1 fee structures.
For Class J shares of the Government Bond and Tax Free Funds, your minimum
initial investment is $100 and all subsequent investments must be at least $20.
For the Money Market and Primary Funds, your minimum initial investment is
$1,000 and all subsequent investments must be at least $100. See "HOW TO
PURCHASE SHARES."
REDEMPTIONS: For information on redeeming shares, see "HOW TO REDEEM."
EXCHANGES: In general, you can exchange shares of a Fund for shares of
another fund in the SM&R Family of Funds (as defined herein) without the payment
of an exchange fee, subject to certain conditions. For information on exchanging
shares, see "Exchange Privilege" within the "SPECIAL PURCHASE PLANS AND
SERVICES" section.
2
<PAGE>
TABLE OF FEES AND EXPENSES
The purpose of the following table is to assist an investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. Investors should be aware that this table is not intended to reflect
in detail the fees and expenses associated with an individual shareholder's own
investment in any of the Funds, or Class thereof, listed. It is being provided
to assist investors in gaining a more complete understanding of fees, charges,
and expenses which are discussed in greater detail in the appropriate sections
of the Prospectus.
THERE ARE NO SHAREHOLDER TRANSACTION CHARGES IN CONNECTION WITH PURCHASES OR
REDEMPTIONS OF CLASS J SHARES OF THE GOVERNMENT BOND FUND AND THE TAX FREE FUND,
OR OF ANY SHARES OF THE PRIMARY FUND AND MONEY MARKET FUND, OTHER THAN AN $8.00
TRANSACTION FEE CHARGED FOR EACH EXPEDITED WIRE REDEMPTION.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets Before Fee Waivers and Expense
Reimbursements)
The "Management Fee," "Other Expenses," and "Total Annual Fund Operating
Expenses" shown below for the Government Bond, Primary, and Tax Free Funds are
for the year ended August 31, 1997; for the Money Market Fund, they are
estimates for the first year of operation (ending August 31, 1999).
<TABLE>
<CAPTION>
GOVERNMENT TAX FREE MONEY
BOND FUND FUND CLASS PRIMARY MARKET
CLASS J J FUND FUND
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Management Fee........................................................ 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service (12b-1) Fee............................... 0.75% 0.75% None None
Other Expenses(1)..................................................... 0.57% 0.77% 0.51% 0.75%
Total Annual Fund Operating Expenses(2)............................... 1.82% 2.02% 1.01% 1.25%
</TABLE>
NOTES TO THE TABLE OF FEES AND EXPENSES
(1) "Other Expenses" include the 0.25% Administrative Service Fee. Because Class
J shares were not available prior to the date of this Prospectus, "Other
Expenses" for Class J shares were based on the expenses and average net
assets of the Government Bond Fund and the Tax Free Fund, respectively, for
the fiscal year ended August 31, 1997. "Other Expenses" shown for the Money
Market Fund are estimated for the current fiscal year ending August 31,
1999.
(2) The Fee Table does not reflect any fees waived or expenses assumed either
contractually or voluntarily by SM&R for the Funds during the fiscal year
ended August 31, 1997. Pursuant to the Administrative Service Agreement,
SM&R has agreed to pay (or to reimburse) each Fund for regular operating
expenses (including the advisory fee and administrative fee, but not
including any 12b-1 fee or Class-specific expenses) in excess of 1.25%
(0.35% for the Money Market Fund) per year of such Fund's average daily net
assets.
SM&R may also waive fees or assume expenses on a voluntary basis. During the
fiscal year ended August 31, 1997, SM&R voluntarily waived management fees of
0.07%, 0.21%, and 0.50% for the Government Bond Fund, Primary Fund, and Tax Free
Fund, respectively, and reimbursed expenses of 0.24% for the Tax Free Fund. SM&R
intends to continue to voluntarily waive the advisory fee for the Tax Free Fund
and reimburse expenses to the extent that total regular operating expenses (not
including any 12b-1 fee or Class-specific expenses) exceed average daily net
assets as follows: 0.80% for the Primary Fund and 1.00% for the Government Bond
Fund. SM&R may discontinue or reduce any such waiver or assumption of expenses
at any time without notice.
The following table is based on the "Management Fee," "Other Expenses," and
"Total Annual Fund Operating Expenses" for the Government Bond, Primary, and Tax
Free Funds for the year ended August 31, 1997 taking into account fee waivers
and expense reimbursements. For the Money Market Fund, they are estimates taking
into account fee waivers and expense reimbursements for the year ending August
31, 1999.
3
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets After Fee Waivers and Expense
Reimbursements)
<TABLE>
<CAPTION>
GOVERNMENT TAX FREE MONEY
BOND FUND FUND CLASS PRIMARY MARKET
CLASS J J FUND FUND
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Management Fee........................................................ 0.43% 0.00% 0.29% 0.00%
Distribution and/or Service (12b-1) Fee............................... 0.75% 0.75% None None
Other Expenses........................................................ 0.57% 0.54% 0.51% 0.35%
Total Annual Fund Operating Expenses.................................. 1.75% 1.29% 0.80% 0.35%
</TABLE>
EXAMPLES OF EXPENSES
These Examples are intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds. These Examples assume
that you invest $10,000 in a Fund (and applicable Class thereof) for the time
periods indicated. These Examples also assume that your investment has a 5%
return each year and that the Fund's operating expenses remain the same. Your
actual costs may be higher or lower than shown.
You would pay the following expenses, based on these assumptions, if you
actually redeem all of your shares at the end of the period shown:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Government Bond Fund (Class J)..................................... $ $ $ $
Tax Free Fund (Class J)............................................ $ $ $ $
Primary Fund....................................................... $ $ $ $
Money Market Fund.................................................. $ $ N/A N/A
</TABLE>
Because there are no sales charges or redemption fees, you would pay the
same expenses, based on these assumptions, if you did not redeem your shares.
4
<PAGE>
FINANCIAL HIGHLIGHTS--GOVERNMENT BOND FUND
The following financial highlights table is intended to help you understand
the Government Bond Fund's financial performance for the past five years.
Certain information reflects financial results for a single Government Bond Fund
share outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Government Bond Fund (assuming reinvestment of all dividends and
distributions) prior to addition of multiple classes of shares. This information
is derived from the financial statements of the Government Bond Fund, which for
the years ended through August 31, 1997 have been audited by KPMG Peat Marwick
LLP, independent auditors, whose report, along with the Government Bond Fund's
financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request, and from unaudited
financial statements of the Government Bond Fund for the six month period ended
February 28, 1998. If multiple classes of shares of the Government Bond Fund had
been in existence during the past five years, the financial performance of Class
J shares of the Government Bond Fund would have been lower than depicted because
of the imposition of distribution ("12b-1") fees.
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED
------------ YEAR ENDED AUGUST 31
FEB. 28, ------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.......... $10.42 $10.14 $10.51 $10.07 $10.87 $10.56
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income....... 0.32 0.67 0.65 0.70 0.54 0.50
Net Realized and Unrealized
Gain
(Loss) on Securities...... 0.15 0.26 (0.37) 0.44 (0.79) 0.49
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... 0.47 0.93 0.28 1.14 (0.25) 0.99
Less Distributions
Dividends from Net
Investment Income......... (0.34) (0.65) (0.65) (0.70) (0.55) (0.50)
Distributions from Capital
Gains..................... 0.00 0.00 0.00 0.00 0.00 (0.18)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS........... (0.34) (0.65) (0.65) (0.70) (0.55) (0.68)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period....................... $10.55 $10.42 $10.14 $10.51 $10.07 $10.87
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN.................. 4.58%(1) 9.37% 2.63% 11.85% (2.41)% 10.23%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED
------------ YEAR ENDED AUGUST 31
FEB. 28, -----------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Assets, End of Period
(000's omitted).............. $23,915 $23,683 $21,127 $20,466 $19,790 $19,783
Ratio of Expenses to Average
Net Assets(3)................ 0.97%(2) 1.00% 1.00% 0.70% 1.12% 1.07%
Ratio of Net Income to Average
Net Assets................... 6.16%(2) 6.46% 6.17% 6.90% 5.11% 5.07%
Portfolio Turnover Rate....... 0.92% 9.06% 30.17% 2.20% 45.48% 18.14%
</TABLE>
- ------------------------
(1) Returns are not annualized.
(2) Ratios are annualized.
5
<PAGE>
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and 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.
FINANCIAL HIGHLIGHTS--TAX FREE FUND
The following financial highlights table is intended to help you understand
the Tax Free Fund's financial performance since inception. Certain information
reflects financial results for a single Tax Free Fund share outstanding
throughout each period shown. The total returns in the table represent the rate
that an investor would have earned (or lost) on an investment in the Tax Free
Fund (assuming reinvestment of all dividends and distributions) prior to
addition of multiple classes of shares. This information is derived from the
financial statements of the Tax Free Fund, which for the years ended through
August 31, 1997 have been audited by KPMG Peat Marwick LLP, independent
auditors, whose report, along with the Tax Free Fund's financial statements, are
incorporated by reference into the Statement of Additional Information, which is
available upon request, and from unaudited financial statements of the Tax Free
Fund for the six month period ended February 28, 1998. If multiple classes of
shares of the Tax Free Fund had been in existence during the past five years,
the financial performance of Class J shares of the Tax Free Fund would have been
lower than depicted because of the imposition of distribution ("12b-1") fees.
<TABLE>
<CAPTION>
SEPT. 9, 1993
(DATE
OPERATIONS
SIX MONTH COMMENCED)
PERIOD ENDED YEAR ENDED AUGUST 31 THRU
FEB. 28, ------------------------ AUG. 31,
1998 1997 1996 1995 1994
------------ ------ ------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period....................... $10.27 $ 9.93 $ 9.95 $ 9.62 $10.00
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income....... 0.26 0.51 0.53 0.51 0.24
Net Realized and Unrealized
Gain (Loss) on
Securities................ 0.26 0.33 (0.02) 0.33 (0.38)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... 0.52 0.84 0.51 0.84 (0.14)
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income......... (0.26) (0.50) (0.53) (0.51) (0.24)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS........... (0.26) (0.50) (0.53) (0.51) (0.24)
------ ------ ------ ------ ------
Net Asset Value, End of
Period....................... $10.53 $10.27 $ 9.93 $ 9.95 $ 9.62
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN.................. 4.62%(1) 8.61% 5.18% 9.15% (1.49)%(1)
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
6
<PAGE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SEPT. 9, 1993
(DATE
OPERATIONS
SIX MONTH COMMENCED)
PERIOD ENDED YEAR ENDED AUGUST 31 THRU
FEB. 28, --------------------------- AUG. 31,
1998 1997 1996 1995 1994
------------ ------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period
(000's omitted).............. $18,555 $10,700 $9,148 $8,399 $7,295
Ratio of Expenses to Average
Net Assets(3)................ 0.73%(2) 0.54% -- -- 1.11%(2)
Ratio of Net Income to Average
Net Assets................... 4.75%(2) 4.97% 5.27% 5.43% 2.50%(2)
Portfolio Turnover Rate....... 0.00% 22.15% 18.44% 12.63% 16.49%
</TABLE>
- ------------------------
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.23% (annualized), 1.27%,
1.18%, and 1.25% for the six month period ended February 28, 1998 and the
years ended August 31, 1997, 1996, and 1995, respectively.
FINANCIAL HIGHLIGHTS--PRIMARY FUND
The following financial highlights table is intended to help you understand
the Primary Fund's financial performance for the past five years. Certain
information reflects financial results for a single Primary Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Primary Fund (assuming reinvestment of all dividends and distributions).
This information is derived from the financial statements of the Primary Fund,
which for the years ended through August 31, 1997 have been audited by KPMG Peat
Marwick LLP, independent auditors, whose report, along with the Primary Fund's
financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request, and from unaudited
financial statements of the Primary Fund for the six month period ended February
28, 1998.
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED
------------ YEAR ENDED AUGUST 31
FEB. 28, ------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income....... 0.03 0.05 0.05 0.05 0.03 0.02
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... 0.03 0.05 0.05 0.05 0.03 0.02
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income......... (0.03) (0.05) (0.05) (0.05) (0.03) (0.02)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS........... (0.03) (0.05) (0.05) (0.05) (0.03) (0.02)
------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN.................. 2.55(1) 4.98% 5.07% 5.01% 2.91% 2.59%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
7
<PAGE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED
------------ YEAR ENDED AUGUST 31
FEB. 28, -----------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Assets, End of Period
(000's omitted).............. $32,578 $33,045 $37,465 $20,984 $15,208 $15,539
Ratio of Expenses to Average
Net Assets(3)................ 0.80%(2) 0.80% 0.81% 0.84% 0.79% 0.85%
Ratio of Net Income to Average
Net Assets................... 5.05%(2) 4.86% 4.93% 4.91% 2.88% 2.47%
Portfolio Turnover Rate(4).... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
- ------------------------
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement the ratio of
expenses to average net assets would have been 0.99% (annualized), 1.01%,
1.15%, 1.21%, 1.20%, and 1.23% for the six month period ended February 28,
1998 and the years ended August 31, 1997, 1996, 1995, 1994, and 1993,
respectively.
(4) The Primary Fund experienced no portfolio turnover because the majority of
securities held during such periods had maturities of one year or less at
the time of acquisition.
INVESTMENT OBJECTIVES AND POLICIES
Each Fund pursues its own investment objective through the investment
policies and techniques described below. These policies and techniques are not
fundamental and may be changed by the Board of Directors of the Company without
the approval of the shareholders. In addition, the Company has adopted certain
restrictions as fundamental policies for each Fund, which may not be changed
without shareholder approval. (See the Company's Statement of Additional
Information for a description of the investment restrictions adopted as
fundamental policies). Since each Fund has a different investment objective,
each should have different investment results and incur different market and
financial risks.
Because of the market risks inherent in any investment, the Funds may not
achieve their investment objectives. In addition, effective management of each
Fund is subject to general economic conditions and to the ability and investment
techniques of management. The net asset value of each Fund's shares will vary
and the redemption value of shares may be either higher or lower than the
shareholder's cost.
GOVERNMENT BOND FUND
(FORMERLY, AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES)
The investment objective of the Government Bond Fund is 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. The Government Bond Fund 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.
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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--It is anticipated that a substantial portion of
the Government Bond Fund's portfolio will consist of mortgage-backed securities
("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"), 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. The Government Bond Fund 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 Fund's securities will generally increase; however, it is
anticipated 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 proceeds to the Fund from such prepayments will have to be invested
at the then prevailing lower interest rates. On the other hand, if interest
rates increase, the value of the Fund'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 Fund 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 Fund 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 Fund may invest a
portion of its assets in collateralized mortgage obligations or "CMOs," which
are debt obligations collateralized by a portfolio or pool of mortgages,
mortgage-backed securities, or U.S. Government securities. Collateralized
obligations
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in which the Government Bond Fund may invest are issued or guaranteed by a U.S.
Government agency or instrumentality, such as the FHLMC. A variety of types of
collateralized obligations are currently available and others may become
available in the future. One should keep in mind that during periods of rapid
interest rate fluctuation, the price of a security, such as a CMO, could either
increase or decrease based on inherent interest rate risk. Additionally, the
risk of maturities shortening or lengthening in conjunction with interest rate
movement, could magnify the overall effect of the price fluctuation.
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. A more complete description
of CMOs is contained in the Statement of Additional Information.
The Government Bond Fund 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.
ZERO COUPON BONDS--The Government Bond Fund may invest in zero coupon bonds,
which are debt obligations issued or purchased at a significant discount from
face value. The Government Bond Fund 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 Fund 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 Fund's distribution obligations.
OTHER INVESTMENTS--The Government Bond Fund may also invest in commercial
paper, certificates of deposit, and repurchase agreements of the same type and
rating as the Primary and Money Market Funds may invest, and may invest in
corporate debt securities of the same type as the Primary Fund which, at the
date of investment, are rated "A" or higher by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"). (See "Primary Fund" and
"Money Market Fund.") In addition, the Government Bond Fund may purchase debt
obligations of foreign corporations or financial institutions, such as Yankee
bonds (dollar-denominated bonds sold in the United States by non-U.S. issuers)
and Euro bonds (bonds not issued in the country (and possibly not the currency
of the country) of the issuer). (See "Foreign Debt Securities" in the Company's
Statement of Additional Information for a description of the risks associated
with investment in foreign securities.)
TAX FREE FUND (FORMERLY, AMERICAN NATIONAL TAX FREE FUND SERIES)
The investment objective of the Tax Free Fund is to provide as high a level
of interest 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. The Tax Free
Fund, as
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a matter of fundamental policy, will seek to achieve its objective by investing
at least 80% of the value of its net assets in municipal securities the interest
on which is exempt from federal income taxes.
The Tax Free Fund has no restrictions on the maturity of municipal
securities in which it may invest. Accordingly, it will seek to invest in
municipal securities of such maturities which, in the judgement of SM&R, the
adviser, will provide a high level of current income consistent with prudent
investment, with consideration given to market conditions.
The Tax Free Fund will invest, without percentage limitations, in municipal
securities having at the time of purchase one of the four highest municipal
ratings by Moody's, S&P, or Fitch Investors Service or in securities which are
not rated, provided that, in the opinion of SM&R, such securities are comparable
in quality to those within the four highest ratings. The rating agencies
consider that bonds rated in the fourth highest category may have some
speculative characteristics and that changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments on those bonds than is the case with higher grade bonds.
SM&R will only purchase bonds rated in such fourth category if it believes that
the purchase of such bonds is consistent with the Tax Free Fund's investment
objective. In the event the rating of an issue held by the Tax Free Fund is
changed by the rating service, such change will be considered by the Tax Free
Fund in its evaluation of the overall investment merits of that security but
such change will not necessarily result in an automatic sale of the security.
Any security held which is subsequently downgraded below BBB by S&P or Baa by
Moody's will be sold as soon as it is advantageous to do so after the downgrade.
A description of the ratings may be found in the Appendix to this Prospectus.
Purchasing unrated municipal securities, which may be less liquid than
comparably rated municipal securities, involves somewhat greater risk and
consequently the Tax Free Fund may not invest more than 20% of its net assets in
unrated municipal securities. To attempt to minimize the risk of such
investments, SM&R will, prior to acquiring unrated securities, consider the
terms of the offering and various other factors to determine the issuer's
comparative credit rating and whether the securities are consistent with the Tax
Free Fund's investment objective and policies.
During normal market conditions, the Tax Free Fund will have at least 80% of
its net assets invested in municipal securities the income of which is fully
exempt from federal income taxation. Furthermore, under normal market conditions
up to 20% of the Tax Free Fund's net assets, and as a temporary defensive
measure during abnormal market conditions, up to 50% of its net assets may be
invested in the following types of taxable fixed income obligations: (1)
obligations issued or guaranteed by the U.S. government, its agencies,
instrumentalities or authorities (See "Government Bond Fund" above for an
explanation of U.S. government obligations); (2) corporate debt securities which
at the date of the investment are rated A or higher by Moody's or by S&P; (3)
commercial paper which at the date of the investment is rated in one of the two
top categories by Moody's or by S&P or if not rated, is issued by a company
which at the date of the investment has an outstanding debt issue rated A or
higher by Moody's or A or higher by S&P; (4) certificates of deposit issued by
U.S. banks which at the date of the investment have capital surplus and
undivided profits of $1 billion as of the date of their most recently published
financial statements; and (5) repurchase agreements secured by U.S. government
securities, provided that no more than 15% of the Fund's net assets will be
invested in illiquid securities including repurchase agreements with maturities
in excess of seven days. To the extent income dividends include income from
taxable sources, a portion of a shareholder's dividend income may be taxable.
(See "DIVIDENDS AND DISTRIBUTIONS").
MUNICIPAL SECURITIES--The term "municipal securities," as used in this
Prospectus means obligations issued by or on behalf of states, territories, and
possessions of the U.S. and the District of Columbia and their political
subdivisions, agencies, and instrumentalities, the interest on which is exempt
from federal income tax. An opinion as to the tax-exempt status of a municipal
security generally is rendered to the issuer by the issuer's counsel at the time
of issuance of the security.
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Municipal securities are used to raise money for various public purposes
such as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the Statement of
Additional Information.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Like other interest-bearing
securities, the value of municipal securities changes as interest rates
fluctuate. For example, if interest rates increase from the time a security is
purchased, the security's value and sales price generally will be less than its
purchase cost. Conversely, if interest rates decline from the time a security is
purchased, the security's value and sales price may be greater than its purchase
cost. Generally, municipal securities of longer maturities produce higher
current yields than municipal securities with shorter maturities but are subject
to greater price fluctuation due to changes in interest rates, tax laws and
other general market factors. Lower-rated municipal securities generally produce
a higher yield with shorter maturities than higher-rated municipal securities
due to the perception of a greater degree of risk as to the ability of the
issuer to pay principal and interest.
The Tax Free Fund may purchase municipal bonds for which the payments of
principal and interest are secured by an escrow account of securities backed by
the full faith and credit of the U.S. government ("defeased") and municipal
securities whose principal and interest payments are insured by a commercial
insurance company as long as the underlying credit is investment grade (BBB or
better by S&P and Fitch and Baa or better by Moody's) ("insured"). The Tax Free
Fund may also purchase unrated securities of issuers which SM&R believes would
have been rated BBB or Baa had the issuer requested a rating from S&P, Fitch or
Moody's. Such implied investment grade rating will be determined by SM&R upon
its performance of a credit analysis of the issue and the issuer. Such credit
analysis may consist of a review of such items as the issuer's debt
characteristics, financial information, structure of the issue, liquidity of the
issue, quality of the issuer, current economic climate, financial adviser, and
underwriter. Insured and defeased bonds are further described in the Statement
of Additional Information. In general, these types of municipal securities will
not be treated as an obligation of the original municipality for purposes of
determining industry concentration.
OTHER INVESTMENTS--The Tax Free Fund may purchase "floating rate" and
"variable rate" obligations. These obligations bear interest at rates that are
not fixed, but vary with changes in specified market rates or indices on
pre-designated dates. See the Statement of Additional Information for details of
these types of investments.
The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed-delivery" basis (See "ADDITIONAL INVESTMENT POLICIES AND
TECHNIQUES--When Issued and Delayed Delivery Purchases" below). Zero coupon
bonds may also be purchased as part of the Tax Free Fund portfolio and are
explained above under the Government Bond Fund.
PRIMARY FUND (FORMERLY, AMERICAN NATIONAL PRIMARY FUND SERIES)
The investment objective of the Primary Fund is to seek maximum current
income consistent with capital preservation and liquidity through investment
primarily in commercial paper. Commercial paper is short-term unsecured
promissory notes issued by corporations to finance short-term credit needs.
Commercial paper is usually sold on a discount basis and has a maturity at the
time of issuance not exceeding nine months. The Primary Fund will invest only 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 ("NRSROs") (See the "Appendix" hereto for information about
such ratings and such rating organizations).
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OTHER INVESTMENTS--The Primary Fund may invest in (i) U.S. Government
Obligations (See the "Government Bond Fund" above for an explanation of U.S.
Government Obligations); (ii) other corporate obligations, such as bonds,
debentures or notes maturing in five (5) years or less at the time of purchase
which at the date of the investment are rated "A" or higher by an NRSRO; and
(iii) negotiable certificates of deposit of banks (including U.S. dollar
denominated obligations of foreign branches of U.S. banks and U.S. branches of
foreign banks and savings and loan associations and banker's acceptances of U.S.
banks which banks and savings and loan associations have total assets at the
date of investment (as of the date of their most recent published financial
statements) of at least $1 billion (See "INVESTMENT OBJECTIVES AND POLICIES,"
"Certificates of Deposit" in the Statement of Additional Information for a
description of the securities) and (iv) repurchase agreements with respect to
any type of instrument in which the Primary Fund is authorized to invest even
though the underlying instrument may mature in more than two (2) years. (See
"Additional Investment Policies and Techniques--Repurchase Agreements.")
Obligations of foreign branches of U.S. banks are subject to somewhat
different risks than those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions which may
adversely affect payment of principal and interest on the obligations, foreign
withholding and other taxes on interest income, and difficulties in obtaining
and enforcing a judgement against a foreign branch of a domestic bank. In
addition, different risks may result from the fact that foreign branches of U.S.
banks and U.S. branches of foreign banks are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks. For instance,
such branches may not be subject to the types of requirements imposed on
domestic banks with respect to mandatory reserves, loan limitations,
examinations, accounting, auditing, record keeping, and the public availability
of information. Such obligations are not traded on any national securities
exchange. While the Primary Fund does not presently invest in obligations of
foreign branches of U.S. banks, it may do so in the future. Investments in such
obligations will not be made in excess of 5% of the Primary Fund's total assets
and will be made only when SM&R believes the risks described above are minimal.
MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek to achieve the
highest current income consistent with the preservation of capital and
maintenance of liquidity. The Money Market Fund 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 Company's Board of
Directors. The Money Market Fund 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 United States Government or by its agencies and
instrumentalities. (See "Government Bond Fund" above for an explanation
of U.S. Government Obligations).
(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
Fund 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. As discussed above under "Primary Fund," commercial
paper is short-term unsecured promissory notes issued by corporations to
finance short-term credit needs.
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(5) BONDS AND NOTES. The Money Market Fund may invest in corporate bonds or
notes with a remaining maturity of one year or less.
(6) COLLATERALIZED MORTGAGE OBLIGATIONS--As discussed above under
"Government Bond Fund," CMOs are debt obligations collateralized by a
portfolio or pool of mortgages, mortgage-backed securities, or U.S.
Government securities.
The Money Market Fund 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 Fund 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 Fund. 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 NRSROs. Currently, five organizations are NRSROs: Moody's
Investor Service, Inc. ("Moody's"), Standard & Poor's Corporation ("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 Fund 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 Objectives and Policies" in the Statement of Additional
Information for a more detailed explanation of the investment categories.) The
Fund 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 Fund'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
Fund may be expected to be less than for any other Fund. By limiting its
investments to Eligible Securities, the Money Market Fund may not achieve as
high a level of current income as a fund investing in lower-rated securities.
ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES
The following investment policies and techniques are available to one or
more of the Funds:
LENDING OF SECURITIES. In order to increase the return on its investment,
the Government Bond Fund may lend portfolio securities to broker-dealers and
other financial institutions in amounts up to 10% of the value of that Fund's
net assets. Loans of portfolio securities will always be collateralized by cash
equal to at least 102% of the market value of the securities loaned including
accrued interest and will be made to borrowers deemed by SM&R to be
creditworthy. Lending portfolio securities involves risk of delay in the
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recovery of the loaned securities and in some cases the loss of rights in the
collateral should the borrower fail financially (See the Statement of Additional
Information).
WHEN-ISSUED AND DELAYED DELIVERY PURCHASES. The Government Bond Fund and
Tax Free Fund 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 at a later date. Normally, the settlement date occurs within one
month of the purchase; during the period between purchase and settlement, no
payment is made by the Fund to the issuer and no interest accrues to the Fund.
These transactions are subject to market fluctuation; 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. While
awaiting delivery of the securities purchased on a when-issued and delayed
delivery basis, each of these Funds will hold in a segregated account cash,
short-term money market instruments, high quality debt securities, or portfolio
securities sufficient to cover any commitment or limit any potential risk. (See
"When Issued and Delayed Delivery Transactions" in the Statement of Additional
Information).
REPURCHASE AGREEMENTS. Each Fund may occasionally enter into repurchase
agreements. Under a repurchase agreement, the Fund will acquire and hold an
obligation (government security, certificate of deposit, or banker's acceptance)
for not more than seven days, subject to the agreement by the seller (a Federal
Reserve System member bank or a registered securities dealer) to repurchase the
obligation at an agreed upon repurchase price and date, thereby determining the
yield during the Fund's holding period. During the holding period, the seller
must provide additional collateral if the market value of the obligation falls
below the repurchase price. See the Statement of Additional Information for a
further explanation.
ILLIQUID SECURITIES. Each Fund (except the Money Market Fund) may invest up
to 15%, and the Money Market Fund may invest up to 10%, of its net assets in
illiquid securities, including foreign securities not listed on foreign or
domestic exchanges and repurchase agreements maturing in excess of seven days.
If otherwise consistent with its investment objective and policies, a Fund
may purchase securities that are not registered under the Securities Act of
1933, as amended (the "1933 Act"), but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act, or which
were issued under Section 4(2) of the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board, after considering
trading activity, availability of reliable price information and other relevant
information, that an adequate trading market exists for that security. To the
extent that, for a period of time, qualified institutional or other buyers may
cease purchasing such restricted securities, the level of illiquidity of a Fund
holding such securities may increase.
RISK FACTORS. The risk inherent in investing in any Fund of the Company is
a risk common to any security. That is, the value of a Fund's shares will
fluctuate in response to changes in economic conditions, interest rates and the
market's perception of the underlying portfolio securities held by that Fund.
Market prices of the securities in which a Fund invests will fluctuate and will
tend to vary inversely with changes in prevailing interest rates. If interest
rates increase from the time a security is purchased, such security might be
valued and/or sold at a price less than its purchase cost. Conversely, if
interest rates decline from the time a security is purchased, such security
might be valued and/or sold at a price greater than its purchase cost.
Substantial redemptions could require a Fund to sell portfolio securities at a
time when a sale might not be favorable.
Investments in U.S. Government Obligations are not all 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
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given that the U.S. Government would lend money to or otherwise provide
financial support to U.S. Government sponsored instrumentalities.
The Primary Fund, consistent with its investment objective, will attempt to
maximize yield by trying to take advantage of changing conditions and trends. It
may also attempt to take advantage of what are believed to be disparities in
yield relationships between different instruments. This procedure may increase
or decrease the portfolio yield depending upon the Primary Fund's ability to
correctly time and execute such transactions. Although the Primary Fund's assets
will be invested in securities with short maturities, the Primary Fund will
manage its portfolio as described above. (See "PORTFOLIO TRANSACTIONS AND
BROKERAGE ALLOCATION" in the Statement of Additional Information.)
The Tax Free Fund's ability to achieve its objective depends partially on
the prompt payment by issuers of the interest on and principal of the municipal
securities held. A moratorium, default, or other non-payment of interest or
principal when due could, in addition to affecting the market value and
liquidity of the particular security, affect the market value and liquidity of
other municipal securities. Additionally, the market for municipal securities is
often thin and can be temporarily affected by large purchases and sales. As a
result, the Tax Free Fund will attempt to minimize risk by diversifying its
investments by investing no more than 5% of its net assets in the securities of
any one issuer (this limitation does not apply to investments issued or
guaranteed by the U.S. Government or its instrumentalities) and by investing no
more than 25% of its net assets in municipal securities issued in any one state
or territory. Each political subdivision, agency, instrumentality, and each
multi-state agency of which a state is a member will be regarded as a separate
issuer for the purpose of determining diversification.
THE FUNDS AND MANAGEMENT
A Board consisting of nine directors has overall responsibility for
overseeing the affairs of the Company in a manner reasonably believed to be in
the best interest of shareholders. The Board has delegated to SM&R, the Fund's
investment adviser, the management of the Company's day-to-day business and
affairs. In addition, SM&R invests the Company's assets, provides administrative
services, and serves as transfer agent, custodian, dividend paying agent, and
underwriter.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of September , 1998, the Moody Foundation, a private
foundation, owned approximately [ ]% of American National's common stock and
the Libbie Shearn Moody Trust, a private trust, owned approximately [ ]% of
such shares. SM&R was incorporated in 1964 and has managed investment companies
since 1966. SM&R also is investment adviser to three other registered investment
companies: American National Growth Fund, Inc., American National Income Fund,
Inc., and American National Triflex Fund, Inc. (the "SM&R Equity Funds," and
collectively with SM&R Investments, Inc., the "SM&R Family of Funds"). SM&R also
serves as investment adviser to the American National Investment Accounts, Inc.,
an investment company used to fund benefits under contracts issued by American
National and for The Moody National Bank of Galveston (the "Bank"), a national
bank. SM&R does and may, from time to time, serve as investment adviser to other
clients including employee benefit plans, other investment companies, banks,
foundations and endowment funds.
The following persons are officers of both SM&R and the Company: Michael W.
McCroskey, Vera M. Young, Emerson V. Unger, Teresa E. Axelson and Brenda T.
Koelemay.
PORTFOLIO MANAGEMENT
While the following individuals are primarily responsible for the day-to-day
portfolio management of their respective Funds, all accounts are reviewed on a
regular basis by SM&R's Investment Committee to ensure that they are being
invested in accordance with investment polices.
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VERA M. YOUNG, VICE PRESIDENT OF SECURITIES MANAGEMENT AND RESEARCH, INC.,
VICE PRESIDENT, PORTFOLIO MANAGER OF THE PRIMARY FUND AND THE MONEY MARKET FUND.
Ms. Young has served as Portfolio Manager of the Primary Fund and the Money
Market Fund since each such Fund's inception (1993 and 1998, respectively). She
also serves as Portfolio Manager of the Money Market Portfolio of American
National Investment Accounts, Inc., a series mutual fund used exclusively for
variable contracts issued by American National. Ms. Young also serves as
Assistant Vice President, Securities for American National. Ms. Young has been
managing fixed income investments for American National since 1987 and has
served as portfolio manager for various funds for over ten years.
TERRY E. FRANK, VICE PRESIDENT, PORTFOLIO MANAGER OF THE GOVERNMENT BOND
FUND AND TAX FREE FUND. Ms. Frank has served as Portfolio Manager of the
Government Bond Fund since 1993 and the Tax Free Fund since its inception. 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.
ADVISORY AGREEMENT
Under the Advisory Agreements with the Company, SM&R is paid an investment
advisory fee, which is calculated separately for each Fund, as compensation for
its services. The Agreements provide that SM&R will receive advisory fees as set
forth below.
GOVERNMENT BOND FUND AND TAX FREE FUND--A monthly investment advisory fee is
computed by applying to the average daily net asset value of the Government Bond
Fund and the Tax Free Fund each month one-twelfth (1/12th) of the annual rate as
follows:
<TABLE>
<CAPTION>
ON THE PORTION OF EACH FUND'S INVESTMENT ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ---------------------------------------------------------------------------------------------- ---------------------
<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>
MONEY MARKET FUND AND PRIMARY FUND--An investment advisory fee is computed
and paid monthly at the annual rate of 0.50% of the Money Market Fund's and
Primary Fund's average daily net asset value.
After applicable fee waivers, SM&R received total advisory fees from the
Government Bond Fund, Tax Free Fund, and Primary Fund for the fiscal year ended
August 31, 1998 which represented [ ]%, [ ]%, and [ ]%, respectively,
of each such Fund's average daily net assets. The Money Market Fund was not in
operation during the fiscal year ended August 31, 1998.
ADMINISTRATIVE SERVICE AGREEMENT
Under its Administrative Service Agreement with the Company, SM&R also
receives a management and administrative service fee from each Class of each
Fund which is computed by applying to the aggregate average daily net asset
value of each Fund each month one-twelfth (1/12th) of the annual rate as
follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S ADMINISTRATIVE SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
- ---------------------------------------------------------------------------------------- ---------------------------
<S> <C>
Not exceeding $100,000,000.............................................................. 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000................................... 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000................................... 0.15%
Exceeding $300,000,000.................................................................. 0.10%
</TABLE>
17
<PAGE>
SM&R has agreed to pay (or to reimburse each Fund for) each Fund's regular
operating expenses (including the advisory fee and administrative service fee,
if any, paid to SM&R, but exclusive of "12b-1 fees," Class-specific expenses,
interest, taxes, commissions, and other expenses incidental to portfolio
transactions) in excess of 1.25% (0.35% for the Money Market Fund) per year of
such Fund's average daily net assets. SM&R received administrative service fees
of [ ]% for the Government Bond Fund; [ ]% for the Primary Fund; and
[ ]% for the Tax Free Fund for the fiscal year ended August 31, 1998 of each
Fund's average daily net assets. The Money Market Fund was not in operation
during the fiscal year ended August 31, 1998.
FEE WAIVERS
In order to improve the yield and total return of any Fund of the Company,
SM&R may from time to time voluntarily waive or reduce all or any portion of its
advisory fee, administrative fee, and/or assume certain or all expenses of any
Fund of the Company while retaining its ability to be reimbursed for such fees
prior to the end of the fiscal year. 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. SM&R has agreed to continue to waive
the advisory fee for the Tax Free Fund and reimburse regular operating expenses
incurred by the Government Bond and Primary Funds to the extent that total
expenses (exclusive of the "12b-1 fees" and Class-specific expenses) exceed
average daily net assets as follows: Primary Fund--.80% and Government Bond
Fund--1.00%.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
The Company adopted a Distribution and Shareholder Servicing Plan (the
"12b-1 Plan") pursuant to Rule 12b-1 under the 1940 Act for the Class A, Class
B, Class C, and Class J shares of the Government Bond Fund and the Tax Free Fund
(the "Multi-Class Funds"). The 12b-1 Plan does not apply to the Money Market
Fund and the Primary Fund (the "Single-Class Funds"). The 12b-1 Plan provides
that SM&R will provide distribution services to the Class J shares of the
Multi-Class Funds.
For Class J shares, SM&R is entitled to receive a distribution ("12b-1") fee
of 0.75%, computed as an annual percentage of the value of the average daily net
assets of the Multi-Class Fund attributable to that Class. The distribution fee
to be paid under the 12b-1 Plan will be calculated daily (as a percentage of
average daily net assets) and paid periodically.
The purpose of the distribution fee is to compensate SM&R, or enable SM&R to
compensate other persons, including any distributor of Class J shares, for
services that are primarily intended to result in or primarily attributable to
the sale of Class J shares ("Selling Services"). "Selling Services" include the
training and supervision of sales personnel; advertising, marketing, and other
promotional expenses, including the costs of preparing and printing sales
literature; printing prospectuses and statements of additional information and
distributing them to prospective investors in Class J; and distributing Class J
shares. Payments for Selling Services may include payment for overhead and other
office expenses that are related to the distribution of the Class J shares. SM&R
also may reimburse the expenses of persons who provide support services in
connection with the distribution of the Class J shares, and may make payments to
financial intermediaries that sell Class J shares.
HOW TO PURCHASE SHARES
You may purchase shares offered in this Prospectus through certain financial
intermediaries (such as broker-dealers and mutual fund "marketplaces") that have
distribution agreements with SM&R. Such purchases will be at the offering price
(the "Offering Price") for such shares determined as and when provided below
(See "DETERMINATION OF OFFERING PRICE"). SM&R will send you a monthly
confirmation for any month in which your account is active. You should carefully
review the monthly
18
<PAGE>
confirmation and promptly report any discrepancies to SM&R. You may make
subsequent purchases directly through SM&R at the following address:
Securities Management and Research, Inc.
One Moody Plaza, 14th Floor
Galveston, Texas 77550
Certificates are not normally issued for shares of each Fund in an effort to
minimize the risk of loss or theft. However, SM&R confirms investors' purchases
and credits such purchases to their accounts on the books maintained by SM&R.
Investors have the same rights of share ownership as they would if certificates
had been issued.
OPENING AN ACCOUNT: A fully completed account application (the "Account
Application") must be submitted to open an account. The Account Application must
include the suitability form (the "Suitability Form"). If you would like to take
advantage of the electronic services available, please complete the Electronic
Transfer Options section of the Account Application. Special forms are required
when establishing an IRA/SEP or 403(b) plan. Keep in mind when opening an
account that transactions by telephone between different accounts will only be
permitted if the accounts are registered in the identical name.
MINIMUM PURCHASE REQUIREMENT: For Class J shares of the Government Bond
Fund and the Tax Free Fund, the minimum initial investment is $100 and all
subsequent investments must be at least $20. For the Primary Fund and the Money
Market Fund, the minimum initial investment is $1000 and the minimum amount of
any subsequent purchase is $100. The Company reserves the right to reject any
purchase. Please note that third party checks will not be accepted to open a new
account, except for IRA Rollover checks that are properly endorsed.
SUBSEQUENT PURCHASES BY MAIL: Make your check(s) payable to SM&R and send
the check(s) to the address indicated above. You must indicate your name,
account number, and the name of the Fund, and the Class if applicable, being
purchased. You may use the remittance slip attached to the confirmation
statement.
PURCHASES BY WIRE: To ensure proper crediting of a wire investment, you
must have an executed Account Application and Suitability Form on file with the
transfer agent. You may then wire your investment by providing the following
instructions to your bank:
The Moody National Bank of Galveston ABA #133100091
Securities Management and Research, Inc. #035 868 9
Name of Class, if applicable, and Fund (E.G., Class J of the Government Bond
Fund)
Fund Account Number (number appears on your confirmation statement)
Your Name (E.G., Mary Smith)
If wires are received after 3:00 p.m. Central Time or during a Bank holiday
or SM&R business holiday, purchases will be made at the price determined on the
next business day. A wire fee in the amount of $8.00 will be charged the
investor for wires under $5,000.
