<PAGE>
As filed with the Securities and Exchange Commission on December 15, 1998
REGISTRATION NOS. 33-44021; 811-6477
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 13 /X/
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 13 /X/
[Check appropriate box or boxes.]
------------------------
SM&R CAPITAL FUNDS, INC.
[Exact Name of Registrant as Specified in Charter]
2450 SOUTH SHORE BOULEVARD, SUITE 400, LEAGUE CITY, TEXAS 77573
[Address of Principal Executive Offices] [Zip Code]
Registrant's Telephone Number, Including Area Code (281) 334-2469
NAME AND ADDRESS OF
AGENT FOR SERVICE: WITH COPY TO:
TERESA E. AXELSON JERRY L. ADAMS
2450 SOUTH SHORE BOULEVARD, SUITE 400 GREER, HERZ & ADAMS, L.L.P.
LEAGUE CITY, TEXAS 77573 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
/X/ on January 1, 1999 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on (date) pursuant to paragraph (a)(1) of Rule 485
/ / 75 days after filing pursuant to paragraph (a)(2) Rule 485
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/X/ this Post-Effective Amendment designates a new effective date for a
previously filed Post-Effective Amendment.
Title of Securities Being Registered: Common Stock, par value $.01 per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SM&R
LOGO
P R O S P E C T U S
JANUARY 1, 1999
SM&R INVESTMENTS, INC.
- SM&R GOVERNMENT BOND FUND
- SM&R TAX FREE FUND
- SM&R PRIMARY FUND
- SM&R MONEY MARKET FUND
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
CLASSES A, B, AND C
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
RISK/RETURN SUMMARY....................................................................... 1
SM&R Government Bond Fund............................................................... 1
SM&R Tax Free Fund...................................................................... 2
SM&R Primary Fund....................................................................... 3
SM&R Money Market Fund.................................................................. 4
Types of Investment Risk................................................................ 5
Bar Chart and Performance Table......................................................... 5
Fees and Expenses of the Funds.......................................................... 9
SHARES OF THE FUNDS....................................................................... 13
Sales Charges........................................................................... 14
Sales Charge Reductions and Waivers..................................................... 15
Distribution and Shareholder Service (12b-1) Fees....................................... 17
INVESTMENT OBJECTIVES AND POLICIES........................................................ 18
Government Bond Fund.................................................................... 18
Tax Free Fund........................................................................... 21
Primary Fund............................................................................ 23
Money Market Fund....................................................................... 24
RISK FACTORS.............................................................................. 25
PURCHASES AND REDEMPTIONS................................................................. 27
Purchasing Shares....................................................................... 27
Pricing of Fund Shares.................................................................. 28
Special Purchase Plans and Services..................................................... 29
Retirement Plans........................................................................ 32
Dividends, Distributions, and Taxes..................................................... 33
Redeeming Shares........................................................................ 34
THE FUNDS AND MANAGEMENT.................................................................. 38
FINANCIAL HIGHLIGHTS...................................................................... 41
Government Bond Fund.................................................................... 41
Tax Free Fund........................................................................... 42
Primary Fund............................................................................ 43
APPENDIX.................................................................................. A-1
</TABLE>
ii
<PAGE>
RISK/RETURN SUMMARY SM&R GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------
GOVERNMENT BOND FUND'S INVESTMENT 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.
GOVERNMENT BOND FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Government Bond Fund normally invests at least 65% of its
assets in securities issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities. These may
include Treasuries and mortgage-backed securities, such as
Ginnie Maes, Freddie Macs, and Fannie Maes. This fund may also
invest assets in collateralized mortgage obligations.
The Government Bond Fund may invest in zero coupon bonds, which
are U.S. Government obligations. The fund may also invest in
commercial paper, certificates of deposit, corporate debt
securities rated "A" or higher, and repurchase agreements.
The Government Bond Fund generally invests primarily in medium
and long term securities. The average portfolio maturity
generally is expected to be in the six to fifteen year range
(some securities may have longer or shorter durations). The
average portfolio maturity may be shorter when management
anticipates that interest rates will increase, and longer when
management anticipates that interest rates will decrease.
PRINCIPAL RISKS OF INVESTING IN THE GOVERNMENT BOND FUND
You could lose money on your investment in the Government Bond
Fund, or it could underperform other investments, if any of the
following occurs:
- interest rates rise (thus causing a decline in the market
value of debt securities)
- the worldwide demand for U.S. government securities falls
- interest rates fall enough to prompt an unexpected number of
people to refinance (or prepay) their mortgages
- interest rates rise enough to cause fewer people than
expected to repay their mortgages early
- if any bonds the fund owns are downgraded in credit rating or
go into default
WHO MAY WANT TO INVEST IN THE GOVERNMENT BOND FUND
The Government Bond Fund may be appropriate if you:
- are seeking a regular stream of income to meet current needs
- are seeking higher potential returns than money market funds
and are willing to accept moderate risk of volatility
- are retired or nearing retirement
The Government Bond Fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require absolute stability of your principal
1
<PAGE>
RISK/RETURN SUMMARY SM&R TAX FREE FUND
- --------------------------------------------------------------------------------
TAX FREE FUND'S INVESTMENT 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.
TAX FREE FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Tax Free Fund invests primarily in tax-exempt securities.
During normal market conditions, this fund invests at least 80%
of its assets in municipal securities that pay interest exempt
from federal income taxes. The Tax Free Fund generally invests
in securities rated Baa or better by Moody's or BBB or better
by Standard and Poor's and Fitch. This fund may not invest more
than 20% of its assets in UNRATED municipal securities. These
securities may be less liquid than comparably rated municipal
securities and involve somewhat greater risk. This fund may
also invest up to 20% of its assets in Government guaranteed
taxable bonds, highly rated corporate bonds, or commercial
paper.
The average portfolio maturity of the Tax Free Fund generally
is expected to be in the six to twelve year range (some
securities have longer or shorter durations). The average
portfolio maturity may be shorter when management anticipates
that interest rates will increase, and longer when management
anticipates that interest rates will decrease.
PRINCIPAL RISKS OF INVESTING IN THE TAX FREE FUND
You could lose money on your investment in the Tax Free Fund,
or it could underperform other investments, if any of the
following occurs:
- interest rates rise (thus causing a decline in the market
value of debt securities)
- if any bonds the fund owns are downgraded in credit rating or
go into default
- certain securities become harder to value or to sell at a
fair price
ALSO, SOME OF YOUR DIVIDEND INCOME MAY BE TAXABLE.
WHO MAY WANT TO INVEST IN THE TAX FREE FUND
The Tax Free Fund may be appropriate if you:
- are willing to sacrifice some investment return for income
exempt from federal income tax and, under certain conditions,
exempt from state and local taxes
- are in a high tax bracket (28% and up)
- are seeking a regular stream of income to meet current needs
- are seeking higher potential returns than money market funds
and are willing to accept moderate risk of volatility
The Tax Free Fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- prefer capital gains over ordinary income
2
<PAGE>
RISK/RETURN SUMMARY SM&R PRIMARY FUND
- --------------------------------------------------------------------------------
PRIMARY FUND'S INVESTMENT OBJECTIVE
To seek maximum current income consistent with capital
preservation and liquidity through investment primarily in
commercial paper.
PRIMARY FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Primary Fund invests primarily in commercial paper.
Commercial paper is short-term unsecured promissory notes
issued by corporations. This fund will only invest in
commercial paper rated in one of the two highest rating
categories.
The Primary Fund may also invest in:
- U.S. Government obligations;
- corporate debt obligations maturing in five years or less and
rated "A" or higher;
- certificates of deposit generally maturing in 3 years or
less; and
- repurchase agreements.
PRINCIPAL RISKS OF INVESTING IN THE PRIMARY FUND
You could lose money on your investment in the Primary Fund, or
it could underperform other investments, if any of the
following occurs:
- interest rates rise (thus causing a decline in the market
value of debt securities)
- if any of the fund's investments are downgraded in credit
rating or go into default
By limiting its investments as described above, the Primary
Fund may not achieve as high a level of current income as a
fund investing in lower-rated securities or longer-term
securities.
WHO MAY WANT TO INVEST IN THE PRIMARY FUND
The Primary Fund may be appropriate if you:
- are seeking a regular stream of income to meet current needs
- are seeking higher potential returns than money market funds
and are willing to accept moderate risk of volatility
- are more concerned with safety of principal than with
investment returns
- are retired or nearing retirement
The Primary Fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- are investing for goals that are many years in the future
- prefer capital gains over ordinary income
3
<PAGE>
RISK/RETURN SUMMARY SM&R MONEY MARKET FUND
- --------------------------------------------------------------------------------
MONEY MARKET FUND'S INVESTMENT OBJECTIVE
To seek the highest current income consistent with the
stability of principal and maintenance of liquidity.
MONEY MARKET FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Money Market Fund seeks to achieve its objective by
investing in high-quality short-term money market instruments,
including: U.S. Government obligations, certificates of
deposit, banker's acceptances, commercial paper, collateralized
mortgage obligations, and corporate bonds and notes. This fund
limits its investments to those short-term securities that it
determines present minimal credit risk and meet certain rating
requirements (in the two highest short-term rating categories).
PRINCIPAL RISKS OF INVESTING IN THE MONEY MARKET FUND
The Money Market Fund is subject to the following risks:
- that interest rates may rise (thus causing a decline in the
market value of debt securities)
- that the fund's investments may be downgraded in credit
rating or go into default
However, the risks of investment in the Money Market Fund may
be expected to be less than for other mutual funds. By limiting
its investments as described above, this fund may not achieve
as high a level of current income as a fund investing in
lower-rated securities. ALTHOUGH THE MONEY MARKET FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS
POSSIBLE TO LOSE MONEY BY INVESTING IN THE MONEY MARKET FUND.
WHO MAY WANT TO INVEST IN THE MONEY MARKET FUND
The Money Market Fund may be appropriate if you:
- require stability of principal
- are seeking a mutual fund for the cash portion of an asset
allocation program
- need to "park" your money temporarily
- are more concerned with safety of principal than with
investment returns
- are investing emergency reserves
The Money Market Fund may NOT be appropriate if you:
- want federal deposit insurance
- are seeking an investment that is likely to outpace inflation
- are investing for retirement or other goals that are many
years in the future
- are investing for growth or maximum current income
YOU SHOULD KEEP IN MIND THAT AN INVESTMENT IN THE MONEY MARKET
FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
4
<PAGE>
RISK/RETURN SUMMARY
- --------------------------------------------------------------------------------
TYPES OF INVESTMENT RISK
As indicated above, each of the four funds may be subject to certain of the
following types of risks:
CREDIT RISK. The risk that the issuer of a security, or a party to a contract,
will default or otherwise not honor a financial obligation. THIS RISK PRIMARILY
AFFECTS THE TAX FREE, PRIMARY AND MONEY MARKET FUNDS.
INTEREST RATE RISK. The risk of declines in market value of an income-bearing
investment due to changes in prevailing interest rates. With fixed-rate
securities, a rise in interest rates typically causes a decline in market
values, while a fall in interest rates typically causes an increase in market
values. THIS RISK AFFECTS ALL FOUR FUNDS, BUT HAS LESS EFFECT ON THE MONEY
MARKET AND PRIMARY FUNDS.
LIQUIDITY RISK. The risk that certain securities or other investments may be
difficult or impossible to sell at the time the fund would like to sell them or
at the price the fund values them. The fund may have to sell at a lower price,
sell other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance. THIS RISK
PRIMARILY AFFECTS THE TAX FREE, PRIMARY AND MONEY MARKET FUNDS.
MANAGEMENT RISK. The risk that a strategy used by a fund's management may fail
to produce the intended result. THIS RISK IS COMMON TO ALL MUTUAL FUNDS. THIS
RISK AFFECTS ALL FOUR FUNDS.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. The fluctuations may cause a security to be
worth less than the price originally paid for it, or less than it was worth at
an earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. This risk is common to all stocks and bonds
and the mutual funds that invest in them. THIS RISK AFFECTS ALL FOUR FUNDS.
PREPAYMENT AND EXTENSION RISK. PREPAYMENT RISK is the risk that an unexpected
fall in prevailing interest rates will shorten the life of an outstanding
mortgage-backed security by increasing the actual or expected number of mortgage
prepayments, thereby reducing the security's value. EXTENSION RISK is the risk
that an unexpected rise in prevailing interest rates will extend the life of an
outstanding mortgage-backed security by reducing the actual or expected number
of mortgage prepayments, thereby reducing the security's value. THIS RISK
APPLIES ONLY TO THE GOVERNMENT BOND FUND.
BAR CHART AND PERFORMANCE TABLE
The bar charts and performance tables shown below provide some indication of the
risks of investing in the funds and the variability of returns:
- - by showing each fund's performance for each year since inception and
- - by showing how each fund's average annual returns for certain periods compare
to those of a broad-based securities market index.
Because the Money Market Fund was not in operation during these periods, it is
not included in the bar chart or the performance table.
The returns shown are based on an investment in the funds prior to the creation
of multiple classes of shares, but do not reflect any sales loads that would be
imposed on the purchase or sale of any shares. We created the multiple classes
of shares on January 1, 1999. If multiple classes of shares of the Government
Bond and Tax Free Funds had been in existence, the financial performance of
Class A, B, and C shares would have been lower than depicted because of the
imposition of distribution and/or service (12b-1) fees.
Past performance is not necessarily an indication of how the funds will perform
in the future.
5
<PAGE>
RISK/RETURN SUMMARY SM&R GOVERNMENT BOND FUND
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1993 9.31%
<S> <C>
1994 -4.65%
1995 18.57%
1996 3.43%
1997 8.14%
</TABLE>
* For the nine month period ended September 30, 1998, the Government Bond Fund
had a total return of 6.70%.
During the period shown in the bar chart, the highest return for a quarter was
6.44% achieved June 30, 1995 and the lowest return for a quarter was minus 1.77%
for the quarter September 30, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING DECEMBER
31, 1997) PAST ONE YEAR PAST 5 YEARS
<S> <C> <C>
SM&R GOVERNMENT BOND FUND 3.28% 5.71%
*LEHMAN BROTHERS 9.54% 8.71%
GOVERNMENT/MORTGAGE-BACKED
SECURITIES INDEX.
</TABLE>
* Lehman Brothers Government/Mortgage-Backed Securities Index is an index
which includes all public obligations of the U.S. Treasury and all publicly
issued debt of U.S. Government agencies quasi-federal corporations and
corporate debt guaranteed by the U.S. Government as well as 15 and 30 year
fixed rate securities backed by mortgage pools of the GNMA, FHLMA and FNMA.
6
<PAGE>
RISK/RETURN SUMMARY SM&R PRIMARY FUND
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1993 2.48%
<S> <C>
1994 3.58%
1995 5.26%
1996 4.92%
1997 5.08%
</TABLE>
* For the nine month period ended September 30, 1998, the Primary Fund had a
total return of 3.81%.
During the period shown in the bar chart, the highest return for a quarter was
2.54% achieved September 30, 1997 and the lowest return for a quarter was 0.60%
for the quarter June 30, 1993.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING DECEMBER
31, 1997) PAST ONE YEAR PAST 5 YEARS
<S> <C> <C>
SM&R PRIMARY FUND 5.08% 4.26%
*LEHMAN GOVERNMENT/ CORPORATE 7.99% 7.02%
INDEX
</TABLE>
* Lehman Government/Corporate Index is an index representing all public
obligations of the U.S. Treasury as well as all publicly issued debt of U.S.
Government agencies with maturities of one to three years.
7
<PAGE>
RISK/RETURN SUMMARY SM&R TAX FREE FUND
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1994 -5.49%
<S> <C>
1995 17.87%
1996 4.48%
1997 8.98%
</TABLE>
* For the nine month period ended September 30, 1998, the Tax Free Fund had a
total return of 5.73%.
During the period shown in the bar chart, the highest return for a quarter was
7.41% achieved March 31, 1995 and the lowest return for a quarter was minus
3.94% for the quarter March 31, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING DECEMBER
31, 1997) PAST ONE YEAR PAST 4 YEARS
<S> <C> <C>
SM&R TAX FREE FUND 4.08% 4.94%
*LEHMAN BROTHERS MUNICIPAL 9.19% 11.18%
INDEX
</TABLE>
* Lehman Brothers Municipal Index is an index of investment grade tax exempt
bonds classified into four major sections: General Obligation, Revenue,
Insured and Preferred.
8
<PAGE>
RISK/RETURN SUMMARY
- --------------------------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
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 Charge Imposed on Purchases
(as a percentage of offering price) 4.75%(1) None 1.00% None
Maximum Deferred Sales Charge (as a
percentage of offering price)(2) None(3) 3.00%(4) 1.00%(5) None
Maximum Sales Charge Imposed on Reinvested
Dividends and Other Distributions (as a
percentage of offering price) None None None None
EXCHANGE FEES None None None None
<CAPTION>
TAX FREE FUND
---------------------------------
CLASS A CLASS B CLASS C MONEY MARKET FUND
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE (TOTAL) 4.75% 3.00% 2.00% None
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.75%(1) None 1.00% None
Maximum Deferred Sales Charge (as a
percentage of offering price)(2) None(3) 3.00%(4) 1.00%(5) None
Maximum Sales Charge Imposed on Reinvested
Dividends and Other Distributions (as a
Percentage of offering price) None None None None
EXCHANGE FEES None None None None
</TABLE>
9
<PAGE>
RISK/RETURN SUMMARY
- --------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES(6)
(expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND
---------------------------------
CLASS A CLASS B CLASS C PRIMARY FUND
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.50%
Distribution and/or Service (12b-1) Fees 0.25% 0.75% 1.00% None
Other Expenses(7) 0.50% 0.50% 0.50% 0.48%
Total Annual Fund Operating Expenses 1.25% 1.75% 2.00% 0.98%
Fee Waivers and Expense Reimbursements(8) -- -- -- --
------- ------- ------- ------
Net Expenses 1.25% 1.75% 2.00% 0.98%
<CAPTION>
TAX FREE FUND
---------------------------------
CLASS A CLASS B CLASS C MONEY MARKET FUND
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.25%
Distribution and/or Service (12b-1) Fees 0.25% 0.75% 1.00% None
Other Expenses(7) 0.75% 0.75% 0.75% 0.25%
Total Annual Fund Operating Expenses 1.50% 2.00% 2.25% 0.50%
Fee Waivers and Expense Reimbursements(8) -- -- -- --
------- ------- ------- ------
Net Expenses 1.50% 2.00% 2.25% 0.50%
</TABLE>
NOTES TO THE FEES AND EXPENSES OF THE FUNDS
(1) You pay a sales charge of 4.75% on initial investments in Class A shares of
less than $50,000. You pay a reduced sales charge at certain breakpoints, as
follows:
- 4.50% on initial investments of at least $50,000 but less than $100,000
- 3.50% on initial investments of at least $100,000 but less than $250,000
- 2.50% on initial investments of at least $250,000 but less than $500,000
- 1.50% on initial investments of at least $500,000 but less than $1 million
- zero on initial investments of $1 million or more
(2) You pay an $8.00 transaction fee for each expedited wire redemption.
(3) Purchases of $1 million or more of Class A shares may be made without an
initial sales charge. Redemptions of such shares within the first thirteen
months after purchase, however, will be subject to a contingent deferred
sales charge of 1.00%.
(4) The maximum 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.
10
<PAGE>
RISK/RETURN SUMMARY
- --------------------------------------------------------------------
(5) A contingent deferred sales charge of 1.00% only applies to redemptions of
Class C shares during the first thirteen months after purchase.
(6) The "Management Fees" and "Other Expenses" shown for the Government Bond,
Primary, and Tax Free Funds are for the year ended August 31, 1998; for the
Money Market Fund, they are estimates for the first year of operation
(ending August 31, 1999).
(7) "Other Expenses" include the 0.25% Administrative Service Fee. Because Class
A, B, and C shares were not available prior to the date of this Prospectus,
"Other Expenses" for Class A, B, and C shares are based on the expenses and
average net assets of the Government Bond Fund and the Tax Free Fund for the
fiscal year ended August 31, 1998. "Other Expenses" shown for the Money
Market Fund are estimated for the current fiscal year ending August 31,
1999.
(8) The Fee Table reflects fees waived and expenses assumed CONTRACTUALLY by the
funds' manager, Securities Management and Research, Inc. ("SM&R"). Pursuant
to the Administrative Service Agreement, SM&R will pay (or reimburse) each
fund for regular operating expenses in excess of 1.25% (0.50% for the Money
Market Fund) per year of such fund's average daily net assets. Regular
operating expenses include the advisory fee and administrative fee, but do
not include the 12b-1 fee or class-specific expenses.
The Fee Table does not reflect fees waived or expenses assumed by SM&R on a
VOLUNTARY basis. During the fiscal year ended August 31, 1998, SM&R
voluntarily waived fees of 0.18% and 0.50% for the Primary Fund and Tax Free
Fund, respectively. SM&R intends to continue to voluntarily waive the
advisory fee for the Tax Free Fund. SM&R also intends to reimburse regular
operating expenses that 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 reimbursement of expenses at any
time without notice.
The following table shows fees and expenses for the Government Bond,
Primary, and Tax Free Funds for the year ended August 31, 1998 taking into
account all fee waivers and expense reimbursements, both contractual and
voluntary. For the Money Market Fund, they are estimates considering
estimated fee waivers and expense reimbursements for the year ending August
31, 1999.
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS AFTER All Fee Waivers and Expense
Reimbursements)
<TABLE>
<CAPTION>
GOVERNMENT BOND FUND
------------------------------------------
CLASS A CLASS B CLASS C PRIMARY FUND
------------- ------------- ------------ ------------------------
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.32%
Distribution and/or Service (12b-1) Fees 0.25% 0.75% 1.00% None
Other Expenses 0.50% 0.50% 0.50% 0.48%
Total Annual Fund Operating Expenses 1.25% 1.75% 2.00% 0.80%
<CAPTION>
TAX FREE FUND
------------------------------------------
CLASS A CLASS B CLASS C MONEY MARKET FUND
------------- ------------- ------------ ------------------------
<S> <C> <C> <C> <C>
Management Fees 0.00% 0.00% 0.00% 0.25%
Distribution and/or Service (12 b-1) Fees 0.25% 0.75% 1.00% None
Other Expenses 0.75% 0.75% 0.75% 0.25%
Total Annual Fund Operating Expenses 1.00% 1.50% 1.75% 0.50%
</TABLE>
11
<PAGE>
RISK/RETURN SUMMARY
- --------------------------------------------------------------------
EXAMPLES OF EXPENSES
These examples are intended to help you compare the cost of investing in the
funds with the cost of investing in other mutual funds. These examples assume
that you invest $10,000 in each fund and applicable class thereof for the time
periods indicated, based on expenses BEFORE fee waivers and expense
reimbursements. These examples also assume that your investment has a 5% return
each year and that the funds' operating expenses remain the same. YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER THAN SHOWN.
You would pay the following expenses, based on these assumptions, if you
actually redeem all of your shares at the end of the period shown:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Government Bond Fund
Class A...................................... $ 596 $ 853 $ 1,129 $ 1,915
Class B...................................... 478 651 949 1,931
Class C...................................... 401 721 1,167 2,404
Tax Free Fund
Class A...................................... $ 620 $ 927 $ 1,255 $ 2,180
Class B...................................... 503 727 1,078 2,199
Class C...................................... 426 796 1,293 2,659
Primary Fund................................... $ 100 $ 312 $ 542 $ 1,201
Money Market Fund.............................. $ 51 $ 160 $ 280 $ 628
</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...................................... $ 596 $ 853 $ 1,129 $ 1,915
Class B...................................... 178 551 949 1,931
Class C...................................... 301 721 1,167 2,404
Tax Free Fund
Class A...................................... $ 620 $ 927 $ 1,255 $ 2,180
Class B...................................... 203 627 1,078 2,199
Class C...................................... 326 796 1,293 2,659
Primary Fund................................... $ 100 $ 312 $ 542 $ 1,201
Money Market Fund.............................. $ 51 $ 160 $ 280 $ 628
</TABLE>
12
<PAGE>
SHARES OF THE FUNDS
- --------------------------------------------------------------------------------
SM&R Investments, Inc., formerly known as SM&R Capital Funds, Inc. (the
"Company" or "we") offers four separate investment portfolios. Two of the funds
offer multiple classes of shares with different sales charge and distribution
and service (12b-1) fee structures. Each class has its own cost structure,
allowing you to choose the class that best suits your circumstances and
preferences. Your representative can help you decide.
The Money Market and Primary Funds each consist of a single class of shares
offered at net asset value and do not impose any sales charges or distribution
and service (12b-1) fees. The Government Bond and Tax Free Funds offer three
classes of shares through this Prospectus, called Class A, Class B, and Class C.
The Government Bond and Tax Free Funds offer other classes through separate
prospectuses. The other classes can only be bought by specified types of
investors or through certain distribution channels. FOR MORE INFORMATION ON THE
OTHER CLASSES OF SHARES OR TO REQUEST A PROSPECTUS FOR ANOTHER CLASS, CALL
INVESTOR SERVICES AT (800) 231-4639.
You may select from among the following three classes of shares:
CLASS A
(FRONT-END LOAD)
- - Front-end sales charges, as described below. There are several ways to reduce
these charges, also described below.
- - Lower annual expenses than Class B or Class C shares.
CLASS B
(BACK-END LOAD)
- - No front-end sales charge; all your money goes to work for you right away.
- - Higher annual expenses than Class A shares.
- - A deferred sales charge on shares you sell within three years of purchase, as
described below.
- - Automatic conversion to Class A shares after eight years, thus reducing future
annual expenses.
CLASS C
(LEVEL LOAD)
- - Lower front-end sales charge than Class A shares, as described below.
- - Higher annual expenses than Class A and Class B shares.
- - A deferred sales charge on shares you sell within thirteen months of purchase,
as described below.
FOR EXPENSES OF CLASS A, B, AND C SHARES, SEE THE FEES AND EXPENSES OF THE FUNDS
EARLIER IN THIS PROSPECTUS.
SALES CHARGES
- --------------------------------------------------------------------------------
13
<PAGE>
CLASS A SALES CHARGES
The offering price of Class A shares is the net asset value plus a "front-end"
sales charge. The sales charge is a percentage of the offering price, as shown
in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS A %
SALES CHARGE AS A % OF
AMOUNT OF INVESTMENT OF OFFERING PRICE NET AMOUNT INVESTED
- ---------------------------------------------------------------------------- ------------------- ---------------------
<S> <C> <C>
Less than $50,000 4.75% 4.9%
$50,000 but less than $100,000 4.5% 4.7%
$100,000 but less than $250,000 3.5% 3.6%
$250,000 but less than $500,000 2.5% 2.6%
$500,000 but less than $1,000,000 1.5% 1.5%
$1,000,000 and over See below None
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE. If you invest $1 million or more in Class A
shares, you do not pay any "front-end" sales charge. However, you will pay a
contingent deferred sales charge (CDSC) of 1.00% of the offering price if you
redeem those shares within 13 months after you bought them. The CDSC will be
calculated in the same manner as for Class B shares, as described below.
CLASS B SALES CHARGES
Class B shares are sold at net asset value, without any initial sales charge.
However, there is a CDSC on shares you sell within three years of buying them.
The CDSC shown in the following table is a percentage of the offering price:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
(AS A % OF OFFERING PRICE)
YEARS SINCE PURCHASE -
- ---------------------------------------------
<S> <C>
Year 1 3.00%
Year 2 2.00%
Year 3 1.00%
Year 4+ None
</TABLE>
If the net asset value of shares being redeemed has increased since you bought
them, we do not impose any CDSC on such increase in net asset value. We do not
impose any CDSC on shares you buy with reinvested dividends or capital gain
distributions. We will minimize any applicable CDSC by assuming that an investor
(i) first redeems Class B shares bought through reinvested dividends and capital
gains distributions, and (ii) next redeems Class B shares held the longest.
CLASS C SALES CHARGES
Class C shares are sold at the net asset value plus a "front-end" sales charge
of 1.00% of the offering price. A contingent deferred sales charge of 1.00% also
applies on redemptions of Class C shares during the first thirteen months after
purchase.
SALES CHARGE REDUCTIONS AND WAIVERS
- --------------------------------------------------------------------------------
14
<PAGE>
REDUCING YOUR CLASS A SALES CHARGE
DISCOUNTS THROUGH CONCURRENT PURCHASES. To qualify for a reduced sales charge on
Class A shares, you may combine concurrent purchases of Class A shares of funds
managed by SM&R on which you paid a front-end sales charge. Investors that are
eligible to combine concurrent purchases to qualify for a reduced sales charge
include:
(1) Any individual;
(2) Any individual, his or her spouse, and trusts or custodial accounts for
their minor children;
(3) A trustee or fiduciary of a single trust estate or single fiduciary account.
(4) Tax-exempt organizations specified in Sections 501(c)(3) or (13) of the
Internal Revenue Code, or employees' trusts, pension, profit-sharing, or
other employee benefit plans qualified under Section 401 of the Internal
Revenue Code; and
(5) Employees (or employees on behalf of employees) under any employee benefit
plan not qualified under Section 401 of the Internal Revenue Code.
Purchases in connection with employee benefit plans not qualified under Section
401 of the Internal Revenue Code will qualify for the above quantity discounts
only if the fund will realize economies of scale in sales effort and sales
related expenses as a result of the employer's or the plan's bearing the expense
of any payroll deduction plan, making the fund's prospectus available to
individual investors or employees, forwarding investments by such employees to
the funds, and the like.
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class A or Class T
shares of a fund managed by SM&R, on which you paid a front-end sales charge,
you may be able to receive a discount when you buy additional shares. The
current net asset value of the shares you already own may be
"accumulated"--I.E., combined together with the dollar amount being invested--to
achieve quantities eligible for discount.
LETTER OF INTENT. You may qualify for a reduced sales charge on purchases of
Class A shares of funds managed by SM&R by completing the Letter of Intent
section of the account application. Under a Letter of Intent, an investor
expresses an intention to purchase, within 13 months of the initial investment,
a specified amount of Class A shares of funds managed by SM&R which, if made
concurrently, would qualify for a reduced sales charge. Upon execution of the
Letter of Intent, the investor must make a minimum initial investment equal to
ten percent (10%) of the amount necessary to qualify for the applicable reduced
sales charge. To assure that the full applicable sales charge will be paid if
the intended purchase is not completed, five percent (5%) of the total intended
purchase amount will be held in escrow in shares registered in the investor's
name. Shares held in escrow under a Letter of Intent are not eligible for the
exchange privilege until the Letter of Intent is completed or canceled. A Letter
of Intent does not represent a binding obligation on the part of the investor to
purchase or the funds to sell the full amount of shares specified.
NET ASSET VALUE PURCHASES
Class A shares may be sold at net asset value to:
15
<PAGE>
a. persons appointed as insurance agents by: (1) American National Insurance
Company ("American National"), (2) American National subsidiaries, and (3)
any insurance company for which any of American National's present directors
serve as a director or partner (and the spouses of such agents);
b. any child, step-child, grand child, parent, grandparent, brother or sister
of any person named in (a) above and their spouses;
c. any trust, pension, profit-sharing plan, IRA, or other benefit plan for any
of such persons mentioned in (a) above;
d. custodial accounts for minor children of such persons mentioned in (a)
pursuant to the Uniform Gift to Minors or Uniform Transfers to Minors Acts;
e. persons who have received a distribution from a pension, profit-sharing, or
other benefit plan, to the extent such distribution represents the proceeds
of a redemption of shares of any fund managed by SM&R (other than the Money
Market and Primary Funds);
f. policyholders of American National subsidiaries that have entered into a
net asset value agreement with SM&R;
g. persons purchasing shares for a federal or state sponsored post-secondary
education funding program;
h. any non-profit business, trade, professional, charitable, civic or similar
associations and clubs with an active membership of at least 100 persons;
i. registered representatives and employees of dealers who have entered into
mutual fund sales or distribution agreements with SM&R and members of the
immediate family (including spouse, children, parents and parents of spouse)
provided that purchases at net asset value are permitted by the policies of
the dealer; and
j. any other persons that have been determined by the Board of Directors (or
by the distributor based on guidelines established by the Board) to have
acquired shares under circumstances not involving any sales expense to the
Funds.
YOU HAVE THE SOLE RESPONSIBILITY OF NOTIFYING SM&R THAT YOU INTEND TO QUALIFY
UNDER ONE OF THESE CATEGORIES.
CLASS B WAIVERS OF CONTINGENT DEFERRED SALES CHARGES
The CDSC will be waived on the following redemptions of Class B shares:
(1) 12% FREE AMOUNT. We waive the CDSC on redemptions pursuant to a systematic
withdrawal plan of up to 12% of account value per year. We apply this 12%
waiver on a per fund basis to the account value determined at the time you
elect a systematic Withdrawal Plan. (Remember that the CDSC does not apply
to appreciation and reinvested dividends. Redemptions from appreciation and
reinvested dividends, which occur first, do not count toward the 12% free
amount.)
(2) DEATH OR POST-PURCHASE DISABILITY. We waive the CDSC on redemptions of Class
B shares following the shareholder's death or post-purchase disability, so
long as:
16
<PAGE>
(a) SM&R is notified of such death or post-purchase disability at the time
of the redemption request and receives satisfactory evidence of such
death or post-purchase disability;
(b) the redemptions are made within one year following death or initial
determination of post-purchase disability; and
(c) the shares were held at the time of death or initial determination of
post-purchase disability.
For purposes of this waiver, the death or post-purchase disability must meet
the definition in Section 72(m)(7) of the Internal Revenue Code (the
"Code"). If the shares are held in a joint account, then all registered
joint owners must be dead or disabled.
(3) MINIMUM REQUIRED DISTRIBUTIONS. We waive the CDSC on redemptions of Class B
shares in connection with certain distributions from four types of qualified
retirement plans: IRAs, custodial accounts maintained pursuant to Code
Section 403(b), deferred compensation plans qualified under Code 457 and
plans qualified under Code Section 401. To qualify for the waiver, the
redemptions must result from one of the following:
(a) required minimum distributions to plan participants or beneficiaries who
are age 70 1/2 or older to the extent it does not exceed 12% annually of
the participant's or beneficiary's account value;
(b) tax-free rollovers or transfers of assets to another IRA, Section 403(b)
plan, Section 457 plan or Section 401 plan invested in Class B shares of
one or more funds managed by SM&R;
(c) tax-free returns of excess contributions or returns of excess deferral
amounts; and
(d) distributions upon the death or disability (as defined in the Code) of
the participant or beneficiary.
(4) SMALL ACCOUNTS. We waive the CDSC on redemptions by the funds of small
accounts (accounts with a value less than $500).
(5) SM&R INVESTMENTS. We waive the CDSC on redemptions of shares owned by SM&R
or any of its affiliates.
DISTRIBUTION AND SHAREHOLDER SERVICE (12b-1) FEE
Classes A, B, and C pay SM&R, the principal underwriter, a distribution and/or
shareholder servicing (12b-1) fee. BECAUSE DISTRIBUTION AND/OR SHAREHOLDER
SERVICING (12b-1) FEES ARE PAID OUT OF FUND ASSETS ON AN ONGOING BASIS, THE FEES
MAY, OVER TIME, INCREASE THE COST OF AN INVESTMENT IN A FUND AND COST INVESTORS
MORE THAN OTHER TYPES OF SALES LOADS.
These fees are computed as an annual percentage of the average daily net assets
of each class of shares of a fund, as follows:
<TABLE>
<CAPTION>
DISTRIBUTION SERVICE TOTAL 12b-1
CLASS FEE FEE FEE
- ------------------------------------------------------------------------------------ ----------- --------- -----------
<S> <C> <C> <C>
Class A Shares (FRONT-END LOAD)..................................................... 0.25% -0- 0.25%
Class B Shares (BACK-END LOAD (CDSC))............................................... 0.50% 0.25% 0.75%
Class C Shares (LEVEL LOAD)......................................................... 0.75% 0.25% 1.00%
</TABLE>
17
<PAGE>
The distribution fee is for services that are primarily intended to result in or
are primarily attributable to the distribution of the Class A, B, and C shares.
The service fee is for providing ongoing servicing to shareholders of the Class
B and C shares. These fees compensate SM&R, or enable SM&R to compensate other
persons (including distributors of the shares), for providing such services.
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
Each fund pursues its own investment objective through various investment
policies and techniques. ONLY THE PRINCIPAL INVESTMENT STRATEGIES OF EACH FUND
AND THE PRINCIPAL TYPES OF SECURITIES EACH FUND PLANS TO PURCHASE ARE DESCRIBED
BELOW. More investment information is in the SAI. These policies and techniques
are not fundamental and may be changed by the Board of Directors without
shareholder approval.
Because of the market risks inherent in any investment, the funds may not
achieve their investment objectives. In addition, effective management of each
fund is subject to general economic conditions and to the ability and investment
techniques of management. The net asset value of each fund's shares will vary
and the redemption value of shares may be either higher or lower than the
shareholder's cost. Since each fund has a different investment objective, each
will have different investment results and incur different market, financial,
and other risks.
GOVERNMENT BOND FUND
(FORMERLY NAMED AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES)
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--We anticipate that a substantial portion of the
Government Bond Fund's portfolio will consist of mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies, or instrumentalities.
These securities represent part ownership of pools of mortgage loans secured by
real property, such as certificates issued by the Government National Mortgage
Association ("GNMA" or "Ginnie Mae"), the Federal National Mortgage Association
("FNMA" or "Fannie Mae"), and the Federal Home Loan Mortgage Corporation
("FHLMC" or
18
<PAGE>
"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 Government Bond Fund's securities will generally increase. However, we
anticipate that the average life of the mortgages in the pool will decrease as
borrowers refinance and prepay mortgages to take advantage of lower interest
rates. The Government Bond Fund invests the proceeds from such prepayments at
the then prevailing lower interest rates. On the other hand, if interest rates
increase, the value of the 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
19
<PAGE>
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.
The Government Bond Fund may also invest in securities issued by private issuers
that represent an interest in or are secured by mortgage-backed securities
issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities. In addition, the fund may invest in securities issued by
private issuers that represent an interest in or are secured by mortgage loans
or mortgage-backed securities without a government guarantee but usually have
some form of private credit enhancement.
ZERO COUPON BONDS--The Government Bond 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.
TAX FREE FUND (FORMERLY NAMED AMERICAN NATIONAL TAX FREE FUND SERIES)
The Tax Free Fund, as a matter of fundamental policy, seeks 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.
20
<PAGE>
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 Investor Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), or Fitch IBCA ("Fitch") (E.G., MIG 4 or higher by Moody's)
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, S&P or Fitch;
(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;
21
<PAGE>
(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, Distributions,
and Taxes"). In addition, Congress could enact tax legislation such as a flat
tax rate that would make tax-free bonds less desirable to investors seeking ways
to reduce taxable income. If that were to occur, it could cause the value of the
securities to drop.
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.
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. Neither the funds nor SM&R will review the
proceedings relating to the issuance of municipal obligations or the basis for
opinions of counsel.
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
22
<PAGE>
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.
PRIMARY FUND (FORMERLY NAMED AMERICAN NATIONAL PRIMARY FUND SERIES)
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).
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.)
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
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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.
MONEY MARKET FUND
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.
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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, S&P, Fitch
IBCA, 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.
RISK FACTORS
- --------------------------------------------------------------------------------
The following discussion relates to all four funds. The risk/return summary
located at the beginning of this prospectus identifies some specific risks
applicable to each individual fund.
GENERAL. There is no assurance that a fund will achieve its goals. Generally, if
the securities owned by a fund increase in value, the value of the shares of the
fund which you own will increase. Similarly, if the securities owned by a fund
decrease in value, the value of your shares will also go down. In this way, you
participate in any change in the value of the securities owned by a fund.
The risk inherent in investing in any fund is a risk common to any security.
That is, the value of a fund's shares will fluctuate in response to changes in
economic conditions, interest rates and the market's perception of the
underlying portfolio securities held by that fund. Each fund's share value
depends on general economic and securities market conditions, the investment
decisions of its management, and numerous other factors. All of these factors
are inherently uncertain and, in some cases, unforeseeable.
Any of the funds could lose money if the stock markets in general go down or if
the particular debt obligations purchased by a fund go down in value. In
addition, the funds could lose money if prevailing interest rates increase or if
the debt securities purchased by a fund are downgraded or defaulted upon.
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DEBT SECURITIES RISKS. Debt securities are subject to change in their values due
to changes in prevailing interest rates. The magnitude of these fluctuations
will often be greater for longer-term debt securities than shorter-term debt
securities. When prevailing interest rates fall, the values of already-issued
debt securities generally rise. Accordingly, if interest rates go down after a
security is purchased, such security might be valued and/or sold at a price
greater than its cost. If interest rates were to drop dramatically, some of the
securities could be called and/or prepaid, requiring reinvesting in securities
at much lower yields.
On the other hand, when prevailing interest rates rise, the values of
already-issued debt securities generally fall. Accordingly, if interest rates
increase after a security is purchased, such security might be valued and/or
sold at a price less than its cost. In such circumstances, the value of existing
bonds decrease because the interest payments from existing bonds are less
attractive than new issues with higher interest rates and investors would lose
money if they liquidate holdings.
The funds could lose money if any bonds they own are downgraded in credit rating
or go into default. 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 securities. A change in credit rating of an issuer can also affect the
bond's value, thus affecting the market value of the funds. However, the funds
invest predominately in investment grade bonds in order to minimize credit risk.
(See "Investment Objectives and Policies" for more information about the ratings
required for investments by each specific fund.) Moreover, substantial
redemptions of fund shares could require a fund to sell portfolio securities at
a time when a sale might not be favorable.
U.S. GOVERNMENT OBLIGATIONS. 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.
MARKET RISKS. Because the funds may invest in debt obligations which are traded
on securities exchanges, the value of each fund's portfolio will be affected by
changes in the stock markets. At times, the stock markets can be volatile and
stock prices can change substantially. This market risk will affect each fund's
net asset value per share, which will fluctuate as the values of each fund's
portfolio securities change. Prices do not always change uniformly or at the
same time and the various stock markets do not always move in the same direction
at the same time. Other factors specific to a particular company also affect the
price of that company's debt obligations (for example, poor earnings, loss of
major customers, or major litigation). The funds cannot always predict the
factors that will affect a security's price. The funds, however, do attempt to
limit market risk by diversifying their investments. The funds diversify their
investments by generally investing only a small percentage of their assets in
the debt obligations of any one company and by not holding a substantial amount
of the debt obligations of any one company.
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REPURCHASE AGREEMENTS. In a repurchase agreement, a fund buys a security and
simultaneously sells it to the vendor for delivery at a future date. These
agreements are used primarily for cash purposes. A fund entering into a
repurchase agreement may lose money if the other party to the transaction fails
to pay the resale price on the delivery date. Such a default may delay or
prevent the fund from disposing of the underlying securities. The value of the
underlying securities may go down during the period in which the fund seeks to
dispose of them. Also, the fund may incur expenses while trying to sell the
underlying securities. Finally, the fund risks losing all or a part of the
income from the agreement.
OTHER RISKS. Each investor will be subject to all the risks normally attendant
to business operations, changes in general economic conditions, governmental
rules and fiscal policies, acts of God, and other factors beyond the control of
the funds' management.
YEAR 2000 RISKS. Many services provided to the funds and their shareholders
depend on the smooth functioning of computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated, referred to as the "Year 2000
Problem." The Year 2000 Problem could have a negative impact on handling
securities trades, payment of interest and dividends, pricing, and account
services. Like other mutual funds, financial and business organizations, and
individuals around the world, the funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and transfer agent) do not properly process and
calculate date-related information and data from and after January 1, 2000. SM&R
is taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by any other service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
funds and their shareholders.
PURCHASES AND REDEMPTIONS
- --------------------------------------------------------------------------------
PURCHASING SHARES
You may purchase shares of a fund from registered representatives of SM&R, from
authorized broker-dealers, or directly from SM&R. Such purchases will be at the
offering price for such shares determined as and when provided below (See
"Pricing of Fund Shares"). You should carefully review all account statements
and promptly report any discrepancies to SM&R. You may make initial and
subsequent purchases directly through SM&R at the following address:
Securities Management and Research, Inc.
P.O. Box 58969
Houston, Texas 77258-8969
Certificates are not issued for shares of the funds. SM&R confirms investors'
purchases and credits such purchases to their accounts on the books maintained
by SM&R. Investors have the same rights of share ownership as they would if
certificates had been issued.
Investors whose shares are held in the name of a broker-dealer or other party
are not shareholders of record and, therefore, may not be able to utilize
services available to shareholders of record.
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OPENING AN ACCOUNT: To purchase shares, you must submit a completed account
application which includes the purchaser suitability form. If you would like to
take advantage of the electronic services available, please complete the
applicable Special Investor Services section of the account application. Special
forms are required when establishing an IRA/SEP or 403(b) plan. Please call
Investor Services at (800) 231-4639 and request special forms when establishing
retirement plans.
MINIMUM PURCHASE REQUIREMENT: The minimum initial investment requirement is $100
for the Government Bond and Tax Free Funds, and $1,000 for the Money Market and
Primary Funds. The minimum amount of any subsequent purchase is $20 for the
Government Bond and Tax Free Funds, and $100 for the Money Market and Primary
Funds. We waive these initial investment minimums when purchases are part of
certain systematic investment programs (See "Special Purchase Plans and
Services" for additional information on reduction of the minimums). We reserve
the right to reject any purchase.
PURCHASES BY MAIL: Make your check(s) payable to SM&R and send the check(s) to
the address indicated above. Please note that third party checks will not be
accepted to open a new account, except for IRA rollover checks that are properly
endorsed. If you make subsequent investments by mail, you must indicate your
name, account number, and the name of the class and the fund being purchased.
You may use the remittance slip attached to the confirmation statement.
PURCHASES BY WIRE: TO ENSURE PROPER CREDITING OF A WIRE INVESTMENT, YOU MUST
HAVE AN EXECUTED ACCOUNT APPLICATION AND PURCHASER SUITABILITY FORM ON FILE WITH
THE TRANSFER AGENT. You may then wire your investment to The Moody National Bank
of Galveston ("Moody National Bank") by providing the following instructions to
your bank:
The Moody National Bank of Galveston ABA #113100091
Securities Management and Research, Inc. #035 868 9
Name of Class and Fund (E.G., Class A of the Government Bond Fund)
Fund Account Number (number appears on your confirmation statement)
Your Name (E.G., Mary Smith)
PURCHASES BY EXCHANGE: Call Investor Services if you have established telephone
exchange privileges on your account. See "Special Purchase Plans and
Services--Exchange Privilege" for procedures and additional information relating
to telephone exchanges. For limitations on exchanges, see "Excessive Trading"
also under "Special Purchase Plans and Services."
PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). We determine each fund's offering price once
each day the New York Stock Exchange (the "Exchange") is open for regular
trading. The offering price equals a fund's net asset value plus the sales
charge, if any, computed at the rate set forth in the applicable tables for the
classes. (See "Shares of the Funds--Sales Charges.") You may purchase shares of
the Primary and Money Market Funds without a sales charge. Accordingly, the
offering price for shares of the Primary and Money Market Funds is net asset
value.
Although the legal rights of the Class A, B, and C shares are substantially
identical, the different expenses borne by each class will result in different
net asset values and dividends. The net asset value of the Class B and C shares
generally will be lower than the Class A shares as a result of respective
service and distribution (12b-1) fees charged.
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EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS (WHEN SHARES ARE PRICED). We
calculate net asset value once each day at the close of regular trading on the
Exchange (currently 3:00 p.m. Central Time). In the event the Exchange closes
early on a particular day, we will determine the net asset value of each fund as
of the close of the Exchange that day. Accordingly, the price you pay or receive
for shares of a fund depends, in part, on the day and time you make your
purchase or redemption. On any day the Exchange is open for regular trading, we
will execute purchases and redemptions at the next applicable price determined
THAT DAY if:
- SM&R receives your order in proper form prior to the close of the Exchange;
- a securities dealer having a dealer contract with SM&R receives your order
prior to the close of the Exchange and reports your order to SM&R prior to
SM&R's close of business (currently 4:30 p.m. Central Time) on the same day;
or
- for purchases, Moody National Bank receives your purchase payment by bank
wire and reports it to SM&R prior to the close of the Exchange.
If we receive your order after the close of the Exchange or on any day that the
Exchange is closed, we will execute your purchase or redemption at the price
determined on the next business day. In unusual circumstances, any fund may
temporarily suspend the processing of sell requests, or may postpone payment of
proceeds for up to three business days or longer, as allowed by federal
securities laws.
SPECIAL PURCHASE PLANS AND SERVICES
In addition to the special plans described above, that permit you to reduce the
initial sales charge assessed on Class A shares or the CDSC on Class B 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, broker-dealer or SM&R. A shareholder considering any of the
plans or services described below should consult a tax advisor before beginning
a plan.
ELECTRONIC TRANSFERS (ACH). The electronic transfer option allows you to move
money between your account(s) and your bank, savings and loan, or credit union
account using the Automated Clearing House ("ACH") network. To arrange for
electronic transfers, complete the relevant Special Investor Services section of
the account application at the time you open your account and specify the type
of service or services desired. Attach a voided, pre-printed check or deposit
slip from your checking, savings and loan, or credit union account. PASSBOOK
SAVINGS ACCOUNTS ARE NOT ELIGIBLE FOR THE ELECTRONIC TRANSFER OPTION.
ADDITIONALLY, YOUR BANK MUST BE A MEMBER OF THE AUTOMATED CLEARING HOUSE (ACH)
NETWORK FOR YOU TO TAKE ADVANTAGE OF THIS SERVICE. You will receive a
confirmation verifying initialization of the electronic transfer option and may
begin conducting transactions in your account(s) under this option approximately
20 calendar days after receipt of the verification notice from SM&R. If you
elect this option after your account is established, it may be necessary for you
to obtain a signature guarantee for all individuals named on the account(s).
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TELEPHONE SERVICES. You can only use telephone services for transaction amounts
of $500 or more. You can take advantage of this service by completing the
appropriate Special Investor Services sections of the account application when
opening your account. Through this service, you will be able to purchase
additional shares for an existing SM&R mutual fund account by ACH. You may also
use the telephone services to redeem and exchange shares on those accounts for
which you have an executed account application on file, and have received
written verification from SM&R that the service has been initialized as
explained under Electronic Transfers above. If this option is elected after your
account is established, it may be necessary for you to obtain a signature
guarantee for all individuals named on the account(s). We permit transfers by
telephone from a joint account only to another joint account registered in the
identical names. There may be additional restrictions on telephone transactions
by joint account owners. Contact your registered representative for more
information. PLEASE NOTE THAT THE TELEPHONE REDEMPTION OPTION IS NOT AVAILABLE
TO RETIREMENT PLANS.
