<PAGE>
ANNUAL REPORT
[LOGO]
SM&R
SM&R INVESTMENTS, INC.
FIXED INCOME FUNDS
GOVERNMENT BOND FUND
PRIMARY FUND
TAX FREE FUND
MONEY MARKET FUND
"The financial statements and discussions contained herein are included for
the general information of our shareholders. This report is not authorized
for distribution to prospective investors unless preceded or accompanied by
an effective prospectus."
Annual Report
August 31, 2000
<PAGE>
SM&R INVESTMENTS, INC. 2450 South Shore Blvd, League City, Texas 77573
--------------------------------------------------------------------------------
DIRECTORS
Ernest S. Barratt, Ph.D.
Lea McLeod Matthews
Michael W. McCroskey
Ann McLeod Moody
Edwin K. Nolan
Robert V. Shattuck, Jr.
Jamie G. Williams
Frank P. Williamson
OFFICERS
Michael W. McCroskey, President
Brenda T. Koelemay, Vice President and Treasurer
Emerson V. Unger, Vice President
Teresa E. Axelson, Vice President and Secretary
INVESTMENT ADVISOR AND MANAGER
Securities Management and Research, Inc.
P.O. Box 58969
Houston, Texas 77258-8969
CUSTODIAN
Securities Management and Research, Inc.
P.O. Box 58969
Houston, Texas 77258-8969
LEGAL COUNSEL
Greer, Herz & Adams, L.L.P.
One Moody Plaza
Galveston, Texas 77550
UNDERWRITER AND REDEMPTION AGENT
Securities Management and Research, Inc.
P.O. Box 58969
Houston, Texas 77258-8969
TRANSFER AGENT, REGISTRAR AND DIVIDEND PAYING AGENT
Securities Management and Research, Inc.
P.O. Box 58969
Houston, Texas 77258-8969
INDEPENDENT AUDITORS
Tait, Weller & Baker
8 Penn Center Plaza, Suite 800
Philadelphia, Pennsylvania 19103-2108
1
<PAGE>
PORTFOLIO MANAGER'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
SM&R GOVERNMENT BOND FUND
GUIDING PRINCIPLES
As we take on our fiduciary responsibility of prudently managing shareholder
assets, we squarely focus on two very important principles:
1. We believe SM&R Government Bond Fund shareholders are truly conservative in
nature, with low tolerance for risk.
2. Our goal is to consistently pass on competitive levels of current income,
without sacrificing credit quality or owning risky, yield-enhancing
securities that can surprise investors when interest rates become volatile.
ECONOMIC REVIEW
For more than half of the last one year period, it has been a difficult time to
be a bond investor. Beginning in June of 1999, the Federal Reserve embarked on a
nearly year-long mission to keep our economy from barreling down the tracks of
growth and prosperity at such a pace that might lead to an unfortunate
derailment, which would come at the hands of inflation. Since June of '99,
Chairman Greenspan and his conductors have raised short-term interest rates six
times, which is one of the more aggressive preemptive inflation strikes in
history. The actions of our central bank were warranted, however, as our red-hot
economy, led by strong consumer confidence and spending, turned in annualized
quarterly growth spurts of 8.3% during the fourth quarter of 1999, 4.8% during
the first quarter of 2000, and 5.2% over the second quarter of this year.
Clearly, these types of growth readings equate to a slippery slope with the
inflation monster looming at the bottom. After all, it wasn't so long ago that
we were "comfortable" with the prospects of continued subdued inflation so long
as growth remained only in the 2.5 to 3% annual range. The bottom line is,
however, we are experiencing this dramatic economic growth cycle and inflation
is still relatively tame, with most estimates for year 2000 consumer inflation
to be a little above 3%. It appears that Chairman Greenspan and the Federal
Reserve board, along with some substantial help from continued corporate
productivity gains, are continuing their `pro-growth-yet-inflation-hawkish'
winning ways.
FUND PERFORMANCE
Again, for the first several months of this fiscal year, the Fund was severely
challenged to provide positive investment return in a steeply rising interest
rate environment. As the inflation picture became more focused, the longer end
of the yield curve, confident that higher short rates would effectively deal
with inflation, began to rally and thus bond prices improved. Over the last
fiscal year (thru 8-31-2000), the fund has provided a total return of 5.58% to
class "T" investors, at net asset value. Through the first eight months of
calendar year 2000, the fund offered class "T" shareholders a total return
4.59%, as of 8-31-2000, at net asset value.