PURCHASES BY EXCHANGE: Call Investor Services if you have established
telephone exchange privileges on your account. See "SPECIAL PURCHASE PLANS AND
SERVICES--Exchange Privilege" for procedures and additional information relating
to telephone exchanges. For limitations on exchanges see "Excessive Trading"
also under "SPECIAL PURCHASE PLANS AND SERVICES."
19
<PAGE>
WHEN ARE PURCHASES EFFECTIVE?
Purchases received in proper form by SM&R prior to the close of the New York
Stock Exchange (currently 3:00 p.m. Central Time) (the "Exchange") on any SM&R
business day, or received prior thereto on any SM&R business day by a securities
dealer having a dealer contract with SM&R and reported to SM&R prior to SM&R's
close of business (currently 4:30 p.m. Central Time) on the same day, will be
effective and executed at the applicable Offering Price determined at the close
of the Exchange on that day. It is the responsibility of any such dealer and not
SM&R to establish procedures to assure that purchases received before the close
of the Exchange on an SM&R business day will be reported to SM&R before SM&R's
close of business on that same day. Purchases received after the close of the
Exchange, on customary national business holidays, or on an SM&R holiday will be
effective upon and made at the Offering Price determined as of the close of the
Exchange on SM&R's next business day that such Exchange is open for trading.
If payments for purchases are transmitted by bank wire to the Bank and
reported to SM&R prior to the close of the Exchange on any SM&R business day,
the investor will purchase at the Offering Price determined and become a
shareholder as of the close of the Exchange on that same day. Purchases by wire
payments reported by the Bank to SM&R after the close of the Exchange, on
customary national business holidays, or on an SM&R holiday, will be effective
on and made at the Offering Price determined on SM&R's next business day.
Procedures for transmitting Federal Funds by wires are available at any national
bank or any state bank which is a member of the Federal Reserve System.
SM&R's business holidays are Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, the Friday following Thanksgiving Day, two (2) days
at Christmas, and New Years Day. If Christmas Day is a weekday other than
Monday, Christmas Day and Christmas Eve Day are business holidays. If Christmas
Day is Monday, Christmas Day and the preceding Friday will be business holidays.
If Christmas Day is a Saturday, the preceding Thursday and Friday will be
business holidays. If Christmas Day is a Sunday, the preceding Friday and the
following Monday will be business holidays. If New Years Day is a Saturday, the
preceding Friday will be a business holiday, and if New Years Day is a Sunday,
the following Monday will be a business holiday.
DETERMINATION OF OFFERING PRICE
Each Fund's Offering Price is determined once each day and is comprised of
that Fund's net asset value plus the sales charge, if any. Shares of the
Single-Class Funds and Class J shares of the Multi-Class Funds may be purchased
without a sales charge. Accordingly, the Offering Price for shares of each
Single Class Fund is that Fund's net asset value; the Offering Price for Class J
shares of each Multi-Class Fund is that Class's net asset value.
Net asset value per share is determined by dividing the market value of the
securities owned by the Fund or Class thereof, plus any cash or other assets
(including dividends accrued but not collected), less all liabilities of such
Fund or Class (including accrued expenses but excluding capital and surplus), by
the number of shares of the Fund or Class outstanding. Net asset value is
currently determined as of 3:00 p.m. Central Time on each business day. Although
the legal rights of the Classes of the Multi-Class Funds are substantially
identical, the different expenses borne by each Class will result in different
net asset values and dividends for each Class.
The Money Market Fund values all of its securities using the amortized cost
method, which does not take into account unrealized capital gains or losses. The
amortized cost method of valuation involves valuing an instrument 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
value of the instrument. (For a further discussion of the amortized cost method,
see the Statement of Additional Information.) The other Funds use the amortized
cost method only for valuing debt securities having maturities of 60 days or
less. Debt securities with maturities in excess of 60 days are valued on the
basis of prices provided by a pricing service or brokers.
For a more complete description of the procedures involved in valuing
various fund assets, see "Offering Price" in the Company's Statement of
Additional Information.
20
<PAGE>
MULTI-CLASS FUNDS
Class J shares of the Multi-Class Funds are offered in this Prospectus to
individuals through certain financial intermediaries (such as broker-dealers,
investment advisers, and mutual fund "marketplaces") that have distribution
agreements with SM&R. Five other Classes of shares of the Multi-Class Funds are
available through separate prospectuses: (1) Class A "front-end load" shares;
(2) Class B "back-end load" shares; (3) Class C "level load" shares; (4) Class T
shares sold only to investors that became shareholders of the Company prior to
September , 1998 and certain designated persons; and (5) Class Y
"institutional" shares. The Class A, Class B, Class C, Class T, and Class Y
shares are subject to different sales charges and other expenses and,
accordingly, may have expense ratios and performance that differs from those of
Class J shares. You are encouraged to consider all of the Company's class
alternatives and choose the one that fits your individual circumstances at the
lowest level of fees. FOR MORE INFORMATION ON THE OTHER CLASSES OF SHARES OR TO
REQUEST A PROSPECTUS FOR ANOTHER CLASS, INVESTORS MAY CONTACT INVESTOR SERVICES
AT (800) 231-4639.
Each Class of shares of a Multi-Class Fund represents an interest in the
same portfolio of investments and each Class has the same rights as the other
Classes, except that each Class bears its own expenses. The net income
attributable to each Class and the dividends payable on the shares of that Class
will be reduced by the amount of the service and distribution fees of that
Class.
FUND AND CLASS EXPENSES
For the Multi-Class Funds, expenses that are directly attributable to a
particular Class of shares ("Class Expenses") will be borne solely by that
Class. Class expenses include: (1) asset-based distribution fees and shareholder
service fees; (2) transfer agency fees attributable to a particular Class; (3)
expenses related to preparing, printing, mailing, and distributing materials
such as shareholder reports, prospectuses, and proxy statements to current
shareholders of a specific Class; (4) state and federal registration fees
incurred by a specific Class; (5) litigation and other legal expenses relating
to a particular Class; (6) directors' fees and expenses incurred as a result of
issues relating solely to a particular Class; (7) accounting, audit, and tax
expenses relating to a specific Class; (8) the expenses of administrative
personnel and services required to support the shareholders of a specific Class;
and (9) fees and other payments made to entities performing services for a
particular Class, including account maintenance, dividend disbursing, or
subaccounting services.
Class Expenses may be waived or reimbursed by SM&R, the Fund's investment
adviser and distributor. Investment advisory fees, custodial fees, and other
expenses relating to the management of the Company's assets shall not be
allocated on a class-specific basis. Income, realized and unrealized capital
gains and losses, and expenses that are not allocated to a specific Class shall
be allocated to each Class on the basis of the proportionate net assets of that
Class in relation to the net assets of the Multi-Class Fund.
All direct sales expenses for the Primary Fund and the Money Market Fund,
including the cost of prospectuses for prospective shareholders, are paid by
SM&R, and no sales expense is borne by those Funds.
For additional information about the expenses of the Funds, see the
Statement of Additional Information.
SPECIAL PURCHASE PLANS AND SERVICES
The Company offers services and plans that are designed to facilitate
investment in the Funds. At this time, there is no charge to you for these
services. The Company may impose fees for such services in the future. Be aware,
however, that if you elect to participate in the ACH plan described below, you
should check with your financial institution for any additional charges imposed
for this service. For additional information contact your registered
representative.
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<PAGE>
ELECTRONIC TRANSFERS (ACH). The electronic transfer option allows you to
move money between your Fund account(s) and your bank, savings and loan, or
credit union account using the Automated Clearing House ("ACH") network. To
arrange for electronic transfers, complete the relevant section of the Account
Application at the time you open your account and specify the type of service or
services desired. Attach a voided, pre-printed check or deposit slip from your
checking, savings and loan, or credit union account. PASSBOOK SAVINGS ACCOUNTS
ARE NOT ELIGIBLE FOR THE ELECTRONIC TRANSFER OPTION. ADDITIONALLY, YOUR BANK
MUST BE A MEMBER OF THE AUTOMATED CLEARING HOUSE (ACH) NETWORK FOR YOU TO TAKE
ADVANTAGE OF THIS SERVICE. You will receive a confirmation verifying
initialization of the electronic transfer option and may begin conducting
transactions in your account(s) under this option three (3) weeks after receipt
of the verification notice from SM&R. If you elect this option after your
account is established, it may be necessary for you to obtain a signature
guarantee for all individuals named on the account(s).
TELEPHONE SERVICES. You can take advantage of this service by completing
the appropriate sections of the Account Application when opening your account.
Through this service, you will be able to purchase by ACH, redeem, and exchange
shares on those accounts for which you have an executed Account Application on
file and have received written verification from SM&R that the service has been
initialized as explained under Electronic Transfers above. If this option is
elected after your account is established, it may be necessary for you to obtain
a signature guarantee for all individuals named on the account(s). PLEASE NOTE
THAT THE TELEPHONE REDEMPTION OPTION IS NOT AVAILABLE TO RETIREMENT PLANS.
The Funds have implemented the following security procedures intended to
protect your account from losses resulting from unauthorized or fraudulent
telephone instructions: The caller will be required to know (i) the name of the
Fund or Funds; (ii) all digits of the account number; (iii) the exact name and
address used in the registration(s); and (iv) the Social Security or Employer
Identification Number listed on the account(s). Additionally, all telephone
transactions will be recorded for your protection.
Neither the Funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone which comply with the current
security procedures and other requirements. SM&R believes that such security
procedures and other requirements are reasonable and, if followed, you should
bear the risk of any losses resulting from unauthorized or fraudulent telephone
transactions on your account(s).
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from your bank account and invested
monthly, bi-monthly, quarterly, or annually into the designated fund(s) at the
applicable offering price determined on the date of the electronic transfer.
GROUP SYSTEMATIC INVESTMENT PLAN. SM&R can establish a Group Systematic
Investment Plan with an employer having 5 or more participants under a single
payroll deduction arrangement. The Minimum Initial Investment amount requirement
per account is waived for such plans. However, all other investment amount
minimums apply. Contact SM&R for further information regarding such plans.
WEALTH ACCUMULATION ACCOUNT. Shareholders having account balances of at
least $2,500 in the Money Market Fund may open a Wealth Accumulation Account,
which will provide them with an automatic dollar cost averaging plan. Automatic
monthly purchases of the shares of the other funds in the SM&R Family of Funds
may be made by exchanges from the shareholder's Money Market Fund Wealth
Accumulation Account. Purchases of the other funds must be at least $50 and,
unless terminated by the shareholder, will continue as long as the balance of
the Money Market Fund Wealth Accumulation Account is sufficient. Additional
investments may be made to a Money Market Fund account designated as a Wealth
Accumulation Account to extend the purchase period under the plan. However, if
additional investments are received by SM&R less than ten (10) days prior to the
20th of the month, such investments will not be available for use under the
Wealth Accumulation Account until the 20th of the following month. If the 20th
of the month is an SM&R holiday, the purchase will be processed on the next
business day.
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<PAGE>
Purchases made will be subject to the applicable sales charge of the fund
whose shares are being purchased. Changes in amounts to be purchased, the funds
being purchased, and termination of a Wealth Accumulation Account will be made
within five (5) business days after written instructions are received by SM&R in
proper form (I.E., signed by the owner(s) of record exactly as registered).
Shareholders' rights to make additional investments, to exchange shares, and
to redeem shares in the Money Market Fund and any of the funds in the SM&R
Family of Funds are not affected by a shareholder's participation in a Wealth
Accumulation Account. However, check writing privileges and expedited redemption
by telephone are not available for the Money Market Fund accounts designated as
a part of the Wealth Accumulation Account.
Primary Fund shareholders that opened a Primary Fund Wealth Accumulation
Account prior to September , 1998 will be permitted to continue using the
Account subject to the terms applicable to a Money Market Fund Wealth
Accumulation Account, described above.
EXCHANGE PRIVILEGE. As an investor in a Fund, you are permitted to exchange
shares that you own in a Fund with shares of another fund in the SM&R Family of
Funds without the payment of an exchange fee, subject to certain conditions.
Exchanges between a Fund and another fund in the SM&R Family of Funds are
available only in states where the applicable funds are registered and the
exchange may be legally made.
MULTI-CLASS FUNDS (GOVERNMENT BOND FUND AND TAX FREE FUND). You may
exchange Class J shares that you own in a Multi-Class Fund, without an exchange
fee, for corresponding Class J shares of another fund in the SM&R Family of
Funds. You also may exchange your Class J shares for shares of a Single-Class
Fund, provided that you meet any minimum investment requirement for the shares
you wish to acquire. Finally, you may exchange Class J shares of a Multi-Class
Fund for shares of another Class of that Fund, provided that you pay any
applicable sales charges.
SINGLE-CLASS FUNDS (PRIMARY FUND AND MONEY MARKET FUND). You may exchange
shares you own in a Single-Class Fund for shares of the other Single-Class Fund
or for shares of a Class of another fund in the SM&R Family of Funds, provided
you pay any sales charge applicable to the acquired shares.
You may acquire, through an exchange, shares of a Class with a contingent
deferred sales charge ("CDSC"). If you redeem those shares, the relevant CDSC,
if any, will be calculated from the date that you initially purchased the
original shares, rather than from the date of exchange.
Shares of any fund in the SM&R Family of Funds held in escrow under a Letter
of Intent are not eligible for the exchange privilege. Such shares will not be
released from escrow until the balance invested during the period specified in
the Letter of Intent equals or exceeds the amount required to be invested under
the Letter of Intent or the shareholder requests, in writing, that the Letter of
Intent be canceled and pays any adjustments in sales charge. After release from
escrow, shares may be exchanged, provided all other applicable conditions are
met.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met: (a) the exchange must be made
between accounts having identical registrations and addresses; (b) the shares of
the fund of the SM&R Family of Fund acquired through exchange must be qualified
for sale in the state in which you reside; (c) the dollar amount of the exchange
must meet the minimum investment requirement applicable to the shares of the
fund in the SM&R Family of Funds that you would acquire through the exchange;
(d) SM&R must have received full payment for the shares being exchanged; (e)
your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal Revenue
Service Form W-8 (certificate of foreign status) or Form W-9 (certifying exempt
status); (f) any shares that you wish to exchange must have been held for at
least ten (10) business days; (g) certificates representing shares, if any, are
returned before such shares are exchanged; and (h) you have received a
prospectus for the shares you receive in the exchange.
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<PAGE>
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time. ANY
GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE INCOME TAX PURPOSES. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR
THE TAX TREATMENT AND EFFECT OF EXCHANGES.
EXCESSIVE TRADING. Frequent trades, involving either substantial fund
assets or a substantial portion of your account or accounts controlled by you,
can disrupt management of the Company and raise the Company's expenses. We
define "excessive trading" as exceeding one purchase and sale involving the same
fund within any 120-day period.
For example, you are in Fund X. You can move substantial assets from Fund X
to Fund Y and, within the next 120 days, sell your shares in Fund Y to return to
Fund X or move to Fund Z. If you exceed the number of trades described above,
you may be barred indefinitely from further transactions between the
participating funds.
There are two types of transactions exempted from the excessive trading
guidelines. They are (1) redemptions that are not part of exchanges and (2)
systematic purchases or redemptions.
RETIREMENT PLANS
The following retirement plans may be funded with Class J shares of the
Government Bond Fund or with shares of the Primary and Money Market Funds:
Individual Retirement Accounts (IRAs); Simplified Employee Pension Plans (SEPs);
403(b) Custodial Accounts (TSAs), and corporate retirement plans. Information
concerning IRAs and TSAs, and the forms necessary to adopt such plans, can be
obtained by contacting your registered representative. A regular Fund
application should be used when establishing a corporate retirement plan. (See
"HOW TO PURCHASE SHARES" for the minimum initial and subsequent purchase
requirements.) SM&R acts as trustee or custodian for IRAs, SEPs and TSAs for the
Company. An annual custodial fee of $7.50 will be charged for any part of a
calendar year in which an investor has an IRA, SEP or TSA in the Company and
will be automatically deducted from each account. An individual considering a
retirement plan may wish to consult with an attorney or tax adviser.
Because IRAs, SEPs, TSAs, and other qualified plans are exempt from federal
income tax, they will be unable to benefit from the general tax-exempt nature of
the Tax Free Fund. Accordingly, the Tax Free Fund is not generally considered to
be suited for such plans or persons.
DIVIDENDS AND DISTRIBUTIONS
The Government Bond Fund and Tax Free Fund will declare and pay dividends
from net investment income monthly and net realized short-term or long-term
capital gains, if any, annually.
At 3:00 p.m. Central Time, on each day that the Exchange is open for trading
other than SM&R's business holidays described above, the Primary Fund and the
Money Market Fund each will declare a dividend of all of its net investment
income to shareholders already of record. Such dividends will be paid monthly.
Dividends and capital gains will be automatically reinvested at net asset
value in additional shares of the Fund making such distribution unless SM&R is
instructed otherwise in writing. Distributions not reinvested are paid by check
or transmitted to your bank account through an ACH transaction, if elected. If
the Postal Service cannot deliver your check, or if your check remains uncashed
for six months, the Company reserves the right to reinvest your distribution
check in your account at the net asset value on the business day of the
reinvestment and to reinvest all future distributions in shares of the Company.
Dividends and capital gains declared in December to shareholders of record in
December and paid the following January will be taxable to shareholders as if
received in December. This is a convenient way to
24
<PAGE>
accumulate additional shares and maintain or increase the shareholder's earning
base. Of course, any shares so acquired remain at market risk.
Shareholders have the right to change their election with respect to the
receipt of distributions by notifying SM&R in writing, but any such change will
be effective only as to distributions for which the record date is seven or more
business days after SM&R has received the shareholder's written request.
In order to be entitled to a dividend, an investor must have acquired shares
of a Fund prior to the close of business on the record date. A shareholder
should be cautioned, however, before purchasing shares of a Fund immediately
prior to a distribution. Dividends and distributions paid by the Company have
the effect of reducing net asset value per share on the record date by the
amount of the payment. Therefore, a dividend or distribution of record shortly
after the purchase of shares by an investor represents in substance, a return of
capital.
TAXES
Each Fund of the Company is treated as a separate entity for federal income
tax purposes. The Company has elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code. The Company 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 the Company
will be required to pay federal income taxes.
In order to qualify as a regulated investment company, each Fund of the
Company must meet several requirements. These requirements include the
following: (1) at least 90% of the Fund's gross income must be derived from
dividends, interest, payments with respect to securities loans, gains from the
sale or disposition of stock, securities or foreign currencies or other income
(including gains from options, futures or forward contracts) derived in
connection with the Fund's investment business and (2) at the close of each
quarter of the Fund's taxable year, (a) at least 50% of the value of the Fund's
assets must consist of cash, United States Government securities, securities of
other regulated investment companies, and other securities (limited generally
with respect to any one issuer to not more than 5% of the total assets of the
Fund and not more than 10% of the outstanding voting securities of such issuer)
and (b) not more than 25% of the value of the Fund's assets may be invested in
the securities of any issuer (other than United States Government Securities or
securities of other regulated investment companies) or of two or more issuers
which the Fund controls and which are determined to be engaged in similar or
related trades or businesses.
For federal income tax purposes, any income dividends derived from taxable
investments which the shareholder receives from such Fund of the Company, as
well as any distributions derived from net short-term capital gains are treated
as ordinary income whether the shareholder has elected to receive them in cash
or in additional shares. Distributions derived from net long-term capital gains
will be taxable as long-term capital gains regardless of the length of time the
shareholder has owned such Fund's shares and regardless of whether such
distributions are received in cash or in additional shares. In determining the
amount of capital gains, if any, available for distribution, net capital gains
are offset against available net capital losses, if any, carried forward from
previous years.
Dividends paid by the Tax Free Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be "exempt-interest" dividends
that shareholders may exclude from their gross income for federal income tax
purposes if the Fund satisfies certain quarterly asset percentage requirements.
To the extent that the Tax Free Fund invests in bonds, the interest on which is
a specific tax preference item for federal income tax purposes ("AMT-Subject
Bonds"), any exempt-interest dividends derived from interest on AMT-Subject
bonds will be a specific tax preference item for purposes of the federal
individual and corporate alternative minimum taxes. All exempt-interest
dividends will be a component of the "current earnings" adjustment item for
purposes of the federal corporate alternative minimum income tax. Current
federal tax law limits the types and volume of securities qualifying for the
25
<PAGE>
federal income tax exemption of interest and may also affect the availability of
municipal obligations for investment by the Fund and the value of the Fund's
portfolio.
Redemptions and exchanges of shares in each Fund of the Company are taxable
events on which a shareholder may realize a gain or loss. Shareholders of the
Tax Free Fund should be careful about redeeming shares immediately prior to the
record date of an "exempt-interest dividend" because the redemption may cause
the shareholder to realize a taxable gain even though a portion of the
redemption proceeds may represent a pro rata share of tax exempt interest earned
by the Fund. In addition, a loss on the sale or redemption of shares held by the
shareholder of the Tax Free Fund for six months or less will be disallowed to
the extent of any exempt-interest dividend received by the shareholder with
respect to those shares. Shareholders should consult with their tax advisor
concerning the tax reporting requirements in effect on the redemption or
exchange of such shares.
The Company may be required to report to the Internal Revenue Service
("IRS") any taxable dividends or other reportable payment (including share
redemption proceeds) and withhold 31% of any such payments made to individuals
and other non-exempt shareholders who have not provided a correct taxpayer
identification number and made certain required certifications that appear in
the Application. A shareholder may also be subject to backup withholding if the
IRS or a broker notifies the Company that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
Shareholders who are not U.S. persons for purposes of federal income
taxation should consult with their financial or tax advisors regarding the
applicability of U.S. withholding taxes to distributions received by them from
the Company.
Many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by the fund from direct obligations of
the U.S. Government, subject in some states to minimum investment requirements
that must be met within the fund.
At the end of each calendar year, the Company will advise shareholders about
the tax status of all distributions made during each taxable year, including the
portion of the dividends which comprise taxable income, exempt income and
interest income that is a tax preference item under the alternative minimum tax.
Shareholders should consult a tax advisor about the application of state and
local tax laws to these distributions and redemption proceeds received from the
Company.
IMPORTANT: The Company reserves the right to (1) refuse to open an account for
any person failing to provide a taxpayer identification number, certified as
correct and (2) close an account by redeeming its shares in full, at the then
current net asset value, upon receipt of notice from the IRS that the taxpayer
identification number certified as correct by the shareholder is in fact
incorrect.
HOW TO REDEEM
Shares of the Company will be redeemed at the net asset value determined on
the date the request is received by SM&R in "Proper Form," as defined in "PROPER
FORM" below, at no charge. A redemption request must be addressed to Securities
Management and Research, Inc., One Moody Plaza, 14th Floor, Galveston, Texas
77550.
If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as practicable and normally
within seven days after receipt of a redemption request in Proper Form.
If the shares being redeemed were purchased by wire, certified check, money
order, or other immediately available funds, redemption proceeds will be mailed
no later than the seventh calendar day following receipt. For shares purchased
by a personal check or ACH transfer, SM&R will process your
26
<PAGE>
redemption but will generally delay sending you the proceeds for up to ten (10)
business days to allow the check or transfer to clear.
TELEPHONE REDEMPTIONS. You may request redemptions by telephone if you have
completed the Account Application and requested this option. This redemption
feature can only be used if: (a) the redemption proceeds are to be mailed to the
address of record or wired to the pre-authorized bank account indicated on the
Account Application ; (b) there has been no change of address of record or pre-
authorized bank account within the preceding 30 business days; (c) the shares to
be redeemed are not in certificate form; (d) the security procedures discussed
under the "Exchange Privilege" have been met; and (e) the proceeds of the
redemption do not exceed $25,000.
SYSTEMATIC WITHDRAWAL PLAN. The Company has a Systematic Withdrawal Plan
("Withdrawal Account"), which permits shareholders having an account value of
$5,000 or more to automatically withdraw a minimum of $50 monthly or each
calendar quarter on or about the 20th of the applicable month. Shareholders
maintaining a Withdrawal Account may elect to have the withdrawal proceeds
automatically deposited in their pre-authorized bank account via an ACH
transaction. This is accomplished by completing the relevant section of the
Account Application and returning it to SM&R. See "SPECIAL PURCHASE PLANS AND
SERVICES--Electronic Transfers" for additional information. Dividends and
capital gains distributions will automatically be reinvested in additional
shares at net asset value. As with other redemptions, a withdrawal is a sale for
federal income tax purposes. The Systematic Withdrawal Plan will automatically
terminate if all shares are liquidated or withdrawn from the account.
Certificates are not issued for shares held in a Withdrawal Account and
certificates held, if any, must be surrendered when shares are transferred to a
Withdrawal Account. No account covered by a Letter of Intent can be changed to a
Systematic Withdrawal Plan until such time as the Letter of Intent is fulfilled
or terminated, nor can an account under a Systematic Withdrawal Plan be placed
under a Letter of Intent. For further information about the Systematic
Withdrawal Plan, contact a registered representative. "Proper Form" means the
request for redemption must include: (1) your share certificates, if issued; (2)
your letter of instruction or a stock assignment specifying the Fund, account
number, and number of shares or dollar amount to be redeemed. Both share
certificates and stock powers, if any, must be endorsed and executed exactly as
the Fund shares are registered. It is suggested that certificates be returned by
certified mail for your protection; (3) any required signature guarantees (see
"Signature Guarantees" below); and (4) other supporting legal documents, if
required in the case of estates, trusts, guardianships, divorce, custodianships,
corporations, partnerships, pension or profit sharing plans, retirement plans,
and other organizations.
Please keep in mind that as a shareholder, it is your responsibility to
ensure that all requests are submitted to the Company's transfer agent in Proper
Form for processing.
SIGNATURE GUARANTEES. This guarantee carries with it certain statutory
warranties relied upon by the transfer agent. This guarantee is designed to
protect the investor, the Company, SM&R, and representatives through the
signature verification of each investor wishing to redeem or exchange shares.
Signature guarantees are required when: (1) the proceeds of the redemption
exceed $25,000; (2) the proceeds (in any amount) are to be paid to someone OTHER
THAN the registered owner(s) of the account; (3) the proceeds (in any amount)
are to be sent to any address OTHER THAN the shareholder's address of record,
pre-authorized bank account or exchanged to one of the other funds in the SM&R
Family of Funds; or (4) the Company or its transfer agent believes a signature
guarantee would protect against potential claims based on the transfer
instructions, such as when the authority of a representative of a corporation,
partnership, association, or other entity has not been established to the
satisfaction of the Company or transfer agent.
Acceptable guarantees can be obtained from an "eligible guarantor
institution" as defined in rules adopted by the Securities and Exchange
Commission. Eligible guarantor institutions include banks,
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<PAGE>
brokers, dealers, municipal securities dealers or brokers, government securities
dealers or broker, credit unions (if authorized under state law), national
securities exchanges, registered securities associations and institutions that
participate in the Securities Transfer Agent Medallion Program ("STAMP") or
other recognized signature guarantee medallion program. IMPORTANT: Witnessing or
notarization is not sufficient.
TEXAS OPTIONAL RETIREMENT PROGRAM. Government Bond Fund, Primary Fund, and
Money Market Fund shares in any account established under the Texas Optional
Retirement Program may not be redeemed unless satisfactory evidence is received
by SM&R from the state that one of the following conditions exist: (1) death of
the employee; (2) termination of service with the employer; or (3) retirement of
employee.
CHECK WRITING OPTION. Check writing is available in the Money Market Fund
to investors having an account value of $1,000 or more. $250 is the minimum
check amount under the check writing option. This option is not available on
IRAs, SEPs, or TSAs. Shareholders wishing to avail themselves of this option
must complete the check writing option signature card in the Prospectus. After
obtaining specimen signatures and the fully executed card, SM&R will order
checks and arrange for the shareholder's checks to be honored by a bank.
Investments made by personal check or third party check will be held for fifteen
(15) business days following the investment during which time checks may not be
drawn on the amount of such investment. This service may be terminated or
suspended or additional charges may be imposed for this service. Shareholders
will be provided the initial checkbook free of charge. There will be a $5 fee
for re-orders. Shareholders will be allowed to write ten (10) checks free each
calendar quarter.
When a check is presented for payment, SM&R, as the shareholder's agent,
will cause each Fund to redeem a sufficient number of full and fractional shares
to cover the amount of the check. Shareholders will continue to be entitled to
dividends on their shares up to the time the check is presented to SM&R for
payment. If the amount of the check is greater than the value of the shares held
in the shareholder's account for more than fifteen (15) business days at the
time the check is presented for payment, the check will be returned to the payee
as not being covered by sufficient funds, and the shareholder will be subject to
extra charges as a result.
Primary Fund shareholders that had check writing privileges prior to
September ___, 1998 will be permitted to continue writing checks on the Primary
Fund subject to the terms applicable to the Money Market Fund described above.
Shareholders using the Primary Fund check writing option should be aware that
writing a check is a redemption of shares. Those shares may be worth less when
the check is presented for payment than when the check was written.
REDEMPTION OF SMALL ACCOUNTS. The Company reserves the right to redeem
shares in any account (which will be promptly paid to the shareholder) if, due
to your redemptions, the value of the account falls below $100 in the case of
the Government Bond Fund and Tax Free Fund or $1,000 in the case of the Primary
Fund and Money Market Fund. You will be notified that the value of your account
is less than the required minimum indicated above and allowed at least 60 days
to make an additional investment to increase the value of your account above the
required minimum. The Board of Directors may, from time to time, change such
required minimum investment.
RIGHTS RESERVED BY THE COMPANY. The Company, acting through its transfer
agent, reserves the right to waive or lower investment minimums; to accept
initial purchases by telephone from a registered representative; to refuse any
purchase order; to cancel or rescind any purchase or exchange at any time prior
to receipt by the shareholder of written confirmation or, if later, within five
(5) business days of the transaction; to freeze an account and suspend account
services when notice has been received of a dispute involving the account owners
or other parties or there is reason to believe a fraudulent transaction may
occur; to restrict or refuse the use of faxed redemptions where there is a
question as to the validity of the request or proper documents have not been
received; to otherwise modify the conditions of purchase and any services at any
time; or to act on instructions not believed to be genuine.
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<PAGE>
OTHER INFORMATION CONCERNING THE FUNDS
SHARING OF FUND EXPENSES. Each Fund bears its proportionate share of the
Company's general expenses not susceptible of direct allocation. Such general
expenses include the Company's organizational expenses, directors' fees and
joint fidelity bonds, which are pro-rated based on the relative amount of each
Fund's assets, and prospectus and shareholder report expenses, which are
pro-rated based on the relative number of each Fund's shareholders.
Organizational expenses for the Tax Free Fund and the Money Market Fund were
paid by the adviser.
AUTHORIZED STOCK. The shares of each Fund, when issued, will be fully paid
and non-assessable, will have no conversion or similar rights, and will be
freely transferable. Each share of stock will have a pro-rata interest in the
assets of the Fund to which the stock of that class relates and will have no
interest in the assets of any other Fund.
As of September 1, 1998, SM&R and its parent, American National, owned
[___]% and [___]%, respectively, of the outstanding shares of the Company;
[___]% and [___]%, respectively of the outstanding shares of the Government Bond
Fund; [___]% and [___]%, respectively of the outstanding shares of the Primary
Fund; and [___]% and [___]%, respectively of the outstanding shares of the Tax
Free Fund. In addition, SM&R provided the initial capital for the Money Market
Fund, and as of the date of this Prospectus owns 100% of the outstanding shares
of such Fund. Any person who owns directly or indirectly more than 25% of the
outstanding voting securities of the Company or a Fund is presumed by the
Investment Company Act of 1940 to "control" the Company or the Fund, and may be
able to significantly influence the outcome of any shareholder vote. For
purposes of voting on matters submitted to shareholders, any person who owns
more than 50% of the outstanding shares of the Company or a Fund generally would
be able to cast the deciding vote. By virtue of their stock ownership, SM&R and
American National control the Company's operations, including the ability to
make changes in the fundamental investment objectives and restrictions of each
Fund of the Company, as well as the ability to increase investment advisory
fees, notwithstanding other shareholders' votes to the contrary. Holders of
shares of any Fund are entitled to redeem their shares as set forth under "HOW
TO REDEEM."
YEAR 2000 RISKS. Many services provided to the Funds and their shareholders
depend on the smooth functioning of computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated, referred to as the "Year 2000
Problem." The Year 2000 Problem could have a negative impact on handling
securities trades, payment of interest and dividends, pricing, and account
services. Like other mutual funds, financial and business organizations, and
individuals around the world, the Funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and transfer agent) do not properly process and
calculate date-related information and data from and after January 1, 2000. SM&R
is taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by any other service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Funds and their shareholders.
VOTING RIGHTS. Within the respective Funds, all shares have equal voting,
participation and liquidation rights, but have no subscription, preemptive,
conversion, or cumulative voting rights. On certain matters, such as the
election of directors, all shares of each Fund vote together, with each share
having one vote. On other matters affecting a particular Fund, such as the
Investment Advisory Contract or fundamental investment policies, only shares of
that Fund are entitled to vote, and a majority of the shares of that Fund are
required for approval of the proposal. On matters affecting a particular Class
of a Fund, only shares of that Class of the Fund are entitled to vote, and a
majority of the shares of that Class are required for approval of the proposal.
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<PAGE>
SPECIAL PAYMENTS TO BROKER-DEALERS. Broker-dealers or other securities
dealers that have entered into selling agreements with SM&R may receive
compensation from SM&R or an affiliated company in connection with selling
shares of the SM&R Family of Funds. Compensation may include financial
assistance for conferences, shareholder services, automation, sales and training
programs, or promotional activities. Registered representatives and their
families may be paid for travel expenses, including lodging, in connection with
business meetings or seminars. In some cases, this compensation may only be
available to securities dealers whose representatives have sold or are expected
to sell significant amounts of shares. Securities dealers may not use certain
sales to qualify for this compensation if prohibited by the laws of any state or
self-regulatory agency, such as the National Association of Securities Dealers,
Inc.
Securities laws of states in which the Fund offers its shares may differ
from federal law. Banks and financial institutions that sell shares of the Fund
may be required to register as securities dealers pursuant to state law.
ADDITIONAL INFORMATION. This Prospectus and the Statement of Additional
Information referred to on the cover page do not contain all the information set
forth in the registration statement, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The omitted information may be obtained from the Commission's principal office
in Washington, D.C., upon payment of the fees prescribed by the Commission.
For further information, shareholders may also contact SM&R, whose address
and phone number are set forth on the cover of this Prospectus.
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APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S BOND RATING:
<TABLE>
<S> <C>
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 that 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 like 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, if 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.
</TABLE>
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S BOND RATINGS:
<TABLE>
<S> <C>
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-edge".
Interest payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the long-term
risks appear somewhat greater than in Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Baa Bonds which are rated "Baa" are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
</TABLE>
DESCRIPTION OF FITCH INVESTORS SERVICE BOND RATINGS:
<TABLE>
<S> <C>
AAA Obligations which have the highest rating assigned by Fitch IBCA on its national
rating scale for that country. This rating is automatically assigned to all
obligations issued or guaranteed by the sovereign state. Capacity for timely
repayment of principal and interest is extremely strong, relative to other obligors
in the same country.
AA Obligations for which capacity for timely repayment of principal and interest is very
strong relative to other obligors in the same country. The risk attached to these
obligations differs only slightly from the country's highest rated debt.
A Obligations for which capacity for timely repayment of principal and interest is
strong relative to other obligors in the same country. However, adverse changes in
business, economic or financial conditions are more likely to affect the capacity for
timely repayment than for obligations in higher rated categories.
BBB Obligations for which capacity for timely repayment of principal and interest is
adequate relative to other obligors in the same country. However, adverse changes in
business, economic or financial conditions are more likely to affect the capacity for
timely repayment than for obligations in higher rated categories.
</TABLE>
MUNICIPAL NOTE RATINGS
DESCRIPTION OF MOODY'S INVESTOR SERVICE INC.'S MUNICIPAL NOTE RATINGS:
<TABLE>
<S> <C>
MIG 1/VMIG 1 This designation denotes best quality. There is present strong protection
by established cash flows, superior liquidity support or demonstrated
broad-based access to the market refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access
for refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly regarded as
required of an investment security is present and although not distinctly
or predominantly speculative, there is specific risk.
</TABLE>
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<PAGE>
DESCRIPTION OF STANDARD AND POOR'S MUNICIPAL NOTE RATINGS:
Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or less
the ratings below usually will be assigned. Notes maturing beyond three years
will most likely receive a bond rating of the type recited above.
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very
strong capacity to pay debt service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
</TABLE>
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
Commercial paper rated "A" by Standard & Poor's Corporation has the
following characteristics: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is generally rated "A" or better. The issuer
has access to at least two additional channels of borrowing. Basic earnings and
cash flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated as follows:
<TABLE>
<S> <C>
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".
</TABLE>
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
Among the factors considered by Moody's Investors Service, Inc. is assigning
commercial paper ratings are the following: (1) evaluation of the management of
the issuer; (2) economic evaluation of the issuer's industry or industries and
an appraisal of the risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition of the management
of obligations which may be present or may arise as a result of public interest
questions and proportions to meet such obligations. Relative differences in
strength and weakness in respect to these criteria would establish a rating in
one of three classifications; "P-1", "P-2" or "P-3". "P-1" is the highest
commercial paper rating assigned by Moody's Investors Service, Inc. "P-2" is the
second highest of such ratings.
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<PAGE>
DESCRIPTION OF FITCH INVESTORS SERVICE COMMERCIAL PAPER, MEDIUM-TERM NOTES, AND
MUNICIPAL AND INVESTMENT NOTES.
<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as
having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than issues rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for issues
assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics suggesting that
the degree of assurance for timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below investment grade.
F-5 Weak Credit Quality. Issues assigned this rating have characteristics suggesting a
minimal degree of assurance for timely payment and are vulnerable to near-term
adverse changes in financial and economic conditions.
</TABLE>
DESCRIPTION OF DUFF & PHELP'S TWO HIGHEST COMMERCIAL RATINGS:
Duff & Phelp's commercial paper ratings place emphasis on liquidity,
considering not only cash from operations, but access to alternative sources of
funds, including trade credit, bank lines and capital markets. Relative
differences in strength and weakness is rated by Duff & Phelp's as Duff-1 or
Duff-2; Duff-1 being the highest commercial paper rating and Duff-2 being the
second highest rating.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
Thomson Bankwatch, Inc.'s ratings of United States commercial banks,
thrifts, and non-bank banks, non-United States banks, and broker-dealers are
based upon among other things, five years's financial information and the
issuer's most recent regulatory filings. Relative differences in strength and
weakness are rated by Thomson Bankwatch, Inc.
<TABLE>
<S> <C>
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.
</TABLE>
FEDERAL FUNDS
As used in this Prospectus and in the Fund's Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.
34
<PAGE>
<TABLE>
<S> <C>
Securities Management & Research, Inc. BULK RATE
One Moody Plaza U.S. POSTAGE PAID
Galveston, TX 77550 PERMIT NO. 89
GALVESTON, TEXAS
</TABLE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
September , 1998
A Statement of Additional Information dated September , 1998 containing
additional information about the Company was filed with the Securities and
Exchange Commission and is incorporated herein by reference. Additional
information about the Company's investments also is available in the Company's
annual and semi-annual reports to shareholders. In the Company's annual report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Company's performance during the last fiscal
year.
The Company's Statement of Additional Information, annual report, and
semi-annual reports are available, without charge, upon request. You may make
shareholder inquiries, request further information about the Company and the
Funds, or obtain copies of the Statement of Additional Information, annual
report, and semi-annual report, by writing Securities Management and Research,
Inc., One Moody Plaza, 14th Floor, Galveston, Texas 77550, or by calling (Toll
Free) 1-800-231-4639 or (Collect) 1-409-763-2767.
Information about the Company and the Funds may be reviewed and copied 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 Company also are available on the Commission's Internet site at
http://www.sec.gov, and 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.
811-6477
<PAGE>
[SM&R Logo] SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
P R O S P E C T U S
CLASS T
(EXISTING OWNERS AND SPECIAL PURCHASERS)
SM&R INVESTMENTS, INC. - One Moody Plaza - Galveston, Texas 77550
Telephone Number: (409) 763-2767 - Toll Free: 1 (800) 231-4639
September 15, 1998
OFFICERS
Michael W. McCroskey, President and CEO
Brenda T. Koelemay, Vice President and Treasurer
Emerson V. Unger, Vice President
Teresa E. Axelson, Vice President and Secretary
<TABLE>
<S> <C>
INVESTMENT ADVISER AND MANAGER UNDERWRITER AND REDEMPTION AGENT
Securities Management and Research, Inc. Securities Management and Research, Inc.
One Moody Plaza One Moody Plaza
Galveston, Texas 77550 Galveston, Texas 77550
CUSTODIAN TRANSFER AND DIVIDEND PAYING AGENT
Securities Management and Research, Inc. Securities Management and Research, Inc.