The funds have implemented the following security procedures intended to protect
your account from losses resulting from unauthorized or fraudulent telephone
instructions: The caller must know:
(i) the name of the fund or funds;
(ii) all digits of the account number;
(iii) the exact name and address used in the registration(s); and
(iv) the Social Security or Employer Identification Number listed on the
account(s).
Additionally, we record all telephone transactions for your protection.
Neither the funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone which comply with the current
security procedures and other requirements. SM&R believes that such security
procedures and other requirements are reasonable and, if followed, you should
bear the risk of any losses resulting from unauthorized or fraudulent telephone
transactions on your account(s).
During times of economic turmoil or market volatility or as a result of severe
weather or a natural disaster, it may be difficult to contact SM&R by telephone
to institute a redemption or exchange.
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from your bank account and invested
monthly, bi-monthly, quarterly, or annually into the designated fund(s) at the
applicable offering price determined on the date of the electronic transfer.
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. We waive the minimum initial investment amount
requirement per account for such plans. However, all other investment amount
minimums apply. Contact SM&R for further information regarding these plans.
EXCHANGE PRIVILEGE. As an investor in a fund, you may be permitted to exchange
shares that you own in a fund with shares of some of the other mutual funds
managed by SM&R without the payment of an exchange fee, subject to certain
conditions. EXCHANGES BETWEEN A FUND AND ANOTHER FUND MANAGED BY SM&R ARE
AVAILABLE ONLY IN STATES WHERE THE APPLICABLE FUNDS ARE REGISTERED
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AND THE EXCHANGE MAY BE LEGALLY MADE. YOU SHOULD CONTACT SM&R TO DETERMINE
WHETHER A FUND IS REGISTERED IN A PARTICULAR STATE AND WHETHER AN EXCHANGE IS
PERMITTED.
WE MAY TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE OFFER AT ANY TIME.
GOVERNMENT BOND FUND AND TAX FREE FUND. You may exchange Class A, Class B, or
Class C shares that you own in the Government Bond or Tax Free Fund, without an
exchange fee or sales charge, for shares of the corresponding class of another
fund managed by SM&R. You also may exchange your Class A or Class B shares for
shares of the Primary or Money Market Fund, subject to two conditions:
- any applicable CDSC period has expired on the shares you wish to exchange
(I.E., 13 months in the case of Class A shares and 3 years in the case of
Class B shares), and
- you meet any minimum investment requirement for the shares you wish to
acquire.
You CANNOT exchange Class C shares for shares of the Money Market Fund or
Primary Fund.
PRIMARY FUND AND MONEY MARKET FUND. You may exchange shares you own in the
Primary Fund for shares of the Money Market Fund, and vise versa. You may
exchange shares you own in the Primary or Money Market Fund for Class A, T, J,
or Y shares of a class of another fund managed by SM&R, provided you meet any
eligibility requirements and pay any sales charge applicable to the acquired
shares. You CANNOT exchange shares of the Money Market Fund or Primary Fund for
Class B or C shares of another fund.
We waive any sales charges on Class A and Class T shares acquired through an
exchange if you previously paid a sales charge on amounts invested in those
shares. For example, you purchase Class A shares of the Government Bond Fund.
You then exchange your Class A shares for shares of the Money Market Fund.
Later, you re-exchange those shares of the Money Market Fund for Class A shares
of the Tax Free Fund. We would not impose any sales charge upon re-exchange into
Class A shares because you previously paid a sales charge on those amounts
invested in shares. In other words, we will never impose a front-end sales
charge on the same investment TWICE.
Shares of any fund managed by SM&R held in escrow under a Letter of Intent are
not eligible for the exchange privilege. Such shares will not be released from
escrow until the balance invested during the period specified in the Letter of
Intent equals or exceeds the amount required to be invested under the Letter of
Intent or the shareholder requests, in writing, that the Letter of Intent be
canceled and pays any adjustments in sales charge. After release from escrow,
shares may be exchanged, provided all other applicable conditions are met.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met:
(a) the exchange must be made between accounts that are registered in the same
name, address and, if applicable, taxpayer identification number;
(b) the shares of the fund acquired through exchange must be qualified for sale
in the state in which you reside;
(c) the dollar amount of a written exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
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(d) the minimum dollar amount of a telephone exchange is $500;
(e) SM&R must have received full payment for the shares being exchanged;
(f) your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal Revenue
Service Form W-8 (certificate of foreign status) or Form W-9 (certifying
exempt status);
(g) any shares that you wish to exchange must have been held for at least ten
(10) business days;
(h) certificates representing shares, if any, are returned before such shares
are exchanged; and
(i) you have received a prospectus for the shares you receive in the exchange.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time. ANY
GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE INCOME TAX PURPOSES. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR
THE TAX TREATMENT AND EFFECT OF EXCHANGES.
AUTOMATIC CONVERSIONS. Class B shares convert automatically to the appropriate
number of Class A shares of equal dollar value after the investor has owned the
Class B shares for eight (8) years. Dividends and other distributions paid to an
investor in the form of additional Class B shares also convert to Class A shares
on a pro-rata basis. The conversion benefits shareholders because Class A shares
are subject to a lower ongoing 12b-1 fee. If an investor converts Class B shares
of a fund for Class B shares of another fund managed by SM&R, the purchase date
of the original investment will be used to determine the appropriate conversion
date.
EXCESSIVE TRADING. Frequent trades, involving either substantial fund assets or
a substantial portion of your account or accounts controlled by you, can disrupt
management of the Company and raise the Company's expenses. We currently define
"excessive trading" as exceeding one purchase and sale involving the same fund
within any 120-day period.
For example, you are in Fund X. You can move substantial assets from Fund X to
Fund Y and, within the next 120 days, sell your shares in Fund Y to return to
Fund X or move to Fund Z. If you exceed the number of trades described above,
you may be barred indefinitely from further transactions between the
participating funds.
There are two types of transactions exempted from the excessive trading
guidelines. They are (1) redemptions that are not part of exchanges and (2)
systematic purchases or redemptions.
RETIREMENT PLANS
The following retirement plans may be funded with shares of the Government Bond,
Primary, and Money Market Funds:
- Individual Retirement Accounts (IRAs), which include traditional IRAs, Roth
IRAs, Education IRAs, and SIMPLE IRAs,
- Simplified Employee Pension Plans (SEPs),
- 403(b) Custodial Accounts (TSAs), and
- corporate retirement plans.
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These plans allow you to shelter investment income from federal income tax while
saving for retirement. Information concerning IRAs and TSAs, and the forms
necessary to adopt such plans, can be obtained by contacting your registered
representative or calling SM&R. A regular fund application should be used when
establishing a corporate retirement plan. In connection with retirement plans,
the minimum initial purchase for each fund is $100. 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 per account 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, DISTRIBUTIONS, AND TAXES
DIVIDENDS.
GOVERNMENT BOND AND TAX FREE FUNDS. The Government Bond and Tax Free Funds
generally will declare and pay dividends from net investment income monthly and
net realized short-term or long-term capital gains, if any, annually. 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 funds have the effect of
reducing net asset value per share on the record date by the amount of the
payment. Therefore, a dividend or distribution of record shortly after the
purchase of shares by an investor represents, in substance, a return of capital.
PRIMARY AND MONEY MARKET FUNDS. At 3:00 p.m. Central Time, on each day that the
Exchange is open for trading, the Primary and Money Market Funds each will
declare a dividend of all of its net investment income to shareholders of record
on that date. Such dividends will be paid monthly.
DIVIDEND REINVESTMENTS. Dividends and capital gains will be automatically
reinvested at net asset value in additional shares of the fund making such
distribution unless SM&R is instructed otherwise in writing. Distributions not
reinvested are paid by check or transmitted to your bank account through an ACH
transaction, if elected. If the Postal Service cannot deliver your check, or if
your check remains uncashed for six months, the funds reserve the right to
reinvest your distribution check in your account at the net asset value on the
business day of the reinvestment and to reinvest all future distributions in
shares of the applicable fund(s). 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
33
<PAGE>
the record date is seven or more business days after SM&R has received the
shareholder's written request.
TAXABILITY OF DIVIDENDS. Dividends you receive from the Government Bond,
Primary, and Money Market Funds, whether reinvested or taken as cash, are
generally considered taxable. A fund's long-term capital gains distributions are
taxable as capital gains; dividends from other sources are generally taxable as
ordinary income. Some dividends paid in January may be taxable as if they had
been paid the previous December. The Form 1099 that is mailed to you every
January details your dividends and their federal tax category, although you
should verify your tax liability with your tax professional.
The Tax Free Fund intends to distribute tax-exempt dividends that shareholders
may exclude from their gross income for federal income tax purposes. However,
the Tax Free Fund may invest a portion of its assets in securities that generate
income that is not exempt from federal or state income tax. Income exempt from
federal tax may be subject to state and local income tax. Any capital gains
distributed by the Tax Free Fund may be taxable. Also, you should also keep in
mind that certain income from the Tax Free Fund may be subject to the federal
alternative minimum tax.
BACKUP WITHHOLDING. Backup withholding of federal income tax may be applied at
the rate of 31% from taxable dividends, distributions, and redemption proceeds
(including exchanges) if you fail to furnish the Company with a correct and
properly certified Social Security or Employer Identification Number when you
sign your application, or if you underreport your income to the Internal Revenue
Service.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions. You should consult with a tax advisor concerning the tax reporting
requirements in effect on the redemption or exchange of such shares.
REDEEMING SHARES
You can redeem fund shares at net asset value, plus any applicable CDSC,
determined on the date the request is received by SM&R in proper form. A
redemption request must be addressed to Securities Management and Research,
Inc., P.O. Box 58969, Houston, Texas 77258-8969.
If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as practicable and normally
within seven days after receipt of a redemption request in proper form. We
currently charge a fee in the amount of $8.00 for redemptions by wire under
$5,000.
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.
34
<PAGE>
TELEPHONE REDEMPTIONS. You may request redemptions by telephone if you have
completed the account application and requested this option. Telephone
privileges are not available to shareholders automatically. This redemption
feature can only be used if:
(a) the redemption proceeds are to be mailed to the address of record or wired
to the pre-authorized bank account indicated on the account application;
(b) there has been no change of address of record or pre-authorized bank account
within the preceding 30 business days;
(c) the proceeds of the redemption are $500 or more and do not exceed $25,000;
and
(d) the security procedures discussed under "Special Purchase Plans And
Services--Exchange Privilege" have been met.
These instructions may be changed only in writing, accompanied by a signature
guarantee and additional documentation may be required for corporations.
FAX REDEMPTIONS. You may request redemptions by fax as long as they meet the
requirements stated in (a)-(c) under Telephone Redemptions above.
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. See
"Class B Waivers of Contingent Deferred Sales Charges" for a discussion of the
CDSC waivers available. You should carefully consider such purchases and contact
your financial adviser regarding their advisability. Dividends and capital gains
distributions will automatically be reinvested in additional shares at net asset
value. As with other redemptions, a withdrawal is a sale for federal income tax
purposes. The Systematic Withdrawal Plan will automatically terminate if all
shares are liquidated or withdrawn from the account. No account covered by a
Letter of Intent can be changed to a Systematic Withdrawal Plan until such time
as the Letter of Intent is fulfilled or terminated, nor can an account under a
Systematic Withdrawal Plan be placed under a Letter of Intent.
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.
35
<PAGE>
For further information about the "Systematic Withdrawal Plan" and "Reinvestment
Privilege," contact a registered representative or SM&R.
"PROPER FORM" means the request for redemption must include:
(1) your letter of instruction or a stock assignment specifying the fund,
account number, and number of shares or dollar amount to be redeemed. Both
share certificates and stock powers, if any, must be endorsed and executed
exactly as the fund shares are registered. It is suggested that certificates
be returned by certified mail for your protection;
(2) any required signature guarantees (see "Signature Guarantees" below); and
(3) other supporting legal documents, if required in the case of estates,
trusts, guardianships, divorce, custodianships, corporations, partnerships,
pension or profit sharing plans, retirement plans, and other organizations.
Please keep in mind that as a shareholder, it is your responsibility to ensure
that all requests are submitted to the Company's transfer agent in proper form
for processing.
SIGNATURE GUARANTEES. A signature guarantee verifies the authenticity of your
signature. Signature guarantees are required when:
(1) the proceeds of the redemption exceed $25,000;
(2) the proceeds (in any amount) are to be paid to someone OTHER THAN the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address OTHER THAN the
shareholder's address of record, pre-authorized bank account or exchanged to
one of the other funds managed by SM&R; or
(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.
You should be able to obtain an acceptable signature guarantee from a bank,
broker, dealer, municipal securities dealer or broker, government securities
dealer or broker, credit union, national securities exchange, or registered
securities association. WITNESSING OR NOTARIZATION IS NOT SUFFICIENT.
TEXAS OPTIONAL RETIREMENT PROGRAM. You may not redeem shares of the Government
Bond Fund, Primary Fund, and Money Market Fund in any account established under
the Texas Optional Retirement Program, unless SM&R receives satisfactory
evidence from the state that one of the following conditions exist:
(1) death of the employee;
(2) termination of service with the employer; or
(3) retirement of employee.
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
36
<PAGE>
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 December
31, 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 $500 in the case of the
Government Bond and Tax Free Funds or $1,000 in the case of the Primary and
Money Market Funds. 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 Funds 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;
- to act on instructions not believed to be genuine; or
- to eliminate duplicate mailings of fund material to shareholders who reside
at the same address.
37
<PAGE>
THE FUNDS AND MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISOR
The Company's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the funds' investment adviser, the management of the
funds' day-to-day business and affairs. In addition, SM&R invests the funds'
assets, provides administrative services, and serves as transfer agent,
custodian, dividend paying agent, and underwriter.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). SM&R was incorporated in 1964 and has managed mutual
funds since 1966. SM&R does and may, from time to time, serve as investment
adviser to other clients including employee benefit plans, other investment
companies, banks, foundations and endowment funds.
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 agreement provides that SM&R will receive advisory fees as set
forth below.
GOVERNMENT BOND FUND AND TAX FREE FUND. We deduct an investment advisory fee
from the value of the shares each day. We calculate this fee for the Government
Bond and Tax Free Funds at 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. For the Money Market and Primary Funds, we
calculate the investment advisory fee at the annual rate of 0.25% and 0.50%,
respectively, of each fund's average daily net asset value.
After applicable fee waivers, SM&R received total advisory fees from the
Government Bond Fund and Primary Fund for the fiscal year ended August 31, 1998
which represented 0.50%, and 0.32%, respectively, of each such fund's average
daily net assets. SM&R waived all advisory fees for the Tax Free Fund. The Money
Market Fund was not in operation during the fiscal year ended August 31, 1998.
ADMINISTRATIVE SERVICES
Pursuant to an Administrative Service Agreement with the Company, SM&R provides
all non-investment related management, executive, administrative, transfer
agent, and operational services
38
<PAGE>
to the funds. Under the agreement, SM&R receives an administrative service fee
from each fund at the annual rate of average daily net asset values as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S ADMINISTRATIVE SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
- -------------------------------------------------------------------- -----------------------------
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
REIMBURSEMENTS AND WAIVERS
SM&R has agreed to pay (or to reimburse each fund for) each fund's regular
operating expenses in excess of 1.25% (0.50% for the Money Market Fund) per year
of such fund's average daily net assets. Regular operating expenses include the
advisory fee and administrative service fee, if any, paid to SM&R, but do not
include 12b-1 fees, class-specific expenses, interest, taxes, commissions, and
other expenses incidental to portfolio transactions. SM&R received
administrative service fees of 0.25% 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.
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 expenses incurred by the
Government Bond and Primary Funds to the extent that regular operating expenses
exceed average daily net assets as follows: 0.80% for the Primary Fund and 1.00%
for the Government Bond Fund.
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 policies.
TERRY E. FRANK, VICE PRESIDENT, PORTFOLIO MANAGER OF THE GOVERNMENT BOND FUND,
TAX FREE FUND, PRIMARY FUND AND MONEY MARKET FUND. Ms. Frank has served as
Portfolio Manager of the Government Bond Fund since 1993 and the Tax Free Fund
since its inception. She has served as Portfolio Manager of the Primary Fund
since November 1998 and the Money Market Fund since its inception (January 1,
1999). 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. She joined
SM&R's investment staff in 1991 and prior to that time she held positions with
American Capital Asset Management and Gibraltar Savings Association as a
securities analyst and Equitable Investment Services as a research analyst.
JOHN S. MAIDLOW, ASSISTANT PORTFOLIO MANAGER OF THE PRIMARY FUND AND THE MONEY
MARKET FUND. Mr. Maidlow has served as the Assistant Portfolio Manager of the
Primary Fund since November,
39
<PAGE>
1998 and the Money Market Fund since its inception (January 1, 1999). He also
services as Assistant 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. He joined SM&R's
staff in 1998 and prior to that time he held positions with American Industries
Trust Companies as a trust officer, Texas Department of Insurance and the Texas
Department of Banking as an examiner, Landmark Group as Vice President of
Investments, MBank as a trust officer and Rotan-Mosle, Inc. and Eppler, Guerin &
Turner as an investment broker.
40
<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 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
and for the year ended August 31, 1998 has been audited by Tait, Weller & Baker,
CPA. Each independent auditor's 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. IF MULTIPLE CLASSES OF
SHARES OF THE GOVERNMENT BOND FUND HAD BEEN IN EXISTENCE DURING THE PAST FIVE
YEARS, THE FINANCIAL PERFORMANCE OF CLASS A, B, AND C SHARES OF THE GOVERNMENT
BOND FUND WOULD HAVE BEEN LOWER THAN DEPICTED BECAUSE OF THE IMPOSITION OF
DISTRIBUTION AND/OR SERVICE (12b-1) FEES.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.42 $ 10.14 $ 10.51 $ 10.07 $ 10.87
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.64 0.67 0.65 0.70 0.54
Net Realized and Unrealized Gain (Loss) on Securities 0.20 0.26 (0.37) 0.44 (0.79)
--------- --------- --------- --------- ----------
TOTAL FROM INVESTMENT OPERATIONS 0.84 0.93 0.28 1.14 (0.25)
--------- --------- --------- --------- ----------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.66) (0.65) (0.65) (0.70) (0.55)
--------- --------- --------- --------- ----------
TOTAL DISTRIBUTIONS (.066) (0.65) (0.65) (0.70) (0.55)
--------- --------- --------- --------- ----------
Net Asset Value, End of Period $ 10.60 $ 10.42 $ 10.14 $ 10.51 $ 10.07
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
TOTAL RETURN 8.31% 9.37% 2.63% 11.85% (2.41)%
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted) $ 23,982 $ 23,683 $ 21,127 $ 20,466 $ 19,790
Ratio of Expenses to Average Net Assets(1) 1.00% 1.00% 1.00% 0.70% 1.12%
Ratio of Net Income to Average Net Assets 6.08% 6.46% 6.17% 6.90% 5.11%
Portfolio Turnover Rate 32.71% 9.06% 30.17% 2.20% 45.48%
</TABLE>
(1) Expenses for the calculation are net of a reimbursement from Securities
Management 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.
41
<PAGE>
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 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 and for the year
ended August 31, 1998 has been audited by Tait, Weller & Baker, CPA. Each
independent auditor's 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. IF MULTIPLE CLASSES OF SHARES OF
THE TAX FREE FUND HAD BEEN IN EXISTENCE DURING THE PAST FIVE YEARS, THE
FINANCIAL PERFORMANCE OF CLASS A, B, AND C SHARES OF THE TAX FREE FUND WOULD
HAVE BEEN LOWER THAN DEPICTED BECAUSE OF THE IMPOSITION OF DISTRIBUTION AND/OR
SERVICE (12b-1) FEES.
<TABLE>
<CAPTION>
SEPT. 9, 1993
YEAR ENDED AUGUST 31, (DATE OPERATIONS
------------------------------------------ COMMENCED) THRU
1998 1997 1996 1995 AUG. 31, 1994
--------- --------- --------- --------- ----------------
<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 0.49 0.51 0.53 0.51 0.24
Net Realized and Unrealized Gain (Loss) on Securities 0.37 0.33 (0.02) 0.33 (0.38)
--------- --------- --------- --------- ----------------
TOTAL FROM INVESTMENT OPERATIONS 0.86 0.84 0.51 0.84 (0.14)
--------- --------- --------- --------- ----------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.49) (0.50) (0.53) (0.51) (0.24)
--------- --------- --------- --------- ----------------
TOTAL DISTRIBUTIONS (0.49) (0.50) (0.53) (0.51) (0.24)
--------- --------- --------- --------- ----------------
Net Asset Value, End of Period $ 10.64 $ 10.27 $ 9.93 $ 9.95 $ 9.62
--------- --------- --------- --------- ----------------
--------- --------- --------- --------- ----------------
TOTAL RETURN 8.58% 8.61% 5.18% 9.15% (1.49)%(1)
--------- --------- --------- --------- ----------------
--------- --------- --------- --------- ----------------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SEPT. 9, 1993
YEAR ENDED AUGUST 31, (DATE OPERATIONS
------------------------------------------ COMMENCED) THRU
1998 1997 1996 1995 AUG. 31, 1994
--------- --------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted) $ 11,058 $ 10,700 $ 9,148 $ 8,399 $ 7,295
Ratio of Expenses to Average Net Assets(3) 0.75% 0.54% -- -- 1.11%(2)
Ratio of Net Income to Average Net Assets 4.60% 4.97% 5.27% 5.43% 2.50%(2)
Portfolio Turnover Rate 12.77% 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 1.25%, 1.27%, 1.18%, and
1.25% for the years ended August 31, 1998, 1997, 1996, and 1995,
respectively.
42
<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 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 and for the year ended August 31, 1998 has been audited by Tait,
Weller & Baker, CPA. Each independent auditor's report, along with the Primary
Fund's financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.05 0.05 0.05 0.05 0.03
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 0.05 0.05 0.05 0.05 0.03
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.05) (0.05) (0.05) (0.05) (0.03)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.05) (0.05) (0.05) (0.05) (0.03)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 5.15% 4.98% 5.07% 5.01% 2.91%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted) $ 34,577 $ 33,045 $ 37,465 $ 20,984 $ 15,208
Ratio of Expenses to Average Net Assets(1) 0.80% 0.80% 0.81% 0.84% 0.79%
Ratio of Net Income to Average Net Assets 5.02% 4.86% 4.93% 4.91% 2.88%
</TABLE>
(1) 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 0.98%, 1.01%, 1.15%, 1.21%,
and 1.20% for the years ended August 31, 1998, 1997, 1996, 1995, and 1994,
respectively.
43
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX
(Description of Ratings Used in Prospectus)
- --------------------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND (BONDS THAT EXTEND
LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S LONG-TERM BOND (BONDS THAT
EXTEND LONGER THAN ONE YEAR) RATINGS:
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities, fluctuation
of protective elements may be of greater amplitude, or there may be other
elements present which make the long-term risks appear somewhat larger than
the Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
A-1
<PAGE>
Baa Bonds which are rated "Baa" are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
DESCRIPTION OF FITCH IBCA BOND RATINGS:
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
MUNICIPAL NOTE RATINGS
DESCRIPTION OF MOODY'S INVESTOR SERVICE INC.'S SHORT-TERM MUNICIPAL NOTE (NOTES
THAT MATURE IN LESS THAN ONE YEAR) RATINGS:
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 for 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.
DESCRIPTION OF STANDARD AND POOR'S SHORT-TERM MUNICIPAL NOTE RATINGS:
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.
SP-3 Speculative capacity to pay principal and interest.
A-2
<PAGE>
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF FITCH IBCA SHORT-TERM DEBT RATINGS (INCLUDING COMMERCIAL PAPER):
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
DESCRIPTION OF DUFF & PHELP'S HIGHEST COMMERCIAL RATINGS:
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
A-3
<PAGE>
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
TBW-1 The highest category; indicates a very high likelihood that principal and
interest will be paid on a timely basis.
TBW-2 The second-highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
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.
A-4
<PAGE>
FOR MORE INFORMATION ABOUT THE FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The following documents contain more information about the SM&R GOVERNMENT BOND FUND
funds and are available free upon request: SM&R TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI contains SM&R PRIMARY FUND
additional information about all aspects of the funds. A SM&R MONEY
current SAI has been filed with the Securities and Exchange MARKET FUND
Commission and is incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS. The funds' annual and
semi-annual reports provide additional information about the
funds' investments. The annual report contains a discussion
of the market conditions and investment strategies that
significantly affected each fund's performance during the
last fiscal year.
</TABLE>
REQUESTING DOCUMENTS. You may request a free copy of the SAI and these reports,
make shareholder inquiries, or request further information about the funds
either by contacting your broker or by contacting the funds at:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE:1-800-231-4639 (TOLL FREE) OR
1-281-334-2469 (COLLECT)
PUBLIC INFORMATION. You can review and copy information about the funds,
including the SAI, at the Securities and Exchange Commission's Public Reference
Room in Washington D.C. You may obtain information on the operation of the
public reference room by calling the Commission at 1-800-SEC-0330. Reports and
other information about the funds also are available on the Commission's
Internet site at http://www.sec.gov. You may obtain copies of this information,
upon payment of a duplicating fee, by writing the Public Reference Section of
the Securities and Exchange Commission, Washington, D.C. 20549-6009.
Investment Company
File No. 811- 6477
<PAGE>
SM&R
LOGO
P R O S P E C T U S
JANUARY 1, 1999
SM&R INVESTMENTS, INC.
- SM&R GOVERNMENT BOND FUND
- SM&R TAX FREE FUND
- SM&R PRIMARY FUND
- SM&R MONEY MARKET FUND
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
CLASS Y (INSTITUTIONAL SALES)
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------
<TABLE>
<S> <C>
RISK/RETURN SUMMARY.......................................... 1
SM&R Government Bond Fund.................................. 1
SM&R Tax Free Fund......................................... 3
SM&R Primary Fund.......................................... 5
SM&R Money Market Fund..................................... 7
Types of Investment Risk................................... 9
Bar Chart and Performance Table............................ 10
Fees and Expenses of the Funds............................. 14
SHARES OF THE FUNDS.......................................... 17
INVESTMENT OBJECTIVES AND POLICIES........................... 18
Government Bond Fund....................................... 18
Tax Free Fund.............................................. 22
Primary Fund............................................... 26
Money Market Fund.......................................... 27
RISK FACTORS................................................. 29
PURCHASES AND REDEMPTIONS.................................... 32
Purchasing Shares.......................................... 32
Pricing of Fund Shares..................................... 33
Special Purchase Plans and Services........................ 34
Retirement Plans........................................... 38
Dividends, Distributions, and Taxes........................ 39
Redeeming Shares........................................... 40
THE FUNDS AND MANAGEMENT..................................... 44
FINANCIAL HIGHLIGHTS......................................... 47
Government Bond Fund....................................... 47
Tax Free Fund.............................................. 48
Primary Fund............................................... 49
APPENDIX..................................................... A-1
</TABLE>
ii
<PAGE>
RISK/RETURN SUMMARY SM&R GOVERNMENT BOND FUND
- -------------------------------------------------------------------
GOVERNMENT BOND FUND'S INVESTMENT 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.
GOVERNMENT BOND FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Government Bond Fund normally invests at
least 65% of its assets in securities issued or guaranteed by
the U.S. Government, its agencies, or instrumentalities.
These may include Treasuries and mortgage-backed securities,
such as Ginnie Maes, Freddie Macs, and Fannie Maes. This fund
may also invest assets in collateralized mortgage
obligations.
The Government Bond Fund may invest in zero coupon bonds,
which are U.S. Government obligations. The fund may also
invest in commercial paper, certificates of deposit,
corporate debt securities rated "A" or higher, and repurchase
agreements.
The Government Bond Fund generally invests primarily in
medium and long term securities. The average portfolio
maturity generally is expected to be in the six to fifteen
year range (some securities may have longer or shorter
durations). The average portfolio maturity may be shorter
when management anticipates that interest rates will
increase, and longer when management anticipates that
interest rates will decrease.
PRINCIPAL RISKS OF INVESTING IN THE GOVERNMENT BOND FUND
You could lose money on your investment in the
Government Bond Fund, or it could underperform other
investments, if any of the following occurs:
- interest rates rise (thus causing a decline in the market
value of debt securities)
- the worldwide demand for U.S. government securities falls
- interest rates fall enough to prompt an unexpected number
of people to refinance (or prepay) their mortgages
- interest rates rise enough to cause fewer people than
expected to repay their mortgages early
- if any bonds the fund owns are downgraded in credit rating
or go into default
1
<PAGE>
RISK/RETURN SUMMARY SM&R GOVERNMENT BOND FUND
- -------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE GOVERNMENT BOND FUND
The Government Bond Fund may be
appropriate if you:
- are seeking a regular stream of income to meet current
needs
- are seeking higher potential returns than money market
funds and are willing to accept moderate risk of volatility
- are retired or nearing retirement
The Government Bond Fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require absolute stability of your principal
2
<PAGE>
RISK/RETURN SUMMARY SM&R TAX FREE FUND
- -------------------------------------------------------------------
TAX FREE FUND'S INVESTMENT 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.
TAX FREE FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Tax Free Fund invests primarily in tax-
exempt securities. During normal market conditions, this fund
invests at least 80% of its assets in municipal securities
that pay interest exempt from federal income taxes. The Tax
Free Fund generally invests in securities rated Baa or better
by Moody's or BBB or better by Standard and Poors and Fitch.
This fund may not invest more than 20% of its assets in
UNRATED municipal securities. These securities may be less
liquid than comparably rated municipal securities and involve
somewhat greater risk. This fund may also invest up to 20% of
its assets in Government guaranteed taxable bonds, highly
rated corporate bonds, or commercial paper.
The average portfolio maturity of the Tax Free Fund generally
is expected to be in the six to twelve year range (some
securities may have longer or shorter durations). The average
portfolio maturity may be shorter when management anticipates
that interest rates will increase, and longer when management
anticipates that interest rates will decrease.
PRINCIPAL RISKS OF INVESTING IN THE TAX FREE FUND
You could lose money on your investment in the
Tax Free Fund, or it could underperform other investments, if
any of the following occurs:
- interest rates rise (thus causing a decline in the market
value of debt securities)
- if any bonds the fund owns are downgraded in credit rating
or go into default
- certain securities become harder to value or to sell at a
fair price
ALSO, SOME OF YOUR DIVIDEND INCOME MAY BE TAXABLE.
3
<PAGE>
RISK/RETURN SUMMARY SM&R TAX FREE FUND
- -------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE TAX FREE FUND
The Tax Free Fund may be appropriate if you:
- are willing to sacrifice some investment return for income
exempt from federal income tax and, under certain
conditions, exempt from state and local taxes
- are in a high tax bracket (28% and up)
- are seeking a regular stream of income to meet current
needs
- are seeking higher potential returns than money market
funds and are willing to accept moderate risk of volatility
The Tax Free Fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- prefer capital gains over ordinary income
4
<PAGE>
RISK/RETURN SUMMARY SM&R PRIMARY FUND
- -------------------------------------------------------------------
PRIMARY FUND'S INVESTMENT OBJECTIVE
To seek maximum current income consistent
with capital preservation and liquidity through investment
primarily in commercial paper.
PRIMARY FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Primary Fund invests primarily in
commercial paper. Commercial paper is short-term unsecured
promissory notes issued by corporations. This fund will only
invest in commercial paper rated in one of the two highest
rating categories.
The Primary Fund may also invest in:
- U.S. Government obligations;
- corporate debt obligations maturing in five years or less
and rated "A" or higher;
- certificates of deposit, generally maturing in 3 years or
less; and
- repurchase agreements.
PRINCIPAL RISKS OF INVESTING IN THE PRIMARY FUND
You could lose money on your investment in the
Primary Fund, or it could underperform other investments, if
any of the following occurs:
- interest rates rise (thus causing a decline in the market
value of debt securities)
- if any of the fund's investments are downgraded in credit
rating or go into default
By limiting its investments as described above, the Primary
Fund may not achieve as high a level of current income as a
fund investing in lower-rated securities or longer-term
securities.
5
<PAGE>
RISK/RETURN SUMMARY SM&R PRIMARY FUND
- -------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE PRIMARY FUND
The Primary Fund may be appropriate if you:
- are seeking a regular stream of income to meet current
needs
- are seeking higher potential returns than money market
funds and are willing to accept moderate risk of volatility
- are more concerned with safety of principal than with
investment returns
- are retired or nearing retirement
The Primary Fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- are investing for goals that are many years in the future
- prefer capital gains over ordinary income
6
<PAGE>
RISK/RETURN SUMMARY SM&R MONEY MARKET FUND
- -------------------------------------------------------------------
MONEY MARKET FUND'S INVESTMENT OBJECTIVE
To seek the highest current income consistent
with the stability of principal and maintenance of liquidity.
MONEY MARKET FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Money Market Fund seeks to achieve its
objective by investing in high-quality short-term money
market instruments, including: U.S. Government obligations,
certificates of deposit, banker's acceptances, commercial
paper, collateralized mortgage obligations, and corporate
bonds and notes. This fund limits its investments to those
short-term securities that it determines present minimal
credit risk and meet certain rating requirements (in the two
highest short-term rating categories).
PRINCIPAL RISKS OF INVESTING IN THE MONEY MARKET FUND
The Money Market Fund is subject to the
following risks:
- that interest rates may rise (thus causing a decline in the
market value of debt securities)
- that the fund's investments may be downgraded in credit
rating or go into default
However, the risks of investment in the Money Market Fund may
be expected to be less than for other mutual funds. By
limiting its investments as described above, this fund may
not achieve as high a level of current income as a fund
investing in lower-rated securities. ALTHOUGH THE MONEY
MARKET FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE MONEY MARKET FUND.
7
<PAGE>
RISK/RETURN SUMMARY SM&R MONEY MARKET FUND
- -------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE MONEY MARKET FUND
The Money Market Fund may be appropriate if
you:
- require stability of principal
- are seeking a mutual fund for the cash portion of an asset
allocation program
- need to "park" your money temporarily
- are more concerned with safety of principal than with
investment returns
- are investing emergency reserves
The Money Market Fund may NOT be appropriate if you:
- want federal deposit insurance
- are seeking an investment that is likely to outpace
inflation
- are investing for retirement or other goals that are many
years in the future
- are investing for growth or maximum current income
YOU SHOULD KEEP IN MIND THAT AN INVESTMENT IN THE MONEY
MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
8
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------------------------------------
TYPES OF INVESTMENT RISK
As indicated above, each of the four funds may be subject to certain of the
following types of risks:
CREDIT RISK. The risk that the issuer of a security, or a party to a contract,
will default or otherwise not honor a financial obligation. THIS RISK PRIMARILY
AFFECTS THE TAX FREE, PRIMARY AND MONEY MARKET FUNDS.
INTEREST RATE RISK. The risk of declines in market value of an income-bearing
investment due to changes in prevailing interest rates. With fixed-rate
securities, a rise in interest rates typically causes a decline in market
values, while a fall in interest rates typically causes an increase in market
values. THIS RISK AFFECTS ALL FOUR FUNDS, BUT HAS LESS EFFECT ON THE MONEY
MARKET AND PRIMARY FUNDS.
LIQUIDITY RISK. The risk that certain securities or other investments may be
difficult or impossible to sell at the time the fund would like to sell them or
at the price the fund values them. The fund may have to sell at a lower price,
sell other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance. THIS RISK
PRIMARILY AFFECTS THE TAX FREE, PRIMARY AND MONEY MARKET FUNDS.
MANAGEMENT RISK. The risk that a strategy used by a fund's management may fail
to produce the intended result. This risk is common to all mutual funds. THIS
RISK AFFECTS ALL FOUR FUNDS.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. The fluctuations may cause a security to be
worth less than the price originally paid for it, or less than it was worth at
an earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. This risk is common to all stocks and bonds
and the mutual funds that invest in them. THIS RISK AFFECTS ALL FOUR FUNDS.
PREPAYMENT AND EXTENSION RISK. PREPAYMENT RISK is the risk that an unexpected
fall in prevailing interest rates will shorten the life of an outstanding
mortgage-backed security by increasing the actual or expected number of mortgage
prepayments, thereby reducing the security's value. EXTENSION RISK is the risk
that an unexpected rise in
9
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
prevailing interest rates will extend the life of an outstanding mortgage-backed
security by reducing the actual or expected number of mortgage prepayments,
thereby reducing the security's value. THIS RISK APPLIES ONLY TO THE GOVERNMENT
BOND FUND.
BAR CHART AND PERFORMANCE TABLE
The bar charts and performance tables shown below provide some indication of the
risks of investing in the funds and the variability of returns:
- - by showing each fund's performance for each year since inception, and
- - by showing how each fund's average annual returns for certain periods compare
to those of a broad-based securities market index.
Because the Money Market Fund was not in operation during these periods, it is
not included in the bar chart or the performance table.
The returns shown are based on an investment in the funds prior to the creation
of multiple classes of shares, but do not reflect any sales loads that would be
imposed on the purchase or sale of any shares. We created the multiple classes
of shares on January 1, 1999.
Past performance is not necessarily an indication of how the funds will perform
in the future.
10
<PAGE>
RISK/RETURN SUMMARY SM&R GOVERNMENT BOND FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 9.31%
1994 -4.65%
1995 18.57%
1996 3.43%
1997 8.14%
</TABLE>
* For the nine month period ended September 30, 1998, the Government Bond Fund
had a total return of 6.70%.
During the period shown in the bar chart, the highest return for a quarter was
6.44% achieved June 30, 1995 and the lowest return for a quarter was minus 1.77%
for the quarter September 30, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR
THE PERIODS ENDING DECEMBER 31,
1997) PAST ONE YEAR PAST 5 YEARS
<S> <C> <C>
SM&R GOVERNMENT BOND FUND 3.28% 5.71%
*LEHMAN BROTHERS GOVERNMENT/ 9.54% 8.71%
MORTGAGE-BACKED SECURITIES
INDEX
</TABLE>
* Lehman Brothers Government/Mortgage-Backed Securities Index is an index which
includes all public obligations of the U.S. Treasury and all publicly issued
debt of U.S. Government agencies quasi-federal corporations and corporate debt
guaranteed by the U.S. Government as well as 15 and 30 year fixed rate
securities backed by mortgage pools of the GNMA, FHLMA and FNMA.
11
<PAGE>
RISK/RETURN SUMMARY SM&R PRIMARY FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 2.48%
1994 3.58%
1995 5.26%
1996 4.92%
1997 5.08%
</TABLE>
* For the nine month period ended September 30, 1998, the Primary Fund had a
total return of 3.81%.
During the period shown in the bar chart, the highest return for a quarter was
2.54% achieved September 30, 1997 and the lowest return for a quarter was 0.60%
for the quarter June 30, 1993.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1997) PAST ONE YEAR PAST 5 YEARS
<S> <C> <C>
SM&R PRIMARY FUND 5.08% 4.26%
*LEHMAN GOVERNMENT/ 7.99% 7.02%
CORPORATE INDEX
</TABLE>
* Lehman Government/Corporate Index is an index representing all public
obligations of the U.S. Treasury as well as all publicly issued debt of U.S.
government agencies with maturities of one to three years.
12
<PAGE>
RISK/RETURN SUMMARY SM&R TAX FREE FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1994 -5.49%
1995 17.87%
1996 4.48%
1997 8.98%
</TABLE>
* For the nine month period ended September 30, 1998, the Tax Free Fund had a
total return of 5.73%.
During the period shown in the bar chart, the highest return for a quarter was
7.41% achieved March 31, 1995 and the lowest return for a quarter was minus
3.94% for the quarter March 31, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1997) PAST ONE YEAR PAST 4 YEARS
<S> <C> <C>
SM&R TAX FREE FUND 4.08% 4.94%
*LEHMAN BROTHERS 9.19% 11.18%
MUNICIPAL INDEX
</TABLE>
* Lehman Brothers Municipal Index is an index of investment grade tax exempt
bonds classified into four major sections: General Obligation, Revenue, Insured
and Preferred.
13
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
THERE ARE NO 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(1)
Expenses that are deducted from fund assets
<TABLE>
<CAPTION>
MONEY
GOVERNMENT TAX FREE PRIMARY MARKET
BOND FUND FUND FUND FUND
----------- -------- -------- -------
CLASS Y CLASS Y
----------- --------
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.25%
Other Expenses(2) 0.50% 0.75% 0.48% 0.25%
Total Annual Fund Operating Expenses 1.00% 1.25% 0.98% 0.50%
Fee Waivers and Expense Reimbursements(3) --% --% --% --%
Net Expenses 1.00% 1.25% 0.98% 0.50%
</TABLE>
NOTES TO THE FEES AND EXPENSES OF THE FUNDS
(1) The "Management Fees" and "Other Expenses" for the Government Bond, Primary,
and Tax Free Funds are for the year ended August 31, 1998; 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.
(2) "Other Expenses" include the 0.25% Administrative Service Fee. Because Class
Y shares were not available prior to the date of this Prospectus, "Other
Expenses" for Class Y shares are based on the expenses and average net
assets of the Government Bond Fund and the Tax Free Fund for the fiscal year
ended August 31, 1998. "Other Expenses" shown for the Money Market Fund are
estimated for the current fiscal year ending August 31, 1999.
14
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
(3) The Fee Table reflects fees waived and expenses assumed contractually by the
funds' manager, Securities Management and Research, Inc. ("SM&R"). Pursuant
to the Administrative Service Agreement, SM&R will pay (or reimburse) each
fund for regular operating expenses in excess of 1.25% (0.50% for the Money
Market Fund) per year of such fund's average daily net assets. Regular
operating expenses include the advisory fee and administrative fee, but do
not include any 12b-1 fee or class-specific expenses.
The Fee Table does not reflect fees waived or expenses assumed by SM&R on a
voluntary basis. During the fiscal year ended August 31, 1998, SM&R
voluntarily waived fees of 0.18%, and 0.50% for the Primary Fund and Tax
Free Fund, respectively. SM&R intends to continue to voluntarily waive the
advisory fee for the Tax Free Fund. SM&R also intends to reimburse regular
operating expenses that 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 reimbursement of expenses at any
time without notice.
The following table shows fees and expenses for the Government Bond, Primary,
and Tax Free Funds for the year ended August 31, 1998 taking into account
all fee waivers and expense reimbursements, both contractual and voluntary.
For the Money Market Fund, they are estimates considering estimated fee
waivers and expense reimbursements for the year ending August 31, 1999.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets After All Fee Waivers and Expense
Reimbursements)
<TABLE>
<CAPTION>
GOVERNMENT TAX FREE MONEY
BOND FUND FUND PRIMARY FUND MARKET FUND
-------------- ------------ ------------ -----------
CLASS Y CLASS Y
-------------- ------------
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.00% 0.32% 0.25%
Other Expenses 0.50% 0.75% 0.48% 0.25%
Total Annual Fund Operating
Expenses 1.00% 0.75% 0.80% 0.50%
</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, based on expenses before fee waivers and expense
reimbursements. These examples also assume that your investment has a 5% return
each
15
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
year and that the funds' operating expenses remain the same. YOUR ACTUAL COSTS
MAY BE HIGHER OR LOWER THAN SHOWN.
You would pay the following expenses, based on these assumptions, if you
actually redeem all of your shares at the end of the period shown:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
------------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
Government Bond Fund (Class
Y) $ 102 $ 318 $ 552 $ 1,225
Tax Free Fund (Class Y) $ 127 $ 397 $ 686 $ 1,511
Primary Fund $ 100 $ 312 $ 542 $ 1,201
Money Market Fund $ 51 $ 160 $ 280 $ 628
</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.
16
<PAGE>
SHARES OF THE FUNDS
- -------------------------------------------------------------------
The funds offer Class Y shares through SM&R or financial intermediaries that
have distribution agreements with SM&R. These financial intermediaries may
include broker-dealers and investment advisers and may charge you separately for
their services.
SM&R Investments, Inc., formerly known as SM&R Capital Funds, Inc. (the
"Company" or "we") offers four separate investment portfolios. 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 Money Market and Primary Funds are offered at net asset value
and do not impose any sales charges or distribution and service (12b-1) fees. As
a result, 100% of your purchase is immediately invested.
Class Y shares of the Government Bond and Tax Free Funds may be purchased by
institutions and certain individuals. Specifically, Class Y shares may be
purchased by:
(a) institutional investors, such as insurance companies, banks, investment
companies, retirement plans, and other institutional investors approved by
SM&R;
(b) trust companies and bank trust departments for funds over which they
exercise exclusive discretionary investment authority or they serve as a
directed trustee and which are held in a fiduciary, agency, advisory,
custodial or similar capacity;
(c) accounts managed by SM&R;
(d) any non-profit business, trade, professional, charitable, civic or similar
associations and clubs with an active membership of at least 100 persons who
have entered into an net asset value agreement with SM&R; and
(e) other investors, including individuals, with initial investments of $500,000
or more.
NOTIFYING SM&R OF AN INTENT TO QUALIFY UNDER ONE OF THESE CATEGORIES IS THE SOLE
RESPONSIBILITY OF THE PROSPECTIVE INVESTOR.
The Government Bond and Tax Free Funds also offer other classes of shares
through separate prospectuses: (1) Class A "front-end load" shares; (2) Class B
"back-end load" shares; (3) Class C "level load" shares; (4) Class T shares sold
only to investors that became shareholders of the Company prior to December 31,
1998 and
17
<PAGE>
certain designated persons; and (5) Class J shares sold only through special
"network" distribution arrangements. Class A, B, C, T, and J shares are subject
to different sales charges and other expenses and, accordingly, may have expense
ratios and performance that differs from those of Class Y shares. FOR MORE
INFORMATION ON THE OTHER CLASSES OF SHARES OR TO REQUEST A PROSPECTUS FOR
ANOTHER CLASS, INVESTORS MAY CONTACT INVESTOR SERVICES AT (800) 231-4639.
INVESTMENT OBJECTIVES AND POLICIES
- -------------------------------------------------------------------
Each fund pursues its own investment objective through various investment
policies and techniques. ONLY THE PRINCIPAL INVESTMENT STRATEGIES OF EACH FUND
AND THE PRINCIPAL TYPES OF SECURITIES EACH FUND PLANS TO PURCHASE ARE DESCRIBED
BELOW. More investment information is in the SAI. These policies and techniques
are not fundamental and may be changed by the Board of Directors without
shareholder approval.
Because of the market risks inherent in any investment, the funds may not
achieve their investment objectives. In addition, effective management of each
fund is subject to general economic conditions and to the ability and investment
techniques of management. The net asset value of each fund's shares will vary
and the redemption value of shares may be either higher or lower than the
shareholder's cost. Since each fund has a different investment objective, each
will have different investment results and incur different market, financial,
and other risks.
GOVERNMENT BOND FUND
(FORMERLY NAMED AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES)
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.
18
<PAGE>
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--We anticipate that a substantial portion of the
Government Bond Fund's portfolio will consist of mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies, or instrumentalities.
These securities represent part ownership of pools of mortgage loans secured by
real property, such as certificates issued by the Government National Mortgage
Association ("GNMA" or "Ginnie Mae"), the Federal National Mortgage Association
("FNMA" or "Fannie Mae"), 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-
19
<PAGE>
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 Government Bond Fund's securities will generally increase. However, we
anticipate that the average life of the mortgages in the pool will decrease as
borrowers refinance and prepay mortgages to take advantage of lower interest
rates. The Government Bond Fund invests the proceeds from such prepayments at
the then prevailing lower interest rates. On the other hand, if interest rates
increase, the value of the 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.
20
<PAGE>
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.
The Government Bond Fund may also invest in securities issued by private issuers
that represent an interest in or are secured by mortgage-backed securities
issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities. In addition, the fund may invest in securities issued by
private issuers that represent an interest in or are secured by mortgage loans
or mortgage-backed securities without a government guarantee but usually have
some form of private credit enhancement.
ZERO COUPON BONDS--The Government Bond 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
21
<PAGE>
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.
TAX FREE FUND (FORMERLY NAMED AMERICAN NATIONAL TAX FREE FUND SERIES)
The Tax Free Fund, as a matter of fundamental policy, seeks 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 Investor Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), or Fitch IBCA ("Fitch") (E.G., MIG 4 or higher by Moody's)
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
22
<PAGE>
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, S&P or Fitch;
(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
23
<PAGE>
(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, Distributions,
and Taxes"). In addition, Congress could enact tax legislation such as a flat
tax rate that would make tax-free bonds less desirable to investors seeking ways
to reduce taxable income. If that were to occur, it could cause the value of the
securities to drop.
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.
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. Neither the funds nor SM&R will review the
proceedings relating to the issuance of municipal obligations or the basis for
opinions of counsel.
24
<PAGE>
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
25
<PAGE>
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.
PRIMARY FUND (FORMERLY NAMED AMERICAN NATIONAL PRIMARY FUND SERIES)
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).
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.)
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
26
<PAGE>
$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.
MONEY MARKET FUND
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.
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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, S&P, Fitch
IBCA, 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
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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.
RISK FACTORS
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The following discussion relates to all four funds. The risk/return summary
located at the beginning of this prospectus identifies some specific risks
applicable to each individual fund.
GENERAL. There is no assurance that a fund will achieve its goals. Generally, if
the securities owned by a fund increase in value, the value of the shares of the
fund which you own will increase. Similarly, if the securities owned by a fund
decrease in value, the value of your shares will also go down. In this way, you
participate in any change in the value of the securities owned by a fund.
The risk inherent in investing in any fund is a risk common to any security.
That is, the value of a fund's shares will fluctuate in response to changes in
economic conditions, interest rates and the market's perception of the
underlying portfolio securities held by that fund. Each fund's share value
depends on general economic and securities market conditions, the investment
decisions of its management, and numerous other factors. All of these factors
are inherently uncertain and, in some cases, unforeseeable.
Any of the funds could lose money if the stock markets in general go down or if
the particular debt obligations purchased by a fund go down in value. In
addition, the funds could lose money if prevailing interest rates increase or if
the debt securities purchased by a fund are downgraded or defaulted upon.
DEBT SECURITIES RISKS. Debt securities are subject to change in their values due
to changes in prevailing interest rates. The magnitude of these fluctuations
will often be greater for longer-term debt securities than shorter-term debt
securities. When prevailing interest rates fall, the values of already-issued
debt securities generally rise. Accordingly, if interest rates go down after a
security is purchased, such security might be valued and/or sold at a price
greater than its cost. If interest rates were to drop dramatically, some of the
securities could be called and/or prepaid, requiring reinvesting in securities
at much lower yields.
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On the other hand, when prevailing interest rates rise, the values of
already-issued debt securities generally fall. Accordingly, if interest rates
increase after a security is purchased, such security might be valued and/or
sold at a price less than its cost. In such circumstances, the value of existing
bonds decrease because the interest payments from existing bonds are less
attractive than new issues with higher interest rates and investors would lose
money if they liquidate holdings.