LOOKING AHEAD
As we move through the remainder of 2000 we expect to see the economy continue
its cooling trend, but would still expect 2001 growth to be in the neighborhood
of 3.5%, while inflation may decrease slightly to just under 3%. Moving forward
we plan to continue relying on individual security selection and market sector
selection strategies, rather than tailoring the portfolio to brash interest rate
calls. For example, over the last couple of years we have taken advantage of
what we perceived to be yield spread inefficiencies to add a significant
percentage of highly rated corporate bonds to the portfolio for additional yield
with only slightly higher risk. We certainly spend a great deal of time
analyzing the yield curve, but are keenly aware of the margin of error involved
with attempting to predict interest rates. We believe our focus on identifying
sector inefficiencies will lead to stronger, more consistent performance over
time.
Finally, for more updated Fund and economic information throughout the year,
visit our website at www.smrinvest.com. Thank you for your continued confidence
in the SM&R Mutual Funds.
2
<PAGE>
AVERAGE ANNUAL RETURNS* AS OF AUGUST 31, 2000
<TABLE>
<CAPTION>
Class T Class A Class B Class C
<S> <C> <C> <C> <C>
1 Year 0.79% 0.14% 1.64% 2.28%
5 Years 4.31% -- -- --
Since Inception 5.75% (0.61%) 0.16% 0.36%
Since Inception
(without sales charge) 6.32% 2.33% 2.02% 1.60%
</TABLE>
*Average annual returns are based on the maximum sales charge and reinvestment
of all dividends and capital gains. The current maximum initial sales charge for
Class T is 4.5%. The current maximum initial sales charge for Class A and C
shares is 4.75% and 1.00%, respectively. Class B shares reflect the applicable
contingent deferred sales charge (CDSC), which is 3% in the first year, declines
to 1% in the third year, and is eliminated thereafter. A CDSC of 1.00% applies
to redemption of Class C shares only within the first thirteen months of
purchase.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE SM&R GOVERNMENT BOND
FUND CLASS T AND LEHMAN BROTHERS GOVERNMENT/MORTGAGE-BACKED SECURITIES INDEX
<TABLE>
<CAPTION>
LEHMAN BROTHERS SM&R
GOVERNMENT/MORTGAGE- GOVERNMENT BOND FUND
BACKED SECURITIES INDEX CLASS T
<S> <C> <C>
March 31, 1992 $10,000 $9,551
August 31, 1992 $10,711 $10,321
August 31, 1993 $11,833 $11,366
August 31, 1994 $11,671 $11,092
August 31, 1995 $12,945 $12,407
August 31, 1996 $13,484 $12,733
August 31, 1997 $14,799 $13,926
August 31, 1998 $16,411 $15,084
August 31, 1999 $16,547 $15,199
August 31, 2000 $17,848 $16,044
</TABLE>
Fund operations began March 16, 1992. 9/1/039/1/04 1654717848
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The SM&R Government Bond Fund's performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions and changes in net
asset value. Returns for Class A, B and C will vary from Class T as shown above
(see average annual returns chart above) due to differences in expenses and
sales charge structure. Investor's share prices and returns will fluctuate and
shares, when redeemed, may be worth more or less than their original cost.
3
<PAGE>
PORTFOLIO MANAGER'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
SM&R PRIMARY FUND
GUIDING PRINCIPLES
The SM&R Primary Fund (the "Primary Fund") seeks maximum current income
consistent with capital preservation and liquidity. Primarily, the Primary Fund
invests in commercial paper, which is short term, unsecured promissory notes
issued by principally large corporations.
1. We strive for share price stability (although the Primary Fund is not a
money market fund, where the implication is a perpetual $1.00 share price).
2. We only invest in commercial paper in one of the two highest rating
categories.