One Moody Plaza One Moody Plaza
Galveston, Texas 77550 Galveston, Texas 77550
LEGAL COUNSEL INDEPENDENT AUDITORS
Greer, Herz & Adams, L.L.P. Tait, Weller & Baker, CPA
One Moody Plaza 8 Penn Center Plaza, Suite 800
Galveston, Texas 77550 Philadelphia, PA 19103-2108
</TABLE>
- --------------------------------------------------------------------------------
This Prospectus offers shares of four separate investment portfolios (Funds)
of SM&R Investments, Inc. (the Company) to investors that became shareholders of
the Company prior to September , 1998 and to certain designated persons. Some
of the Funds offer other share classes with different sales charge and
distribution and service fee structures.
Each Fund has its own investment objective designed to meet different
investment goals. The Funds' investment objectives, and suitability for
particular types of investors, are further described under The Funds at a Glance
and Investment Objectives and Policies.
Please read this Prospectus carefully before making an investment and keep
it for future reference.
Shares of the Company and each Fund are not deposits or obligations of, or
guaranteed or endorsed by, any bank. Further, shares of the Company and each
Fund, including the Government Bond and Money Market Funds, are not federally
insured or guaranteed by the U.S. Government, the Federal Deposit Insurance
Corporation (FDIC), the Federal Reserve Board or any other agency. Investing in
shares of any Fund of the Company involves investment risks, including the
possible loss of principal.
Like all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission or any state securities
commission nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
There can be no assurance that SM&R Money Market Fund will be able to
maintain a net asset value of $1.00 per share.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
TABLE OF FEES AND EXPENSES............................................................. 3
FINANCIAL HIGHLIGHTS................................................................... 5
INVESTMENT OBJECTIVES AND POLICIES..................................................... 8
ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES.......................................... 14
THE FUNDS AND MANAGEMENT............................................................... 15
HOW TO PURCHASE SHARES................................................................. 17
WHO CAN PURCHASE CLASS T SHARES?....................................................... 19
DETERMINATION OF OFFERING PRICE........................................................ 20
MULTI-CLASS FUNDS...................................................................... 21
SPECIAL PURCHASE PLANS AND SERVICES.................................................... 23
RETIREMENT PLANS....................................................................... 25
DIVIDENDS AND DISTRIBUTIONS............................................................ 25
TAXES.................................................................................. 26
HOW TO REDEEM.......................................................................... 27
OTHER INFORMATION CONCERNING THE FUNDS................................................. 30
</TABLE>
i
<PAGE>
THE FUNDS AT A GLANCE
SM&R Investments, Inc., formerly known as SM&R Capital Funds, Inc. (the
"Company"), is a diversified, open-end management investment company that was
incorporated under the laws of Maryland on November 6, 1991. The Company offers
four separate investment portfolios (the "Funds"), each of which pursues a
different investment objective. The investment objective and investor
suitability profile of each Fund are summarized below.
SM&R GOVERNMENT BOND FUND ("GOVERNMENT BOND FUND")
OBJECTIVE: 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.
INVESTOR SUITABILITY PROFILE: The Government Bond Fund is for investors
desiring the security of investing primarily in the strength and stability of
the U.S. Government, its agencies, or instrumentalities in order to meet their
current needs. However, you should keep in mind that the Fund may invest in
other instruments in order to meet its objective.
SM&R TAX FREE FUND ("TAX FREE FUND")
OBJECTIVE: To provide as high a level of interest 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.
INVESTOR SUITABILITY PROFILE: The Tax Free Fund is for the investor
desiring income exempt from federal income tax and, under certain conditions,
exempt from state and local taxes. You should keep in mind that certain income
from the Fund may be subject to the federal alternative minimum tax ("AMT") and
investors in certain states may be subject to state taxation on all or a portion
of the income and capital gains realized by the Fund.
SM&R PRIMARY FUND ("PRIMARY FUND")
OBJECTIVE: To seek maximum current income consistent with capital
preservation and liquidity through investment primarily in commercial paper.
INVESTOR SUITABILITY PROFILE: The Primary Fund is for fixed income
investors who desire minimal investment risk yet may be looking to move
cautiously into the investment arena.
SM&R MONEY MARKET FUND ("MONEY MARKET FUND")
OBJECTIVE: To seek to achieve the highest current income consistent with
the preservation of capital and maintenance of liquidity. The Fund seeks to
achieve its objective by investing in high-quality short-term money market
instruments.
INVESTOR SUITABILITY PROFILE: The Money Market Fund is for investors who
are risk-averse, such as first-time investors who wish to move cautiously into
the investment arena. The Fund is designed to provide investors a relatively
safe and liquid investment alternative. The Money Market Fund also may be
appropriate for investors who wish to temporarily "park" funds during periods
when investment in the equity markets is unattractive.
The Company designates its capital stock as shares of the Funds. Each Fund
is, for investment purposes, considered a separate investment fund. Each share
of capital stock represents a pro-rata interest in the assets of a particular
Fund and has no interest in the assets of any other Fund. Each Fund bears its
own liabilities. YOU SHOULD KEEP IN MIND THAT INVESTMENTS IN THE FUNDS,
INCLUDING THE GOVERNMENT BOND AND MONEY MARKET FUNDS, ARE NOT INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT.
1
<PAGE>
PORTFOLIO TURNOVER RATES: Historical turnover rates for each Fund (except
the Money Market Fund) are included in the Financial Highlights tables. No Fund
expects its portfolio turnover rate to exceed eighty percent (80%). An
explanation of turnover rate calculations and brokerage fees can be found in the
Company's Statement of Additional Information.
MANAGEMENT: Securities Management and Research, Inc. ("SM&R") makes the
investment choices for the Funds. SM&R has served as adviser and distributor to
mutual funds since 1966. See "THE FUNDS AND MANAGEMENT" for additional
information.
PURCHASING SHARES: Shares of the Money Market Fund and the Primary Fund are
offered at net asset value without the imposition of any sales charge on
purchases or redemptions. Class T shares of the Government Bond and Tax Free
Funds are available at net asset value plus a sales charge of 4.5% of the public
offering price. For amounts invested over certain levels, or "breakpoints"
(beginning at $100,000), you pay reduced sales charges. For investments of
$500,000 or more, you do not pay any initial sales charge. This initial sales
charge may be waived for certain designated investors, as described in "MULTI-
CLASS FUNDS--Waiver of Initial Sales Charge for Special Purchasers." None of the
shares offered in this Prospectus impose any distribution and service ("12b-1")
fees.
Class T shares of the Government Bond and Tax Free Funds are available
through this Prospectus to investors that became shareholders of the Company
prior to September , 1998 and to certain designated persons listed in "WHO CAN
PURCHASE CLASS T SHARES?". The Government Bond and Tax Free Funds also offer
other share classes with different sales charge and distribution and service
("12b-1") fee structures, as described in "MULTI-CLASS FUNDS."
For Class T shares of the Government Bond and Tax Free Funds, the initial
investment must be at least $100. For the Money Market and Primary Funds, the
initial investment must be at least $1,000. See "HOW TO PURCHASE SHARES."
Redemptions: For information on redeeming shares, see "HOW TO REDEEM."
EXCHANGES: In general, shareholders can exchange shares of a Fund for
shares of another fund in the SM&R Family of Funds (as defined herein) without
the payment of an exchange fee, subject to certain conditions. For information
on exchanging shares, see "Exchange Privilege" within "SPECIAL PURCHASE PLANS
AND SERVICES."
2
<PAGE>
TABLE OF FEES AND EXPENSES
The purpose of the following table is to assist an investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. Investors should be aware that this table is not intended to reflect
in detail the fees and expenses associated with an individual shareholder's own
investment in any of the Funds, or Class thereof, listed. It is being provided
to assist investors in gaining a more complete understanding of fees, charges,
and expenses which are discussed in greater detail in the appropriate sections
of the Prospectus.
<TABLE>
<CAPTION>
GOVERNMENT TAX FREE
BOND FUND FUND PRIMARY MONEY
CLASS T CLASS T FUND MARKET FUND
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)............................................................ 4.5%(1) 4.5%(1) None None
Maximum Deferred Sales Load (as a percentage of offering
price)(2)......................................................... None None None None
Maximum Sales Load Imposed on Reinvested Dividends (as a Percentage
of offering price)................................................ None None None None
Exchange Fees....................................................... None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets Before Fee Waivers and Expense
Reimbursements)
The "Management Fee," "Other Expenses," and "Total Annual Fund Operating
Expenses" shown below for the Government Bond, Primary, and Tax Free Funds are
for the year ended August 31, 1997; for the Money Market Fund, they are
estimates for the first year of operation (ending August 31, 1999). No
Distribution or Service (12b-1) Fees are imposed on Class T shares of the
Government Bond Fund and the Tax Free Fund, or on any shares of the Primary Fund
and Money Market Fund.
<TABLE>
<CAPTION>
GOVERNMENT TAX FREE MONEY
BOND FUND FUND PRIMARY MARKET
CLASS T CLASS T FUND FUND
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Management Fee........................................................ 0.50% 0.50% 0.50% 0.50%
Other Expenses(3)..................................................... 0.57% 0.77% 0.51% 0.75%
Total Annual Fund Operating Expenses(4)............................... 1.07% 1.27% 1.01% 1.25%
</TABLE>
NOTES TO THE TABLE OF FEES AND EXPENSES
(1) A sales charge of 4.5% is imposed on initial investments in Class T shares
of less than $100,000. This sales charge is reduced at certain breakpoints,
as follows: 3.50% on initial investments of at least $100,000 but less than
$250,000; 2.50% on initial investments of at least $250,000 but less than
$500,000; and zero on initial investments of $500,000 or more.
(2) An $8.00 transaction fee is charged for each expedited wire redemption.
(3) "Other Expenses" include the 0.25% Administrative Service Fee. "Other
Expenses" for Class T shares were based on the expenses and average net
assets of the Government Bond Fund and the Tax Free Fund, respectively, for
the fiscal year ended August 31, 1997. "Other Expenses" shown for the Money
Market Fund are estimated for the current fiscal year ending August 31,
1999.
(4) The Fee Table does not reflect any fees waived or expenses assumed either
contractually or voluntarily by SM&R for the Funds during the fiscal year
ended August 31, 1997. Pursuant to the Administrative Service Agreement,
SM&R has agreed to pay (or to reimburse) each Fund for regular operating
expenses (including the advisory fee and administrative fee, but not
including any 12b-1 fee or Class-
3
<PAGE>
specific expenses) in excess of 1.25% (0.35% for the Money Market Fund) per
year of such Fund's average daily net assets.
SM&R may also waive fees or assume expenses on a voluntary basis. During the
fiscal year ended August 31, 1997, SM&R voluntarily waived management fees of
0.07%, 0.21%, and 0.50% for the Government Bond Fund, Primary Fund, and Tax Free
Fund, respectively, and reimbursed expenses of 0.24% for the Tax Free Fund. SM&R
intends to continue to voluntarily waive the advisory fee for the Tax Free Fund
and reimburse expenses to the extent that total regular operating expenses (not
including any 12b-1 fee or Class-specific expenses) exceed average daily net
assets as follows: 0.80% for the Primary Fund and 1.00% for the Government Bond
Fund. SM&R may discontinue or reduce any such waiver or assumption of expenses
at any time without notice.
The following table is based on the "Management Fee," "Other Expenses," and
"Total Annual Fund Operating Expenses" for the Government Bond, Primary, and Tax
Free Funds for the year ended August 31, 1997 taking into account fee waivers
and expense reimbursements. For the Money Market Fund, they are estimates taking
into account fee waivers and expense reimbursements for the year ending August
31, 1999.
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS AFTER FEE WAIVERS AND EXPENSE
REIMBURSEMENTS)
<TABLE>
<CAPTION>
GOVERNMENT TAX FREE MONEY
BOND FUND FUND CLASS PRIMARY MARKET
CLASS T T FUND FUND
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Management Fee........................................................ 0.43% 0.00% 0.29% 0.00%
Other Expenses........................................................ 0.57% 0.54% 0.51% 0.35%
Total Annual Fund Operating Expenses.................................. 1.00% 0.54% 0.80% 0.35%
</TABLE>
EXAMPLES OF EXPENSES
These Examples are intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds. These Examples assume
that you invest $10,000 in a Fund (and applicable Class thereof) for the time
periods indicated. These Examples also assume that the investment has a 5%
return each year and that the Fund's operating expenses remain the same. Your
actual costs may be higher or lower than shown.
You would pay the following expenses, based on these assumptions, if you
redeemed all of your shares at the end of the period shown:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Government Bond Fund (Class Y)..................................... $ $ $ $
Tax Free Fund (Class Y)............................................ $ $ $ $
Primary Fund....................................................... $ $ $ $
Money Market Fund.................................................. $ $ N/A N/A
</TABLE>
Because there are no deferred sales charges or redemption fees, you would
pay the same expenses, based on these assumptions, if you did not redeem your
shares.
4
<PAGE>
FINANCIAL HIGHLIGHTS--GOVERNMENT BOND FUND
The following financial highlights table is intended to help an investor
understand the Government Bond Fund's financial performance for the past five
years. Certain information reflects financial results for a single Government
Bond Fund share outstanding throughout each period shown. The total returns in
the table represent the rate that an investor would have earned (or lost) on an
investment in the Government Bond Fund (assuming reinvestment of all dividends
and distributions) prior to addition of multiple classes of shares, but do not
reflect any sales loads that would be imposed on the purchase or sale of any
shares. This information is derived from the financial statements of the
Government Bond Fund, which for the years ended through August 31, 1997 have
been audited by KPMG Peat Marwick LLP, independent auditors, whose report, along
with the Government Bond Fund's financial statements, are incorporated by
reference into the Statement of Additional Information, which is available upon
request, and from unaudited financial statements of the Government Bond Fund for
the six month period ended February 28, 1998.
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED YEAR ENDED AUGUST 31
------------- ---------------------------------------
FEB. 28, 1998 1997 1996 1995 1994 1993
------------- ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period............................... $10.42 $10.14 $10.51 $10.07 $10.87 $10.56
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........................... 0.32 0.67 0.65 0.70 0.54 0.50
Net Realized and Unrealized Gain (Loss) on
Securities.................................... 0.15 0.26 (0.37) 0.44 (0.79) 0.49
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS.................. 0.47 0.93 0.28 1.14 (0.25) 0.99
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income............ (0.34) (0.65) (0.65) (0.70) (0.55) (0.50)
Distributions from Capital Gains................ 0.00 0.00 0.00 0.00 0.00 (0.18)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS............................... (0.34) (0.65) (0.65) (0.70) (0.55) (0.68)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period.................... $10.55 $10.42 $10.14 $10.51 $10.07 $10.87
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN...................................... 4.58%(1) 9.37% 2.63% 11.85% (2.41)% 10.23%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED YEAR ENDED AUGUST 31
------------- -------------------------------------------
FEB. 28, 1998 1997 1996 1995 1994 1993
------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted)......... $23,915 $23,683 $21,127 $20,466 $19,790 $19,783
1.0 0.7 1.1
Ratio of Expenses to Average Net Assets(3)........ 0.97%(2) 1.00% 0% 0% 2% 1.07%
Ratio of Net Income to Average Net Assets......... 6.16%(2) 6.46% 6.17% 6.90% 5.11% 5.07%
Portfolio Turnover Rate........................... 0.92% 9.06% 30.17% 2.20% 45.48% 18.14%
</TABLE>
- ------------------------
(1) Returns are not annualized.
(2) Ratios are annualized.
5
<PAGE>
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and 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.
FINANCIAL HIGHLIGHTS--TAX FREE FUND
The following financial highlights table is intended to help an investor
understand the Tax Free Fund's financial performance since inception. Certain
information reflects financial results for a single Tax Free Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Tax Free Fund (assuming reinvestment of all dividends and distributions)
prior to addition of multiple classes of shares, but do not reflect any sales
loads that would be imposed on the purchase or sale of any shares. This
information is derived from the financial statements of the Tax Free Fund, which
for the years ended through August 31, 1997 have been audited by KPMG Peat
Marwick LLP, independent auditors, whose report, along with the Tax Free Fund's
financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request, and from unaudited
financial statements of the Tax Free Fund for the six month period ended
February 28, 1998.
<TABLE>
<CAPTION>
SEPT. 9, 1993
SIX MONTH (DATE
PERIOD ENDED YEAR ENDED AUGUST 31 OPERATIONS
------------- ---------------------- COMMENCED) THRU
FEB. 28, 1998 1997 1996 1995 AUG. 31, 1994
------------- ------ ------ ------ ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $10.27 $ 9.93 $ 9.95 $ 9.62 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........................... 0.26 0.51 0.53 0.51 0.24
Net Realized and Unrealized Gain (Loss) on
Securities.................................... 0.26 0.33 (0.02) 0.33 (0.38)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS.................. 0.52 0.84 0.51 0.84 (0.14)
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income............ (0.26) (0.50) (0.53) (0.51) (0.24)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS............................... (0.26) (0.50) (0.53) (0.51) (0.24)
------ ------ ------ ------ ------
Net Asset Value, End of Period.................... $10.53 $10.27 $ 9.93 $ 9.95 $ 9.62
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN...................................... 4.62%(1) 8.61% 5.18% 9.15% (1.49)%(1)
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SEPT. 9, 1993
SIX MONTH (DATE
PERIOD ENDED YEAR ENDED AUGUST 31 OPERATIONS
------------- ------------------------- COMMENCED) THRU
FEB. 28, 1998 1997 1996 1995 AUG. 31, 1994
------------- ------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted)......... $18,555 $10,700 $9,148 $8,399 $7,295
Ratio of Expenses to Average Net Assets(3)........ 0.73%(2) 0.54% -- -- 1.11%(2)
Ratio of Net Income to Average Net Assets......... 4.75%(2) 4.97% 5.27% 5.43% 2.50%(2)
Portfolio Turnover Rate........................... 0.00% 22.15% 18.44% 12.63% 16.49%
</TABLE>
- ------------------------
(1) Returns are not annualized.
(2) Ratios are annualized.
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.23% (annualized), 1.27%,
1.18%, and 1.25% for the six month period ended February 28, 1998 and the
years ended August 31, 1997, 1996, and 1995, respectively.
6
<PAGE>
FINANCIAL HIGHLIGHTS--PRIMARY FUND
The following financial highlights table is intended to help an investor
understand the Primary Fund's financial performance for the past five years.
Certain information reflects financial results for a single Primary Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Primary Fund (assuming reinvestment of all dividends and distributions).
This information is derived from the financial statements of the Primary Fund,
which for the years ended through August 31, 1997 have been audited by KPMG Peat
Marwick LLP, independent auditors, whose report, along with the Primary Fund's
financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request, and from unaudited
financial statements of the Primary Fund for the six month period ended February
28, 1998.
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED YEAR ENDED AUGUST 31
------------- --------------------------------------
FEB. 28, 1998 1997 1996 1995 1994 1993
------------- ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income........................... 0.03 0.05 0.05 0.05 0.03 0.02
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS.................. 0.03 0.05 0.05 0.05 0.03 0.02
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income............ (0.03) (0.05) (0.05) (0.05) (0.03) (0.02)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS............................... (0.03) (0.05) (0.05) (0.05) (0.03) (0.02)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN...................................... 2.55(1) 4.98% 5.07% 5.01% 2.91% 2.59%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SIX MONTH
PERIOD ENDED YEAR ENDED AUGUST 31
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FEB. 28, 1998 1997 1996 1995 1994 1993
------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted)......... $32,578 $33,045 $37,465 $20,984 $15,208 $15,539
Ratio of Expenses to Average Net Assets(3)........ 0.80%(2) 0.80% 0.81% 0.84% 0.79% 0.85%
Ratio of Net Income to Average Net Assets......... 5.05%(2) 4.86% 4.93% 4.91% 2.88% 2.47%
Portfolio Turnover Rate(4)........................ 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
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(1) Returns are not annualized.
(2) Ratios are annualized.
(3) Expenses for the calculation are net of a reimbursement from Securities
Management and Research, Inc. Without this reimbursement the ratio of
expenses to average net assets would have been 0.99% (annualized), 1.01%,
1.15%, 1.21%, 1.20%, and 1.23% for the six month period ended February 28,
1998 and the years ended August 31, 1997, 1996, 1995, 1994, and 1993,
respectively.
(4) The Primary Fund experienced no portfolio turnover because the majority of
securities held during such periods had maturities of one year or less at
the time of acquisition.
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INVESTMENT OBJECTIVES AND POLICIES
Each Fund pursues its own investment objective through the investment
policies and techniques described below. These policies and techniques are not
fundamental and may be changed by the Board of Directors of the Company without
the approval of the shareholders. In addition, the Company has adopted certain
restrictions as fundamental policies for each Fund, which may not be changed
without shareholder approval. (See the Company's Statement of Additional
Information for a description of the investment restrictions adopted as
fundamental policies). Since each Fund has a different investment objective,
each should have different investment results and incur different market and
financial risks.
Because of the market risks inherent in any investment, the Funds may not
achieve their investment objectives. In addition, effective management of each
Fund is subject to general economic conditions and to the ability and investment
techniques of management. The net asset value of each Fund's shares will vary
and the redemption value of shares may be either higher or lower than the
shareholder's cost.
GOVERNMENT BOND FUND (FORMERLY, AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES)
The investment objective of the Government Bond Fund is 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. The Government Bond Fund 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--It is anticipated that a substantial portion of
the Government Bond Fund's portfolio will consist of mortgage-backed securities
("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"), 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
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<PAGE>
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. The Government Bond Fund
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 Fund's securities will generally increase; however, it is
anticipated 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 proceeds to the Fund from such prepayments will have to be invested
at the then prevailing lower interest rates. On the other hand, if interest
rates increase, the value of the Fund'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 Fund 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 Fund 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 Fund may invest a
portion of its assets in collateralized mortgage obligations or "CMOs," which
are debt obligations collateralized by a portfolio or pool of mortgages,
mortgage-backed securities, or U.S. Government securities. Collateralized
obligations in which the Government Bond Fund may invest are issued or
guaranteed by a U.S. Government agency or instrumentality, such as the FHLMC. A
variety of types of collateralized obligations are currently available and
others may become available in the future. One should keep in mind that during
periods of rapid interest rate fluctuation, the price of a security, such as a
CMO, could either increase or decrease based on inherent interest rate risk.
Additionally, the risk of maturities shortening or lengthening in conjunction
with interest rate movement, could magnify the overall effect of the price
fluctuation.
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. A more complete description
of CMOs is contained in the Statement of Additional Information.
The Government Bond Fund 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.
ZERO COUPON BONDS--The Government Bond Fund may invest in zero coupon bonds,
which are debt obligations issued or purchased at a significant discount from
face value. The Government Bond Fund 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
9
<PAGE>
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 Fund 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 Fund's distribution obligations.
OTHER INVESTMENTS--The Government Bond Fund may also invest in commercial
paper, certificates of deposit and repurchase agreements of the same type and
rating as the Primary Fund and Money Market Fund may invest, and may invest in
corporate debt securities of the same type as the Primary Fund, which, at the
date of investment, are rated "A" or higher by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"). (See "Primary Fund" and
"Money Market Fund.") In addition, the Government Bond Fund may purchase debt
obligations of foreign corporations or financial institutions, such as Yankee
bonds (dollar-denominated bonds sold in the United States by non-U.S. issuers)
and Euro bonds (bonds not issued in the country (and possibly not the currency
of the country) of the issuer). (See "Foreign Debt Securities" in the Company's
Statement of Additional Information for a description of the risks associated
with investment in foreign securities.)
TAX FREE FUND (FORMERLY, AMERICAN NATIONAL TAX FREE FUND SERIES)
The investment objective of the Tax Free Fund is to provide as high a level
of interest 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. The Tax Free
Fund, as a matter of fundamental policy, will seek to achieve its objective by
investing at least 80% of the value of its net assets in municipal securities
the interest on which is exempt from federal income taxes.
The Tax Free Fund has no restrictions on the maturity of municipal
securities in which it may invest. Accordingly, it will seek to invest in
municipal securities of such maturities which, in the judgement of SM&R, the
adviser, will provide a high level of current income consistent with prudent
investment, with consideration given to market conditions.
The Tax Free Fund will invest, without percentage limitations, in municipal
securities having at the time of purchase one of the four highest municipal
ratings by Moody's, S&P, or Fitch Investors Service or in securities which are
not rated, provided that, in the opinion of SM&R, such securities are comparable
in quality to those within the four highest ratings. The rating agencies
consider that bonds rated in the fourth highest category may have some
speculative characteristics and that changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments on those bonds than is the case with higher grade bonds.
SM&R will only purchase bonds rated in such fourth category if it believes that
the purchase of such bonds is consistent with the Tax Free Fund's investment
objective. In the event the rating of an issue held by the Tax Free Fund is
changed by the rating service, such change will be considered by the Tax Free
Fund in its evaluation of the overall investment merits of that security but
such change will not necessarily result in an automatic sale of the security.
Any security held which is subsequently downgraded below BBB by S&P or Baa by
Moody's will be sold as soon as it is advantageous to do so after the downgrade.
A description of the ratings may be found in the Appendix to this Prospectus.
Purchasing unrated municipal securities, which may be less liquid than
comparably rated municipal securities, involves somewhat greater risk and
consequently the Tax Free Fund may not invest more than 20% of its net assets in
unrated municipal securities. To attempt to minimize the risk of such
investments, SM&R will, prior to acquiring unrated securities, consider the
terms of the offering and various other factors to determine the issuer's
comparative credit rating and whether the securities are consistent with the Tax
Free Fund's investment objective and policies.
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<PAGE>
During normal market conditions, the Tax Free Fund will have at least 80% of
its net assets invested in municipal securities the income of which is fully
exempt from federal income taxation. Furthermore, under normal market conditions
up to 20% of the Tax Free Fund's net assets, and as a temporary defensive
measure during abnormal market conditions, up to 50% of its net assets may be
invested in the following types of taxable fixed income obligations: (1)
obligations issued or guaranteed by the U.S. government, its agencies,
instrumentalities or authorities (See "Government Bond Fund" above for an
explanation of U.S. government obligations); (2) corporate debt securities which
at the date of the investment are rated A or higher by Moody's or by S&P; (3)
commercial paper which at the date of the investment is rated in one of the two
top categories by Moody's or by S&P or if not rated, is issued by a company
which at the date of the investment has an outstanding debt issue rated A or
higher by Moody's or A or higher by S&P; (4) certificates of deposit issued by
U.S. banks which at the date of the investment have capital surplus and
undivided profits of $1 billion as of the date of their most recently published
financial statements; and (5) repurchase agreements secured by U.S. government
securities, provided that no more than 15% of the Fund's net assets will be
invested in illiquid securities including repurchase agreements with maturities
in excess of seven days. To the extent income dividends include income from
taxable sources, a portion of a shareholder's dividend income may be taxable.
(See "DIVIDENDS AND DISTRIBUTIONS").
MUNICIPAL SECURITIES--The term "municipal securities," as used in this
Prospectus means obligations issued by or on behalf of states, territories, and
possessions of the U.S. and the District of Columbia and their political
subdivisions, agencies, and instrumentalities, the interest on which is exempt
from federal income tax. An opinion as to the tax-exempt status of a municipal
security generally is rendered to the issuer by the issuer's counsel at the time
of issuance of the security.
Municipal securities are used to raise money for various public purposes
such as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the Statement of
Additional Information.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Like other interest-bearing
securities, the value of municipal securities changes as interest rates
fluctuate. For example, if interest rates increase from the time a security is
purchased, the security's value and sales price generally will be less than its
purchase cost. Conversely, if interest rates decline from the time a security is
purchased, the security's value and sales price may be greater than its purchase
cost. Generally, municipal securities of longer maturities produce higher
current yields than municipal securities with shorter maturities but are subject
to greater price fluctuation due to changes in interest rates, tax laws and
other general market factors. Lower-rated municipal securities generally produce
a higher yield with shorter maturities than higher-rated municipal securities
due to the perception of a greater degree of risk as to the ability of the
issuer to pay principal and interest.
The Tax Free Fund may purchase municipal bonds for which the payments of
principal and interest are secured by an escrow account of securities backed by
the full faith and credit of the U.S. government ("defeased") and municipal
securities whose principal and interest payments are insured by a commercial
insurance company as long as the underlying credit is investment grade (BBB or
better by S&P and Fitch and Baa or better by Moody's) ("insured"). The Tax Free
Fund may also purchase unrated securities of issuers which SM&R believes would
have been rated BBB or Baa had the issuer requested a rating from S&P, Fitch or
Moody's. Such implied investment grade rating will be determined by SM&R upon
its performance of a credit analysis of the issue and the issuer. Such credit
analysis may consist of a review of such items as the issuer's debt
characteristics, financial information, structure of the issue, liquidity of the
issue, quality of the issuer, current economic climate, financial adviser, and
underwriter. Insured and defeased bonds are further described in the Statement
of Additional Information. In general, these types
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of municipal securities will not be treated as an obligation of the original
municipality for purposes of determining industry concentration.
OTHER INVESTMENTS--The Tax Free Fund may purchase "floating rate" and
"variable rate" obligations. These obligations bear interest at rates that are
not fixed, but vary with changes in specified market rates or indices on
pre-designated dates. See the Statement of Additional Information for details of
these types of investments.
The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed-delivery" basis (See "ADDITIONAL INVESTMENT POLICIES AND
TECHNIQUES--When Issued and Delayed Delivery Purchases" below). Zero coupon
bonds may also be purchased as part of the Tax Free Fund portfolio and are
explained above under the Government Bond Fund.
PRIMARY FUND (FORMERLY, AMERICAN NATIONAL PRIMARY FUND SERIES)
The investment objective of the Primary Fund is to seek maximum current
income consistent with capital preservation and liquidity through investment
primarily in commercial paper. Commercial paper is short-term unsecured
promissory notes issued by corporations to finance short-term credit needs.
Commercial paper is usually sold on a discount basis and has a maturity at the
time of issuance not exceeding nine months. The Primary Fund will invest only 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 ("NRSROs") (See the "Appendix" hereto for information about
such ratings and such rating organizations).
OTHER INVESTMENTS--The Primary Fund may invest in (i) U.S. Government
Obligations (See the "Government Bond Fund" above for an explanation of U.S.
Government Obligations); (ii) other corporate obligations, such as bonds,
debentures or notes maturing in five (5) years or less at the time of purchase
which at the date of the investment are rated "A" or higher by an NRSRO; and
(iii) negotiable certificates of deposit of banks (including U.S. dollar
denominated obligations of foreign branches of U.S. banks and U.S. branches of
foreign banks and savings and loan associations and banker's acceptances of U.S.
banks which banks and savings and loan associations have total assets at the
date of investment (as of the date of their most recent published financial
statements) of at least $1 billion (See "INVESTMENT OBJECTIVES AND POLICIES,"
"Certificates of Deposit" in the Statement of Additional Information for a
description of the securities) and (iv) repurchase agreements with respect to
any type of instrument in which the Primary Fund is authorized to invest even
though the underlying instrument may mature in more than two (2) years. (See
"Additional Investment Policies and Techniques--Repurchase Agreements.")
Obligations of foreign branches of U.S. banks are subject to somewhat
different risks than those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions which may
adversely affect payment of principal and interest on the obligations, foreign
withholding and other taxes on interest income, and difficulties in obtaining
and enforcing a judgement against a foreign branch of a domestic bank. In
addition, different risks may result from the fact that foreign branches of U.S.
banks and U.S. branches of foreign banks are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks. For instance,
such branches may not be subject to the types of requirements imposed on
domestic banks with respect to mandatory reserves, loan limitations,
examinations, accounting, auditing, record keeping, and the public availability
of information. Such obligations are not traded on any national securities
exchange. While the Primary Fund does not presently invest in obligations of
foreign branches of U.S. banks, it may do so in the future. Investments in such
obligations will not be made in excess of 5% of the Primary Fund's total assets
and will be made only when SM&R believes the risks described above are minimal.
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MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek to achieve the
highest current income consistent with the preservation of capital and
maintenance of liquidity. The Money Market Fund 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 Company's Board of
Directors. The Money Market Fund 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 United States Government or by its agencies and
instrumentalities. (See "Government Bond Fund" above for an explanation
of U.S. Government Obligations).
(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
Fund 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. As discussed above under "Primary Fund," commercial
paper is short-term unsecured promissory notes issued by corporations to
finance short-term credit needs.
(5) BONDS AND NOTES. The Money Market Fund may invest in corporate bonds or
notes with a remaining maturity of one year or less.
(6) COLLATERALIZED MORTGAGE OBLIGATIONS--As discussed above under
"Government Bond Fund," CMOs are debt obligations collateralized by a
portfolio or pool of mortgages, mortgage-backed securities, or U.S.
Government securities.
The Money Market Fund 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 Fund 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 Fund. 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 NRSROs. Currently, five organizations are NRSROs: Moody's Investor
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("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 Fund 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.
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- 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 Objectives and Policies" in the Statement of Additional
Information for a more detailed explanation of the investment categories.) The
Fund 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 Fund'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
Fund may be expected to be less than for any other Fund. By limiting its
investments to Eligible Securities, the Money Market Fund may not achieve as
high a level of current income as a fund investing in lower-rated securities.
ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES
The following investment policies and techniques are available to one or
more of the Funds:
LENDING OF SECURITIES. In order to increase the return on its investment,
the Government Bond Fund may lend portfolio securities to broker-dealers and
other financial institutions in amounts up to 10% of the value of that Fund's
net assets. Loans of portfolio securities will always be collateralized by cash
equal to at least 102% of the market value of the securities loaned including
accrued interest and will be made to borrowers deemed by SM&R to be
creditworthy. Lending portfolio securities involves risk of delay in the
recovery of the loaned securities and in some cases the loss of rights in the
collateral should the borrower fail financially (See the Statement of Additional
Information).
WHEN-ISSUED AND DELAYED DELIVERY PURCHASES. The Government Bond Fund and
Tax Free Fund 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 at a later date. Normally, the settlement date occurs within one
month of the purchase; during the period between purchase and settlement, no
payment is made by the Fund to the issuer and no interest accrues to the Fund.
These transactions are subject to market fluctuation; 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. While
awaiting delivery of the securities purchased on a when-issued and delayed
delivery basis, each of these Funds will hold in a segregated account cash,
short-term money market instruments, high quality debt securities, or portfolio
securities sufficient to cover any commitment or limit any potential risk. (See
"When Issued and Delayed Delivery Transactions" in the Statement of Additional
Information).
REPURCHASE AGREEMENTS. Each Fund may occasionally enter into repurchase
agreements. Under a repurchase agreement, the Fund will acquire and hold an
obligation (government security, certificate of deposit, or banker's acceptance)
for not more than seven days, subject to the agreement by the seller (a Federal
Reserve System member bank or a registered securities dealer) to repurchase the
obligation at an agreed upon repurchase price and date, thereby determining the
yield during the Fund's holding period. During the holding period, the seller
must provide additional collateral if the market value of the obligation falls
below the repurchase price. See the Statement of Additional Information for a
further explanation.
ILLIQUID SECURITIES. Each Fund (except the Money Market Fund) may invest up
to 15%, and the Money Market Fund may invest up to 10%, of its net assets in
illiquid securities, including foreign securities not listed on foreign or
domestic exchanges and repurchase agreements maturing in excess of seven days.
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If otherwise consistent with its investment objective and policies, a Fund
may purchase securities that are not registered under the Securities Act of
1933, as amended (the "1933 Act") but which can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act, or which
were issued under Section 4(2) of the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Board, after considering
trading activity, availability of reliable price information and other relevant
information, that an adequate trading market exists for that security. To the
extent that, for a period of time, qualified institutional or other buyers may
cease purchasing such restricted securities, the level of illiquidity of a Fund
holding such securities may increase.
RISK FACTORS. The risk inherent in investing in any Fund of the Company is
a risk common to any security. That is, the value of a Fund's shares will
fluctuate in response to changes in economic conditions, interest rates and the
market's perception of the underlying portfolio securities held by that Fund.
Market prices of the securities in which a Fund invests will fluctuate and will
tend to vary inversely with changes in prevailing interest rates. If interest
rates increase from the time a security is purchased, such security might be
valued and/or sold at a price less than its purchase cost. Conversely, if
interest rates decline from the time a security is purchased, such security
might be valued and/or sold at a price greater than its purchase cost.
Substantial redemptions could require a Fund to sell portfolio securities at a
time when a sale might not be favorable.
Investments in U.S. Government Obligations are not all 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.
The Primary Fund, consistent with its investment objective, will attempt to
maximize yield by trying to take advantage of changing conditions and trends. It
may also attempt to take advantage of what are believed to be disparities in
yield relationships between different instruments. This procedure may increase
or decrease the portfolio yield depending upon the Primary Fund's ability to
correctly time and execute such transactions. Although the Primary Fund's assets
will be invested in securities with short maturities, the Primary Fund will
manage its portfolio as described above. (See "PORTFOLIO TRANSACTIONS AND
BROKERAGE ALLOCATION" in the Statement of Additional Information.)
The Tax Free Fund's ability to achieve its objective depends partially on
the prompt payment by issuers of the interest on and principal of the municipal
securities held. A moratorium, default, or other non-payment of interest or
principal when due could, in addition to affecting the market value and
liquidity of the particular security, affect the market value and liquidity of
other municipal securities. Additionally, the market for municipal securities is
often thin and can be temporarily affected by large purchases and sales. As a
result, the Tax Free Fund will attempt to minimize risk by diversifying its
investments by investing no more than 5% of its net assets in the securities of
any one issuer (this limitation does not apply to investments issued or
guaranteed by the U.S. Government or its instrumentalities) and by investing no
more than 25% of its net assets in municipal securities issued in any one state
or territory. Each political subdivision, agency, instrumentality, and each
multi-state agency of which a state is a member will be regarded as a separate
issuer for the purpose of determining diversification.
THE FUNDS AND MANAGEMENT
A Board consisting of nine directors has overall responsibility for
overseeing the affairs of the Company in a manner reasonably believed to be in
the best interest of shareholders. The Board has delegated to SM&R, the Fund's
investment adviser, the management of the Company's day-to-day business and
affairs. In addition, SM&R invests the Company's assets, provides administrative
services, and serves as transfer agent, custodian, dividend paying agent, and
underwriter.
15
<PAGE>
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of September , 1998, the Moody Foundation, a private
foundation, owned approximately [ ]% of American National's common stock and
the Libbie Shearn Moody Trust, a private trust, owned approximately [ ]% of
such shares. SM&R was incorporated in 1964 and has managed investment companies
since 1966. SM&R also is investment adviser to three other registered investment
companies: American National Growth Fund, Inc., American National Income Fund,
Inc., and American National Triflex Fund, Inc. (the "SM&R Equity Funds," and
collectively with SM&R Investments, Inc., the "SM&R Family of Funds"). SM&R also
serves as investment adviser to the American National Investment Accounts, Inc.,
an investment company used to fund benefits under contracts issued by American
National and for The Moody National Bank of Galveston (the "Bank"), a national
bank. SM&R does and may, from time to time, serve as investment adviser to other
clients including employee benefit plans, other investment companies, banks,
foundations and endowment funds.
The following persons are officers of both SM&R and the Company: Michael W.
McCroskey, Vera M. Young, Emerson V. Unger, Teresa E. Axelson and Brenda T.
Koelemay.
PORTFOLIO MANAGEMENT
While the following individuals are primarily responsible for the day-to-day
portfolio management of their respective Funds, all accounts are reviewed on a
regular basis by SM&R's Investment Committee to ensure that they are being
invested in accordance with investment polices.
VERA M. YOUNG, VICE PRESIDENT OF SECURITIES MANAGEMENT AND RESEARCH, INC.,
VICE PRESIDENT, PORTFOLIO MANAGER OF THE PRIMARY FUND AND THE MONEY MARKET
FUND. Ms. Young has served as Portfolio Manager of the Primary Fund and the
Money Market Fund since each such Fund's inception (1993 and 1998,
respectively). She also serves as Portfolio Manager of the Money Market
Portfolio of American National Investment Accounts, Inc., a series mutual fund
used exclusively for variable contracts issued by American National. Ms. Young
also serves as Assistant Vice President, Securities for American National. Ms.
Young has been managing fixed income investments for American National since
1987 and has served as portfolio manager for various funds for over ten years.
TERRY E. FRANK, VICE PRESIDENT, PORTFOLIO MANAGER OF THE GOVERNMENT BOND
FUND AND TAX FREE FUND. Ms. Frank has served as Portfolio Manager of the
Government Bond Fund since 1993 and the Tax Free Fund since its inception. 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.
ADVISORY AGREEMENT
Under the Advisory Agreements with the Company, SM&R is paid an investment
advisory fee, which is calculated separately for each Fund, as compensation for
its services. The Agreements provide that SM&R will receive advisory fees as set
forth below.