The funds could lose money if any bonds they own are downgraded in credit rating
or go into default. 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 securities. A change in credit rating of an issuer can also affect the
bond's value, thus affecting the market value of the funds. However, the funds
invest predominately in investment grade bonds in order to minimize credit risk.
(See "Investment Objectives and Policies" for more information about the ratings
required for investments by each specific fund.) Moreover, substantial
redemptions of fund shares could require a fund to sell portfolio securities at
a time when a sale might not be favorable.
U.S. GOVERNMENT OBLIGATIONS. 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.
MARKET RISKS. Because the funds may invest in debt obligations which are traded
on securities exchanges, the value of each fund's portfolio will be affected by
changes in the stock markets. At times, the stock markets can be volatile and
stock prices can change substantially. This market risk will affect each fund's
net asset value per share, which will fluctuate as the values of each fund's
portfolio securities change. Prices do not always change uniformly or at the
same time and the various stock markets do not always move in the same direction
at the same time. Other factors specific to a particular company also affect the
price of that company's debt obligations (for example, poor earnings, loss of
major customers, or major litigation). The funds cannot always predict the
factors that will affect a security's
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price. The funds, however, do attempt to limit market risk by diversifying their
investments. The funds diversify their investments by generally investing only a
small percentage of their assets in the debt obligations of any one company and
by not holding a substantial amount of the debt obligations of any one company.
REPURCHASE AGREEMENTS. In a repurchase agreement, a fund buys a security and
simultaneously sells it to the vendor for delivery at a future date. These
agreements are used primarily for cash purposes. A fund entering into a
repurchase agreement may lose money if the other party to the transaction fails
to pay the resale price on the delivery date. Such a default may delay or
prevent the fund from disposing of the underlying securities. The value of the
underlying securities may go down during the period in which the fund seeks to
dispose of them. Also, the fund may incur expenses while trying to sell the
underlying securities. Finally, the fund risks losing all or a part of the
income from the agreement.
OTHER RISKS. Each investor will be subject to all the risks normally attendant
to business operations, changes in general economic conditions, governmental
rules and fiscal policies, acts of God, and other factors beyond the control of
the funds' management.
YEAR 2000 RISKS. Many services provided to the funds and their shareholders
depend on the smooth functioning of computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated, referred to as the "Year 2000
Problem." The Year 2000 Problem could have a negative impact on handling
securities trades, payment of interest and dividends, pricing, and account
services. Like other mutual funds, financial and business organizations, and
individuals around the world, the funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and transfer agent) do not properly process and
calculate date-related information and data from and after January 1, 2000. SM&R
is taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by any other service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
funds and their shareholders.
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PURCHASES AND REDEMPTIONS
- -------------------------------------------------------------------
PURCHASING SHARES
You may purchase shares of a fund directly from SM&R or through broker-dealers
and investment advisers who have executed a distribution or sales agreement with
SM&R. Such purchases will be at the offering price for such shares determined as
and when provided below (See "Pricing of Fund Shares"). You should carefully
review all account statements and promptly report any discrepancies to SM&R. You
may make initial and subsequent purchases directly through SM&R at the following
address:
Securities Management and Research, Inc.
P.O. Box 58969
Houston, Texas 77258-8969
Certificates are not issued for shares of the funds. SM&R confirms investors'
purchases and credits such purchases to their accounts on the books maintained
by SM&R. Investors have the same rights of share ownership as they would if
certificates had been issued.
Investors whose shares are held in the name of a broker-dealer or other party
are not shareholders of record and therefore may not be able to utilize services
available to shareholders of record.
OPENING AN ACCOUNT: To purchase shares, you must submit a completed account
application. If you would like to take advantage of the electronic services
available, please complete the applicable Special Investor Services section of
the account application. Special forms are required when establishing an IRA/SEP
or 403(b) plan. Please call Investor Services at (800) 231-4639 and request
special forms when establishing retirement plans.
MINIMUM PURCHASE REQUIREMENT: For Class Y shares of the Government Bond and Tax
Free Funds, the minimum initial investment requirement is $500,000. All
subsequent investments must be at least $2,000. We apply investment minimums to
the aggregate value invested in omnibus accounts. 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
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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 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 PURCHASER SUITABILITY FORM ON FILE WITH
THE TRANSFER AGENT. You may then wire your investment to The Moody National Bank
of Galveston ("Moody National Bank") by providing the following instructions to
your bank:
The Moody National Bank of Galveston ABA #113100091
Securities Management and Research, Inc. #035 868 9
Name of Class, 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)
PURCHASES BY EXCHANGE: Call Investor Services if you have established telephone
exchange privileges on your account. See "Special Purchase Plans and
Services--Exchange Privilege" for procedures and additional information relating
to telephone exchanges. For limitations on exchanges, see "Excessive Trading"
also under "Special Purchase Plans and Services."
PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). We determine each fund's offering price once
each day the New York Stock Exchange (the "Exchange") is open for regular
trading. The offering price equals a fund's net asset value plus the sales
charge, if any. You may purchase shares offered in this prospectus without a
sales charge. Accordingly, the offering price for shares offered in this
prospectus is that fund's (or class') net asset value.
EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS (WHEN SHARES ARE PRICED). We
calculate net asset value once each day at the close of regular trading on the
Exchange (currently 3:00 p.m. Central Time). In the event the Exchange closes
early on a particular day we will determine the net asset value of each fund as
of the close of the Exchange that day. Accordingly, the price you pay or receive
for shares of a fund depends, in part, on the day and time you make
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your purchase or redemption. On any day the Exchange is open for regular
trading, we will execute purchases and redemptions at the next applicable price
determined that day if:
- SM&R receives your order in proper form prior to the close of the Exchange;
- a securities dealer having a dealer contract with SM&R receives your order
prior to the close of the Exchange and reports your order to SM&R prior to
SM&R's close of business (currently 4:30 p.m. Central Time) on the same day;
or
- for purchases, Moody National Bank receives your purchase payment by bank
wire and reports it to SM&R prior to the close of the Exchange.
If we receive your order after the close of the Exchange or on any day that the
Exchange is closed, we will execute your purchase or redemption at the price
determined on the next business day. In unusual circumstances, any fund may
temporarily suspend the processing of sell requests, or may postpone payment of
proceeds for up to three business days or longer, as allowed by federal
securities laws.
SPECIAL PURCHASE PLANS AND SERVICES
The Company offers services and plans 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 broker-dealer, investment adviser or SM&R. A
shareholder considering any of the plans or services described below should
consult a tax advisor before beginning a plan.
ELECTRONIC TRANSFERS (ACH). The electronic transfer option allows you to move
money between your account(s) and your bank, savings and loan, or credit union
account using the Automated Clearing House ("ACH") network. To arrange for
electronic transfers, complete the relevant Special Investor Services section of
the account application at the time you open your account and specify the type
of service or services desired. Attach a voided, pre-printed check or deposit
slip from your checking, savings and loan, or credit union account. PASSBOOK
SAVINGS ACCOUNTS ARE NOT ELIGIBLE FOR THE ELECTRONIC TRANSFER
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OPTION. ADDITIONALLY, YOUR BANK MUST BE A MEMBER OF THE AUTOMATED CLEARING HOUSE
(ACH) NETWORK FOR YOU TO TAKE ADVANTAGE OF THIS SERVICE. You will receive a
confirmation verifying initialization of the electronic transfer option and may
begin conducting transactions in your account(s) under this option approximately
20 calendar days after receipt of the verification notice from SM&R. If you
elect this option after your account is established, it may be necessary for you
to obtain a signature guarantee for all individuals named on the account(s).
TELEPHONE SERVICES. You can only use telephone services for transaction amounts
of $500 or more. You can take advantage of this service by completing the
appropriate Special Investor Services sections of the account application when
opening your account. Through this service, you will be able to purchase
additional shares for an existing SM&R mutual fund account by ACH. You may also
use the telephone services to redeem and exchange shares on those accounts for
which you have an executed account application on file, and have received
written verification from SM&R that the service has been initialized as
explained under Electronic Transfers above. If this option is elected after your
account is established, it may be necessary for you to obtain a signature
guarantee for all individuals named on the account(s). We permit transfers by
telephone from a joint account only to another joint account registered in the
identical names. There may be additional restrictions on telephone transactions
by joint account owners. Contact your broker-dealer, investment adviser or SM&R
for more information. PLEASE NOTE THAT THE TELEPHONE REDEMPTION OPTION IS NOT
AVAILABLE TO RETIREMENT PLANS.
The funds have implemented the following security procedures intended to protect
your account from losses resulting from unauthorized or fraudulent telephone
instructions: The caller must know:
(i) the name of the fund or funds;
(ii) all digits of the account number;
(iii) the exact name and address used in the registration(s); and
(iv) the Social Security or Employer Identification Number listed on the
account(s).
Additionally, we record all telephone transactions for your protection.
Neither the funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone which comply with
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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
elephone transactions on your account(s).
During times of economic turmoil or market volatility or as a result of severe
weather or a natural disaster, it may be difficult to contact SM&R by telephone
to institute a redemption or exchange.
EXCHANGE PRIVILEGE. As an investor in a fund, you may be permitted to exchange
shares that you own in a fund with shares of some of the other mutual funds
managed by SM&R without the payment of an exchange fee, subject to certain
conditions. EXCHANGES BETWEEN A FUND AND ANOTHER FUND MANAGED BY SM&R ARE
AVAILABLE ONLY IN STATES WHERE THE APPLICABLE FUNDS ARE REGISTERED AND THE
EXCHANGE MAY BE LEGALLY MADE. YOU SHOULD CONTACT SM&R TO DETERMINE WHETHER A
FUND IS REGISTERED IN A PARTICULAR STATE AND WHETHER AN EXCHANGE IS PERMITTED.
WE MAY TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE OFFER AT ANY TIME.
GOVERNMENT BOND FUND AND TAX FREE FUND. You may exchange Class Y shares that you
own in the Government Bond or Tax Free Fund, without an exchange fee, for shares
of the corresponding class of another fund managed by SM&R. You also may
exchange your Class Y shares for shares of the Money Market or Primary Fund,
provided that you meet any minimum investment requirement for the shares you
wish to acquire.
PRIMARY FUND AND MONEY MARKET FUND. You may exchange shares you own in the
Primary Fund for shares of the Money Market Fund, and vise versa. You may
exchange shares you own in the Primary or Money Market Fund for Class A, T, J,
or Y shares of another fund managed by SM&R, provided you meet any eligibility
requirements and pay any sales charge applicable to the acquired shares. You
CANNOT exchange shares of the Money Market Fund or Primary Fund for Class B or C
shares of another fund.
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You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met:
(a) the exchange must be made between accounts that are registered in the same
name, address and, if applicable, taxpayer identification number;
(b) the shares of the fund acquired through exchange must be qualified for sale
in the state in which you reside;
(c) the dollar amount of a written exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(d) the minimum dollar amount of a telephone exchange is $500;
(e) SM&R must have received full payment for the shares being exchanged;
(f) your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal Revenue
Service Form W-8 (certificate of foreign status) or Form W-9 (certifying
exempt status);
(g) any shares that you wish to exchange must have been held for at least ten
(10) business days;
(h) certificates representing shares, if any, are returned before such shares
are exchanged; and
(i) you have received a prospectus for the shares you receive in the exchange.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time. ANY
GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE 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 currently define
"excessive trading" as exceeding one purchase and sale involving the same fund
within any 120-day period.
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For example, you are in Fund X. You can move substantial assets from Fund X to
Fund Y and, within the next 120 days, sell your shares in Fund Y to return to
Fund X or move to Fund Z. If you exceed the number of trades described above,
you may be barred indefinitely from further transactions between the
participating funds.
There are two types of transactions exempted from the excessive trading
guidelines. They are (1) redemptions that are not part of exchanges and (2)
systematic purchases or redemptions.
RETIREMENT PLANS
The following retirement plans may be funded with Class Y shares of the
Government Bond Fund or with shares of the Primary and Money Market Funds:
- Individual Retirement Accounts (IRAs), which include traditional IRAs, Roth
IRAs, Education IRAs, and SIMPLE IRAs,
- Simplified Employee Pension Plans (SEPs),
- 403(b) Custodial Accounts (TSAs), and
- corporate retirement plans.
These plans allow you to shelter investment income from federal income tax while
saving for retirement. Information concerning IRAs and TSAs, and the forms
necessary to adopt such plans, can be obtained by contacting your registered
representative or calling SM&R. A regular fund application should be used when
establishing a corporate retirement plan. In connection with retirement plans,
the minimum initial purchase for each fund is $100. (See "Purchasing Shares" for
the minimum initial and subsequent purchase requirements.) SM&R acts as trustee
or custodian for IRAs, SEPs, and TSAs for the Company. An annual custodial fee
of $7.50 per account will be charged for any part of a calendar year in which an
investor has an IRA, SEP, or TSA in the 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.
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DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS.
GOVERNMENT BOND AND TAX FREE FUNDS. The Government Bond and Tax Free Funds will
generally declare and pay dividends from net investment income monthly and net
realized short-term or long-term capital gains, if any, annually. 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 funds have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution of record shortly after the purchase of
shares by an investor represents, in substance, a return of capital.
PRIMARY AND MONEY MARKET FUNDS. At 3:00 p.m. Central Time, on each day that the
Exchange is open for trading, the Primary and Money Market Funds each will
declare a dividend of all of its net investment income to shareholders of record
on that date. Such dividends will be paid monthly.
DIVIDEND REINVESTMENTS. Dividends and capital gains will be automatically
reinvested at net asset value in additional shares of the fund making such
distribution unless SM&R is instructed otherwise in writing. Distributions not
reinvested are paid by check or transmitted to your bank account through an ACH
transaction, if elected. If the Postal Service cannot deliver your check, or if
your check remains uncashed for six months, the funds reserve the right to
reinvest your distribution check in your account at the net asset value on the
business day of the reinvestment and to reinvest all future distributions in
shares of the applicable fund(s). 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.
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TAXABILITY OF DIVIDENDS. Dividends you receive from the Government Bond,
Primary, and Money Market Funds, whether reinvested or taken as cash, are
generally considered taxable. A fund's long-term capital gains distributions are
taxable as capital gains; dividends from other sources are generally taxable as
ordinary income. Some dividends paid in January may be taxable as if they had
been paid the previous December. The Form 1099 that is mailed to you every
January details your dividends and their federal tax category, although you
should verify your tax liability with your tax professional.
The Tax Free Fund intends to distribute tax-exempt dividends that shareholders
may exclude from their gross income for federal income tax purposes. However,
the Tax Free Fund may invest a portion of its assets in securities that generate
income that is not exempt from federal or state income tax. Income exempt from
federal tax may be subject to state and local income tax. Any capital gains
distributed by the Tax Free Fund may be taxable. Also, you should also keep in
mind that certain income from the Tax Free Fund may be subject to the federal
alternative minimum tax.
BACKUP WITHHOLDING. Backup withholding of federal income tax may be applied at
the rate of 31% from taxable dividends, distributions, and redemption proceeds
(including exchanges) if you fail to furnish the Company with a correct and
properly certified Social Security or Employer Identification Number when you
sign your application, or if you underreport your income to the Internal Revenue
Service.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions. You should consult with a tax advisor concerning the tax reporting
requirements in effect on the redemption or exchange of such shares.
REDEEMING SHARES
You can redeem fund shares at the net asset value determined on the date the
request is received by SM&R in proper form. A redemption request must be
processed through your investment adviser or broker-dealer.
If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as
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practicable and normally within seven days after receipt of a redemption request
in proper form. We currently charge a fee in the amount of $8.00 for redemptions
by wire under $5,000.
If the shares being redeemed were purchased by wire, certified check, money
order, or other immediately available funds, redemption proceeds will be mailed
no later than the seventh calendar day following receipt. For shares purchased
by a personal check or ACH transfer, SM&R will process your redemption but will
generally delay sending you the proceeds for up to ten (10) business days to
allow the check or transfer to clear.
TELEPHONE REDEMPTIONS. You may request redemptions by telephone if you have
completed the account application and requested this option. Telephone
privileges are not available to shareholders automatically. This redemption
feature can only be used if:
(a) the redemption proceeds are to be mailed to the address of record or wired
to the pre-authorized bank account indicated on the account application;
(b) there has been no change of address of record or pre-authorized bank account
within the preceding 30 business days;
(c) the proceeds of the redemption are $500 or more and do not exceed $25,000.
(d) the security procedures discussed under "Special Purchase Plans And
Services--Exchange Privilege" have been met; and
These instructions may be changed only in writing, accompanied by a signature
guarantee and additional documentation may be required for corporations.
During times of economic turmoil or market volatility or as a result of severe
weather or a natural disaster, it may be difficult to contact SM&R by telephone
to institute a redemption or exchange.
SYSTEMATIC WITHDRAWAL PLAN. The Company has a Systematic Withdrawal Plan
("Withdrawal Account"), which permits shareholders having an account value of
$50,000 or more to automatically withdraw a minimum of $50 monthly or each
calendar quarter on or about the 20th of the applicable month. Shareholders
maintaining a Withdrawal Account may elect to have the withdrawal proceeds
automatically deposited in their pre-authorized bank account via an ACH
transaction. This is accomplished by completing the relevant section
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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.
For further information about the "Systematic Withdrawal Plan," contact a
registered representative or SM&R.
"PROPER FORM" means the request for redemption must include:
(1) your letter of instruction or a stock assignment specifying the fund,
account number, and number of shares or dollar amount to be redeemed. Both
share certificates and stock powers, if any, must be endorsed and executed
exactly as the fund shares are registered. It is suggested that certificates
be returned by certified mail for your protection;
(2) any required signature guarantees (see "Signature Guarantees" below); and
(3) other supporting legal documents, if required in the case of estates,
trusts, guardianships, divorce, custodianships, corporations, partnerships,
pension or profit sharing plans, retirement plans, and other organizations.
Please keep in mind that as a shareholder, it is your responsibility to ensure
that all requests are submitted to the Company's transfer agent in proper form
for processing.
SIGNATURE GUARANTEES. A signature guarantee verifies the authenticity of your
signature. Signature guarantees are required when:
(1) the proceeds of the redemption exceed $25,000;
(2) the proceeds (in any amount) are to be paid to someone OTHER THAN the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address OTHER THAN the
shareholder's address of record, pre-authorized bank account or exchanged to
one of the other funds managed by SM&R; or
(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
42
<PAGE>
corporation, partnership, association, or other entity has not been
established to the satisfaction of the Company or transfer agent.
You should be able to obtain an acceptable signature guarantee from a bank,
broker, dealer, municipal securities dealer or broker, government securities
dealer or broker, credit union, national securities exchange, or registered
securities association. WITNESSING OR NOTARIZATION IS NOT SUFFICIENT.
REDEMPTION OF SMALL ACCOUNTS. The 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 $10,000. 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 Funds 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 subsequent purchases by telephone from financial intermediaries;
- to refuse any purchase order;
- to cancel or rescind any purchase or exchange at any time prior to receipt
by the shareholder of written confirmation or, if later, within five (5)
business days of the transaction;
- to freeze an account and suspend account services when notice has been
received of a dispute involving the account owners or other parties or there
is reason to believe a fraudulent transaction may occur;
- to restrict or refuse the use of faxed redemptions where there is a question
as to the validity of the request or proper documents have not been
received;
- to otherwise modify the conditions of purchase and any services at any time;
- to act on instructions not believed to be genuine; or
- to eliminate duplicate mailings of fund material to shareholders who reside
at the same address.
43
<PAGE>
THE FUNDS AND MANAGEMENT
- -------------------------------------------------------------------
INVESTMENT ADVISOR
The Company's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the funds' investment adviser, the management of the
funds' day-to-day business and affairs. In addition, SM&R invests the funds'
assets, provides administrative services, and serves as transfer agent,
custodian, dividend paying agent, and underwriter.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). SM&R was incorporated in 1964 and has managed mutual
funds since 1966. SM&R does and may, from time to time, serve as investment
adviser to other clients including employee benefit plans, other investment
companies, banks, foundations and endowment funds.
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 agreement provides that SM&R will receive advisory fees as set
forth below.
GOVERNMENT BOND FUND AND TAX FREE FUND. We deduct an investment advisory fee
from the value of the shares each day. We calculate this fee for the Government
Bond and Tax Free Funds at the annual rate as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF EACH FUND'S INVESTMENT ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ------------------------------------------------- ---------------------
Not exceeding $100,000,000 0.50%
<S> <C>
Exceeding $100,000,000 but not exceeding
$300,000,000 0.45%
Exceeding $300,000,000 0.40%
<CAPTION>
</TABLE>
MONEY MARKET FUND AND PRIMARY FUND. For the Money Market and Primary Funds, we
calculate the investment advisory fee at the annual rate of 0.25% and 0.50%,
respectively, of each fund's average daily net asset value.
After applicable fee waivers, SM&R received total advisory fees from the
Government Bond Fund and Primary Fund for the fiscal year ended August 31, 1998
which represented 0.50% and 0.32%, respectively, of each such fund's average
daily net assets. SM&R waived all
44
<PAGE>
advisory fees for the Tax Free Fund for the fiscal year ended August 31, 1998.
The Money Market Fund was not in operation during the fiscal year ended August
31, 1998.
ADMINISTRATIVE SERVICES
Pursuant to an Administrative Service Agreement with the Company, SM&R provides
all non-investment related management, executive, administrative, transfer
agent, and operational services to the funds. Under the agreement, SM&R receives
an administrative service fee from each fund at the annual rate of average daily
net asset values as follows:
<TABLE>
<CAPTION>
<S> <C>
ON THE PORTION OF THE FUND'S ADMINISTRATIVE SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
- -------------------------------------------- --------------------------
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.20%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.15%
Exceeding $300,000,000 0.10%
<CAPTION>
</TABLE>
REIMBURSEMENTS AND WAIVERS
SM&R has agreed to pay (or to reimburse each fund for) each fund's regular
operating expenses in excess of 1.25% (0.50% for the Money Market Fund) per year
of such fund's average daily net assets. Regular operating expenses include the
advisory fee and administrative service fee, if any, paid to SM&R, but do not
include 12b-1 fees, class-specific expenses, interest, taxes, commissions, and
other expenses incidental to portfolio transactions. SM&R received
administrative service fees of 0.25% 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.
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 expenses incurred by the
Government Bond and Primary
45
<PAGE>
Funds to the extent that regular operating expenses exceed average daily net
assets as follows: 0.80% for the Primary Fund and 1.00% for the Government Bond
Fund.
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 policies.
TERRY E. FRANK, VICE PRESIDENT, PORTFOLIO MANAGER OF THE GOVERNMENT BOND FUND,
TAX FREE FUND, PRIMARY FUND AND MONEY MARKET FUND. Ms. Frank has served as
Portfolio Manager of the Government Bond Fund since 1993 and the Tax Free Fund
since its inception. She has served as Portfolio Manager of the Primary Fund
since November 1998 and the Money Market Fund since its inception (January 1,
1999). 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. She joined
SM&R's investment staff in 1991 and prior to that time she held positions with
American Capital Asset Management and Gibraltar Savings Association as a
securities analyst and Equitable Investment Services as a research analyst.
JOHN S. MAIDLOW, ASSISTANT PORTFOLIO MANAGER OF THE PRIMARY FUND AND THE MONEY
MARKET FUND. Mr. Maidlow has served as the Assistant Portfolio Manager of the
Primary Fund since November, 1998 and the Money Market Fund since its inception
(January 1, 1999). He also services as Assistant 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. He
joined SM&R's staff in 1998 and prior to that time he held positions with
American Industries Trust Company as a trust officer, Texas Department of
Insurance and the Texas Department of Banking as an examiner, Landmark Group as
Vice President of Investments, MBank as a trust officer and Rotan-Mosle, Inc.
and Eppler, Guerin & Turner as an investment broker.
46
<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 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 and for the
year ended August 31, 1998 has been audited by Tait, Weller & Baker, CPA. Each
independent auditor's 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.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.42 $ 10.14 $ 10.51 $ 10.07 $ 10.87
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.64 0.67 0.65 0.70 0.54
Net Realized and Unrealized Gain (Loss) on
Securities 0.20 0.26 (0.37) 0.44 (0.79)
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 0.84 0.93 0.28 1.14 (0.25)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.66) (0.65) (0.65) (0.70) (0.55)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.66) (0.65) (0.65) (0.70) (0.55)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 10.60 $ 10.42 $ 10.14 $ 10.51 $ 10.07
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 8.31% 9.37% 2.63% 11.85% (2.41)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted) $ 23,982 $ 23,683 $ 21,127 $ 20,466 $ 19,790
Ratio of Expenses to Average Net Assets(1) 1.00% 1.00% 1.00% 0.70% 1.12%
Ratio of Net Income to Average Net Assets 6.08% 6.46% 6.17% 6.90% 5.11%
Portfolio Turnover Rate 32.71% 9.06% 30.17% 2.20% 45.48%
</TABLE>
(1) Expenses for the calculation are net of a reimbursement from Securities
Management 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.
47
<PAGE>
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 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 and for the year ended August 31, 1998 has been
audited by Tait, Weller & Baker, CPA. Each independent auditor's 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.
<TABLE>
<CAPTION>
SEPT. 9, 1993
YEAR ENDED AUGUST 31, (DATE OPERATIONS
------------------------------------------ COMMENCED) THRU
1998 1997 1996 1995 AUG. 31, 1994
--------- --------- --------- --------- ----------------
<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 0.49 0.51 0.53 0.51 0.24
Net Realized and Unrealized Gain
(Loss) on Securities 0.37 0.33 (0.02) 0.33 (0.38)
--------- --------- --------- --------- --------
TOTAL FROM INVESTMENT OPERATIONS 0.86 0.84 0.51 0.84 (0.14)
--------- --------- --------- --------- --------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.49) (0.50) (0.53) (0.51) (0.24)
--------- --------- --------- --------- --------
TOTAL DISTRIBUTIONS (0.49) (0.50) (0.53) (0.51) (0.24)
--------- --------- --------- --------- --------
Net Asset Value, End of Period $ 10.64 $ 10.27 $ 9.93 $ 9.95 $ 9.62
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
TOTAL RETURN 8.58% 8.61% 5.18% 9.15% (1.49)%(1)
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's
omitted) $ 11,058 $ 10,700 $ 9,148 $ 8,399 $ 7,295
Ratio of Expenses to Average Net
Assets(3) 0.75% 0.54% -- -- 1.11%(2)
Ratio of Net Income to Average Net
Assets 4.60% 4.97% 5.27% 5.43% 2.50% (2)
Portfolio Turnover Rate 12.77% 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 1.25%, 1.27%, 1.18%, and
1.25% for the years ended August 31, 1998, 1997, 1996, and 1995,
respectively.
48
<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 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 and for the year ended August 31, 1998 has been audited by Tait,
Weller & Baker, CPA. Each independent auditor's report, along with the Primary
Fund's financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.05 0.05 0.05 0.05 0.03
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 0.05 0.05 0.05 0.05 0.03
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.05) (0.05) (0.05) (0.05) (0.03)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.05) (0.05) (0.05) (0.05) (0.03)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 5.15% 4.98% 5.07% 5.01% 2.91%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted) $ 34,577 $ 33,045 $ 37,465 $ 20,984 $ 15,208
Ratio of Expenses to Average Net Assets(1) 0.80% 0.80% 0.81% 0.84% 0.79%
Ratio of Net Income to Average Net Assets 5.02% 4.86% 4.93% 4.91% 2.88%
</TABLE>
(1) 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 0.98%, 1.01%, 1.15%, 1.21%,
and 1.20% for the years ended August 31, 1998, 1997, 1996, 1995, and 1994,
respectively.
49
<PAGE>
- -------------------------------------------------------------------
APPENDIX
(Description of Ratings Used in Prospectus)
- -------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND (BONDS THAT EXTEND
LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S LONG-TERM BOND (BONDS THAT
EXTEND LONGER THAN ONE YEAR) RATINGS:
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-
A-1
<PAGE>
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risks appear
somewhat larger than the Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated "Baa" are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
DESCRIPTION OF FITCH IBCA BOND RATINGS:
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
A-2
<PAGE>
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
MUNICIPAL NOTE RATINGS
DESCRIPTION OF MOODY'S INVESTOR SERVICE INC.'S SHORT-TERM MUNICIPAL NOTE (NOTES
THAT MATURE IN LESS THAN ONE YEAR) RATINGS:
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 for 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.
DESCRIPTION OF STANDARD AND POOR'S SHORT-TERM MUNICIPAL NOTE RATINGS:
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.
SP-3 Speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-3
<PAGE>
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to
a lesser degree. Earnings trends and coverage ratios, while sound, may
be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF FITCH IBCA SHORT-TERM DEBT RATINGS (INCLUDING COMMERCIAL PAPER):
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
A-4
<PAGE>
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result
in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
DESCRIPTION OF DUFF & PHELP'S HIGHEST COMMERCIAL RATINGS:
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors
are small.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
TBW-1 The highest category; indicates a very high likelihood that principal and
interest will be paid on a timely basis.
TBW-2 The second-highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
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.
A-5
<PAGE>
FOR MORE INFORMATION ABOUT THE FUNDS
- -------------------------------------------------------------------
<TABLE>
<S> <C>
The following documents contain more information about the SM&R GOVERNMENT BOND FUND
funds and are available free upon request: SM&R TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI contains SM&R PRIMARY FUND
additional information about all aspects of the funds. A SM&R MONEY
current SAI has been filed with the Securities and Exchange MARKET FUND
Commission and is incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS. The funds' annual and
semi-annual reports provide additional information about the
funds' investments. The annual report contains a discussion
of the market conditions and investment strategies that
significantly affected each fund's performance during the
last fiscal year.
</TABLE>
REQUESTING DOCUMENTS. You may request a free copy of the SAI and these reports,
make shareholder inquiries, or request further information about the funds
either by contacting your broker or by contacting the funds at:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE:1-800-231-4639 (TOLL FREE) OR
1-281-334-2469 (COLLECT)
PUBLIC INFORMATION. You can review and copy information about the funds,
including the SAI, at the Securities and Exchange Commission's Public Reference
Room in Washington D.C. You may obtain information on the operation of the
public reference room by calling the Commission at 1-800-SEC-0330. Reports and
other information about the funds also are available on the Commission's
Internet site at http://www.sec.gov. You may obtain copies of this information,
upon payment of a duplicating fee, by writing the Public Reference Section of
the Securities and Exchange Commission, Washington, D.C. 20549-6009.
Investment Company
File No. 811-6477
<PAGE>
SM&R
LOGO
P R O S P E C T U S
JANUARY 1, 1999
SM&R INVESTMENTS, INC.
- SM&R GOVERNMENT BOND FUND
- SM&R TAX FREE FUND
- SM&R PRIMARY FUND
- SM&R MONEY MARKET FUND
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
CLASS J
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------
<TABLE>
<S> <C>
RISK/RETURN SUMMARY.......................................... 1
SM&R Government Bond Fund.................................. 1
SM&R Tax Free Fund......................................... 3
SM&R Primary Fund.......................................... 5
SM&R Money Market Fund..................................... 7
Types of Investment Risk................................... 9
Bar Chart and Performance Table............................ 10
Fees and Expenses of the Funds............................. 14
SHARES OF THE FUNDS.......................................... 17
INVESTMENT OBJECTIVES AND POLICIES........................... 18
Government Bond Fund....................................... 18
Tax Free Fund.............................................. 22
Primary Fund............................................... 26
Money Market Fund.......................................... 27
RISK FACTORS................................................. 29
PURCHASES AND REDEMPTIONS.................................... 32
Purchasing Shares.......................................... 32
Pricing of Fund Shares..................................... 32
Special Services........................................... 33
Retirement Plans........................................... 35
Dividends, Distributions, and Taxes........................ 36
Redeeming Shares........................................... 38
THE FUNDS AND MANAGEMENT..................................... 41
FINANCIAL HIGHLIGHTS......................................... 44
Government Bond Fund....................................... 44
Tax Free Fund.............................................. 45
Primary Fund............................................... 46
APPENDIX..................................................... A-1
</TABLE>
ii
<PAGE>
RISK/RETURN SUMMARY SM&R GOVERNMENT BOND FUND
- -------------------------------------------------------------------
GOVERNMENT BOND FUND'S INVESTMENT 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.
GOVERNMENT BOND FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Government Bond Fund normally invests at
least 65% of its assets in securities issued or guaranteed by
the U.S. Government, its agencies, or instrumentalities.
These may include Treasuries and mortgage-backed securities,
such as Ginnie Maes, Freddie Macs, and Fannie Maes. This fund
may also invest assets in collateralized mortgage
obligations.
The Government Bond Fund may invest in zero coupon bonds,
which are U.S. Government obligations. The fund may also
invest in commercial paper, certificates of deposit,
corporate debt securities rated "A" or higher, and repurchase
agreements.
The Government Bond Fund generally invests primarily in
medium and long term securities. The average portfolio
maturity generally is expected to be in the six to fifteen
year range (some securities may have longer or shorter
durations). The average portfolio maturity may be shorter
when management anticipates that interest rates will
increase, and longer when management anticipates that
interest rates will decrease.
PRINCIPAL RISKS OF INVESTING IN THE GOVERNMENT BOND FUND
You could lose money on your investment in the
Government Bond Fund, or it could underperform other
investments, if any of the following occurs:
- interest rates rise (thus causing a decline in the market
value of debt securities)
1
<PAGE>
RISK/RETURN SUMMARY SM&R GOVERNMENT BOND FUND
- -------------------------------------------------------------------
- the worldwide demand for U.S. government securities falls
- interest rates fall enough to prompt an unexpected number
of people to refinance (or prepay) their mortgages
- interest rates rise enough to cause fewer people than
expected to repay their mortgages early
- if any bonds the fund owns are downgraded in credit rating
or go into default
WHO MAY WANT TO INVEST IN THE GOVERNMENT BOND FUND
The Government Bond Fund may be
appropriate if you:
- are seeking a regular stream of income to meet current
needs
- are seeking higher potential returns than money market
funds and are willing to accept moderate risk of volatility
- are retired or nearing retirement
The Government Bond Fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require absolute stability of your principal
2
<PAGE>
RISK/RETURN SUMMARY SM&R TAX FREE FUND
- -------------------------------------------------------------------
TAX FREE FUND'S INVESTMENT 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.
TAX FREE FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Tax Free Fund invests primarily in tax-
exempt securities. During normal market conditions, this fund
invests at least 80% of its assets in municipal securities
that pay interest exempt from federal income taxes. The Tax
Free Fund generally invests in securities rated Baa or better
by Moody's or BBB or better by Standard and Poors and Fitch.
This fund may not invest more than 20% of its assets in
UNRATED municipal securities. These securities may be less
liquid than comparably rated municipal securities and involve
somewhat greater risk. This fund may also invest up to 20% of
its assets in Government guaranteed taxable bonds, highly
rated corporate bonds, or commercial paper.
The average portfolio maturity of the Tax Free Fund generally
is expected to be in the six to twelve year range (some
securities have longer or shorter durations). The average
portfolio maturity may be shorter when management anticipates
that interest rates will increase, and longer when management
anticipates that interest rates will decrease.
PRINCIPAL RISKS OF INVESTING IN THE TAX FREE FUND
You could lose money on your investment in the
Tax Free Fund, or it could underperform other investments, if
any of the following occurs:
- interest rates rise (thus causing a decline in the market
value of debt securities)
- if any bonds the fund owns are downgraded in credit rating
or go into default
- certain securities become harder to value or to sell at a
fair price
3
<PAGE>
RISK/RETURN SUMMARY SM&R TAX FREE FUND
- -------------------------------------------------------------------
ALSO, SOME OF YOUR DIVIDEND INCOME MAY BE TAXABLE.
WHO MAY WANT TO INVEST IN THE TAX FREE FUND
The Tax Free Fund may be appropriate if you:
- are willing to sacrifice some investment return for income
exempt from federal income tax and, under certain
conditions, exempt from state and local taxes
- are in a high tax bracket (28% and up)
- are seeking a regular stream of income to meet current
needs
- are seeking higher potential returns than money market
funds and are willing to accept moderate risk of volatility
The Tax Free Fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- prefer capital gains over ordinary income
4
<PAGE>
RISK/RETURN SUMMARY SM&R PRIMARY FUND
- -------------------------------------------------------------------
PRIMARY FUND'S INVESTMENT OBJECTIVE
To seek maximum current income consistent
with capital preservation and liquidity through investment
primarily in commercial paper.
PRIMARY FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Primary Fund invests primarily in
commercial paper. Commercial paper is short-term unsecured
promissory notes issued by corporations. This fund will only
invest in commercial paper rated in one of the two highest
rating categories.
The Primary Fund may also invest in:
- U.S. Government obligations;
- corporate debt obligations maturing in five years or less
and rated "A" or higher;
- certificates of deposit, generally maturing in 3 years or
less; and
- repurchase agreements.
PRINCIPAL RISKS OF INVESTING IN THE PRIMARY FUND
You could lose money on your investment in the
Primary Fund, or it could underperform other investments, if
any of the following occurs:
- interest rates rise (thus causing a decline in the market
value of debt securities)
- if any of the fund's investments are downgraded in credit
rating or go into default
By limiting its investments as described above, the Primary
Fund may not achieve as high a level of current income as a
fund investing in lower-rated securities or longer-term
securities.
5
<PAGE>
RISK/RETURN SUMMARY SM&R PRIMARY FUND
- -------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE PRIMARY FUND
The Primary Fund may be appropriate if you:
- are seeking a regular stream of income to meet current
needs
- are seeking higher potential returns than money market
funds and are willing to accept moderate risk of volatility
- are more concerned with safety of principal than with
investment returns
- are retired or nearing retirement
The Primary Fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- are investing for goals that are many years in the future
- prefer capital gains over ordinary income
6
<PAGE>
RISK/RETURN SUMMARY SM&R MONEY MARKET FUND
- -------------------------------------------------------------------
MONEY MARKET FUND'S INVESTMENT OBJECTIVE
To seek the highest current income consistent
with the stability of principal and maintenance of liquidity.
MONEY MARKET FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Money Market Fund seeks to achieve its
objective by investing in high-quality short-term money
market instruments, including: U.S. Government obligations,
certificates of deposit, banker's acceptances, commercial
paper, collateralized mortgage obligations, and corporate
bonds and notes. This fund limits its investments to those
short-term securities that it determines present minimal
credit risk and meet certain rating requirements (in the two
highest short-term rating categories).
PRINCIPAL RISKS OF INVESTING IN THE MONEY MARKET FUND
The Money Market Fund is subject to the
following risks:
- that interest rates may rise (thus causing a decline in the
market value of debt securities)
- that the fund's investments may be downgraded in credit
rating or go into default
However, the risks of investment in the Money Market Fund may
be expected to be less than for other mutual funds. By
limiting its investments as described above, this fund may
not achieve as high a level of current income as a fund
investing in lower-rated securities. ALTHOUGH THE MONEY
MARKET FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE MONEY MARKET FUND.
7
<PAGE>
RISK/RETURN SUMMARY SM&R MONEY MARKET FUND
- -------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE MONEY MARKET FUND
The Money Market Fund may be appropriate if
you:
- require stability of principal
- are seeking a mutual fund for the cash portion of an asset
allocation program
- need to "park" your money temporarily
- are more concerned with safety of principal than with
investment returns
- are investing emergency reserves
The Money Market Fund may NOT be appropriate if you:
- want federal deposit insurance
- are seeking an investment that is likely to outpace
inflation
- are investing for retirement or other goals that are many
years in the future
- are investing for growth or maximum current income
YOU SHOULD KEEP IN MIND THAT AN INVESTMENT IN THE MONEY
MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
8
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------------------------------------
TYPES OF INVESTMENT RISK
As indicated above, each of the four funds may be subject to certain of the
following types of risks:
CREDIT RISK. The risk that the issuer of a security, or a party to a contract,
will default or otherwise not honor a financial obligation.
INTEREST RATE RISK. The risk of declines in market value of an income-bearing
investment due to changes in prevailing interest rates. With fixed-rate
securities, a rise in interest rates typically causes a decline in market
values, while a fall in interest rates typically causes an increase in market
values. THIS RISK AFFECTS ALL FOUR FUNDS, BUT HAS LESS EFFECT ON THE MONEY
MARKET AND PRIMARY FUNDS.
LIQUIDITY RISK. The risk that certain securities or other investments may be
difficult or impossible to sell at the time the fund would like to sell them or
at the price the fund values them. The fund may have to sell at a lower price,
sell other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance. THIS RISK
PRIMARILY AFFECTS THE TAX FREE, PRIMARY, AND MONEY MARKET FUNDS.
MANAGEMENT RISK. The risk that a strategy used by a fund's management may fail
to produce the intended result. This risk is common to all mutual funds. THIS
RISK AFFECTS ALL FOUR FUNDS.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. The fluctuations may cause a security to be
worth less than the price originally paid for it, or less than it was worth at
an earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. This risk is common to all stocks and bonds
and the mutual funds that invest in them. THIS RISK AFFECTS ALL FOUR FUNDS.
PREPAYMENT AND EXTENSION RISK. PREPAYMENT RISK is the risk that an unexpected
fall in prevailing interest rates will shorten the life of an outstanding
mortgage-backed security by increasing the actual or expected number of mortgage
prepayments, thereby reducing the security's value. EXTENSION RISK is the risk
that an unexpected rise in prevailing interest rates will extend the life of an
outstanding mortgage-backed security by reducing the actual or expected number
9
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
of mortgage prepayments, thereby reducing the security's value. THIS RISK
APPLIES ONLY TO THE GOVERNMENT BOND FUND.
BAR CHART AND PERFORMANCE TABLE
The bar charts and performance tables shown below provide some indication of the
risks of investing in the funds and the variability of returns:
- - by showing each fund's performance for each year since inception, and
- - by showing how each fund's average annual returns for certain periods compare
to those of a broad-based securities market index.
Because the Money Market Fund was not in operation during these periods, it is
not included in the bar chart or the performance table.
The returns shown are based on an investment in the funds prior to the creation
of multiple classes of shares, but do not reflect any sales loads that would be
imposed on the purchase or sale of any shares. We created the multiple classes
of shares on January 1, 1999. If multiple classes of shares of the Government
Bond and Tax Free Funds had been in existence, the financial performance of
Class J shares would have been lower than depicted because of the imposition of
distribution and/or service (12b-1) fees.
Past performance is not necessarily an indication of how the funds will perform
in the future.
10
<PAGE>
RISK/RETURN SUMMARY SM&R GOVERNMENT BOND FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 9.31%
1994 -4.65%
1995 18.57%
1996 3.43%
1997 8.14%
</TABLE>
* For the nine month period ended September 30, 1998, the Government Bond Fund
had a total return of 6.70%.
During the period shown in the bar chart, the highest return for a quarter was
6.44% achieved June 30, 1995 and the lowest return for a quarter was minus 1.77%
for the quarter September 30, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR
THE PERIODS ENDING DECEMBER 31,
1997) PAST ONE YEAR PAST 5 YEARS
<S> <C> <C>
SM&R GOVERNMENT BOND FUND 3.28% 5.71%
*LEHMAN BROTHERS GOVERNMENT/ 9.54% 8.71%
MORTGAGE-BACKED SECURITIES
INDEX
</TABLE>
* Lehman Brothers Government/Mortgage-Backed Securities Index is an index
which includes all public obligations of the U.S. Treasury and all publicly
issued debt of U.S. Government agencies quasi-federal corporations and
corporate debt guaranteed by the U.S. Government as well as 15 and 30 year
fixed rate securities backed by mortgage pools of the GNMA, FHLMA and FNMA.
11
<PAGE>
RISK/RETURN SUMMARY SM&R PRIMARY FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 2.48%
1994 3.58%
1995 5.26%
1996 4.92%
1997 5.08%
</TABLE>
* For the nine month period ended September 30, 1998, the Primary Fund had a
total return of 3.81%.
During the period shown in the bar chart, the highest return for a quarter was
2.54% achieved September 30, 1997 and the lowest return for a quarter was 0.60%
for the quarter June 30, 1993.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (FOR
THE PERIODS ENDING DECEMBER 31,
1997) PAST ONE YEAR PAST 5 YEARS
<S> <C> <C>
SM&R PRIMARY FUND 5.08% 4.26%
*LEHMAN GOVERNMENT/CORPORATE 7.99% 7.02%
INDEX
</TABLE>
* Lehman Government/Corporate Index is an index representing all public
obligations of the U.S. Treasury as well as all publicly issued debt of U.S.
government agencies with maturities of one to three years.
12
<PAGE>
RISK/RETURN SUMMARY SM&R TAX FREE FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1994 -5.49%
1995 17.87%
1996 4.48%
1997 8.98%
</TABLE>
* For the nine month period ended September 30, 1998, the Tax Free Fund had a
total return of 5.73%.
During the period shown in the bar chart, the highest return for a quarter was
7.41% achieved March 31, 1995 and the lowest return for a quarter was minus
3.94% for the quarter March 31, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1997) PAST ONE YEAR PAST 4 YEARS
<S> <C> <C>
SM&R TAX FREE FUND 4.08% 4.94%
*LEHMAN BROTHERS 9.19% 11.18%
MUNICIPAL INDEX
</TABLE>
* Lehman Brothers Municipal Index is an index of investment grade tax exempt
bonds classified into four major sections: General Obligation, Revenue,
Insured and Preferred.
13
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
THERE ARE NO 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(1)
(expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
MONEY
GOVERNMENT TAX FREE PRIMARY MARKET
BOND FUND FUND FUND FUND
----------- -------- -------- -------
CLASS J CLASS J
----------- --------
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.25%
Distribution (12b-1) Fees 0.75% 0.75% None None
Other Expenses(2) 0.50% 0.75% 0.48% 0.25%
Total Annual Fund Operating Expenses 1.75% 2.00% 0.98% 0.50%
Fee Waivers and Expense Reimbursements(3) --% --% --% --%
----- -------- -------- -------
Net Expenses 1.75% 2.00% 0.98% 0.50%
----- -------- -------- -------
</TABLE>
NOTES TO THE FEES AND EXPENSES OF THE FUNDS
(1) The "Management Fees" and "Other Expenses" for the Government Bond, Primary,
and Tax Free Funds are for the year ended August 31, 1998; for the Money
Market Fund, they are estimates for the first year of operation (ending
August 31, 1999).
(2) "Other Expenses" include the 0.25% Administrative Service Fee. Because Class
J shares were not available prior to the date of this Prospectus, "Other
Expenses" for Class J shares are based on the expenses and average net
assets of the Government Bond Fund and the Tax Free Fund for the fiscal year
ended August 31, 1998. "Other Expenses" shown for the Money Market Fund are
estimated for the current fiscal year ending August 31, 1999.
(3) The Fee Table reflects any fees waived and expenses assumed contractually by
the funds' manager, Securities Management and Research, Inc. ("SM&R").
14
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
Pursuant to the Administrative Service Agreement, SM&R will pay (or
reimburse) each fund for regular operating expenses in excess of 1.25%
(0.50% for the Money Market Fund) per year of such fund's average daily net
assets. Regular operating expenses include the advisory fee and
administrative fee, but do not include any 12b-1 fee or class-specific
expenses.
The Fee Table does not reflect fees waived or expenses assumed by SM&R on a
voluntary basis. During the fiscal year ended August 31, 1998, SM&R
voluntarily waived fees of 0.18%, and 0.50% for the Primary Fund and Tax
Free Fund, respectively. SM&R intends to continue to voluntarily waive the
advisory fee for the Tax Free Fund. SM&R also intends to reimburse regular
operating expenses that 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 reimbursement of expenses at any
time without notice.
The following table shows fees and expenses for the Government Bond,
Primary, and Tax Free Funds for the year ended August 31, 1998 taking into
account all fee waivers and expense reimbursements, both contractual and
voluntary. For the Money Market Fund, they are estimates considering
estimated fee waivers and expense reimbursements for the year ending August
31, 1999.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets After All Fee Waivers and Expense
Reimbursements)
<TABLE>
<CAPTION>
GOVERNMENT BOND TAX FREE PRIMARY MONEY
FUND FUND FUND MARKET FUND
--------------- ------------ ----------- -----------
CLASS J CLASS J
--------------- ------------
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.00% 0.32% 0.25%
Distribution (12b-1) Fees 0.75% 0.75% None None
Other Expenses 0.50% 0.75% 0.48% 0.25%
Total Annual Fund Operating
Expenses 1.75% 1.50% 0.80% 0.50%
--- ----- ----- -----
</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, based on expenses before fee waivers and expense
reimbursements. These
15
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
examples also assume that your investment has a 5% return each year and that the
funds' operating expenses remain the same. YOUR ACTUAL COSTS MAY BE HIGHER OR
LOWER THAN SHOWN.
You would pay the following expenses, based on these assumptions, if you
actually redeem all of your shares at the end of the period shown:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Government Bond Fund (Class
J) $ 178 $ 551 $ 949 $ 2,062
Tax Free Fund (Class J) $ 203 $ 627 $ 1,078 $ 2,327
Primary Fund $ 100 $ 312 $ 542 $ 1,201
Money Market Fund $ 51 $ 160 $ 280 $ 628
</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.
16
<PAGE>
SHARES OF THE FUNDS
- -------------------------------------------------------------------
SM&R Investments, Inc., formerly known as SM&R Capital Funds, Inc. (the
"Company" or "we") offers four separate investment portfolios. This prospectus
offers Class J shares of the Government Bond and Tax Free Funds and shares of
the Money Market and Primary Funds through financial intermediaries that have
distribution agreements with SM&R. These financial intermediaries may include
broker-dealers, investment advisers, and mutual fund "supermarkets", and may
charge you separately for their services.
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.
The Government Bond and Tax Free Funds also offer other classes of shares
through separate prospectuses: (1) Class A "front-end load" shares; (2) Class B
"back-end load" shares; (3) Class C "level load" shares; (4) Class T shares sold
only to investors that became shareholders of the Company prior to December 31,
1998 and certain designated persons; and (5) Class Y "institutional" shares.
Class A, B, C, T, and Y shares are subject to different sales charges and other
expenses and, accordingly, may have expense ratios and performance that differs
from those of Class J shares. You are encouraged to consider all of the
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.
DISTRIBUTION AND SHAREHOLDER SERVICE (12b-1) FEE
Class J shares of the Government Bond and Tax Free Funds pay SM&R, the principal
underwriter, a distribution (12b-1) fee of 0.75%. This fee is computed as an
annual percentage of the average daily net assets of the class. BECAUSE
DISTRIBUTION (12b-1) FEES ARE PAID OUT OF FUND ASSETS ON AN ONGOING BASIS, THE
FEES MAY, OVER TIME, INCREASE THE COST OF AN INVESTMENT IN A FUND AND COST
INVESTORS MORE THAN OTHER TYPES OF SALES LOADS.