Because of its relatively new classification as an ultra short-term bond fund,
it is important that you be aware that the Fund also invests 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 three years or less
- Repurchase agreements
ECONOMIC REVIEW
For more than half of the last one year period it has been a difficult time to
be a bond investor. Beginning in June of 1999, the Federal Reserve embarked on a
nearly year-long mission to keep our economy from barreling down the tracks of
growth and prosperity at such a pace that might lead to an unfortunate
derailment, which would come at the hands of inflation. Since June of '99,
Chairman Greenspan and his conductors have raised short-term interest rates six
times, which is one of the more aggressive preemptive inflation strikes in
history. The actions of our central bank were warranted, however, as our red-hot
economy, led by strong consumer confidence and spending, turned in annualized
quarterly growth spurts of 8.3% during Q4 of 1999, 4.8% during Q1 of 2000, and
5.2% over the second quarter of this year. Clearly, these types of growth
readings equate to a slippery slope with the inflation monster looming at the
bottom. After all, it wasn't so long ago that we were "comfortable" with the
prospects of continued subdued inflation so long as growth remained only in the
2.5 to 3% annual range. The bottom line is, however, we are experiencing this
dramatic economic growth cycle and inflation is still relatively tame, with most
estimates for year 2000 consumer inflation to be a little above 3%. It appears
that Chairman Greenspan and the Federal Reserve board, along with some
substantial help from continued corporate productivity gains, are continuing
their `pro-growth-yet-inflation-hawkish' winning ways.
FUND PERFORMANCE
While periods of consistent interest rate increases are generally not conducive
to positive bond market performance, these short-term rate hikes have increased
the yield potential within the Fund. In fact, the 30-day yield on the Primary
Fund on September 1st, 1999, was 4.82%. As of August 31st, 2000, the 30-day
yield had climbed to 5.96%, a range not experienced in the shorter-term bond
arena for quite a few years. Over the last one-year period (thru 8-31-2000), the
Primary Fund has managed a total return of 4.68%, while its year-to-date total
return stands at 3.93%, as-of 8-31-2000.
LOOKING AHEAD
As we move through the remainder of 2000, we expect to see the economy continue
its cooling trend, but would still expect 2001 growth to be in the neighborhood
of 3.5%, while inflation may decrease slightly to just under 3%. As we speak,
Fed watchers are sifting through each economic release attempting to get a feel
for when the Fed is likely replace its tightening bias with a neutral one. Our
feeling is, though progress has been made in slowing the economy, the Fed does
not yet have the arsenal of evidence necessary to emphatically announce a bias
change. Additional interesting bond market events to watch over the next few
years will include further interest rate spread developments as the supply of
the benchmark 30-year Treasury bond is impacted by Federal Reserve buyback
programs and reductions in the rate of 30-year bond issuance.
Finally, for more updated Fund and economic information throughout the year,
visit our website at www.smrinvest.com. Thank you for your continued confidence
in the SM&R Mutual Funds.
4
<PAGE>
AVERAGE ANNUAL RETURNS* AS OF AUGUST 31, 2000
<TABLE>
<S> <C>
1 Year 4.68%
5 Years 4.93%
Since Inception 4.32%
</TABLE>
*The SM&R Primary Fund does not have a sales charge. Average annual returns
include reinvestment of all dividends and capital gains.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE SM&R PRIMARY
FUND AND LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX
<TABLE>
<CAPTION>
LEHMAN
GOVERNMENT/CORPORATE
INDEX SM&R PRIMARY FUND
<S> <C> <C>
March 31, 1992 $10,000 $10,000
August 31, 1992 $11,404 $10,149
August 31, 1993 $12,838 $10,411
August 31, 1994 $12,539 $10,714
August 31, 1995 $13,979 $11,250
August 31, 1996 $14,500 $11,820
August 31, 1997 $15,923 $12,409
August 31, 1998 $17,743 $13,048
August 31, 1999 $22,871 $13,669
August 31, 2000 $24,599 $14,309
</TABLE>
Funds operations began March 16, 1992.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The SM&R Primary Fund's performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions and changes in net
asset value. Investor's share prices and returns will fluctuate and shares, when
redeemed, may be worth more or less than their original cost.
5
<PAGE>
PORTFOLIO MANAGER'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
SM&R TAX FREE FUND
GUIDING PRINCIPLES
We manage this Fund to prudently provide current tax-free income . To live up to
this conservative objective, we adhere to the following:
1. We seek to maintain an average credit quality rating of AA
2. We maintain a conservative, well diversified portfolio designed to
methodically produce monthly tax free income, while attempting to keep
taxable, realized capital gains, to a minimum.