GOVERNMENT BOND FUND AND TAX FREE FUND--A monthly investment advisory fee is
computed by applying to the average daily net asset value of the Government Bond
Fund and the Tax Free Fund each month one-twelfth (1/12th) of the annual rate as
follows:
<TABLE>
<CAPTION>
ON THE PORTION OF EACH FUND'S INVESTMENT ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ------------------------------------------------------------------------------------ -------------------
<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>
16
<PAGE>
MONEY MARKET FUND AND PRIMARY FUND--An investment advisory fee is computed
and paid monthly at the annual rate of 0.50% of the Money Market Fund's and
Primary Fund's average daily net asset value.
After applicable fee waivers, SM&R received total advisory fees from the
Government Bond Fund, Tax Free Fund, and Primary Fund for the fiscal year ended
August 31, 1998 which represented [ ]%, [ ]%, and [ ]%, respectively, of each
such Fund's average daily net assets. The Money Market Fund was not in operation
during the fiscal year ended August 31, 1998.
ADMINISTRATIVE SERVICE AGREEMENT
Under its Administrative Service Agreement with the Company, SM&R also
receives a management and administrative service fee from each Fund which is
computed by applying to the aggregate average daily net asset value of each Fund
each month one-twelfth (1/12th) of the annual rate as follows:
<TABLE>
<CAPTION>
ADMINISTRATIVE
ON THE PORTION OF THE FUND'S SERVICE FEE ANNUAL
AVERAGE DAILY NET ASSETS RATE
- ---------------------------------------------------------------------------------- ---------------------
<S> <C>
Not exceeding $100,000,000........................................................ 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000............................. 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000............................. 0.15%
Exceeding $300,000,000............................................................ 0.10%
</TABLE>
SM&R has agreed to pay (or to reimburse each Fund for) each Fund's regular
operating expenses (including the advisory fee and administrative service fee,
if any, paid to SM&R, but exclusive of "12b-1 fees," Class-specific expenses,
interest, taxes, commissions, and other expenses incidental to portfolio
transactions) in excess of 1.25% (0.35% for the Money Market Fund) per year of
such Fund's average daily net assets. SM&R received administrative service fees
of [ ]% for the Government Bond Fund; [ ]% for the Primary Fund; and [ ]% for
the Tax Free Fund for the fiscal year ended August 31, 1998 of each Fund's
average daily net assets. The Money Market Fund was not in operation during the
fiscal year ended August 31, 1998.
FEE WAIVERS
In order to improve the yield and total return of any Fund of the Company,
SM&R may from time to time voluntarily waive or reduce all or any portion of its
advisory fee, administrative fee, and/or assume certain or all expenses of any
Fund of the Company while retaining its ability to be reimbursed for such fees
prior to the end of the fiscal year. 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. SM&R has agreed to continue to waive
the advisory fee for the Tax Free Fund and reimburse regular operating expenses
incurred by the Government Bond and Primary Funds to the extent that total
expenses (exclusive of the "12b-1 fees" and Class-specific expenses) exceed
average daily net assets as follows: Primary Fund--.80% and Government Bond
Fund--1.00%.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
The Company adopted a Distribution and Shareholder Servicing Plan (the
"12b-1 Plan") pursuant to Rule 12b-1 under the 1940 Act for certain classes of
the Government Bond Fund and the Tax Free Fund (the "Multi-Class Funds"). No
distribution and/or service ("12b-1") fee is imposed on Class T shares of the
Multi-Class Funds. A 12b-1 Plan has not been adopted for the Primary Fund or
Money Market Fund (the "Single-Class Funds").
HOW TO PURCHASE SHARES
You may purchase shares offered through this Prospectus from registered
representatives of SM&R, from authorized broker-dealers, or directly from SM&R.
Such purchases will be at the offering price (the "Offering Price") for such
shares determined as and when provided below (See "DETERMINATION OF OFFERING
PRICE"). SM&R will send a monthly confirmation for any month in which the
account is
17
<PAGE>
active. You should carefully review the monthly confirmation and promptly report
any discrepancies to SM&R. Initial and subsequent purchases may be made directly
through SM&R at the following address:
Securities Management and Research, Inc.
One Moody Plaza, 14th Floor
Galveston, Texas 77550
There are restrictions on the purchases of Class T shares. For more
information about these restrictions, see "WHO CAN PURCHASE CLASS T SHARES?"
Certificates are not normally issued for shares of each Fund in an effort to
minimize the risk of loss or theft. However, SM&R confirms investors' purchases
and credits such purchases to their accounts on the books maintained by SM&R.
Investors have the same rights of share ownership as they would if certificates
had been issued.
OPENING AN ACCOUNT: To purchase shares, you must submit an account
application (the "Account Application") which includes a purchaser suitability
form (the "Suitability Form"). If you would like to take advantage of the
electronic services available, you must complete the Electronic Transfer Options
section of the Account Application. Special forms are required when establishing
an IRA/SEP or 403(b) plan. Please call Investor Services at (800) 231-4639 and
request the special forms when establishing retirement plans. Keep in mind when
opening an account that transactions by telephone between different accounts
will only be permitted if the accounts are registered in the identical name.
MINIMUM PURCHASE REQUIREMENT: For Class T shares of the Government Bond
Fund and the Tax Free Fund, your initial investment must be at least $100 and
all subsequent investments must be at least $20. For the Primary Fund and the
Money Market Fund, your initial investment must be at least $1000 and all
subsequent investments must be at least $100. The Company reserves the right to
reject any purchase.
PURCHASES BY MAIL: You should make the check(s) payable to SM&R and send
the check(s) to the address indicated above. Please note that third party checks
will not be accepted to open a new account, except for IRA Rollover checks that
are properly endorsed. Investors making subsequent investments by mail must
indicate their name, account number, and the name of the Fund, and the Class if
applicable, being purchased. You may use the remittance slip attached to the
confirmation statement.
PURCHASES BY WIRE: To ensure proper crediting of a wire investment, you
must have an executed Account Application and Suitability Form on file with the
transfer agent. You may then wire your investment by providing the following
instructions to your bank:
The Moody National Bank of Galveston ABA #133100091
Securities Management and Research, Inc. #035 868 9
Name of Class, if applicable, and Fund (E.G., Class T of the Government
Bond Fund)
Fund Account Number (number appears on confirmation statement)
Your Name (E.G., Mary Smith)
If wires are received after 3:00 p.m. Central Time or during a Bank holiday
or SM&R business holiday, purchases will be made at the price determined on the
next business day. A wire fee in the amount of $8.00 will be charged the
investor for wires under $5,000.
PURCHASES BY EXCHANGE: You may call Investor Services if you have
established telephone exchange privileges on your account. See " SPECIAL
PURCHASE PLANS AND SERVICES--Exchange Privilege" for procedures and additional
information relating to telephone exchanges. For limitations on exchanges see
"Excessive Trading" also under "SPECIAL PURCHASE PLANS AND SERVICES."
18
<PAGE>
WHO CAN PURCHASE CLASS T SHARES?
In general, Class T shares may only be purchased by investors that became
shareholders of the Company prior to September , 1998 and certain designated
persons. Specifically, Class T shares may be purchased by:
(a) shareholders of the Company who own Class T shares of the Government
Bond Fund or Tax Free Fund that were purchased prior to September ,
1998 ("Existing Shareholders");
(b) present and retired directors, officers, and full-time employees of the
Company;
(c) present and retired directors, officers, registered representatives, and
full-time employees of SM&R and their spouses;
(d) present and retired officers, directors, insurance agents, and full-time
employees and their spouses of American National and its subsidiaries and
its "affiliated persons," as defined in the Investment Company Act of
1940, and of any corporation or partnership for which any of American
National's present directors serve as a director or partner, and their
spouses;
(e) present and retired partners and full-time employees of legal counsel to
SM&R and officers and directors of any professional corporations which
are partners of such legal counsel and their spouses;
(f) any child, step-child, grandchild, parent, grandparent, brother, or
sister of any person named in (a), (b), (c), or (d) above and their
spouses;
(g) any trust, pension, profit-sharing, IRA, or other benefit plan for any
of such persons mentioned in (a), (b), (c), (d) or (e) (although shares
of the Tax Free Fund should not be purchased by these entities);
(h) custodial accounts for minor children of such persons mentioned in (a),
(b), (c), (d) or (e) pursuant to the Uniform Gifts to Minors or Uniform
Transfers to Minors Acts (although shares of the Tax Free Fund should not
be purchased by these entities);
(i) persons who have received a distribution from a pension, profit-sharing,
or other benefit plan, to the extent such distribution represents the
proceeds of a redemption of shares of any fund in the SM&R Family of
Funds (other than the Money Market and Primary Funds);
(j) persons receiving rebated amounts through American National Property and
Casualty's (ANPAC) "Cash Back Program" to the extent the proceeds
represent the amount of the rebate,
(k) policyholders of American National subsidiaries who have entered into an
NAV agreement with SM&R; and
(l) registered representatives and employees of securities dealers with whom
SM&R has a selling agreement.
Neither the Funds nor SM&R are responsible for determining whether or not a
prospective investor qualifies under any of the above categories for purchase of
Class T shares. Notifying SM&R of an intent to qualify under one of these
categories is the sole responsibility of the prospective investor.
An Existing Shareholder, as defined above, is permitted to purchase Class T
shares of a Multi-Class Fund, but only if that Existing Shareholder currently
owns Class T shares of that Fund. For example, an Existing Shareholder that owns
only Class T shares of the Government Bond Fund would be permitted to purchase
additional Class T shares of the Government Bond Fund, but would not be able to
purchase Class T shares of the Tax Free Fund.
New accounts in Class T shares, however, can be opened by those investors
listed in (b)-(m) above (collectively, "Special Purchasers"). Special
Purchasers, therefore, are permitted to purchase Class T shares of a Multi-Class
Fund regardless of whether or not they currently own shares of that Fund.
Special Purchasers are also eligible for waiver of the initial sales charge as
described below in "MULTI-CLASS FUNDS--Waiver of Initial Sales Charge for
Special Purchasers."
19
<PAGE>
WHEN ARE PURCHASES EFFECTIVE?
Purchases received in proper form by SM&R prior to the close of the New York
Stock Exchange (currently 3:00 p.m. Central Time) (the "Exchange") on any SM&R
business day, or received prior thereto on any SM&R business day by a securities
dealer having a dealer contract with SM&R and reported to SM&R prior to SM&R's
close of business (currently 4:30 p.m. Central Time) on the same day, will be
effective and executed at the applicable Offering Price determined at the close
of the Exchange on that day. It is the responsibility of any such dealer and not
SM&R to establish procedures to assure that purchases received before the close
of the Exchange on an SM&R business day will be reported to SM&R before SM&R's
close of business on that same day. Purchases received after the close of the
Exchange, on customary national business holidays, or on an SM&R holiday will be
effective upon and made at the Offering Price determined as of the close of the
Exchange on SM&R's next business day that such Exchange is open for trading.
If payments for purchases are transmitted by bank wire to the Bank and
reported to SM&R prior to the close of the Exchange on any SM&R business day,
the investor will purchase at the Offering Price determined and become a
shareholder as of the close of the Exchange on that same day. Purchases by wire
payments reported by the Bank to SM&R after the close of the Exchange, on
customary national business holidays, or on an SM&R holiday, will be effective
on and made at the Offering Price determined on SM&R's next business day.
Procedures for transmitting Federal Funds by wires are available at any national
bank or any state bank which is a member of the Federal Reserve System.
SM&R's business holidays are Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, the Friday following Thanksgiving Day, two (2) days
at Christmas, and New Years Day. If Christmas Day is a weekday other than
Monday, Christmas Day and Christmas Eve Day are business holidays. If Christmas
Day is Monday, Christmas Day and the preceding Friday will be business holidays.
If Christmas Day is a Saturday, the preceding Thursday and Friday will be
business holidays. If Christmas Day is a Sunday, the preceding Friday and the
following Monday will be business holidays. If New Years Day is a Saturday, the
preceding Friday will be a business holiday, and if New Years Day is a Sunday,
the following Monday will be a business holiday.
DETERMINATION OF OFFERING PRICE
Each Fund's Offering Price is determined once each day and is comprised of
that Fund's net asset value plus the sales charge, if any. The sales charge for
shares of the Multi-Class Funds is computed at the rate set forth in the table
below. Shares of the Single-Class Funds may be purchased without a sales charge.
Accordingly, the Offering Price for shares of each Single Class Fund is that
Fund's net asset value.
Net asset value per share is determined by dividing the market value of the
securities owned by the Fund or Class thereof, plus any cash or other assets
(including dividends accrued but not collected), less all liabilities of such
Fund or Class (including accrued expenses but excluding capital and surplus), by
the number of shares of the Fund or Class outstanding. Net asset value is
currently determined as of 3:00 p.m. Central Time on each business day. Although
the legal rights of the Classes of the Multi-Class Funds are substantially
identical, the different expenses borne by each Class will result in different
net asset values and dividends for each Class.
The Money Market Fund values all of its securities using the amortized cost
method, which does not take into account unrealized capital gains or losses. The
amortized cost method of valuation involves valuing an instrument 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
value of the instrument. (For a further discussion of the amortized cost method,
see the Statement of Additional Information.) The other Funds use the amortized
cost method only for valuing debt securities having maturities of 60 days or
less. Debt securities with maturities in excess of 60 days are valued on the
basis of prices provided by a pricing service or brokers.
For a more complete description of the procedures involved in valuing
various fund assets, see "Offering Price" in the Company's Statement of
Additional Information.
20
<PAGE>
MULTI-CLASS FUNDS
This Prospectus offers Class T shares of the Multi-Class Funds to investors
that became shareholders of the Company prior to September , 1998 and certain
designated persons. Five other Classes of shares of the Multi-Class Funds are
available through separate prospectuses: (1) Class A "front-end load" shares;
(2) Class B "back-end load" shares; (3) Class C "level load" shares; (4) Class Y
"institutional" shares; and (5) Class J "network" shares offered through certain
financial intermediaries that have distribution agreements with SM&R. Class A,
Class B, Class C, Class T, and Class J shares are subject to different sales
charges and other expenses and, accordingly, may have expense ratios and
performance that differs from those of Class T shares. You are encouraged to
consider all of the Company's class alternatives and choose the one that fits
your individual circumstances at the lowest level of fees. FOR MORE INFORMATION
ON THE OTHER CLASSES OF SHARES OR TO REQUEST A PROSPECTUS FOR ANOTHER CLASS,
INVESTORS MAY CONTACT INVESTOR SERVICES AT (800) 231-4639.
Each Class of shares of a Multi-Class Fund represents an interest in the
same portfolio of investments and each Class has the same rights as the other
Classes, except that each Class bears its own expenses. The net income
attributable to each Class and the dividends payable on the shares of that Class
will be reduced by the amount of the service and distribution fees of that
Class.
Class T shares are subject to an initial sales charge of up to 4.5% of the
public offering price. Certain purchasers of Class T shares may qualify for a
reduction or waiver of initial sales charges, as set forth in the chart below
and under "Reduction and/or Waiver of Initial Sales Charges." If you invest
$500,000 or more in Class T shares, there is no initial sales charge.
The offering price of Class T shares is the next determined net asset value
plus a sales charge, if applicable, (expressed as a percentage of the offering
price) shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS A SALES CHARGE AS A DISCOUNT TO SELECTED
PERCENTAGE OF PERCENTAGE OF NET DEALERS AS A PERCENTAGE
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*
- -------------------------------------------------------- --------------------- --------------------- -----------------------
<S> <C> <C> <C>
Less than $100,000...................................... 4.5% 4.7% 4.0%
$100,000 but less than $250,000......................... 3.5% 3.6% 3.0%
$250,000 but less than $500,000......................... 2.5% 2.6% 2.0%
$500,000 and over....................................... None None None
</TABLE>
- ------------------------
* For Class T shares (as well as for shares of the Primary and Money Market
Funds), SM&R may, in certain circumstances, provide compensation (from its
own profits and resources) to broker-dealers in addition to these discounts.
(See "OTHER INFORMATION CONCERNING THE FUNDS-- Special Payments to
Broker-Dealers.")
REDUCTION AND/OR WAIVER OF INITIAL SALES CHARGES
DISCOUNTS THROUGH CONCURRENT PURCHASES. To qualify for a reduced sales
charge on the Class T shares, you may combine concurrent purchases of Class T
shares of funds in the SM&R Family of Funds at the respective sales charges
applicable to each. Investors that are eligible to combine concurrent purchases
to qualify for a reduced sales charge include:
(1) Any individual;
(2) Any individual, his or her spouse, and trusts or custodial accounts for
their minor children;
(3) A trustee or fiduciary of a single trust estate or single fiduciary
account.
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class T or
Class A shares of a fund in the SM&R Family of Funds, you may be able to receive
a discount when you buy additional shares. The
21
<PAGE>
offering value of the shares you already own may be "accumulated" - i.e.,
combined together with the offering value of the new shares you plan to buy - to
achieve quantities eligible for discount. See "SPECIAL PURCHASE PLANS" in the
Statement of Additional Information for further information about certain rules
that apply when taking advantage of the right of accumulation.
LETTER OF INTENT. You may qualify immediately for a reduced sales charge on
purchases of Class T shares of funds in the SM&R Family of Funds by completing
the Letter of Intent section of the Account Application. Under a Letter of
Intent, an investor expresses an intention to purchase, within 13 months of the
initial investment, a specified amount of Class T shares of funds in the SM&R
Family of Funds which, if made concurrently, would qualify for a reduced sales
charge. Upon execution of the Letter of Intent, the investor must make a minimum
initial investment equal to ten percent (10%) of the amount necessary to qualify
for the applicable reduced sales charge. To assure that the full applicable
sales charge will be paid if the intended purchase is not completed, five
percent (5%) of the total intended purchase amount will be held in escrow in
shares of the funds registered in the investor's name. Shares held in escrow
under a Letter of Intent are not eligible for the exchange privilege until the
Letter of Intent is completed or canceled. A Letter of Intent does not represent
a binding obligation on the part of the investor to purchase or the SM&R Family
of Funds to sell the full amount of shares specified. (See the Investor's Letter
of Intent on the Account Application and "SPECIAL PURCHASE PLANS" in the
Statement of Additional Information.)
WAIVER OF INITIAL SALES CHARGE FOR SPECIAL PURCHASERS. After receipt of
written request by SM&R, Class T shares of the Government Bond Fund and the Tax
Free Fund may be purchased by Special Purchasers at net asset value per share
without the imposition of any sales charge.
FUND AND CLASS EXPENSES
For the Multi-Class Funds, expenses that are directly attributable to a
particular Class of shares ("Class Expenses") will be borne solely by that
Class. Class expenses include: (1) asset-based distribution fees and shareholder
service fees; (2) transfer agency fees attributable to a particular Class; (3)
expenses related to preparing, printing, mailing, and distributing materials
such as shareholder reports, prospectuses, and proxy statements to current
shareholders of a specific Class; (4) state and federal registration fees
incurred by a specific Class; (5) litigation and other legal expenses relating
to a particular Class; (6) directors' fees and expenses incurred as a result of
issues relating solely to a particular Class; (7) accounting, audit, and tax
expenses relating to a specific Class; (8) the expenses of administrative
personnel and services required to support the shareholders of a specific Class;
and (9) fees and other payments made to entities performing services for a
particular Class, including account maintenance, dividend disbursing, or
subaccounting services.
Class Expenses may be waived or reimbursed by SM&R, the Fund's investment
adviser and distributor. Investment advisory fees, custodial fees, and other
expenses relating to the management of the Company's assets shall not be
allocated on a class-specific basis. Income, realized and unrealized capital
gains and losses, and expenses that are not allocated to a specific Class shall
be allocated to each Class on the basis of the proportionate net assets of that
Class in relation to the net assets of the Multi-Class Fund.
All direct sales expenses for the Primary and the Money Market Fund,
including the cost of prospectuses for prospective shareholders, are paid by
SM&R, and no sales expense is borne by those Funds.
For additional information about the expenses of the Funds, see the
Statement of Additional Information.
22
<PAGE>
SPECIAL PURCHASE PLANS AND SERVICES
The Company offers services and plans that are designed to facilitate
investment in the Funds. At this time, there is no charge to shareholders for
these services. The Company may impose fees for such services in the future. Be
aware, however, that shareholders electing to participate in the ACH plan
described below should check with their financial institution for any additional
charges imposed for this service. For additional information contact your
registered representative or SM&R.
ELECTRONIC TRANSFERS (ACH). The electronic transfer option allows
shareholders to move money between their Fund account(s) and their bank, savings
and loan, or credit union account using the Automated Clearing House ("ACH")
network. To arrange for electronic transfers, investors should complete the
relevant section of the Account Application at the time they open the account
and specify the type of service or services desired. Shareholders should also
attach a voided, pre-printed check or deposit slip from their checking, savings
and loan, or credit union account. PASSBOOK SAVINGS ACCOUNTS ARE NOT ELIGIBLE
FOR THE ELECTRONIC TRANSFER OPTION. ADDITIONALLY, AN INVESTOR'S BANK MUST BE A
MEMBER OF THE AUTOMATED CLEARING HOUSE (ACH) NETWORK FOR THE INVESTOR TO TAKE
ADVANTAGE OF THIS SERVICE. Shareholders will receive a confirmation verifying
initialization of the electronic transfer option and may begin conducting
transactions in their account(s) under this option three (3) weeks after receipt
of the verification notice from SM&R. If this option is elected after the
account is established, it may be necessary for the shareholder to obtain a
signature guarantee for all individuals named on the account(s).
TELEPHONE SERVICES. Investors can take advantage of this service by
completing the appropriate sections of the Account Application when opening
their account. Through this service, investor will be able to purchase by ACH,
redeem, and exchange shares on those accounts for which they have an executed
Account Application on file and have received written verification from SM&R
that the service has been initialized as explained under Electronic Transfers
above. If this option is elected after the account is established, it may be
necessary for the shareholder to obtain a signature guarantee for all
individuals named on the account(s). PLEASE NOTE THAT THE TELEPHONE REDEMPTION
OPTION IS NOT AVAILABLE TO RETIREMENT PLANS.
The Funds have implemented the following security procedures intended to
protect shareholder accounts from losses resulting from unauthorized or
fraudulent telephone instructions: The caller will be required to know (i) the
name of the Fund or Funds; (ii) all digits of the account number; (iii) the
exact name and address used in the registration(s); and (iv) the Social Security
or Employer Identification Number listed on the account(s). Additionally, all
telephone transactions will be recorded for the shareholder's protection.
Neither the Funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone which comply with the current
security procedures and other requirements. SM&R believes that such security
procedures and other requirements are reasonable and, if followed, shareholders
should bear the risk of any losses resulting from unauthorized or fraudulent
telephone transactions on their accounts.
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from a shareholder's bank account and
invested monthly, bi-monthly, quarterly, or annually into the designated fund(s)
at the applicable offering price determined on the date of the electronic
transfer.
WEALTH ACCUMULATION ACCOUNT. Shareholders having account balances of at
least $2,500 in the Money Market Fund may open a Wealth Accumulation Account,
which will provide them with an automatic dollar cost averaging plan. Automatic
monthly purchases of the shares of other funds in the SM&R Family of Funds may
be made by exchanges from the shareholder's Money Market Fund Wealth
Accumulation Account. Purchases of the other funds must be at least $50 and,
unless terminated by the shareholder, will continue as long as the balance of
the Money Market Fund Wealth Accumulation Account is sufficient.
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Additional investments may be made to a Money Market Fund account designated as
a Wealth Accumulation Account to extend the purchase period under the plan.
However, if additional investments are received by SM&R less than ten (10) days
prior to the 20th of the month, such investments will not be available for use
under the Wealth Accumulation Account until the 20th of the following month. If
the 20th of the month is an SM&R holiday, the purchase will be processed on the
next business day.
Purchases made will be subject to the applicable sales charge of the fund
whose shares are being purchased. Changes in amounts to be purchased, the funds
being purchased, and termination of a Wealth Accumulation Account will be made
within five (5) business days after written instructions are received by SM&R in
proper form (I.E., signed by the owner(s) of record exactly as registered).
Shareholders' rights to make additional investments, to exchange shares, and
to redeem shares in the Money Market Fund and any of the funds in the SM&R
Family of Funds are not affected by a shareholder's participation in a Wealth
Accumulation Account. However, check writing privileges and expedited redemption
by telephone are not available for the Money Market Fund accounts designated as
a part of the Wealth Accumulation Account.
Primary Fund shareholders that opened a Primary Fund Wealth Accumulation
Account prior to September , 1998 will be permitted to continue using the
Account subject to the terms applicable to a Money Market Fund Wealth
Accumulation Account, described above.
EXCHANGE PRIVILEGE. Shareholders in a Fund are permitted to exchange shares
that they own in a Fund with shares of another fund of the SM&R Family of Funds
without the payment of an exchange fee, subject to certain conditions. Exchanges
between a Fund and another fund in the SM&R Family of Funds are available only
in states where the applicable funds are registered and the exchange may be
legally made.
MULTI-CLASS FUNDS (GOVERNMENT BOND FUND AND TAX FREE FUND ). Shareholders
may exchange Class T shares that they own in a Multi-Class Fund, without an
exchange fee, for corresponding Class T shares of another fund in the SM&R
Family of Funds. Shareholders also may exchange their Class T shares for shares
of a Single-Class Fund, provided that the shareholder meets any minimum
investment requirement for the shares they wish to acquire. Finally,
shareholders may exchange Class T shares of a Multi-Class Fund for shares of
another Class of that Fund, provided that they pay any applicable sales charges.
SINGLE-CLASS FUNDS (PRIMARY FUND AND MONEY MARKET FUND). Shareholders may
exchange shares they own in a Single-Class Fund for shares of the other
Single-Class Fund or for shares of a Class of another fund in the SM&R Family of
Funds, provided the shareholder pays any sales charge applicable to the acquired
shares.
You may acquire, through an exchange, shares of a Class with a contingent
deferred sales charge ("CDSC"). If you redeem those shares, the relevant CDSC,
if any, will be calculated from the date that you initially purchased the
original shares, rather than from the date of exchange.
Shares of any fund in the SM&R Family of Funds held in escrow under a Letter
of Intent are not eligible for the exchange privilege. Such shares will not be
released from escrow until the balance invested during the period specified in
the Letter of Intent equals or exceeds the amount required to be invested under
the Letter of Intent or the shareholder requests, in writing, that the Letter of
Intent be canceled and pays any adjustments in sales charge. After release from
escrow, shares may be exchanged, provided all other applicable conditions are
met.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met: (a) the exchange must be made
between accounts having identical registrations and addresses; (b) the shares of
the fund of the SM&R Family of Fund acquired through exchange must be qualified
for sale in the state in which you reside; (c) the dollar amount of the exchange
must meet the minimum investment requirement applicable to the shares of the
fund in the SM&R Family of Funds that you would acquire through the exchange;
(d) SM&R must have received full payment for the shares being
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exchanged; (e) your account must have been coded to reflect your certified
taxpayer identification number, or, if applicable, an appropriate Internal
Revenue Service Form W-8 (certificate of foreign status) or Form W-9 (certifying
exempt status); (f) any shares that you wish to exchange must have been held for
at least ten (10) business days; (g) certificates representing shares, if any,
are returned before such shares are exchanged; and (h) you have received a
prospectus for the shares you receive in the exchange.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time. ANY
GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE INCOME TAX PURPOSES. SHAREHOLDERS SHOULD CONSULT A TAX ADVISOR
FOR THE TAX TREATMENT AND EFFECT OF EXCHANGES.
EXCESSIVE TRADING. Frequent trades, involving either substantial fund
assets or a substantial portion of an account or accounts controlled by a
shareholder, can disrupt management of the Company and raise the Company's
expenses. The Company defines "excessive trading" as exceeding one purchase and
sale involving the same fund within any 120-day period.
For example, a shareholder is in Fund X. He can move substantial assets from
Fund X to Fund Y and, within the next 120 days, sell his shares in Fund Y to
return to Fund X or move to Fund Z. If the shareholder exceeds the number of
trades described above, he may be barred indefinitely from further transactions
between the participating funds.
There are two types of transactions exempted from the excessive trading
guidelines. They are (1) redemptions that are not part of exchanges and (2)
systematic purchases or redemptions.
RETIREMENT PLANS
The following retirement plans may be funded with Class T shares of the
Government Bond Fund or with shares of the Primary and Money Market Funds:
Individual Retirement Accounts (IRAs); Simplified Employee Pension Plans (SEPs);
403(b) Custodial Accounts (TSAs), and corporate retirement plans. Information
concerning IRAs and TSAs, and the forms necessary to adopt such plans, can be
obtained by contacting your registered representative or calling SM&R. A regular
Fund application should be used when establishing a corporate retirement plan.
(See "HOW TO PURCHASE SHARES" for the minimum initial and subsequent purchase
requirements.) SM&R acts as trustee or custodian for IRAs, SEPs and TSAs for the
Company. An annual custodial fee of $7.50 will be charged for any part of a
calendar year in which an investor has an IRA, SEP or TSA in the Company and
will be automatically deducted from each account. An individual considering a
retirement plan may wish to consult with an attorney or tax adviser.
Because IRAs, SEPs, TSAs, and other qualified plans are exempt from federal
income tax, they will be unable to benefit from the general tax-exempt nature of
the Tax Free Fund. Accordingly, the Tax Free Fund is not generally considered to
be suited for such plans or persons.
DIVIDENDS AND DISTRIBUTIONS
The Government Bond Fund and Tax Free Fund will declare and pay dividends
from net investment income monthly and net realized short-term or long-term
capital gains, if any, annually.
At 3:00 p.m. Central Time, on each day that the Exchange is open for trading
other than SM&R's business holidays described above, the Primary Fund and the
Money Market Fund each will declare a dividend of all of its net investment
income to shareholders already of record. Such dividends will be paid monthly.
Dividends and capital gains will be automatically reinvested at net asset
value in additional shares of the Fund making such distribution unless SM&R is
instructed otherwise in writing. Distributions not reinvested are paid by check
or transmitted to your bank account through an ACH transaction, if elected.
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<PAGE>
If the Postal Service cannot deliver your check, or if your check remains
uncashed for six months, the Company reserves the right to reinvest your
distribution check in your account at the net asset value on the business day of
the reinvestment and to reinvest all future distributions in shares of the
Company. Dividends and capital gains declared in December to shareholders of
record in December and paid the following January will be taxable to
shareholders as if received in December. This is a convenient way to accumulate
additional shares and maintain or increase the shareholder's earning base. Of
course, any shares so acquired remain at market risk.
Shareholders have the right to change their election with respect to the
receipt of distributions by notifying SM&R in writing, but any such change will
be effective only as to distributions for which the record date is seven or more
business days after SM&R has received the shareholder's written request.
In order to be entitled to a dividend, an investor must have acquired shares
of a Fund prior to the close of business on the record date. A shareholder
should be cautioned, however, before purchasing shares of a Fund immediately
prior to a distribution. Dividends and distributions paid by the Company have
the effect of reducing net asset value per share on the record date by the
amount of the payment. Therefore, a dividend or distribution of record shortly
after the purchase of shares by an investor represents in substance, a return of
capital.
TAXES
Each Fund of the Company is treated as a separate entity for federal income
tax purposes. The Company has elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code. The Company 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 the Company
will be required to pay federal income taxes.
In order to qualify as a regulated investment company, each Fund of the
Company must meet several requirements. These requirements include the
following: (1) at least 90% of the Fund's gross income must be derived from
dividends, interest, payments with respect to securities loans, gains from the
sale or disposition of stock, securities or foreign currencies or other income
(including gains from options, futures or forward contracts) derived in
connection with the Fund's investment business and (2) at the close of each
quarter of the Fund's taxable year, (a) at least 50% of the value of the Fund's
assets must consist of cash, United States Government securities, securities of
other regulated investment companies and other securities (limited generally
with respect to any one issuer to not more than 5% of the total assets of the
Fund and not more than 10% of the outstanding voting securities of such issuer)
and (b) not more than 25% of the value of the Fund's assets may be invested in
the securities of any issuer (other than United States Government Securities or
securities of other regulated investment companies) or of two or more issuers
which the Fund controls and which are determined to be engaged in similar or
related trades or businesses.
For federal income tax purposes, any income dividends derived from taxable
investments which the shareholder receives from such Fund of the Company, as
well as any distributions derived from net short-term capital gains are treated
as ordinary income whether the shareholder has elected to receive them in cash
or in additional shares. Distributions derived from net long-term capital gains
will be taxable as long-term capital gains regardless of the length of time the
shareholder has owned such Fund's shares and regardless of whether such
distributions are received in cash or in additional shares. In determining the
amount of capital gains, if any, available for distribution, net capital gains
are offset against available net capital losses, if any, carried forward from
previous years.
Dividends paid by the Tax Free Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be "exempt-interest" dividends
that shareholders may exclude from their gross income for federal income tax
purposes if the Fund satisfies certain quarterly asset percentage requirements.
To the extent that the Tax Free Fund invests in bonds, the interest on which is
a specific tax
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preference item for federal income tax purposes ("AMT-Subject Bonds"), any
exempt-interest dividends derived from interest on AMT-Subject bonds will be a
specific tax preference item for purposes of the federal individual and
corporate alternative minimum taxes. All exempt-interest dividends will be a
component of the "current earnings" adjustment item for purposes of the federal
corporate alternative minimum income tax. Current federal tax law limits the
types and volume of securities qualifying for the federal income tax exemption
of interest and may also affect the availability of municipal obligations for
investment by the Fund and the value of the Fund's portfolio.
Redemptions and exchanges of shares in each Fund of the Company are taxable
events on which a shareholder may realize a gain or loss. Shareholders of the
Tax Free Fund should be careful about redeeming shares immediately prior to the
record date of an "exempt-interest dividend" because the redemption may cause
the shareholder to realize a taxable gain even though a portion of the
redemption proceeds may represent a pro rata share of tax exempt interest earned
by the Fund. In addition, a loss on the sale or redemption of shares held by the
shareholder of the Tax Free Fund for six months or less will be disallowed to
the extent of any exempt-interest dividend received by the shareholder with
respect to those shares. Shareholders should consult with their tax advisor
concerning the tax reporting requirements in effect on the redemption or
exchange of such shares.
The Company may be required to report to the Internal Revenue Service
("IRS") any taxable dividends or other reportable payment (including share
redemption proceeds) and withhold 31% of any such payments made to individuals
and other non-exempt shareholders who have not provided a correct taxpayer
identification number and made certain required certifications that appear in
the Application. A shareholder may also be subject to backup withholding if the
IRS or a broker notifies the Company that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
Shareholders who are not U.S. persons for purposes of federal income
taxation should consult with their financial or tax advisors regarding the
applicability of U.S. withholding taxes to distributions received by them from
the Company.
Many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by the fund from direct obligations of
the U.S. Government, subject in some states to minimum investment requirements
that must be met within the fund.
At the end of each calendar year, the Company will advise shareholders about
the tax status of all distributions made during each taxable year, including the
portion of the dividends which comprise taxable income, exempt income and
interest income that is a tax preference item under the alternative minimum tax.
Shareholders should consult a tax advisor about the application of state and
local tax laws to these distributions and redemption proceeds received from the
Company.
IMPORTANT: The Company reserves the right to (1) refuse to open an account
for any person failing to provide a taxpayer identification number, certified as
correct and (2) close an account by redeeming its shares in full, at the then
current net asset value, upon receipt of notice from the IRS that the taxpayer
identification number certified as correct by the shareholder is in fact
incorrect.
HOW TO REDEEM
Shares of the Company will be redeemed at the net asset value determined on
the date the request is received by SM&R in "Proper Form," as defined in "PROPER
FORM" below, at no charge. A redemption request must be addressed to Securities
Management and Research, Inc., One Moody Plaza, 14th Floor, Galveston, Texas
77550.
If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as practicable and normally
within seven days after receipt of a redemption request in Proper Form.
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If the shares being redeemed were purchased by wire, certified check, money
order, or other immediately available funds, redemption proceeds will be mailed
no later than the seventh calendar day following receipt. For shares purchased
by a personal check or ACH transfer, SM&R will process the redemption but will
generally delay sending the proceeds for up to ten (10) business days to allow
the check or transfer to clear.
TELEPHONE REDEMPTIONS. Shareholders may request redemptions by telephone if
they have completed the Account Application and requested this option. This
redemption feature can only be used if: (a) the redemption proceeds are to be
mailed to the address of record or wired to the pre-authorized bank account
indicated on the Account Application; (b) there has been no change of address of
record or pre-authorized bank account within the preceding 30 business days; (c)
the shares to be redeemed are not in certificate form; (d) the security
procedures discussed under the "Exchange Privilege" have been met; and (e) the
proceeds of the redemption do not exceed $25,000.
SYSTEMATIC WITHDRAWAL PLAN. The Company has a Systematic Withdrawal Plan
("Withdrawal Account"), which permits shareholders having an account value of
$5,000 or more to automatically withdraw a minimum of $50 monthly or each
calendar quarter on or about the 20th of the applicable month. Shareholders
maintaining a Withdrawal Account may elect to have the withdrawal proceeds
automatically deposited in their pre-authorized bank account via an ACH
transaction. This is accomplished by completing the relevant section of the
Account Application and returning it to SM&R. See "SPECIAL PURCHASE PLANS AND
SERVICES--Electronic Transfers" for additional information. Dividends and
capital gains distributions will automatically be reinvested in additional
shares at net asset value. As with other redemptions, a withdrawal is a sale for
federal income tax purposes. The Systematic Withdrawal Plan will automatically
terminate if all shares are liquidated or withdrawn from the account.
Certificates are not issued for shares held in a Withdrawal Account and
certificates held, if any, must be surrendered when shares are transferred to a
Withdrawal Account. No account covered by a Letter of Intent can be changed to a
Systematic Withdrawal Plan until such time as the Letter of Intent is fulfilled
or terminated, nor can an account under a Systematic Withdrawal Plan be placed
under a Letter of Intent.
For further information about the Systematic Withdrawal Plan, contact a
registered representative or SM&R.
"PROPER FORM" means the request for redemption must include: (1) your share
certificates, if issued; (2) your letter of instruction or a stock assignment
specifying the Fund, account number, and number of shares or dollar amount to be
redeemed. Both share certificates and stock powers, if any, must be endorsed and
executed exactly as the Fund shares are registered. It is suggested that
certificates be returned by certified mail for your protection; (3) any required
signature guarantees (see "Signature Guarantees" below); and (4) other
supporting legal documents, if required in the case of estates, trusts,
guardianships, divorce, custodianships, corporations, partnerships, pension or
profit sharing plans, retirement plans, and other organizations.
Please keep in mind that as a shareholder, it is your responsibility to
ensure that all requests are submitted to the Company's transfer agent in Proper
Form for processing.
SIGNATURE GUARANTEES. This guarantee carries with it certain statutory
warranties relied upon by the transfer agent. This guarantee is designed to
protect the investor, the Company, SM&R, and its representatives through the
signature verification of each investor wishing to redeem or exchange shares.
Signature guarantees are required when: (1) the proceeds of the redemption
exceed $25,000; (2) the proceeds (in any amount) are to be paid to someone OTHER
THAN the registered owner(s) of the account; (3) the proceeds (in any amount)
are to be sent to any address OTHER THAN the shareholder's address of record,
pre-authorized bank account or exchanged to one of the other funds managed by
SM&R; and (4) the Company or its transfer agent believes a signature guarantee
would protect against potential claims based on the transfer instructions,
including, when the authority of a representative of a corporation,
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partnership, association, or other entity has not been established to the
satisfaction of the Company or transfer agent.
Acceptable guarantees can be obtained from an "eligible guarantor
institution" as defined in rules adopted by the Securities and Exchange
Commission. Eligible guarantor institutions include banks, brokers, dealers,
municipal securities dealers or brokers, government securities dealers or
broker, credit unions (if authorized under state law), national securities
exchanges, registered securities associations and institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program or an SM&R representative who has executed
an agreement and received authorization from SM&R. IMPORTANT: Witnessing or
notarization is not sufficient.
TEXAS OPTIONAL RETIREMENT PROGRAM. Government Bond Fund, Primary Fund, and
Money Market Fund shares in any account established under the Texas Optional
Retirement Program may not be redeemed unless satisfactory evidence is received
by SM&R from the state that one of the following conditions exist: (1) death of
the employee; (2) termination of service with the employer; or (3) retirement of
employee.
CHECK WRITING OPTION. Check writing is available in the Money Market Fund
to investors having an account value of $1,000 or more. $250 is the minimum
check amount under the check writing option. This option is not available on
IRAs, SEPs, or TSAs. Shareholders wishing to avail themselves of this option
must complete the check writing option signature card in the Prospectus. After
obtaining specimen signatures and the fully executed card, SM&R will order
checks and arrange for the shareholder's checks to be honored by a bank.
Investments made by personal check or third party check will be held for fifteen
(15) business days following the investment during which time checks may not be
drawn on the amount of such investment. This service may be terminated or
suspended or additional charges may be imposed for this service. Shareholders
will be provided the initial checkbook free of charge. There will be a $5 fee
for re-orders. Shareholders will be allowed to write ten (10) checks free each
calendar quarter.