17
<PAGE>
The distribution fee is for services that are primarily intended to result in or
are primarily attributable to the distribution of the classes. This fee
compensates SM&R, or enables SM&R to compensate other persons (including
distributors of the shares), for providing such services.
INVESTMENT OBJECTIVES AND POLICIES
- -------------------------------------------------------------------
Each fund pursues its own investment objective through various investment
policies and techniques. ONLY THE PRINCIPAL INVESTMENT STRATEGIES OF EACH FUND
AND THE PRINCIPAL TYPES OF SECURITIES EACH FUND PLANS TO PURCHASE ARE DESCRIBED
BELOW. More investment information is in the SAI. These policies and techniques
are not fundamental and may be changed by the Board of Directors without
shareholder approval.
Because of the market risks inherent in any investment, the funds may not
achieve their investment objectives. In addition, effective management of each
fund is subject to general economic conditions and to the ability and investment
techniques of management. The net asset value of each fund's shares will vary
and the redemption value of shares may be either higher or lower than the
shareholder's cost. Since each fund has a different investment objective, each
will have different investment results and incur different market, financial,
and other risks.
GOVERNMENT BOND FUND
(FORMERLY NAMED AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES)
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.
18
<PAGE>
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--We anticipate that a substantial portion of the
Government Bond Fund's portfolio will consist of mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies, or instrumentalities.
These securities represent part ownership of pools of mortgage loans secured by
real property, such as certificates issued by the Government National Mortgage
Association ("GNMA" or "Ginnie Mae"), the Federal National Mortgage Association
("FNMA" or "Fannie Mae"), 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
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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 Government Bond Fund's securities will generally increase. However, we
anticipate that the average life of the mortgages in the pool will decrease as
borrowers refinance and prepay mortgages to take advantage of lower interest
rates. The Government Bond Fund invests the proceeds from such prepayments at
the then prevailing lower interest rates. On the other hand, if interest rates
increase, the value of the 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.
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A CMO is often issued in multiple classes with varying maturities and interest
rates. As a result the investor may obtain greater predictability of maturity
than with direct investments in mortgage-backed securities. Thus, classes with
shorter maturities may have lower volatility and lower yield while those with
longer maturities may have higher volatility and higher yields. This provides
the investor with greater control over the characteristics of the investment in
a changing interest rate environment. 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.
The Government Bond Fund may also invest in securities issued by private issuers
that represent an interest in or are secured by mortgage-backed securities
issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities. In addition, the fund may invest in securities issued by
private issuers that represent an interest in or are secured by mortgage loans
or mortgage-backed securities without a government guarantee but usually have
some form of private credit enhancement.
ZERO COUPON BONDS--The Government Bond 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
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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.
TAX FREE FUND (FORMERLY NAMED AMERICAN NATIONAL TAX FREE FUND SERIES)
The Tax Free Fund, as a matter of fundamental policy, seeks 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 Investor Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), or Fitch IBCA ("Fitch") (E.G., MIG 4 or higher by Moody's)
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
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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, S&P or Fitch;
(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
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(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, Distributions,
and Taxes"). In addition, Congress could enact tax legislation such as a flat
tax rate that would make tax-free bonds less desirable to investors seeking ways
to reduce taxable income. If that were to occur, it could cause the value of the
securities to drop.
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.
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. Neither the funds nor SM&R will review the
proceedings relating to the issuance of municipal obligations or the basis for
opinions of counsel.
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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
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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.
PRIMARY FUND (FORMERLY NAMED AMERICAN NATIONAL PRIMARY FUND SERIES)
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).
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.)
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
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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.
MONEY MARKET FUND
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.
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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, S&P, Fitch
IBCA, 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
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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.
RISK FACTORS
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The following discussion relates to all four funds. The risk/return summary
located at the beginning of this prospectus identifies some specific risks
applicable to each individual fund.
GENERAL. There is no assurance that a fund will achieve its goals. Generally, if
the securities owned by a fund increase in value, the value of the shares of the
fund which you own will increase. Similarly, if the securities owned by a fund
decrease in value, the value of your shares will also go down. In this way, you
participate in any change in the value of the securities owned by a fund.
The risk inherent in investing in any fund is a risk common to any security.
That is, the value of a fund's shares will fluctuate in response to changes in
economic conditions, interest rates and the market's perception of the
underlying portfolio securities held by that fund. Each fund's share value
depends on general economic and securities market conditions, the investment
decisions of its management, and numerous other factors. All of these factors
are inherently uncertain and, in some cases, unforeseeable.
Any of the funds could lose money if the stock markets in general go down or if
the particular debt obligations purchased by a fund go down in value. In
addition, the funds could lose money if prevailing interest rates increase or if
the debt securities purchased by a fund are downgraded or defaulted upon.
DEBT SECURITIES RISKS. Debt securities are subject to change in their values due
to changes in prevailing interest rates. The magnitude of these fluctuations
will often be greater for longer-term debt securities than shorter-term debt
securities. When prevailing interest rates fall, the values of already-issued
debt securities generally rise. Accordingly, if interest rates go down after a
security is purchased, such security might be valued and/or sold at a price
greater than its cost. If interest rates were to drop dramatically, some of the
securities could be called and/or prepaid, requiring reinvesting in securities
at much lower yields.
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On the other hand, when prevailing interest rates rise, the values of
already-issued debt securities generally fall. Accordingly, if interest rates
increase after a security is purchased, such security might be valued and/or
sold at a price less than its cost. In such circumstances, the value of existing
bonds decrease because the interest payments from existing bonds are less
attractive than new issues with higher interest rates and investors would lose
money if they liquidate holdings.
The funds could lose money if any bonds they own are downgraded in credit rating
or go into default. 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 securities. A change in credit rating of an issuer can also affect the
bond's value, thus affecting the market value of the funds. However, the funds
invest predominately in investment grade bonds in order to minimize credit risk.
(See "Investment Objectives and Policies" for more information about the ratings
required for investments by each specific fund.) Moreover, substantial
redemptions of fund shares could require a fund to sell portfolio securities at
a time when a sale might not be favorable.
U.S. GOVERNMENT OBLIGATIONS. 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.
MARKET RISKS. Because the funds may invest in debt obligations which are traded
on securities exchanges, the value of each fund's portfolio will be affected by
changes in the stock markets. At times, the stock markets can be volatile and
stock prices can change substantially. This market risk will affect each fund's
net asset value per share, which will fluctuate as the values of each fund's
portfolio securities change. Prices do not always change uniformly or at the
same time and the various stock markets do not always move in the same direction
at the same time. Other factors specific to a particular company also affect the
price of that company's debt obligations (for example, poor earnings, loss of
major customers, or major litigation). The funds cannot always predict the
factors that will affect a security's
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price. The funds, however, do attempt to limit market risk by diversifying their
investments. The funds diversify their investments by generally investing only a
small percentage of their assets in the debt obligations of any one company and
by not holding a substantial amount of the debt obligations of any one company.
REPURCHASE AGREEMENTS. In a repurchase agreement, a fund buys a security and
simultaneously sells it to the vendor for delivery at a future date. These
agreements are used primarily for cash purposes. A fund entering into a
repurchase agreement may lose money if the other party to the transaction fails
to pay the resale price on the delivery date. Such a default may delay or
prevent the fund from disposing of the underlying securities. The value of the
underlying securities may go down during the period in which the fund seeks to
dispose of them. Also, the fund may incur expenses while trying to sell the
underlying securities. Finally, the fund risks losing all or a part of the
income from the agreement.
OTHER RISKS. Each investor will be subject to all the risks normally attendant
to business operations, changes in general economic conditions, governmental
rules and fiscal policies, acts of God, and other factors beyond the control of
the funds' management.
YEAR 2000 RISKS. Many services provided to the funds and their shareholders
depend on the smooth functioning of computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated, referred to as the "Year 2000
Problem." The Year 2000 Problem could have a negative impact on handling
securities trades, payment of interest and dividends, pricing, and account
services. Like other mutual funds, financial and business organizations, and
individuals around the world, the funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and transfer agent) do not properly process and
calculate date-related information and data from and after January 1, 2000. SM&R
is taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by any other service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
funds and their shareholders.
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PURCHASES AND REDEMPTIONS
- -------------------------------------------------------------------
PURCHASING SHARES
You may purchase shares offered in this prospectus through certain financial
intermediaries (such as broker-dealers and mutual fund "supermarkets") that have
distribution agreements with SM&R and are authorized to accept orders on the
funds behalf. Such purchases will be at the offering price for such shares
determined as and when provided below (See "Pricing of Fund Shares").
Certificates are not issued for shares of the funds. SM&R confirms investors'
purchases and credits such purchases to their accounts on the books maintained
by SM&R. Investors have the same rights of share ownership as they would if
certificates had been issued.
Investors whose shares are held in the name of a broker-dealer or other party
are not shareholders of record and therefore may not be able to utilize services
available to shareholders of record.
OPENING AN ACCOUNT: To purchase shares, you must submit a completed account
application. Special forms or information may be required when establishing an
IRA/SEP or 403(b) plan. Please note that third party checks will not be accepted
to open a new account, except for IRA Rollover checks that are properly
endorsed.
MINIMUM PURCHASE REQUIREMENT: The minimum initial investment is $2,000 and all
subsequent investments must be at least $500. The Company reserves the right to
reject any purchase.
PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). We determine each fund's offering price once
each day the New York Stock Exchange (the "Exchange") is open for regular
trading. The offering price equals a fund's net asset value plus the sales
charge, if any. You may purchase shares offered in this prospectus without a
sales charge. Accordingly, the offering price for shares offered in this
prospectus is that fund's (or class') net asset value.
EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS (WHEN SHARES ARE PRICED). We
calculate net asset value once each day at the close of regular trading on the
Exchange (currently 3:00 p.m. Central Time). In the
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event the Exchange closes early on a particular day, we will determine the net
asset value of each fund as of the close of the Exchange that day. Accordingly,
the price you pay or receive for shares of a fund depends, in part, on the day
and time you make your purchase or redemption. On any day the Exchange is open
for regular trading, we will execute purchases and redemptions at the next
applicable price determined that day if:
- SM&R receives your order in proper form prior to the close of the Exchange;
- a securities dealer having a dealer contract with SM&R receives your order
prior to the close of the Exchange and reports your order to SM&R prior to
SM&R's close of business (currently 4:30 p.m. Central Time) on the same day;
or
- for purchases, Moody National Bank receives your purchase payment by bank
wire and reports it to SM&R prior to the close of the Exchange.
If we receive your order after the close of the Exchange or on any day that the
Exchange is closed, we will execute your purchase or redemption at the price
next determined on the next business day. In unusual circumstances, any fund may
temporarily suspend the processing of sell requests, or may postpone payment of
proceeds for up to three business days or longer, as allowed by federal
securities laws.
SPECIAL SERVICES
EXCHANGE PRIVILEGE. As an investor in a fund, you may be permitted to exchange
shares that you own in a fund with shares of some of the other mutual funds
managed by SM&R without the payment of an exchange fee, subject to certain
conditions. EXCHANGES BETWEEN A FUND AND ANOTHER FUND MANAGED BY SM&R ARE
AVAILABLE ONLY IN STATES WHERE THE APPLICABLE FUNDS ARE REGISTERED AND THE
EXCHANGE MAY BE LEGALLY MADE. YOU SHOULD CONTACT SM&R TO DETERMINE WHETHER A
FUND IS REGISTERED IN A PARTICULAR STATE AND WHETHER AN EXCHANGE IS PERMITTED.
WE MAY TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE OFFER AT ANY TIME.
GOVERNMENT BOND FUND AND TAX FREE FUND. You may exchange Class J shares that you
own in the Government Bond or Tax Free
33
<PAGE>
Fund, without an exchange fee, for shares of the corresponding class of another
fund managed by SM&R.
PRIMARY FUND AND MONEY MARKET FUND. You may exchange shares you own in the
Primary Fund for shares of the Money Market Fund, and vise versa. You may
exchange shares you own in the Primary or Money Market Fund for Class A, T, J,
or Y shares of another fund managed by SM&R, provided you meet any eligibility
requirements and pay any sales charge applicable to the acquired shares. You
CANNOT exchange shares of the Money Market Fund or Primary Fund for Class B or C
shares of another fund.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met:
(a) the exchange must be made between accounts that are registered in the same
name, address and, if applicable, taxpayer identification number;
(b) the shares of the fund acquired through exchange must be qualified for sale
in the state in which you reside;
(c) the dollar amount of a written exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(d) the minimum dollar amount of a telephone exchange is $500;
(e) SM&R must have received full payment for the shares being exchanged;
(f) your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal Revenue
Service Form W-8 (certificate of foreign status) or Form W-9 (certifying
exempt status);
(g) any shares that you wish to exchange must have been held for at least ten
(10) business days;
(h) certificates representing shares, if any, are returned before such shares
are exchanged; and
(i) you have received a prospectus for the shares you receive in the exchange.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating
34
<PAGE>
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 currently define
"excessive trading" as exceeding one purchase and sale involving the same fund
within any 120-day period.
For example, you are in Fund X. You can move substantial assets from Fund X to
Fund Y and, within the next 120 days, sell your shares in Fund Y to return to
Fund X or move to Fund Z. If you exceed the number of trades described above,
you may be barred indefinitely from further transactions between the
participating funds.
There are two types of transactions exempted from the excessive trading
guidelines. They are (1) redemptions that are not part of exchanges and (2)
systematic purchases or redemptions.
RETIREMENT PLANS
The following retirement plans may be funded with Class J shares of the
Government Bond Fund or with shares of the Primary and Money Market Funds:
- Individual Retirement Accounts (IRAs), which include traditional IRAs, Roth
IRAs, Education IRAs, and SIMPLE IRAs,
- Simplified Employee Pension Plans (SEPs),
- 403(b) Custodial Accounts (TSAs), and
- corporate retirement plans.
These plans allow you to shelter investment income from federal income tax while
saving for retirement. Information concerning IRAs and TSAs, and the forms
necessary to adopt such plans, can be obtained by contacting your registered
representative. 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. (See "Purchasing Shares" for the minimum
initial and subsequent purchase requirements.) SM&R acts as trustee or custodian
for IRAs, SEPs, and TSAs for the Company. An annual custodial fee of $7.50 per
account will be charged for any
35
<PAGE>
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, DISTRIBUTIONS, AND TAXES
DIVIDENDS.
GOVERNMENT BOND AND TAX FREE FUNDS. The Government Bond and Tax Free Funds will
generally declare and pay dividends from net investment income monthly and net
realized short-term or long-term capital gains, if any, annually. 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 funds have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution of record shortly after the purchase of
shares by an investor represents, in substance, a return of capital.
PRIMARY AND MONEY MARKET FUNDS. At 3:00 p.m. Central Time, on each day that the
Exchange is open for trading, the Primary and Money Market Funds each will
declare a dividend of all of its net investment income to shareholders of record
on that date. Such dividends will be paid monthly.
DIVIDEND REINVESTMENTS. Dividends and capital gains will be automatically
reinvested at net asset value in additional shares of the fund making such
distribution unless SM&R is instructed otherwise in writing. Distributions not
reinvested are paid by check or transmitted to your bank account through an ACH
transaction, if elected. If the Postal Service cannot deliver your check, or if
your check remains uncashed for six months, the funds reserve the right to
reinvest your distribution check in your account at the net asset value on the
business day of the reinvestment and to reinvest all future distributions in
shares of the applicable fund(s). Dividends and capital gains
36
<PAGE>
declared in December to shareholders of record in December and paid the
following January will be taxable to shareholders as if received in December.
This is a convenient way to accumulate additional shares and maintain or
increase the shareholder's earning base. Of course, any shares so acquired
remain at market risk.
Shareholders have the right to change their election with respect to the receipt
of distributions by notifying SM&R in writing, but any such change will be
effective only as to distributions for which the record date is seven or more
business days after SM&R has received the shareholder's written request.
TAXABILITY OF DIVIDENDS. Dividends you receive from the Government Bond,
Primary, and Money Market Funds, whether reinvested or taken as cash, are
generally considered taxable. A fund's long-term capital gains distributions are
taxable as capital gains; dividends from other sources are generally taxable as
ordinary income. Some dividends paid in January may be taxable as if they had
been paid the previous December. The Form 1099 that is mailed to you every
January details your dividends and their federal tax category, although you
should verify your tax liability with your tax professional.
The Tax Free Fund intends to distribute tax-exempt dividends that shareholders
may exclude from their gross income for federal income tax purposes. However,
the Tax Free Fund may invest a portion of its assets in securities that generate
income that is not exempt from federal or state income tax. Income exempt from
federal tax may be subject to state and local income tax. Any capital gains
distributed by the Tax Free Fund may be taxable. Also, you should also keep in
mind that certain income from the Tax Free Fund may be subject to the federal
alternative minimum tax.
BACKUP WITHHOLDING. Backup withholding of federal income tax may be applied at
the rate of 31% from taxable dividends, distributions, and redemption proceeds
(including exchanges) if you fail to furnish the Company with a correct and
properly certified Social Security or Employer Identification Number when you
sign your application, or if you underreport your income to the Internal Revenue
Service.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions. You should consult with a
37
<PAGE>
tax advisor concerning the tax reporting requirements in effect on the
redemption or exchange of such shares.
REDEEMING SHARES
You can redeem fund shares at the net asset value determined on the date the
request is received by SM&R in proper form. A redemption request must be
processed through your investment adviser or broker-dealer.
If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as practicable and normally
within seven days after receipt of a redemption request in proper form. We
currently charge a fee in the amount of $8.00 for redemptions by wire under
$5,000.
If the shares being redeemed were purchased by wire, certified check, money
order, or other immediately available funds, redemption proceeds will be mailed
no later than the seventh calendar day following receipt. For shares purchased
by a personal check or ACH transfer, SM&R will process your redemption but will
generally delay sending you the proceeds for up to ten (10) business days to
allow the check or transfer to clear.
SYSTEMATIC WITHDRAWAL PLAN. The 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.
For further information about the "Systematic Withdrawal Plan," contact a
registered representative or SM&R.
"PROPER FORM" means the request for redemption must include:
38
<PAGE>
(1) your letter of instruction or a stock assignment specifying the fund,
account number, and number of shares or dollar amount to be redeemed. Both
share certificates and stock powers, if any, must be endorsed and executed
exactly as the fund shares are registered. It is suggested that certificates
be returned by certified mail for your protection;
(2) any required signature guarantees (see "Signature Guarantees" below); and
(3) other supporting legal documents, if required in the case of estates,
trusts, guardianships, divorce, custodianships, corporations, partnerships,
pension or profit sharing plans, retirement plans, and other organizations.
Please keep in mind that as a shareholder, it is your responsibility to ensure
that all requests are submitted to the Company's transfer agent in proper form
for processing.
SIGNATURE GUARANTEES. A signature guarantee verifies the authenticity of your
signature. Signature guarantees are required when:
(1) the proceeds of the redemption exceed $25,000;
(2) the proceeds (in any amount) are to be paid to someone OTHER THAN the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address OTHER THAN the
shareholder's address of record, pre-authorized bank account or exchanged to
one of the other funds managed by SM&R; or
(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.
You should be able to obtain an acceptable signature guarantee from a bank,
broker, dealer, municipal securities dealer or broker, government securities
dealer or broker, credit union, national securities exchange, or registered
securities association. WITNESSING OR NOTARIZATION IS NOT SUFFICIENT.
39
<PAGE>
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 $500 in the case of the
Government Bond and Tax Free Funds or $1,000 in the case of the Primary and
Money Market Funds. 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 Funds 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 subsequent purchases by telephone from financial intermediaries;
- to refuse any purchase order;
- to cancel or rescind any purchase or exchange at any time prior to receipt
by the shareholder of written confirmation or, if later, within five (5)
business days of the transaction;
- to freeze an account and suspend account services when notice has been
received of a dispute involving the account owners or other parties or there
is reason to believe a fraudulent transaction may occur;
- to restrict or refuse the use of faxed redemptions where there is a question
as to the validity of the request or proper documents have not been
received;
- to otherwise modify the conditions of purchase and any services at any time;
- to act on instructions not believed to be genuine; or
- to eliminate duplicate mailings of fund material to shareholders who reside
at the same address.
40
<PAGE>
THE FUNDS AND MANAGEMENT
- -------------------------------------------------------------------
INVESTMENT ADVISOR
The Company's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the funds' investment adviser, the management of the
funds' day-to-day business and affairs. In addition, SM&R invests the funds'
assets, provides administrative services, and serves as transfer agent,
custodian, dividend paying agent, and underwriter.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). SM&R was incorporated in 1964 and has managed mutual
funds since 1966. SM&R does and may, from time to time, serve as investment
adviser to other clients including employee benefit plans, other investment
companies, banks, foundations and endowment funds.
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 agreement provides that SM&R will receive advisory fees as set
forth below.
GOVERNMENT BOND FUND AND TAX FREE FUND. We deduct an investment advisory fee
from the value of the shares each day. We calculate this fee for the Government
Bond and Tax Free Funds at 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. For the Money Market and Primary Funds, we
calculate the investment advisory fee at the annual rate of 0.25% and 0.50%,
respectively, of each fund's average daily net asset value.
After applicable fee waivers, SM&R received total advisory fees from the
Government Bond Fund and Primary Fund for the fiscal year ended August 31, 1998
which represented 0.50% and 0.32%, respectively, of each such fund's average
daily net assets. SM&R waived all
41
<PAGE>
advisory fees for the Tax Free Fund for the fiscal year ended August 31, 1998.
The Money Market Fund was not in operation during the fiscal year ended August
31, 1998.
ADMINISTRATIVE SERVICES
Pursuant to an Administrative Service Agreement with the Company, SM&R provides
all non-investment related management, executive, administrative, transfer
agent, and operational services to the funds. Under the agreement, SM&R receives
an administrative service fee from each fund at the annual rate of average daily
net asset values as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUND'S ADMINISTRATIVE SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
- -------------------------------------------- --------------------------
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.20%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
REIMBURSEMENTS AND WAIVERS
SM&R has agreed to pay (or to reimburse each fund for) each fund's regular
operating expenses in excess of 1.25% (0.50% for the Money Market Fund) per year
of such fund's average daily net assets. Regular operating expenses include the
advisory fee and administrative service fee, if any, paid to SM&R, but do not
include 12b-1 fees, class-specific expenses, interest, taxes, commissions, and
other expenses incidental to portfolio transactions. SM&R received
administrative service fees of 0.25% 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.
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 expenses incurred by the
Government Bond and Primary
42
<PAGE>
Funds to the extent that regular operating expenses exceed average daily net
assets as follows: 0.80% for the Primary Fund and 1.00% for the Government Bond
Fund.
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 policies.
TERRY E. FRANK, VICE PRESIDENT, PORTFOLIO MANAGER OF THE GOVERNMENT BOND FUND,
TAX FREE FUND, PRIMARY FUND AND MONEY MARKET FUND. Ms. Frank has served as
Portfolio Manager of the Government Bond Fund since 1993 and the Tax Free Fund
since its inception. She has served as Portfolio Manager of the Primary Fund
since November 1998 and the Money Market Fund since its inception (January 1,
1999). 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. She joined
SM&R's investment staff in 1991 and prior to that time she held positions with
American Capital Asset Management and Gibraltar Savings Association as a
securities analyst and Equitable Investment Services as a research analyst.
JOHN S. MAIDLOW, ASSISTANT PORTFOLIO MANAGER OF THE PRIMARY FUND AND THE MONEY
MARKET FUND. Mr. Maidlow has served as the Assistant Portfolio Manager of the
Primary Fund since November, 1998 and the Money Market Fund since its inception
(January 1, 1999). He also services as Assistant 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. He
joined SM&R's staff in 1998 and prior to that time he held positions with
American Industries Trust Company as a trust officer, Texas Department of
Insurance and the Texas Department of Banking as an examiner, Landmark Group as
Vice President of Investments, MBank as a trust officer and Rotan-Mosle, Inc.
and Eppler, Guerin & Turner as an investment broker.
43
<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 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 and for the
year ended August 31, 1998 has been audited by Tait, Weller & Baker, CPA. Each
independent auditor's 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. 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>
YEAR ENDED AUGUST 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.42 $ 10.14 $ 10.51 $ 10.07 $ 10.87
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.64 0.67 0.65 0.70 0.54
Net Realized and Unrealized Gain (Loss) on
Securities 0.20 0.26 (0.37) 0.44 (0.79)
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 0.84 0.93 0.28 1.14 (0.25)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.66) (0.65) (0.65) (0.70) (0.55)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.66) (0.65) (0.65) (0.70) (0.55)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 10.60 $ 10.42 $ 10.14 $ 10.51 $ 10.07
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 8.31% 9.37% 2.63% 11.85% (2.41)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted) $ 23,982 $ 23,683 $ 21,127 $ 20,466 $ 19,790
Ratio of Expenses to Average Net Assets(1) 1.00% 1.00% 1.00% 0.70% 1.12%
Ratio of Net Income to Average Net Assets 6.08% 6.46% 6.17% 6.90% 5.11%
Portfolio Turnover Rate 32.71% 9.06% 30.17% 2.20% 45.48%
</TABLE>
(1) Expenses for the calculation are net of a reimbursement from Securities
Management 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.
44
<PAGE>
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 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 and for the year ended August 31, 1998 has been
audited by Tait, Weller & Baker, CPA. Each independent auditor's 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.
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
YEAR ENDED AUGUST 31, (DATE OPERATIONS
------------------------------------------ COMMENCED) THRU
1998 1997 1996 1995 AUG. 31, 1994
--------- --------- --------- --------- -----------------
<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 0.49 0.51 0.53 0.51 0.24
Net Realized and Unrealized Gain
(Loss) on Securities 0.37 0.33 (0.02) 0.33 (0.38)
--------- --------- --------- --------- -------
TOTAL FROM INVESTMENT OPERATIONS 0.86 0.84 0.51 0.84 (0.14)
--------- --------- --------- --------- -------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.49) (0.50) (0.53) (0.51) (0.24)
--------- --------- --------- --------- -------
TOTAL DISTRIBUTIONS (0.49) (0.50) (0.53) (0.51) (0.24)
--------- --------- --------- --------- -------
Net Asset Value, End of Period $ 10.64 $ 10.27 $ 9.93 $ 9.95 $ 9.62
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
TOTAL RETURN 8.58% 8.61% 5.18% 9.15% (1.49)%(1)
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's
omitted) $ 11,058 $ 10,700 $ 9,148 $ 8,399 $ 7,295
Ratio of Expenses to Average Net
Assets(3) 0.75% 0.54% -- -- 1.11%(2)
Ratio of Net Income to Average Net
Assets 4.60% 4.97% 5.27% 5.43% 2.50%(2)
Portfolio Turnover Rate 12.77% 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 [1.25]%, 1.27%, 1.18%, and
1.25% for the years ended August 31, 1998, 1997, 1996, and 1995,
respectively.
45
<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 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 and for the year ended August 31, 1998 has been audited by Tait,
Weller & Baker, CPA. Each independent auditor's report, along with the Primary
Fund's financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.05 0.05 0.05 0.05 0.03
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 0.05 0.05 0.05 0.05 0.03
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.05) (0.05) (0.05) (0.05) (0.03)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.05) (0.05) (0.05) (0.05) (0.03)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 5.15% 4.98% 5.07% 5.01% 2.91%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted) $ 34,577 $ 33,045 $ 37,465 $ 20,984 $ 15,208
Ratio of Expenses to Average Net
Assets(1) 2.80% 0.80% 0.81% 0.84% 0.79%
Ratio of Net Income to Average Net Assets 5.02% 4.86% 4.93% 4.91% 2.88%
</TABLE>
(1) 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 0.98%, 1.01%, 1.15%, 1.21%,
and 1.20% for the years ended August 31, 1998, 1997, 1996, 1995, and 1994,
respectively.
46
<PAGE>
- -------------------------------------------------------------------
APPENDIX
(Description of Ratings Used in Prospectus)
- -------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND (BONDS THAT EXTEND
LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S BOND RATINGS:
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as
A-1
<PAGE>
"gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risks appear
somewhat greater than in Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated "Baa" are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
DESCRIPTION OF FITCH IBCA BOND RATINGS:
AAA Highest credit quality "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
A-2
<PAGE>
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
MUNICIPAL NOTE RATINGS
DESCRIPTION OF MOODY'S INVESTOR SERVICE INC.'S SHORT-TERM MUNICIPAL NOTE (NOTES
THAT MATURE IN LESS THAN ONE YEAR) RATINGS:
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 for 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.
DESCRIPTION OF STANDARD AND POOR'S SHORT-TERM MUNICIPAL NOTE RATINGS:
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.
SP-3 Speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-3
<PAGE>
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by
many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage
rations, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity
is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt
protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF FITCH IBCA SHORT-TERM DEBT RATINGS (INCLUDING COMMERCIAL PAPER):
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit quality.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
A-4
<PAGE>
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result
in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
DESCRIPTION OF DUFF & PHELP'S HIGHEST COMMERCIAL RATINGS:
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors
are small.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
TBW-1 The highest category; indicates a very high likelihood that principal and
interest will be paid on a timely basis.
TBW-2 The second-highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
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.
A-5
<PAGE>
FOR MORE INFORMATION ABOUT THE FUNDS
- -------------------------------------------------------------------
<TABLE>
<S> <C>
The following documents contain more information about the SM&R GOVERNMENT BOND FUND
funds and are available free upon request: SM&R TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI contains SM&R PRIMARY FUND
additional information about all aspects of the funds. A SM&R MONEY
current SAI has been filed with the Securities and Exchange MARKET FUND
Commission and is incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS. The funds' annual and
semi-annual reports provide additional information about the
funds' investments. The annual report contains a discussion
of the market conditions and investment strategies that
significantly affected each fund's performance during the
last fiscal year.
</TABLE>
REQUESTING DOCUMENTS. You may request a free copy of the SAI and these reports,
make shareholder inquiries, or request further information about the funds
either by contacting your broker or by contacting the funds at:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE:1-800-231-4639 (TOLL FREE) OR
1-281-334-2469 (COLLECT)
PUBLIC INFORMATION. You can review and copy information about the funds,
including the SAI, at the Securities and Exchange Commission's Public Reference
Room in Washington D.C. You may obtain information on the operation of the
public reference room by calling the Commission at 1-800-SEC-0330. Reports and
other information about the funds also are available on the Commission's
Internet site at http://www.sec.gov. You may obtain copies of this information,
upon payment of a duplicating fee, by writing the Public Reference Section of
the Securities and Exchange Commission, Washington, D.C. 20549-6009.
Investment Company
File No. 811- 6477
<PAGE>
SM&R
LOGO
P R O S P E C T U S
JANUARY 1, 1999
SM&R INVESTMENTS, INC.
- SM&R GOVERNMENT BOND FUND
- SM&R TAX FREE FUND
- SM&R PRIMARY FUND
- SM&R MONEY MARKET FUND
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
CLASS T(CERTAIN ELIGIBLE PURCHASERS
AND SHAREHOLDERS
PRIOR TO JANUARY 1, 1999.)
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------
<TABLE>
<S> <C>
RISK/RETURN SUMMARY.......................................... 1
SM&R Government Bond Fund.................................. 1
SM&R Tax Free Fund......................................... 3
SM&R Primary Fund.......................................... 5
SM&R Money Market Fund..................................... 7
Types of Investment Risk................................... 9
Bar Chart and Performance Table............................ 10
Fees and Expenses of the Funds............................. 14
SHARES OF THE FUNDS.......................................... 17
Eligible Purchasers of Class T Shares...................... 17
Class T Sales Charges...................................... 19
Sales Charge Reductions and Waivers........................ 19
INVESTMENT OBJECTIVES AND POLICIES........................... 21
Government Bond Fund....................................... 21
Tax Free Fund.............................................. 25
Primary Fund............................................... 29
Money Market Fund.......................................... 30
RISK FACTORS................................................. 32
PURCHASES AND REDEMPTIONS.................................... 35
Purchasing Shares.......................................... 35
Pricing of Fund Shares..................................... 36
Special Purchase Plans and Services........................ 37
Retirement Plans........................................... 42
Dividends, Distributions, and Taxes........................ 42
Redeeming Shares........................................... 44
THE FUNDS AND MANAGEMENT..................................... 50
FINANCIAL HIGHLIGHTS......................................... 53
Government Bond Fund....................................... 53
Tax Free Fund.............................................. 54
Primary Fund............................................... 55
APPENDIX..................................................... A-1
</TABLE>
ii
<PAGE>
RISK/RETURN SUMMARY SM&R GOVERNMENT BOND FUND
- -------------------------------------------------------------------
GOVERNMENT BOND FUND'S INVESTMENT 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.
GOVERNMENT BOND FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Government Bond Fund normally invests at
least 65% of its assets in securities issued or guaranteed by
the U.S. Government, its agencies, or instrumentalities.
These may include Treasuries and mortgage-backed securities,
such as Ginnie Maes, Freddie Macs, and Fannie Maes. This fund
may also invest assets in collateralized mortgage
obligations.
The Government Bond Fund may invest in zero coupon bonds,
which are U.S. Government obligations. The fund may also
invest in commercial paper, certificates of deposit,
corporate debt securities rated "A" or higher, and repurchase
agreements.
The Government Bond Fund generally invests primarily in
medium and long term securities. The average portfolio
maturity generally is expected to be in the six to fifteen
year range (some securities may have longer or shorter
durations). The average portfolio maturity may be shorter
when management anticipates that interest rates will
increase, and longer when management anticipates that
interest rates will decrease.
1
<PAGE>
RISK/RETURN SUMMARY SM&R GOVERNMENT BOND FUND
- -------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE GOVERNMENT BOND FUND
You could lose money on your investment in the
Government Bond Fund, or it could underperform other
investments, if any of the following occurs:
- interest rates rise (thus causing a decline in the market
value of debt securities)
- the worldwide demand for U.S. government securities falls
- interest rates fall enough to prompt an unexpected number
of people to refinance (or prepay) their mortgages
- interest rates rise enough to cause fewer people than
expected to repay their mortgages early
- if any bonds the fund owns are downgraded in credit rating
or go into default
WHO MAY WANT TO INVEST IN THE GOVERNMENT BOND FUND
The Government Bond Fund may be
appropriate if you:
- are seeking a regular stream of income to meet current
needs
- are seeking higher potential returns than money market
funds and are willing to accept moderate risk of volatility
- are retired or nearing retirement
The Government Bond Fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require absolute stability of your principal
2
<PAGE>
RISK/RETURN SUMMARY SM&R TAX FREE FUND
- -------------------------------------------------------------------
TAX FREE FUND'S INVESTMENT 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.
TAX FREE FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Tax Free Fund invests primarily in tax-
exempt securities. During normal market conditions, this fund
invests at least 80% of its assets in municipal securities
that pay interest exempt from federal income taxes. The Tax
Free Fund generally invests in securities rated Baa or better
by Moody's or BBB or better by Standard and Poors and Fitch.
This fund may not invest more than 20% of its assets in
UNRATED municipal securities. These securities may be less
liquid than comparably rated municipal securities and involve
somewhat greater risk. This fund may also invest up to 20% of
its assets in Government guaranteed taxable bonds, highly
rated corporate bonds, or commercial paper.
The average portfolio maturity of the Tax Free Fund generally
is expected to be in the six to twelve year range (some
securities have longer or shorter durations). The average
portfolio maturity may be shorter when management anticipates
that interest rates will increase, and longer when management
anticipates that interest rates will decrease.
3
<PAGE>
RISK/RETURN SUMMARY SM&R TAX FREE FUND
- -------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE TAX FREE FUND
You could lose money on your investment in the
Tax Free Fund, or it could underperform other investments, if
any of the following occurs:
- interest rates rise (thus causing a decline in the market
value of debt securities)
- if any bonds the fund owns are downgraded in credit rating
or go into default
- certain securities become harder to value or to sell at a
fair price
ALSO, SOME OF YOUR DIVIDEND INCOME MAY BE TAXABLE.
WHO MAY WANT TO INVEST IN THE TAX FREE FUND
The Tax Free Fund may be appropriate if you:
- are willing to sacrifice some investment return for income
exempt from federal income tax and, under certain
conditions, exempt from state and local taxes
- are in a high tax bracket (28% and up)
- are seeking a regular stream of income to meet current
needs
- are seeking higher potential returns than money market
funds and are willing to accept moderate risk of volatility
The Tax Free Fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- prefer capital gains over ordinary income
4
<PAGE>
RISK/RETURN SUMMARY SM&R PRIMARY FUND
- -------------------------------------------------------------------
PRIMARY FUND'S INVESTMENT OBJECTIVE
To seek maximum current income consistent
with capital preservation and liquidity through investment
primarily in commercial paper.
PRIMARY FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Primary Fund invests primarily in
commercial paper. Commercial paper is short-term unsecured
promissory notes issued by corporations. This fund will only
invest in commercial paper rated in one of the two highest
rating categories.
The Primary Fund may also invest in:
- U.S. Government obligations;
- corporate debt obligations maturing in five years or less
and rated "A" or higher;
- certificates of deposit, generally maturing in 3 years or
less; and
- repurchase agreements.
PRINCIPAL RISKS OF INVESTING IN THE PRIMARY FUND
You could lose money on your investment in the
Primary Fund, or it could underperform other investments, if
any of the following occurs:
- interest rates rise (thus causing a decline in the market
value of debt securities)
- if any of the fund's investments are downgraded in credit
rating or go into default
By limiting its investments as described above, the Primary
Fund may not achieve as high a level of current income as a
fund investing in lower-rated securities or longer-term
securities.
5
<PAGE>
RISK/RETURN SUMMARY SM&R PRIMARY FUND
- -------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE PRIMARY FUND
The Primary Fund may be appropriate if you:
- are seeking a regular stream of income to meet current
needs
- are seeking higher potential returns than money market
funds and are willing to accept moderate risk of volatility
- are more concerned with safety of principal than with
investment returns
- are retired or nearing retirement
The Primary Fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- are investing for goals that are many years in the future
- prefer capital gains over ordinary income
6
<PAGE>
RISK/RETURN SUMMARY SM&R MONEY MARKET FUND
- -------------------------------------------------------------------
MONEY MARKET FUND'S INVESTMENT OBJECTIVE
To seek the highest current income consistent
with the stability of principal and maintenance of liquidity.
MONEY MARKET FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Money Market Fund seeks to achieve its
objective by investing in high-quality short-term money
market instruments, including: U.S. Government obligations,
certificates of deposit, banker's acceptances, commercial
paper, collateralized mortgage obligations, and corporate
bonds and notes. This fund limits its investments to those
short-term securities that it determines present minimal
credit risk and meet certain rating requirements (in the two
highest short-term rating categories).
PRINCIPAL RISKS OF INVESTING IN THE MONEY MARKET FUND
The Money Market Fund is subject to the
following risks:
- that interest rates may rise (thus causing a decline in the
market value of debt securities)
- that the fund's investments may be downgraded in credit
rating or go into default
However, the risks of investment in the Money Market Fund may
be expected to be less than for other mutual funds. By
limiting its investments as described above, this fund may
not achieve as high a level of current income as a fund
investing in lower-rated securities. ALTHOUGH THE MONEY
MARKET FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE MONEY MARKET FUND.
7
<PAGE>
RISK/RETURN SUMMARY SM&R MONEY MARKET FUND
- -------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE MONEY MARKET FUND
The Money Market Fund may be appropriate if
you:
- require stability of principal
- are seeking a mutual fund for the cash portion of an asset
allocation program
- need to "park" your money temporarily
- are more concerned with safety of principal than with
investment returns
- are investing emergency reserves
The Money Market Fund may NOT be appropriate if you:
- want federal deposit insurance
- are seeking an investment that is likely to outpace
inflation
- are investing for retirement or other goals that are many
years in the future
- are investing for growth or maximum current income
YOU SHOULD KEEP IN MIND THAT AN INVESTMENT IN THE MONEY
MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
8
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------------------------------------
TYPES OF INVESTMENT RISK
As indicated above, each of the four funds may be subject to certain of the
following types of risks:
CREDIT RISK. The risk that the issuer of a security, or a party to a contract,
will default or otherwise not honor a financial obligation. THIS RISK PRIMARILY
AFFECTS THE TAX FREE, PRIMARY AND MONEY MARKET FUNDS.
INTEREST RATE RISK. The risk of declines in market value of an income-bearing
investment due to changes in prevailing interest rates. With fixed-rate
securities, a rise in interest rates typically causes a decline in market
values, while a fall in interest rates typically causes an increase in market
values. THIS RISK AFFECTS ALL FOUR FUNDS, BUT HAS LESS AFFECT ON THE MONEY
MARKET AND PRIMARY FUNDS.
LIQUIDITY RISK. The risk that certain securities or other investments may be
difficult or impossible to sell at the time the fund would like to sell them or
at the price the fund values them. The fund may have to sell at a lower price,
sell other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance. THIS RISK
PRIMARILY AFFECTS THE TAX FREE, PRIMARY AND MONEY MARKET FUNDS.
MANAGEMENT RISK. The risk that a strategy used by a fund's management may fail
to produce the intended result. This risk is common to all mutual funds. THIS
RISK AFFECTS ALL FOUR FUNDS.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. The fluctuations may cause a security to be
worth less than the price originally paid for it, or less than it was worth at
an earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. This risk is common to all stocks and bonds
and the mutual funds that invest in them. THIS RISK AFFECTS ALL FOUR FUNDS.
PREPAYMENT AND EXTENSION RISK. PREPAYMENT RISK is the risk that an unexpected
fall in prevailing interest rates will shorten the life of an outstanding
mortgage-backed security by increasing the actual or expected number of mortgage
prepayments, thereby reducing the security's value. EXTENSION RISK is the risk
that an unexpected rise in
9
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
prevailing interest rates will extend the life of an outstanding mortgage-backed
security by reducing the actual or expected number of mortgage prepayments,
thereby reducing the security's value. THIS RISK APPLIES ONLY TO THE GOVERNMENT
BOND FUND.
BAR CHART AND PERFORMANCE TABLE
The bar charts and performance tables shown below provide some indication of the
risks of investing in the funds and the variability of returns:
- - by showing each fund's performance for each year since inception and
- - by showing how each fund's average annual returns for certain periods compare
to those of a broad-based securities market index.
Because the Money Market Fund was not in operation during these periods, it is
not included in the bar chart or the performance table.
The returns shown are based on an investment in the funds prior to the creation
of multiple classes of shares, but do not reflect any sales loads that would be
imposed on the purchase or sale of any shares. We created the multiple classes
of shares on January 1, 1999.
Past performance is not necessarily an indication of how the funds will perform
in the future.
10
<PAGE>
RISK/RETURN SUMMARY SM&R GOVERNMENT BOND FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 9.31%
1994 -4.65%
1995 18.57%
1996 3.43%
1997 8.14%
</TABLE>
* For the nine month period ended September 30, 1998, the Government Bond Fund
had a total return of 6.70%.
During the period shown in the bar chart, the highest return for a quarter was
6.44% achieved June 30, 1995 and the lowest return for a quarter was minus 1.77%
for the quarter September 30, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1997) PAST ONE YEAR PAST 5 YEARS
<S> <C> <C>
SM&R GOVERNMENT BOND FUND 3.28% 5.71%
* LEHMAN BROTHERS 9.54% 8.71%
GOVERNMENT/MORTGAGE-
BACKED SECURITIES INDEX
</TABLE>
* Lehman Brothers Government/Mortgage-Backed Securities Index is an index which
includes all public obligations of the U.S Treasury and all publicly issued debt
of U.S. Government agencies quasi-federal corporations and corporate debt
guaranteed by the U.S. Government as well as 15 and 30 year fixed rate
securities backed by mortgage pools of the GNMA, FHLMA and FNMA.
11
<PAGE>
RISK/RETURN SUMMARY SM&R PRIMARY FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 2.48%
1994 3.58%
1995 5.26%
1996 4.92%
1997 5.08%
</TABLE>
* For the nine month period ended September 30, 1998, the Primary Fund had a
total return of 3.81%.
During the period shown in the bar chart, the highest return for a quarter was
2.54% achieved September 30, 1997 and the lowest return for a quarter was 0.60%
for the quarter June 30, 1993.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1997) PAST ONE YEAR PAST 5 YEARS
<S> <C> <C>
SM&R PRIMARY FUND 5.08% 4.26%
* LEHMAN GOVERNMENT/ 7.99% 7.02%
CORPORATE INDEX
</TABLE>
* Lehman Government/Corporate Index is an index representing all public
obligations of the U.S. Treasury as well as all publicly issued debt of U.S.
government agencies with maturities of one to three years.
12
<PAGE>
RISK/RETURN SUMMARY SM&R TAX FREE FUND
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1994 -5.49%
1995 17.87%
1996 4.48%
1997 8.98%
</TABLE>
* For the nine month period ended September 30, 1998, the Tax Free Fund had a
total return of 5.73%.
During the period shown in the bar chart, the highest return for a quarter was
7.41% achieved March 31, 1995 and the lowest return for a quarter was minus
3.94% for the quarter March 31, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (FOR THE PERIODS
ENDING DECEMBER 31, 1997) PAST ONE YEAR PAST 4 YEARS
<S> <C> <C>
SM&R TAX FREE FUND 4.08% 4.94%
* LEHMAN BROTHERS 9.19% 11.18%
MUNICIPAL INDEX
</TABLE>
* Lehman Brothers Municipal Index is an index of investment grade tax exempt
bonds classified into four major sections: General Obligation, Revenue, Insured
and Preferred.
13
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
MONEY
GOVERNMENT TAX FREE PRIMARY MARKET
BOND FUND FUND FUND FUND
----------- -------- -------- -------
CLASS T CLASS T
----------- --------
<S> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as
a percentage of offering price) 4.5%(1) 4.5%(1) None None
Maximum Deferred Sales Charge (as a
percentage of offering price)(2) None None None None
Maximum Sales Charge 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(3)
(expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
MONEY
GOVERNMENT TAX FREE PRIMARY MARKET
BOND FUND FUND FUND FUND
----------- -------- -------- -------
CLASS T CLASS T
----------- --------
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50% 0.25%
Other Expenses(4) 0.57% 0.75% 0.48% 0.25%
Total Annual Fund Operating Expenses 1.07% 1.25% 0.98% 0.50%
Fee Waivers and Expense Reimbursements(5) (0.07)% -- -- --
Net Expenses 1.00% 1.25% 0.98% 0.50%
</TABLE>
14
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
NOTES TO THE FEES AND EXPENSES OF THE FUNDS
(1) You pay a sales charge of 4.5% on initial investments in Class T shares of
less than $100,000. You pay a reduced sales charge 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
- zero on initial investments of $500,000 or more
(2) You pay an $8.00 transaction fee for each expedited wire redemption.
(3) The "Management Fees" and "Other Expenses" for the Government Bond, Primary,
and Tax Free Funds are for the year ended August 31, 1998; 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.
(4) "Other Expenses" include the 0.25% Administrative Service Fee. "Other
Expenses" for Class T shares are based on the expenses and average net
assets of the Government Bond Fund and the Tax Free Fund for the fiscal year
ended August 31, 1998. "Other Expenses" shown for the Money Market Fund are
estimated for the current fiscal year ending August 31, 1999.
(5) The Fee Table reflects fees waived and expenses assumed contractually by the
funds' manager, Securities Management and Research, Inc. ("SM&R"). Pursuant
to the Administrative Service Agreement, SM&R will pay (or reimburse) each
fund for regular operating expenses in excess of 1.25% (0.50% for the Money
Market Fund) per year of such fund's average daily net assets. Regular
operating expenses include the advisory fee and administrative fee, but do
not include any 12b-1 fee or class-specific expenses.
The Fee Table does not reflect fees waived or expenses assumed by SM&R on a
voluntary basis. During the fiscal year ended August 31, 1998, SM&R
voluntarily waived fees of 0.18%, and 0.50% for the, Primary Fund and Tax
Free Fund, respectively. SM&R intends to continue to voluntarily waive the
advisory fee for the Tax Free Fund. SM&R also intends to reimburse regular
operating expenses that 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 reimbursement of expenses at any
time without notice.
The following table shows fees and expenses for the Government Bond,
Primary, and Tax Free Funds for the year ended August 31, 1998 taking
15
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
into account fee all waivers and expense reimbursements, both contractual
and voluntary. For the Money Market Fund, they are estimates considering
estimated fee waivers and expense reimbursements for the year ending August
31, 1999.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets After All Fee Waivers and Expense
Reimbursements)
<TABLE>
<CAPTION>
GOVERNMENT BOND TAX FREE MONEY
FUND FUND PRIMARY FUND MARKET FUND
--------------- ------------ ------------ -----------
CLASS T CLASS T
--------------- ------------
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.00% 0.32% 0.25%
Other Expenses 0.50% 0.75% 0.48% 0.25%
Total Annual Fund
Operating Expenses 1.00% 0.75% 0.80% 0.50%
--- ----- ----- -----
--- ----- ----- -----
</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, based on expenses before fee waivers and expense
reimbursements. These examples also assume that your investment has a 5% return
each year and that the funds' operating expenses remain the same. YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER THAN SHOWN.
You would pay the following expenses, based on these assumptions, if you
actually redeem all of your shares at the end of the period shown:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Government Bond Fund (Class
T) $ 547 $ 754 $ 978 $ 1,620
Tax Free Fund (Class T) $ 572 $ 829 $ 1,105 $ 1,893
Primary Fund $ 100 $ 312 $ 542 $ 1,201
Money Market Fund $ 51 $ 160 $ 280 $ 628
</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.
16
<PAGE>
SHARES OF THE FUNDS
- -------------------------------------------------------------------
SM&R Investments, Inc., formerly known as SM&R Capital Funds, Inc. (the
"Company" or "we") offers four separate investment portfolios. The Money Market
and Primary Funds each consist of a single class of shares offered at net asset
value and do not impose any sales charges or distribution and service (12b-1)
fees. The Government Bond and Tax Free Funds offer Class T shares at net asset
value plus an initial sales charge. Class T shares do not impose any
distribution and service (12b-1) fees.
The Government Bond and Tax Free Funds offer five other classes through separate
prospectuses: (1) Class A "front-end load" shares; (2) Class B "back-end load"
shares; (3) Class C "level load" shares; (4) Class Y "institutional" shares; and
(5) Class J "network" shares offered through certain financial intermediaries
that have distribution agreements with SM&R. Class A, Class B, Class C, Class Y,
and Class J shares are subject to different sales charges and other expenses
and, accordingly, may have expense ratios and performance that differs from
those of Class T shares. You are encouraged to consider all of the 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.