ECONOMIC REVIEW
For more than half of the last one year period it has been a difficult time to
be a bond investor. Beginning in June of 1999, the Federal Reserve embarked on a
nearly year-long mission to keep our economy from barreling down the tracks of
growth and prosperity at such a pace that might lead to an unfortunate
derailment, which would come at the hands of inflation. Since June of '99,
Chairman Greenspan and his conductors have raised short-term interest rates six
times, which is one of the more aggressive preemptive inflation strikes in
history. The actions of our central bank were warranted, however, as our red-hot
economy, led by strong consumer confidence and spending, turned in annualized
quarterly growth spurts of 8.3% during Q4 of 1999, 4.8% during Q1 of 2000, and
5.2% over the second quarter of this year. Clearly, these types of growth
readings equate to a slippery slope with the inflation monster looming at the
bottom. After all, it wasn't so long ago that we were "comfortable" with the
prospects of continued subdued inflation so long as growth remained only in the
2.5 to 3% annual range. The bottom line is, however, we are experiencing this
dramatic economic growth cycle and inflation is still relatively tame, with most
estimates for year 2000 consumer inflation to be a little above 3%. It appears
that Chairman Greenspan and the Federal Reserve board, along with some
substantial help from continued corporate productivity gains, are continuing
their `pro-growth-yet-inflation-hawkish' winning ways.
FUND PERFORMANCE
While periods of consistent interest rate increases are generally not conducive
to positive bond market performance, the last twelve months have offered periods
in which yield spreads have been decidedly in favor of municipal securities,
thus benefiting our shareholders as we have taken selective advantage of this
development. For class "T" shareholders, over the last 12 months (thru
8-31-2000) the Fund has offered a total return of 6.16%, at net asset value.
Year to date, the Fund has rewarded class "T" investors with a 7.32%, as-of
8-31-2000.
LOOKING AHEAD
As we move through the remainder of 2000 we expect to see the economy continue
its cooling trend, but would still expect 2001 growth to be in the neighborhood
of 3.5%, while inflation may decrease slightly to just under 3%. Moving forward
we plan to continue relying on individual security selection and market sector
selection strategies, rather than tailoring the portfolio to brash interest rate
calls. Interesting bond market events to watch over the next few years will
include further interest rate spread developments as the supply of the benchmark
30-year Treasury bond is impacted by Federal Reserve buyback programs and
reductions in the rate of 30-year bond issuance.
Finally, for more updated Fund and economic information throughout the year,
visit our website at www.smrinvest.com. Thank you for your continued confidence
in the SM&R Mutual Funds.
6
<PAGE>
AVERAGE ANNUAL RETURNS* AS OF AUGUST 31, 2000
<TABLE>
<CAPTION>
Class T Class A Class B Class C
<S> <C> <C> <C> <C>
1 Year 1.37% 0.83% 2.26% 3.57%
5 Years 4.63% -- -- --
Since Inception 4.38% (0.93%) (0.36%) 0.46%
Since Inception
(without sales charge) 5.07% 2.00% 1.47% 1.70%
</TABLE>
*Average annual returns are based on the maximum sales charge and reinvestment
of all dividends and capital gains. The current maximum initial sales charge for
Class T is 4.5%. The current maximum initial sales charge for Class A and C
shares is 4.75% and 1.00%, respectively. Class B shares reflect the applicable
contingent deferred sales charge (CDSC), which is 3% in the first year, declines
to 1% in the third year, and is eliminated thereafter. A CDSC of 1.00% applies
to redemption of Class C shares only within the first thirteen months of
purchase.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
SM&R TAX FREE FUND AND LEHMAN BROTHERS MUNICIPAL INDEX
<TABLE>
<CAPTION>
LEHMAN BROTHERS SM&R
MUNICIPAL INDEX TAX FREE FUND CLASS T
<S> <C> <C>
September 9, 1993 $10,000 $9,551
August 31, 1994 $9,901 $9,412
August 31, 1995 $10,779 $10,274
August 31, 1996 $11,343 $10,806
August 31, 1997 $12,392 $11,737
August 31, 1998 $13,542 $12,744
August 31, 1999 $13,610 $12,708
August 31, 2000 $14,531 $13,489
</TABLE>
Fund operations began September 9, 1993.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The SM&R Tax Free Fund's performance figures are historical and reflect
reinvestment of all dividends and capital gains distributions and changes in net
asset value. Fund income from the SM&R Tax Free Fund may be subject to
alternative minimum tax. Returns for Class A, B and C will vary from Class T as
shown above (see average annual returns chart above) due to differences in
expenses and sales charge structure. Investor's share prices and returns will
fluctuate and shares, when redeemed, may be worth more or less than their
original cost.