When a check is presented for payment, SM&R, as the shareholder's agent,
will cause each Fund to redeem a sufficient number of full and fractional shares
to cover the amount of the check. Shareholders will continue to be entitled to
dividends on their shares up to the time the check is presented to SM&R for
payment. If the amount of the check is greater than the value of the shares held
in the shareholder's account for more than fifteen (15) business days at the
time the check is presented for payment, the check will be returned to the payee
as not being covered by sufficient funds, and the shareholder will be subject to
extra charges as a result.
Primary Fund shareholders that had check writing privileges prior to
September , 1998 will be permitted to continue writing checks on the Primary
Fund subject to the terms applicable to the Money Market Fund described above.
Shareholders using the Primary Fund check writing option should be aware that
writing a check is a redemption of shares. Those shares may be worth less when
the check is presented for payment than when the check was written.
REDEMPTION OF SMALL ACCOUNTS. The Company reserves the right to redeem
shares in any account (which will be promptly paid to the shareholder) if, due
to your redemptions, the value of the account falls below $100 in the case of
the Government Bond Fund and Tax Free Fund or $1,000 in the case of the Primary
Fund and Money Market Fund. Shareholders will be notified that the value of
their account is less than the required minimum indicated above and allowed at
least 60 days to make an additional investment to increase the value of their
account above the required minimum. The Board of Directors may, from time to
time, change such required minimum investment.
RIGHTS RESERVED BY THE COMPANY. The Company, acting through its transfer
agent, reserves the right to waive or lower investment minimums; to accept
initial purchases by telephone from a registered representative; to refuse any
purchase order; to cancel or rescind any purchase or exchange at any time prior
to receipt by the shareholder of written confirmation or, if later, within five
(5) business days of the
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transaction; to freeze an account and suspend account services when notice has
been received of a dispute involving the account owners or other parties or
there is reason to believe a fraudulent transaction may occur; to restrict or
refuse the use of faxed redemptions where there is a question as to the validity
of the request or proper documents have not been received; to otherwise modify
the conditions of purchase and any services at any time; or to act on
instructions not believed to be genuine.
OTHER INFORMATION CONCERNING THE FUNDS
SHARING OF FUND EXPENSES. Each Fund bears its proportionate share of the
Company's general expenses not susceptible of direct allocation. Such general
expenses include the Company's organizational expenses, directors' fees and
joint fidelity bonds, which are pro-rated based on the relative amount of each
Fund's assets, and prospectus and shareholder report expenses, which are
pro-rated based on the relative number of each Fund's shareholders.
Organizational expenses for the Tax Free Fund and the Money Market Fund were
paid by the adviser.
AUTHORIZED STOCK. The shares of each Fund, when issued, will be fully paid
and non-assessable, will have no conversion or similar rights, and will be
freely transferable. Each share of stock will have a pro-rata interest in the
assets of the Fund to which the stock of that class relates and will have no
interest in the assets of any other Fund.
As of September 1, 1998, SM&R and its parent, American National Insurance
Company, owned [ ]% and [ ]%, respectively, of the outstanding shares of the
Company; [ ]% and [ ]% respectively of the outstanding shares of the
Government Bond Fund; [ ]% and [ ]%, respectively of the outstanding shares of
the Primary Fund; and [ ]% and [ ]%, respectively of the outstanding shares of
the Tax Free Fund. In addition, SM&R provided the initial capital for the Money
Market Fund, and as of the date of this Prospectus owns 100% of the outstanding
shares of such Fund. Any person who owns directly or indirectly more than 25% of
the outstanding voting securities of the Company or a Fund is presumed by the
Investment Company Act of 1940 to "control" the Company or the Fund, and may be
able to significantly influence the outcome of any shareholder vote. For
purposes of voting on matters submitted to shareholders, any person who owns
more than 50% of the outstanding shares of the Company or a Fund generally would
be able to cast the deciding vote. By virtue of their stock ownership, SM&R and
American National control the Company's operations, including the ability to
make changes in the fundamental investment objectives and restrictions of each
Fund of the Company, as well as the ability to increase investment advisory
fees, notwithstanding other shareholders' votes to the contrary. Holders of
shares of any Fund are entitled to redeem their shares as set forth under "HOW
TO REDEEM."
YEAR 2000 RISKS. Many services provided to the Funds and their shareholders
depend on the smooth functioning of computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated, referred to as the "Year 2000
Problem." The Year 2000 Problem could have a negative impact on handling
securities trades, payment of interest and dividends, pricing, and account
services. Like other mutual funds, financial and business organizations, and
individuals around the world, the Funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and transfer agent) do not properly process and
calculate date-related information and data from and after January 1, 2000. SM&R
is taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by any other service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Funds and their shareholders.
VOTING RIGHTS. Within the respective Funds, all shares have equal voting,
participation and liquidation rights, but have no subscription, preemptive,
conversion, or cumulative voting rights.
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On certain matters, such as the election of directors, all shares of each
Fund vote together, with each share having one vote. On other matters affecting
a particular Fund, such as the Investment Advisory Contract or fundamental
investment policies, only shares of that Fund are entitled to vote, and a
majority of the shares of that Fund are required for approval of the proposal.
On matters affecting a particular Class of a Fund, only shares of that Class of
the Fund are entitled to vote, and a majority of the shares of that Class are
required for approval of the proposal.
SPECIAL PAYMENTS TO BROKER-DEALERS. Broker-dealers or other securities
dealers that have entered into selling agreements with SM&R may receive
compensation from SM&R or an affiliated company in connection with selling
shares of the SM&R Family of Funds. Compensation may include financial
assistance for conferences, shareholder services, automation, sales and training
programs, or promotional activities. Registered representatives and their
families may be paid for travel expenses, including lodging, in connection with
business meetings or seminars. In some cases, this compensation may only be
available to securities dealers whose representatives have sold or are expected
to sell significant amounts of shares. Securities dealers may not use certain
sales to qualify for this compensation if prohibited by the laws of any state or
self-regulatory agency, such as the National Association of Securities Dealers,
Inc.
Securities laws of states in which the Fund offers its shares may differ
from federal law. Banks and financial institutions that sell shares of the Fund
may be required to register as securities dealers pursuant to state law.
For purchases of Class T shares of $500,000 or more, SM&R may pay its
representatives and broker-dealers from its own profits and resources. The
amount (expressed as a per annum percentage of the amount invested) which SM&R
might pay such representatives and broker-dealers is as follows for Class T
shares of the Government Income Fund and Tax Free Fund, respectively: Year
1--[ ]% and [ ]%; Year 2--[ ]% and [ ]%; and Year 3 and subsequent years,
[ ]% (for each Fund).
ADDITIONAL INFORMATION. This Prospectus and the Statement of Additional
Information referred to on the cover page do not contain all the information set
forth in the registration statement, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The omitted information may be obtained from the Commission's principal office
in Washington, D.C., upon payment of the fees prescribed by the Commission.
For further information, shareholders may also contact SM&R, whose address
and phone number are set forth on the cover of this Prospectus.
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APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUS)
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S BOND RATING:
<TABLE>
<S> <C>
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 that 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 like 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, if 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.
</TABLE>
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S BOND RATINGS:
<TABLE>
<S> <C>
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-edge".
Interest payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the long-term
risks appear somewhat greater than in Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
Baa Bonds which are rated "Baa" are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
</TABLE>
DESCRIPTION OF FITCH INVESTORS SERVICE BOND RATINGS:
<TABLE>
<S> <C>
AAA Obligations which have the highest rating assigned by Fitch IBCA on its national
rating scale for that country. This rating is automatically assigned to all
obligations issued or guaranteed by the sovereign state. Capacity for timely
repayment of principal and interest is extremely strong, relative to other obligors
in the same country.
AA Obligations for which capacity for timely repayment of principal and interest is very
strong relative to other obligors in the same country. The risk attached to these
obligations differs only slightly from the country's highest rated debt.
A Obligations for which capacity for timely repayment of principal and interest is
strong relative to other obligors in the same country. However, adverse changes in
business, economic or financial conditions are more likely to affect the capacity for
timely repayment than for obligations in higher rated categories.
BBB Obligations for which capacity for timely repayment of principal and interest is
adequate relative to other obligors in the same country. However, adverse changes in
business, economic or financial conditions are more likely to affect the capacity for
timely repayment than for obligations in higher rated categories.
</TABLE>
MUNICIPAL NOTE RATINGS
DESCRIPTION OF MOODY'S INVESTOR SERVICE INC.'S MUNICIPAL NOTE RATINGS:
<TABLE>
<S> <C>
MIG 1/VMIG 1 This designation denotes best quality. There is present strong protection
by established cash flows, superior liquidity support or demonstrated
broad-based access to the market refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access
for refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly regarded as
required of an investment security is present and although not distinctly
or predominantly speculative, there is specific risk.
</TABLE>
33
<PAGE>
DESCRIPTION OF STANDARD AND POOR'S MUNICIPAL NOTE RATINGS:
Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or less
the ratings below usually will be assigned. Notes maturing beyond three years
will most likely receive a bond rating of the type recited above.
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very
strong capacity to pay debt service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
</TABLE>
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
Commercial paper rated "A" by Standard & Poor's Corporation has the
following characteristics: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is generally rated "A" or better. The issuer
has access to at least two additional channels of borrowing. Basic earnings and
cash flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated as follows:
<TABLE>
<S> <C>
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".
</TABLE>
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
Among the factors considered by Moody's Investors Service, Inc. is assigning
commercial paper ratings are the following: (1) evaluation of the management of
the issuer; (2) economic evaluation of the issuer's industry or industries and
an appraisal of the risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition of the management
of obligations which may be present or may arise as a result of public interest
questions and proportions to meet such obligations. Relative differences in
strength and weakness in respect to these criteria would establish a rating in
one of three classifications; "P-1", "P-2" or "P-3". "P-1" is the highest
commercial paper rating assigned by Moody's Investors Service, Inc. "P-2" is the
second highest of such ratings.
34
<PAGE>
DESCRIPTION OF FITCH INVESTORS SERVICE COMMERCIAL PAPER, MEDIUM-TERM NOTES, AND
MUNICIPAL AND INVESTMENT NOTES.
<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as
having the strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than issues rated "F-1+".
F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for issues
assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have characteristics suggesting that
the degree of assurance for timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below investment grade.
F-5 Weak Credit Quality. Issues assigned this rating have characteristics suggesting a
minimal degree of assurance for timely payment and are vulnerable to near-term
adverse changes in financial and economic conditions.
</TABLE>
DESCRIPTION OF DUFF & PHELP'S TWO HIGHEST COMMERCIAL RATINGS:
Duff & Phelp's commercial paper ratings place emphasis on liquidity,
considering not only cash from operations, but access to alternative sources of
funds, including trade credit, bank lines and capital markets. Relative
differences in strength and weakness is rated by Duff & Phelp's as Duff-1 or
Duff-2; Duff-1 being the highest commercial paper rating and Duff-2 being the
second highest rating.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
Thomson Bankwatch, Inc.'s ratings of United States commercial banks,
thrifts, and non-bank banks, non-United States banks, and broker-dealers are
based upon among other things, five years's financial information and the
issuer's most recent regulatory filings. Relative differences in strength and
weakness are rated by Thomson Bankwatch, Inc.
<TABLE>
<S> <C>
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.
</TABLE>
FEDERAL FUNDS
As used in this Prospectus and in the Fund's Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.
35
<PAGE>
<TABLE>
<S> <C>
Securities Management & Research, Inc. BULK RATE
One Moody Plaza U.S. POSTAGE PAID
Galveston, TX 77550 PERMIT NO. 89
GALVESTON, TEXAS
</TABLE>
- --------------------------------------------------------------------------------
P R O S P E C T U S
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
September , 1998
A Statement of Additional Information dated September , 1998 containing
additional information about the Company was filed with the Securities and
Exchange Commission and is incorporated herein by reference. Additional
information about the Company's investments also is available in the Company's
annual and semi-annual reports to shareholders. In the Company's annual report,
investors will find a discussion of the market conditions and investment
strategies that significantly affected the Company's performance during the last
fiscal year.
The Company's Statement of Additional Information, annual report, and
semi-annual reports are available, without charge, upon request. Investors may
make inquiries, request further information about the Company and the Funds, or
obtain copies of the Statement of Additional Information, annual report, and
semi-annual report, by writing Securities Management and Research, Inc., One
Moody Plaza, 14th Floor, Galveston, Texas 77550, or by calling (Toll Free)
1-800-231-4639 or (Collect) 1-409-763-2767.
Information about the Company and the Funds may be reviewed and copied at
the Securities and Exchange Commission's Public Reference Room in Washington
D.C. Investors 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 Company also are available on the Commission's Internet site at
http://www.sec.gov, and investors 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.
811-6477
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 15, 1998
SM&R INVESTMENTS, INC.
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
One Moody Plaza, 14th Floor Telephone Number: (409) 763-2767
Galveston, Texas 77550 Toll Free 1-(800) 231-4639
This Statement of Additional Information is NOT a prospectus, but should be
read in conjunction with the prospectus or prospectuses dated September 15, 1998
that is relevant to the class or classes of shares of that you wish to purchase
(each such prospectus is referred to herein as a "Prospectus" and collectively
as the "Prospectuses"). A copy of each Prospectus may be obtained from your
registered representative or Securities Management and Research, Inc. ("SM&R"),
One Moody Plaza, 14th Floor, Galveston, Texas 77550 (Telephone No. (409)
763-2767 or Toll Free 1-(800)-231-4639). Terms not defined herein have the same
meaning as given to them in the Prospectuses.
No dealer, sales representative, or other person has been authorized to give
any information or to make any representations other than those contained in
this Statement of Additional Information (and/or the Prospectuses referred to
above), and if given or made, such information or representations must not be
relied upon as having been authorized by the Fund or SM&R. No Prospectus or this
Statement of Additional Information constitutes an offer or solicitation by
anyone in any state in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
THE COMPANY............................................................... 1
INVESTMENT OBJECTIVES AND POLICIES........................................ 1
PORTFOLIO TURNOVER........................................................ 14
MANAGEMENT OF THE COMPANY................................................. 14
REMUNERATION OF DIRECTORS................................................. 17
POLICY REGARDING PERSONAL INVESTING....................................... 18
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES................... 18
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 18
CONTROL AND MANAGEMENT OF SM&R............................................ 18
INVESTMENT ADVISORY AGREEMENT............................................. 19
INVESTMENT ADVISORY FEE................................................... 20
ADMINISTRATIVE SERVICE AGREEMENT.......................................... 20
ADMINISTRATIVE SERVICE FEE................................................ 21
FEE WAIVERS............................................................... 21
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN............................... 22
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION........................... 23
CAPITAL STOCK............................................................. 24
PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED.............. 25
DETERMINATION OF NET ASSET VALUE.......................................... 25
DETERMINATION OF OFFERING PRICE........................................... 27
SPECIAL PURCHASE PLANS.................................................... 29
REDEMPTION................................................................ 33
SYSTEMATIC WITHDRAWAL PLAN................................................ 33
THE UNDERWRITER........................................................... 34
CUSTODIAN................................................................. 35
TRANSFER AGENT AND DIVIDEND PAYING AGENT.................................. 35
COUNSEL................................................................... 35
AUDITORS AND FINANCIAL STATEMENTS......................................... 35
PERFORMANCE AND ADVERTISING DATA.......................................... 36
COMPARISONS............................................................... 39
</TABLE>
ii
<PAGE>
THE COMPANY
SM&R Investments, Inc. (formerly, SM&R Capital Funds, Inc.) (the "Company")
is a diversified, open-end management investment company incorporated under the
laws of Maryland on November 6, 1991.
The Fund consists of four (4) separate series or portfolios, (each, a
"Fund"):
- SM&R Government Bond Fund (formerly, American National Government Income
Fund Series) ("Government Bond Fund");
- SM&R Tax Free Fund (formerly, American National Tax Free Fund Series) (the
"Tax Free Fund");
- SM&R Primary Fund (formerly, American National Primary Fund Series) (the
"Primary Fund"); and
- SM&R Money Market Fund (the "Money Market Fund").
Each Fund is, for investment purposes, considered a separate investment
fund. Each share of capital stock issued with respect to a Fund represents a
pro-rata interest in the assets of that Fund and has no interest in the assets
of any other Fund. Each Fund bears its own liabilities and its proportionate
share of the general liabilities of the Company.
The Government Bond Fund and the Tax Free Fund (the "Multi-Class Funds") are
each divided into six classes of shares of common stock designated as:
- Class T Shares (existing shareholders and certain designated persons);
- Class A Shares (front-end load);
- Class B Shares (back-end load);
- Class C Shares (level load);
- Class J Shares (network);
- Class Y Shares (institutional shareholders).
These classes of shares have different sales charges and distribution and
service ("12b-1") fee structures. Each Class of a Multi-Class Fund bears its own
liabilities and its proportionate share of the general liabilities of that Fund.
A multiple class plan was adopted for the Multi-Class Funds pursuant to Rule
18f-3. The Primary Fund and Money Market Fund do not have separate classes (that
is, they are each a "Single-Class Fund").
The Company is registered under the Investment Company Act of 1940, as
amended (the "1940 Act") as a diversified, open-end management investment
company, commonly called a "mutual fund." This registration does not imply any
supervision by the Securities and Exchange Commission (the "Commission") over
the Company's management or its investment policies or practices.
INVESTMENT OBJECTIVES AND POLICIES
As noted in the Prospectuses under "INVESTMENT OBJECTIVES AND POLICIES,"
each Fund has its own investment objective and follows policies and techniques
designed to achieve those objectives.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following restrictions have been adopted as fundamental policies for
each of the four Funds, which means that they may not be changed without the
approval of shareholders.
Each Fund:
1. With respect to 75% of the Fund's total assets, may not purchase
securities of an issuer (other than cash or cash items, or
securities of the U.S. Government, its agencies, or
instrumentalities or of other investment companies), if (i) such
purchase would cause more
<PAGE>
than 5% of the Fund's total assets taken at market value to be
invested in the securities of such issuer, or (ii) such purchase
would at the time result in more than 10% of the outstanding voting
securities of such issuer being held by the Fund.
2. May not invest 25% or more of its total assets in the securities of
one or more issuers conducting their principal business activities
in the same industry (excluding the U.S. Government or any of its
agencies or instrumentalities).
3. May not borrow money, except (a) the Fund may borrow from banks (as
defined in the Act) or through reverse repurchase agreements in
amounts up to 33 1/3% of its total assets (including the amount
borrowed), (b) the Fund may, to the extent permitted by applicable
law, borrow up to an additional 5% of its total assets for
temporary purposes, (c) the Fund may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
portfolio securities, (d) the Fund may purchase securities on
margin to the extent permitted by applicable law, and (e) the Fund
may engage in transactions in mortgage dollar rolls which are
accounted for as financings.
4. Not make loans, except through (a) the purchase of debt obligations
in accordance with the Fund's investment objective policies, (b)
repurchase agreements with banks, brokers, dealers, and other
financial institutions, and (c) loans of securities as permitted by
applicable law.
5. May not underwrite securities issued by others, except to the
extent that the sale of portfolio securities by the Fund may be
deemed to be an underwriting.
6. May not purchase, hold or deal in real estate, although the Fund
may purchase and sell securities that are secured by real estate or
interests therein, securities of real estate investment trusts, and
mortgage-related securities and may hold and sell real estate
acquired by the Fund as a result of the ownership of securities.
7. May not invest in commodities or commodity contracts, except that
the Fund may invest in currency and financial instruments and
contracts that are commodities or commodity contracts.
8. May not issue senior securities to the extent such issuance would
violate applicable law.
The above investment restrictions are fundamental policies that may be
changed by the Fund only with the approval of a majority of the outstanding
shares of the Fund, as determined by the provisions of the 1940 Act. This means
that shareholders of the Fund must approve any change to the foregoing
restrictions before that change may be effected. Such approval requires the
affirmative vote of the lesser of (i) 67% or more of the voting securities
present at a meeting if the holders of more than 50% of voting securities are
represented at that meeting or (ii) more than 50% of the outstanding voting
securities of the Fund.
NON-FUNDAMENTAL INVESTMENT POLICIES
The Board of Directors of the Company (the "Board") has adopted the
following non-fundamental investment policies. Non-fundamental investment
policies may be adopted or changed by the Board of Directors, without approval
from shareholders.
Each Fund will not:
1. Issue senior securities.
2. May not engage in the strategy of short sales of securities.
2
<PAGE>
3. Purchase securities on margin (but it may obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of securities).
4. Acquire, lease or hold real estate except such as may be necessary
or advisable for the maintenance of its offices.
5. Write or purchase from others, put and call options, or any
combination thereof.
6. Purchase or sell commodities or commodity contracts including
futures contracts.
7. Invest in companies for the purpose of exercising control or
management.
8. Invest in oil, gas or other mineral exploration or development
programs. However, any Fund may invest in securities which are
secured by real estate or real estate mortgages; securities of
issuers which invest or deal in real estate mortgages and
securities of issuers which invest in or sponsor oil, gas, or other
mineral exploration, provided such securities meet the criterion
set forth under "INVESTMENT OBJECTIVES AND POLICIES" in the
Prospectuses.
9. Act as underwriter of securities issued by other persons except
insofar as the Fund may be technically deemed an underwriter under
the federal securities laws in connection with the disposition of
portfolio securities.
10. Borrow money, except for such action by the Fund for temporary or
emergency purposes in an amount not to exceed 10% of the Fund's net
assets.
11. Lend any funds or other assets, except that the Government Bond
Fund may from time to time lend the securities it holds to
qualified broker-dealers or other institutional investors. Such
loans shall not exceed ten percent (10%) of the Government Bond
Fund's net assets at the time of the most recent loan and shall be
made pursuant to written agreements and shall be continuously
secured by collateral in the form of cash, U.S. Government
obligations, or irrevocable standby letters of credit in an amount
equal to at least 102% of the market value at all times of the
loaned securities plus the accrued interest and dividends. During
the time securities are on loan, the Government Bond Fund will
continue to receive the interest and dividends, or amounts
equivalent thereto, on the loaned securities while receiving a fee
from the borrower or earning interest on the investment of the cash
collateral. The right to terminate the loan will be given to either
party subject to appropriate notice. Upon termination of the loan,
the borrower will return to the lender securities identical to the
loaned securities. The Government Bond Fund will not have the right
to vote securities on loan, but would terminate the loan and retain
the right to vote if that were considered important with respect to
the investment.
12. Pledge or mortgage any of its assets, except for such action by the
Fund for temporary or emergency purposes in an amount not to exceed
10% of the Fund's net assets.
13. Invest more than 5% of the value of the net assets of the Fund, at
time of purchase in the securities of any one issuer, but this
limitation does not apply to investments in securities issued or
guaranteed by the U.S. government or its instrumentalities.
14. Purchase any security (other than United States Government
obligations) if, as a result, the Fund would hold more than (a) 10%
of the total value of any class of outstanding securities of an
issuer or (b) 10% of the outstanding voting securities of an
issuer.
3
<PAGE>
15. Concentrate more than 25% of the net assets of the Fund in any one
industry or group of industries; provided however, there is no
limitation with respect to investments in obligations issued or
guaranteed by the United States Government or its agencies or
instrumentalities. For purposes of this restriction, telephone, gas
and electric public utilities are each regarded as separate
industries.
16. Purchase any securities issued by a corporation which has not been
in continuous operation for three years, but such period may
include the operation of a predecessor.
17. Purchase or retain securities of any issuer if any officer or
director of the Company or of its investment manager own
individually more than one-half of one percent ( 1/2 of 1%) of the
securities of that issuer, and collectively the officers and
directors of the Company and investment manager together own more
than 5% of the securities of that issuer.
18. Purchase securities of other investment companies except pursuant
to a plan of merger, consolidation or acquisition of assets
approved by the Company's shareholders.
19. Invest in foreign securities, except that this policy does not
apply to the Government Bond Fund.
20. Purchase warrants.
21. Purchase any security which is an "illiquid security" if more than
15% (10% for the Money Market Fund) of the net assets of the Fund
taken at market value would be invested in such securities.
If a percentage restriction on investment or utilization of assets as set
forth is adhered to at the time an investment is made, a later change in the
percentage resulting from a change in the value or cost of a Fund's assets will
not be considered a violation of the restriction except as provided in 17 above.
INVESTMENT TECHNIQUES
LENDING PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Government Bond Fund may lend its portfolio securities to
broker-dealers and other financial institutions, to a maximum of 10% of the
value of its net assets at the time of the most recent loan. Such loans must be
callable at any time and continuously secured by cash collateral equal at all
times to at least 102% of the market value of the securities loaned, including
accrued interest.
The market value of the securities loaned shall be monitored daily , and the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral. Cash collateral shall
be invested in short-term instruments that are sufficiently liquid to provide
for repayment upon demand (such as bank letters of credit, U.S. Government
Obligations, or other cash equivalents). Cash or instruments collateralizing the
Fund's loans of securities will be segregated and maintained at all times with
SM&R, the Fund's custodian, in an amount at least equal to the current market
value of the loaned securities. The Government Bond Fund will receive amounts
equal to earned income for having made the loan.
The Government Bond Fund will be the beneficial owner of the loaned
securities in that any gain or loss in the market price during the loan inures
to the Government Bond Fund and its shareholders. Thus, when a loan is
terminated, the value of the securities may be more or less than their value at
the beginning of the loan. In determining whether to lend its portfolio
securities to a broker-dealer or other financial institution, the Government
Bond Fund will take into account the creditworthiness of such borrower and will
monitor such creditworthiness on an ongoing basis inasmuch as default by the
other party may cause delays or other collection difficulties. The Government
Bond Fund may pay placing brokers' fees in connection with loans of its
portfolio securities.
4
<PAGE>
In lending its portfolio securities, the Government Bond Fund is subject to
the risk that the borrower may become insolvent on a day on which the loaned
security is rapidly advancing in price. In that event, the borrower may fail to
return the loaned securities while the cash collateral is insufficient to
purchase the full amount of the security loaned, and the borrower would be
unable to furnish additional collateral. The borrower would be liable for any
shortage; but the Government Bond Fund would be an unsecured creditor with
respect to such shortage and might not be able to recover any of it. However,
this risk may be minimized by a careful selection of borrowers and securities to
be lent and by monitoring collateral.
The Government Bond Fund will not lend securities to broker-dealers
affiliated with SM&R. This restriction will not affect the ability of the Fund
to maximize its securities lending opportunities.
U.S. TREASURY SECURITIES. Each Fund 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 Fund may invest in direct or implied
obligations of the U.S. Government, its agencies or instrumentalities ("U.S.
Government Obligations"). These U.S. Government Obligations, including those
that are guaranteed by federal agencies or instrumentalities, may or may not be
backed by the full faith and credit of the United States. Obligations of the
Government National Mortgage Association ("GNMA" or "Ginnie Mae"), the Farmers
Home Administration and the Export-Import Bank are backed by the full faith and
credit of the United States. Securities that are not backed by the full faith
and credit of the United States include, among others, obligations issued by 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") and the United States Postal
Service, each of which has the right to borrow from the United States Treasury
to meet its obligations. In addition, obligations of the Federal Farm Credit
Bank and the Federal Home Loan Bank may be satisfied only by the individual
credit of the issuing agency. Investments in Freddie Mac, and Fannie Mae and
other obligations may include collateralized mortgage obligations ("CMOS") and
real estate mortgage investment conduits issued or guaranteed by such entities.
In the case of U.S. Government Obligations not backed by the full faith and
credit of the United States, the Company 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 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.
MORTGAGE-BACKED U.S. GOVERNMENT OBLIGATIONS. The Government Bond Fund may
invest in mortgage-backed securities issued or guaranteed by U.S. Government
agencies such as GNMA, FNMA or FHLMC and representing undivided ownership
interests 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 Fund'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
mortgagees 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
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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 Fund reinvests the prepaid amounts in other income
producing securities, the yields of which reflect interest rates prevailing at
the time. Therefore, the Government Bond Fund's 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 which have
lower yields than the prepaid mortgage-backed securities. Moreover, prepayments
of mortgages which underlie securities purchased by the Government Bond Fund at
a premium would result in capital losses.
COLLATERALIZED OBLIGATIONS. The Government Bond Fund and the Money Market
Fund each may invest a portion of its assets in collateralized mortgage
obligations or "CMOs" issued or guaranteed by a U.S. Government agency or
instrumentality, such as the FHLMC. A CMO is a debt security issued by a
corporation, trust or custodian, or by a U.S. Government agency or
instrumentality, that is collateralized by a portfolio or pool of mortgages,
mortgage-backed securities or U.S. Government Obligations. The issuer's
obligation to make interest and principal payments is secured by the underlying
pool or portfolio of securities. A variety of types of collateralized
obligations are available currently and others may become available in the
future.
Each of the Government Bond Fund and the Money Market Fund will invest only
in 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.
MUNICIPAL SECURITIES. The Tax Free Fund intends under normal market
conditions to invest at least 80% of its net assets in municipal securities.
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As used in the Prospectuses and this Statement of Additional Information,
the term "municipal securities" means obligations including municipal bonds and
notes and tax exempt commercial paper issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest from
which is, in the opinion of counsel to the issuers of such securities, exempt
from federal income tax. To the extent that an investment in municipal
securities does not run counter to any of the investment policies of the Tax
Free Fund or any of the investment restrictions to which the Tax Free Fund is
subject, the Fund may invest in any combination of the various types of
municipal securities described below which, in the judgment of SM&R, will
contribute to the attainment of the Fund's investment objective. Such
combination of municipal securities may vary from time to time. Discussed below
are the major attributes of the various municipal and other securities in which
the Tax Free Fund may invest.
Municipal Bonds, which meet longer term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.
GENERAL OBLIGATION BONDS--Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith and credit and taxing power for the payment of
principal and interest. The taxes that can be levied for the payment of debt
service may be limited or unlimited as to the rate or amount of special
assessments.
REVENUE BONDS--The principal security for a revenue bond is generally the
net revenues derived from a particular facility, group of facilities, or, in
some cases, the proceeds of a special excise or other specific revenue source.
Revenue bonds are issued to finance a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund whose money may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a state's ability (without obligation)
to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds are, in most cases, revenue bonds and are
issued for or on behalf of public authorities to raise money to finance various
privately operated facilities for business and manufacturing, housing, sports
and pollution control. These bonds are also used to finance public facilities
such as airports, mass transit systems, ports and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facilities user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment. The Tax
Free Fund will purchase Industrial Revenue Development Bonds only to the extent
the interest paid is tax-exempt pursuant to the Tax Reform Act of 1986, which
limited the types of facilities that may be financed with tax-exempt industrial
development and private activity bonds.
Municipal notes generally are used to provide for short-term working capital
needs and generally have maturities of one year or less. Municipal notes
include:
TAX ANTICIPATION NOTES (TANS) - TANS are issued to finance working capital
needs of municipalities and are issued in anticipation of various seasonal tax
revenue, such as income, sales, use and business taxes, and are payable from
these specific future taxes.
REVENUE ANTICIPATION NOTES (RANS) - RANS are in expectation of receipt of
other types of revenue, such as federal revenues available under federal revenue
sharing programs.
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BOND ANTICIPATION NOTES (BANS) - BANS are issued to provide interim
financing until long-term financing can be arranged. In most cases, the
long-term bonds then provide the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES--Construction Loan Notes are sold to provide
construction financing. After successful completion and acceptance, many
projects receive permanent financing through the Federal Housing Administration
under "Fannie Mae" (the Federal National Mortgage Association) or "Ginnie Mae"
(the Government National Mortgage Association).
TAX-EXEMPT COMMERCIAL PAPER (SHORT-TERM DISCOUNT NOTES)--Tax Exempt
Commercial Paper is a short-term obligation with a stated maturity of 365 days
or less. It is issued by state and local governments or their agencies to
finance seasonal working capital needs or as short-term financing in
anticipation of longer-term financing.
VARIABLE OR FLOATING RATE DEMAND NOTES ("VRDNs") are tax-exempt obligations
which contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest upon a short notice period (generally up to 30 days) prior
to specified dates, either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument. The
interest rates are adjustable at intervals ranging from daily to up to six
months to some prevailing market rate for similar investments, such adjustment
formula being calculated to maintain the market value of the VRDN at
approximately the par value of the VRDN upon the adjustment date. The
adjustments are typically based upon the prime rate of a bank or some other
appropriate interest rate adjustment index. The Tax Free Fund will decide which
variable or floating rate demand instruments it will purchase in accordance with
procedures prescribed by the Board to minimize credit risks. Any VRDN must be of
high quality as determined by SM&R and subject to review by the Board with
respect to both its long-term and short-term aspects, except where credit
support for the instrument is provided even in the event of default on the
underlying security, the Fund may rely only on the high quality character of the
short-term aspect of the demand instrument.
Defeased bonds or escrow secured bonds are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of principal
and interest of the advance refunded bond. Escrow secured bonds will often
receive a triple A rating from Moody's and S&P. The Tax Free Fund will purchase
escrow secured bonds without additional insurance only when the escrow is
invested in U.S. government securities backed by the full faith and credit of
the U.S. government.
Insured bonds are secured by the issuer's revenues and also are backed by
insurance policies written by commercial insurance companies. Issuers of
municipal bonds enter into a contractual agreement with an insurance company to
pay the bondholder any principal and interest that is due on a stated maturity
date which has not been paid by the issuer. Once issued, this default insurance
usually extends for the term of the issue and cannot be canceled by the
insurance company. The bondholder who has not received payments for principal or
interest on the stated due dates for the insured bond must notify the insurance
company and surrender any unpaid bonds and coupons for payment of the face
amount of the insured principal and interest. The commercial insurance companies
represent some of the largest and financially strongest insurance companies in
the United States.
Although insured municipal bonds sell at yields lower than they would
without the insurance, they tend to have yields higher than Aaa/AAA-rated
noninsured municipal bonds.
In addition, other types of municipal securities similar to the above
described municipal bonds and municipal notes are, or may become available. For
the purpose of the Company's investment restrictions
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set forth in this Statement of Additional Information, the identification of the
"issuer" of a municipal security which is not a general obligation bond is made
by the adviser on the basis of the characteristics of the obligation, the most
significant of which is the source of funds for the payment of principal and
interest on such security.
RISKS RELATING TO MUNICIPAL SECURITIES. There can be no assurance that the
Tax Free Fund will achieve its investment objective. Yields on municipal
securities are dependent on a variety of factors, including the general
conditions of the money market and the municipal bond market, the size of a
particular offering, the maturity of the obligations and the rating of the
issue. Municipal securities with longer maturities tend to produce higher yields
and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields. The
market prices of municipal securities usually vary, depending upon available
yields. An increase in interest rates will generally reduce the value of
portfolio investments, and a decline in interest rates will generally increase
the value of portfolio investments. The ability of the Fund to achieve its
investment objective is also dependent on the continuing ability of the issuers
of municipal securities in which the Fund invests to meet their obligations for
the payment of interest and principal when due. The ratings of Moody's and
Standard & Poor's represent their opinion as to the quality of municipal
securities which they undertake to rate. Ratings are not absolute standards of
quality; consequently, municipal securities with the same maturity, coupon and
rating may have different yields. There are variations in municipal securities,
both within a particular classification and between classifications, depending
on numerous factors. It should also be pointed out that, unlike other types of
investments, municipal securities have traditionally not been subject to
regulation by, or registration with, the Securities and Exchange Commission,
although there have been proposals which would provide for such regulation in
the future.
The federal bankruptcy statutes relating to the debts of political
subdivisions and authorities of states of the United States provide that, in
certain circumstances, such subdivisions or authorities may be authorized to
initiate bankruptcy proceedings without prior notice to or consent of creditors,
which proceedings could result in material and adverse changes in the rights of
holders of their obligations.
Lawsuits challenging the validity under state constitutions of present
systems of financing public education have been initiated or adjusted in a
number of states, and legislation has been introduced to effect changes in
public school financing in some states. In other instances there have been
lawsuits challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law which could ultimately
affect the validity of those municipal securities or the tax-free nature of the
interest thereon.
TAXABLE SECURITIES. Each Fund, except the Tax Free Fund, invests primarily
in securities the income from which (either in the form of dividends or
interest) is taxable as ordinary income. Under normal market conditions, the Tax
Free Fund invest up to 20% of its net assets in taxable securities, and may
invest a greater percentage of its net assets in taxable securities under
extraordinary circumstances as a temporary defensive measure.
Interest earned on investments in taxable securities may be taxable to
shareholders as ordinary income. Investors should be aware that investments in
taxable securities by the Tax Free Fund are restricted to:
U.S. Government Obligations, which consist of obligations issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. Some of these securities are supported by the full faith
and credit of the U.S. Government; others are supported by the right of the
issuer to borrow from the U.S. Treasury; and the remainder are supported
only by the credit of the instrumentality.
Corporate Debt Securities which at the date of the investment are rated A or
higher by Moody's and Standard & Poor's.
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Commercial Paper which at the date of the investment is rated P-1 by Moody's
or A-1 by S&P or, if not rated, is issued by a company which at the date of
the investment has an outstanding debt issue rated A or higher by Moody's
and Standard & Poor's.
Bank Obligations, which include certificates of deposit, bankers'
acceptances, and other short-term obligations of U.S. banks which at the
date of the investment have a capital, surplus and undivided profits of $1
billion as of the date of their most recently published financial statements
(See Certificate of Deposits below).
REPURCHASE AGREEMENTS. Each Fund may enter into "repurchase agreements"
with banks or with government securities dealers, recognized by the Federal
Reserve Board and which have been approved by the Board, who agree to repurchase
the securities at a predetermined price within a specified time (normally one
day to one week). In these transactions, the securities purchased shall have an
initial total value in excess of the value of the repurchase agreement.
The custodian for a Fund purchasing such repurchase agreement will hold the
securities underlying such repurchase agreement or such securities may be part
of the Federal Reserve Book Entry System. If the seller defaults or becomes
insolvent, the Fund could realize delays, costs or a loss in asserting its
rights to, or in liquidating, the collateral in satisfaction of the seller's
repurchase agreement. The Funds 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 Funds may enter into such repurchase agreements.
Such arrangements permit each Fund to keep all of its assets at work while
retaining flexibility in pursuit of investments of a longer-term nature. No Fund
will purchase repurchase agreements maturing more than seven (7) days after such
purchase.
RATINGS. If the rating of a security purchased by a Fund is subsequently
reduced below the minimum rating required for purchase or a security purchased
by the Fund ceases to be rated, neither event will require the sale of the
security. However, the adviser will consider any such event in determining
whether the Fund should continue to hold the security. Any security held by the
Tax Free Fund which is subsequently downgraded below BBB by S&P or Baa by
Moody's will be sold as soon as it is advantageous to do so after the downgrade.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Government Bond Fund and
Tax Free Fund each 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 at a later date. Normally, the settlement date occurs within one
month of the purchase; during the period between purchase and settlement, no
payment is made by the Fund to the issuer and no interest accrues to the Fund.
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 Fund and Tax Free Fund each 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 Fund missing the
opportunity of obtaining a price or yield considered to be advantageous. When
the Government Bond Fund or Tax Free Fund 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 Fund or Tax Free Fund
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 Fund's or Tax Free Fund's assets which may
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be used to acquire securities on a "when issued" or "delayed delivery" basis. To
the extent either Fund engages in "when issued" and "delayed delivery"
transactions, it will do so for the purpose of acquiring securities for it's
portfolio consistent with the it's investment objective and policies and not for
the purpose of investment leverage.
FOREIGN DEBT SECURITIES. The Government Bond Fund 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 Fund, 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 also 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.
144A SECURITIES AND SECTION 4(2) COMMERCIAL PAPER. If otherwise consistent
with its investment objective and policies, a Fund may purchase securities that
are not registered under the Securities Act of 1933, as amended (the "1933 Act")
but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act, or which were issued under Section 4(2) of the
1933 Act. Any such security will not be considered illiquid so long as it is
determined by the Board, after considering trading activity, availability of
reliable price information and other relevant information, that an adequate
trading market exists for that security. To the extent that, for a period of
time, qualified institutional or other buyers may cease purchasing such
restricted securities, the level of illiquidity of a Fund holding such
securities may increase.
CERTIFICATE OF DEPOSITS AND BANKERS ACCEPTANCES. A certificate of deposit
generally is a short-term, interest-bearing negotiable certificate issued by a
commercial bank or savings and loan association against funds deposited in the
issuing institution. The interest rate may be fixed for the stated term or may
be periodically adjusted prior to the instrument's stated maturity, based upon a
specified market rate. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction to finance the import, export, transfer or storage of
goods. The borrower is liable for payment, as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Most
bankers' acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity.