ELIGIBLE PURCHASERS OF CLASS T SHARES
In general, Class T shares may only be purchased by existing shareholders that
owned shares of the Government Bond Fund or Tax Free Fund on December 31, 1998
and certain other designated persons. The other designated persons that can
purchase Class T shares include:
(a) present and retired directors, officers, and full-time employees of the
Company;
(b) present and retired directors, officers, registered representatives, and
full-time employees of SM&R and their spouses;
(c) present and retired officers, directors, and full-time employees (and their
spouses) of: (1) American National Insurance
17
<PAGE>
Company ("American National"), (2) American National subsidiaries, and (3)
any insurance company for which any of American National's present directors
serve as a director or partner;
(d) present and retired partners and full-time employees of legal counsel to
SM&R (and officers and directors of any professional corporations which are
partners of such legal counsel) and their spouses;
(e) any child or step-child of any person named in (a), (b), (c), or (d) above
and their spouses;
(f) any trust, pension, profit-sharing, IRA, or other benefit plan for any of
such persons mentioned in (a), (b), (c), (d) or (e) (although shares of the
Tax Free Fund should not be purchased by these entities);
(g) custodial accounts for minor children of such persons mentioned in (a), (b),
(c), (d) or (e) pursuant to the Uniform Gifts to Minors or Uniform Transfers
to Minors Acts (although shares of the Tax Free Fund should not be purchased
by these entities);
(h) persons mentioned in (a), (b), (c), or (d) who have received a distribution
from a pension, profit-sharing, or other benefit plan, to the extent such
distribution represents the proceeds of a redemption of shares of any fund
managed by SM&R (other than the Money Market and Primary Funds); and
(i) persons purchasing shares for a federal or state sponsored post-secondary
education funding program;
YOU HAVE THE SOLE RESPONSIBILITY OF NOTIFYING SM&R THAT YOU INTEND TO QUALIFY
UNDER ONE OF THESE CATEGORIES.
OPENING AN ACCOUNT. Your ability to open a new account depends on the basis of
your eligibility to purchase Class T shares, as follows:
- If you are eligible to purchase Class T shares because you are an existing
shareholder of either the Government Bond Fund or the Tax Free Fund (and
owned shares on December 31, 1998), you can purchase additional Class T
shares of the fund in which you are invested, but cannot open a new account
in another fund. For example, if you own shares of the Government Bond Fund
only (and you owned shares of that fund on December 31, 1998), you may
purchase additional Class T shares of that fund.
18
<PAGE>
However, you cannot purchase Class T shares of the Tax Free Fund.
- If you are a designated person listed in (a)-(i) above, you can open a new
account in Class T shares and may purchase Class T shares of any fund
managed by SM&R. YOU ARE ALSO ELIGIBLE FOR WAIVER OF THE INITIAL SALES
CHARGE AS DESCRIBED BELOW.
CLASS T SALES CHARGES
The offering price of Class T shares is the net asset value plus a "front-end"
sales charge. The sales charge is a percentage of the offering price, as shown
in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS A %
SALES CHARGE AS A % OF NET AMOUNT
AMOUNT OF INVESTMENT OF OFFERING PRICE INVESTED
- ---------------------------------------- ------------------- ---------------------
<S> <C> <C>
Less than $100,000 4.5% 4.7%
$100,000 but less than $250,000 3.5% 3.6%
$250,000 but less than $500,000 2.5% 2.6%
$500,000 and over None None
</TABLE>
SALES CHARGE REDUCTIONS AND WAIVERS
DISCOUNTS THROUGH CONCURRENT PURCHASES. To qualify for a reduced sales charge on
Class T shares, you may combine concurrent purchases of Class T shares of funds
managed by SM&R that impose a front-end sales charge. Investors that are
eligible to combine concurrent purchases to qualify for a reduced sales charge
include:
(1) Any individual;
(2) Any individual, his or her spouse, and trusts or custodial accounts for
their minor children;
(3) A trustee or fiduciary of a single trust estate or single fiduciary account.
(4) Tax-exempt organizations specified in Secitons 501(c)(3) or (13) of the
Internal Revenue Code, or employees' trusts, pension, profit-sharing, or
other employee benefit plans qualified under Section 401 of the Internal
Revenue Code; and
(5) Employees (or employers on behalf of employees) under any employee benefit
plan not qualified under Section 401 of the Internal Revenue Code.
19
<PAGE>
Purchases in connection with employee benefit plans not qualified under Section
401 of the Internal Revenue Code will qualify for the above quantity discounts
only if the fund will realize economies of scale.
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class A or Class T
shares of a fund managed by SM&R on which you paid a front-end sales charge, you
may be able to receive a discount when you buy additional shares. The current
net asset value of the shares you already own may be "accumulated"--I.E.,
combined together with the dollar amount being invested--to achieve quantities
eligible for discount.
LETTER OF INTENT. You may qualify for a reduced sales charge on purchases of
Class T shares of funds managed by SM&R by completing the Letter of Intent
section of the account application. Under a Letter of Intent, an investor
expresses an intention to purchase, within 13 months of the initial investment,
a specified amount of Class T shares of funds managed by SM&R which, if made
concurrently, would qualify for a reduced sales charge. Upon execution of the
Letter of Intent, the investor must make a minimum initial investment equal to
ten percent (10%) of the amount necessary to qualify for the applicable reduced
sales charge. To assure that the full applicable sales charge will be paid if
the intended purchase is not completed, five percent (5%) of the total intended
purchase amount will be held in escrow in shares registered in the investor's
name. Shares held in escrow under a Letter of Intent are not eligible for the
exchange privilege until the Letter of Intent is completed or canceled. A Letter
of Intent does not represent a binding obligation on the part of the investor to
purchase or the funds to sell the full amount of shares specified.
WAIVER OF INITIAL SALES CHARGE FOR CERTAIN PURCHASERS. After SM&R receives a
written request, those designated person listed in (a)-(i) above may purchase
Class T shares of the Government Bond Fund and the Tax Free Fund at net asset
value per share without the imposition of any sales charge.
20
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
- -------------------------------------------------------------------
Each fund pursues its own investment objective through various investment
policies and techniques. ONLY THE PRINCIPAL INVESTMENT STRATEGIES OF EACH FUND
AND THE PRINCIPAL TYPES OF SECURITIES EACH FUND PLANS TO PURCHASE ARE DESCRIBED
BELOW. More investment information is in the SAI. These policies and techniques
are not fundamental and may be changed by the Board of Directors without
shareholder approval.
Because of the market risks inherent in any investment, the funds may not
achieve their investment objectives. In addition, effective management of each
fund is subject to general economic conditions and to the ability and investment
techniques of management. The net asset value of each fund's shares will vary
and the redemption value of shares may be either higher or lower than the
shareholder's cost. Since each fund has a different investment objective, each
will have different investment results and incur different market, financial,
and other risks.
GOVERNMENT BOND FUND
(FORMERLY NAMED AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES)
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.
21
<PAGE>
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--We anticipate that a substantial portion of the
Government Bond Fund's portfolio will consist of mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies, or instrumentalities.
These securities represent part ownership of pools of mortgage loans secured by
real property, such as certificates issued by the Government National Mortgage
Association ("GNMA" or "Ginnie Mae"), the Federal National Mortgage Association
("FNMA" or "Fannie Mae"), 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
22
<PAGE>
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans generally may be prepaid at any time. The average mortgage in a
pool may be expected to be repaid within about twelve (12) years. If mortgage
interest rates decrease, the value of the Government Bond Fund's securities will
generally increase. However, we anticipate that the average life of the
mortgages in the pool will decrease as borrowers refinance and prepay mortgages
to take advantage of lower interest rates. The Government Bond Fund invests the
proceeds from such prepayments at the then prevailing lower interest rates. On
the other hand, if interest rates increase, the value of the 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
23
<PAGE>
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.
The Government Bond Fund may also invest in securities issued by private issuers
that represent an interest in or are secured by mortgage-backed securities
issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities. In addition, the fund may invest in securities issued by
private issuers that represent an interest in or are secured by mortgage loans
or mortgage-backed securities without a government guarantee but usually have
some form of private credit enhancement.
ZERO COUPON BONDS--The Government Bond 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
24
<PAGE>
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.
TAX FREE FUND (FORMERLY NAMED AMERICAN NATIONAL TAX FREE FUND SERIES)
The Tax Free Fund, as a matter of fundamental policy, seeks 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 Investor Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), or Fitch IBCA ("Fitch") (E.G., MIG 4 or higher by Moody's)
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
25
<PAGE>
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, S&P or Fitch.
(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.
26
<PAGE>
To the extent income dividends include income from taxable sources, a portion of
a shareholder's dividend income may be taxable. (See "Dividends, Distributions,
and Taxes"). In addition, Congress could enact tax legislation such as a flat
tax rate that would make tax-free bonds less desirable to investors seeking ways
to reduce taxable income. If that were to occur, it could cause the value of the
securities to drop.
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.
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. Neither the funds nor SM&R will review the
proceedings relating to the issuance of municipal obligations or the basis for
opinions of counsel.
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.
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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.
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PRIMARY FUND (FORMERLY NAMED AMERICAN NATIONAL PRIMARY FUND SERIES)
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).
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.)
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.
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MONEY MARKET FUND
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.
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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, S&P, Fitch
IBCA, 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.
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RISK FACTORS
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The following discussion relates to all four funds. The risk/return summary
located at the beginning of this prospectus identifies some specific risks
applicable to each individual fund.
GENERAL. There is no assurance that a fund will achieve its goals. Generally, if
the securities owned by a fund increase in value, the value of the shares of the
fund which you own will increase. Similarly, if the securities owned by a fund
decrease in value, the value of your shares will also go down. In this way, you
participate in any change in the value of the securities owned by a fund.
The risk inherent in investing in any fund is a risk common to any security.
That is, the value of a fund's shares will fluctuate in response to changes in
economic conditions, interest rates and the market's perception of the
underlying portfolio securities held by that fund. Each fund's share value
depends on general economic and securities market conditions, the investment
decisions of its management, and numerous other factors. All of these factors
are inherently uncertain and, in some cases, unforeseeable.
Any of the funds could lose money if the stock markets in general go down or if
the particular debt obligations purchased by a fund go down in value. In
addition, the funds could lose money if prevailing interest rates increase or if
the debt securities purchased by a fund are downgraded or defaulted upon.
DEBT SECURITIES RISKS. Debt securities are subject to change in their values due
to changes in prevailing interest rates. The magnitude of these fluctuations
will often be greater for longer-term debt securities than shorter-term debt
securities. When prevailing interest rates fall, the values of already-issued
debt securities generally rise. Accordingly, if interest rates go down after a
security is purchased, such security might be valued and/or sold at a price
greater than its cost. If interest rates were to drop dramatically, some of the
securities could be called and/or prepaid, requiring reinvesting in securities
at much lower yields.
On the other hand, when prevailing interest rates rise, the values of
already-issued debt securities generally fall. Accordingly, if interest rates
increase after a security is purchased, such security might be valued and/or
sold at a price less than its cost. In such circumstances,
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the value of existing bonds decrease because the interest payments from existing
bonds are less attractive than new issues with higher interest rates and
investors would lose money if they liquidate holdings.
The funds could lose money if any bonds they own are downgraded in credit rating
or go into default. 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 securities. A change in credit rating of an issuer can also affect the
bond's value, thus affecting the market value of the funds. However, the funds
invest predominately in investment grade bonds in order to minimize credit risk.
(See "Investment Objectives and Policies" for more information about the ratings
required for investments by each specific fund.) Moreover, substantial
redemptions of fund shares could require a fund to sell portfolio securities at
a time when a sale might not be favorable.
U.S. GOVERNMENT OBLIGATIONS. 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.
MARKET RISKS. Because the funds may invest in debt obligations which are traded
on securities exchanges, the value of each fund's portfolio will be affected by
changes in the stock markets. At times, the stock markets can be volatile and
stock prices can change substantially. This market risk will affect each fund's
net asset value per share, which will fluctuate as the values of each fund's
portfolio securities change. Prices do not always change uniformly or at the
same time and the various stock markets do not always move in the same direction
at the same time. Other factors specific to a particular company also affect the
price of that company's debt obligations (for example, poor earnings, loss of
major customers, or major litigation). The funds cannot always predict the
factors that will affect a security's price. The funds, however, do attempt to
limit market risk by diversifying their investments. The funds diversify their
investments by generally investing only a small percentage of their assets in
the debt
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obligations of any one company and by not holding a substantial amount of the
debt obligations of any one company.
REPURCHASE AGREEMENTS. In a repurchase agreement, a fund buys a security and
simultaneously sells it to the vendor for delivery at a future date. These
agreements are used primarily for cash purposes. A fund entering into a
repurchase agreement may lose money if the other party to the transaction fails
to pay the resale price on the delivery date. Such a default may delay or
prevent the fund from disposing of the underlying securities. The value of the
underlying securities may go down during the period in which the fund seeks to
dispose of them. Also, the fund may incur expenses while trying to sell the
underlying securities. Finally, the fund risks losing all or a part of the
income from the agreement.
OTHER RISKS. Each investor will be subject to all the risks normally attendant
to business operations, changes in general economic conditions, governmental
rules and fiscal policies, acts of God, and other factors beyond the control of
the funds' management.
YEAR 2000 RISKS. Many services provided to the funds and their shareholders
depend on the smooth functioning of computer systems. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated, referred to as the "Year 2000
Problem." The Year 2000 Problem could have a negative impact on handling
securities trades, payment of interest and dividends, pricing, and account
services. Like other mutual funds, financial and business organizations, and
individuals around the world, the funds could be adversely affected if the
computer systems used by SM&R (which acts as their investment adviser,
underwriter, custodian, and transfer agent) do not properly process and
calculate date-related information and data from and after January 1, 2000. SM&R
is taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by any other service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
funds and their shareholders.
PURCHASES AND REDEMPTIONS
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PURCHASING SHARES
You may purchase shares of a fund from registered representatives of SM&R, from
authorized broker-dealers, or directly from SM&R. WE RESTRICT PURCHASES OF CLASS
T SHARES. FOR MORE INFORMATION ABOUT THESE RESTRICTIONS, SEE "ELIGIBLE
PURCHASERS OF CLASS T SHARES" UNDER "SHARES OF THE FUNDS."
Such purchases will be at the offering price for such shares determined as and
when provided below (See "Pricing of Fund Shares"). You should carefully review
all account statements and promptly report any discrepancies to SM&R. You may
make initial and subsequent purchases directly through SM&R at the following
address:
Securities Management and Research, Inc.
P.O. Box 58969
Houston, Texas 77258-8969
Certificates are not issued for shares of the funds. SM&R confirms investors'
purchases and credits such purchases to their accounts on the books maintained
by SM&R. Investors have the same rights of share ownership as they would if
certificates had been issued.
Investors whose shares are held in the name of a broker-dealer or other party
are not shareholders of record and, therefore, may not be able to utilize
services available to shareholders of record.
OPENING AN ACCOUNT: To purchase shares, you must submit a completed account
application which includes the purchaser suitability form. The application and
suitability form are to be mailed directly to SM&R at the above address. If you
would like to take advantage of the electronic services available, please
complete the applicable Special Investor Services section of the account
application. Special forms are required when establishing an IRA/SEP or 403(b)
plan. Please call Investor Services at (800) 231-4639 and request special forms
when establishing retirement plans.
MINIMUM PURCHASE REQUIREMENT: For Class T shares of the Government Bond and Tax
Free Funds, your initial investment must be at least $100 and all subsequent
investments must be at least $20. For the Primary and the Money Market Fund,
your initial investment must be at least $1,000 and all subsequent investments
must be at least $100. We waive these initial investment minimums when purchases
are part of certain systematic investment programs (See "Special Purchase Plans
and Services" for additional information on
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reduction of the minimums). We reserve the right to reject any purchase.
PURCHASES BY MAIL: Make your check(s) payable to SM&R and send the check(s) to
the address indicated above. Please note that third party checks will not be
accepted to open a new account, except for IRA rollover checks that are properly
endorsed. If you make subsequent investments by mail, you must indicate your
name, account number, and the name of the class and the fund being purchased.
You may use the remittance slip attached to the confirmation statement.
PURCHASES BY WIRE: TO ENSURE PROPER CREDITING OF A WIRE INVESTMENT, YOU MUST
HAVE AN EXECUTED ACCOUNT APPLICATION AND PURCHASER SUITABILITY FORM ON FILE WITH
THE TRANSFER AGENT. You may then wire your investment to The Moody National Bank
of Galveston ("Moody National Bank") by providing the following instructions to
your bank:
The Moody National Bank of Galveston ABA #113100091
Securities Management and Research, Inc. #035 868 9
Name of Class and Fund (E.G., Class T of the Government Bond Fund)
Fund Account Number (number appears on your confirmation statement)
Your Name (E.G., Mary Smith)
PURCHASES BY EXCHANGE: Call Investor Services if you have established telephone
exchange privileges on your account. See "Special Purchase Plans and
Services--Exchange Privilege" for procedures and additional information relating
to telephone exchanges. For limitations on exchanges, see "Excessive Trading"
also under "Special Purchase Plans and Services."
PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). We determine each fund's offering price once
each day the New York Stock Exchange ("the Exchange") is open for regular
trading. The offering price equals a fund's net asset value plus the sales
charge, if any, computed at the rate set forth in the applicable table for the
class. (See "Shares of the Funds--Sales Charges.") You may purchase shares of
the Primary and Money Market Funds without a sales charge. Accordingly, the
offering price for shares of those funds is net asset value.
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EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS (WHEN SHARES ARE PRICED). We
calculate net asset value once each day the Exchange is open at the close of
regular trading on the Exchange (currently 3:00 p.m. Central Time). In the event
the Exchange closes early on a particular day, we will determine the net asset
value of each fund as of the close of the Exchange that day. Accordingly, the
price you pay or receive for shares of a fund depends, in part, on the day and
time you make your purchase or redemption. On any day the Exchange is open for
regular trading, we will execute purchases and redemptions at the next
applicable price determined that day if:
- SM&R receives your order in proper form prior to the close of the Exchange;
- a securities dealer having a dealer contract with SM&R receives your order
prior to the close of the Exchange and reports your order to SM&R prior to
SM&R's close of business (currently 4:30 p.m. Central Time) on the same day;
or
- for purchases, Moody National Bank receives your purchase payment by bank
wire and reports it to SM&R prior to the close of the Exchange.
If we receive your order after the close of the Exchange or on any day that the
Exchange is closed, we will execute your purchase or redemption at the price
determined on the next business day. In unusual circumstances, any fund may
temporarily suspend the processing of sell requests, or may postpone payment of
proceeds for up to three business days or longer, as allowed by federal
securities laws.
SPECIAL PURCHASE PLANS AND SERVICES
In addition to the special plans described above that permit you to reduce the
initial sales charge assessed on Class T shares, the 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, broker-dealer or
SM&R. A shareholder considering any of the plans or
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services described below should consult a tax advisor before beginning a plan.
ELECTRONIC TRANSFERS (ACH). The electronic transfer option allows you to move
money between your account(s) and your bank, savings and loan, or credit union
account using the Automated Clearing House ("ACH") network. To arrange for
electronic transfers, complete the relevant Special Investor Services section of
the account application at the time you open your account and specify the type
of service or services desired. Attach a voided, pre-printed check or deposit
slip from your checking, savings and loan, or credit union account. PASSBOOK
SAVINGS ACCOUNTS ARE NOT ELIGIBLE FOR THE ELECTRONIC TRANSFER OPTION.
ADDITIONALLY, YOUR BANK MUST BE A MEMBER OF THE AUTOMATED CLEARING HOUSE (ACH)
NETWORK FOR YOU TO TAKE ADVANTAGE OF THIS SERVICE. You will receive a
confirmation verifying initialization of the electronic transfer option and may
begin conducting transactions in your account(s) under this option approximately
20 calendar days after receipt of the verification notice from SM&R. If you
elect this option after your account is established, it may be necessary for you
to obtain a signature guarantee for all individuals named on the account(s).
TELEPHONE SERVICES. You can only use telephone services for transaction amounts
of $500 or more. You can take advantage of this service by completing the
appropriate Special Investor Services sections of the account application when
opening your account. Through this service, you will be able to purchase
additional shares for an existing SM&R mutual fund account by ACH. You may also
use the telephone services to redeem and exchange shares on those accounts for
which you have an executed account application on file, and have received
written verification from SM&R that the service has been initialized as
explained under Electronic Transfers above. If this option is elected after your
account is established, it may be necessary for you to obtain a signature
guarantee for all individuals named on the account(s). We permit transfers by
telephone from a joint account only to another joint account registered in the
identical names. There may be additional restrictions on telephone transactions
by joint account owners. Contact your registered representative or SM&R for more
information. PLEASE NOTE THAT THE TELEPHONE REDEMPTION OPTION IS NOT AVAILABLE
TO RETIREMENT PLANS.
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The funds have implemented the following security procedures intended to protect
your account from losses resulting from unauthorized or fraudulent telephone
instructions: The caller must know:
(i) the name of the fund or funds;
(ii) all digits of the account number;
(iii) the exact name and address used in the registration(s); and
(iv) the Social Security or Employer Identification Number listed on the
account(s).
Additionally, we record all telephone transactions for your protection.
Neither the funds nor SM&R will be responsible for the authenticity of
transaction instructions received by telephone which comply with the current
security procedures and other requirements. SM&R believes that such security
procedures and other requirements are reasonable and, if followed, you should
bear the risk of any losses resulting from unauthorized or fraudulent telephone
transactions on your account(s).
During times of economic turmoil or market volatility or as a result of severe
weather or a natural disaster, it may be difficult to contact SM&R by telephone
to institute a redemption or exchange.
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from your bank account and invested
monthly, bi-monthly, quarterly, or annually into the designated fund(s) at the
applicable offering price determined on the date of the electronic transfer.
EXCHANGE PRIVILEGE. As an investor in a fund, you may be permitted to exchange
shares that you own in a fund with shares of some of the other mutual funds
managed by SM&R without the payment of an exchange fee, subject to certain
conditions. EXCHANGES BETWEEN A FUND AND ANOTHER FUND MANAGED BY SM&R ARE
AVAILABLE ONLY IN STATES WHERE THE APPLICABLE FUNDS ARE REGISTERED AND THE
EXCHANGE MAY BE LEGALLY MADE. YOU SHOULD CONTACT SM&R TO DETERMINE WHETHER A
FUND IS REGISTERED IN A PARTICULAR STATE OR WHETHER AN EXCHANGE IS PERMITTED.
WE MAY TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE OFFER AT ANY TIME.
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GOVERNMENT BOND FUND AND TAX FREE FUND. You may exchange Class T shares that you
own in the Government Bond or Tax Free Fund, without an exchange fee or sales
charge, for corresponding Class T shares of another fund managed by SM&R. You
also may exchange your Class T shares for shares of the Primary or Money Market
Fund, provided that you meet any minimum investment requirement for the shares
you wish to acquire.
PRIMARY FUND AND MONEY MARKET FUND. You may exchange shares you own in the
Primary Fund for shares of the Money Market Fund, and vise versa. You may
exchange shares you own in the Primary or Money Market Fund for Class A, T, J,
or Y shares of another fund managed by SM&R, provided you meet any eligibility
requirements and pay any sales charge applicable to the acquired shares. You
CANNOT exchange shares of the Money Market Fund or Primary Fund for Class B or C
shares of another fund.
We waive any sales charges on Class A and Class T shares acquired through an
exchange if you previously paid a sales charge on amounts invested in those
shares. For example, you purchase Class T shares of the Government Bond Fund.
You then exchange your Class T shares for shares of the Money Market Fund.
Later, you re-exchange those shares of the Money Market Fund for Class T shares
of the Tax Free Fund. We would not impose any sales charge upon re-exchange into
Class T shares because you previously paid a sales charge on those amounts
invested in shares. In other words, we will never impose a front-end sales
charge on the same investment TWICE.
Shares of any fund managed by SM&R held in escrow under a Letter of Intent are
not eligible for the exchange privilege. Such shares will not be released from
escrow until the balance invested during the period specified in the Letter of
Intent equals or exceeds the amount required to be invested under the Letter of
Intent or the shareholder requests, in writing, that the Letter of Intent be
canceled and pays any adjustments in sales charge. After release from escrow,
shares may be exchanged, provided all other applicable conditions are met.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met:
(a) the exchange must be made between accounts that are registered in the same
name, address and, if applicable, taxpayer identification number;
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(b) the shares of the fund acquired through exchange must be qualified for sale
in the state in which you reside;
(c) the dollar amount of a written exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(d) the minimum dollar amount of a telephone exchange is $500;
(e) SM&R must have received full payment for the shares being exchanged;
(f) your account must have been coded to reflect your certified taxpayer
identification number, or, if applicable, an appropriate Internal Revenue
Service Form W-8 (certificate of foreign status) or Form W-9 (certifying
exempt status);
(g) any shares that you wish to exchange must have been held for at least ten
(10) business days;
(h) certificates representing shares, if any, are returned before such shares
are exchanged; and
(i) you have received a prospectus for the shares you receive in the exchange.
The exchange privilege is not an option or right to purchase shares but is
permitted under the respective policies of the participating funds, and may be
modified or discontinued by the participating funds or by SM&R at any time. ANY
GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE MAY BE RECOGNIZED FOR
FEDERAL AND STATE 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 currently define
"excessive trading" as exceeding one purchase and sale involving the same fund
within any 120-day period.
For example, you are in Fund X. You can move substantial assets from Fund X to
Fund Y and, within the next 120 days, sell your shares in Fund Y to return to
Fund X or move to Fund Z. If you exceed the number of trades described above,
you may be barred indefinitely from further transactions between the
participating funds.
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There are two types of transactions exempted from the excessive trading
guidelines. They are (1) redemptions that are not part of exchanges and (2)
systematic purchases or redemptions.
RETIREMENT PLANS
The following retirement plans may be funded with Class T shares of the
Government Bond Fund, or with shares of the Primary and Money Market Funds:
- Individual Retirement Accounts (IRAs), which include traditional IRAs, Roth
IRAs, Education IRAs, and SIMPLE IRAs,
- Simplified Employee Pension Plans (SEPs),
- 403(b) Custodial Accounts (TSAs), and
- corporate retirement plans.
These plans allow you to shelter investment income from federal income tax while
saving for retirement. Information concerning IRAs and TSAs, and the forms
necessary to adopt such plans, can be obtained by contacting your registered
representative or calling SM&R. A regular fund application should be used when
establishing a corporate retirement plan. In connection with retirement plans,
the minimum initial purchase for each fund is $100. (See "Purchasing Shares" for
the minimum initial and subsequent purchase requirements.) SM&R acts as trustee
or custodian for IRAs, SEPs, and TSAs for the Company. An annual custodial fee
of $7.50 per account will be charged for any part of a calendar year in which an
investor has an IRA, SEP, or TSA in the 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, DISTRIBUTIONS, AND TAXES
DIVIDENDS.
GOVERNMENT BOND AND TAX FREE FUNDS. The Government Bond and Tax Free Funds
generally will declare and pay dividends from net
42
<PAGE>
investment income monthly and net realized short-term or long-term capital
gains, if any, annually. 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 funds have the effect of reducing net asset value per share on the record
date by the amount of the payment. Therefore, a dividend or distribution of
record shortly after the purchase of shares by an investor represents, in
substance, a return of capital.
PRIMARY AND MONEY MARKET FUNDS. At 3:00 p.m. Central Time, on each day that the
Exchange is open for trading, the Primary and Money Market Funds each will
declare a dividend of all of its net investment income to shareholders of record
on that date. Such dividends will be paid monthly.
DIVIDEND REINVESTMENTS. Dividends and capital gains will be automatically
reinvested at net asset value in additional shares of the fund making such
distribution unless SM&R is instructed otherwise in writing. Distributions not
reinvested are paid by check or transmitted to your bank account through an ACH
transaction, if elected. If the Postal Service cannot deliver your check, or if
your check remains uncashed for six months, the funds reserve the right to
reinvest your distribution check in your account at the net asset value on the
business day of the reinvestment and to reinvest all future distributions in
shares of the applicable fund(s). Dividends and capital gains declared in
December to shareholders of record in December and paid the following January
will be taxable to shareholders as if received in December. This is a convenient
way to accumulate additional shares and maintain or increase the shareholder's
earning base. Of course, any shares so acquired remain at market risk.
Shareholders have the right to change their election with respect to the receipt
of distributions by notifying SM&R in writing, but any such change will be
effective only as to distributions for which the record date is seven or more
business days after SM&R has received the shareholder's written request.
TAXABILITY OF DIVIDENDS. Dividends you receive from the Government Bond,
Primary, and Money Market Funds, whether reinvested or taken as cash, are
generally considered taxable. A fund's long-term capital gains distributions are
taxable as capital gains; dividends from
43
<PAGE>
other sources are generally taxable as ordinary income. Some dividends paid in
January may be taxable as if they had been paid the previous December. The Form
1099 that is mailed to you every January details your dividends and their
federal tax category, although you should verify your tax liability with your
tax professional.
The Tax Free Fund intends to distribute tax-exempt dividends that shareholders
may exclude from their gross income for federal income tax purposes. However,
the Tax Free Fund may invest a portion of its assets in securities that generate
income that is not exempt from federal or state income tax. Income exempt from
federal tax may be subject to state and local income tax. Any capital gains
distributed by the Tax Free Fund may be taxable. Also, you should also keep in
mind that certain income from the Tax Free Fund may be subject to the federal
alternative minimum tax.
BACKUP WITHHOLDING. Backup withholding of federal income tax may be applied at
the rate of 31% from taxable dividends, distributions, and redemption proceeds
(including exchanges) if you fail to furnish the Company with a correct and
properly certified Social Security or Employer Identification Number when you
sign your application, or if you underreport your income to the Internal Revenue
Service.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions. You should consult with a tax advisor concerning the tax reporting
requirements in effect on the redemption or exchange of such shares.
REDEEMING SHARES
You can redeem fund shares at net asset value determined on the date the request
is received by SM&R in proper form. A redemption request must be addressed to
Securities Management and Research, Inc., P.O. Box 58969, Houston, Texas
77258-8969.
If uncertain of the redemption requirements, investors should call Investor
Services or write SM&R. Payment will be made as soon as practicable and normally
within seven days after receipt of a redemption request in proper form. We
currently charge a fee in the amount of $8.00 for redemptions by wire under
$5,000.
44
<PAGE>
If the shares being redeemed were purchased by wire, certified check, money
order, or other immediately available funds, redemption proceeds will be mailed
no later than the seventh calendar day following receipt. For shares purchased
by a personal check or ACH transfer, SM&R will process your redemption but will
generally delay sending you the proceeds for up to ten (10) business days to
allow the check or transfer to clear.
TELEPHONE REDEMPTIONS. You may request redemptions by telephone if you have
completed the account application and requested this option. Telephone
privileges are not available to shareholders automatically. This redemption
feature can only be used if:
(a) the redemption proceeds are to be mailed to the address of record or wired
to the pre-authorized bank account indicated on the account application;
(b) there has been no change of address of record or pre-authorized bank account
within the preceding 30 business days;
(c) the proceeds of the redemption are $500 or more and do not exceed $25,000;
and
(d) the security procedures discussed under "Special Purchase Plans And
Services--Exchange Privilege" have been met.
These instructions may be changed only in writing, accompanied by a signature
guarantee and additional documentation may be required for corporations.
FAX REDEMPTIONS. You may request redemptions by fax as long as they meet the
requirements stated in (a)-(c) under Telephone Redemptions above.
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
45
<PAGE>
Withdrawal Account while concurrently purchasing shares of the Government Bond
Fund or the Tax Free Fund because of the sales charge involved in additional
purchases. You should carefully consider such purchases and contact your
financial adviser regarding their advisability. Dividends and capital gains
distributions will automatically be reinvested in additional shares at net asset
value. As with other redemptions, a withdrawal is a sale for federal income tax
purposes. The Systematic Withdrawal Plan will automatically terminate if all
shares are liquidated or withdrawn from the account. No account covered by a
Letter of Intent can be changed to a Systematic Withdrawal Plan until such time
as the Letter of Intent is fulfilled or terminated, nor can an account under a
Systematic Withdrawal Plan be placed under a Letter of Intent.
REINVESTMENT PRIVILEGE. Within ninety (90) days of a redemption of Class T
shares of a fund, a shareholder may reinvest all or part of the proceeds in
Class T shares of that same fund at the net asset value next computed after
receipt of the proceeds to be reinvested by SM&R. The shareholder must ask the
transfer agent for this privilege at the time of reinvestment. Prior to
reinvestment of redemption proceeds, a shareholder is encouraged to consult with
his or her accountant or tax advisor to determine any possible tax ramifications
of such a transaction. Each fund managed by SM&R may amend, suspend, or cease
offering this privilege at any time as to shares redeemed after the date of the
amendment, suspension, or cessation.
For further information about the "Systematic Withdrawal Plan" and "Reinvestment
Privilege," contact a registered representative or SM&R.
"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
46
<PAGE>
(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. A signature guarantee verifies the authenticity of your
signature. Signature guarantees are required when:
(1) the proceeds of the redemption exceed $25,000;
(2) the proceeds (in any amount) are to be paid to someone OTHER THAN the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address OTHER THAN the
shareholder's address of record, pre-authorized bank account or exchanged to
one of the other funds managed by SM&R; or
(4) the 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.
You should be able to obtain an acceptable signature guarantee from a bank,
broker, dealer, municipal securities dealer or broker, government securities
dealer or broker, credit union, national securities exchange, or registered
securities association. WITNESSING OR NOTARIZATION IS NOT SUFFICIENT.
TEXAS OPTIONAL RETIREMENT PROGRAM. You may not redeem shares of the Government
Bond Fund, Primary Fund, and Money Market Fund in any account established under
the Texas Optional Retirement Program, unless SM&R receives satisfactory
evidence from the state that one of the following conditions exist:
(1) death of the employee;
(2) termination of service with the employer; or
(3) retirement of employee.
47
<PAGE>
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 December
31, 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 $500 in the case of the
Government Bond and Tax Free Funds or $1,000 in the case of the Primary and
Money Market Funds. You will be notified that the value of your account is less
than the required minimum indicated above and allowed at least 60
48
<PAGE>
days to make an additional investment to increase the value of your account
above the required minimum. The Funds may, from time to time, change such
required minimum investment.
RIGHTS RESERVED BY THE 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;
- to act on instructions not believed to be genuine; or
- to eliminate duplicate mailings of fund material to shareholders who reside
at the same address.
49
<PAGE>
THE FUNDS AND MANAGEMENT
- -------------------------------------------------------------------
INVESTMENT ADVISOR
The Company's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the funds' investment adviser, the management of the
funds' day-to-day business and affairs. In addition, SM&R invests the funds'
assets, provides administrative services, and serves as transfer agent,
custodian, dividend paying agent, and underwriter.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). SM&R was incorporated in 1964 and has managed mutual
funds since 1966. SM&R does and may, from time to time, serve as investment
adviser to other clients including employee benefit plans, other investment
companies, banks, foundations and endowment funds.
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 agreement provides that SM&R will receive advisory fees as set
forth below.
GOVERNMENT BOND FUND AND TAX FREE FUND. We deduct an investment advisory fee
from the value of the shares each day. We calculate this fee for the Government
Bond and Tax Free Funds at the annual rate as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF EACH FUND'S INVESTMENT ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
- ------------------------------------------------- ---------------------
Not exceeding $100,000,000 0.50%
<S> <C>
Exceeding $100,000,000 but not exceeding
$300,000,000 0.45%
Exceeding $300,000,000 0.40%
<CAPTION>
</TABLE>
MONEY MARKET FUND AND PRIMARY FUND. For the Money Market and Primary Funds, we
calculate the investment advisory fee at the annual rate of 0.25% and 0.50%,
respectively, of each fund's average daily net asset value.
After applicable fee waivers, SM&R received total advisory fees from the
Government Bond Fund and Primary Fund for the fiscal year ended August 31, 1998
which represented 0.50%, and 0.32%, respectively, of each such fund's average
daily net assets. SM&R waived all
50
<PAGE>
advisory fees for the Tax Free Fund for the fiscal year ended August 31, 1998.
The Money Market Fund was not in operation during the fiscal year ended August
31, 1998.
ADMINISTRATIVE SERVICES
Pursuant to an Administrative Service Agreement with the Company, SM&R provides
all non-investment related management, executive, administrative, transfer
agent, and operational services to the funds. Under the agreement, SM&R receives
an administrative service fee from each fund at the annual rate of average daily
net asset values as follows:
<TABLE>
<CAPTION>
<S> <C>
ON THE PORTION OF THE FUND'S ADMINISTRATIVE SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
- -------------------------------------------- --------------------------
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.20%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.15%
Exceeding $300,000,000 0.10%
<CAPTION>
</TABLE>
REIMBURSEMENTS AND WAIVERS
SM&R has agreed to pay (or to reimburse each fund for) each fund's regular
operating expenses in excess of 1.25% (0.50% for the Money Market Fund) per year
of such fund's average daily net assets. Regular operating expenses include the
advisory fee and administrative service fee, if any, paid to SM&R, but do not
include 12b-1 fees, class-specific expenses, interest, taxes, commissions, and
other expenses incidental to portfolio transactions. SM&R received
administrative service fees of 0.25% 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.
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 expenses incurred by the
Government Bond and Primary
51
<PAGE>
Funds to the extent that regular operating expenses exceed average daily net
assets as follows: 0.80% for the Primary Fund and 1.00% for the Government Bond
Fund.
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 policies.
TERRY E. FRANK, VICE PRESIDENT, PORTFOLIO MANAGER OF THE GOVERNMENT BOND FUND,
TAX FREE FUND, PRIMARY FUND AND MONEY MARKET 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.
She has served as Portfolio Manager of the Primary Fund since November 1998 and
the Money Market Fund since its inception January 1, 1999. 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.
JOHN S. MAIDLOW, ASSISTANT PORTFOLIO MANAGER OF THE PRIMARY FUND AND THE MONEY
MARKET FUND. Mr. Maidlow has served as the Assistant Portfolio Manager of the
Primary Fund since November, 1998 and the Money Market Fund since its inception
January 1, 1999. He also services as Assistant 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. He
joined SM&R's staff in 1998 and prior to that time he held positions with
American Industries Trust Company as a trust officer, Texas Department of
Insurance and the Texas Department of Banking as an examiner, Landmark Group as
Vice President of Investments, MBank as a trust officer and Rotan-Mosla, Inc.
and Eppler, Guerin & Turner as an investment broker.
52
<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 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
and for the year ended August 31, 1998 has been audited by Tait, Weller & Baker,
CPA. Each independent auditor's 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.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.42 $ 10.14 $ 10.51 $ 10.07 $ 10.87
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.64 0.67 0.65 0.70 0.54
Net Realized and Unrealized Gain (Loss)
on Securities 0.20 0.26 (0.37) 0.44 (0.79)
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 0.84 0.93 0.28 1.14 (0.25)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.66) (0.65) (0.65) (0.70) (0.55)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.66) (0.65) (0.65) (0.70) (0.55)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 10.60 $ 10.42 $ 10.14 $ 10.51 $ 10.07
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 8.31% 9.37% 2.63% 11.85% (2.41)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted) $ 23,982 $ 23,683 $ 21,127 $ 20,466 $ 19,790
Ratio of Expenses to Average Net Assets(1) 1.00% 1.00% 1.00% 0.70% 1.12%
Ratio of Net Income to Average Net Assets 6.08% 6.46% 6.17% 6.90% 5.11%
Portfolio Turnover Rate 32.71% 9.06% 30.17% 2.20% 45.48%
</TABLE>
(1) Expenses for the calculation are net of a reimbursement from Securities
Management 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.
53
<PAGE>
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 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 and for the year
ended August 31, 1998 has been audited by Tait, Weller & Baker, CPA. Each
independent auditor's 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.
<TABLE>
<CAPTION>
SEPT. 9, 1993
YEAR ENDED AUGUST 31, (DATE OPERATIONS
------------------------------------------ COMMENCED) THRU
1998 1997 1996 1995 AUG. 31, 1994
--------- --------- --------- --------- ----------------
<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 0.49 0.51 0.53 0.51 0.24
--------- --------- --------- --------- --------
Net Realized and Unrealized
Gain (Loss) on Securities 0.37 0.33 (0.02) 0.33 (0.38)
--------- --------- --------- --------- --------
TOTAL FROM INVESTMENT OPERATIONS 0.86 0.84 0.51 0.84 (0.14)
--------- --------- --------- --------- --------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.49) (0.50) (0.53) (0.51) (0.24)
--------- --------- --------- --------- --------
TOTAL DISTRIBUTIONS (0.49) (0.50) (0.53) (0.51) (0.24)
--------- --------- --------- --------- --------
Net Asset Value, End of Period $ 10.64 $ 10.27 $ 9.93 $ 9.95 $ 9.62
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
TOTAL RETURN 8.58% 8.61% 5.18% 9.15% (1.49)%(1)
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's
omitted) $ 11,058 $ 10,700 $ 9,148 $ 8,399 $ 7,295
Ratio of Expenses to Average Net
Assets(3) 0.75% 0.54% -- -- 1.11%(2)
Ratio of Net Income to Average
Net Assets 4.60% 4.97% 5.27% 5.43% 2.50% (2)
Portfolio Turnover Rate 12.77% 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 1.25%, 1.27%, 1.18%, and
1.25% for the years ended August 31, 1998, 1997, 1996, and 1995,
respectively.
54
<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 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 and for the year ended August 31, 1998 has been audited by Tait,
Weller & Baker, CPA. Each independent auditor's report, along with the Primary
Fund's financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.05 0.05 0.05 0.05 0.03
--------- --------- --------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS 0.05 0.05 0.05 0.05 0.03
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.05) (0.05) (0.05) (0.05) (0.03)
--------- --------- --------- --------- ---------
TOTAL DISTRIBUTIONS (0.05) (0.05) (0.05) (0.05) (0.03)
--------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN 5.15% 4.98% 5.07% 5.01% 2.91%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period (000's omitted) $ 34,577 $ 33,045 $ 37,465 $ 20,984 $ 15,208
Ratio of Expenses to Average Net Assets(1) 0.80% 0.80% 0.81% 0.84% 0.79%
Ratio of Net Income to Average Net Assets 5.02% 4.86% 4.93% 4.91% 2.88%
</TABLE>
(1) 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 0.98%, 1.01%, 1.15%, 1.21%,
and 1.20% for the years ended August 31, 1998, 1997, 1996, 1995, and 1994,
respectively.
55
<PAGE>
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APPENDIX
(Description of Ratings Used in Prospectus)
- -------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND (BONDS THAT EXTEND
LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S LONG-TERM BOND (BONDS THAT
EXTEND LONGER THAN ONE YEAR) RATINGS:
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there
may be other elements
A-1
<PAGE>
present which make the long-term risks appear somewhat larger than the Aaa
securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated "Baa" are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
DESCRIPTION OF FITCH IBCA BOND RATINGS:
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
MUNICIPAL NOTE RATINGS
DESCRIPTION OF MOODY'S INVESTOR SERVICE INC.'S SHORT-TERM MUNICIPAL NOTE (NOTES
THAT MATURE IN LESS THAN ONE YEAR) RATINGS:
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 for refinancing.
A-2
<PAGE>
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.
DESCRIPTION OF STANDARD AND POOR'S SHORT-TERM MUNICIPAL NOTE RATINGS:
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.
SP-3 Speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
A-3
<PAGE>
DESCRIPTION OF FITCH IBCA SHORT-TERM DEBT RATING (INCLUDING COMMERCIAL PAPER):
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result
in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
DESCRIPTION OF DUFF & PHELP'S HIGHEST COMMERCIAL RATINGS:
High Grade
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
Good Grade
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors
are small.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
TBW-1 The highest category; indicates a very high likelihood that principal and
interest will be paid on a timely basis.
TBW-2 The second-highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
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.
A-4
<PAGE>
FOR MORE INFORMATION ABOUT THE FUNDS
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<TABLE>
<S> <C>
The following documents contain more information about the SM&R GOVERNMENT BOND FUND
funds and are available free upon request: SM&R TAX FREE FUND
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI contains SM&R PRIMARY FUND
additional information about all aspects of the funds. A SM&R MONEY
current SAI has been filed with the Securities and Exchange MARKET FUND
Commission and is incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS. The funds' annual and
semi-annual reports provide additional information about the
funds' investments. The annual report contains a discussion
of the market conditions and investment strategies that
significantly affected each fund's performance during the
last fiscal year.
</TABLE>
REQUESTING DOCUMENTS. You may request a free copy of the SAI and these reports,
make shareholder inquiries, or request further information about the funds
either by contacting your broker or by contacting the funds at:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE:1-800-231-4639 (TOLL FREE) OR
281-334-2469 (COLLECT)
PUBLIC INFORMATION. You can review and copy information about the funds,
including the SAI, at the Securities and Exchange Commission's Public Reference
Room in Washington D.C. You may obtain information on the operation of the
public reference room by calling the Commission at 1-800-SEC-0330. Reports and
other information about the funds also are available on the Commission's
Internet site at http://www.sec.gov. You may obtain copies of this information,
upon payment of a duplicating fee, by writing the Public Reference Section of
the Securities and Exchange Commission, Washington, D.C. 20549-6009.
Investment Company
File No. 811-6477
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1999
SM&R INVESTMENTS, INC.
ALL CLASSES (A, B, C, T, Y AND J)
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
Mailing Address: P.O. Box 58969
Houston, Texas 77258-8969
Street Address: 2450 South Shore Boulevard Telephone Number: (281) 334-2469
League City, Texas 77573 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 January 1, 1999
that is relevant to the class or classes of shares that you own or wish to
purchase (each such prospectus is referred to herein as a "Prospectus" and
collectively as the "Prospectuses"). A copy of each Prospectus may be obtained
from your registered representative broker-dealer, financial intermediary, or
Securities Management and Research, Inc. ("SM&R"), One Moody Plaza, 14th Floor,
Galveston, Texas 77550 (Telephone No. (281) 334-2469 or Toll Free
1-(800)-231-4639). Terms not defined herein have the same meaning as given to
them in the Prospectuses.
No dealer, sales representative, or other person has been authorized to give
any information or to make any representations other than those contained in
this Statement of Additional Information (and/or the Prospectuses referred to
above), and if given or made, such information or representations must not be
relied upon as having been authorized by the Company or SM&R. No Prospectus or
Statement of Additional Information constitutes an offer or solicitation by
anyone in any state in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE COMPANY.................................................................... 1
INVESTMENT OBJECTIVES AND POLICIES............................................. 2
PORTFOLIO TURNOVER............................................................. 19
MANAGEMENT OF THE COMPANY...................................................... 20
REMUNERATION OF DIRECTORS...................................................... 23
POLICY REGARDING PERSONAL INVESTING............................................ 24
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES........................ 24
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES............................ 25
CONTROL AND MANAGEMENT OF SM&R................................................. 25
INVESTMENT ADVISORY AGREEMENT.................................................. 26
ADMINISTRATIVE SERVICE AGREEMENT............................................... 28
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION................................ 30
DESCRIPTION OF FUND SHARES..................................................... 31
PURCHASE, REDEMPTION, AND PRICING OF SHARES.................................... 33
DETERMINATION OF NET ASSET VALUE........................................... 33
DETERMINATION OF OFFERING PRICE............................................ 35
REDUCTION AND/OR WAIVER OF INITIAL SALES CHARGES (CLASS A AND CLASS T
SHARES).................................................................. 38
REDUCTION AND/OR WAIVER OF CONTINGENT DEFERRED SALES CHARGES (CLASS B
SHARES).................................................................. 40
FUND AND CLASS EXPENSES.................................................... 41
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN.................................... 42
SPECIAL PURCHASE PLANS......................................................... 44
REDEMPTION..................................................................... 45
TAXES.......................................................................... 47
SYSTEMATIC WITHDRAWAL PLAN..................................................... 50
THE UNDERWRITER................................................................ 51
CUSTODIAN...................................................................... 52
TRANSFER AGENT AND DIVIDEND PAYING AGENT....................................... 53
COUNSEL........................................................................ 53
AUDITORS AND FINANCIAL STATEMENTS.............................................. 53
PERFORMANCE AND ADVERTISING DATA............................................... 53
COMPARISONS.................................................................... 58
</TABLE>
ii
<PAGE>
THE COMPANY
SM&R Investments, Inc. (the "Company") is a diversified, open-end management
investment company incorporated under the laws of Maryland on November 6, 1991.
The Company changed its name from SM&R Capital Funds, Inc. to SM&R Investments,
Inc. on December 31, 1998.
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.
The Company 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").
The Government Bond Fund and the Tax Free Fund (the "Multi-Class Funds") are
each divided into six classes of shares (the "Classes") of common stock
designated as:
- Class T (existing shareholders and certain designated persons);
- Class A (front-end load);
- Class B (back-end load);
- Class C (level load);
- Class J (network);
- Class Y (institutional shareholders).
These classes of shares have different sales charges and distribution and
service (12b-1) fee structures. 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, each is a "Single-Class Fund").
1
<PAGE>
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
Each Fund's investment objective and the following restrictions have been
adopted as fundamental policies. (A fundamental policy 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 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. May not make loans, except through (a) the purchase of debt obligations
in accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers, and other financial
institutions, and (c) loans of securities as permitted by applicable law.
5. 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.
2
<PAGE>
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. Engage in the strategy of short sales of securities.
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.
3
<PAGE>
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.
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.
4
<PAGE>
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
5
<PAGE>
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.
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.
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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 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.
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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.
INFLATION-INDEXED BONDS. The Government Bond Fund may invest in inflation-
indexed bonds, which are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. The interest rate on
these bonds is generally fixed at issuance at a rate lower than typical bonds.
Over the life of an inflation-indexed bond, however, interest will be paid based
on a principal value that is adjusted for inflation. Inflation-indexed
securities issued by the U.S. Treasury will initially have maturities of five or
ten years, although it is anticipated that securities with other maturities will
be issued in the future. The securities will pay interest on a semi-annual
basis, equal to a fixed percentage of the inflation-adjusted principal amount.
If the periodic adjustment rate measuring inflation fails, the principal
value of inflation falls, the principal value of inflation-indexed bonds will be
adjusted downward, and consequently the interest payable on these securities
(calculated with respect to a smaller principal amount) will be reduced.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed and will fluctuate.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility the fund may be forced to liquidate positions when it
would not be advantageous to do so.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
COLLATERALIZED 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.
The Government Bond Fund and the Money Market Fund will not invest in any
CMOs that are not fully collateralized obligations. "Fully collateralized" means
that the
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collateral will generate cash flows sufficient to meet obligations to holders of
the collateralized obligations under even the most conservative prepayment and
interest rate projections. Thus, the collateralized obligations are structured
to anticipate a worst case prepayment condition and to minimize the reinvestment
rate risk for cash flows between coupon dates for the collateralized
obligations. A worst case prepayment condition generally assumes immediate
prepayment of all securities purchased at a premium and zero prepayment of all
securities purchased at a discount. Reinvestment rate risk may be minimized by
assuming very conservative reinvestment rates and by other means such as by
maintaining the flexibility to increase principal distributions in a low
interest rate environment. The requirements as to collateralization are
determined by the issuer or sponsor of the collateralized obligation in order to
satisfy the U.S. Government agency or instrumentality guaranteeing the
obligation.