7
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
COMMERCIAL PAPER DATE RATE(%) AMOUNT VALUE
<S> <C> <C> <C> <C>
GOVERNMENT AGENCIES--2.61%
Federal Home Loan Bank 09/01/00 6.400 $ 200,000 $ 200,000
Federal Home Loan Mortgage Corporation 09/05/00 6.400 116,000 115,917
Federal Home Loan Mortgage Corporation 09/21/00 6.500 150,000 149,457
Federal National Mortgage Corporation 09/28/00 6.440 139,000 138,327
-----------
TOTAL COMMERCIAL PAPER--2.61%
(Cost $603,701) 603,701
-----------
<CAPTION>
CORPORATE BONDS
AUTO & TRUCK MANUFACTURERS--4.10%
<S> <C> <C> <C> <C>
General Motors Corporation 05/01/08 6.375 1,000,000 948,534
BANKS--4.06%
Chase Manhattan Corporation 02/15/08 6.375 1,000,000 939,737
FINANCIAL SERVICES--12.68%
Bear Stearns Companies, Incorporated 03/30/03 6.200 175,000 170,258
CNA Financial Corporation 01/15/08 6.450 1,000,000 868,738
Household Finance Corporation 06/17/08 6.400 1,000,000 924,226
Morgan Stanley, Dean Witter & Discover 03/01/07 6.875 1,000,000 971,684
-----------
2,934,906
MEDICAL SERVICES--4.26%
Aetna Services, Incorporated 08/15/36 6.970 1,000,000 987,702
NATURAL GAS--2.18%
National Fuel Gas Company 02/01/04 7.750 500,000 504,604
TELECOM--CELLULAR--4.30%
GTE Corporation 04/01/09 7.510 1,000,000 994,730
-----------
TOTAL CORPORATE BONDS--31.58%
(Cost $7,767,346) 7,310,213
-----------
<CAPTION>
FOREIGN BONDS
U S DOLLAR DENOMINATED
FOREIGN GOVERNMENT BONDS--1.97%
<S> <C> <C> <C> <C>
Province of Quebec, Canada 02/15/09 5.750 500,000 455,674
-----------
TOTAL FOREIGN BONDS--1.97%
(Cost $452,628) 455,674
-----------
<CAPTION>
U S GOVERNMENT AGENCY AND
U S GOVERNMENT SECURITIES
U S GOVERNMENT AGENCY SECURITIES--60.60%
<S> <C> <C> <C> <C>
Federal Home Loan Bank 08/05/04 7.380 1,000,000 1,020,027
Federal Home Loan Bank 10/25/05 6.230 150,000 146,433
Federal Home Loan Mortgage Corporation 08/01/05 6.750 165,000 164,441
Federal Home Loan Mortgage Corporation 09/15/06 7.000 106,404 106,169
</TABLE>
8
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
GOVERNMENT BOND FUND, CONTINUED
<TABLE>
<CAPTION>
INTEREST/
U S GOVERNMENT AGENCY AND MATURITY STATED FACE
U S GOVERNMENT SECURITIES DATE RATE(%) AMOUNT VALUE
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation 03/15/07 7.000 $ 659,249 $ 656,909
Federal Home Loan Mortgage Corporation 09/15/07 7.000 1,000,000 997,090
Federal Home Loan Mortgage Corporation 04/15/23 7.000 1,000,000 992,270
Federal Home Loan Mortgage Corporation 06/15/27 7.500 1,000,000 1,004,240
Federal National Mortgage Association 02/11/02 7.500 1,585,000 1,602,089
Federal National Mortgage Association 09/12/05 6.550 100,000 99,030
Federal National Mortgage Association 04/10/07 7.700 300,000 297,665
Federal National Mortgage Association 07/25/07 7.000 864,621 860,281
Federal National Mortgage Association 03/16/09 6.320 250,000 237,595
Federal National Mortgage Association 04/29/09 6.500 1,000,000 946,300
Federal National Mortgage Association 05/18/09 6.500 1,500,000 1,438,020
Federal National Mortgage Association 11/18/15 6.350 420,470 417,535
Federal National Mortgage Association 08/01/30 8.000 1,000,000 1,009,526
Private Export Funding 01/15/10 7.200 1,000,000 1,020,028
Tennessee Valley Authority 12/15/17 6.250 300,000 278,786
Vende 09/15/15 6.500 736,330 730,491
-----------
14,024,925
U S GOVERNMENT SECURITIES--2.19%
U S Treasury Bonds 02/15/26 6.000 500,000 506,875
-----------
TOTAL U S GOVERNMENT AGENCY and U S GOVERNMENT SECURITIES--62.79%
(Cost $14,526,448) 14,531,800
-----------
TOTAL INVESTMENTS--98.95%
(Cost $23,350,123) 22,901,388
CASH AND OTHER ASSETS, LESS LIABILITIES--1.05% 243,290
-----------
TOTAL NET ASSETS--100.00% $23,144,678
===========
</TABLE>
See notes to financial statements.