Savings and loan associations whose certificates of deposit may be purchased
by the Funds are subject to regulation and examination by the Office of Thrift
Supervision. Such certificates of deposit held by a Fund do not benefit
materially from insurance from the Federal Deposit Insurance Corporation.
The Money Market Fund 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.
RISK FACTORS. Obligations of foreign branches of U.S. banks are subject to
somewhat different risks than those of domestic banks. These risks include
foreign economic and political developments, foreign governmental restrictions
which may adversely affect payment of principal and interest on the obligations,
foreign withholding and other taxes on interest income, and difficulties in
obtaining and enforcing a
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judgment against a foreign branch of a domestic bank. In addition, different
risks may result from the fact that foreign branches of U.S. banks and U.S.
branches of foreign banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks. For instance, such
branches may not be subject to the types of requirements imposed on domestic
banks with respect to mandatory reserves, loan limitations, examinations,
accounting, auditing, record keeping and the public availability of information.
Such obligations are not traded on any national securities exchange. While the
Primary Fund does not presently invest in obligations of foreign branches of
United States banks, it may do so in the future. Investments in such obligations
will not be made in excess of 10% of the Primary Fund's total assets and will be
made only when SM&R believes the risks described above are minimal.
MONEY MARKET FUND INVESTMENTS. Pursuant to the 1940 Act, the Money Market
Fund 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 Fund currently does not intend to invest in
unrated securities.
SM&R has the responsibility of determining that each investment by the Money
Market Fund 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 Fund 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 Fund 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 Fund'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 Fund 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
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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 Fund has not invested more than 5% of its
total assets in securities issued by any one issuer; provided, however, that the
Fund 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 Fund 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 Fund 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.
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PORTFOLIO TURNOVER
Portfolio turnover is calculated by dividing the lesser of annual purchases
or sales of portfolio securities by the monthly average of the value of a Fund's
portfolio securities, excluding securities whose maturities at the time of
purchase are one (1) year or less. It is intended that portfolio changes in the
Government Bond Fund and Tax Free Fund 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. (See
"ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES" in the Prospectuses.)
The portfolio turnover rate for years ended August 31, 1998, 1997, and 1996
was [ ], 9.06% and 30.17%, respectively, for the Government Bond Fund and
[ ], 22.15%, and 18.44%, respectively for the Tax Free Fund. The Primary Fund
experienced no portfolio turnover as the majority of securities owned during the
period had maturities of one year or less at the time of acquisition. The Money
Market Fund will not experience portfolio turnover because it invests only in
short-term money market instruments.
A high rate of portfolio turnover involves corresponding greater expenses
than a lower rate. A Fund and its shareholders must bear such higher expenses.
High portfolio turnover also may result in the realization of substantial net
short-term capital gains.
MANAGEMENT OF THE COMPANY
The Board of Directors has the responsibility for the overall management of
the Company, including general supervision and review of its investment
activities. The directors, in turn, elect the officers of the Company who are
responsible for administering day-to-day operations of the Company.
Information about each of the officers and directors of the Company is set
forth below. Unless otherwise indicated, the address of an officer or director
is One Moody Plaza, Galveston, Texas 77550. Directors who are deemed to be
"interested persons" of the Company, as defined in the 1940 Act, are indicated
by an asterisk(*).
<TABLE>
<CAPTION>
POSITIONS HELD
NAME, ADDRESS, AND AGE WITH THE COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- ------------------------------------ ------------------------ ------------------------------------------------
<S> <C> <C>
Ernest S. Barratt, Ph.D.(1) ........ Director Professor and Chief of Psychophysiology Lab-
Age 72 oratory, Department of Psychiatry and Behav-
Department of Psychiatry and ioral Sciences, University of Texas Medical
Behavioral Sciences Branch, a medical school and hospital system,
University of Texas Medical Branch 1981 to present; Director of American National
Galveston, Texas 77550-2777 Investment Accounts, Inc. ("Investment
Accounts"), another investment company advised
by SM&R, 1990 to present.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD
NAME, ADDRESS, AND AGE WITH THE COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- ------------------------------------ ------------------------ ------------------------------------------------
<S> <C> <C>
Michael W. McCroskey* .............. Director and President, Chief Executive Officer, Director and
Age 54 President member of the Executive Committee of SM&R, June
1994 to present; President and Director of the
Company, June 1994 to present; President and
Director of the American National Growth Fund,
Inc., American National Income Fund, Inc., and
Triflex Fund, Inc. (each, an "SM&R Equity
Fund"), each an investment company advised by
SM&R, June 1994 to present; President and
Director of Investment Accounts, June 1994 to
present; Executive Vice President, American
National, 1971 to present; 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, Pacific
Property and Casualty, 1996 to present, life,
health and accident insurance companies in the
American National Family of Companies; Vice
President, Garden State Life Insurance Company,
1994 to present; Director, ANREM Corporation,
1977 to present; President and Director of ANTAC
Corporation, 1995 to present.
Allan W. Matthews*(1) .............. Director Program Officer, The Moody Foundation (a
Age 32 charitable foundation), April, 1991 to present.
7114 Youpon
Galveston, Texas 77551
Lea McLeod Matthews* ............... Director Publications Editor, National Western Life
Age 35 Insurance Co., 1990 to present; Associate in
850 E. Anderson Lane Customer Service Designation; Director of
Austin, Texas 78752-1602 Investment Accounts, (an affiliated mutual fund)
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 present; Consultant to
Austin Writers League.
Ann McLeod Moody*(2) ............... Director Director of Moody Gardens, Inc., 1994 to
Age 60 present; Director of Bank of Galveston, National
5 Colony Park Drive Association, 1989 to present; Director of The
Galveston, Texas 77551 Westcap Corporation, 1990 to present; Director
of Seal Fleet, Inc., 1972 to 1996.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD
NAME, ADDRESS, AND AGE WITH THE COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- ------------------------------------ ------------------------ ------------------------------------------------
<S> <C> <C>
Edwin K. Nolan(1) .................. Director Investor and Attorney, Law Offices, Edwin K.
Age 54 Nolan, P. C., Canyon Lake, Texas, 1977 to
#7 Mt. Lookout Drive present; Director, 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.
Robert V. Shattuck, Jr. ............ Director Attorney, Law Offices of Robert V. Shattuck,
Age 56 Jr., Galveston, Texas, 1986 to present.
1013 23rd Street
Galveston, Texas 77550
Jamie G. Williams .................. Director Academic Language Therapist and Educational
Age 51 Consultant, 1974 to present; Director of The
3328 Stanford Learning Therapist Graduate Certificate Program,
Dallas, Texas 75225 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.
Frank P. Williamson ................ Director Owner of Professional Pharmacy, 1964 to present.
Age 65
200 University Boulevard
Galveston, Texas 77550
Emerson V. Unger, C.L.U. ........... Vice President Vice President SM&R, each SM&R Equity Fund and
Age 52 Investment Accounts since 1983.
Brenda T. Koelemay ................. Vice President and Vice President and Treasurer SM&R, each SM&R
Age 43 Treasurer Equity Fund 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, each SM&R
Age 50 Secretary Equity Fund, and Investment Accounts since 1983.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD
NAME, ADDRESS, AND AGE WITH THE COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- ------------------------------------ ------------------------ ------------------------------------------------
<S> <C> <C>
Vera M. Young ...................... Vice President and Vice President and Portfolio Manager of the
Age 70 Portfolio Manager Primary Fund and member of the Fixed Income
Investment Committee of SM&R since 1987;
Portfolio Manager of the Money Market Fund since
September 1998; Portfolio Manager of Money
Market Portfolio of Investment Accounts since
1987; Assistant Vice President, Securities,
American National since 1985.
Terry E. Frank ..................... Vice President and Vice President and Portfolio Manager of the
Age 43 Portfolio Manager Government Bond Fund and the Tax Free Fund and
One Moody Plaza, member of the Fixed Income Investment Committee
Galveston, Texas of SM&R since 1991; research analyst, Equitable
Investment Services, Des Moines, Iowa from 1989
to 1991; Former securities analyst, Gibraltar
Savings Association, Houston, Texas; Former
Senior Money Market Trader, American Capital
Asset Management, Houston, Texas.
</TABLE>
- ------------------------
* "Interested persons" as defined by the 1940 Act.
(1) Member of the Company's audit committee.
(2) Mr. Matthews and Ms. Matthews are children of Mrs. Ann Moody.
REMUNERATION OF DIRECTORS
Each director is reimbursed for expenses incurred in connection with each
meeting of the Board of Directors or any Committee meeting attended. Each
director receives a fee, allocated among the Fund, which consists of an annual
retainer component and a meeting fee component.
Set forth below is information regarding compensation paid or accrued during
the fiscal year ended August 31, 1998 for each director of the Company.
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM ALL AMERICAN
DIRECTOR FROM COMPANY NATIONAL FUNDS
- ---------------------------------------------------------- ------------- ------------------
<S> <C> <C>
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....................................... $ [ ] $ [ ]
</TABLE>
17
<PAGE>
Directors of the Company who are affiliated with SM&R receive no
compensation for attendance at Board or committee meetings. Officers and
directors of the Company affiliated with SM&R may, however, receive indirect
compensation from the Company to the extent the Company pays underwriting
commissions and investment advisory and service fees to SM&R. During the year
ended August 31, 1998, the Company paid or accrued approximately $[ ] to
directors for fees and expenses in attending meetings of the Board. There were 5
Board meetings and no Committee meetings held during this period, and each
director attended at least 75% of the Board and Committee meetings,
respectively.
POLICY REGARDING PERSONAL INVESTING
The following policies have been made a part of the Company's Code of
Ethics.
A portfolio manager must use extreme care to avoid even the appearance of a
conflict of interest in trading in any personal account (or an account in which
he has a beneficial interest). Accordingly, a portfolio manager may not trade in
(or otherwise acquire) any security for his personal account if that same
security is held in, or is being considered as a potential acquisition by, any
of the Funds. Any beneficial interest in a security held by a portfolio manager
must be sold at least 24 hours prior to any investment by the Funds. The
following exceptions apply: (1) Any beneficial interest in a security owned at
the time of employment may be held or traded at any time other than within 24
hours of a trade in the Funds for the same or related security. Dividends in
that security may be re-invested in accordance with a formal plan offered by the
issuer; (2) Any beneficial interest in a security acquired by devise or bequeath
may be held or traded at any time other than within 24 hours of a trade in the
Funds for the same or related security; (3) Any beneficial interest in a
security issued by the Government or any Agency of the United States, a State,
or any political subdivision thereof may be traded or held; and (4) Any
beneficial interest in a security for which a written approval is first obtained
from the President & CEO may be traded or held.
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES
Officers and employees of the Company other than portfolio managers may
trade in (or otherwise acquire) or hold any security for his own account (or an
account in which he has beneficial interest). However, the trade must not occur
within 24 hours of a trade in the Funds for the same or related security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of September , 1998, the officers and directors of the Company as a
group owned less than 1% the outstanding shares of the Company and of each Fund.
As of September , 1998 and SM&R owned [ ]% and [ ] of the outstanding
shares of the Company, respectively. See the "Control and Management of SM&R"
below.
American National Insurance Company ("American National"), and American
National and SM&R acting together, are deemed to be "control persons" (as that
term is defined in the 1940 Act) of the Company and may be able to significantly
influence the outcome of any shareholder vote.
CONTROL AND MANAGEMENT OF SM&R
SM&R has been the investment adviser, manager and underwriter of the Company
since the Company began business in 1992. SM&R acts pursuant to a written
agreement periodically approved by the directors or shareholders of the
Company.SM&R is also the investment adviser and underwriter of the SM&R Equity
Funds and Investment Accounts. SM&R's address is that of the Company.
SM&R is a wholly-owned subsidiary of American National, a Texas life
insurance company with its principal offices in Galveston, Texas. As of
September , 1998, the Moody Foundation (the "Foundation"), a charitable
foundation established for charitable and educational purposes, owned
approximately
18
<PAGE>
[ ]% of American National's common stock and the Libbie S. Moody Trust, a
private trust, owned approximately [ ]% of such shares. The trustees of the
Moody Foundation are Robert L. Moody ("RLM"), Chairman of the Board of Directors
of American National, Frances Moody Newman and Ross R. Moody. SM&R was
incorporated in 1964 and has managed investment companies since 1966. SM&R also
is investment adviser to the SM&R Equity Funds, which are three other registered
investment companies, Investment Accounts, which is an investment company used
to fund benefits under contracts issued by American National and for The Moody
National Bank of Galveston (the "Bank"), a national bank. SM&R does and may,
from time to time, serve as investment adviser to other clients including
employee benefit plans, other investment companies, banks, foundations and
endowment funds.
The Bank is trustee of the Libbie S. Moody Trust. RLM is Chairman of the
Board and President, Chief Executive Officer of the Bank, President and Director
of Moody Bancshares, Inc. ("Bancshares"), the sole shareholder of Moody Bank
Holding Company, Inc. ("MBHC"), and President and Director of MBHC, the Bank's
controlling shareholder. As of September , 1998, the Three R Trusts, trusts
established by RLM for the benefit of his children, owned 100% of Bancshares'
Class B stock (which elects a majority of Bancshares' and MBHC's directors) and
[ ]% of its Class A Stock. The trustee of the Three R Trusts is Irwin M. Herz,
Jr., who is also a director of American National and a partner in Greer, Herz &
Adams, L.L.P., 18th Floor, One Moody Plaza, Galveston, Texas, General Counsel to
American National, the Bank, Bancshares, MBHC, the Company, the other American
National Funds, Investment Accounts and SM&R.
Michael W. McCroskey, President and Director of the Company, 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
Investment Accounts; Emerson V. Unger, Vice President of the Company, is also
Vice President of SM&R and Vice President of the SM&R Equity Funds and the
American National Investment Accounts, Inc.; Teresa E. Axelson, Vice President,
Secretary of the Company, is also Vice President and Secretary of SM&R, the
American National Investment Accounts, Inc., and the SM&R Equity Funds; Brenda
T. Koelemay, Vice President and Treasurer of the Company, is also Vice President
and Treasurer of SM&R, the American National Investment Accounts, Inc. and the
SM&R Equity Funds; Vera M. Young, Vice President and Portfolio Manager of the
Primary Fund and Money Market Fund is also Vice President and Portfolio Manager
of the Money Market Portfolio of the American National Investment Accounts,
Inc., and a member of the Fixed Income Investment Committee of SM&R and is
affiliated with American National as Assistant Vice President, Securities
Investment; and Terry E. Frank is Vice President and Portfolio Manager of the
Government Bond Fund and Tax Free Fund and a member of the Fixed Income
Investment Committee.
INVESTMENT ADVISORY AGREEMENT
Under Investment Advisory Agreements (each, an "Advisory Agreement") between
the Company and SM&R dated February 19, 1992 for the Government Bond Fund and
Primary Fund, July 1, 1993 for the Tax Free Fund, and August [ ], 1998 for the
Money Market Fund, SM&R acts as investment adviser for and provides certain
investment-related administrative services to the Funds.
As investment adviser, SM&R manages the investment and reinvestment of the
Company'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 Company investment programs.
All investments are reviewed quarterly by the Board to determine whether or not
such investments are within the policies, objectives and restrictions of the
Company.
Each Advisory Agreement continues in effect from year to year with respect
to a Fund so long as such continuance is specifically approved at least annually
by the Board or by a vote of majority of the outstanding voting securities of
the Fund, and in either case by the specific approval of a majority of the
directors who are not parties to such Agreement or "interested persons" (as such
term is defined in the
19
<PAGE>
1940 Act) of any such parties, cast in person at a meeting called for the
purpose of voting on such approval. Each Advisory Agreement may be terminated
with respect to a Fund at any time, without the payment of any penalty, by vote
of the Board or by vote of the holders of a majority of the outstanding voting
securities of the Fund, or by SM&R, upon 60 days written notice to the other
party. Each Advisory Agreement terminates automatically in the event of its
assignment, as such term is defined in the 1940 Act.
INVESTMENT ADVISORY FEE
Under its Advisory Agreements with the Company, SM&R receives the following
investment advisory fees:
Government Bond Fund and Tax Free Fund - A monthly investment advisory fee
computed by applying to the average daily net asset value of the Government Bond
Fund and the Tax Free Fund each month one-twelfth (1/12th) of the annual rate as
follows:
<TABLE>
<CAPTION>
INVESTMENT
ON THE PORTION OF EACH FUND'S ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- -------------------------------------------------------------------------- ------------------
<S> <C>
Not exceeding $100,000,000 .50 of 1%
Exceeding $100,000,000 but not exceeding $300,000,000 .45 of 1%
Exceeding $300,000,000 .40 of 1%
</TABLE>
Primary Fund and Money Market Fund - An investment advisory fee, computed
and paid monthly, at the annual rate of 0.50 of 1% of the Money Market Fund's
and the Primary Fund's average daily net asset value.
For the years ended August 31, 1998, 1997, and 1996, SM&R received
investment advisory fees from each Fund (except the Money Market Fund) As
follows: [ ], $113,231, and $106,126, respectively, from the Government Bond
Fund; [ ], $50,224 and $45,881, respectively, from the Tax Free Fund and [ ],
$176,167 and $126,371 respectively, from the Primary Fund. SM&R received no fees
from the Money Market Fund during these periods because that Fund had not
commenced operations prior to September 1998. For these periods, SM&R received
total fees from the Company of [ ], $339,622, and $278,378, respectively.
ADMINISTRATIVE SERVICE AGREEMENT
Under an Administrative Service Agreement between the Company and SM&R dated
July 1, 1993, as amended on , 1998 (the "Administrative Agreement"), SM&R
provides all non-investment related management, executive, administrative and
operational services to the Company. Pursuant to the Administrative Agreement,
SM&R also acts as transfer agent for the Funds' authorized and issued shares and
as dividend disbursing agent.
In its capacity as administrator under the Administrative 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
Company. SM&R's duties as administrator include, among other things:
administering the Company's 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 the Company.
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.
20
<PAGE>
EXPENSES BORNE BY THE COMPANY
Pursuant to the Administrative Agreement, the Company pays other Company
expenses, such as such as interest, taxes, commissions and other expenses
incidental to portfolio transactions, Securities and Exchange Commission fees,
Service Fees, Distribution Fees, fees of the Custodian (See "The Custodian"
herein), auditing and legal expenses, fees and expenses of qualifying Company
shares for sale and maintaining such qualifications under the various state
securities laws where Company shares are offered for sale, fees and expenses of
directors not affiliated with SM&R, costs of maintaining corporate existence,
costs of printing and mailing prospectuses and shareholder reports to existing
shareholders and expenses of shareholders' meetings.
ADMINISTRATIVE SERVICE FEE
Under the Administrative Agreement, SM&R receives a management and
administrative service fee from each Fund which is computed by applying to the
aggregate average daily net asset value of each Fund, each month one-twelfth
(1/12th) of the annual rate as follows:
<TABLE>
<CAPTION>
ADMINISTRATIVE
ON THE PORTION OF EACH FUND'S SERVICE
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ------------------------------------------------------------------------ --------------------
<S> <C>
Not exceeding $100,000,000 .25 of 1%
Exceeding $100,000,000 but not exceeding $200,000,000 .25 of 1%
Exceeding $200,000,000 but not exceeding $300,000,000 .15 of 1%
Exceeding $300,000,000 .10 of 1%
</TABLE>
Under the Administrative Agreement with the Company, SM&R has agreed to pay
(or to reimburse each Fund for) each Fund's expenses (including the advisory fee
and administrative service fee, if any, paid to SM&R, and any other fees
allocated to all classes of shares of a Fund based on average daily net assets,
but exclusive of interest, taxes, the Service Fee, the Distribution Fee,
commissions and other expenses incidental to portfolio transactions and any
other class-specific expenses) in excess of 1.25% per year of such Fund's (0.35%
for the Money Market Fund) average daily net assets.
FEE WAIVERS
In order to improve the yield and total return of a Fund, SM&R may, from
time to time, voluntarily waive or reduce all or any portion of its advisory
fee, administrative fee and/or assume certain or all expenses of that Fund while
retaining its ability to be reimbursed for such fees prior to the end of the
fiscal year. SM&R may rescind fee waivers and/or reductions, other than those
stated in the Administrative Agreement, at any time without notice to investors.
SM&R has voluntarily agreed to waive the advisory fee for the Tax Free Fund and
reimburse expenses incurred by the Government Bond and Primary Funds to the
extent that total expenses exceed average daily net assets as follows: Primary
Fund - 0.80% and the Government Bond Fund -1.00%.
During the years ended August 31, 1998, 1997, and 1996, SM&R reimbursed the
Company a total of [ ], $162,949 and $237,833, respectively for expenses of
the Funds in excess of the expense limitation and/or any undertaking then in
existence. SM&R reimbursed expenses for each Fund during these periods as
follows: [ ], $15,547, and $43,795, respectively, for the Government Bond
Fund; $[ ], $73,202 and $107,943, respectively for the Tax Free Fund; and
$[ ], $74,200 and $86,095, respectively, for the Primary Fund. During these
periods, the Money Market Fund had not yet commenced operations.
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 years ended August 31, 1998, 1997, and 1996, SM&R
received administrative service fees from the Company of [ ], $169,811
and $139,189, respectively. SM&R received administrative service fees for each
Fund during these periods as follows: $[ ], $56,616 and $53,063,
respectively, for the Government Bond
21
<PAGE>
Fund; $[ ], $50,224, and $22,940, respectively for the Tax Free Fund; and
$[ ], $176,167, and $63,186, respectively, for the Primary Fund.
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN
The Company adopted a Distribution and Shareholder Servicing Plan (the
"12b-1 Plan") pursuant to Rule 12b-1 under the 1940 Act for the Class A, Class
B, Class C, and Class J shares of the Government Bond Fund and the Tax Free Fund
(as defined above, the "Multi-Class Funds"). The 12b-1 Plan provides that SM&R
will provide distribution and/or shareholder services to the Class A, Class B,
and Class C shares of the Multi-Class Funds (the "12b-1 Classes").
For each 12b-1 Class, SM&R is entitled to receive a Distribution Fee and/or
Service Fee, as applicable, computed as an annual percentage of the value of the
average daily net assets of the Multi-Class Fund attributable to that Class, as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION TOTAL 12b-1
CLASS FEE SERVICE FEE FEE
- ------------------------------------------------------------------------------- --------------- ----------- -------------
<S> <C> <C> <C>
Class T Shares: Existing Shareholders.......................................... -0- -0- -0-
Class A Shares: Front-End Load................................................. -0- .25% 0.25%
Class B Shares: Back-End Load (CDSC)........................................... .50% .25% 0.75%
Class C Shares: Level Load..................................................... .75% .25% 1.00%
Class J Shares: Network........................................................ .75% -0- 0.75%
Class Y Shares: Institutional.................................................. -0- -0- -0-
</TABLE>
- ------------------------
(1) The Distribution Fee and/or Service Fee, as applicable, to be paid under the
12b-1 Plan will be calculated daily (as a percentage of average daily net
assets) and paid periodically.
The purpose of the Distribution Fee is to compensate SM&R, or enable SM&R to
compensate other persons, including any distributor of shares of the 12b-1
Classes, for services that are primarily intended to result in or primarily
attributable to the sale of the 12b-1 Classes ("Selling Services"). The purpose
of the Service Fee is to compensate SM&R, or enable SM&R to compensate other
persons, for providing ongoing servicing to shareholders of the Funds
("Shareholder Services").
"Selling Services" include the training and supervision of sales personnel;
advertising, marketing, and other promotional expenses, including the costs of
preparing and printing sales literature; printing prospectuses and statements of
additional information and distributing them to prospective investors in 12b-1
Classes; and distributing shares of the 12b-1 Classes. Payments for Selling
Services may include payment for overhead and other office expenses that are
related to the distribution of the 12b-1 Classes. SM&R also may reimburse the
expenses of persons who provide support services in connection with the
distribution of the 12b-1 Classes, and may make payments to financial
intermediaries that sell shares of the 12b-1 Classes. "Shareholder Services"
include all forms of shareholder liaison services that SM&R deems appropriate,
including maintaining shareholder accounts, providing shareholder liaison
services, responding to customer inquiries, and providing shareholders with
information on their investments and about the 12b-1 Classes.
The 12b-1 Plan, and any related agreement, continues in effect with respect
to a 12b-1 Class only if such continuance is specifically approved at least
annually by either the Board or the shareholders of that 12b-1 Class and, in
either case, by a majority vote of those directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of this Plan or in such agreement (the "Independent Directors"), cast
in person at a meeting called for the purpose of voting on this Plan and/or the
related agreement. The 12b-1 Plan may be terminated with respect to any 12b-1
Class at any time, by vote of a majority of the Independent Directors or by a
vote of a majority of the outstanding voting securities of the relevant Class.
22
<PAGE>
Any distribution and shareholder services agreement related to the 12b-1
Plan terminates automatically upon its assignment. Moreover, with respect to
each 12b-1 Class of a Multi-Class Fund, any distribution and shareholder
services agreement related to that 12b-1 Class may be terminated at any time,
without the payment of any penalty, (1) by the Board or by a vote of the 12b-1
Class' outstanding shareholders, on 60 days written notice to SM&R, or (2) by
SM&R, on 60 days written notice to the Company.
The 12b-1 Plan provides that it may not be amended with respect to any 12b-1
Class of a Multi-Class Fund to increase materially the amount of the fees
described in such Plan without approval of the shareholders of the relevant
Class. All material amendments to the Plan also must be approved by the Board in
the manner described above and in the 12b-1 Plan.
In each year during which this Plan remains in effect with respect to a
12b-1 Class, SM&R (and any other person authorized to direct the disposition of
monies paid or payable by the relevant Fund pursuant to the Plan or any related
agreement) will prepare and furnish to the Board, and the Board will review, at
least quarterly, written reports complying with the requirements of Rule 12b-1,
which set out the amounts expended under this Plan and the purposes for which
those expenditures were made. The obligations of the Company and each Fund under
the 12b-1 Plan will not be binding upon any of the directors, shareholders,
nominees, officers, employees or agents, whether past, present or future, of the
Company, individually, but are binding only upon the assets and property of the
Company and the relevant Funds or Funds, as provided in the Company's Articles
of Incorporation.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
SM&R, which supervises the Company's investments, is responsible for
effecting portfolio transactions through eligible securities brokers and
dealers, subject to the general supervision of the Company's Board of Directors.
Investment decisions are made by an Investment Committee of SM&R, and orders are
placed by persons supervised by that committee.
There is no arrangement or intention to place orders with any specific
broker or group of brokers. The paramount factors considered by SM&R in placing
orders are efficiency in the execution of orders and obtaining the most
favorable prices for the Company 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 continuously
evaluates the brokerage fees paid by each Fund to any affiliated person by
comparing such fees to those paid by other investment companies for similar
transactions as reported in various industry surveys.
Whenever the primary consideration of best price and best execution is met
to the satisfaction of SM&R, the brokers and dealers selected will include those
who provide supplementary statistical and research services. Such research
services include advice as to the advisability of investing in, purchasing or
selling securities, as well as analyses and reports concerning securities,
economic factors and trends. While SM&R is able to fulfill its obligation to the
Company 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, Investment
Accounts and to American National and its other accounts.
SM&R will authorize each Fund to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another
broker-dealer would have charged only if it determines in good faith that such
amount of commission is reasonable in relation to the value of the brokerage and
research services provided by such broker-dealer. Generally, the Funds pay
higher than the lowest commission rates available.
23
<PAGE>
During the years ended August 31, 1998, 1997, and 1996, the Company paid no
brokerage fees for transactions in portfolio securities. No brokerage
commissions have been paid during the period to any broker which is an
affiliated person of the Company, which is an affiliated person of a broker
which is an affiliated person of the Company or an affiliated person of which is
an affiliated person of the Company or SM&R.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, and subject to seeking the best price and execution, the
Company may give consideration to sales of shares of the Company as a factor in
the selection of brokers and dealers to execute Company portfolio transactions.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients managed by SM&R are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by SM&R,
taking into account the respective sizes of the Fund and such other investment
companies and clients and the amount of securities to be purchased or sold.
The Board has determined that such ability to effect simultaneous
transactions may be in the best interests of each Fund. It is recognized that in
some cases these practices could have a detrimental effect upon the price and
volume of securities being bought and sold by each Fund, while in other cases
these practices could produce better executions.
CAPITAL STOCK
The Company's authorized capital stock consists of Six Billion
(6,000,000,000) shares of common stock with a par value of $0.01 per share,
issuable in separate series. Currently four such series have been established -
the Government Bond Fund, the Tax Free Fund, the Primary Fund and the Money
Market Fund. All shares are equal with respect to distributions from income and
capital gains. There are no conversion, pre-emptive or other subscription
rights. In the event of liquidation, each share is entitled to an equal portion
of all the Company's assets after all debts and expenses have been paid.
Each share is entitled to one vote, and the Company's shares have
non-cumulative voting rights with respect to election of directors. This 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.
Prior to the Company's offering of any shares to investors, SM&R provided
the Company with initial capital by purchasing 100,000 shares of the Primary
Fund at a purchase price of $1.00 per share and 10,000 shares of the Government
Bond Fund at a purchase price of $10.00 per share. In addition, SM&R purchased
an additional 190,000 shares of the Government Bond Fund at a purchase price of
$10.00 per share, and American National purchased 400,000 shares of the
Government Bond Fund at a price of $10.00 per share. Such additional shares of
the Government Bond Fund were acquired by SM&R and American National in
connection with the formation of the Company, were acquired for investment and
can be disposed of only by redemption.
The Tax Free Fund initial capital was provided by SM&R through the purchase
of 10,000 shares at a price of $10.00 per share. In addition, SM&R purchased an
additional 90,000 shares and American National purchased 500,000 shares at a
price of $10.00 per share. These additional shares were acquired by SM&R and
American National in connection with the formation of the Fund for investment
and can only be disposed of by redemption.
SM&R provided the initial capital to the Money Market Fund by purchasing
[ ] shares of that Fund at $1.00 per share.
24
<PAGE>
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 Fund are large enough
that such redemption will not have a material adverse effect upon investment
performance.
PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED
Certificates representing shares purchased are not ordinarily issued in an
effort to minimize the risk of loss or theft. Most investors do not choose to
receive certificates for their shares as this eliminates the problem of
safekeeping and facilitates redemptions and transfers. However, a confirmation
will be sent to the investor promptly after each share purchase. The investor
will have the same ownership rights with respect to shares purchased as if
certificates had been issued. Investors may receive a certificate representing
shares by making written request to SM&R. If a certificate is requested, it will
normally be forwarded to the investor within 14 days after receipt of the
request. SM&R reserves the right to charge a small administrative fee for
issuance of any certificates. Certificates will not be issued for fractional
shares (although fractional shares remain in your account on the books of each
Fund).
All purchases must be in (or payable in) U.S. dollars. All checks must be
drawn in U.S. dollars on a U.S. bank. Investors will be subject to a service
charge on dishonored checks. The Company reserves the right to reject any order
for the purchase of its shares when in the judgment of management such rejection
is in the best interests of the Company.
DETERMINATION OF NET ASSET VALUE
GOVERNMENT BOND FUND AND TAX FREE FUND
The net asset value per share of each of the Government Bond and Tax Free
Fund's shares is determined by adding the market value of its portfolio
securities and other assets, subtracting liabilities, and dividing the result by
the number of the relevant Fund's shares outstanding. Expenses and fees of each
such Fund, including the advisory fee and the expense limitation reimbursement,
if any, are accrued daily and taken into account in determining net asset value.
The portfolio securities of the Company are valued as of the close of trading on
each day when the New York Stock Exchange is open for trading other than
customary national business holidays and SM&R's business holidays, as described
in the Prospectuses . Securities listed on national securities exchanges are
valued at the last sales price on such day, or if there is no sale, then at the
closing bid price therefor on such day on such exchange. The value of unlisted
securities is determined on the basis of the latest bid prices therefor on such
day. Debt obligations that are issued or guaranteed by the U.S. Government, its
agencies, authorities, and instrumentalities are valued on the basis of prices
provided by an independent pricing service. Prices provided by the pricing
service may be determined without exclusive reliance on quoted prices, and may
reflect appropriate factors such as yield, type of issue, coupon rate, maturity
and seasoning differential. Securities in corporate short-term notes are valued
at cost plus amortized discount, which approximates market value. 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 on a consistent basis.
PRIMARY FUND
The net asset value per share of the Primary Fund is determined by adding
the market value of its portfolio securities and other assets, subtracting
liabilities, and dividing the result by the number of such Fund's shares
outstanding. Expenses of the Primary Fund, if any, are accrued daily and taken
into account in determining the net asset value. The portfolio securities of the
Primary Fund are valued as of 3:00 p.m. Central Time on each business day and on
any other day in which there is a sufficient degree of trading in such Fund's
investment securities that the current net asset value of such Fund shares might
be materially affected by changes in the value of its portfolio of investment
securities, other than customary national business holidays and SM&R's business
holidays. Securities listed on national exchanges are valued at the
25
<PAGE>
last sales price on such day, or if there is no sale, then at the closing bid
price therefor on such day on such exchange. The value of unlisted securities is
determined on the basis of the latest bid prices therefor on such day.
Securities in corporate short-term notes are valued at cost plus amortized
discount, which approximates market value. If no quotations are available for a
security or other property, it is valued at fair value as determined in good
faith by the Board of Directors of the Company on a consistent basis.
Securities subject to floating or variable interest rates with demand
features in compliance with applicable Rules of the Securities and Exchange
Commission may have stated maturities in excess of one year.
MONEY MARKET FUND
The Money Market Fund values all of its securities using the amortized cost
valuation method, which does not take into account unrealized capital gains or
losses. This involves valuing an instrument 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 value of the instrument.
The other Funds use the amortized cost method only for valuing debt securities
having maturities of 60 days or less. Debt securities with maturities in excess
of 60 days are valued on the basis of prices provided by a independent pricing
service or brokers.
During periods of declining interest rates, the daily yield on shares of the
Money Market Fund 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 Fund results in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Fund 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 Fund would receive less investment income. The
converse would apply in a period of rising interest rates.
The valuation of the Money Market Fund's instruments based upon amortized
cost is subject to the Fund's adherence to certain conditions with respect to
its operation. The Fund must maintain a dollar-weighted average portfolio
maturity of 90 days or less, purchase instruments having a remaining maturity of
one year or less, and invest only in securities that the Board determines to be
of high quality with minimal credit risks.
Pursuant to the rules of the Securities and Exchange Commission, the Money
Market Fund follows procedures established by the Board that are designed to
stabilize, to the extent reasonably possible, the Money Market Fund's net asset
value at $1.00 per share. There can be no assurance that the Money Market Fund
will at all times be to maintain a continuous $1.00 net asset value per share.
These procedures include a review of the extent of any deviation of net asset
value per share as a result of fluctuating interest rates, based on available
market rates, from the Fund's $1.00 per share amortized cost price per share.
Should that deviation exceed 1/2 of 1%, the Board will consider whether any
action shall be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Where the Board believes the extent of any
deviation from the Fund's $1.00 amortized cost price per share may result in
material dilution or other unfair results to investors or existing shareholders,
it shall cause the Money Market Fund to take such action as it deems appropriate
to eliminate or to reduce to extent reasonably practicable such dilution or
unfair results, which may include: redeeming of shares in kind; selling
portfolio instruments prior to maturity to realize capital gains or losses;
shortening the Fund's average maturity; or withholding dividends.
26
<PAGE>
DETERMINATION OF OFFERING PRICE
GOVERNMENT BOND FUND AND TAX FREE FUND
Shares of the Money Market Fund and the Primary Fund are offered at net
asset value without the imposition of any sales charge on purchases or
redemptions. Full and fractional shares of the Government Bond Fund and Tax Free
Fund are purchased at the offering price, which is the net asset value next
determined after receipt of a purchase plus any applicable sales charge. The
sales charge is a percentage of the net asset value per share and will vary as
shown below. Purchases received by SM&R at its office in Galveston, Texas prior
to 3:00 p.m., Central Time, will be executed at the applicable offering price
determined on that day. Purchases received thereafter will be executed at the
offering price determined on the next business day.
CLASS T SHARES (EXISTING SHAREHOLDERS)
The offering price of the Class T Shares of the Government Bond Fund and Tax
Free Fund is the net asset value per share plus a sales charge computed at the
rates set forth in the following table: Class T shares are subject to an initial
sales charge of up to 4.5% of the public offering price. Certain purchasers of
Class T shares may qualify for a reduction or waiver of initial sales charges,
as set forth in the chart below and under "Special Purchase Plans" below and
"Reduction and/or Waiver of Initial Sales Charges" in the Prospectuses. If you
invest $500,000 or more in Class T shares, there is no initial sales charge.
The offering price of Class T shares is the next determined net asset value
plus a sales charge, if applicable, (expressed as a percentage of the offering
price) shown in the following table:
<TABLE>
<CAPTION>
DISCOUNT TO SELECTED
SALES CHARGE AS A SALES CHARGE AS A DEALERS AS A
PERCENTAGE OF PERCENTAGE OF NET PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE*
- ---------------------------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
Less than $100,000...................... 4.5% 4.7% 4.0%
$100,000 but less than $250,000......... 3.5% 3.6% 3.0%
$250,000 but less than $500,000......... 2.5% 2.6% 2.0%
$500,000 and over....................... None None None
</TABLE>
- ------------------------
* For Class T shares (as well as for shares of the Primary and Money Market
Funds), SM&R may, in certain circumstances, provide compensation (from its
own profits and resources) to broker-dealers in addition to these discounts.
CLASS A SHARES (FRONT-END LOAD)
Class A shares are subject to an initial sales charge of up to 4.75% of the
public offering price and an annual 12b-1 fee of 0.25% of the average daily net
assets of the Class A shares. Certain purchasers of Class A shares may qualify
for a reduction or waiver of initial sales charges, as set forth in the chart
below and under "Special Purchase Plans" below and "Reduction and/or Waiver of
Initial Sales Charges" in the Prospectuses. If you invest $1 million or more in
Class A shares, there is no initial sales charge, but such shares will be
subject to a contingent deferred sales charge ("CDSC") of 1.00% of the offering
price on redemptions within 13 months of purchase.
27
<PAGE>
The offering price of Class A shares is the next determined net asset value
plus a sales charge (expressed as a percentage of the offering price) shown in
the following table:
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS SALES CHARGE AS A SELECTED DEALERS AS
A PERCENTAGE OF PERCENTAGE OF NET A PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE*
- ---------------------------------------- ---------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $50,000....................... 4.75% [ ] 3.75%
$50,000 but less than $100,000.......... 4.5% 4.7% 4.0%
$100,000 but less than $250,000......... 3.5% 3.6% 3.0%
$250,000 but less than $500,000......... 2.5% 2.6% 2.0%
$500,000 but less than $100,000,000..... 1.5% [ ] 1.00%
$1,000,000 and over*.................... None** None None
</TABLE>
- ------------------------
* For Class A shares (as well as for shares of the Primary and Money Market
Funds), SM&R may, in certain circumstances, provide compensation (from its
own profits and resources) to broker-dealers in addition to these discounts.
** Subject to a CDSC of 1.00% on shares redeemed within 13 months of purchase.
CLASS B SHARES (BACK-END LOAD)
An investor pays no initial sales charge upon the purchase of Class B
shares, but such shares are subject to a CDSC that declines from 3.00% to zero,
calculated as a percentage of the amount invested, imposed on certain
redemptions made within four years of purchase. Class B shares are subject to an
annual 12b-1 fee of 0.75% of the average daily net asset value of the Class B
shares.
Class B shares are sold at net asset value subject to a contingent deferred
sales charge (expressed as a percentage of the offering price) shown in the
following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
(AS A PERCENTAGE OF OFFERING PRICE AT TIME OF
PURCHASE OR NET ASSET
VALUE AT THE TIME OF PURCHASE, WHICHEVER IS
YEARS SINCE PURCHASE LESS)
- ------------------------------------------------- -----------------------------------------------
<S> <C>
Year 1........................................... 3%
Year 2........................................... 2%
Year 3........................................... 1%
Year 4+.......................................... 0%
</TABLE>
If the net asset value of shares being redeemed has increased above the
initial purchase price, no CDSC is imposed on amounts attributable to such
increase in net asset value. No CDSC is assessed on shares derived from
reinvestment of dividends or capital gain distributions. The Company will
minimize any applicable CDSC payable by assuming that an investor (i) first
redeems Class B shares owned through reinvested dividends and capital gains
distributions, and (ii) next redeems Class B shares held the longest.
Class B shares convert automatically to the appropriate number of Class A
shares of equal dollar value after the investor has owned the Class B shares for
eight (8) years. Dividends and other distributions paid to an investor in the
form of additional Class B shares also will convert to Class A shares on a
pro-rata basis. The conversion benefits shareholders because Class A shares are
not subject to an ongoing Distribution Fee. If an investor converts Class B
shares of a Multi-Class Fund for Class B shares another fund in the SM&R Family
of Funds, the purchase date of the original investment will be used to determine
the appropriate conversion date.