Collateralized obligations are designed to be retired as the underlying
securities are repaid. In the event of prepayment on or call of such securities,
the class of collateralized obligations first to mature generally will be paid
down first. Therefore, although in most cases the issuer of collateralized
obligations will not supply additional collateral in the event of such
prepayment, there will be sufficient collateral to secure collateralized
obligations that remain outstanding.
The Government Bond Fund may also invest in securities issued by private
issuers that represent an interest in or are secured by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities. In addition, the Government Bond Fund may invest in
securities issued by private issuers that represent an interest in or are
secured by mortgage loans or mortgage-backed securities without a government
guarantee but usually have some form of private credit enhancement.
MORTGAGE PASS-THROUGH SECURITIES. Additionally, the Government Bond Fund
may invest in mortgage pass-through securities that do not contain government
guarantees. Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
entities creating the mortgage pools. Such insurance and guarantees, and the
creditworthiness of the issuers thereof, will be considered in determining
whether a mortgage-related security meets the Government Bond Fund's investment
quality standards. There can be no assurance that the private
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insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements.
OTHER ASSET-BACKED SECURITIES. It is expected that new types of
asset-backed securities (unrelated to mortgage loans) may be available for
investment in the future and may be purchased by the funds that may invest in
mortgage-related securities. Several types of asset-backed securities have
already been offered to investors, such as home equity loan receivables.
Traditional home equity loans (HELs) are very similar to residential mortgages
which pass through principal payments (or amortize) over a time period.
Generally these securities have maturities of 10 to 20 years, which is modestly
shorter than a traditional 30-year first mortgage. Although some HELs evidence a
first lien on the underlying property, usually a first mortgage is in place
concurrently with a HEL. Another asset-backed security is a home equity line of
credit (HELOC), which is a line of credit extended to a property owner that can
be drawn upon, and paid down and then re-drawn upon until the line's final
maturity. This revolving feature results in HELOC cash flows looking very
similar to credit card cash flows. As with other pass-through securities, an
investor's return may be affected by early prepayment of principal on the
underlying loan.
Consistent with the Government Bond Fund's investment objectives and
policies, the portfolio manager may invest in other types of asset-backed
securities.
MUNICIPAL SECURITIES. The Tax Free Fund intends under normal market
conditions to invest at least 80% of its net assets in municipal securities.
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
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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.
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.
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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
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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 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. 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, Standard & Poor's, and Fitch
represent their opinions 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.
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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.
In addition, Congress could enact tax legislation such as a flat tax rate
that would make tax-free bonds less desirable to investors seeking ways to
reduce taxable income. If that were to occur, it could cause the value of the
securities to drop.
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 may 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, Standard & Poor's, or Fitch.
Commercial Paper which at the date of the investment is rated P-2 or higher
by Moody's or A-2 or higher 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. Under a repurchase
agreement, the Fund will acquire and hold a security (government security,
certificate of deposit, or banker's acceptance) subject to the seller's
agreement to repurchase the securities at a predetermined price within a
specified time (normally one day to one week), thereby determining
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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. 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,
generally 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
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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 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 its portfolio consistent with its 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.
ILLIQUID SECURITIES. Each Fund may invest up to 15% (10% for the Money
Market Fund) of its net assets in illiquid securities, including domestic or
foreign securities not listed on domestic or foreign exchanges and repurchase
agreements maturing in excess of seven days. Non-publicly traded securities may
be less liquid than publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by a Fund. In addition, companies
whose securities are not publicly traded are not subject to the disclosure and
other investor protection requirements that may be applicable if their
securities were publicly traded. A Fund's investments in illiquid securities are
subject to the risk that should the Fund desire to sell any of these securities
when a ready buyer is not available at a price that the Investment Manager deems
representative of their value, the value of the Fund's net assets could be
adversely affected.
144A SECURITIES AND SECTION 4(2) COMMERCIAL PAPER. If otherwise consistent
with its investment objective and policies, a Fund may purchase securities that
are not registered
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under the Securities Act of 1933, as amended (the "1933 Act") but which can be
sold to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act, or which were issued under Section 4(2) of the 1933 Act. Due to
changing markets or other factors, 144A securities may be subject to a greater
possibility of becoming illiquid than securities which have been registered with
the SEC for sale.
Any such security may be determined to be LIQUID under procedures adopted by
the Board. These procedures consider trading activity, availability of reliable
price information, and other relevant information to determine whether an
adequate trading market exists for that security. To the extent that, for a
period of time, qualified institutional or other buyers may cease purchasing
such restricted securities, the level of illiquidity of a Fund holding such
securities may increase.
CERTAIN INVESTMENT GRADE OBLIGATIONS. Although obligations rated BBB by S&P
or Baa by Moody's are considered investment grade, they may be viewed as being
subject to greater risks than other investment grade obligations. Obligations
rated BBB by S&P are regarded as having only an adequate capacity to pay
principal and interest and those rated Baa by Moody's are considered
medium-grade obligations that lack outstanding investment characteristics and
have speculative characteristics as well.
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.
FOREIGN 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
17
<PAGE>
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 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,
18
<PAGE>
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 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.
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.
19
<PAGE>
The portfolio turnover rates for the Funds for past three fiscal years are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1997 AUGUST 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Government Bond Fund....................... 30.17% 9.06% 32.71%
Tax Free Fund.............................. 18.44% 22.15% 12.77%
Primary Fund............................... 0% 0% 0%
</TABLE>
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.
A significant increase in bond yields early in calendar year 1996 provided
an opportunity to restructure the Government Bond Fund. Bonds with high coupons
and short maturities and calls were sold with the proceeds invested in bonds
with similar coupons and longer maturities. Another opportunity to restructure
occurred in mid-calendar year 1998, when investors appeared to strongly prefer
Treasury securities over all other fixed income securities. Agency and Treasury
securities with lower yields and shorter maturities were sold and the proceeds
were invested in agency and corporate issues with higher yields and longer
maturities.
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 2450 South Shore Boulevard, Suite 400, League City, Texas 77573. Directors
who are deemed to be "interested persons" of the Company, as defined in the 1940
Act, are indicated by an asterisk(*).
20
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE COMPANY DURING PAST 5 YEARS
- -------------------------------- ------------------------- -----------------------------------------------------
<S> <C> <C>
Ernest S. Barratt, Ph.D.(1) Director Professor and Chief of Psychophysiology Laboratory,
Age 73 Department of Psychiatry and Behavioral Sciences,
Department of Psychiatry and University of Texas Medical Branch, a medical school
Behavioral Sciences, and hospital system, 1981 to present; Director of
University of Texas Medical American National Investment Accounts, Inc.
Branch, ("Investment Accounts"), another investment company
Galveston, Texas 77550-2777 advised by SM&R, 1990 to present.
Michael W. McCroskey* Director and President President, Chief Executive Officer, Director and
Age 55 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 SM&R
Growth Fund, Inc., SM&R Equity Income Fund, Inc., and
SM&R Balanced Fund, Inc. (the "SM&R Equity Funds"),
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; Director,
Comprehensive Investment Services, Inc. since 1997.
Allan W. Matthews*(1)(2) Director Program Officer, The Moody Foundation (a charitable
Age 33 foundation), April 1991 to present; Director of
7114 Youpon Investments Accounts, 1997 to present.
Galveston, Texas 77551
Lea McLeod Matthews*(2) Director Publications Editor, National Western Life Insurance
Age 36 Co., 1990 to present; Associate in Customer Service
850 E. Anderson Lane Designation; Director of Investment Accounts, 1994 to
Austin, Texas 78752-1602 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.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE COMPANY DURING PAST 5 YEARS
- -------------------------------- ------------------------- -----------------------------------------------------
<S> <C> <C>
Ann McLeod Moody*(2) Director Director of Moody Gardens, Inc., 1994 to present;
Age 61 Director of Bank of Galveston, National Association,
5 Colony Park Drive 1989 to present; Director of The Westcap Corporation,
Galveston, Texas 77551 1990 to present; Director of Seal Fleet, Inc., 1972
to 1996; Director of Investments Accounts, 1997 to
present.
Edwin K. Nolan(1) Director Investor and Attorney, Law Offices, Edwin K. Nolan,
Age 55 P. C., Canyon Lake, Texas, 1977 to present;
#7 Mt. Lookout Drive Director/Owner, Canyon Lake Aviation, Inc. (Aviation
Canyon Lake, Texas 78133 Service), Canyon Lake, Texas, 1986 to present;
Director/Owner, Canyon Lake Airport, Inc. (Airport),
Canyon Lake, Texas, 1985 to 1995; Director, Hancock
Mini Mart, Inc., 1995 to present; Director of
Investments Accounts, 1997 to present.
Robert V. Shattuck, Jr. Director Attorney, Law Offices of Robert V. Shattuck, Jr.,
Age 57 Galveston, Texas, 1986 to present; Director of
1013 23rd Street Investments Accounts, 1997 to present.
Galveston, Texas 77550
Jamie G. Williams Director Academic Language Therapist and Educational
Age 52 Consultant, 1974 to present; Director of The Learning
3328 Stanford Therapist Graduate Certificate Program, 1986 to 1995;
Dallas, Texas 75225 Adult Assessment Clinic and Adolescent Academic
Development Programs, Division of Evening, Summer and
Continuing Studies, Southern Methodist University,
1994 to 1995; Adjunct Instructor in Department of
Psychology, Dedman College, Southern Methodist
University, 1988 to 1995; Director of Investments
Accounts, 1997 to present.
Frank P. Williamson Director Owner of Professional Pharmacy, 1964 to present;
Age 66 Director of Investments Accounts, 1997 to present.
200 University Boulevard
Galveston, Texas 77550
Emerson V. Unger, C.L.U. Vice President Vice President of SM&R and the SM&R Equity Funds
Age 52 since 1983; and Vice President of the Investment
Accounts since 1991.
Brenda T. Koelemay - Vice Vice President and Vice President and Treasurer of SM&R, the SM&R Equity
President and Treasurer Treasurer Funds, and Investment Accounts since 1992; Treasurer
Age 44 of Comprehensive Investment Services, Inc. since
1997; Senior Manager, KPMG Peat Marwick LLP, July
1980 to April 1992.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE COMPANY DURING PAST 5 YEARS
- -------------------------------- ------------------------- -----------------------------------------------------
<S> <C> <C>
Teresa E. Axelson Vice President and Vice President and Secretary of SM&R and the SM&R
Age 51 Secretary Equity Funds since 1983; Vice President and Secretary
of the Investment Accounts since 1991.
Terry E. Frank Vice President and Vice President and Portfolio Manager of the
Age 43 Portfolio Manager Government Bond Fund, Tax Free Fund, Primary Fund and
Money Market Fund and member of the Fixed Income
Investment Committee of SM&R since 1991; Former
research analyst, Equitable Investment Services, Des
Moines, Iowa; Former securities analyst, Gibraltar
Savings Association, Houston, Texas; Former Senior
Money Market Trader, American Capital Asset
Management, Houston, Texas.
</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 McLeod 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 Funds, 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>
PENSION OR
RETIREMENT TOTAL
BENEFITS ESTIMATED COMPENSATION
AGGREGATE ACCRUED AS ANNUAL FROM ALL FUNDS
COMPENSATION PART OF FUND BENEFITS UPON MANAGED BY
DIRECTOR FROM COMPANY EXPENSES RETIREMENT SM&R
- ------------------------------- -------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Ernest S. Barratt, Ph.D........ $ 4,000 None None $ 9,000
Allan W. Matthews.............. $ 5,000 None None $ 9,000
Lea McLeod Matthews............ $ 5,000 None None $ 10,000
Michael W. McCroskey........... $ -- None None $ --
Ann McLeod Moody............... $ 4,000 None None $ 8,000
Edwin K. Nolan................. $ 5,000 None None $ 9,000
Robert V. Shattuck, Jr......... $ 4,000 None None $ 8,000
Jamie G. Williams.............. $ 4,000 None None $ 8,000
Frank P. Williamson............ $ 4,000 None None $ 8,000
</TABLE>
23
<PAGE>
Directors of the Company who are affiliated with SM&R receive no
compensation for attendance at Board or committee meetings. No officer receives
compensation from the Company. 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 $40,137 to directors for fees and expenses in attending
meetings of the Board.
Directors, officers, full-time employees, and other affiliated persons of
the Company, SM&R, or American National may purchase Class T shares of the
Government Bond and Tax Free Funds at net asset value per share without the
imposition of any sales charge. (For more information, see "Eligible Purchasers
of Class T Shares" and "Waiver of Initial Sales Charge for Certain Purchasers"
in the Prospectus for Class T shares.) The difference between the price at which
these shares are sold to public and the price at which these shares are sold to
directors and affiliated persons arises because SM&R does not pay commissions on
sales of shares to these types of purchasers.
POLICY REGARDING PERSONAL INVESTING
The following policies have been made a part of 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.
Furthermore, portfolio managers are prohibited from acquiring any security
of an initial public offering and must receive prior written approval from
SM&R's Chief Executive Officer before investing in any private placement
securities.
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES
Officers and employees of 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
24
<PAGE>
he has beneficial interest). However, the trade must not occur within 24 hours
of a trade in the Funds for the same or related security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of December 1, 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 December 1, 1998, SM&R and its parent, American National Insurance
Company ("American National"), a Texas life insurance company with its principal
offices at One Moody Plaza, Galveston, Texas 77550, owned the following:
<TABLE>
<CAPTION>
% OF % OF % OF
OUTSTANDING % OF % OF OUTSTANDING OUTSTANDING
SHARES OF THE OUTSTANDING OUTSTANDING SHARES OF THE SHARES OF THE
GOVERNMENT SHARES OF THE SHARES OF THE MONEY MARKET COMPANY (AS A
BOND FUND TAX FREE FUND PRIMARY FUND FUND WHOLE)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
American National..... 29.58% 59.89% 65.41% None 63.16%
SM&R.................. 21.15% 11.81% 1.58% 100% 3.00%
</TABLE>
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.
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 December
1, 1998, the Moody Foundation (the "Foundation"), a charitable foundation
established for charitable and educational purposes, owned approximately 23.7%
of American National's common stock and the Libbie S. Moody Trust, a private
trust, owned approximately 37.6% of such shares. The trustees of the Moody
Foundation are Robert L. Moody ("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
25
<PAGE>
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 December 1, 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
47.5% of its Class A Stock. The trustee of the Three R Trusts is Irwin M. Herz,
Jr., who is also a director of American National and a partner in Greer, Herz &
Adams, L.L.P., 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.
The following persons are affiliated with the Company and SM&R in the
specified capacities:
- 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 Investment Accounts;
- Teresa E. Axelson, Vice President, Secretary of the Company, is also Vice
President and Secretary of SM&R, Investment Accounts, 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 Investment Accounts and the SM&R
Equity Funds;
- Terry E. Frank is Vice President and Portfolio Manager of the Government
Bond Fund, Tax Free Fund, Primary Fund and Money Market 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 November 19, 1998 for the
Money
26
<PAGE>
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 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>
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>
PRIMARY FUND AND MONEY MARKET FUND--An investment advisory fee, computed and
paid monthly, at the annual rate of 0.25% of the Money Market Fund's and 0.50%
of the Primary Fund's average daily net asset value.
27
<PAGE>
For the past three fiscal years, SM&R received investment advisory fees from
each Fund as follows:
<TABLE>
<CAPTION>
ADVISORY FEES ADVISORY FEES ADVISORY FEES
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED AUGUST ENDED AUGUST ENDED AUGUST
31, 1996 31, 1997 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Government Bond Fund....................... $ 106,126 $ 113,231 $ 120,397
Tax Free Fund.............................. $ 45,881 $ 50,224 $ 53,102
Primary Fund............................... $ 126,371 $ 176,167 $ 174,328
Company Total.............................. $ 278,378 $ 339,622 $ 347,827
</TABLE>
SM&R received no fees from the Money Market Fund during these periods
because that Fund had not commenced operations prior to December 31, 1998.
ADMINISTRATIVE SERVICE AGREEMENT
Under an Administrative Service Agreement between the Company and SM&R dated
July 1, 1993, as amended on November 19, 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.
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
28
<PAGE>
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............................................. 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>
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 (0.50%
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 $116,461, $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: $0, $15,547, and $43,795, respectively, for the Government Bond Fund;
$53,102, $73,202, and $107,943, respectively for the Tax Free Fund; and $63,359,
$74,200, and $86,095, respectively, for the Primary Fund. During these periods,
the Money Market Fund had not yet commenced operations.
29
<PAGE>
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 $173,914, $169,811, and
$139,189, respectively. SM&R received administrative service fees for each Fund
during these periods as follows: $60,199, $56,616, and $53,063, respectively,
for the Government Bond Fund; $26,551, $25,112, and $22,940, respectively for
the Tax Free Fund; and $87,164, $88,083, and $63,186, respectively, for the
Primary Fund.
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. Such services and information may be used by SM&R
in servicing any fund it manages. Not all of these services or information may
be used by SM&R in connection with the Company. 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.
30
<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 three most recent fiscal years to: (i) any
broker that is an affiliated person of the Company or an affiliated person of
that person; or (ii) any broker an affiliated person of which is an affiliated
person of the Company or SM&R.
Consistent with the Conduct Rules 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.
DESCRIPTION OF FUND SHARES
SHARES OF BENEFICIAL INTEREST
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. 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 (existing shareholders and certain designated persons);
- Class A (front-end load);
- Class B (back-end load);
- Class C (level load);
- Class J (network);
- Class Y (institutional shareholders).
The Primary Fund and Money Market Fund do not have separate classes (that
is, each is a "Single-Class Fund").
The Company designates its capital stock as shares of the Funds. Each Fund
is, for investment purposes, considered a separate investment fund. The shares
of each Fund,
31
<PAGE>
when issued, will be fully paid and non-assessable, will have no conversion,
preemptive, or other subscription rights, and will be freely transferable and
redeemable. Each Fund bears its own liabilities and its proportionate share of
the general liabilities of the Company.
Each share of capital stock represents an interest in the assets of a
particular Fund and has no interest in the assets of any other Fund. Shares of a
Fund are equal with respect to distributions from income and capital gains,
except as described below. In the event of liquidation, each share of a Fund is
entitled to an equal portion of all the assets of that Fund after all debts and
expenses have been paid.
Each Class of 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 its proportionate
share of the general liabilities of that Fund. The net income attributable to
each Class and the dividends payable on the shares of that Class will be reduced
by the amount of the service and distribution (12b-1) fees of that Class and any
Class-specific expenses. 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.
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.
VOTING RIGHTS
Within the respective Funds, all shares have equal voting, participation,
and liquidation rights, but do not have cumulative voting rights. With respect
to election of directors, non-cumulative voting means that the holders of more
than 50% of the shares voting for the election of directors can elect 100% of
the directors if they so choose, and in such event, holders of the remaining
shares will not be able to elect any directors.
On certain matters, such as the election of directors, 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.
32
<PAGE>
INITIAL CAPITAL CONTRIBUTIONS
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.
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 SHARES
Certificates representing shares purchased are not issued. Investors have
the same ownership rights with respect to shares purchased as if certificates
had been issued. A confirmation will be sent to the investor promptly after each
share purchase.
All purchases must be in (or payable in) U.S. dollars. All checks must be
drawn in U.S. dollars on a U.S. bank. Investors will be subject to a service
charge on dishonored checks. The 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 for
each Class of the Government Bond and Tax Free Funds is determined by adding the
market value of the portfolio securities and other assets of that Class
(including dividends accrued but not collected), subtracting liabilities of that
Class (including accrued expenses), and dividing the result by the number of
shares outstanding of the relevant Class. Net asset value is currently
determined as of 3:00 p.m. Central Time on each day that the New York Stock
Exchange is open for trading. Although the legal rights of the Classes of a Fund
are substantially identical, the different expenses borne by each Class will
result in different net asset values and dividends for each Class.
33
<PAGE>
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. 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
day that the New York Exchange is open for trading. Securities listed on
national 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. Securities in corporate short-term notes are valued
at cost plus amortized discount, which approximates market value. Debt
securities with maturities in excess of 60 days are valued on the basis of
prices provided by an independent pricing service or brokers. 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.
34
<PAGE>
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 asst 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.
DETERMINATION OF OFFERING PRICE
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 League City, Texas prior to 3:00
p.m., Central Time, on any day that the New York Stock Exchange is open for
trading, will be executed at the applicable offering price determined on that
day. Purchases received thereafter will be executed at the offering price
determined on the next day that the New York Stock Exchange is open for trading.
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<PAGE>
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 an initial sales charge of up to 4.5% of the public offering price.
For amounts invested over certain levels, or "breakpoints" (beginning at
$100,000), you pay reduced sales charges. Certain purchasers of Class T shares
may qualify for a reduction or waiver of initial sales charges, as set forth in
the chart below and under "Special Purchase Plans" below and "Sales Charge
Reductions and Waivers" in the Prospectuses. If you invest $500,000 or more in
Class T shares, there is no initial sales charge.
The offering price of Class T shares is the next determined net asset value
plus a sales charge, if applicable, (expressed as a percentage of the offering
price) shown in the following table:
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS A SALES CHARGE AS A SELECTED DEALERS AS
PERCENTAGE OF PERCENTAGE OF NET A 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% 2.25%
$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. For amounts
invested over certain levels, or "breakpoints" (beginning at $50,000), you pay
reduced sales charges. 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 "Sales Charge Reductions and
Waivers" 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.
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<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 A SALES CHARGE AS A SELECTED DEALERS AS
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% 4.9% 4.25%
$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% 2.25%
$500,000 but less than
$1,000,000....................... 1.5% 1.5% 1.25%
$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.
37
<PAGE>
Each Class B share converts automatically to Class A shares of equal dollar
value after the investor has owned Class B shares for eight (8) years. Dividends
and other distributions paid to an investor in the form of additional Class B
shares also will convert to Class A shares on a pro-rata basis. 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 of another fund managed by SM&R, the purchase date of the
original investment will be used to determine the appropriate conversion date.
CLASS C SHARES (LEVEL LOAD). The Multi-Class Funds offer Class C shares at
their respective net asset value plus an initial sales charge of 1.00% of the
offering price. A contingent deferred sales charge of 1.00% is also assessed on
redemptions of Class C shares during the first thirteen months after purchase.
Class C shares are subject to an annual 12b-1 fee of 1.00% of the average daily
net asset value of the Class C shares.
CLASS Y SHARES. Class Y shares are no-load shares of the Multi-Class Funds
offered through certain financial intermediaries (such as broker-dealers and
investment advisers) that have distribution agreements with SM&R. Class Y shares
are available to institutions and certain other investors, as described in the
Prospectus for the Class Y shares. Like the Single Class shares, Class Y shares
are offered at net asset value without the imposition of any sales charge on
purchases or redemptions or any distribution and service ("12b-1") fees.
Accordingly, the Offering Price for Class Y shares of each Multi-Class Fund is
that Class' net asset value.
CLASS J SHARES. Class J shares of the Multi-Class Funds are offered through
mutual fund "supermarkets" that have distribution agreements with SM&R. Like the
Single Class shares, Class J shares are offered at net asset value without the
imposition of any sales charge on purchases or redemptions. Accordingly, the
Offering Price for Class J shares of each Multi-Class Fund is that Class' net
asset value. Class J shares are subject to an annual 12b-1 fee of .75% of the
average daily net asset value of the Class J shares.
REDUCTION AND/OR WAIVER OF INITIAL SALES CHARGES (CLASS A AND CLASS T SHARES)
DISCOUNTS THROUGH CONCURRENT PURCHASES. Investors may qualify for a reduced
sales charge on Class T shares or Class A shares. To qualify, the investor may
combine concurrent purchases of Class T and Class A shares of a Multi-Class Fund
and the Class T and Class A shares of another Multi-Class Fund 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;
38
<PAGE>
(3) A trustee or fiduciary of a single trust estate or single fiduciary
account.
(4) Tax-exempt organizations specified in Sections 501(c)(3) or (13) of the
Internal Revenue Code, or employees' trusts, pension, profit-sharing, or
other employee benefit plans qualified under Section 401 of the Internal
Revenue Code; and
(5) Employees (or employers on behalf of employees) under any employee
benefit plan not qualified under Section 401 of the Internal Revenue
Code.
Purchases in connection with employee benefit plans not qualified under
Section 401 of the Internal Revenue Code will qualify for the above quantity
discounts only if the fund will realize economies of scale in sales effort and
sales related expenses as a result of the employer's or the plan's bearing the
expense of any payroll deduction plan, making the fund's prospectus available to
individual investors or employees, forwarding investments by such employees to
the funds, and the like.
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class T or
Class A shares of a fund managed by SM&R, on which you paid a front-end sales
load, you may be able to receive a discount when you buy additional shares. The
current net asset value of the shares you already own may be
"accumulated"--I.E., combined together with the dollar amount being invested to
achieve quantities eligible for discount.
LETTER OF INTENT. You may qualify immediately for a reduced sales charge
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 managed by SM&R by completing a Letter of Intent (See "Letter of
Intent" in the Prospectuses). A minimum initial investment equal to 10% of the
amount necessary for the applicable reduced sales charge is required when a
Letter of Intent is executed. Investments made under a Letter of Intent will
purchase shares at the total sales charge rate applicable to the specified total
investment. SM&R will hold in escrow from the initial investment shares equal to
5% of the amount of the total intended investment. Such escrow shares may not be
exchanged for or reinvested in shares of another fund and, subject to the right
of early cancellation described below, will not be released until the amount
purchased equals the commitment set forth in the Letter of Intent. If the
intended investment is not completed during the 13-month period, the difference
between the sales charge actually paid and the sales charge applicable to the
total of such purchases made will be deducted from the escrow shares if not paid
by the investor within twenty days after the date notice thereof has been mailed
to such investor.
A Letter of Intent agreement can be canceled prior to the end of the
13-month period and escrow shares released to the investor if the investor pays
the difference between the sales charge paid and the sales charge applicable to
the amount actually invested and agrees that such Letter of Intent agreement is
canceled and no longer in effect.
39
<PAGE>
The offering value of the shares of funds managed by SM&R currently owned,
and previously subject to a front-end sales load, may also be included in the
aggregate amount of an investment covered by a Letter of Intent.
For example, if an investor owns 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 CLASS A AND CLASS T INITIAL SALES CHARGE FOR SPECIAL
PURCHASERS. After receipt of written request by SM&R, Class A and Class T
shares of the Government Bond Fund and the Tax Free Fund may be purchased by
certain purchasers designated in the Class T and Class A Prospectuses at net
asset value per share without the imposition of any sales charge.
REDUCTION AND/OR WAIVER OF CONTINGENT DEFERRED SALES CHARGE (CLASS B SHARES)
The CDSC will be waived on the following redemptions of Class B shares:
(1) 12% FREE AMOUNT. The CDSC will be waived on redemptions pursuant to a
systematic withdrawal plan of up to 12% of account value per year. We
apply this 12% waiver on a per fund basis to the account value determined
at the time you elect a systematic withdrawal plan (amounts not subject
to a CDSC, such as appreciation and reinvested dividends, are withdrawn
first).
(2) DEATH OR POST-PURCHASE DISABILITY. The CDSC will be waived on
redemptions of Class B shares following the shareholder's death or
post-purchase disability, so long as:
(a) SM&R is notified of such death or post-purchase disability at the
time of the redemption request and receives satisfactory evidence
of such death or post-purchase disability;
(b) the redemptions are made within one year following death or initial
determination of post-purchase disability; and
(c) the shares were held at the time of death or initial determination of
post-purchase disability.
For purposes of this waiver, the death or post-purchase disability must
meet the definition in Section 72(m)(7) of the Internal Revenue Code (the
"Code"). If the shares are held in a joint account, then all registered
joint owners must be dead or disabled.
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(3) MINIMUM REQUIRED DISTRIBUTIONS. The CDSC will be waived on redemptions
of Class B shares in connection with certain distributions from four
types of qualified retirement plans: IRAs, custodial accounts maintained
pursuant to Code Section 403(b), deferred compensation plans qualified
under Code 457 and plans qualified under Code Section 401. To qualify for
the waiver, the redemptions must result from one of the following:
(a) required minimum distributions to plan participants or beneficiaries
who are age 70 1/2 or older to the extent it does not exceed 12%
annually of the participants or beneficiary's account value;
(b) tax-free rollovers or transfers of assets to another IRA, Section
403(b) plan, or Section 401 plan invested in Class B shares of one
or more funds managed by SM&R;
(c) tax-free returns of excess contributions or returns of excess
deferral amounts; and
(d) distributions upon the death or disability (as defined in the Code)
of the participant or beneficiary.
(4) SMALL ACCOUNTS. We waive the CDSC on redemptions by the funds of small
accounts (accounts with a value less than $500).
(5) SM&R INVESTMENTS. We waive the CDSC on redemptions of shares owned by
SM&R or any of its affiliates.
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, 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
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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.
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,
Class C, and Class J shares of the Multi-Class Funds (the "12b-1 Classes").
For each 12b-1 Class and regardless of actual expenses, 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 FEE FEE
- ---------------------------------------------------------- ------------- --------- -----------
<S> <C> <C> <C>
Class T Shares: Existing Shareholders..................... -0- -0- -0-
Class A Shares: Front-End Load............................ 0.25% -0- 0.25%
Class B Shares: Back-End Load (CDSC)...................... 0.50% 0.25% 0.75%
Class C Shares: Level Load................................ 0.75% 0.25% 1.00%
Class J Shares: Network................................... 0.75% -0- 0.75%
Class Y Shares: Institutional............................. -0- -0- -0-
</TABLE>
- ---------------------
(1) The Distribution Fee and/or Service Fee, as applicable, to be paid under the
12b-1 Plan will be calculated daily (as a percentage of average daily net
assets) and paid periodically.
The purpose of the Distribution Fee is to compensate SM&R, or enable SM&R to
compensate other persons, including any distributor of shares of the 12b-1
Classes, for services that are primarily intended to result in or primarily
attributable to the sale of the 12b-1 Classes ("Selling Services"). The purpose
of the Service Fee is to compensate SM&R, or enable SM&R to compensate other
persons, for providing ongoing servicing to shareholders of the Funds
("Shareholder Services").
"Selling Services" include the training and supervision of sales personnel;
advertising, marketing, and other promotional expenses, including the costs of
preparing and printing sales literature; printing prospectuses and statements of
additional information and distributing them to prospective investors in 12b-1
Classes; and distributing shares of the 12b-1 Classes. Payments for Selling
Services may include payment for overhead and other office expenses that are
related to the distribution of the 12b-1 Classes. SM&R also
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may reimburse the expenses of persons who provide support services in connection
with the distribution of the 12b-1 Classes, and may make payments to financial
intermediaries that sell shares of the 12b-1 Classes. "Shareholder Services"
include all forms of shareholder liaison services that SM&R deems appropriate,
including maintaining shareholder accounts, providing shareholder liaison
services, responding to customer inquiries, and providing shareholders with
information on their investments and about the 12b-1 Classes.
The 12b-1 Plan, and any related agreement, continues in effect with respect
to a 12b-1 Class only if such continuance is specifically approved at least
annually by either the Board or the shareholders of that 12b-1 Class and, in
either case, by a majority vote of those directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of this Plan or in such agreement (the "Independent Directors"), cast
in person at a meeting called for the purpose of voting on this Plan and/or the
related agreement. The 12b-1 Plan may be terminated with respect to any 12b-1
Class at any time, by vote of a majority of the Independent Directors or by a
vote of a majority of the outstanding voting securities of the relevant Class.
Any distribution and shareholder services agreement related to the 12b-1
Plan terminates automatically upon its assignment. Moreover, with respect to
each 12b-1 Classof 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.
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SPECIAL PURCHASE PLANS
AUTOMATIC INVESTMENT PLAN AND ELECTRONIC TRANSFERS
Classes A, B and C provide a convenient, voluntary method of purchasing
their shares through "Automatic Investment Plan." Classes A, B, C, T and Y allow
for the use of the "Electronic Transfers." These plans are referred to as a
"Plan" or "Plans." The principal purposes of such Plans are to encourage thrift
by enabling investors to make regular purchases in amounts less than normally
required, and, in the case of the 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.
GROUP SYSTEMATIC INVESTMENT PLAN
A Group Systematic Investment Plan is available for purchases of Class A,
Class B or Class C shares. This Plan provides employers and employees with a
convenient means for purchasing shares of the 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
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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
You may make exchanges shall be permitted, without charge, between
corresponding classes of shares of funds managed by SM&R on terms described in
the Prospectuses.
You may exchange shares you own in the Primary Fund for shares of the Money
Market Fund and vise versa.
You also may exchange your Class A, B, T, Y, and J shares for shares of the
Primary and Money Market Fund, subject to two conditions:
- any applicable CDSC period has expired on the shares you wish to exchange
(I.E., 13 months in the case of Class A shares and 3 years in the case of
Class B shares), and
- you meet any minimum investment requirement for the shares you wish to
acquire.
You CANNOT exchange Class C shares for shares of the Money Market Fund or
Primary Fund.
You may exchange shares you own in the Primary or Money Market Fund for
Class A, T, Y, and J shares of another fund managed by SM&R, provided you meet
any eligibility requirements and pay any sales charge applicable to the acquired
shares. You CANNOT exchange shares of the Money Market Fund or Primary Fund for
Class B or C shares of another fund.
We waive any sales charges on Class A and Class T shares acquired through an
exchange if you previously paid a sales charge on amounts invested in those
shares. In other words, we will never impose a front-end sales charge on the
same investments TWICE. If the exchanged shares were acquired through
reinvestment of dividends or capital gains distributions while in a Class that
imposes a front-end sales charge, we deem those amounts invested in shares to
have previously paid a sales charge for purposes of the exchange privilege.
For example, you purchase Class T shares of the Government Bond Fund. You
then exchange all your Class T shares (including shares acquired through
reinvestment of
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dividends and capital gains distributions) for shares of the Money Market Fund.
Later, you re-exchange those shares of the Money Market Fund for Class T shares
of the Tax Free Fund. We would not impose any sales charge upon re-exchange into
Class T shares because you previously paid a sales charge on those amounts
invested in shares.
Shares of any fund held in escrow under a Letter of Intent are not eligible
for the exchange privilege. Such shares will not be released from escrow until
the balance invested during the period specified in the Letter of Intent equals
or exceeds the amount required to be invested under the Letter of Intent or the
shareholder requests, in writing, that the Letter of Intent be canceled and pays
any adjustments in sales charge. After release from escrow, shares may be
exchanged, provided all other applicable conditions are met.
The exchange privilege does not give an investor the option or right to
purchase securities, but is a revocable privilege permitted under the present
policies of each of the Funds. SM&R reserves the right to restrict the frequency
of or otherwise modify, condition, terminate or impose additional charges upon
the exchange privilege. ANY GAIN OR LOSS REALIZED ON AN EXCHANGE OR RE-EXCHANGE
MAY BE RECOGNIZED FOR FEDERAL AND STATE INCOME TAX PURPOSES. YOU SHOULD CONSULT
YOUR TAX ADVISOR FOR THE TAX TREATMENT AND EFFECT OF EXCHANGES.
The minimum number of shares of a Fund that may be exchanged is the number
of shares of the 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.
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, must be accompanied by
certificates endorsed for transfer (if certificates have been issued), and must
contain a signature guarantee. The signature guarantee carries with it certain
statutory warranties relied upon by the transfer agent. This guarantee is
designed to protect the investor, the funds, SM&R, and its representatives
through the signature verification of each investor wishing to redeem or
exchange shares.
Signatures may be guaranteed by an "eligible guarantor institution" as
defined in rules adopted by the Securities and Exchange Commission. Eligible
guarantor institutions generally include banks, brokers, dealers, municipal
securities dealers or brokers, government securities dealers or brokers, credit
unions, national securities exchanges, registered securities associations and
institutions that participate in the Securities Transfer Agent Medallion Program
("STAMP") or other recognized signature guarantee medallion program or an SM&R
representative who has executed an agreement and received authorization from
SM&R. WITNESSING OR NOTARIZATION IS NOT SUFFICIENT.
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<PAGE>
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
"Redeeming Shares" in the Prospectuses). A shareholder may receive more or less
than he paid for his shares, depending on the prevailing market value of the
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 ten (10) business days after the
purchase, or until SM&R can verify that good payment (for example, cash or
certified check on a United States bank) has been, or will be, collected for the
purchase of such shares.
The right of redemption is subject to suspension and payment 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.
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TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY
Each fund 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
derived in connection with the Fund's investment business and (2) at the close
of each quarter of the Fund's taxable year, (a) at least 50% of the value of the
Fund's assets must consist of cash, United States Government securities,
securities of other regulated investment companies and other securities (limited
generally with respect to any one issuer to not more than 5% of the total assets
of the Fund and not more than 10% of the outstanding voting securities of such
issuer) and (b) not more than 25% of the value of the Fund's assets may be
invested in the securities of any issuer (other than United States Government
Securities or securities of other regulated investment companies) or of two or
more issuers which the Fund controls and which are determined to be engaged in
similar or related trades or businesses.
In addition, each Fund must distribute to its shareholders at least 90% of
its net investment income and net tax-exempt income for each of its taxable
years. If a Fund fails to qualify as a regulated investment company, the Fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to its shareholders will be taxed as
ordinary dividend income to the extent of such Fund's available earnings and
profits.
EXCISE TAX
In order to avoid federal excise taxes, each Fund is required to distribute
to its shareholders at least 98% of its taxable ordinary income earned during
the calendar year and 98% of its capital gain net income earned during the
twelve month period ending on October 31 (in addition to undistributed amounts
from the prior year). The Funds intend to declare and pay sufficient dividends
in a manner that will comply with such distribution requirements but can give no
assurances that their distributions will be sufficient to eliminate all such
excise taxes.
DISTRIBUTIONS OF INVESTMENT INCOME AND CAPITAL GAINS
For federal income tax purposes, any income dividends derived from taxable
investments which the shareholder receives from a fund, as well as any
distributions derived
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<PAGE>
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.
Distributions which are declared in October, November, or December and paid
to shareholders in January of the following year will be treated for tax
purposes as if they had been received by the shareholders on December 31 of the
year in which they were declared.
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.
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. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of the distributions may be exempt from
corporate income or franchise taxes.
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.
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.
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REDEMPTION OF FUND SHARES
Redemptions and exchanges of fund shares are taxable transactions for
federal and state income tax purposes. The tax law generally requires that
shareholders recognize a gain or loss in an amount equal to the difference
between the amount received by the shareholder and the shareholder's tax basis.
If the fund shares are held as a capital asset, the shareholder will realize
capital gain or loss and if the shares have been held for more than one year at
the time of the redemption or exchange, the shareholder will realize long term
gain or loss for federal income tax purposes. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long term capital loss to the extent of any long-term capital gains
distributed to the shareholder on those shares. In addition, all or a portion of
any loss realized upon the redemption of fund shares will be disallowed to the
extent the shareholder buys other shares in the fund (through reinvestment of
dividends or otherwise) within 30 days before or after the share redemption.
(Any loss disallowed under this rule will be added to the shareholder's tax
basis in the new fund shares acquired during such period.)
Shareholders 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.
BACKUP WITHHOLDING
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 account 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.
NON-U.S. INVESTORS
Ordinary dividends generally will be subject to U.S. income tax withholding.
The non-U.S. investor's home country may also tax ordinary dividends, capital
gain distributions and gains arising from redemptions and exchanges of fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. Non-U.S. investors may wish to contact their tax advisors to
determine the U.S. and non-U.S. tax consequences of an investment in the Funds.
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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.
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 ($50,000 or more for Class Y) to automatically
withdraw a minimum of $50 monthly or quarterly. It may not be advisable for
shareholders to maintain a Withdrawal Account while concurrently purchasing
shares of the 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.
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 1st 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
51
<PAGE>
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
November 19, 1998 (the "Underwriting Agreement"). Such Underwriting Agreement
provides that it shall continue in effect only so long as such continuance is
specifically approved at least annually by the Board of Directors of 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
November 19, 1998. The Underwriting Agreement may be terminated without penalty
by vote of the Board of Directors or by vote of the holders of a majority of the
outstanding voting securities of the Company, or by SM&R, upon sixty (60) days'
written notice and will automatically terminate if assigned (as provided in the
1940 Act).
As principal underwriter, SM&R continuously offers and sells shares of each
Fund 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.
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
52
<PAGE>
whose representatives have sold or are expected to sell significant amounts of
shares. Securities dealers may not use certain sales to qualify for this
compensation if prohibited by the laws of any state or self-regulatory agency,
such as the National Association of Securities Dealers, Inc.
The sales charge allowance to broker-dealers, ranges from a maximum of 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. For certain large purchases, 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 T shares of the Government Income and Tax Free Funds: Year 1
- -- 0.35%; Year 2 -- 0.25% and Year 3 and subsequent years, 0.075% (for each
fund). For Primary Fund shares, SM&R may pay representatives and broker-dealers
as follows: Year 1 and Year 2 -- 0.10% and Year 3 and subsequent years, 0.075%.
The aggregate amount of sales charge received by SM&R from the sale of
Company shares for the years ended August 31, 1998, 1997, and 1996 was $30,387,
$29,337, and $92,706. The amount of sales charge retained by SM&R from the sale
of Company shares for the years ended August 31, 1998, 1997, and 1996 was
$2,038, $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, 2450 South Shore
Boulevard, Suite 400, League City, Texas, 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, 2450 South Shore Boulevard, Suite 400, League City, Texas, 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.
53
<PAGE>
AUDITORS AND FINANCIAL STATEMENTS
Tait, Weller & Baker ("TWB"), 8 Penn Center, Philadelphia, PA 19103, 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
May 28, 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, 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, 1998, and the Independent Auditors' Report of TWB
dated October 2, 1998, are included herein.
PERFORMANCE AND ADVERTISING DATA
Quotations of performance may from time to time be used in advertisements,
sales literature, shareholder reports or other communications to shareholders or
prospective investors. Each Fund's yield and total return fluctuate in response
to market conditions and other factors. Investment return and principal value
will fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. 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
54
<PAGE>
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 and income other than
investment income) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, (2) dividing the
difference by the value of the account at the beginning of the base period to
get the base period return, then (3) multiplying the base period return by the
dividend obtained by dividing 365 by 7. The resulting yield figure is carried to
the nearest hundredth of one percent.
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)To the Power of 356/7]-1. The resulting yield figure is carried to
the nearest hundredth of one percent.
The calculations include (1) the value of additional shares purchased with
dividends declared on the original shares and dividends declared on both the
original shares and any additional shares, and (2) all fees (other than
nonrecurring fees or sales charges) charged to all shareholder accounts, in
proportion to the length of the base period and the Money Market 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. Income other than investment income is excluded. The yield
computation may be of limited use for comparative purposes as charges at the
account level will decrease the yield. The amount or specific rate of any
nonrecurring sales charge not included in the calculation of yield will be
disclosed.
55
<PAGE>
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
For the 30-day period ended August 31, 1998, the standardized yield for the
Primary Fund is 4.81%. Standardized yield for the Primary Fund is computed by
dividing the Fund's investment income (in accordance with specific standardized
rules) for a given 30-day or one month period, net of expenses, by the average
number of shares entitled to receive distributions during the period, dividing
this figure by the Fund's net asset value per share at the end of the period and
annualizing the result (assuming compounding of income in accordance with
specific standardized rules) in order to arrive at an annual percentage rate.
The 30-day yield figure is calculated for each class of each Fund according to a
formula prescribed by the SEC. The formula can be expressed as follows:
Yield = 2[(a-b + 1)To the Power of 6-1]
---
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
For the purpose of determining the interest earned (variable a in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest rates, the
yield will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yield will tend to be somewhat lower. In
addition, when interest rates are falling, moneys received by the Fund from the
continuous sale of its shares will likely be invested in portfolio instruments
producing lower yields than the balance of the Fund's portfolio, thereby
reducing the current yield of the Fund. In periods of rising interest rates, the
opposite result can be expected to occur.
Yield information is useful in reviewing the performance of a Fund, but
because yields fluctuate, this information cannot necessarily be used to compare
an investment in shares of the Fund with bank deposits, savings accounts and
similar investment alternatives that often provide an agreed or guaranteed fixed
yield for a stated period of time. Shareholders of a Fund should remember that
yield is a function of the kind and quality of the instruments in the Fund's
portfolio, portfolio maturity, operating expenses and market conditions.
56
<PAGE>
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 returns for the Funds for the periods ended August
31, 1998 are:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING
AUGUST 31, 1998) PAST ONE YEAR PAST 4 YEARS PAST 5 YEARS
- -------------------------------------------------- --------------- ------------- -------------
<S> <C> <C> <C>
SM&R Government Bond Fund......................... 3.44% -- 4.85%
SM&R Primary Fund................................. 5.15% -- 4.62%
SM&R Tax Free Fund................................ 3.69% 6.64% --
</TABLE>
The average annual total return figures for the Funds described in the
Prospectuses are computed for a class according to a formula prescribed by the
SEC. The formula can be expressed as follows:
P(1 + T)TO THE POWER OF n = ERV
Where P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of the 1-, 5- or
10-year periods at the end of a 1-, 5- or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period. The ERV assumes the deduction of all nonrecurring
charges deducted at the end of each period.
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
57
<PAGE>
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.
MULTI-CLASS PERFORMANCE
The Multi-Class Funds converted from a single-class to a multi-class
structure. That single class of shares was converted to Class T Shares,
effective December 31, 1998. Existing shareholders as of December 31, 1998
became shareholders in Class T.
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
58
<PAGE>
industry. Rank individual mutual fund performance over specified time periods,
assuming reinvestment of all distributions, exclusive of any applicable sales
charges.
CDA MUTUAL FUND REPORT, PUBLISHED BY CDA INVESTMENT TECHNOLOGIES,
INC.--analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods for
the mutual fund industry.
MUTUAL FUND SOURCE BOOK, PUBLISHED BY MORNINGSTAR, INC.--analyzes price,
yield, risk and total return for equity funds.
FINANCIAL PUBLICATIONS: THE WALL STREET JOURNAL AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES--provide
performance statistics over specified time periods.
CONSUMER PRICE INDEX (OR COST OF LIVING INDEX), PUBLISHED BY THE U.S. BUREAU
OF LABOR STATISTICS--a statistical measure of change, over time, in the price of
goods and services in major expenditure groups.
SALOMON BROTHERS BROAD BOND INDEX OR ITS COMPONENT INDICES--The Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee Bonds.
STANDARD & POOR'S BOND INDICES--measures yield and price of Corporate,
Municipal, and Government bonds.
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.
59
<PAGE>
AUDITED FINANCIALS
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT PRIMARY TAX FREE
INCOME FUND FUND FUND
SERIES SERIES SERIES
<S> <C> <C> <C>
ASSETS
Investment in securities, at value $ 23,990,119 $ 34,591,101 $ 11,026,401
Cash -- 524,507 --
Prepaid expenses 6,861 8,722 5,524
Receivable for:
Capital stock sold 3,460 105,369 3,552
Interest 207,758 -- 141,218
Expense reimbursement -- 5,603 4,537
Other assets 2,782 2,782 3,212
------------- ------------- -------------
TOTAL ASSETS 24,210,980 35,238,084 11,184,444
------------- ------------- -------------
LIABILITIES
Distribution payable 4,857 2,683 1,072
Capital stock reacquired 11,616 631,909 --
Investment securities purchased 181,023 -- 100,502
Accrued:
Investment advisory fee 10,187 13,989 4,537
Service fee 5,094 6,994 2,269
Other liabilities 16,668 5,627 18,400
------------- ------------- -------------
TOTAL LIABILITIES 229,445 661,202 126,780
------------- ------------- -------------
NET ASSETS $ 23,981,535 $ 34,576,882 $ 11,057,664
------------- ------------- -------------
------------- ------------- -------------
Shares of capital stock outstanding, (6,000,000,000 shares
authorized, $.01 par value per share) 2,262,725 34,582,655 1,038,994
------------- ------------- -------------
------------- ------------- -------------
Net asset value $ 10.60 $ 1.00 $ 10.64
------------- ------------- -------------
------------- ------------- -------------
Offering price per share:
(Net asset value / 95.5%) $ 11.10 $ 11.14
------------- -------------
------------- -------------
Offering price per share $ 1.00
-------------
-------------
</TABLE>
STATEMENTS OF OPERATIONS For Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT PRIMARY TAX FREE
INCOME FUND FUND FUND
SERIES SERIES SERIES
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 1,696,829 $ 2,049,686 $ 571,797
EXPENSES
Investment advisory fees 120,397 174,328 53,102
Service fees 60,199 87,164 26,551
Professional fees 12,662 12,662 12,661
Custody and transaction fees 13,906 26,284 10,674
Directors' fees 13,405 13,305 13,427
Qualification fees 12,265 19,679 13,381
Shareholder reporting expenses 3,411 3,476 711
Insurance expenses 2,411 2,820 1,880
Other 990 5,519 872
------------- ------------- -------------
TOTAL EXPENSES 239,646 345,237 133,259
LESS EXPENSES REIMBURSED -- (63,359) (53,102)
------------- ------------- -------------
NET EXPENSES 239,646 281,878 80,157
------------- ------------- -------------
INVESTMENT INCOME--NET 1,457,183 1,767,808 491,640
------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 103,599 -- 28,603
Change in unrealized appreciation of investments for the period 340,609 -- 363,642
------------- ------------- -------------
NET GAIN ON INVESTMENTS 444,208 -- 392,245
------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,901,391 $ 1,767,808 $ 883,885
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to financial statements.