28
<PAGE>
CLASS C SHARES (LEVEL LOAD)
A sales charge of 1.00% is assessed on initial investments in Class C shares
as a percentage of offering price. A contingent deferred sales charge of 1.00%
is also assessed on redemptions of Class C shares during the first thirteen
months after purchase. Class C shares are subject to an annual 12b-1 fee of
1.00% of the average daily net asset value of the Class C shares.
CLASS Y SHARES AND CLASS J SHARES
Class Y Shares are no-load shares of the Multi-Class Funds that are
available to institutions and certain other investors, as described in the
Prospectus for the Class Y Shares. Class J Shares are no-load shares of the
Multi-Class Funds that are offered through certain financial intermediaries
(such as broker-dealers, investment advisers, and mutual fund "marketplaces")
that have distribution agreements with SM&R. Like the Single Class Shares, Class
Y Shares and Class J Shares are offered at net asset value without the
imposition of any sales charge on purchases or redemptions or any distribution
and service ("12b-1") fees. Accordingly, the Offering Price for Class Y Shares
and Class J Shares of each Multi-Class Fund is that Class' net asset value.
SPECIAL PURCHASE PLANS
DISCOUNTS THROUGH CONCURRENT PURCHASES. Investors may qualify for a reduced
sales charge on Class T shares or Class A shares. To qualify, the investor may
investors may combine concurrent purchases of Class T shares of a Multi-Class
Fund and the Class T shares of another Multi-Class Fund at the respective sales
charges applicable to each. Investors may likewise combine concurrent purchases
of Class A Shares of the Multi-Class Funds.
Investors that are eligible to combine concurrent purchases to qualify for a
reduced sales charge include:
(1) Any individual;
(2) Any individual, his or her spouse, and trusts or custodial accounts for
their minor children;
(3) A trustee or fiduciary of a single trust estate or single fiduciary
account.
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class T or
Class A shares of another fund in the SM&R Family of Funds, you may be able to
receive a discount when you buy additional shares. The offering value of the
shares you already own may be "accumulated"--I.E., combined together with the
offering value of the new shares you plan to buy--to achieve quantities eligible
for discount.
LETTER OF INTENT. You may qualify immediately for a reduced sales charge
the Letter of Intent section of the Account Application. Shareholders may
qualify for a reduced sales charge on purchases of Class T shares and Class A
shares of funds in the SM&R Family of Funds by completing a Letter of Intent
(See "Letter of Intent" in the Prospectuses). A minimum initial investment equal
to 10% of the amount necessary for the applicable reduced sales charge is
required when a Letter of Intent is executed. Investments made under a Letter of
Intent will purchase shares at the total sales charge rate applicable to the
specified total investment. SM&R will hold in escrow from the initial investment
shares equal to 5% of the amount of the total intended investment. Such escrow
shares may not be exchanged for or reinvested in shares of another fund and,
subject to the right of early cancellation described below, will not be released
until the amount purchased equals the commitment set forth in the Letter of
Intent. If the intended investment is not completed during the 13-month period,
the difference between the sales charge actually paid and the sales charge
applicable to the total of such purchases made will be deducted from the escrow
shares if not paid by the investor within twenty days after the date notice
thereof has been mailed to such investor.
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<PAGE>
A Letter of Intent agreement can be canceled prior to the end of the
13-month period and escrow shares released to the investor if the investor pays
the difference between the sales charge paid and the sales charge applicable to
the amount actually invested and agrees that such Letter of Intent agreement is
canceled and no longer in effect.
The offering value of the shares of funds in the SM&R Family of Funds
currently owned may also be included in the aggregate amount of an investment
covered by a Letter of Intent.
For example, if an investor owns shares of the Government Bond Fund, the Tax
Free Fund or shares of one or more SM&R Equity Funds currently valued at $80,000
and intends to invest $25,000 over the next thirteen months in the Government
Bond Fund and/or the Tax Free Fund, such investor may execute a Letter of Intent
and the entire $25,000 will purchase shares of either or all of such funds at
the reduced sales charge rate applicable to an investment of $100,000 or more. A
Letter of Intent does not represent a binding obligation on the part of the
investor to purchase or the Government Bond Fund or the Tax Free Fund to sell
the full amount of shares specified.
WAIVER OF INITIAL SALES CHARGE FOR SPECIAL PURCHASERS. After receipt of
written request by SM&R, Class T shares of the Government Bond Fund and the Tax
Free Fund may be purchased by certain purchasers designated in the Class T
Prospectus at net asset value per share without the imposition of any sales
charge. The reduced sales charge rates set forth in the table above apply to
purchases of shares of the Government Bond Fund and the Tax Free Fund, either
singly or in combination with purchases of shares of the SM&R Equity Funds at
the respective sales charges applicable to each, made at one time by: (1) Any
individual; (2) Any individual, his or her spouse, and trusts or custodial
accounts for their minor children; (3) A trustee or fiduciary of a single trust
estate or single fiduciary account.
Purchases in the Government Bond Fund will also receive a reduction in sales
charge pursuant to the rates set forth in the table above for purchases either
singly or in combination with purchases of shares of the SM&R Equity Funds at
the respective sales charges applicable to each, made at one time by: (1) Tax-
exempt organizations specified in Sections 501(c)(3) or (13) of the Internal
Revenue Code, or employees' trusts, pension, profit-sharing, or other employee
benefit plans qualified under Section 401 of the Internal Revenue Code; and (2)
Employees or employers on behalf of employees under any employee benefit plan
not qualified under Section 401 of the Internal Revenue Code.
Furthermore, purchases by any "company" or employee benefit plans not
qualified under Section 401 of the Internal Revenue Code will qualify for the
above quantity discounts only if the Company will realize economies of scale in
sales effort and sales related expenses as a result of the employer's or the
plan's bearing the expense of any payroll deduction plan, making the Company's
prospectus available to individual investors or employees, forwarding
investments by such employees to the Company, and the like.
The rates set forth above are applicable to single, lump sum purchases made
under the provisions of the preceding paragraphs 1, 2 and 3 and to qualified
investments under a "Letter of Intent" or under the "Accumulation Privilege" as
described in the Prospectus for the Class T shares.
REDUCTION AND/OR WAIVER OF CONTINGENT DEFERRED SALES CHARGE (CLASS B
SHARES). Contingent deferred sales charges on Class B shares will be waived on
redemptions:
(1) following the shareholder's (or in the case of joint accounts, all
registered joint owners') death or disability, as defined in Section
72(m)(7) of the Internal Revenue Code (the "Code") (provided SM&R is
notified of such death or disability at the time of the redemption
request and is provided with satisfactory evidence of such death or
disability);
(2) in connection with certain distributions from IRAs, custodial accounts
maintained pursuant to Code Section 403(b), and plans qualified under
Code Section 401 (collectively, "Retirement Plans"); or
30
<PAGE>
(3) not exceeding 10% per year of the amount otherwise subject to the CDSC
(amounts not subject to a CDSC, such as appreciation and reinvested
dividends, are withdrawn first).
Waiver category (1) above applies only to redemptions:
(i) made within one year following death or initial determination of
disability; and
(ii) of Class B share held at the time of death or initial determination of
disability.
Waiver category (2) above applies only to redemptions resulting from:
(i) required minimum distributions to plan participants or beneficiaries who
are age 70 1/2 or older;
(ii) in kind transfers of assets where the participant or beneficiary
notifies SM&R of such transfer no later than the time such transfer
occurs;
(iii) tax-free rollovers or transfers of assets to another Retirement Plan
invested in Class B shares of one or more funds in the SM&R Family of
Funds;
(iv) tax-free returns of excess contributions or returns of excess deferral
amounts; and
(v) distributions upon the death or disability (as defined in the Code) of
the participant or beneficiary.
SYSTEMATIC INVESTMENT PLAN AND ELECTRONIC TRANSFER SERVICE. All Funds
provide a convenient, voluntary method of purchasing their shares through
"Systematic Investment Plan and Electronic Transfer Service" (a "Plan" or
"Plans"). The principal purposes of such Plans are to encourage thrift by
enabling investors to make regular purchases in amounts less than normally
required, and, in the case of the Government Bond Fund and the Tax Free Fund, to
employ the principle of dollar cost averaging described below. INVESTORS SHOULD
BE AWARE THAT ANY APPLICABLE SALES CHARGE WILL APPLY TO PURCHASES MADE THROUGH A
PLAN.
By acquiring shares of the Government Bond Fund and the Tax Free Fund on a
regular basis pursuant to a Plan, or investing regularly on any other systematic
plan, the investor takes advantage of the principle of Dollar Cost Averaging.
Under Dollar Cost Averaging, if a constant amount is invested at regular
intervals at varying price levels, the average cost of all the shares will be
lower than the average of the price levels. This is because the same fixed
number of dollars buys more shares when price levels are low and fewer shares
when price levels are high. It is essential that the investor consider his or
her financial ability to continue this investment program during times of market
decline as well as market rise. The principle of Dollar Cost averaging will not
protect against loss in a declining market, as a loss will result if the Plan is
discontinued when the market value is less than cost.
A Plan may be opened by indicating an intention to invest $20 or more (per
individual) in the Government Bond Fund or the Tax Free Fund or $100 or more in
the Primary Fund or Money Market Fund monthly for at least one year. The
investor will receive a confirmation showing the number of shares purchased,
purchase price, and subsequent new balance of shares accumulated.
An investor has no obligation to invest regularly or to continue
participating in a Plan, which may be terminated by the investor at any time
without penalty. Under a Plan, any distributions of income and realized capital
gains will be reinvested in additional shares at net asset value unless a
shareholder instructs SM&R in writing to pay them in cash. SM&R reserves the
right to increase or decrease the amount required to open and continue the Plan,
and to terminate any shareholder's right to participate in the Plan if after one
year the value of the amount invested is less than $100 in the Government Bond
Fund or the Tax Free Fund or $1,000 in the Primary Fund or Money Market Fund.
31
<PAGE>
GROUP SYSTEMATIC INVESTMENT PLAN. A Group Systematic Investment Plan
provides employers and employees with a convenient means for purchasing shares
of the Company under various types of employee benefit and thrift plans,
including payroll deduction and bonus incentive plans. The plan may be started
with an initial cash investment of $100 ($20 per individual) in the Government
Bond Fund or the Tax Free Fund or $1,000 in the Primary Fund or Money Market
Fund for a group consisting of five or more participants. The shares purchased
by each participant under the Plan will be credited to a separate account in the
name of each investor in which all dividends and capital gains will be
reinvested in additional shares of the applicable Fund at net asset value (plus
a sales charge, if applicable). Such reinvestments will be made at the start of
business on the day following the record date for such dividends and capital
gains distributions. To keep his or her account open, subsequent payments in the
amount of $20 must be made into each participant's account. If the group is
reduced to less than five participants, the minimums set forth under "Systematic
Investment Plan and Electronic Transfer Service" shall apply. The plan may be
terminated by SM&R or the shareholder at any time upon sixty (60) days' prior
written notice.
EXCHANGE PRIVILEGE
Exchanges shall be permitted, without charge, between each class of Shares
of a Fund and the corresponding class of another fund in the SM&R Family of
Funds on terms described in the Prospectuses. Investors also may exchange shares
of a class of a Multi-Class Fund for shares of a Single-Class Fund, and
visa-versa, and may exchange shares of one class of a Multi-Class Fund for
shares of another class of that Fund. An investor exchanging shares must meet
any minimum investment requirement for any shares the investor wishes to
acquire, and must pay any applicable sales charge.
Investors may acquire, through an exchange, shares of a class with a CDSC.
For purposes of determining any CDSC an investor must pay if the investor
redeems those acquired shares, the length of time such acquired shares have been
held will be calculated from the date that the investor initially purchased
shares in the relevant fund the SM&R Family of Funds, rather from the date the
investor exchanged those shares for the shares subject to a CDSC. In determining
the applicability of any CDSC, it will be assumed that a redemption is made
first of shares representing capital appreciation, next of shares representing
the reinvestment of dividends and capital gain distributions and finally other
shares held by the shareholders for the longest period of dividend and capital
gain distribution reinvestments in such other funds. For Federal income tax
purposes, the amount of the CDSC will reduce the gain or increase the loss, as
the case may be, on the amount realized on redemption.
Shares of any fund in the SM&R Family of Funds held in escrow under a Letter
of Intent are not eligible for the exchange privilege. Such shares will not be
released from escrow until the balance invested during the period specified in
the Letter of Intent equals or exceeds the amount required to be invested under
the Letter of Intent or the shareholder requests, in writing, that the Letter of
Intent be canceled and pays any adjustments in sales charge. After release from
escrow, shares may be exchanged, provided all other applicable conditions are
met.
The exchange privilege does not give an investor the option or right to
purchase securities, but is a revocable privilege permitted under the present
policies of each of the Funds. SM&R reserves the right to restrict the frequency
of or otherwise modify, condition, terminate or impose additional charges upon
the exchange privilege. Any gain or loss realized on an exchange or re-exchange
may be recognized for federal and state income tax purposes. You should consult
your tax advisor for the tax treatment and effect of exchanges.
The minimum number of shares of a Fund that may be exchanged is the number
of shares of the that Fund that have a net asset value on the date of such
exchange that is equal to the minimum initial or subsequent investment, as the
case may be, of the Fund or SM&R Equity Funds into which the exchange is being
made.
32
<PAGE>
REDEMPTION
Any shareholder may redeem all or any part of his shares by submitting a
written request to SM&R as the Company's agent for such purpose. Such requests
must be duly executed by each registered owner and must be accompanied by
certificates endorsed for transfer, if certificates have been issued, with
signatures guaranteed by an "eligible guarantor institution" as discussed in the
Prospectuses. No signature guarantees are required on the written request for
redemption by a shareholder of record when payment is to be made to such
shareholder of record at such shareholder's address of record and the value of
the shares redeemed is $25,000 or less. In all other cases the signatures on the
request for redemption, as well as on certificates being tendered, must be
guaranteed. On all redemption requests for joint accounts, the signatures of all
joint owners are required. Redemptions may also be requested by telephone, see
"HOW TO REDEEM" in the Prospectuses. Corporations, executors, divorced persons,
administrators, trustees or guardians will be required to submit further
documentation. Any applicable CDSC must be paid upon redemption.
Shares are redeemed at the net asset value per share next computed after the
request and certificates, if any, are received in "Proper Form" as set forth
above. Any applicable CDSC must be paid at the time of redemption. (See "HOW TO
REDEEM" in the Prospectuses). A shareholder may receive more or less than he
paid for his shares, depending on the prevailing market value of the portfolio
value of the Fund being redeemed and the applicable CDSC.
Redemption checks are delivered as soon as practicable and normally will be
sent to the investor within seven days following the date on which redemption is
made.
At various times the Company may be requested to redeem shares for which it
has not yet received good payment for prior purchases of Company shares.
Accordingly, proceeds of the Company will not be paid until good payment has
been received which could be as much as fifteen business days after the
purchase, or until SM&R can verify that good payment (for example, cash or
certified check on a United States bank) has been, or will be, collected for the
purchase of such shares.
The right of redemption is subject to suspension and payment therefor
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 the Company of its securities is not reasonably
practicable or it is not reasonably practicable for the Company to fairly
determine the value of its net assets; or for such other periods as the
Commission has by order permitted such suspension for the protection of the
Company's security holders.
The Company has made an election under the 1940 Act to pay in cash all
requests for redemption by any shareholder of record, limited in amount with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000 or (ii) 1% of the net asset value of the Company at the beginning of
such period. The Company may pay the redemption price, if any, in excess of the
amounts described above in whole or in part in portfolio securities, at the
market value thereof determined as of the close of business next following
receipt of the request in proper form, if deemed advisable by the Board of
Directors. In such case a shareholder would incur brokerage costs if he sold the
securities received.
SYSTEMATIC WITHDRAWAL PLAN
As described in the Prospectuses under "Systematic Withdrawal Plan," the
Fund have a Systematic Withdrawal Plan pursuant to which shareholders having an
account value of $5,000 or more to automatically withdraw a minimum of $50
monthly or quarterly. It may not be advisable for shareholders to maintain a
Withdrawal Account while concurrently purchasing shares of the Government Bond
Fund or the Tax Free Fund because of the sales charge or CDSC (as applicable)
involved in additional purchases. A shareholder should carefully consider such
purchases and contact his or her financial adviser regarding their advisability.
33
<PAGE>
A Systematic Withdrawal Plan provides for regular monthly or quarterly
payments to the account investor or his designee through redemption of a portion
of the shares held in the account. Some portion of each withdrawal may be
taxable gain or loss to the account investor at the time of the withdrawal, the
amount of the gain or loss being determined by the investment in the Fund's
shares. The minimum, though not necessarily recommended, withdrawal amount is
$50. Shares sufficient to provide the designated withdrawal payment are redeemed
each month or quarterly on the 20th, or the next succeeding business day, and
checks are mailed to reach the investor on or about the lst of the following
month. All income dividends and capital gains distributions are automatically
reinvested at net asset value, without sales charge. Since each withdrawal check
represents proceeds from the sale of sufficient shares equal to the withdrawal,
there can be a reduction of invested capital, particularly in a declining
market. If redemptions are consistently in excess of shares added through
reinvestment of distributions, the withdrawals will ultimately exhaust the
capital.
The shareholder may designate withdrawal payments for a fixed dollar amount,
as stated in the preceding paragraph, or a variable dollar amount based on (1)
redemption of a fixed number of shares at monthly or quarterly intervals, or (2)
redemption of a specified and increasing fraction of shares held at monthly or
quarterly intervals. To illustrate the latter option, if an investor wanted
quarterly payments for a ten-year period, the first withdrawal payment would be
the proceeds from redemption of 1/40th of the shares held in the account. The
second payment would be 1/39th of the remaining shares; the third payment would
be 1/38th of the remaining shares, etc. Under this option, all shares would be
redeemed over the ten-year period, and the payment amount would vary each
quarter, depending upon the number of shares redeemed and the redemption price.
No charge is made for a non-qualified Systematic Withdrawal Plan, and the
account investor may change the option or payment amount at any time upon
written request received by SM&R no later than the month prior to the month of a
scheduled redemption for a withdrawal payment. A Systematic Withdrawal Plan may
also be terminated at any time by the account investor or the Fund without
penalty.
Occasionally certain limited types of qualified retirement plans are
involved in making investments and withdrawals during the same year. Under such
an arrangement, it is possible for the plan to be, in effect, charged duplicate
sales charges. In order to eliminate this possibility, each Fund of the Company
will permit additional investments, without sales charge, equal to all sums
withdrawn, providing the additional investments are made during the next twelve
months following the withdrawal or redemption, and providing that all funds
withdrawn were for the specific purpose of satisfying plan benefits of
participants who have retired, become disabled or left the plan. Furthermore,
for a qualified plan to qualify under this provision, the plan must include at
least one participant who is a non-owner employee. The Company and SM&R
discourage shareholders from maintaining a withdrawal account while concurrently
and regularly purchasing shares of the Company although such practice is not
prohibited.
THE UNDERWRITER
SM&R serves as principal underwriter of the shares of all Funds of the
Company pursuant to an Underwriting Agreement dated July 1, 1993, as amended on
[ ], 1998 (the "Underwriting Agreement"). Such Underwriting Agreement
provides that it shall continue in effect only so long as such continuance is
specifically approved at least annually by the Board of Directors of the Company
or by vote of a majority of the outstanding voting securities of a Fund and, in
either case, by the specific approval of a majority of directors who are not
parties to such agreement or not "interested" persons (as defined in the 1940
Act) of any such parties, cast in person at a meeting called for the purpose of
voting on such approval. The Underwriting Agreement was approved by the Board of
Directors of the Company in accordance with such procedures at a meeting held on
August 21, 1997. The Underwriting Agreement may be terminated without penalty by
vote of the Board of Directors or by vote of the holders of a majority of the
outstanding voting securities of the Company, or by SM&R, upon sixty (60) days'
written notice and will automatically terminate if assigned (as provided in the
1940 Act).
34
<PAGE>
As principal underwriter, SM&R continuously offers and sells shares of each
Fund of the Company through its own sales representatives and broker-dealers. As
compensation for such services, SM&R receives the sales charge, which is the
difference between the offering price at which shares are issued and the net
asset value thereof. Prior to April 1, 1996, SM&R allowed varying portions of
the sales charge to broker-dealers, ranging from a maximum of 4.7% to a minimum
of .50% of the net amount invested and from a maximum of 4.0% to a minimum of
.30% of the public offering price. Effective April 1, 1996, the sales charge
allowance to broker-dealers, ranges from a maximum of 4.7% to a minimum of 2.6%
of the net amount invested, and from a maximum of 4.0% to a minimum of 2.0% of
the public offering price. In connection with purchases of $500,000 or more,
SM&R may pay broker-dealers from its own profits and resources, a per annum
percent of the amount invested as follows: Year 1--0.35% and Year 2--0.25%. In
the third and subsequent years, SM&R may pay 0.075% per annum, in quarterly
installments, to those broker-dealers with accounts totaling assets of $1
million or more. The amount of sales charge received and retained by SM&R from
the sale of Company shares for the years ended August 31, 1998, 1997, and 1996
was $[ ], $29,337, and $92,706, and [ ], $3,000, and $13,795 respectively.
SM&R reallowed to dealers less than $500 for the years ended August 31, 1998,
1997, and 1996.
CUSTODIAN
The cash and securities of the Company are held by SM&R, One Moody Plaza,
Galveston, Texas, 77550, pursuant to a Custodian Agreement dated July 1, 1993.
The Custodian holds and administers the Company's cash and securities as
provided for in such Custodian Agreement. The compensation paid to the Custodian
is paid by the Company and is based upon and varies with the number, type and
amount of transactions conducted by the Custodian.
SM&R, as custodian, will hold and administer the Company's cash and
securities and maintain certain financial and accounting books and records as
provided for in such Custodian Agreement.
TRANSFER AGENT AND DIVIDEND PAYING AGENT
SM&R, One Moody Plaza, Galveston, Texas 77550, is the transfer agent and
dividend paying agent for the Company pursuant to the Administrative Agreement.
A discussion of SM&R's duties as transfer agent is set forth above under
"Administrative Service Agreement."
COUNSEL
The Company's General Counsel is Greer, Herz & Adams, L.L.P. 18th Floor, One
Moody Plaza, Galveston, Texas 77550.
AUDITORS AND FINANCIAL STATEMENTS
Tait, Weller & Baker, 8 Penn Center, Philadelphia, PA 19103, have served as
the Company's independent auditors for the year ending August 31, 1998. Prior to
the year ending August 31, 1998, the Company's financial statements were audited
by KPMG Peat Marwick LLP, 700 Louisiana, Houston, Texas 77002 ("KPMG").
Due to a concern over a potential conflict of interest, KPMG resigned as
auditors to the Company. The Board appointed TWB to serve as the independent
auditors to the Company for the year ended August 31, 1998. Shareholders of the
Company ratified the selection of TWB at a meeting of the Shareholders held on
June , 1998. For the year ended December 31, 1997, and up to the date of
resignation of KPMG, there were no disagreements with KPMG on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved to the satisfaction of KPMG, would
have caused it to make reference to the subject matter of the disagreement in
connection with its report. The independent auditors' report on the 1997
financial statements did not contain an adverse opinion or a disclaimer of
opinion, and was not qualified or modified as to uncertainty,
35
<PAGE>
audit scope or accounting principles. Each of TWB and KPMG has advised the
Company that neither it nor any present member or associate of the relevant firm
has any financial interest, direct or indirect, in the Company.
The Company's Schedule of Investments and audited financial statements for
the year ended August 31, 1997, and the Independent Auditors' Report of KPMG
dated October 10, 1997 are incorporated herein by reference to post-effective
amendment number 10 the Company's registration statement. The Company's
unaudited financial statements for the six-month period ended February 28, 1998
are incorporated herein by reference from the Company's Semi-Annual Report dated
February 28, 1998.
PERFORMANCE AND ADVERTISING DATA
Quotations of performance may from time to time be used in advertisements,
sales literature, shareholder reports or other communications to shareholders or
prospective investors. Each Fund's yield and total return fluctuate in response
to market conditions and other factors. Investment return and principal value
will fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. There can be no assurance that the Money Market Fund will be able
to maintain a stable net asset value of $1.00 per share.
Each Fund's performance may be quoted in advertising in terms of yield or
total return. All advertisements will disclose the maximum sales charge to which
investments in shares of that Fund may be subject. If any advertised performance
data does not reflect the maximum sales charge (if any), such advertisement will
disclose that the sales charge has not been deducted in computing the
performance data, and that, if reflected, the maximum sales charge would reduce
the performance quoted. An investor should keep in mind when reviewing
performance that past performance of a fund is not indicative of future results,
but is an indication of the return to the investor only for the limited
historical period.
With respect to those categories of investors who are permitted to purchase
shares of a Fund at net asset value, sales literature pertaining to the Fund may
quote a current distribution rate, yield, total return, average annual total
return and other measures of performance as described elsewhere in this
Statement of Additional Information with the substitution of net asset value for
the public offering price.
Sales literature referring to the use of the Company or any of its Funds as
a potential investment for Individual Retirement Accounts (IRAs), and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
MONEY MARKET FUND--YIELD
The Money Market Fund will attempt, consistent with safety of principal, to
achieve the highest possible yield from its investments. The Money Market Fund's
yield is its current investment income expressed in annualized terms. Yield
quotations for the Money Market Fund 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) in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, (2) dividing the net change in account value 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 dividend obtained by dividing 365
by 7. The resulting yield figure is carried to the nearest hundredth of one
percent.
36
<PAGE>
The Money Market Fund'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; (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) 365/7]-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 share and dividends declared on both the
original share and any additional share, 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 Fund'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. The yield computation may be of limited use for
comparative purposes as charges at the account level will decrease the yield.
Current and compounded yields fluctuate daily and will vary with factors
such as interest rates, the quality and length of maturities and the type
investments in the Money Market Fund's portfolio. Neither principal or interest
is insured or guaranteed.
NON-MONEY MARKET FUNDS--YIELD
Standardized yield for each Fund (other than the Money Market Fund) is
computed by dividing the Fund's interest income (in accordance with specific
standardized rules) for a given 30-day or one month period, net of expenses, by
the average number of shares entitled to receive distributions during the
period, dividing this figure by the Fund's net asset value per share at the end
of the period and annualizing the result (assuming compounding of income in
accordance with specific standardized rules) in order to arrive at an annual
percentage rate. The 30-day yield figure is calculated for each class of each
Fund according to a formula prescribed by the SEC. The formula can be expressed
as follows:
Yield = 2[(a-b + 1)(6)-1]
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
For the purpose of determining the interest earned (variable a in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest rates, the
yield will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yield will tend to be somewhat lower. In
addition, when interest rates are falling, moneys received by the Fund from the
continuous sale of its shares will likely be invested in portfolio instruments
producing lower yields than the balance of the Fund's portfolio, thereby
reducing the current yield of the Fund. In periods of rising interest rates, the
opposite result can be expected to occur.
37
<PAGE>
Yield information is useful in reviewing the performance of a Fund, but
because yields fluctuate, this information cannot necessarily be used to compare
an investment in shares of the Fund with bank deposits, savings accounts and
similar investment alternatives that often provide an agreed or guaranteed fixed
yield for a stated period of time. Shareholders of a Fund should remember that
yield is a function of the kind and quality of the instruments in the Fund's
portfolio, portfolio maturity, operating expenses and market conditions.
TOTAL RETURN
Standardized total returns quoted in advertising and sales literature
reflect all aspects of a Fund's return, including the effect of reinvesting
dividends and capital gain distributions, any change in the Fund's net asset
value per share over the period and maximum sales charge, if any, applicable to
purchases of the Fund's shares. A cumulative total return reflects a Fund's
performance over a stated period of time. An average annual total return
reflects the hypothetical annually compounded return that would have produced
the same cumulative total return if the Fund's performance had been constant
over the entire period. Because average annual returns tend to even out
variations in a Fund's return, investors should recognize that such returns are
not the same as actual year-by-year results. To illustrate the components of
overall performance, a Fund may separate its cumulative and average annual
returns into income results and capital gain or loss.
The average annual total return figures for the Funds described in the
Prospectuses are computed for a class according to a formula prescribed by the
SEC. The formula can be expressed as follows:
P(1 + T)(n) = ERV
<TABLE>
<CAPTION>
<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 a 1-, 5- or
10-year period at the end of a 1-, 5- or 10-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
</TABLE>
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period. The aggregate total return figures described in the
Prospectuses represent the cumulative change in the value of an investment in a
class for the specified period are computed by the following formula:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Aggregate Total Return = ERV - P
P
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Where P = a hypothetical initial payment of $1,000; and
ERV = Ending Redeemable Value of a hypothetical $1,000 investment made at the beginning of a 1-, 5- or
10-year period at the end of the 1-, 5- or 10-year period (or fractional portion thereof),
assuming reinvestment of all dividends and distributions.
</TABLE>
YIELD AND TOTAL RETURN FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCES.
A Fund's performance is a function of its portfolio management in selecting
the type and quality of portfolio securities and is affected by operating
expenses of the Fund and market conditions. A shareholder's investment in a Fund
is not insured or guaranteed. These factors should be carefully considered by
the investor before making any investment in any Fund.
38
<PAGE>
MULTI-CLASS PERFORMANCE
The Multi-Class Funds converted from a single-class to a multi-class
structure in September 1998. That single class of shares was converted to Class
T Shares, effective September 15, 1998. Existing shareholders as of September
15, 1998 became shareholders in the Class T Shares.
The performance calculations for the classes of the Multi-Class Funds, other
than the Class T Shares, and any classes that might be created after the Class T
Shares, may be stated so as to include the performance of the Fund's Class T
Shares. For these purposes, the inception of the Class T Shares is the inception
of the Fund. Generally, performance of the Class T Shares will not be restated
to reflect the expenses or expense ratio of another class. For example, the
inception of performance for the Class A Shares will be deemed to be the
inception date of the Class T Shares and the performance of the Class T Shares
(based on the Class T Shares' actual expenses) from the inception of Class T
Shares to the inception of Class A Shares will be deemed to be the performance
of the Class A Shares for that period. For standardized total return
calculations, the current maximum initial sales load Class A Shares would be
used in determining the total return of Class A Shares as if assessed at the
inception of Class T Shares.
COMPARISONS
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements and other materials regarding the
Company or any of its Funds may discuss various measures of the Fund's
performance as reported by various financial publications. Materials may also
compare performance (as calculated above) to performance as reported by other
investments, indices, and averages. The following publications, indices, and
averages may be used:
Dow Jones Composite Average or its Component Averages--an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
Standard & Poor's 500 Stock Index or its Component Indices--an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
The New York Stock Exchange Composite or Component Indices--unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
Lipper--Mutual Fund Performance Analysis and Lipper--Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
CDA Mutual Fund Report, Published by CDA Investment Technologies,
Inc.--analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods for
the mutual fund industry.
Mutual Fund Source Book, Published by Morningstar, Inc.--analyzes price,
yield, risk and total return for equity funds.
Financial Publications: the Wall Street Journal and Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money Magazines--provide
performance statistics over specified time periods.
Consumer Price Index (Or Cost of Living Index), Published by the U.S. Bureau
of Labor Statistics--a statistical measure of change, over time, in the price of
goods and services in major expenditure groups.
Salomon Brothers Broad Bond Index or its Component Indices--The Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee Bonds.
39
<PAGE>
Standard & Poor's Bond Indices--measures yield and price of Corporate,
Municipal, and Government bonds.
Shearson Lehman Brothers Aggregate Bond Index or its Component Indices--The
Aggregate Bond Index measures yield, price and total return for Treasury,
Agency, Corporate, Mortgage and Yankee Bonds.
Shearson Lehman Brothers Municipal Bond Index (SLMBI) or its Component
Indices--SLMBI measures yield, price and total return for the municipal bond
market.
Bond Buyer's 20-bond Index--an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
Bond Buyer's 30-bond Index--an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.
Historical Data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill, Lynch,
Pierce, Fenner & Smith, Shearson Lehman Hutton and Bloomberg, L.P.
In assessing such comparisons of performance, an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the portfolio of any Fund, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by any Fund to calculate its
figures. In addition there can be no assurance that any series of the Company
will continue this performance as compared to such other averages.
40
<PAGE>
PART C: OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
The Annual Financial Statements required in the instructions to this Form
N-1A are incorporated by reference to the Statement of Additional
Information included in Post-Effective Amendment No. 10.
The Semi-Annual Financial Statements required in the instructions to Form
N-1A are included in the Semi-Annual Report to Shareholders dated February
28, 1998, which is incorporated by reference into the Statement of
Additional Information.
(b) Exhibits
1a.Registrant's Articles of Incorporation are incorporated herein by
reference to Exhibit 99B.1a to Post-Effective Amendment No. 7 to this
form N-1A Registration Statement.
1b.Registrant's Supplementary Articles of Incorporation are incorporated
herein by reference to Exhibit 99B.1b to Post-Effective Amendment No. 7
to this form N-1A Registration Statement.
2.Registrant's By-Laws are incorporated herein by reference to Exhibit
99B.2 to Post-Effective Amendment No. 7 to this form N-1A Registration
Statement.
3. Not Applicable.
4.A specimen of Registrant's stock certificate is incorporated herein by
reference to Exhibit 99B.4 to Post-Effective Amendment No. 7 to this
form N-1A Registration Statement.
5a.Registrant's Investment Advisory Agreement is incorporated herein by
reference to Exhibit 99B.5 to Post-Effective Amendment No. 7 to this
form N-1A Registration Statement.
5b.Registrant's Investment Advisory Agreement on behalf of the Money Market
Fund will be filed by amendment.
6a.Registrant's Underwriting Agreement is incorporated herein by reference
to Exhibit 99B.6 to Post-Effective Amendment No. 7 to this form N-1A
Registration Statement.
6b.Registrant's Distribution and Shareholder Servicing Plan is filed
herewith.
7. Not Applicable.
8a.Registrant's Custodian Agreement is incorporated herein by reference to
Exhibit 99B.8a to Post-Effective Amendment No. 7 to this form N-1A
Registration Statement.
8b.Registrant's Sub-Custodian Agreement is incorporated herein by reference
to Exhibit 99B.8b to Post-Effective Amendment No. 7 to this form N-1A
Registration Statement.
9.Not Applicable.
10.Consent and Opinion of Registrant's counsel, Greer, Herz & Adams, L.L.P.
will be filed by amendment.
11.Consent of KPMG Peat Marwick LLP and Tait, Weller and Baker, independent
accountants of Registrant will be filed by amendment.
12. Not Applicable.
13.Stock Purchase Letters from Securities Management and Research, Inc. and
American National Insurance Company are incorporated herein by reference
to Exhibit 99B.13 to Post-Effective Amendment No. 7 to this form N-1A
Registration Statement.
C-1
<PAGE>
14a.Documents used to establish Tax Sheltered Custodial Accounts and Texas
Optional Retirement Programs are incorporated herein by reference to
Exhibit 99B.14a to Post-Effective Amendment No. 10 to this form N-1A
Registration Statement.
14b.Documents used to establish Individual Retirement Accounts, in
conjunction with which Registrant offers its securities are incorporated
herein by reference to Exhibit 99B.14b to Post-Effective Amendment No.
10 to this form N-1A Registration Statement.
15. Not Applicable.
16. Schedule of computation of performance quotations provided pursuant to
Item 22. of Form N-1A will be filed by amendment.
17. Power of Attorney will be filed by amendment.
18. Registrant's Multiple Class Plan is filed herewith.
19. List of persons controlled by or under common control with Registrant
is filed herewith.
27. Financial Data Schedules will be filed by amendment.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
All persons under common control with the Registrant are shown on the list
attached hereto as Exhibit 99B.19.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of July 31, 1998, the number of record holders of Registrant's common
stock were as follows:
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
- ------------------------------------------------------------------- -------------------------
<S> <C>
Common Stock,
$0.01 par value
Government Income Fund:
Class T Shares................................................. [ ]
Class A Shares................................................. None
Class B Shares................................................. None
Class C Shares................................................. None
Class J Shares................................................. None
Class Y Shares................................................. None
Tax Free Fund:
Class T Shares................................................. [ ]
Class A Shares................................................. None
Class B Shares................................................. None
Class C Shares................................................. None
Class J Shares................................................. None
Class Y Shares................................................. None
Primary Fund....................................................... [ ]
Money Market Fund.................................................. None
</TABLE>
C-2
<PAGE>
ITEM 27. 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 this Form N-1A Registration Statement.
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 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 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Securities Management and Research, Inc. ("SM&R") serves as investment
adviser to Registrant and Triflex Fund, Inc., American National Growth Fund,
Inc., American National Income Fund, Inc. (collectively, the "SM&R Equity
Funds") and American National Investment Accounts, Inc. ("Investment Accounts").
See "THE FUNDS AND MANAGEMENT" in Part A and "ADVISORY AGREEMENT" and
"MANAGEMENT OF THE COMPANY" in Part B. The address of SM&R is One Moody Plaza,
Galveston, Texas.
DIRECTORS AND OFFICERS OF SM&R
ROBERT A. FRUEND, CLU
DIRECTOR OF SM&R
Director of SM&R; Director of Investment Accounts, One Moody Plaza,
Galveston, Texas; Executive Vice President and Director of Ordinary Agencies of
American National Insurance Company ("American National"), all located at One
Moody Plaza, Galveston, Texas; Director of American National Property and
Casualty Company, 1949 East Sunshine, Springfield, Missouri; Director of
American National General Insurance Company, 1949 East Sunshine, Springfield,
Missouri; and Director of American National Insurance Service Company, 1722
South Glenstone, Springfield, Missouri.
R. EUGENE LUCAS
DIRECTOR AND MEMBER OF EXECUTIVE COMMITTEE OF SM&R
Director of American National, One Moody Plaza, Galveston, Texas; President
and Director of Gal-Tex Hotel Corporation, 504 Moody National Bank Tower,
Galveston, Texas, Gal-Tenn Hotel Corporation, 504 Moody National Bank Tower,
Galveston, Texas; Director of ANREM Corporation, One Moody Plaza, Galveston,
Texas.
C-3
<PAGE>
MICHAEL W. MCCROSKEY
DIRECTOR, PRESIDENT, CHIEF EXECUTIVE OFFICER
AND MEMBER OF THE EXECUTIVE COMMITTEE SM&R
President and Director of the Registrant; President and Director of
Investment Accounts; President and Director of SM&R Equity Funds; Executive Vice
President, American National; Director and President, ANREM Corporation;
Director and President, ANTAC Corporation; Assistant Secretary of American
National Life Insurance Company of Texas; Director, Comprehensive Investment
Services, all located at One Moody Plaza, Galveston, Texas; Vice President,
American National Property and Casualty; Vice President, American National
General Insurance Company; Vice President, Pacific Property and Casualty, Inc.,
all located at 1949 East Sunshine, Springfield, Missouri. Vice President of
Standard Life and Accident Insurance Company, 201 Robert S. Kerr Avenue,
Oklahoma City, Oklahoma; Vice President of Garden State Life Insurance Company,
2450 South Shore Blvd., League City, Texas.
G. RICHARD FERDINANDSTEN
DIRECTOR AND MEMBER OF EXECUTIVE COMMITTEE OF SM&R
Director, Senior Executive Vice President and Chief Operating Officer,
American National; Director, Chairman of the Board, President and Chief
Executive Officer, American National Life Insurance Company of Texas; Director,
Comprehensive Investment Services, all located at One Moody Plaza, Galveston,
Texas; Director, Vice Chairman of the Board, American National General Insurance
Company; Director, Vice Chairman of the Board, American National Property and
Casualty; Director and Vice Chairman of the Board, Pacific Property & Casualty
Company; Underwriter, American National Lloyds Insurance Company, all located at
1949 East Sunshine, Springfield, Missouri. Director and Chairman of the Board,
Standard Life and Accident Insurance Company, 201 Robert S. Kerr Avenue,
Oklahoma City, Oklahoma; Director, Garden State Life Insurance Company, 2450
South Shore Boulevard, League City, Texas.
RONALD J. WELCH
DIRECTOR OF SM&R
Executive Vice President and Chief Actuary of American National; Senior Vice
President of American National Life Insurance Company of Texas, all located at
One Moody Plaza, Galveston, Texas; Director and Chairman of the Board of Garden
State Life Insurance Company, 2450 South Shore Boulevard, League City, Texas;
Director of Standard Life and Accident Insurance Company, 201 Robert S. Kerr
Avenue, Oklahoma City, Oklahoma; Director of American National Property and
Casualty Company; Director of American National General Insurance Company;
Director of American National Insurance Service Company; Director of Pacific
Property and Casualty Company, all located at 1949 East Sunshine Street,
Springfield, Missouri.