14
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
GOVERNMENT INCOME FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,457,183 $ 1,462,594
Net realized gain (loss) on investments 103,599 (2,446)
Change in unrealized appreciation (depreciation) 340,609 562,324
------------- -------------
Net increase in net assets resulting from operations 1,901,391 2,022,472
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (1,500,708) (1,419,091)
CAPITAL SHARE TRANSACTIONS--NET (102,449) 1,952,455
------------- -------------
TOTAL INCREASE 298,234 2,555,836
NET ASSETS
Beginning of Year 23,683,301 21,127,465
------------- -------------
End of Year $ 23,981,535 $ 23,683,301
------------- -------------
------------- -------------
</TABLE>
PRIMARY FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,767,808 $ 1,712,208
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (1,767,808) (1,712,208)
CAPITAL SHARE TRANSACTIONS--NET 1,532,007 (4,420,149)
------------- -------------
TOTAL INCREASE (DECREASE) 1,532,007 (4,420,149)
NET ASSETS
Beginning of Year 33,044,875 37,465,024
------------- -------------
End of Year $ 34,576,882 $ 33,044,875
------------- -------------
------------- -------------
</TABLE>
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 491,640 $ 499,113
Net realized gain on investments 28,603 12,803
Change in unrealized appreciation (depreciation) 363,642 314,617
------------- -------------
Net increase in net assets resulting from operations 883,885 826,533
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (499,989) (492,984)
CAPITAL SHARE TRANSACTIONS--NET (26,401) 1,218,423
------------- -------------
TOTAL INCREASE 357,495 1,551,972
NET ASSETS
Beginning of Year 10,700,169 9,148,197
------------- -------------
End of Year $ 11,057,664 $ 10,700,169
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
15
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
GOVERNMENT INCOME FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.42 $ 10.14 $ 10.51 $ 10.07 $ 10.87
Investment income--net 0.64 0.67 0.65 0.70 0.54
Net realized and unrealized gain (loss) on
investments 0.20 0.26 (0.37) 0.44 (0.79)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations 0.84 0.93 0.28 1.14 (0.25)
Less distributions from
Investment income--net (0.66) (0.65) (0.65) (0.70) (0.55)
---------- ---------- ---------- ---------- ----------
Total Distributions (0.66) (0.65) (0.65) (0.70) (0.55)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year $ 10.60 $ 10.42 $ 10.14 $ 10.51 $ 10.07
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total Return 8.31% 9.37% 2.63% 11.85% (2.41)%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 23,982 $ 23,683 $ 21,127 $ 20,466 $ 19,790
Ratio of expenses to average net assets 1.00% 1.00%(1) 1.00%(1) 0.70%(1) 1.12%
Ratio of net investment income to average
net assets 6.08% 6.46% 6.17% 6.90% 5.11%
Portfolio turnover rate 32.71% 9.06% 30.17% 2.20% 45.48%
</TABLE>
(1) Expenses for the calculation are net of a reimbursement from Securities
Management & Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.07%, 1.20% and 1.06% for
the years ended August 31, 1997, 1996 and 1995, respectively.
See notes to financial statements.
16
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
PRIMARY FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment income--net 0.05 0.05 0.05 0.05 0.03
---------- ---------- ---------- ---------- ----------
Total from Investment Operations 0.05 0.05 0.05 0.05 0.03
Less distributions from
Investment income--net (0.05) (0.05) (0.05) (0.05) (0.03)
---------- ---------- ---------- ---------- ----------
Total Distributions (0.05) (0.05) (0.05) (0.05) (0.03)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total Return 5.15% 4.98% 5.07% 5.01% 2.91%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 34,577 $ 33,045 $ 37,465 $ 20,984 $ 15,208
Ratio of expenses to average net assets (1) 0.80% 0.80% 0.81% 0.84% 0.79%
Ratio of net investment income to average
net assets 5.02% 4.86% 4.93% 4.91% 2.88%
</TABLE>
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED AUGUST 31, ENDED
AUGUST 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.27 $ 9.93 $ 9.95 $ 9.62 $ 10.00
Investment income--net 0.49 0.51 0.53 0.51 0.24
Net realized and unrealized gain (loss) on
investments 0.37 0.33 (0.02) 0.33 (0.38)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations 0.86 0.84 0.51 0.84 (0.14)
Less distributions from
Investment income--net (0.49) (0.50) (0.53) (0.51) (0.24)
---------- ---------- ---------- ---------- ----------
Total Distributions (0.49) (0.50) (0.53) (0.51) (0.24)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Year $ 10.64 $ 10.27 $ 9.93 $ 9.95 $ 9.62
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total Return 8.58% 8.61% 5.18% 9.15% (1.49)%**
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 11,058 $ 10,700 $ 9,148 $ 8,399 $ 7,295
Ratio of expenses to average net assets 0.75%(2) 0.54%(2) --(2) --(2) 1.11%*
Ratio of net investment income to average
net assets 4.60% 4.97% 5.27% 5.43% 2.50%*
Portfolio turnover rate 12.77% 22.15% 18.44% 12.63% 16.49%
</TABLE>
* Ratios annualized
** Returns are not annualized
(1) Expenses for the calculation are net of a reimbursement from Securities
Management & Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 0.98%, 1.01%, 1.15%, 1.21%
and 1.20% for the years ended August 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
(2) Expenses for the calculation are net of a reimbursement from Securities
Management & Research, Inc. Without this reimbursement, the ratio of
expenses to average net assets would have been 1.25%, 1.27%, 1.18% and 1.25%
for the years ended August 31, 1998, 1997, 1996 and 1995, respectively.
See notes to financial statements.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS August 31, 1998
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The SM&R Capital Funds, Inc. (the "Funds") is a diversified open-end management
investment company registered as a series fund under the Investment Company Act
of 1940, as amended. The Funds are comprised of the American National Government
Income Fund Series ("Government Income Fund Series"), American National Primary
Fund Series ("Primary Fund Series"), and American National Tax Free Fund Series
("Tax Free Fund Series"). Operations commenced March 16, 1992, for the
Government Income Fund Series and Primary Fund Series. The Tax Free Fund Series
began operations September 9, 1993.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
SECURITY VALUATION:
Investments in securities are valued based on market quotations or at fair value
as determined by a pricing service approved by the Board of Directors. Prices
provided by the pricing service represent valuations at bid prices or on a basis
determined without exclusive reliance on quoted prices and may reflect
appropriate factors such as institution-size trading in similar groups of
securities, yield quality, coupon rate, maturity, type of issue, individual
trading characteristics and other market data. Securities for which market
quotations are not readily available are valued as determined by the Board of
Directors. Commercial paper is stated at amortized cost, which is equivalent to
value.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME:
Investment transactions are accounted for on the trade date (date order to buy
or sell is executed). Dividend income is recognized on the ex-dividend date, and
interest income is recognized on an accrual basis. Realized gains and losses
from security transactions are reported on the basis of identified cost for
financial reporting and federal income tax purposes.
FEDERAL INCOME TAXES:
For federal income tax purposes, each series is treated as a separate entity.
The Funds intend to comply with requirements of the Internal Revenue Code
relating to regulated investment companies and intend to distribute
substantially all of its taxable income to its shareholders. Therefore, no
provision for federal income taxes is recorded in the accompanying financial
statements. At December 31, 1997, the funds' tax year-end, the Government Income
Fund Series, Primary Fund Series and the Tax Free Fund Series had capital loss
carryforwards that will expire in 2004 of approximately $373,000, $6,000 and
$45,000, respectively.
CAPITAL STOCK TRANSACTIONS AND DISTRIBUTIONS TO SHAREHOLDERS:
Fund shares are sold in a continuous public offering and may be redeemed on any
business day.
AMERICAN NATIONAL GOVERNMENT INCOME FUND SERIES
The Government Income Fund Series invest primarily in the agencies or
instrumentalities of the U.S. Government. Dividends to shareholders from net
investment income are declared and paid monthly.
AMERICAN NATIONAL PRIMARY FUND SERIES
The Primary Fund Series' objective is to seek maximum current income
consistent with capital preservation and liquidity through investment
primarily in commercial paper. All capital stock transactions are made at
net asset value. Distributions are computed daily and distributed monthly.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.
AMERICAN NATIONAL TAX FREE SERIES
The Tax Free Series' objective is to provide as high a level of income
largely exempt from federal income taxes as is consistent with preservation
of capital through investment of at least 80% of its net assets in
tax-exempt securities during normal market conditions. Dividends to
shareholders from net investment income are declared and paid monthly.
EXPENSES:
Operating expenses not directly attributable to a series' shares are prorated
among the series based on the relative amount of each series' net assets or
shareholders. Organization expenses have been deferred and are being amortized
over a five-year period. All organization expenses for the Tax Free Fund Series
were paid by Securities Management & Research, Inc.
NOTE 2--INVESTMENT ADVISORY AND SERVICE FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
Securities Management & Research, Inc. ("SM&R") is the investment advisor and
principal underwriter for the Funds. Investment advisory fees paid to SM&R are
computed as a percentage of the average daily net assets as follows:
GOVERNMENT INCOME FUND SERIES
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
INVESTMENT
ADVISORY
NET ASSETS FEE
<S> <C>
Not exceeding $100,000,000 0.50%
Exceeding $100,000,000 but not exceeding $300,000,000 0.45%
Exceeding $300,000,000 0.40%
</TABLE>
PRIMARY FUND SERIES
<TABLE>
<S> <C>
All average daily net assets 0.50%
</TABLE>
Administrative fees paid to SM&R by the Funds are computed as a percentage of
average daily net assets as follows:
<TABLE>
<CAPTION>
SERVICE
NET ASSETS FEES
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
SM&R has agreed to reimburse the Funds for all expenses, other than taxes,
interest and expenses directly related to the purchase and sale of investment
securities, in excess of 1.25% per annum of the average daily net assets. SM&R
has voluntarily agreed to reimburse the Primary Fund Series for expenses in
excess of 0.80% per annum of average daily net assets and the Government Income
Fund Series for expenses in excess of 1.00% per annum of average daily net
assets for the year ended August 31, 1998.
The Tax Free Fund Series has voluntarily agreed to waive investment advisory
fees leaving the Tax Free Fund responsible for all other expenses.
For the year ended August 31, 1998, SM&R, as principal underwriter, received as
sales charges on sales of shares of capital stock of the Funds as follows:
<TABLE>
<CAPTION>
SALES CHARGES
RECEIVED BY SM&R
<S> <C>
Government Income $ 15,030
Tax Free $ 15,357
</TABLE>
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of August 31, 1998, SM&R and American National had the
following ownership in the Funds:
<TABLE>
<CAPTION>
SM&R AMERICAN NATIONAL
------------------------------ ---------------------------------
PERCENT OF SHARES PERCENT OF SHARES
SHARES OUTSTANDING SHARES OUTSTANDING
<S> <C> <C> <C> <C>
Government Income 481,769 21% 660,766 29%
Primary 560,841 2% 15,345,869 44%
Tax Free 125,404 12% 627,022 60%
</TABLE>
NOTE 3--COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
Investments have the same cost for tax and financial statement purposes.
Aggregate purchases and sales of investments in securities, other than
commercial paper, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Government Income $ 7,618,884 $ 7,643,966
Tax Free $ 1,300,728 $ 1,375,923
</TABLE>
Gross unrealized appreciation and depreciation as of August 31, 1998, were as
follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION
------------ ------------
<S> <C> <C>
Government Income $852,256 $11,649
Tax Free $702,775 $0
</TABLE>
NOTE 4--CAPITAL STOCK
GOVERNMENT INCOME FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1998 AUGUST 31, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sale of capital shares 107,893 $ 1,143,207 291,016 $ 3,010,920
Investment income dividends reinvested 148,408 1,562,712 127,868 1,322,811
------------- ------------- ------------- -------------
Subtotals 256,301 2,705,919 418,884 4,333,731
Redemptions of capital shares (265,757) (2,808,368) (229,580) (2,381,276)
------------- ------------- ------------- -------------
Net increase (decrease) in capital shares outstanding (9,456) $ (102,449) 189,304 $ 1,952,455
------------- -------------
------------- -------------
Shares outstanding at beginning of year 2,272,181 2,082,877
------------- -------------
Shares outstanding at end of year 2,262,725 2,272,181
------------- -------------
------------- -------------
Net assets as of August 31, 1998 are comprised of the
following:
Capital (par value and additional paid-in) $ 23,410,410
Accumulated net realized loss on investments (269,482)
Net unrealized appreciation of investments 840,607
-------------
Net Assets $ 23,981,535
-------------
-------------
</TABLE>
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
SM&R CAPITAL FUNDS, INC.
PRIMARY FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1998 AUGUST 31, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sale of capital shares 35,251,969 $ 35,251,969 37,131,503 $ 37,131,503
Investment income dividends reinvested 1,891,922 1,891,922 1,614,059 1,614,059
------------- ------------- ------------- -------------
Subtotals 37,143,891 37,143,891 38,745,562 38,745,562
Redemptions of capital shares (35,611,884) (35,611,884) (43,165,711) (43,165,711)
------------- ------------- ------------- -------------
Net increase (decrease) in capital shares outstanding 1,532,007 $ 1,532,007 (4,420,149) $ (4,420,149)
------------- -------------
------------- -------------
Shares outstanding at beginning of year 33,050,648 37,470,797
------------- -------------
Shares outstanding at end of year 34,582,655 33,050,648
------------- -------------
------------- -------------
Net assets as of August 31, 1998 are comprised of the
following:
Capital (par value and additional paid-in) $ 34,582,637
Accumulated net realized loss on sales of investments (5,755)
-------------
Net Assets $ 34,576,882
-------------
-------------
</TABLE>
TAX FREE FUND SERIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1998 AUGUST 31, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sale of capital shares 59,089 $ 621,304 95,379 $ 964,391
Investment income dividends reinvested 51,288 536,758 47,765 482,300
------------- ------------- ------------- -------------
Subtotals 110,377 1,158,062 143,144 1,446,691
Redemptions of capital shares (113,023) (1,184,463) (22,454) (228,268)
------------- ------------- ------------- -------------
Net increase (decrease) in capital shares outstanding (2,646) $ (26,401) 120,690 $ 1,218,423
------------- -------------
------------- -------------
Shares outstanding at beginning of year 1,041,640 920,950
------------- -------------
Shares outstanding at end of year 1,038,994 1,041,640
------------- -------------
------------- -------------
Net assets as of August 31, 1998 are comprised of the
following:
Capital (par value and additional paid-in) $ 10,376,327
Accumulated net realized loss on sales of investments (21,438)
Net unrealized appreciation of investments 702,775
-------------
Net Assets $ 11,057,664
-------------
-------------
</TABLE>
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
SM&R Capital Funds, Inc.
We have audited the accompanying statements of assets and liabilities of SM&R
Capital Funds, Inc. (comprised of Government Income Fund Series, Primary Fund
Series, and Tax Free Fund Series), including the schedule of investments as of
August 31, 1998, the related statements of operations, the statements of changes
in net assets and the financial highlights. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statement of changes for the year
ended August 31, 1997 and the financial highlights for each of the four years in
the period ended August 31, 1997 were audited by other auditors whose report
dated October 10, 1997, issued an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of SM&R
Capital Funds, Inc. as of August 31, 1998, the results of its operations, the
changes in its net assets and the financial highlights, in conformity with
generally accepted accounting principles.
Tait, Weller & Baker, CPA
Philadelphia, Pennsylvania
October 2, 1998
22
<PAGE>
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) 1.a. Registrant's Amended and Restated Articles of Incorporation are
filed herewith.
1.b. Registrant's Articles of Amendment dated December 7, 1998 are
filed herewith.
2. Registrant's Supplementary Articles of Incorporation dated
February 23, 1998, July 21, 1998 and August 6, 1998 are filed
herewith.
(b) Registrant's By-Laws are incorporated herein by reference to Exhibit 2 to
Post-Effective Amendment No. 7 to this form N-1A Registration Statement.
(c) A specimen of Registrant's stock certificate is incorporated herein by
reference to Exhibit 4 to Post-Effective Amendment No. 7 to this form
N-1A Registration Statement.
(d) 1. Registrant's Investment Advisory Agreement is incorporated herein
by reference to Exhibit 5 to Post-Effective Amendment No. 7 to this
form N-1A Registration Statement.
2. Registrant's Investment Advisory Agreement on behalf of the Money
Market Fund is filed herewith.
(e) Registrant's Underwriting Agreement is filed herewith.
(f) Not Applicable.
(g) 1. Registrant's Custodian Agreement is incorporated herein by
reference to Exhibit 8a to Post-Effective Amendment No. 7 to this
form N-1A Registration Statement.
2. Registrant's Sub-Custodian Agreement is incorporated herein by
reference to Exhibit 8b to Post-Effective Amendment No. 7 to this
form N-1A Registration Statement.
(h) Not Applicable.
(i) Consent and Opinion of Registrant's counsel, Greer, Herz & Adams, L.L.P.,
is filed herewith.
C-1
<PAGE>
(j) Consent of Tait, Weller and Baker, independent accountant of Registrant
is filed herewith.
(k) Not Applicable.
(l) Stock Purchase Letters from Securities Management and Research, Inc. and
American National Insurance Company are incorporated herein by reference
to Exhibit 13 to Post-Effective Amendment No. 7 to this form N-1A
Registration Statement.
(m) Registrant's Distribution and Shareholder Servicing Plan is filed
herewith.
(n) Financial Data Schedules are filed herewith.
(o) Registrant's Multiple Class Plan is filed herewith.
(p) List of persons controlled by or under common control with Registrant is
filed herewith.
(q) Power of Attorney is incorporated herein by reference to Exhibit 17 to
Post-Effective Amendment No. 10 to this form N-1A Registration Statement.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
All persons under common control with Registrant are shown on the list
attached hereto as Exhibit (p).
ITEM 25. INDEMNIFICATION.
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
C-2
<PAGE>
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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Securities Management and Research, Inc. ("SM&R") serves as investment
adviser to Registrant and SM&R Balanced Fund, Inc., SM&R Growth Fund, Inc., SM&R
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 "MANAGEMENT OF THE COMPANY" and "INVESTMENT ADVISORY
AGREEMENT" in Part B. The address of SM&R is 2450 South Shore Boulevard, Suite
400, League City, Texas 77573.
DIRECTORS AND OFFICERS OF SM&R
ROBERT A. FRUEND, CLU
DIRECTOR OF SM&R
- ---------------------
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"), 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.
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 the SM&R Equity Funds;
Director, Comprehensive Investment Services, Inc., all located at 2450 South
Shore Boulevard, Suite 400, League City, Texas; Executive Vice President,
American National; Director and President, ANREM Corporation; Director and
President, ANTAC Corporation; Assistant Secretary of American National Life
Insurance Company of Texas;
C-3
<PAGE>
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 FERDINANDTSEN
DIRECTOR AND MEMBER OF EXECUTIVE COMMITTEE OF SM&R
- --------------------------------------------------
Director, Senior Executive Vice President and Chief Operating Officer,
American National; Director, Chairman of the Board, President and Chief
Executive Officer, American National Life Insurance Company of Texas, all
located at One Moody Plaza, Galveston, Texas; Director, Comprehensive
Investment Services, 2450 South Shore Boulevard, Suite 400, League City,
Texas; Director, Vice Chairman of the Board, American National General
Insurance Company; Director, Vice Chairman of the Board, American National
Property and Casualty; Director and Vice Chairman of the Board, Pacific
Property & Casualty Company; Underwriter, American National Lloyds Insurance
Company, all located at 1949 East Sunshine, Springfield, Missouri. Director
and Chairman of the Board, Standard Life and Accident Insurance Company, 201
Robert S. Kerr Avenue, Oklahoma City, Oklahoma; Director, Garden State Life
Insurance Company, 2450 South Shore Boulevard, League City, Texas.
RONALD J. WELCH
DIRECTOR OF SM&R
- ----------------
Executive Vice President and Chief Actuary of American National; Senior
Vice President of American National Life Insurance Company of Texas, all located
at One Moody Plaza, Galveston, Texas; Director and Chairman of the Board of
Garden State Life Insurance Company, 2450 South Shore Boulevard, League City,
Texas; Director of Standard Life and Accident Insurance Company, 201 Robert S.
Kerr Avenue, Oklahoma City, Oklahoma; Director of American National Property and
Casualty Company; Director of American National General Insurance Company;
Director of American National Insurance Service Company; Director of Pacific
Property and Casualty Company, all located at 1949 East Sunshine Street,
Springfield, Missouri.
GORDON DIXON
DIRECTOR, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER AND
MEMBER OF INVESTMENT AND EXECUTIVE COMMITTEES OF SM&R
- -------------------------------------------------------------
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; Director and President, Comprehensive Investment
Services. Each of the foregoing entities is located at 2450 South Shore
Boulevard, Suite 400, League City, Texas. Vice President of Stocks for
American National, One Moody Plaza, Galveston, Texas; Vice President of
Investments for Garden State Life Insurance Company, 2450 South Shore
Boulevard, League
C-4
<PAGE>
City, Texas; Former Director of Equity Strategy Research and Trading for
C&S/Sovran Bank (now NationsBank) Atlanta, Georgia.
K. DAVID WHEELER
SENIOR VICE PRESIDENT, INSTITUTIONAL SALES AND PRIVATE CLIENT
SERVICES OF SM&R
- -------------------------------------------------------------
2450 South Shore Boulevard, Suite 400, League City, Texas; Senior
Institutional Consultants, Bank South, Atlanta, Georgia.
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 2450 South Shore Boulevard, Suite 400, League City,
Texas.
BRENDA T. KOELEMAY
VICE PRESIDENT AND TREASURER OF SM&R
- ------------------------------------
Vice President and Treasurer of the Registrant, the SM&R Equity Funds,
and Investment Accounts, each located at One Moody Plaza, Galveston, Texas;
Treasurer, Comprehensive Investment Services, also located at 2450 South Shore
Boulevard, Suite 400, League City, Texas.
TERESA E. AXELSON
VICE PRESIDENT AND SECRETARY OF SM&R
- ------------------------------------
Vice President and Secretary of the Registrant, the SM&R Equity Funds,
and Investment Accounts, each located at 2450 South Shore Boulevard, Suite 400,
League City, Texas.
WILLIAM J. KEARNS, JR.
SENIOR VICE PRESIDENT, NATIONAL MARKETING AND SALES DIRECTOR OF SM&R
- --------------------------------------------------------------------
2450 South Shore Boulevard, Suite 400, League City, Texas; Vice President
for Private Label Funds for Standish, Ayers & Wood in Boston, Massachusetts.
C-5
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) SM&R serves as the principal underwriter and investment adviser for
the Registrant, the other SM&R Equity Funds, and Investment Accounts. See "The
Funds and Management" in Part A.
(b)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
- --------------------------------------------------------------------------------
<S> <C> <C>
Robert A. Fruend, C.L.U. Director None
One Moody Plaza
Galveston, Texas
- --------------------------------------------------------------------------------
R. Eugene Lucas Director None
Moody National Bank Tower
Galveston, Texas
- --------------------------------------------------------------------------------
Michael W. McCroskey Director and President, President and Director
South Shore Boulevard Chief Executive Officer
Suite 400
League City, Texas
- --------------------------------------------------------------------------------
G. Richard Ferdinandtsen Director None
One Moody Plaza
Galveston, Texas
- --------------------------------------------------------------------------------
Ronald J. Welch Director None
One Moody Plaza
Galveston, Texas
- --------------------------------------------------------------------------------
Gordon D. Dixon Director, Senior Vice None
South Shore Boulevard President, Chief
Suite 400 Investment Officer
League City, Texas
- --------------------------------------------------------------------------------
K. David Wheeler Senior Vice President None
South Shore Boulevard Institutional Sales and
Suite 400 Private Client Services
League City, Texas
- --------------------------------------------------------------------------------
</TABLE>
C-6
<PAGE>
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
Emerson V. Unger, C.L.U. Vice President Vice President
South Shore Boulevard
Suite 400
League City, Texas
- --------------------------------------------------------------------------------
Brenda T. Koelemay Vice President and Vice President and
South Shore Boulevard Treasurer Treasurer
Suite 400
League City, Texas
- --------------------------------------------------------------------------------
Teresa E. Axelson Vice President and Vice President and
South Shore Boulevard Secretary Secretary
Suite 400
League City, Texas
- --------------------------------------------------------------------------------
William J. Kearns, Jr. Senior Vice President None
South Shore Boulevard
Suite 400
League City, Texas
- --------------------------------------------------------------------------------
</TABLE>
(c) Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books, and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder will be maintained at the office of SM&R at 2450 South Shore
Boulevard, Suite 400, League City, Texas 77573.
ITEM 29. MANAGEMENT SERVICES.
There are no management-related service contracts to which the Registrant
is a party not discussed under Part A or Part B of this Registration Statement.
ITEM 30. UNDERTAKINGS.
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-7
<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-8
<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.,
certifies that it meets all of the requirements for effectiveness of this
POST-EFFECTIVE AMENDMENT NO. 13 to this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused it to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
League City and State of Texas, on the 14th day of December 1998.
SM&R CAPITAL FUNDS, INC.
By: /s/ Michael W. McCroskey
------------------------------------------
Michael W. McCroskey, President
Pursuant to the requirements of the Securities Act of 1933, this
POST-EFFECTIVE AMENDMENT NO. 13 has been signed below by the following persons
in the capacities and on the dates indicated:
PRINCIPAL EXECUTIVE AND PRINCIPAL ACCOUNTING OFFICER:
FINANCIAL OFFICER:
/s/ Michael W. McCroskey /s/ Brenda T. Koelemay
- ----------------------------------- -------------------------------------
Michael W. McCroskey, President Brenda T. Koelemay, Treasurer
Date: December 14, 1998 Date: December 14, 1998
---------------------------- ------------------------------
DIRECTORS
/s/ Ernest S. Barratt, Ph.D. Date: December 14, 1998
- ----------------------------------- -----------------------------
*Ernest S. Barratt, Ph.D.
By: Michael W. McCroskey
/s/ Allan W. Matthews Date: December 14, 1998
- ----------------------------------- -----------------------------
*Allan W. Matthews
By: Michael W. McCroskey
/s/ Lea McLeod Matthews Date: December 14, 1998
- ----------------------------------- -----------------------------
*Lea McLeod Matthews
By: Michael W. McCroskey
/s/ Michael W. McCroskey Date: December 14, 1998
- ----------------------------------- -----------------------------
Michael W. McCroskey
/s/ Ann McLeod Moody Date: December 14, 1998
- ----------------------------------- -----------------------------
*Ann McLeod Moody
By: Michael W. McCroskey
/s/ Edwin K. Nolan Date: December 14, 1998
- ----------------------------------- -----------------------------
*Edwin K. Nolan
By: Michael W. McCroskey
C-9
<PAGE>
/s/ Robert V. Shattuck, Jr. Date: December 14, 1998
- ----------------------------------- -----------------------------
*Robert V. Shattuck, Jr.
By: Michael W. McCroskey
/s/ Jamie G. Williams Date: December 14, 1998
- ----------------------------------- -----------------------------
*Jamie G. Williams
By: Michael W. McCroskey
/s/ Frank P. Williamson Date: December 14, 1998
- ----------------------------------- -----------------------------
*Frank P. Williamson
By: Michael W. McCroskey
* PURSUANT TO A POWER OF ATTORNEY EXECUTED BY THE BOARD OF DIRECTORS DATED
DECEMBER 4, 1997. ATTACHED AS EXHIBIT 99.B17 TO POST-EFFECTIVE AMENDMENT
NO. 10.
C-10
<PAGE>
EXHIBIT INDEX
99.B(a)1.a. Registrant's Amended and Restated Articles of Incorporation
99.B(a)1.b. Registrant's Articles of Amendment dated December 7, 1998
99.B(a)2. Registrant's Supplementary Articles of Incorporation dated
February 23, 1998, July 21, 1998 and August 6, 1998
99.B(d)2. Registrant's Investment Advisory Agreement for the Money
Market Fund.
99.B(e) Registrant's Underwriting Agreement
99.B(i) Consent and Opinion of Registrant's Counsel, Greer, Herz &
Adams, L.L.P.
99.B(j) Consent of Tait, Weller and Baker, independent accountant of
Registrant
99.B(m) Registrant's Distribution and Shareholder Servicing Plan
99.B(n) Financial Data Schedules
99.B(o) Registrant's Multiple Class Plan
99.B(p) List of persons controlled by or under common control with
Registrant
C-11
<PAGE>
Exhibit (a)1.a.
ARTICLES OF AMENDMENT AND RESTATEMENT
OF THE CHARTER OF
SM&R CAPITAL FUNDS, INC.
Pursuant to the provisions of Section 2-609 of the General Corporation Law
of the State of Maryland (the "GCL"), the undersigned corporation hereby
certifies that:
FIRST: SM&R Capital Funds, Inc., a Maryland corporation (the
"Corporation"), desires to amend and restate its charter as currently in effect
and as amended herein.
SECOND: The following provisions are all the provisions of the charter
currently in effect and as amended herein:
"AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
SM&R CAPITAL FUNDS, INC.
ARTICLE I
The undersigned, Gregory S. Garrison, whose post office address is One
Moody Plaza, 14th Floor, Galveston, Texas 77550 and who is of full legal age,
does hereby declare that he is an incorporator intending to form a corporation
under and by virtue of the Maryland General Corporation Law authorizing the
formation of corporations.
ARTICLE II
The name of the Corporation is SM&R CAPITAL FUNDS, INC.
ARTICLE III
Purposes and Powers
The purpose for which the Corporation is formed and its objects,
rights, power and privileges are:
(1) To conduct and carry on the business of an open-end, management
type investment company registered under the Investment Company Act of 1940 (as
amended and together with any successor act thereto and all rules, regulations
and orders thereunder, referred to as the "'40 Act"), and to have and exercise
any and all rights and powers necessary and appropriate to the conduct of such
business or in any way incidental thereto;
(2) To subscribe for, or otherwise acquire, purchase, pledge, sell,
assign, transfer, exchange, distribute or otherwise dispose of, and generally
deal in and hold all forms of securities and other investments, including, but
not limited to, stocks (preferred and common), notes, bonds, debentures, script,
warrants, participation certificates, bankers acceptances, futures, options of
all types on securities and futures, mortgages, commercial paper, choses in
action, evidences of indebtedness and other obligations of every kind and
description, precious metals and contracts and rights to acquire or dispose of
precious metals, and in connection therewith to hold part or all of its assets
in cash or cash equivalents or money market instruments;
<PAGE>
(3) To continuously issue and sell shares of its own capital stock
(all without the vote or consent of the stockholders of the Corporation) in such
amounts and on such terms and conditions, for such purposes and for such amounts
or kinds of consideration now or hereafter permitted by the Maryland General
Corporation Law, or any act amendatory thereof, supplemental thereto, or in
substitution therefor (the "Maryland General Corporation Law"), and by the
Articles of Incorporation of the Corporation, as its Board of Directors may
determine;
(4) To redeem, purchase or otherwise acquire, hold, dispose of,
resell, transfer, reissue, retire or cancel (all without the vote or consent of
the stockholders of the Corporation) shares of its capital stock, in any manner
and to the extent now or hereafter permitted by the Maryland General Corporation
Law and by the Articles of Incorporation of the Corporation;
(5) To borrow or raise money for any purpose of the Corporation and
from time to time to draw, make, accept, endorse, execute and issue promissory
notes, drafts, bills of exchange, warrants, bonds, debentures and other
negotiable and nonnegotiable instruments and evidences of indebtedness, and to
pledge, hypothecate and borrow upon the credit of the assets of the Corporation;
(6) To take all such action as shall be desirable and necessary to
cause its shares to be licensed or registered for sale under the laws of the
United States and in any state, country, city or other municipality of the
United States, the territories thereof, the District of Columbia or in any
foreign country and in any town, city or subdivision thereof;
(7) To make contracts and generally to do any and all acts and things
necessary or desirable in furtherance of any of the corporate purposes or
designed to protect, preserve and/or enhance the value of the corporate assets,
all to the extent permitted to business corporations authorized under the laws
of the State of Maryland, as now or may in the future be authorized by said
laws;
(8) To do all and everything necessary, suitable and proper for the
accomplishment of any of the purposes, objects or powers hereinbefore set forth
to the same extent and as fully as a natural person might or could do, in any
part of the world and either alone or in association or partnership with other
corporations, firms or individuals;
(9) To have all the rights, powers and privileges now or hereafter
conferred by the laws of the State of Maryland upon a corporation organized
under the Maryland General Corporation Law; and
(10) To do any and all such further acts or things and to exercise any
and all such further powers or rights as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment, carrying out or
attainment of all or any of the foregoing purposes, objects or powers.
The foregoing clauses are and shall be regarded as independent and
separate, and the enumeration in any such clause of any specific objectives
and/or powers shall not be construed as limiting or restricting in any way the
general objectives and powers stated in any other clause; nor shall any of the
objectives and/or powers stated above, except when otherwise expressly provided,
be in any way limited or restricted by reference to, or inference from, the
terms of any other clause of these Articles of Incorporation.
2
<PAGE>
ARTICLE IV
Principal Office and Resident Agent
The address of the principal office of the Corporation in the State of
Maryland is c/o The Corporation Trust Incorporated, 300 E Lombard Street,
Baltimore, Maryland 21202. The resident agent of the Corporation in the
State of Maryland is The Corporation Trust Incorporated, a corporation of
the State of Maryland, whose address is 300 E Lombard Street, Baltimore,
Maryland 21202.
ARTICLE V
Capital Stock
(1) The total number of shares of capital stock that the Corporation
shall have authority to issue is two billion (2,000,000,000) shares, of the
par value of one cent ($0.01) per share and of the aggregate par value of
twenty million dollars ($20,000,000), all of which two billion
(2,000,000,000) shares are designated Common Shares.
(2) The Board of Directors of the Corporation is authorized, from
time to time, to classify or to reclassify, as the case may be, any
unissued shares of, or any shares previously issued and reacquired by, the
Corporation, whether now or hereafter authorized, in separate series and
classes that may be established and designated from time to time. The
shares of said series and classes of stock shall have such preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption as shall
be fixed and determined from time to time by the Board of Directors. The
Board of Directors is authorized to increase or decrease the number of
shares of any series or class, but the number of shares of any series or
class shall not be decreased by the Board of Directors below the number of
shares thereof then outstanding.
(3) The Board of Directors may redesignate a class or series of
shares of capital stock whether or not shares of such class or series are
issued and outstanding, provided that such redesignation does not in itself
affect the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock.
(4) There is hereby established and classified three separate series
of stock, the "American National Primary Fund Series" to be comprised of
one billion one hundred seventy six million (1,176,000,000) shares, each
with a par value of one cent ($0.01), the "American National Government
Income Fund Series" to be compromised of twenty three million (23,000,000)
shares, each with a par value of one cent ($0.01) and all of which are
designated as "American National Government Income Fund Series-Class T"
shares, and the "American National Tax Free Fund Series" to be comprised of
twenty one million (21,000,000) shares each with a par value of one cent
($0.01) and all of which are designated as "American National Tax Free Fund
Series-Class T" shares. Without limiting the authority of the Board of
Directors set forth herein to establish and designate any further series or
classes, and to classify and reclassify any unissued shares, and subject to
such authority, shares of each series, now authorized and hereafter
authorized, shall be subject to the following provisions:
(a) As more fully set forth hereafter, the assets and
liabilities and the income and expenses of each series shall be
determined separately and, accordingly, the net asset value, the
dividends payable to holders, and the amounts
3
<PAGE>
distributable in the event of dissolution of the Corporation to
holders of shares of the Corporation's stock may vary from series to
series.
(b) All consideration received by the Corporation for the issue
or sale of shares of a particular series, together with all assets in
which such consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof, including all proceeds
derived from the sale, exchange or liquidation thereof, and any funds
or payments derived from any reinvestment of such proceeds in whatever
form the same may be, shall irrevocably belong to that series for all
purposes, subject only to the rights of creditors of that series and
shall be referred to as "assets belonging to" that series. The assets
belonging to a particular series shall be so recorded upon the books
of the Corporation. In the event that there are any assets, income,
earnings, profits and proceeds thereof, funds or payments which are
not readily identifiable as belonging to any particular series, the
Directors shall allocate them among, and they shall then belong to,
any one or more of the series established and designated from time to
time in such manner and on such basis as they, in their sole
discretion, deem fair and equitable. Each such allocation by the
Corporation shall be conclusive and binding upon the stockholders of
all series for all purposes. The Directors shall have full
discretion, to the extent not inconsistent with the '40 Act and the
Maryland General Corporation Law, to determine which items shall be
treated as income and which items shall be treated as capital, and
each such determination and allocation shall be conclusive and
binding upon the stockholders.
(c) The assets belonging to each particular series shall be
charged with the liabilities of the Corporation attributable to that
series and all expenses, costs, charges and reserves attributable to
that series. Any general liabilities, expenses, costs, charges or
reserves of the Corporation which are not readily identifiable as
belonging to any particular series shall be allocated and charged by
the Directors to and among any one or more of the series established
and designated from time to time in such manner and on such basis as
the Directors in their sole discretion deem fair and equitable. Each
allocation of liabilities, expenses, costs, charges and reserves by
the Directors shall be conclusive and binding upon the stockholders of
all series for all purposes.
(d) Shares of each series shall be entitled to such dividends
and distributions, in shares or in cash or both, as may be declared
from time to time by the Board of Directors, acting in its sole
discretion, with respect to such series, provided that dividends and
distributions shall be paid on shares of a series only out of lawfully
available assets belonging to that series. Dividends may be declared
daily or otherwise pursuant to a standing resolution or resolutions
adopted only once or with such frequency as the Board of Directors may
determine. All dividends and distributions on Common Shares of a
particular series shall be distributed pro-rata to the holders of that
series in proportion to the number of Common Shares of that series
held by such holders all the date and time of record established for
the payment of such dividends or distributions, except that in
connection with any dividend or distribution program or procedure,
the Board of Directors may determine that no dividend or distribution
shall be payable on shares as to which the stockholder's purchase
order or payment has not been received by the time or times
established by the Board of Directors under such program or procedure.
4
<PAGE>
(e) The Board of Directors shall have the power, in its sole
discretion, to distribute in any fiscal year as dividends (including
dividends designated in whole or in part as capital gain
distributions) an amount sufficient, in the opinion of the Board of
Directors, to enable each series of the Corporation to qualify as a
regulated investment company under the Internal Revenue Code of 1986,
as from time to time amended, or any successor or comparable statute
thereto, and regulations promulgated thereunder, and to avoid
liability of each series of the Corporation for federal income and
excise taxes in respect of that year. However, nothing in the
foregoing shall limit the authority of the Board of Directors to make
distributions greater than or less than the amount necessary to
qualify as a regulated investment company and to avoid liability of
any series of the Corporation for such taxes. Dividends and
distributions may be made in cash, property or additional shares of
the same or another class or series, or a combination thereof, as
determined by the Board of Directors or pursuant to any program that
the Board of Directors may have in effect at the time for the election
by each stockholder of the mode of the making of such dividend or
distribution to that stockholder. Any such dividend or distribution
paid in shares will be paid at the net asset value thereof as defined
in the '40 Act and as determined by the Board of Directors of the
Corporation.
(f) In the event of the liquidation or dissolution of the
Corporation or of a particular series, the stockholders of a series
that has been established and designated and is being liquidated shall
be entitled to receive, as a series, when and as declared by the Board
of Directors, out of the assets of the Corporation available for
distribution to stockholders, the assets belonging to that series.
The assets so distributable to the stockholders of a series shall be
distributed among such stockholders in proportion to the number of
shares of that series held by them and recorded on the books of the
Corporation or, in the event that the series is divided into classes,
in the manner determined by the Board of Directors in accordance with
the '40 Act. In the event that there are any assets available for
distribution which are not readily identifiable as belonging to any
particular series, such assets shall be allocated by the Directors
to and among any one or more of the series established and designated
from time to time in such manner and on such basis as the Directors
in their sole discretion deem fair and equitable, and then distributed
to the holders of stock of each series as aforesaid. Each allocation
of such assets by the Directors shall be conclusive and binding upon
the stockholders of all series for all purposes.
(g) If a series is divided into multiple classes, the classes
may be invested with one or more other classes in the common
investment portfolio comprising the series. Not withstanding the
foregoing provisions of this Article V(4) of these Articles of
Incorporation, if two or more classes are invested in a common
investment portfolio, the shares of each such class of stock of the
Corporation shall be subject to the following preferences, conversion
and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption, and,
if there are other classes of stock invested in a different investment
portfolio comprising a different series, shall also be subject to the
provisions of Article V(4)(a) through (f) of these Articles of
Incorporation at the series level as if the classes invested in the
common investment portfolio were one class:
(i) The income and expenses of the series shall be
allocated among the classes comprising the series in such manner
as may be determined by the Board of Directors in accordance with
law.
5
<PAGE>
(ii) As more fully set forth in this Article V(4)(g) of
these Articles of Incorporation, the liabilities and expenses of
the classes comprising the series shall be determined separately
from those of each other and, accordingly, the net asset values,
the dividends and distributions payable to holders, and the
amounts distributable in the event of liquidation of the
Corporation or termination of a series to holders of shares of
the Corporation's stock may vary within the classes comprising
the series. Except for these differences and certain other
differences set forth in this Article V(4)(g) or elsewhere in
these Articles of Incorporation, the classes comprising a series
shall have the same preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption.
(iii) The dividends and distributions of investment income
and capital gains with respect to the classes comprising a series
shall be in such amounts as may be declared from time to time by
the Board of Directors, and such dividends and distributions may
vary among the classes comprising the series to reflect differing
allocations of the expenses and liabilities of the Corporation
among the classes and any resultant differences between the net
asset values per share of the classes, to such extent and for
such purposes as the Board of Directors may deem appropriate.
The allocation of investment income, capital gains, expenses and
liabilities of the Corporation among the classes comprising a
series shall be determined by the Board of Directors in a manner
that is consistent with the applicable law.
(h) The Corporation shall, upon due presentation of share or
shares of stock for redemption, redeem such share or shares of stock
at a redemption price prescribed by the Board of Directors in
accordance with applicable laws and regulations. The proceeds of the
redemption of the shares of any class of stock of the Corporation may
be reduced by the amount of any contingent deferred sales charge,
liquidation charge, or other charge (which charges may vary within and
among the classes) payable on such redemption pursuant to the terms of
issuance of such shares, all in accordance with the '40 Act and
applicable rules and regulations of the National Association of
Securities Dealers, Inc. and NASD Regulation, Inc. (together, the
"NASD").
(i) To the extent permitted by the '40 Act and the Maryland
General Corporation Law, the Corporation may redeem shares of Common
Shares of any series or class not offered for redemption held by any
shareholder whose shares have a value less than such minimum amount as
may be fixed by the Board of Directors (the "Minimum Required
Investment").
(j) Notwithstanding Article V(4)(i) of these Articles of
Incorporation, to the extent permitted by the '40 Act and the Maryland
General Corporation Law, the Corporation may redeem shares of Common
Shares of any series or class not offered for redemption held by any
shareholder without regard to the value of such shares.
(k) If shares of stock are redeemed pursuant to Articles V(4)(i)
or V(4)(j) of these Articles of Incorporation, the Corporation shall
pay the redemption price in cash or in kind in such manner as is
consistent with and not in contravention of the
6
<PAGE>
'40 Act. Redemption prices shall be paid exclusively out of the assets
of the series whose shares are being redeemed. Notwithstanding the
foregoing, the Corporation may postpone payment of the redemption
price and may suspend the right of holders of shares of any class or
series to require the Corporation to redeem shares of that class or
series during any period or at any time when and to the extent
permissible under the '40 Act.
(I) At such times (which may vary between and among the holders
of particular classes) as may be determined by the Board of Directors
(or with the authorization of the Board of Directors, by the officers
of the Corporation) in accordance with the '40 Act and applicable
rules and regulations of the NASD and reflected in the pertinent
registration statement of the Corporation, shares of any particular
class of stock of the Corporation may be automatically converted into
shares of another class of stock of the Corporation based on the
relative net asset values of such classes at the time of conversion,
subject, however, to any conditions of conversion that may be imposed
by the Board of Directors (or with the authorization of the Board of
Directors, by the officers of the Corporation) and reflected in the
pertinent registration statement of the Corporation as aforesaid.
Except as provided above, all provisions of the Articles of
Incorporation relating to stock of the Corporation shall apply to
shares of, and to the holders of, all classes of stock.
(5) On each matter submitted to a vote of the stockholders, each
holder of a share shall be entitled to one vote for each share standing in
his name on the books of the Corporation on a date reasonably determined by
the Board of Directors of the Corporation, irrespective of the class or
series thereof, and all shares of all classes or series shall vote as a
single class or series ("Single Class Voting"); provided, however, that (i)
as to any matter with respect to which a separate vote of any class or
series is required by the '40 Act, or by the Maryland General Corporation
Law, such requirement as to a separate vote by the class or series shall
apply in lieu of Single Class Voting as described above; (ii) in the event
that the separate vote requirements referred to in (i) above apply with
respect to one or more classes or series, then, subject to (iii) below, the
shares of all other classes or series shall vote as a single class or
series; and (iii) as to any matter which does not affect the interest of
particular class or series, only the holders of shares of the one or more
affected classes or series shall be entitled to vote.
(6) The establishment and designation of any series or class of
Common Shares shall be effective upon (1) the adoption by a majority of the
then Directors of a resolution selling forth such establishment and
designation and the relative rights and preferences of such series or
class, or as otherwise provided in such instrument and (2) the filling with
the proper authority of the State of Maryland of Articles Supplementary
setting forth such establishment and designation and relative rights and
preferences.
(7) Unless otherwise required by the '40 Act, the presence in person
or by proxy of the holders of one-third (1/3) of the shares of capital
stock of the Corporation outstanding and entitled to vote thereat shall
constitute a quorum for the transaction of business at a stockholder's
meeting, except that where any provision of law or of these Articles of
Incorporation permit or require that holders of any series or class shall
vote as a separate series or class, then one-third (1/3) of the aggregate
number of shares of capital stock of that
7
<PAGE>
series or class, as applicable, outstanding and entitled to vote shall
constitute a quorum for the transaction of business by that series or
class, as applicable.
(8) No holder of stock of the Corporation by virtue of being such a
holder shall have any right to purchase, subscribe for, or otherwise
acquire any shares of the Corporation or any other security that the
Corporation may issue or sell (whether out of the number of shares
authorized by the Charter of the Corporation or out of any shares of the
Corporations's capital stock that the Corporation may acquire) other than a
right that the Board of Directors in its discretion may determine to grant.
(9) All person who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of these Articles of
Incorporation and the By-Laws of the Corporation, as from time to time
amended or supplemented.
(10) The Corporation may issue, sell, redeem, repurchase and otherwise
deal in and with shares of its stock in fractional denominations and such
fractional denominations shall, for all purposes be Common Shares having
proportionately tot he respective fractions represented thereby all the
rights of the whole shares, including without limitation, the right to
vote, the right to receive dividends, and the right to participate upon
liquidation of the Corporation; provided that the issue of shares in
fractional denominations shall be limited to such transactions and be made
upon such terms as may be fixed by or under authority of the By-Laws.
(11) The Corporation shall not be obligated to issue certificates
representing shares of any class or series unless it shall receive a
written request therefor from the record holder thereof in accordance with
procedures established in the By-Laws or by the Board of Directors.
(12) The Board of Directors of the Corporation shall have the final
decision upon questions concerning the method of computing net asset value,
valuation of assets, procedure in repurchase, and other matters in
connection with placing in effect the offering price and repurchase of the
Corporation's Common Shares.
ARTICLES VI
Preemptive Rights
No stockholder of the Corporation of any class or series, whether new
or hereafter authorized, shall have any preemptive or preferential or other
right of purchase of or subscription to any shares of any class or series
of stock, or securities convertible into, exchangeable for or evidencing
the right to purchase stock of any class or series whatever, whether or not
the stock in question is of the same class or series as may be held by such
stockholders, and whether now or hereafter authorized and whether issued
for cash, property, services or otherwise, other than such, if any, as the
Board of Directors in its discretion may from time to time fix.
ARTICLES VIII
Number and Powers of Directors
(1) The number of directors of the Corporation shall be such number,
not less than three (3), as may be specified in or fixed in the manner
prescribed by the By-Laws of the Corporation. Until a different number is
fixed as provided by the By-Laws, the
8
<PAGE>
Corporation shall have seven (7) directors. Unless otherwise provided by
the By-Laws of the Corporation, directors need not be stockholders thereof.
(2) The names of the current directors who shall act until their
successors are duly chosen are:
Ernest S. Barrett
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
(3) So long as permitted by Maryland law and by the '40 Act,
directors elected at a meeting of shareholders shall not have a specified
term and shall serve until their successors are elected and qualified.
Cumulative voting int he election of directors is prohibited.
(4) The Board of Directors of the Corporation is hereby empowered to
authorized the issuance from time to time of shares of capital stock,
whether new or hereafter authorized, for such consideration as the Board of
Directors may deem advisable, subject to such limitations as may be set
forth in the Charter or the By-Laws of the Corporation or in the Maryland
General Corporation Law or int he '40 Act.
(5) Each Director and each officer of the Corporation shall be
indemnified by the Corporation to the fullest extent permitted by the
Maryland General Corporation Law and the By-Laws of the Corporation, as
such LAW and By-Laws may now or in the future be in effect, subject only to
such limitations as may be required by the '40 Act.
(6) The Board of Directors of the Corporation may make, alter or
repeat from time to time any of the By-Laws of the Corporation except any
particular By-Law which is specified as not subject to alteration or repeat
by the Board of Directors.
(7) The Corporation may employ such custodian or custodians for the
safekeeping of the property of the Corporations and of its shares, such
dividend disbursing agent or agents, and such transfer agent or agents and
registrar or registrars for its shares, and may make and perform such
contracts for the aforesaid purposes as in the opinion of the Board of
Directors of this Corporation may be reasonable, necessary or proper for
the conduct of the affairs of the Corporation, and may pay the fees and
disbursements of such custodians, dividend disbursing agents, transfer
agents, and registrars out of the income and/or any other property of the
Corporation. Notwithstanding any other provisions of these Articles of
Incorporation or the By-Laws of the Corporation, the Board of Directors may
cause any or all of the property of the Corporation to be transferred or to
be acquired and held in the name of a custodian so appointed or in the name
of any nominee or nominees of this Corporation or nominee or nominees of
such custodian satisfactory to the said Board of Directors.
9
<PAGE>
(8) The Corporation may enter into a written contract or contracts
with any person, including any firm, corporation, trust or association in
which any officer, other employee, director or stockholder of the
Corporation may be interested, providing for a delegation of the management
of all or part of the Corporation's securities portfolio and also for the
delegation of the performance of administrative corporate functions,
subject always to the direction of the Board of Directors. The
compensation payable by the Corporation under such contracts shall be such
as is deemed fair and equitable to both parties by the said Board of
Directors. Any such contracts shall in all respects be consistent with and
subject to the requirements of the '40 Act.
ARTICLE VIII
Stockholder Vote
Notwithstanding any provisions of Maryland law requiring the
affirmative vote of more than a majority of the votes of all classes or of
any class of stock entitled to be cast, to take or authorized any action,
the Corporation, if permitted by the '40 Act, may take or authorize any
such action upon the concurrence of a majority of the aggregate number of
the votes entitled to be cast thereon. Without intending any limitations
of the foregoing sentence, such majority approval shall be sufficient,
valid and effective, after due authorization, approval and/or other action
by the Board of Directors, as required by law, to approve and authorized
the following acts of the Corporation:
(a) the amendment of the Charter of the Corporation;
(b) the consolidation of the Corporation with one ore more
corporations to form a new consolidated corporation;
(c) the merger of the Corporation into another corporation or the
merger of one or more other corporations into the Corporation;
(d) the sale, lease, exchange or other transfer of all, or
substantially all, of the property and assets of the Corporation, including
its goodwill and franchises;
(e) the participation by the Corporation in share exchange (as
defined by applicable Maryland laws) as the Corporation the stock of which
is to be acquired;
(f) the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation.
ARTICLE IX
Limitation of Directors and Officers Liability
The person liability of the Corporation's directors and officers to
the Corporation or to its stockholders shall be limited to the fullest
extent permitted by the Maryland General Corporation Law. In particular,
but without limiting in any way the preceding sentence, directors and
officers of the Corporation shall not be personally liable to the
Corporation or to its stockholders for monetary damages arising out of any
act or omission in their capacity as director or officer, except:
(1) To the extent that it is proved that a director or officer
actually received an improper benefit or profit in money, property, or
services, such director or officer shall be
10
<PAGE>
liable to the Corporation for the amount of the benefit or profit in money,
property, or services actually received; or
(2) To the extent that a judgement or other final adjudication
adverse to a director or officer is entered in a proceeding based on a
finding in the proceeding that such director's or officer's action, or
failure to act, was the result of active or deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding.
ARTICLE X
Perpetual Existence
The duration of the Corporation shall be perpetual"
THIRD: The amendments to and restatement of the charter of the Corporation
as hereinabove set forth has been duly advised by the Board of Directors of the
Corporation and approved by the stockholders of the Corporation and the Board of
Directors of the Corporation, as required by law.
FOURTH: The current address of the principal office of the Corporation in
the State of Maryland is as set forth in Article IV of the foregoing amendment
and restatement of the charter.
FIFTH: The name and address of the Corporation's current resident agent is
as set forth in Article IV of the foregoing amendment and restatement of the
charter.
SIXTH: The Corporation currently has nine (9) directors, and the names of
those currently in office are as set forth in Article VII of the foregoing
amendment and restatement of the charter.
IN WITNESS WHEREOF, the Corporation has caused these presents to be signed
in its name and on its behalf by its President and attested by its Secretary on
the 27th day of July, 1998.
ATTEST: SM&R CAPITAL FUNDS, INC.
/s/ Teresa E. Axelson By: /s/ Michael W. McCroskey
- ------------------------------- --------------------------------------
Teresa E. Axelson, Secretary Michael W. McCroskey, President (TEA)
- ------------------------------- --------------------------------------
THE UNDERSIGNED, President of SM&R Capital Funds, Inc., who executed on
behalf of said corporation, the foregoing Articles of Amendment and Restatement,
of which this certificate is made a part, hereby acknowledges, in the name and
on behalf of said corporation, the foregoing Articles of Amendment and
Restatement to be the corporate act of said corporation and further certifies
that, to the best of his knowledge, information, and belief, the matters and
facts set forth therein with respect to the approval thereof are true in all
material respects, under the penalties of perjury.
By: /s/ Michael W. McCroskey
--------------------------------------
Michael W. McCroskey, President (TEA)
--------------------------------------
11
<PAGE>
Exhibit (a)1.b.
ARTICLES OF AMENDMENT
OF THE CHARTER OF
SM&R CAPITAL FUNDS, INC.
Pursuant to the provisions of Section 2-605(a)(4) of the General
Corporation Law of the State of Maryland (the "GCL"). SM&R Capital Funds, Inc.
(the "Corporation"), a Maryland corporation, has adopted the amendments to its
Articles of Incorporation as stated in these Articles of Amendment.
ARTICLE I
The name of the Corporation is SM&R Capital Funds, Inc.
ARTICLE II
The Corporation is registered as an open-end company under the Investment
Company Act of 1940.
ARTICLE III
Article II of the Amended and Restated Articles of Incorporation is amended
to change the name of the Corporation. As amended, Article II reads as follows:
"The name of the corporation is SM&R INVESTMENTS, INC."
ARTICLE IV
Article V, Section (4) of the Amended and Restated Articles of
Incorporation is amended to change the name of the American National Primary
Fund Series to the "SM&R PRIMARY FUND."
ARTICLE V
Article V, Section (4) of the Amended and Restated Articles of
Incorporation is further amended to change the name of the American National
Government Income Fund Series to the "SM&R GOVERNMENT BOND FUND" and to
redesignate the American National Government Income Fund Series-Class T shares
the "SM&R GOVERNMENT BOND FUND-CLASS T" shares.
ARTICLE VI
Article V, Section (4) of the Amended and Restated Articles of
Incorporation is further amended to change the name of the American National Tax
Free Fund Series to the "SM&R TAX FREE FUND" and to redesignate the American
National Tax Free Fund Series-Class T shares the "SM&R TAX FREE FUND-CLASS T"
shares.
ARTICLE VII
As amended by Articles IV, V, and VI of these Articles of Amendment,
Article V, Section (4) of the Amended and Restated Articles of Incorporation
reads as follows:
"(4) There is hereby established and classified three separate series
of stock, the "SM&R Primary Fund" to be comprised of one billion one
hundred seventy six million (1,176,000,000) shares, each with a par value
of one cent ($0.01), the "SM&R Government Income Fund" to be comprised of
twenty three million (23,000,000) shares, each with a par value of one cent
($0.01) and all of which are designated as "SM&R Government Income
Fund-Class T" shares, and the "SM&R Tax Free Fund" to be comprised of
twenty one million (21,000,000) shares each with a par value of one cent
($0.01) and all of which are designated as "SM&R Tax Free Fund-Class T"
shares. Without limiting the authority of the Board of Directors set forth
herein to establish and designate any further series or classes, and to
classify and reclassify any unissued shares, and subject to such authority,
shares of each series, now authorized and hereafter authorized, shall be
subject to the following provisions:"
<PAGE>
ARTICLE VIII
The amendments are limited to changes expressly permitted by Section 2-605
of the GCL.
ARTICLE IX
The amendments were approved by a majority of the entire board of directors
of the Corporation.
ARTICLE X
In accordance with Section 2-610.1(2) of the GCL, the amendments contained
in these Articles of Amendment shall be effective as of December 31, 1998.
IN WITNESS WHEREOF, the Corporation has caused these presents to be signed
in its name and on its behalf by its President and attested by its Secretary on
the 7th day of December, 1998.
ATTEST: SM&R CAPITAL FUNDS, INC.
/s/ Teresa E. Axelson By: /s/ Michael W. McCroskey
- --------------------------------- ------------------------
Teresa E. Axelson, Secretary Michael W. McCroskey, President
- ----------------------------------- --------------------------------
THE UNDERSIGNED, President of SM&R Capital Funds, Inc., who executed on
behalf of said corporation, the foregoing Articles of Amendment, of which this
certificate is made a part, hereby acknowledges, in the name and on behalf of
said corporation, the foregoing Articles of Amendment to be the corporate act of
said corporation and further certifies that, to the best of his knowledge,
information, and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ Michael W. McCroskey
------------------------
Michael W. McCroskey, President
-------------------------------
<PAGE>
Exhibit (a)2.a
Articles Supplementary
for
SM&R Capital Funds, Inc.
(dated February 23, 1998)
Increase in Authorized Shares
Pursuant to the provisions of Section 2-208.1 of the Maryland General
Corporation Law, SM&R Capital Funds, Inc. (the "Corporation") adopts the
following Articles Supplementary
ARTICLE ONE
The Corporation is registered as an open-end investment company under the
Investment Company Act of 1940.
ARTICLE TWO
At a special meeting of the Board of the Directors of the Corporation
held on October 27, 1997, the Board authorized the reclassification of
seventeen million (17,000,000) shares of the Corporation's $0.01 par value
common stock previously designated as the "Government Income Fund Series"
into the "Primary Fund Series" and the reclassification of nineteen million
(19,000,000) shares of the Corporation's $0.01 par value common stock
previously designated as the "Tax Free Fund Series" into the "Primary Fund
Series." Such shares shall have the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms and conditions of redemption of the Primary Fund
Series shares as described in the Corporation's Articles of Incorporation.
ARTICLE THREE
Prior to the adoption of these Articles Supplementary, the Corporation had
two hundred million (200,000,000) shares of $0.01 par value common stock
authorized. The aggregate par value of the Corporation's stock was two million
dollars ($2,000,000.00).
ARTICLE FOUR
The total number of shares of capital stock that the Corporation has
authority to issue has been increased by the Board of Directors in accordance
with Section 2-105(c) of the Maryland General Corporation Law. At a regular
meeting of the Board of Directors of the Corporation held on December 4,
1997, the Board authorized the number of authorized shares to be increased by
one billion eight hundred million (1,800,000,000) shares.
ARTICLE FIVE
Each additional authorized share shall be a share of the Corporation's
$0.01 par value common stock and each such share shall have the same
preferences, conversion and other rights,
<PAGE>
voting powers, restrictions, limitations as to dividends, qualifications, or
terms and conditions of redemption as the other shares of the Corporation's
$0.01 par value common stock.
ARTICLE SIX
Following adoption of these Articles Supplementary, the Corporation has two
billion (2,000,000,000) shares of $0.01 par value common stock authorized. The
aggregate par value of the Corporation's stock is twenty million dollars
($20,000,000.00).
Executed and acknowledged, this the 23rd day of February, 1998.
/s/ Michael W. McCroskey
---------------------------------------
Michael W. McCroskey, President
I, Teresa E. Axelson, Secretary of SM&R Capital Funds, Inc., hereby
acknowledge on behalf of SM&R Capital Funds, Inc. that the foregoing Articles
Supplementary are the corporate act of said corporation under the penalties of
perjury.
Attested:
/s/ Teresa E. Axelson
- ----------------------------------
Teresa E. Axelson, Secretary
<PAGE>
Exhibit (a)2.b
ARTICLES SUPPLEMENTARY FOR SM&R CAPITAL FUNDS, INC.
(dated July 21, 1998)
Classification of Shares
Pursuant to the provisions of Section 2-208.1 of the Maryland General
Corporation Law, SM&R Capital Funds, Inc. (the "Corporation") adopts the
following Articles Supplementary:
ARTICLE ONE
The Corporation is registered as an open-end investment company under the
Investment Company Act of 1940.
ARTICLE TWO
Prior to the adoption of these Articles Supplementary, the Corporation had
two billion (2,000,000,000) shares of $0.01 par value common stock authorized.
The aggregate par value of the Corporation's stock was twenty million dollars
($20,000,000).
ARTICLE THREE
Following adoption of these Articles Supplementary, the Corporation has two
billion (2,000,000,000) shares of $0.01 par value common stock authorized. The
aggregate par value of the Corporation's stock is twenty million dollars
($20,000,000.00).
ARTICLE FOUR
Prior to the adoption of these Articles Supplementary, the Corporation had
the following three single-class series of shares: American National Government
Income Fund Series, comprised of thirteen million (13,000,000) shares of
$0.01 par value stock with an aggregate par value of one hundred thirty thousand
dollars ($130,000); American National Tax Free Fund Series, comprised of eleven
million (11,000,000) shares of $0.01 par value stock with an aggregate par value
of one hundred ten thousand dollars ($110,000); and American National Primary
Fund Series, comprised of one hundred seventy-six million (176,000,000) shares
of $0.01 par value stock with an aggregate par value of one million seven
hundred sixty thousand dollars ($1,760,000).
ARTICLE FIVE
At a meeting of the Board of Directors of the Corporation held on
December 4, 1997, in accordance with Section 2-105(c) of the Maryland General
Corporation Law and Article V of the Corporation's Articles of Incorporation,
the Board of Directors of the Corporation passed a resolution designating
shares of the Corporation's authorized but unissued and unclassified $0.01
par value common stock as follows: ten million (10,000,000) shares as shares
of the American National Government Income Fund Series; ten million
(10,000,000) shares as shares of the American National Tax Free Fund Series;
and one billion (1,000,000,000) shares as shares of the American National
Primary Fund Series. All such shares shall continue to have the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption described
in the Corporation's Articles of Incorporation.
ARTICLE SIX
Following adoption of these Articles Supplementary, the Corporation has the
following three single-class series of shares; American National Government
Income Fund Series, comprised of twenty-three million
<PAGE>
(23,000,000) shares of $0.01 par value stock with an aggregate par value of two
hundred thirty thousand dollars ($230,000); American National Tax Free Fund
Series, comprised of twenty-one million (21,000,000) shares of $0.01 par value
stock with an aggregate par value of two hundred ten thousand dollars
($210,000); and American National Primary Fund Series, comprised of one billion
one hundred seventy-six million (1,176,000,000) shares of $0.01 par value stock
with an aggregate par value of eleven million seven hundred sixty thousand
dollars ($11,760,000).
IN WITNESS WHEREOF, the Corporation has caused these presents to be signed
in its name and on its behalf by its President and attested by its Secretary on
the 21st day of July, 1998.
ATTEST: SM&R CAPITAL FUNDS, INC.
/s/ Teresa E. Axelson By: /s/ Michael W. McCroskey
- --------------------------------- --------------------------------------
Teresa E. Axelson, Secretary Michael W. McCroskey, President (TEA)
- --------------------------------- --------------------------------------
THE UNDERSIGNED, President of SM&R Capital Funds, Inc., who executed on
behalf of said corporation, the foregoing Articles Supplementary, of which this
certificate is made a part, hereby acknowledges, in the name and on behalf of
said corporation, the foregoing Articles Supplementary to be the corporate act
of said corporation and further certifies that, to the best of his knowledge,
information, and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ Michael W. McCroskey
--------------------------------------
Michael W. McCroskey, President (TEA)
--------------------------------------
2
<PAGE>
Exhibit (a)2.c
ARTICLES SUPPLEMENTARY FOR SM&R CAPITAL FUNDS, INC.
(filed August 6, 1998)
Increase in Authorized Shares,
Designation of New Series, and
Classification of Shares
Pursuant to the provisions of Section 2-208 and Section 2-208.1 of the
Maryland General Corporation Law, SM&R Capital Funds, Inc. (the "Corporation")
adopts the following Articles Supplementary:
ARTICLE ONE
The Corporation is registered as an open-end investment company under the
Investment Company Act of 1940.
ARTICLE TWO
Prior to the adoption of these Articles Supplementary, the Corporation had
two billion (2,000,000,000) shares of $0.01 par value common stock authorized.
The aggregate par value of the Corporation's stock was twenty million dollars
($20,000,000).
ARTICLE THREE
The total number of shares of capital stock that the Corporation has
authority to issue has been increased by the Board of Directors in accordance
with Section 2-105(c) and Section 2-208.1 of the Maryland General Corporation
Law. At a meeting of the Board of Directors of the Corporation held on May
29, 1998, the Board authorized the number of authorized shares to be
increased by four billion (4,000,000,000) shares.
ARTICLE FOUR
Each additional authorized share shall be a share of the Corporation's
$0.01 par value common stock and each such share shall have the same
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms and conditions of
redemption as the other shares of the Corporation's $0.01 par value common
stock.
ARTICLE FIVE
Following adoption of these Articles Supplementary, the Corporation has six
billion (6,000,000,000) shares of $0.01 par value common stock authorized. The
aggregate par value of the Corporation's stock is sixty million dollars
($60,000,000.00).
ARTICLE SIX
Prior to the adoption of these Articles Supplementary, the Corporation had
the following three single-class series of shares: American National Government
Income Fund Series-Class T, comprised of twenty-three million (23,000,000)
shares of $0.01 par value stock with an aggregate par value of two hundred
thirty thousand dollars ($230,000); American National Tax Free Fund Series-Class
T, comprised of twenty-one million (21,000,000) shares of $0.01 par value stock
with an aggregate par value of two hundred ten thousand dollars ($210,000); and
American National Primary Fund Series, comprised of one billion one hundred
seventy-six million (1,176,000) shares of $0.01 par value stock with an
aggregate par value of eleven million seven hundred sixty thousand dollars
($11,760,000).
<PAGE>
ARTICLE SEVEN
At a meeting of the Board of Directors of the Corporation held on May
29, 1998, in accordance with Section 2-105(c), Section 2-208, Section 2-208.1
of the Maryland General Corporation Law and Article V of the Corporation's
Articles of Incorporation, the Board of Directors of the Corporation passed a
resolution designating one billion (1,000,000,000) shares of the
Corporation's newly authorized $0.01 par value common stock as a new series
called the "SM&R Money Market Fund." Such shares shall have the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption described
in the Corporation's Articles of Incorporation.
ARTICLE EIGHT
At a meeting of the Board of Directors of the Corporation held on May 29,
1998, in accordance with Section 2-105(c), Section 2-208, and Section 2-208.1 of
the Maryland General Corporation Law and Article V of the Corporation's Articles
of Incorporation, the Board of Directors of the Corporation passed a resolution
classifying five hundred million (500,000,000) shares of the Corporation's newly
authorized $0.01 par value common stock as follows:
<TABLE>
<S> <C>
American National Government Income Fund Series-Class A 100,000,000 shares
American National Government Income Fund Series-Class B 100,000,000 shares
American National Government Income Fund Series-Class C 100,000,000 shares
American National Government Income Fund Series-Class J 100,000,000 shares
American National Government Income Fund Series-Class Y 100,000,000 shares
</TABLE>
Such shares shall have the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption described in the Corporation's Articles of
Incorporation.
ARTICLE NINE
At a meeting of the Board of Directors of the Corporation held on May 29,
1998, in accordance with Section 2-105(c), Section 2-208, and Section 2-208.1 of
the Maryland General Corporation Law and Article V of the Corporation's Articles
of Incorporation, the Board of Directors of the Corporation passed a resolution
classifying five hundred million (500,000,000) shares of the Corporation's newly
authorized $0.01 par value common stock as follows:
<TABLE>
<S> <C>
American National Tax Free Fund Series-Class A 100,000,000 shares
American National Tax Free Fund Series-Class B 100,000,000 shares
American National Tax Free Fund Series-Class C 100,000,000 shares
American National Tax Free Fund Series-Class J 100,000,000 shares
American National Tax Free Fund Series-Class Y 100,000,000 shares
</TABLE>
Such shares shall have the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption described in the Corporation's Articles of
Incorporation.
[SIGNATURES ON FOLLOWING PAGE]
2
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these presents to be signed
in its name and on its behalf by its President and attested by its Secretary on
the ____ day of July, 1998.
ATTEST: SM&R CAPITAL FUNDS, INC.
/s/ Teresa E. Axelson By: /s/ Michael W. McCroskey
- --------------------------------- --------------------------------------
Teresa E. Axelson, Secretary Michael W. McCroskey, President (TEA)
- --------------------------------- --------------------------------------
THE UNDERSIGNED, President of SM&R Capital Funds, Inc., who executed on
behalf of said corporation, the foregoing Articles Supplementary, of which this
certificate is made a part, hereby acknowledges, in the name and on behalf of
said corporation, the foregoing Articles Supplementary to be the corporate act
of said corporation and further certifies that, to the best of his knowledge,
information, and belief, the matters and facts set forth therein with respect to
the approval thereof are true in all material respects, under the penalties of
perjury.
/s/ Michael W. McCroskey
--------------------------------------
Michael W. McCroskey, President (TEA)
--------------------------------------
3
<PAGE>
Exhibit (d)2.
INVESTMENT ADVISORY AGREEMENT
BETWEEN
SM&R CAPITAL FUNDS, INC.
(MONEY MARKET FUND)
AND
SECURITIES MANAGEMENT AND RESEARCH, INC.
THIS INVESTMENT ADVISORY AGREEMENT (the "Agreement") is made and entered
into this 19th day of November, 1998, by and between SM&R CAPITAL FUNDS, INC.
(to be renamed SM&R INVESTMENTS, INC. effective December 31, 1998), a Maryland
corporation hereinafter referred to as the "Fund", on behalf of SM&R Money
Market Fund (the "Money Market Series") and SECURITIES MANAGEMENT AND RESEARCH,
INC., a Florida corporation hereinafter referred to as the "Adviser".
The Money Market Series is a series of the Fund with different investment
objectives than the other series which it pursues through separate investment
policies.
SM&R is engaged in the business of rendering investment advisory and
related services to investment companies and desires to provide such services to
the Money Market Series.
In consideration of the mutual covenants contained in this Agreement and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Adviser and the Fund hereby agree as follows:
1. Adviser shall act as investment adviser for the Money Market Series and
shall, in such capacity, supervise the investment and reinvestment of the cash,
securities and other properties comprising the assets of the Money Market
Series, subject at all times to the objectives, policies and restrictions of the
Money Market Series and to the policies and approval of the Board of Directors
of the Fund. Adviser shall give the Money Market Series the benefit of its best
judgment and efforts in rendering its services as investment adviser. In
carrying out its obligations in this Agreement, the Advisor shall be deemed to
be an independent contractor and, except as expressly provided or authorized by
the Fund (whether in this Agreement or otherwise), shall have no authority to
act for or represent the Fund in any way or otherwise be deemed to be an agent
of the Fund.
2. In carrying out its obligations under paragraph (1) hereof, Adviser shall:
(a) Obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally or the
portfolio of the Money Market Series, and whether concerning the individual
companies whose securities are included in the Money Market Series'
portfolio, or the industries in which the Money Market Series engages, or
with respect to securities which the Adviser considers desirable for
inclusion in the Money Market Series' portfolio.
(b) Determine what industries and companies shall be represented in the
Money Market Series' portfolio and regularly report them to the Board of
Directors of the Fund.
(c) After such determination, formulate and implement programs for the
purchases and sales of the securities of such companies and regularly
report thereon to the Board of Directors of the Fund.
(d) Take, on behalf of the Money Market Series of the Fund, all actions
which appear to the Adviser to be necessary to carry into effect such
purchase and sale programs, and all related supervisory and other
functions, including the placing of orders for the purchase and sale of
portfolio securities for the Money Market Series.
(e) Maintain all internal bookkeeping, account and auditing services and
records in connection with the investment activities of the Money Market
Series and the computation of the Money Market Series' net asset value. As
required by the rules and regulations under the Investment Company Act of
1940, as amended (the "'40 Act"), the Adviser agrees that all records which
it may maintain for the Fund or the Money Market Series thereof are the
property of the Fund and the Money Market Series and further agrees to
promptly surrender to the Fund any of such records upon the Fund's request.
The Adviser
1
<PAGE>
further agrees to preserve for the periods prescribed by such rules and
regulations any such records as are required to be preserved.
3. As its sole compensation for the services supplied to the Fund hereunder,
the Money Market Series shall pay to the Adviser an investment advisory fee
equal to .25 of 1% annually. The investment advisory fee shall be paid monthly
and shall be computed by applying to the average daily net asset value of the
Money Market Series each month one-twelfth (1/12th) of the annual rate.
The "average daily net asset value" of the Money Market Series of the Fund
for a particular period shall be determined by adding net asset values as
regularly computed by the Fund each day during such period and dividing the
resulting total by the number of days during such period.
The investment advisory fee for each month shall each be payable as soon as
practical after the last business day of such month.
4. Any investment program undertaken by the Adviser pursuant to this
Agreement, as well as any other activities undertaken by the Adviser on behalf
of the Fund pursuant hereto, shall at all times be subject to any directives of
the Board of Directors of the Fund, any Committee of the Fund's Board of
Directors acting pursuant to authority of the Board, and any officer of the Fund
acting pursuant to authority of the Board of Directors.
5. In carrying out its obligations under this Agreement, Adviser shall at all
times conform to:
(a) All applicable provisions of the Investment Company Act of 1940, as
amended, and any rules and regulations adopted thereunder;
(b) The provisions of the Articles of Incorporation of the Fund as amended
from time to time;
(c) The provisions of the By-Laws of the Fund as amended from time to
time;
(d) The provisions of the registration statements of the Fund under the
Securities Act of 1933 and the Investment Company Act of 1940, as amended
from time to time;
(e) Any other applicable provisions of state or federal law.
In connection with purchases or sales of portfolio securities for the
account of the Money Market Series of the Fund, neither the Adviser nor any
officer or director of the Adviser shall act as a principal or receive any
commission other than its compensation provided for in paragraph (3) hereof.
6. Decisions with respect to placement of the Money Market Series' portfolio
transactions will be made by the Adviser. The primary consideration in making
these decisions will be efficiency in the execution of orders and obtaining the
most favorable net prices for the Money Market Series. When consistent with
these objectives, business may be placed with brokers and dealers who furnish
investment research services to the Adviser. Such research services include
advice, both directly and in writing, as to the value of securities, or
purchasers or Sellers of securities, as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. The investment research furnished by such
brokers and dealers allows the Adviser to supplement its own research activities
and enables the Adviser to obtain the views and information of individuals and
research staffs of many different securities firms prior to making investment
decisions for the Money Market Series. To the extent portfolio transactions are
effected by dealers who furnish research services to it, the Adviser receives a
benefit not susceptible of evaluation in dollar amounts, without providing any
direct monetary benefit to the Fund from these transactions. The Adviser
believes that most research obtained by it generally benefits several or all of
the investment companies which it manages, as opposed to solely benefitting one
specific fund.
Consistent with the foregoing, the Adviser may recommend that the Money
Market Series execute portfolio transactions through brokers and dealers who
have sold shares of other investment companies managed by the Adviser, but in no
event will any such recommendation be intended as a reward or compensation for
sales of such other funds' shares, nor will such sales be considered by the
Adviser as either a qualifying or disqualifying factor in the selection of
executing broker/dealers.
The Adviser shall render regular reports to the Fund, not more frequently
than monthly, regarding the
2
<PAGE>
total brokerage business placed with brokers falling into either of the
foregoing categories and the manner in which the allocation has been
accomplished.
The Adviser agrees that no investment recommendation will be made or
influenced by a desire to provide brokerage for allocation, except in accordance
with the foregoing, and that the recommendations for such allocation or
brokerage shall not interfere with the Adviser's paramount consideration of
obtaining the best possible price and execution for the Fund.
7. The Fund understands and acknowledges that the Adviser furnishes investment
advisory, management and underwriting services to a number of other clients
including, the three (3) mutual funds known as the "American National Funds
Group". Accordingly, the Fund agrees that the services of the Adviser to the
Fund hereunder are not deemed to be exclusive and the Adviser is and shall
continue to be free to render such services and services related thereto to
others.
The American National Funds Group and other clients for which the Adviser
is investment advisor may own securities of the same companies from time to
time. However, the Money Market Series' portfolio security transactions will be
conducted independently, except when decisions are made to purchase or sell
portfolio securities of or for the Money Market Series, the other series of the
Fund, the American National Funds Group and/or other clients of the Adviser
simultaneously. In such event, the transactions will be averaged as to price
and allocated as to amount (according to the proportionate share of the total
commitment) in accordance with the daily purchase or sale orders actually
executed.
In authorizing the execution of this Agreement, the Funds' Board of
Directors and shareholders have determined that such ability to effect
simultaneous transactions may be in the best interest of the Fund and each
series thereof. It is recognized that in some cases these practices could have
a detrimental effect upon the price and volume of securities being bought and
sold by the Fund or a series thereof, while in other cases these practices could
produce better executions.
8. The Adviser shall not be liable for any error of judgment or mistake of law
or for any loss suffered by the Fund or any series thereof in connection with
the matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Adviser in
the performance of its duties or from reckless disregard by the Adviser of its
obligations and duties under this Agreement.
9. This Agreement shall become effective on the date set forth above and shall
continue in effect until November 19, 2000. Thereafter, this Agreement will
continue in effect for additional one year periods only so long as such
continuance is specifically approved at least annually by the Board of Directors
of the Fund or by vote of a majority of the outstanding voting securities of the
Money Market Series of the Fund, and in either case by the specific approval of
a majority of the directors who are not parties to such contract or agreement,
or "interested" persons of any such parties, cast in person at a meeting called
for the purpose of voting on such approval, the term "interested" persons for
this purpose having the meaning defined in Section 2(a)(19) of the Investment
Company Act of 1940, as amended.
10. This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Board of Directors of the Fund or by vote of the holders
of a majority of the outstanding voting securities of the Money Market Series of
the Fund, or by the Adviser, on sixty days' written notice to the other party.
11. This Agreement shall automatically terminate in the event of its
assignment, the term "assignment" for this purpose having the meaning defined in
Section 2(a)(4) of the Investment Company Act of 1940.
12. Any notice under this Agreement shall be in writing addressed and delivered
or mailed postage paid to the other party, at such address as such other party
may designate for the receipt of such notice. Until further notice to the other
party, it is agreed that the address of the Fund, the Money Market Series of the
Fund, and that of the Adviser for this purpose shall be 2450 South Shore
Boulevard, Suite 400, League City, Texas 77573.
13. No amendment to this Agreement shall be effective until approved by vote of
the holders of a majority of the outstanding shares of the Fund as defined in
the Investment Company Act of 1940.
14. This Investment Advisory Agreement is separate and distinct from, and
neither affects nor is affected by, the Underwriting Agreement or the
Administrative Service Agreement between the parties hereto.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate on the day and year first above written.
SM&R CAPITAL FUNDS, INC.
By: /s/ Michael W. McCroskey
--------------------------
Michael W. McCroskey, President
SECURITIES MANAGEMENT AND RESEARCH, INC.
By: /s/ Gordon D. Dixon
----------------------
Gordon D. Dixon, Senior Vice President
4
<PAGE>
EXHIBIT (e)
UNDERWRITING AGREEMENT
BETWEEN
SM&R CAPITAL FUNDS, INC.
AND
SECURITIES MANAGEMENT AND RESEARCH, INC.
THIS UNDERWRITING AGREEMENT (the "Agreement") is made and entered into this
19th day of November, 1998, by and between SM&R CAPITAL FUNDS, INC. (to be
renamed SM&R Investments, Inc. effective December 31, 1998), a Maryland
corporation hereinafter referred to as the "Fund", and SECURITIES MANAGEMENT AND
RESEARCH, INC., a Florida corporation hereinafter referred to as the
"Underwriter".
The Fund is a series fund and currently has four series: SM&R Government
Bond Fund, formerly named American National Government Income Fund Series (the
"Government Bond Fund"); SM&R Primary Fund, formerly named American National
Primary Fund Series (the "Primary Fund"); SM&R Tax Free Fund, formerly named
American National Tax Free Series Fund (the "Tax Free Fund"); and SM&R Money
Market Fund (the "Money Market Fund"). The Government Bond Fund, the Primary
Fund, the Tax Free Fund and the Money Market Fund (individually and
collectively, the "Series") each pursue different investment objectives through
separate investment policies.
The Government Bond Fund and Tax Free Fund offer multiple classes of shares
(each, a "Class" and, collectively, "Classes" ) described in the Fund's current
effective registration statement filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Current
Registration Statement"). Such Classes have different sales charges and
distribution and service (12b-1) fee structures described in the Fund's Current
Registration Statement.
The Money Market and Primary Funds each consist of a single class and do
not impose any sales charges or distribution and service (12b-1) fees.
SM&R is engaged in the business of providing underwriting and related
services to investment companies and desires to provide such services to the
Fund and to each Class of each of its Series.
In consideration of the mutual covenants contained in this Agreement and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Underwriter and the Fund hereby agree as follows:
1. The Fund hereby appoints the Underwriter as exclusive distributor of the
shares of all Classes of each Series of the Fund to sell such shares to the
public on the terms set forth in this Agreement. During the term of this
Agreement and any continuation thereof, no Series will sell or agree to sell any
of its shares except to or through the Underwriter at a public offering price
determined in accordance with Paragraph 3 hereof; provided, however, that any
Class of any Series of the Fund may issue shares at net asset value:
(a) in connection with the merger or consolidation of any investment
company with the Fund or the acquisition by purchase or otherwise of all or
substantially all of the assets of any investment company by the Fund;
(b) to a Series' shareholders upon their reinvestment of dividends of such
Series from net investment income or representing distributions of such
Series from net realized capital gains;
1
<PAGE>
(c) to one or more unit investment trusts organized under the Investment
Company Act of 1940 and sponsored by the Underwriter; and
(d) to such other persons and entities approved or recommended by
Underwriter which the Fund's Board of Directors may from time to time
approve and which are set forth in the Fund's Current Registration
Statement.
2. The Underwriter hereby accepts appointment as exclusive underwriter and
distributor of the shares of all Classes of all Series of the Fund and agrees
that it will use its best efforts to sell such shares; PROVIDED, HOWEVER, that
by accepting this appointment as exclusive underwriter and distributor of such
shares, the Underwriter does not undertake to sell all or any portion of the
shares of any Class of any Series.
3. The Underwriter agrees to offer shares of the capital stock of the Series
to the public through its representatives and through dealers having sales
agreements with the Underwriter (PROVIDED, HOWEVER, that nothing provided for in
this Agreement shall obligate the Underwriter to execute sales agreements with
dealers or to sell any shares to dealers). The offering price for shares of
each Class of the Government Bond Fund and the Tax Free Fund shall be equal to
each such Class' net asset value per share plus the applicable sales charge, if
any, computed as provided in the Fund's Current Registration Statement. The
offering price for shares of the Primary Fund and the Money Market Fund shall be
the net asset value of such shares computed as provided in the Fund's current
Registration Statement. The net asset value for each share of any Class of any
Series, computed as provided in the Fund's Current Registration Statement, shall
be referred to as the "Net Asset Value".
The full Net Asset Value for the Fund shares purchased shall be remitted to
the Fund promptly after payment is received by the Underwriter. The applicable
sales charge, if any, received in connection with sales of shares of the
Government Bond Fund or Tax Free Fund shall be retained by the Underwriter, and
the Underwriter may fix the portion of such sales charge to be allowed to its
representatives or to dealers having sales agreements with the Underwriter.
4. The Underwriter shall require each Series to issue shares of any Class only
to the extent necessary (except for reasonable allowances for clerical errors,
delays and errors of transmission and cancellation of orders) to fill
unconditional orders for shares of such Class placed with the Underwriter by
investors and dealers and not in excess of such unconditional orders, and the
Underwriter will not avail itself of any opportunity of making a profit by
expediting or withholding orders. In the event payment is not received by the
Underwriter for shares so issued by a Series, the Underwriter shall reimburse
the Series for the Net Asset Value applicable to such purchase, and thereafter
the shares so issued will be redeemed at the Net Asset Value applicable at the
time of redemption.
5. Shareholders of a Class of a Series are permitted to exchange their shares
into the shares of another series or fund to the extent provided and subject to
the conditions stated in the Fund's Current Registration Statement. It is
understood that the Underwriter has agreed to waive its right to that portion of
the sales charge waived on shares exchanged pursuant to such exchange privilege.
6. The Fund hereby authorizes the Underwriter to redeem upon the terms and
conditions hereinafter set forth and as described in the Fund's Current
Registration Statement, as agent of the Fund and for its account, such shares of
stock of each Class of each Series of the Fund as may be offered for redemption
to the Fund from time to time:
(a) The Underwriter may accept redemption requests from a stockholder of
record (including a request from an agent of such stockholder), to redeem
such shares at a price equal to the Net Asset Value per share which is or
becomes effective for such redemption, less any applicable contingent
deferred sales charges.
2
<PAGE>
(b) The Underwriter agrees that all redemptions of the Fund's shares made
by it after this Agreement becomes effective shall be made only as agent
for the account of each Series of the Fund and pursuant to the terms and
conditions herein set forth.
(c) The Fund reserves the right to suspend or revoke the foregoing
authorization at any time; unless otherwise stated, any such suspension or
revocation shall be effective forthwith upon receipt of notice by an
officer of the Underwriter by telegraph or written instrument from an
officer of the Fund duly authorized by its Board of Directors. In the
event that the authorization of the Underwriter is, by terms of such
notice, suspended:
(i) for more than forty-eight (48) hours, excluding from such period
any day on which the New York Stock Exchange is not open, or
(ii) until further notice, the authorization given by this Article 6
shall not be revived except by vote of the Board of Directors of
the Fund.
(d) Except for contingent deferred sales charges, which are to be paid to
SM&R, the Underwriter shall receive no commissions in respect of any
redemptions under the foregoing authorization and appointment as agent.
7. The Underwriter covenants and agrees that in selling the shares of each
Series of the Fund, it will in all respect duly conform with all state and
federal laws relating to the sale of such securities, and will indemnify and
save harmless the Fund and each such Series from any damage or expenses on
account of any wrongful act by it or its representatives. Neither the
Underwriter nor any dealer nor any other person is authorized by the Fund to
give any information or to make any representations other than those contained
in the Current Registration Statement covering the shares of any Series of the
Fund or in approved sales literature.
8. The Fund shall pay all costs and expenses in connection with registering
the shares of the Series for sale under all applicable securities laws,
including preparation and filing of required registration statements and
prospectuses under federal law and all amendments and supplements thereto, and
the expense of preparing, printing, mailing and otherwise distributing
prospectuses and statements of additional information, annual or interim reports
and proxy materials to shareholders.
9. The Underwriter shall pay the expenses normally attributable to the sale of
shares, other than as paid under the Fund's distribution and service (12b-1)
plan, including the cost of printing and mailing prospectuses (other than those
furnished to existing shareholders) and any sales literature used by the
Underwriter. It is understood and agreed that so long as the Fund's
distribution and service (12b-1) plan continues in effect, any expenses incurred
by the Underwriter hereunder may be paid in accordance with the terms of such
distribution and service (12b-1) plan.
10. In connection with the purchase or sale of portfolio securities for the
account of any Series of the Fund, neither the Underwriter nor any officer or
director of the Underwriter shall act as principal.
11. This Agreement shall become effective on the date hereof and shall continue
in effect for a period of two (2) years and thereafter only so long as such
continuance is specifically approved at least annually by the Board of Directors
or by a vote of a majority of the outstanding voting securities of each Series
of the Fund, and in either case, by the specific approval by a majority of the
directors, who are not parties to such contract or agreement or "interested"
persons of any such parties, cast in person at a meeting called for the purpose
of voting on such approval, the term "interested" persons for this purpose
having the meaning defined in Section 2(a)(19) of the '40 Act.
This Agreement may be terminated at any time without the payment of any
penalty, by vote of the
3
<PAGE>
Board of Directors of the Fund or by vote of the holders of a majority of the
outstanding shares of either Series of the Fund, or by the Underwriter, on sixty
(60) days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
assignment, the term "assignment" for this purpose having the meaning defined in
Section 2(a)(4) of the '40 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate on the day and year first above written.
SM&R CAPITAL FUNDS, INC.
By: /s/ Michael W. McCroskey
-------------------------
Michael W. McCroskey, President
SECURITIES MANAGEMENT AND RESEARCH, INC.
By: /s/ Teresa Axelson
------------------
Teresa E. Axelson, Vice President
4
<PAGE>
Exhibit (i)
December 14, 1998
SM&R Capital Funds, Inc.
2450 South Shore Boulevard, Suite 400
League City, Texas 77573
RE: SM&R Capital Funds, Inc. (the "Fund") Post-Effective Amendment No. 13
under the Securities Act of 1933 (the "33 Act") and to the Investment
Company Act of 1940 (the "40 Act") to Form N-1A Registration Statement
No. 33-44021
Gentlemen:
We have assisted you in preparing the above referenced post-effective
amendments to your '33 Act and '40 Act Registration Statements referenced above.
In connection therewith, we have examined the Company's Articles of
Incorporation and such other corporate records, prospectuses and other material
we deemed appropriate. On the basis of such examination, we are of the opinion
that the Company's shares, when sold, will be legally issued, fully paid and
non-assessable. We, of course, assume that the Company will not sell more than
the 6,000,000,000 shares authorized by its Articles of Incorporation, and that
all sales will be for full value received at the time of sale.
We consent to the attachment of this opinion to and its used in connection
with the above referenced post-effective amendments.
Yours very truly,
/s/ JERRY L. ADAMS
Jerry L. Adams
<PAGE>
EXHIBIT (j)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our report dated October 2, 1998 on the financial
statements and financial highlights of American National Government Income Fund,
American National Primary Fund and American National Tax Free Fund, each a
series of shares of SM&R Capital Funds, Inc. Such financial statements and
financial highlights appear in the 1998 Annual Report to Shareholders which
appears in the Statement of Additional Information filed in the Post-Effective
Amendment No. 13 to the Registration Statement on Form N-1A of SM&R Capital
Funds, Inc. We also consent to the references to our Firm in the Registration
Statement and Prospectus.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
December 14, 1998
<PAGE>
Exhibit (m)
SM&R CAPITAL FUNDS, INC.
(TO BE RENAMED SM&R INVESTMENTS, INC. EFFECTIVE DECEMBER 31, 1998)
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
October 1998
This Distribution and Shareholder Servicing Plan (the "Plan") is adopted by
SM&R Capital Funds, 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 SM&R Government Income Fund and the SM&R Tax Free Fund
(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- 0.25%
- --------------------------------------------------------------------------------
Class B Shares: Back-End Load (CDSC) 0.50% 0.25% 0.75%
- --------------------------------------------------------------------------------
Class C Shares: Level Load 0.75% 0.25% 1.00%
- --------------------------------------------------------------------------------
Class J Shares: Network 0.75% -0- 0.75%
- --------------------------------------------------------------------------------
Class Y Shares: Institutional -0- -0- -0-
- --------------------------------------------------------------------------------
</TABLE>
(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.
1
<PAGE>
(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.
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
2
<PAGE>
(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.
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.
3
<PAGE>
SECTION 10. FILING.
This Plan shall be filed as an exhibit to the Fund's Registration Statement
on Form N-1A with the U.S. Securities and Exchange Commission, with the next
amendment of such Registration Statement filed after the date hereof.
SECTION 11. INTERPRETATION; MEANING OF CERTAIN TERMS.
(a) This Plan shall be interpreted in accordance with the 1940 Act and Rule
12b-1 thereunder.
(b) As used in this Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act and the rules and regulations under the 1940
Act, subject to any exemption that may be granted to the Fund under the 1940 Act
by the Securities and Exchange Commission.
(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 2nd day of November, 1998
and will become effective with respect to the Class A, Class B, Class C or Class
J Shares of a Series as of January 1, 1999 or on such other date as 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 CAPITAL FUNDS, INC.
By: /s/ Michael W. McCroskey
-------------------------
Michael W. McCroskey
President
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000881166
<NAME> SM&R CAPITAL FUNDS, INC.
<SERIES>
<NUMBER> 01
<NAME> GOVERNMENT INCOME FUND SERIES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 23149512
<INVESTMENTS-AT-VALUE> 23990119
<RECEIVABLES> 211218
<ASSETS-OTHER> 2782
<OTHER-ITEMS-ASSETS> 6861
<TOTAL-ASSETS> 24210980
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 229445
<TOTAL-LIABILITIES> 229445
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23387783
<SHARES-COMMON-STOCK> 2262725
<SHARES-COMMON-PRIOR> 2272181
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (269482)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 840607
<NET-ASSETS> 23981535
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1696829
<OTHER-INCOME> 0
<EXPENSES-NET> 239646
<NET-INVESTMENT-INCOME> 1457183
<REALIZED-GAINS-CURRENT> 103599
<APPREC-INCREASE-CURRENT> 340609
<NET-CHANGE-FROM-OPS> 1901391
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1500708)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 107893
<NUMBER-OF-SHARES-REDEEMED> (265757)
<SHARES-REINVESTED> 148408
<NET-CHANGE-IN-ASSETS> 298234
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000881166
<NAME> SM&R CAPITAL FUNDS, INC.
<SERIES>
<NUMBER> 02
<NAME> PRIMARY FUND SERIES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 34591101
<INVESTMENTS-AT-VALUE> 34591101
<RECEIVABLES> 110972
<ASSETS-OTHER> 11504
<OTHER-ITEMS-ASSETS> 524507
<TOTAL-ASSETS> 35238084
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 661202
<TOTAL-LIABILITIES> 661202
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34236810
<SHARES-COMMON-STOCK> 34582655
<SHARES-COMMON-PRIOR> 33050648
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5755)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 34576882
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2049686
<OTHER-INCOME> 0
<EXPENSES-NET> 281878
<NET-INVESTMENT-INCOME> 1767808
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1767808
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1767808
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 35251969
<NUMBER-OF-SHARES-REDEEMED> (35611884)
<SHARES-REINVESTED> 1891922
<NET-CHANGE-IN-ASSETS> 1532007
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (5755)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 174328
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 345237
<AVERAGE-NET-ASSETS> 35232431
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>Expenses for the calculation are net from Securities Management & Research,
Inc. Without this reimbursement, the ratio of expenses to average net assets
would have been 0.98%, 1.01%, 1.15%, 1.21% and 1.20% for the years ended August
31, 1998, 1997, 1996, 1995 and 1994, respectively.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000881166
<NAME> SM&R CAPITAL FUNDS, INC.
<SERIES>
<NUMBER> 03
<NAME> TAX FREE FUND SERIES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 10323626
<INVESTMENTS-AT-VALUE> 11026401
<RECEIVABLES> 149307
<ASSETS-OTHER> 8736
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11184444
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 126780
<TOTAL-LIABILITIES> 126780
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10365937
<SHARES-COMMON-STOCK> 1038994
<SHARES-COMMON-PRIOR> 1041640
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21438)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 702775
<NET-ASSETS> 11057664
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 571797
<OTHER-INCOME> 0
<EXPENSES-NET> 80157
<NET-INVESTMENT-INCOME> 491640
<REALIZED-GAINS-CURRENT> 28603
<APPREC-INCREASE-CURRENT> 363642
<NET-CHANGE-FROM-OPS> 883885
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (499989)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 59089
<NUMBER-OF-SHARES-REDEEMED> (113023)
<SHARES-REINVESTED> 51288
<NET-CHANGE-IN-ASSETS> 357495
<ACCUMULATED-NII-PRIOR> 8346
<ACCUMULATED-GAINS-PRIOR> (50038)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 53102
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 133259
<AVERAGE-NET-ASSETS> 10696719
<PER-SHARE-NAV-BEGIN> 10.27
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> 0.37
<PER-SHARE-DIVIDEND> (0.49)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.64
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>Expenses for the calculation are net of a reimbursement from Securities
Management & Research, Inc. Without this reimbursement, the ratio of expenses
to average net assets would have been 1.25%, 1.27%, 1.18% and 1.25% for the
years ended August 31, 1998, 1997, 1996, and 1995, respectively.
</FN>
</TABLE>
<PAGE>
Exhibit (o)
SM&R CAPITAL FUNDS, INC.
(TO BE RENAMED SM&R INVESTMENTS, INC. EFFECTIVE DECEMBER 31, 1998)
MULTIPLE CLASS PLAN
October 1998
This Multiple Class Plan (the "Multi-Class Plan") is adopted by SM&R
Capital Funds, Inc., a corporation organized under the laws of the State of
Maryland (the "Fund"), pursuant to Rule 18f-3 under the Investment Company Act
of 1940, as amended (the "1940 Act") for two of the Fund's series: the SM&R
Government Income Fund and the SM&R Tax Free Fund (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 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
- --------------------
(1) The SM&R Primary Fund and the proposed new SM&R Money Market Fund will each
have only one class, with no sales load and no Rule 12b-1 Distribution or
Shareholder Fees.
1
<PAGE>
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
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 SM&R Growth Fund, Inc., SM&R Equity Income Fund, Inc. and SM&R
Balanced Fund, Inc., (each, a "Portfolio"), on terms described in the
Prospectus. Each Class of Shares also will be exchangeable for shares of the
SM&R Money Market Fund (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 Distribution Fee of
- --------------------
(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.
(3) Shareholders who have existing accounts in the SM&R Primary Fund will also
be able to exchange from other Series into the SM&R Primary Fund.
2
<PAGE>
.25% of the value of the average daily net assets attributable to Class A
Shares; (ii) subject to an Administrative Fee at a maximum annual rate of
.25% of the value of the average daily net assets attributable to Class A
Shares; and (iii) not subject to any Service 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.
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:
3
<PAGE>
(1) expenses related to the distribution of a Class of Shares or to the
services provided to shareholders of a Class of Shares shall be borne
solely by such Class;
(2) each Class will bear different Class Expenses (as defined below);
(3) each Class will have exclusive voting rights with respect to matters
that exclusively affect such Class; and
(4) each Class will bear a different name or designation.
Expenses that are directly attributable to a particular Class of Shares
will be incurred by that Class of Shares. The Board, acting in its sole
discretion, has determined that the following expenses attributable to the
Shares of a particular Class ("Class Expenses") will be borne solely by the
Class to which they are attributable:
(1) asset-based distribution fees and shareholder service fees;
(2) transfer agency fees attributable to a particular Class;
(3) expenses related to preparing, printing, mailing and distributing
materials such as shareholder reports, prospectuses and proxy
statements to current shareholders of a specific Class;
(4) state and federal registration fees incurred by a specific Class;
(5) litigation and other legal expenses relating to a particular Class;
(6) directors' fees and expenses incurred as a result of issues relating
solely to a particular Class;
(7) accounting, audit and tax expenses relating to a specific Class;
(8) the expenses of administrative personnel and services required to
support the shareholders of a specific Class; and
(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.
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.
4
<PAGE>
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 will become effective with respect to each Class of Shares of a
Series on January 1, 1999 or on such other date as interests in that Class are
first offered to or held by the public, subject to approval by the Board as
required by Rule 18f-3 under the 1940 Act.
IN WITNESS WHEREOF, the Fund has executed this Multi-Class Plan on the day
and year set forth below.
Date: November 2, 1998
------------------
SM&R CAPITAL FUNDS, INC.
/s/ Teresa Axelson By: /s/ Michael W. McCroskey
- ----------------------- ----------------------------
Vice President Michael W. McCroskey, President
- -----------------------
Attest:
<PAGE>
EXHIBIT 99.B(p)
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 21% and 30%, respectively, of the
outstanding stock of the Government Bond Fund, 2% and 65%, respectively, of
the Primary Fund, and 12% and 60%, 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: ANDV 97, Inc.
ENTITY FORM: A Texas Corporation
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: Beechwood Business Park Joint Venture
ENTITY FORM: a Texas limited partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: ANTAC owns a 50% limited partership
interest
ENTITY: Garden State Life Insurance Company
ENTITY FORM: a New Jersey insurance company
OWNERSHIP OR OTHER BASIS OF CONTROL: Wholly owned subsidiary of American
National Insurance Company.
ENTITY: Gateway Park Joint Venture
ENTITY FORM: a Texas joint venture
OWNERSHIP OR OTHER BASIS OF CONTROL: South Shore Harbour Development, Ltd. has
a 50% interest.
ENTITY: Harbour Title Company
ENTITY FORM: a Texas corporation
OWNERSHIP OR OTHER BASIS OF CONTROL: South Shore Harbour Development, Ltd. owns
50% of the outstanding stock.
ENTITY: IAH 97 Joint Venture
ENTITY FORM: a Texas General Partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: ANTAC owns a 50% General Partnership
interest
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: MR/SA Partnership
ENTITY FORM: A Nevada General Partnership
OWNERSHIP OR OTHER BASIS OF CONTROL: ANTAC owns a 50% General 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: 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.