GORDON D. DIXON
DIRECTOR, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER AND
MEMBER OF INVESTMENT AND EXECUTIVE COMMITTEES OF SM&R
Vice President and Portfolio Manager of the Registrant; Vice President,
Portfolio Manager of Growth Portfolio of Investment Accounts; Co-Manager of the
American National Income Fund Inc. and the Managed Portfolio of Investment
Accounts; Vice President of Stocks for American National; Director and
President, Comprehensive Investment Services. Each of the foregoing entities is
located at One Moody Plaza, Galveston, Texas. Vice President of Investments for
Garden State Life Insurance Company, 2450 South Shore Boulevard, League City,
Texas; Former Director of Equity Strategy Research and Trading for C&S/Sovran
Bank (now NationsBank) Atlanta, Georgia.
C-4
<PAGE>
K. DAVID WHEELER
SENIOR VICE PRESIDENT, INSTITUTIONAL SALES AND PRIVATE CLIENT
SERVICES OF SM&R
Senior Institutional Consultants, Bank South, Atlanta, Georgia.
VERA M. YOUNG
VICE PRESIDENT, PORTFOLIO MANAGER OF SM&R
Vice President of the Registrant; Portfolio Manager of the Money Market Fund
and the Primary Fund of the Registrant; Portfolio Manager of the Money Market
Portfolio of Investment Accounts; Assistant Vice President, Securities of
American National. Each of the foregoing entities is located at One Moody Plaza,
Galveston, Texas.
EMERSON V. UNGER, C.L.U.
VICE PRESIDENT OF SM&R
Vice President of the Registrant, the SM&R Equity Funds and Investment
Accounts, each located at One Moody Plaza, Galveston, Texas.
BRENDA T. KOELEMAY
VICE PRESIDENT AND TREASURER OF SM&R
Vice President and Treasurer of the Registrant, the SM&R Equity Funds, and
Investment Accounts, each located at One Moody Plaza, Galveston, Texas;
Treasurer, Comprehensive Investment Services, also located at One Moody Plaza,
Galveston, Texas.
TERESA E.AXELSON
VICE PRESIDENT AND SECRETARY OF SM&R
Vice President and Secretary of the Registrant, the SM&R Equity Funds, and
Investment Accounts, each located at One Moody Plaza, Galveston, Texas.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) SM&R also serves as the principal underwriter for the Registrant, the
other SM&R Equity Funds and the Investment Accounts. See "THE FUNDS AND
MANAGEMENT" in Part A.
(b)
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICERS POSITIONS AND OFFICERS
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
- ------------------------------------------ ------------------------------------ --------------------------------
<S> <C> <C>
Robert A. Fruend, C.L.U. ................. Director None
One Moody Plaza
Galveston, Texas
R. Eugene Lucas .......................... Director None
Moody National Bank Tower
Galveston, Texas
Michael W. McCroskey ..................... Director and President, Chief President and Director
One Moody Plaza Executive Officer
Galveston, Texas
G. Richard Ferdinandsten ................. Director None
One Moody Plaza
Galveston, Texas
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICERS POSITIONS AND OFFICERS
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
- ------------------------------------------ ------------------------------------ --------------------------------
<S> <C> <C>
Ronald J. Welch .......................... Director None
One Moody Plaza
Galveston, Texas
Gordon D. Dixon .......................... Director, Senior Vice President, None
One Moody Plaza Chief Investment Officer
Galveston, Texas
K. David Wheeler ......................... Senior Vice President Institutional None
One Moody Plaza Sales and Private Client Services
Galveston, Texas
Vera M. Young ............................ Vice President, Portfolio Manager Vice President and Portfolio
One Moody Plaza Manager
Galveston, Texas
Emerson V. Unger, C.L.U. ................. Vice President Vice President
One Moody Plaza
Galveston, Texas
Brenda T. Koelemay ....................... Vice President and Treasurer Vice President and Treasurer
One Moody Plaza
Galveston, Texas
Teresa E. Axelson ........................ Vice President and Secretary Vice President and Secretary
One Moody Plaza
Galveston, Texas
</TABLE>
(c) Not Applicable.
ITEM 30. 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 One Moody Plaza, Galveston, Texas
77550.
ITEM 31. 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 32. UNDERTAKINGS.
(a) The Registrant undertakes to provide a copy of the Registrant's latest
Annual Report to shareholders to whom a prospectus is delivered upon
request and without charge.
(b) TEXAS OPTIONAL RETIREMENT PROGRAM
The Government Income Fund and the Primary Fund offer shares as investments
for custodial accounts that meet the requirements of Section 403(b)(7) of the
Internal Revenue Code of 1986, as amended (the "Code"), in connection with the
Texas Optional Retirement Program (the "Program"). Under the Program, a
custodial account for each participating employee ("Participant") is established
in the name of SM&R. The Program, as interpreted by the Texas Attorney General,
imposes certain restrictions on early withdrawals from custodial accounts.
Section 22(e) prohibits a registered investment company from suspending a
shareholder's right of redemption or postponing payment on redemption of any
redeemable security for more than seven days after tender of the security.
C-6
<PAGE>
The Staff of the Securities and Exchange Commission took a no-action
position under section 22(e) of the 1940 Act permitting the Government Income
Fund and the Primary Fund to offer shares in connection with the Program as
contemplated above (See SM&R Capital Funds, pub. avail. Sept. 17, 1992 (the "No-
Action Letter")). The Staff took its position based on the Registrant's
representation that the Funds and SM&R would comply with conditions set forth in
the No-Action Letter. In this regard, each Fund and SM&R has complied with the
following provisions of the No-Action Letter:
(a) Appropriate disclosure regarding the restrictions on redemption imposed
by the Program is included in this Registration Statement on Form N-1A
and the applicable Prospectuses included in this Registration Statement.
(b) Appropriate disclosure regarding the restrictions on redemption imposed
by the Program is included in any sales literature used in connection
with the offer of the relevant Fund shares to Participants in connection
with the Program.
(c) The Fund and SM&R instruct salespeople who solicit Participants to
purchase Fund shares specifically to bring the restrictions on redemption
imposed by the Program to the attention of the potential Participants.
(d) The Fund and SM&R obtain from each Participant who purchases Fund shares
in connection with the Program, prior to or at the time of purchase, a
signed statement acknowledging the restrictions on redemption imposed by
the Program.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, SM&R CAPITAL FUNDS, INC., has
duly caused this POST-EFFECTIVE AMENDMENT NO. 11 to the 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 2nd day of July, 1998.
<TABLE>
<S> <C> <C>
SM&R CAPITAL FUNDS, INC.
By: /s/ MICHAEL W. MCCROSKEY
-----------------------------------------
Michael W. McCroskey,
President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
POST-EFFECTIVE AMENDMENT NO. 11 to Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
PRINCIPAL EXECUTIVE AND
FINANCIAL OFFICER: PRINCIPAL ACCOUNTING OFFICER:
<S> <C>
/s/ MICHAEL W. MCCROSKEY /s/ BRENDA T. KOELEMAY
- -------------------------------- ------------------------------
Michael W. McCroskey, President Brenda T. Koelemay, Treasurer
Date: July 2, 1998
</TABLE>
<TABLE>
<CAPTION>
DIRECTORS:
<S> <C>
/s/ ERNEST S. BARRATT, PH.D. Date: July 2, 1998
- --------------------------------
Ernest S. Barratt, Ph.D.
/s/ ALLAN W. MATTHEWS Date: July 2, 1998
- --------------------------------
Allan W. Matthews
/s/ LEA MCLEOD MATTHEWS Date: July 2, 1998
- --------------------------------
Lea McLeod Matthews
/s/ MICHAEL W. MCCROSKEY Date: July 2, 1998
- --------------------------------
Michael W. McCroskey
/s/ ANN MCLEOD MOODY Date: July 2, 1998
- --------------------------------
Ann McLeod Moody
/s/ EDWIN K. NOLAN Date: July 2, 1998
- --------------------------------
Edwin K. Nolan
/s/ ROBERT V. SHATTUCK, JR. Date: July 2, 1998
- --------------------------------
Robert V. Shattuck, Jr.
/s/ JAMIE G. WILLIAMS Date: July 2, 1998
- --------------------------------
Jamie G. Williams
/s/ FRANK P. WILLIAMSON Date: July 2, 1998
- --------------------------------
Frank P. Williamson
</TABLE>
<PAGE>
EXHIBIT 99.B6b
SM&R INVESTMENTS, INC.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
May 29, 1998
This Distribution and Shareholder Servicing Plan (the "Plan") is adopted by
SM&R Investments, Inc., a corporation organized under the laws of the State of
Maryland (the "Fund"), pursuant to Rule 12b-1 ("Rule 12b-1") under the
Investment Company Act of 1940, as amended (the "1940 Act") for two of the
Fund's series: the Government Income Fund Series and the Tax Free Fund Series
(individually and collectively, the "Series").
Each Series currently has a single class of shares, but it is intended that
five new classes will be established so there will be six classes of shares of
common stock (the "Shares") of each Series, designated as the Class T Shares
(existing shareholders), the Class A Shares, the Class B Shares, the Class C
Shares, the Class J Shares (network), and the Class Y Shares (institutional
shareholders), respectively. This Plan describes distribution services and
shareholder servicing to be provided by Securities Management and Research, Inc.
("SM&R") (investment adviser and principal underwriter to the Fund), any person
providing ongoing servicing to shareholders of the Series (each, a "Service
Provider"), or any distributor of the Series' Shares (each, a "Distributor") in
connection with the Class A, Class B, Class C and Class J Shares. The Plan also
specifies the deductions from Series assets to pay for such services.
SECTION 1. AMOUNT OF PAYMENTS: DISTRIBUTION AND SHAREHOLDER SERVICE FEES
(a) The two Series will pay distribution fees (the "Distribution Fees")
and/or shareholder service fees (the "Service Fees") with respect to each of the
Class A, Class B, Class C and Class J Shares of that Series (the "12b-1
Classes") for distribution-related services and shareholder services,
respectively, provided to each such Class of Shares. The Distribution Fee and
Service Fee, as applicable, for each Class of Shares shall be computed as an
annual percentage of the value of the average daily net assets of the two Series
attributable to such Class, as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
DISTRIBUTION SERVICE TOTAL 12b-1
CLASS FEE FEE FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Class T Shares: Existing Shareholders -0- -0- -0-
- -------------------------------------------------------------------------------
Class A Shares: Front-End Load . . . -0- .25% 0.25%
- -------------------------------------------------------------------------------
Class B Shares: Back-End Load (CDSC). .50% .25% 0.75%
- -------------------------------------------------------------------------------
Class C Shares: Level Load . . . . . .75% .25% 1.00%
- -------------------------------------------------------------------------------
Class J Shares: Network . . . . . . . .75% -0- 0.75%
- -------------------------------------------------------------------------------
Class Y Shares: Institutional . . . . -0- -0- -0-
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
(b) The Distribution Fees to be paid under this Plan will be calculated
daily (as a percentage of average daily net assets) and paid periodically by
each of the two Series with respect to the Shares of the relevant 12b-1 Classes
of that Series at the annual rates indicated above.
(c) The Service Fees to be paid under this Plan will be calculated daily
(as a percentage of average daily net assets) and paid periodically by each of
the two Series with respect to the Shares of the relevant 12b-1 Classes of that
Series at the annual rates indicated above.
(d) Payments under this Plan are not tied exclusively to shareholder
services or distribution expenses actually incurred by SM&R or any Service
Provider or Distributor; the payments may exceed or be less than expenses
actually incurred by SM&R, a Service Provider and/or a Distributor.
SECTION 2. DISTRIBUTION AND SHAREHOLDER SERVICES PROVIDED.
The Distribution Fees payable with respect to Class B, Class C and Class J
Shares of the two Series are intended to compensate SM&R, or enable SM&R to
compensate other persons, including Distributors, for services that are
primarily intended to result in, or that are primarily attributable to, the sale
of such respective Classes of Shares of the Series ("Selling Services"). The
Service Fees payable with respect to the Class A, Class B and Class C Shares of
the Series are intended to compensate SM&R, or enable SM&R to compensate Service
Providers, for providing ongoing servicing to shareholders of the Series
("Shareholder Services").
"Selling Services" when used in this Plan include, but are not limited to:
compensation of sales personnel, training and supervision of sales personnel,
advertising, marketing, and other promotional expenses (including the
preparation of, printing, and making of sales literature), and the printing and
distribution to prospective investors in the Series of prospectuses and
statements of additional information, that are used in connection with sales of
the relevant 12b-1 Classes of the Series and distributing such Classes of Shares
of the Series. In providing compensation for Selling Services in accordance
with this Plan, SM&R is expressly authorized (i) to make, or cause to be made,
payments reflecting an allocation of overhead and other office expenses related
to the distribution of the relevant 12b-1 Classes of each Series; (ii) to make,
or cause to be made, payments, or to provide for the reimbursement of expenses
of, persons who provide support services in connection with the distribution of
the relevant 12b-1 Classes of each Series; and (iii) to make, or cause to be
made, payments to financial intermediaries who have sold the Shares of the
relevant 12b-1 Classes.
"Shareholder Services" as used in this Plan mean all forms of shareholder
liaison services, as SM&R deems appropriate for functions such as maintaining
shareholder accounts, providing shareholder liaison services, responding to
customer inquiries, and providing shareholders with information on their
investments and about the Series.
-2-
<PAGE>
SECTION 3. APPROVAL OF PLAN AND RELATED AGREEMENTS.
(a) SHAREHOLDER APPROVAL. Neither this Plan nor any related agreements
will take effect with respect to a 12b-1 Class of a Series, and no fee will be
deducted or payable in accordance with Section 1 of this Plan, with respect to
the Shares of such 12b-1 Class of a Series, until this Plan has been approved by
a vote of at least a majority of the outstanding voting securities represented
by that Class, if adopted after any public offering of the Shares of that Class
or the sale of such Shares to persons who are not affiliated persons of the Fund
or affiliated persons of such persons. This Plan will be deemed to have been
approved by shareholders of a 12b-1 Class of a Series so long as a majority of
the outstanding voting securities of the shareholders of such 12b-1 Class vote
for the approval of the Plan, notwithstanding that: (i) the Plan has not been
approved by a majority of the outstanding voting securities represented by any
other Class; (ii) the Plan has not been approved by a majority of the
outstanding voting securities of the relevant Series of the Fund; or (iii) the
Plan has not been approved by a majority of the outstanding voting securities
of the Fund.
(b) DIRECTOR APPROVAL. Neither this Plan nor any related agreements will
take effect with respect to any Class of Shares of a Series until approved by:
(i) a majority vote of the full Board of Directors of the Fund (the
"Board"), and
(ii) a majority vote of those directors who are not interested persons of
the Fund and who have no direct or indirect financial interest in the
operation of this Plan or in any agreements related to it (the "Independent
Directors"),
cast in person at a meeting called for the purpose of voting on this Plan
and the related agreements. In voting to approve the implementation or
continuance of this Plan (see Section 4 below), the directors must conclude, in
exercise of reasonable business judgment and in light of their fiduciary duties,
that there is a reasonable likelihood that the Plan will benefit the relevant
Class of the Series and its shareholders.
SECTION 4. CONTINUANCE OF PLAN.
This Plan will continue in effect with respect to a 12b-1 Class of Shares
of a Series from year to year so long as its continuance is specifically
approved annually by vote of the Board in the manner described in Section 3(b)
above. The Board will evaluate the appropriateness of this Plan with respect to
the Shares of each of the respective 12b-1 Classes of each Series and its
payment terms on a continuing basis and in doing so will consider all relevant
factors, including the types and extent of Shareholder Services and/or Selling
Services provided by SM&R, Service Providers and/or Distributors and amounts
SM&R, Service Providers and/or Distributors receive under this Plan.
-3-
<PAGE>
SECTION 5. TERMINATION.
This Plan may be terminated with respect to any 12b-1 Class of a Series at
any time, by vote of a majority of the Independent Directors or by a vote of a
majority of the outstanding voting securities of the relevant Class of the
Series.
SECTION 6. AMENDMENTS.
This Plan may not be amended with respect to any 12b-1 Class of a Series to
increase materially the amount of the fees described in Section 1 above without
approval of the shareholders of the relevant Class of the Series as contemplated
in Section 3(a) above. In addition, all material amendments to this Plan must
be approved in the manner described in Section 3(b) above.
SECTION 7. SELECTION OF INDEPENDENT DIRECTORS.
While this Plan is in effect with respect to any 12b-1 Class of a Series,
the selection and nomination of the Fund's Directors who are not interested
persons of the Fund will be committed to the discretion of the Directors then in
office who are not interested persons of the Fund.
SECTION 8. QUARTERLY WRITTEN REPORTS.
In each year during which this Plan remains in effect with respect to a
12b-1 Class, SM&R (and any other person authorized to direct the disposition of
monies paid or payable by the relevant Series pursuant to the Plan or any
related agreement) will prepare and furnish to the Board, and the Board will
review, at least quarterly, written reports complying with the requirements of
Rule 12b-1, which set out the amounts expended under this Plan and the purposes
for which those expenditures were made.
SECTION 9. RECORDKEEPING.
The Fund will preserve copies of this Plan, any agreement relating to this
Plan and any report made pursuant to Section 8 above, for a period of not less
than six years (the first two years in an easily accessible place) from the date
of this Plan, the agreement or the report, or for such other periods as may be
required by applicable law.
SECTION 10. FILING.
This Plan shall be filed as an exhibit to the Fund's Registration Statement
on Form N-1A with the U.S. Securities and Exchange Commission, with the next
amendment of such Registration Statement filed after the date hereof.
-4-
<PAGE>
SECTION 11. INTERPRETATION; MEANING OF CERTAIN TERMS.
(a) This Plan shall be interpreted in accordance with the 1940 Act and Rule
12b-1 thereunder.
(b) As used in this Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act and the rules and regulations under the 1940
Act, subject to any exemption that may be granted to the Fund under the 1940 Act
by the Securities and Exchange Commission.
(c) The provisions of this Plan are severable for each Class of each
Series.
SECTION 12. LIMITATION OF LIABILITY.
The obligations of the Fund and each Series under this Plan will not be
binding upon any of the directors, shareholders, nominees, officers, employees
or agents, whether past, present or future, of the Fund, individually, but are
binding only upon the assets and property of the Fund and the relevant Series,
as provided in the Fund's Articles of Incorporation. The execution and delivery
of this Plan have been authorized by the directors of the Fund, and signed by an
authorized officer of the Fund, acting as such, and neither the authorization by
the directors nor the execution and delivery by the officer will be deemed to
have been made by any of them individually or to impose any liability on any of
them personally, but will bind only the property of the Fund and each Series, as
applicable.
SECTION 13. DATE OF EFFECTIVENESS.
This Plan has been executed by the Fund as of the ______ day of _________,
1998 and will become effective with respect to the Class A, Class B, Class C or
Class J Shares of a Series as of the date on which interests in the Class A,
Class B, Class C or Class J Shares of that Series, as applicable, are first
offered to or held by the public (subject to approvals as provided for in
Section 3 above).
SM&R INVESTMENTS, INC.
By:
-------------------------------
Michael M. McCroskey
President
-5-
<PAGE>
EXHIBIT 99.B18
SM&R INVESTMENTS, INC.
MULTIPLE CLASS PLAN
May 29, 1998
This Multiple Class Plan (the "Multi-Class Plan") is adopted by SM&R
Investments, Inc., a corporation organized under the laws of the State of
Maryland (the "Fund"), pursuant to Rule 18f-3 of the under the Investment
Company Act of 1940, as amended (the "1940 Act") for two of the Fund's series:
the Government Income Fund Series and the Tax Free Fund Series (individually and
collectively, the "Series").(1)
Each of the two Series currently has a single class of shares, but it is
intended that five new classes of those two Series will be established so there
will be six classes of shares of common stock (the "Shares"), designated as the
Class T Shares (existing shareholders), the Class A Shares, the Class B Shares,
the Class C Shares, the Class J Shares (network), and the Class Y Shares
(institutional shareholders), respectively. These classes of Shares have
different sales charges and distribution and service ("12b-1") fee structures.
SECTION 1: DISTRIBUTION ARRANGEMENTS AND SERVICE FEES
(a) INTRODUCTION.
Each Class of Shares of the two Series will have the same relative rights
and privileges, except that, as set forth in this Plan, they shall differ with
respect to (i) sales, distribution and shareholder services and other charges
and expenses as initially provided for in Section 1 of this Plan and as
subsequently provided for in the Fund's prospectus and statement of additional
information, as the same may be amended from time to time (each a "Prospectus"
and "SAI," and collectively, the "Prospectus" and "SAI"); (ii) the exclusive
right of each Class of Shares to vote on matters submitted to shareholders that
relate solely to that Class or for which the interests of one Class differ from
the interests of another Class or Classes; (iii) such differences relating to
eligible investors as may be set forth in the Prospectus and SAI; (iv) the
designation of each Class of Shares; and (v) conversion features.
The board of directors of the Fund (the "Board") may determine in the
future that other distribution arrangements, allocations of expenses (whether
ordinary or extraordinary) or services
- --------------------
(1) The Primary Fund Series will only have one class (Class T, for existing
shareholders) and the proposed new Money Market Fund will only have one class,
with no sales load and no Rule 12b-1 Distribution or Shareholder Fees.
<PAGE>
to be provided to a Class of Shares are appropriate and amend this Plan
accordingly without the approval of shareholders of any Class to the extent
permitted by law.
(b) DISTRIBUTION AND SHAREHOLDER SERVICES FEES: As discussed below, the
Class A, Class B, Class C and Class J Shares (the "12b-1 Classes") shall be
offered by each of the two Series pursuant to a Distribution and Shareholder
Servicing Plan, adopted pursuant to Rule 12b-1 under the 1940 Act ("Rule 12b-1
Plan"), providing for a distribution fee (the "Distribution Fee") and a
shareholder services fee (the "Service Fee") at annual rates computed based on
the value of the average daily net assets of the that Series attributable to the
relevant Classes of Shares. Such fees shall be calculated daily and paid
periodically by the Series. The Distribution Fee is intended to compensate
Securities Management and Research, Inc. ("SM&R"), or enable SM&R to compensate
other persons, including any distributor of Shares, for services that are
primarily intended to result in, or that are primarily attributable to, the sale
of Shares attributable to the relevant 12b-1 Class. The Service Fee payable
under the Plan is intended to compensate SM&R, or enable SM&R to compensate
other persons ("Service Providers"), for providing ongoing servicing and/or
maintenance of the accounts of shareholders of the applicable Class of each
Series ("Shareholder Services").
(c) ADMINISTRATIVE SERVICE FEE. As discussed below, all six Classes of
Shares of the Fund shall be subject to an administrative service fee (the
"Administrative Fee") at an annual rate computed based on the value of the
average daily net assets of each Series. The Administrative Fee declines with
respect to higher asset levels, as set forth in the Prospectus and/or SAI (as
revised from time to time) and an administrative services agreement between the
Fund and SM&R (the "Administrative Agreement"). Pursuant to the Administrative
Agreement, SM&R has agreed(2) to pay the Series or to reimburse the Series for
the expenses attributable to any Class (including the advisory fee and
Administrative Fee paid to SM&R and any other fees allocated to all Classes of
shares of the Series based on average daily net assets, but exclusive of
interest, taxes, the Service Fee, the Distribution Fee, commissions and other
expenses incidental to portfolio transactions and any other Class Expenses, as
defined below) in excess of 1.25% per year of such Class' average daily net
assets.
(d) CONTINGENT DEFERRED SALES CHARGE. As discussed below, some Class A
Shares and all Class B and Class C Shares shall be subject to a contingent
deferred sales charge ("CDSC") calculated as a specified percentage of the
offering price of the Shares of the relevant Class at the time of purchase. No
CDSC shall be imposed on Shares of a Class unless so provided in the Prospectus.
No CDSC shall be imposed on increases in the net asset value of the Shares being
- --------------------
(2) As of the date hereof, the Administrative Agreement does not provide
for multiple classes and provides for the 1.25% expense limit on a Series by
Series basis (I.E., to apply separately for each Series), and does not provide
for the Service or Distribution Fee. It is anticipated that the Administrative
Agreement will be revised to provide for multiple classes, in accordance with
this Multi-Class Plan, before this Plan is implemented.
-2-
<PAGE>
redeemed above the initial purchase price. No CDSC shall be assessed on Shares
derived from reinvestment of dividends or capital gain distributions. SM&R, in
its discretion, may waive a CDSC otherwise due upon the redemption of Shares on
terms disclosed in the Prospectus or SAI and as allowed under Rule 6c-10 and
other applicable rules of the 1940 Act.
(e) EXCHANGE PRIVILEGES. Exchanges shall be permitted, without charge,
between each Class of Shares of a Series and corresponding classes of other
investment funds advised by SM&R, including the classes of the other series, and
the classes of American National Growth Fund, Inc., American National Income
Fund, Inc. and Triflex Fund, Inc., (each, a "Portfolio"), on terms described in
the Prospectus. Each Class of Shares also will be exchangeable for shares of
the American National Money Market Fund Series (the ("Money Market Series"), the
proposed fourth series of the Fund, which will become available for sale to the
public in the fourth quarter of 1998 and offer a single class of Shares.(3)
(f) CLASS-SPECIFIC ARRANGEMENTS.
The Classes of Shares have the following service and distribution fee
arrangements:
CLASS T SHARES (EXISTING SHAREHOLDERS). Class T Shares shall be (i)
offered only to existing shareholders (I.E., accounts in the Fund prior to
the implementation of this Plan; (ii) subject to an Administrative Fee at
the maximum annual rate of .25% of the value of the average daily net
assets attributable to Class T Shares; (iii) not subject to any Service
Fee; and (iv) not subject to any Distribution Fee. Class T Shares shall be
subject to a front-end sales charge is that is reduced at certain
breakpoints as set forth on attached Appendix A - Multi-Class Structure and
is eventually eliminated with respect to investments in a Series in an
amount of Five Hundred Thousand Dollars ($500,000.00) or more.
CLASS A SHARES. Class A Shares shall be sold subject to a front-end sales
charge as approved from time to time by the Board and set forth in the
Prospectus. The front-end sales charge is reduced for investments made in
amounts over certain levels, or "breakpoints," and is eventually eliminated
with respect to investments in Class A Shares in an amount of One Million
Dollars ($1,000,000.00) or more. The currently proposed front-end sales
charges and corresponding breakpoints for the Class A Shares are set forth
in Appendix A - Multi-Class Structure. Shares that are not subject to a
front-end sales charge because a purchaser invests $1,000,000.00 or more in
Class A Shares shall be subject to a CDSC of 1% for a period of 13 months.
Class A Shares also shall be (i) subject to a Service Fee of .25% of the
value of the average daily net assets attributable to Class A Shares; (ii)
subject to an Administrative Fee at a maximum annual rate of .25%
- ---------------------
(3) Shareholders who have existing accounts in the Primary Series will also
be able to exchange from other Series into the Primary Series.
-3-
<PAGE>
of the value of the average daily net assets attributable to Class A
Shares; and (iii) not subject to any Distribution Fee. Class A Shares may
be exchanged for Class A Shares of another Portfolio or for shares of the
Money Market Series at their relative net asset values, on terms described
in the Prospectus.
CLASS B SHARES: Class B Shares shall be subject to a CDSC on Shares
redeemed as follows:
<TABLE>
<CAPTION>
YEARS SINCE PURCHASE OF
CLASS B SHARES CDSC
-------------- ----
<S> <C>
Year 1 3%
Year 2 2%
Year 3 1%
Year 4+ 0%
</TABLE>
Class B Shares also shall be (i) subject to an Administrative Fee at a
maximum annual rate of .25% of the average daily net assets attributable to
Class B Shares; (ii) subject to a Service Fee of .25%, of the value of the
average daily net assets attributable to Class B Shares; and (iii) subject
to a Distribution Fee of .50%, of the value of the average daily net assets
attributable to Class B Shares. Class B Shares automatically convert to
Class A Shares after eight years. Such conversion will occur at the
relative net asset value per Share of each Class without the imposition of
any sales charge, fee or other charge. Class B Shares may be exchanged for
Class B Shares of another Portfolio or for shares of the Money Market
Series at their relative net asset values, on terms described in the
Prospectus.
CLASS C SHARES: Class C Shares shall be: (i) sold subject to a front-end
sales charge of 1.00% of the offering price; (ii) subject to a 1.00% CDSC
for a period of 13 months, (iii) subject to an Administrative Fee at a
maximum annual rate of .25% of the value of the average daily net assets
attributable to Class C Shares; (iv) subject to a Service Fee of .25% of
the value of the average daily net assets attributable to Class C Shares;
and (v) subject to a Distribution Fee of .75% of the value of the average
daily net assets attributable to Class C Shares. Class C Shares will not
convert to any other Class of Shares. Class C Shares may be exchanged for
Class C Shares of another Portfolio or for shares of the Money Market
Series at their relative net asset values, on terms described in the
Prospectus.
-4-
<PAGE>
CLASS J SHARES (NETWORK CLASS). Class J Shares shall be (i) offered only
pursuant to certain distribution arrangements approved from time to time
and as set forth in the Prospectus; (ii) subject to an Administrative Fee
at the maximum annual rate of .25% of the value of the average daily net
assets attributable to Class J Shares; (iii) subject to a Distribution Fee
of .75% of the value of the average daily net assets attributable to
Class J Shares; and (iv) not subject to any Service Fee. Class J Shares
may be exchanged for Class J Shares of another Portfolio or for shares of
the Money Market Series at their relative net asset values, on terms
described in the Prospectus.
CLASS Y SHARES (INSTITUTIONAL CLASS). Class Y Shares shall be (i) offered
only to certain categories of institutional investors as approved from time
to time and as set forth in the Prospectus; (ii) subject to an
Administrative Fee at a maximum annual rate of .25% of the value of the
average daily net assets attributable to Class Y Shares; (iii) not subject
to any Service Fee; and (iv) not subject to any Distribution Fee. Class Y
Shares may be exchanged for Class Y Shares of another Portfolio or for
shares of the Money Market Series at their relative net asset values, on
terms described in the Prospectus.
SECTION 2: ALLOCATION OF CLASS EXPENSES
Each Class of Shares of each Series represents interests in that Series,
and each has the same rights, preferences, voting powers, restrictions and
limitations, as the other Classes, except as follows:
(1) expenses related to the distribution of a Class of Shares or to the
services provided to shareholders of a Class of Shares shall be borne
solely by such Class;
(2) each Class will bear different Class Expenses (as defined below);
(3) each Class will have exclusive voting rights with respect to matters
that exclusively affect such Class; and
(4) each Class will bear a different name or designation.
Expenses that are directly attributable to a particular Class of Shares
will be incurred by that Class of Shares. The Board, acting in its sole
discretion, has determined that the following expenses attributable to the
Shares of a particular Class ("Class Expenses") will be borne solely by the
Class to which they are attributable:
(1) asset-based distribution fees and shareholder service fees;
(2) transfer agency fees attributable to a particular Class;
-5-
<PAGE>
(3) expenses related to preparing, printing, mailing and distributing
materials such as shareholder reports, prospectuses and proxy
statements to current shareholders of a specific Class;
(4) state and federal registration fees incurred by a specific Class;
(5) litigation and other legal expenses relating to a particular Class;
(6) directors' fees and expenses incurred as a result of issues relating
solely to a particular Class;
(7) accounting, audit and tax expenses relating to a specific Class;
(8) the expenses of administrative personnel and services required to
support the shareholders of a specific Class; and
(9) fees and other payments made to entities performing services for a
particular Class, including account maintenance, dividend disbursing
or subaccounting services.
Class Expenses may be waived or reimbursed proportionately and on a pro
rata basis between Classes of a Series by SM&R, the Series' investment adviser
and distributor. Investment advisory fees, custodial fees, and other expenses
relating to the management of the Series' assets shall not be allocated on a
class-specific basis.
SECTION 3: ALLOCATION OF SERIES INCOME AND EXPENSES
Income, realized and unrealized capital gains and losses, and expenses that
are not allocated to a specific Class pursuant to Section 2 above, shall be
allocated to each Class of a Series on the basis of the proportionate net assets
of that Class in relation to the net assets of that Series. (Likewise, income,
realized and unrealized capital gains and losses, and expenses that are not
allocated to a specific Series shall be allocated to each Series of the Fund on
the basis of the proportionate net assets of that Series in relation to the net
assets of the Fund.) On a daily basis, the total income, dividends, other
income accrued and Series-level expenses incurred are multiplied by the
proportionate value of the Series' net assets attributable to each Class to
determine the income and expenses attributable to that Class for the day.
Expenses properly attributable to each Class are recorded separately and charged
to that Class. Net income for each Class is then determined for the day and
segregated on the Fund's general ledger. Dividends are calculated in the same
manner for each Class and declared and paid on all Classes of Shares on the same
days and at the same times.
SECTION 4: AMENDMENTS
This Multi-Class Plan may not be amended to change any material provision
unless such amendment is approved by a vote of the majority of the Board,
including a majority of the Directors who are not interested persons of the Fund
(as defined in Section 2(a)(19) of the 1940 Act) (the "Independent Directors"),
based on its finding that the amendment is in the best interest of each Class
individually and the relevant Series as a whole.
-6-
<PAGE>
SECTION 5: TERMINATION
This Multi-Class Plan shall remain in effect until such time as the Board
terminates this Multi-Class Plan or makes a material change to this Multi-Class
Plan. Any material change to this Multi-Class Plan must be approved by the
Board, including a majority of the Independent Directors, as being in the best
interests of each Class of Shares and each Series as a whole.
SECTION 6: RECORD KEEPING
The Fund shall preserve copies of this Multi-Class Plan and any related
agreements for a period of not less than six years from the date of this
Multi-Class Plan or agreement, the first two years in an easily accessible
place, or for such other periods as may be required by applicable law.
SECTION 7: FILING
This Plan shall be filed as an exhibit to the Fund's Registration Statement
on Form N-1A with the U.S. Securities and Exchange Commission, with the next
amendment of such Registration Statement filed after the date hereof.
SECTION 8: INTERPRETATION; MEANING OF CERTAIN TERMS.
(a) This Plan shall be interpreted in accordance with the 1940 Act and Rule
18f-3 thereunder.
(b) As used in this Plan, the term "interested person" shall have the same
meaning that such term has under the 1940 Act and the rules and regulations
under the 1940 Act, subject to any exemption that may be granted to the Fund
under the 1940 Act by the Securities and Exchange Commission.
(c) The provisions of this Plan are severable for each Class.
SECTION 9. DATE OF EFFECTIVENESS.
This Plan has been executed by the Fund as of the ______ day of _________,
1998 and will become effective with respect to each Class of Shares of a Series
as of the date on which interests in that Class are first offered to or held by
the public, subject to approval by the Board as required by Rule 18f-3 under the
1940 Act.
-7-
<PAGE>
IN WITNESS WHEREOF, the Fund has executed this Multi-Class Plan on the day
and year set forth below.
Date:
-----------------
SM&R INVESTMENTS, INC.
- ------------------------------- By:
--------------------------
- ------------------------------- Title:
Attest: ------------------------
-8-
<PAGE>
EXHIBIT 99.B19
CONTROL LIST
The Registrant, SM&R Investments, Inc., is an open-end investment company,
organized under the laws of the State of Maryland. The Registrant has an
investment advisory contract with Securities Management and Research, Inc.
("SM&R"), a Florida corporation and a registered broker-dealer and investment
adviser. SM&R and its parent company, American National Insurance Company, a
Texas insurance company, own approximately 10% and 28%, respectively, of the
outstanding stock of the Government Bond Fund, 9% and 54%, respectively, of
the Primary Fund, and 12% and 53%, respectively, of the Tax Free Fund. The
Moody Foundation owns approximately 23.7% and the Libbie Shearn Moody Trust
owns approximately 37.58% of the outstanding stock of American National
Insurance Company.
The Trustees of The Moody Foundation are Mrs. Frances Moody Newman, Robert
L. Moody and Ross Rankin Moody. Robert L. Moody is a beneficiary of the Libbie
Shearn Moody Trust and Chairman of the Board, Director, President and Chief
Executive Officer of American National Insurance Company. Robert L. Moody is
also Chairman of the Board, a Director and controlling shareholder of National
Western Life Insurance Company, a Colorado insurance company.
The Moody National Bank of Galveston is the trustee of the Libbie Shearn
Moody Trust and various other trusts which, in the aggregate, own approximately
47% of the outstanding stock of American National Insurance Company. Moody Bank
Holding Company, Inc. owns approximately 97% of the outstanding shares of The
Moody National Bank of Galveston. Moody Bank Holding Company, Inc. is a wholly
owned subsidiary of Moody Bancshares, Inc. The Three R Trusts, trusts created
by Robert L. Moody for the benefit of his children, are controlling stockholders
of Moody Bancshares, Inc.
The Moody Foundation owns 33% and the Libbie Shearn Moody Trust owns
51% of the outstanding stock of Gal-Tex Hotel Corporation, a Texas corporation.
Gal-Tex Hotel Corporation has the following wholly-owned subsidiaries, listed in
alphabetical order:
Gal-Tenn Corporation
Gal-Tex Management Company
Gal-Tex Woodstock, Inc.
GTG Corporation
New Paxton Hotel Corporation
<PAGE>
American National owns a direct or indirect interest in the following
entities, listed in alphabetical order:
ENTITY: Alamo Quarry Market, Ltd.
ENTITY FORM: a Texas limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: ANTAC, Inc. owns a 17.5% interest.
ENTITY: American Hampden Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
98% interest.
ENTITY: American National of Delaware Corporation
ENTITY FORM: a Delaware corporation (inactive)
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company
ENTITY: American National Financial Corporation
ENTITY FORM: a Texas corporation (inactive)
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company
ENTITY: American National Financial Corporation (Delaware)
ENTITY FORM: a Delaware corporation (inactive)
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: American National Financial Corporation (Nevada)
ENTITY FORM: a Nevada corporation (inactive)
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: American National General Insurance Company
ENTITY FORM: a Missouri insurance company
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company.
ENTITY: American National Growth Fund, Inc.
ENTITY FORM: a Maryland corporation - registered investment company
OWNERSHIP OR OTHER BASIS OF CONTROL: Investment Advisory Agreement with SM&R.
<PAGE>
ENTITY: American National Income Fund, Inc.
ENTITY FORM: a Maryland corporation - registered investment company
OWNERSHIP OR OTHER BASIS OF CONTROL: Investment Advisory Agreement with SM&R.
ENTITY: Triflex Fund, Inc.
ENTITY FORM: a Maryland corporation - registered investment company
OWNERSHIP OR OTHER BASIS OF CONTROL: Investment Advisory Agreement with SM&R.
ENTITY: American National Investment Accounts, Inc.
ENTITY FORM: a Maryland corporation - registered investment company
OWNERSHIP OR OTHER BASIS OF CONTROL: Investment Advisory Agreement with SM&R.
ENTITY: American National Insurance Service Company
ENTITY FORM: Missouri corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company.
ENTITY: American National Life Insurance Company of Texas
ENTITY FORM: a Texas insurance company
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company
ENTITY: American National Lloyds Insurance Company
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company
ENTITY: American National Property and Casualty Company
ENTITY FORM: a Missouri insurance company
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: ANPAC General Agency of Texas
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company.
ENTITY: ANPAC Lloyds Insurance Management, Inc.
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company
ENTITY: ANREM Corporation
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of SM&R
<PAGE>
ENTITY: ANTAC, Inc.
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: Garden State Life Insurance Company
ENTITY FORM: a New Jersey insurance company
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: Gateway Park Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: South Shore Harbour Development, Ltd. has
a 50% interest.
ENTITY: Harbour Title Company
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: South Shore Harbour Development, Ltd. owns
50% of the outstanding stock.
ENTITY: Kearns Building Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: American National owns an 85% interest.
ENTITY: Lincolnshire Equity Fund, L.P.
ENTITY FORM: a Delaware limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
12.6% limited partnership interest.
ENTITY: National Institute of Family Economics, Inc.
ENTITY FORM: a Texas corporation (inactive)
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company
ENTITY: Pacific Property and Casualty Company
ENTITY FORM: a California corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Property and Casualty Company
ENTITY: Panther Creek Limited Partnership
ENTITY FORM: a Texas limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
99% limited partnership interest
<PAGE>
ENTITY: Ridgedale Festival Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
50% interest.
ENTITY: Rutledge Partners, L.P.
ENTITY FORM: a Texas limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
50% limited partnership interest.
ENTITY: South Shore Harbour Development, Ltd.
ENTITY FORM: a Texas limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
95% limited partnership interest. ANREM Corp. owns a 5% general partnership
interest.
ENTITY: Standard Life and Accident Insurance Company
ENTITY FORM: an Oklahoma insurance company
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: Terra Venture Bridgeton Project Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned by American National
Insurance Company.
ENTITY: Third and Catalina, Ltd.
ENTITY FORM: a Texas limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
49% limited partnership interest.
ENTITY: Timbermill, Ltd.
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
99% limited partnership interest.
ENTITY: Town and Country Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: American National Insurance Company owns a
99% limited partnership interest.