9
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2000
--------------------------------------------------------------------------------
GOVERNMENT BOND FUND
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value $ 22,901,388
Cash 22,770
Prepaid expenses 25,642
Receivable for:
Capital stock sold 2,903
Interest 243,804
Expense reimbursement 2,828
Other assets 2,782
------------
TOTAL ASSETS 23,202,117
------------
LIABILITIES
Capital stock reacquired 27,423
Distribution payable 3,820
Accrued:
Investment advisory fee 9,759
Service fee 4,880
Other liabilities 11,557
------------
TOTAL LIABILITIES 57,439
------------
NET ASSETS (applicable to shares outstanding) $ 23,144,678
============
NET ASSETS:
Class A $ 127,344
--------------------------------------------------------------------------
Class B $ 78,137
--------------------------------------------------------------------------
Class C $ 11,514
--------------------------------------------------------------------------
Class T $ 22,927,683
--------------------------------------------------------------------------
Total Net Assets $ 23,144,678
============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 12,564
--------------------------------------------------------------------------
Class B:
Authorized 100,000,000
Outstanding 7,709
--------------------------------------------------------------------------
Class C:
Authorized 100,000,000
Outstanding 1,141
--------------------------------------------------------------------------
Class T:
Authorized 23,000,000
Outstanding 2,282,147
--------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 10.14
Offering price per share: (Net Assets value of $10.14 /
95.25%) $ 10.65
--------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 10.14
--------------------------------------------------------------------------
Class C:
Net asset value and redemption price per share $ 10.09
Offering price per share: (Net Assets value of $10.09 /
99.00%) $ 10.19
--------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 10.05
Offering price per share: (Net Assets value of $10.05 /
95.5%) $ 10.52
--------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
10
<PAGE>
STATEMENT OF OPERATIONS For Year Ended August 31, 2000
--------------------------------------------------------------------------------
GOVERNMENT BOND FUND
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $1,577,979
EXPENSES
Investment advisory fees 114,520
Service fees 57,261
Professional fees 11,731
Custody and transaction fees 13,966
Directors' fees 5,450
Qualification fees 14,796
Shareholder reporting expenses 4,702
Insurance expenses 1,848
Distribution Fees 786
----------
TOTAL EXPENSES 225,060
LESS EXPENSES REIMBURSED (102)
----------
NET EXPENSES 224,958
----------
INVESTMENT INCOME--NET 1,353,021
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (27,911)
Change in unrealized depreciation of investments for the
year (91,162)
----------
NET LOSS ON INVESTMENTS (119,073)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,233,948
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,353,021 $ 1,347,702
Net realized gain (loss) on investments (27,911) 45,700
Change in unrealized depreciation (91,162) (1,198,180)
----------- -----------
Net increase in net assets resulting from operations 1,233,948 195,222
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (5,129) (651)
Class B (3,094) (209)
Class C (547) (131)
Class T (1,344,156) (1,346,738)
----------- -----------
Total distributions to shareholders (1,352,926) (1,347,729)
CAPITAL SHARE TRANSACTIONS--NET
Class A 58,691 69,763
Class B 70,603 8,079
Class C 547 11,131
Class T (321,873) 537,687
----------- -----------
Total net capital share transactions (192,032) 626,660
----------- -----------
TOTAL DECREASE (311,010) (525,847)
NET ASSETS
Beginning of Year 23,455,688 23,981,535
----------- -----------
End of Year $23,144,678 $23,455,688
=========== ===========
</TABLE>
See notes to financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the year.
GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
CLASS T
------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.10 $ 10.60 $ 10.42 $ 10.14 $ 10.51
Investment income--net 0.59 0.59 0.64 0.67 0.65
Net realized and unrealized gain (loss) on
investments (0.05) (0.50) 0.20 0.26 (0.37)
------- ------- ------- ------- -------
Total from Investment Operations 0.54 0.09 0.84 0.93 0.28
Less distributions from
Investment income--net (0.59) (0.59) (0.66) (0.65) (0.65)
------- ------- ------- ------- -------
Total Distributions (0.59) (0.59) (0.66) (0.65) (0.65)
------- ------- ------- ------- -------
Net Asset Value, End of Year $ 10.05 $ 10.10 $ 10.60 $ 10.42 $ 10.14
======= ======= ======= ======= =======
Total Return 5.58 % 0.76 % 8.31 % 9.37 % 2.63 %
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $22,928 $23,368 $23,982 $23,683 $21,127
Ratio of expenses with reimbursement to average
net assets 0.98 % 1.00 % 1.00 % 1.00 % 1.00 %
Ratio of expenses without reimbursement to
average net assets 0.98 % 1.11 % 1.00 % 1.07 % 1.20 %
Ratio of net investment income to average net
assets 5.91 % 5.58 % 6.08 % 6.46 % 6.17 %
Portfolio turnover rate 30.87 % 22.86 % 32.71 % 9.06 % 30.17 %
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
-------------------------------- ------------------------------- ------------
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1, 1999 YEAR ENDED JANUARY 1, 1999 YEAR ENDED
AUGUST 31, TO AUGUST 31, AUGUST 31, TO AUGUST 31, AUGUST 31,
------------- ---------------- ------------ ---------------- ------------
2000 1999 2000 1999 2000
------------- ---------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 10.20 $ 10.62 $ 10.16 $10.62 $ 10.15
Investment income--net 0.57 0.30 0.49 0.33 0.49
Net realized and unrealized
gain (loss) on investments (0.06) (0.42) (0.02) (0.46) (0.06)
-------- ------- ------- ------ -------
Total from Investment
Operations 0.51 (0.12) 0.47 (0.13) 0.43
Less distributions from
Investment income--net (0.57) (0.30) (0.49) (0.33) (0.49)
-------- ------- ------- ------ -------
Total Distributions (0.57) (0.30) (0.49) (0.33) (0.49)
-------- ------- ------- ------ -------
Net Asset Value, End of Period $ 10.14 $ 10.20 $ 10.14 $10.16 $ 10.09
======== ======= ======= ====== =======
Total Return 5.15 % (1.17)%** 4.74 % (1.30)%** 4.39 %
======== ======= ======= ====== =======
RATIOS (IN PERCENTAGES)/
SUPPLEMENTAL DATA
Net Assets, end of period $127,344 $68,792 $78,137 $7,743 $11,514
Ratio of expenses with
reimbursement to average net
assets 1.25 % 1.25 %* 1.75 % 1.75 %* 2.00 %
Ratio of expenses without
reimbursement to average net
assets 1.29 % 1.42 %* 1.84 % 1.77 %* 2.12 %
Ratio of net investment income
to average net assets 5.68 % 5.25 %* 5.12 % 4.86 %* 4.89 %
Portfolio turnover rate 30.87 % 22.86 % 30.87 % 22.86 % 30.87 %
<CAPTION>
CLASS C
SHARES
----------------
PERIOD FROM
JANUARY 1, 1999
TO AUGUST 31,
----------------
1999
----------------
<S> <C>
Net Asset Value, Beginning of
Period $ 10.62
Investment income--net 0.30
Net realized and unrealized
gain (loss) on investments (0.47)
-------
Total from Investment
Operations (0.17)
Less distributions from
Investment income--net (0.30)
-------
Total Distributions (0.30)
-------
Net Asset Value, End of Period $ 10.15
=======
Total Return (1.64)%**
=======
RATIOS (IN PERCENTAGES)/
SUPPLEMENTAL DATA
Net Assets, end of period $11,022
Ratio of expenses with
reimbursement to average net
assets 2.00 %*
Ratio of expenses without
reimbursement to average net
assets 2.25 %*
Ratio of net investment income
to average net assets 4.54 %*
Portfolio turnover rate 22.86 %
</TABLE>
* Ratios annualized
** Returns are not annualized
See notes to financial statements.
12
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
PRIMARY FUND
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C>
COMMERCIAL PAPER
AUTO PARTS MANUFACTURERS--3.02%
AutoZone Incorporated 09/15/00 6.700 $ 811,000 $ 808,881
CHEMICALS--7.47%
Eastman Chemical Company 09/08/00 6.700 1,007,000 1,005,683
Union Carbide Corporation 09/22/00 6.800 1,000,000 996,028
-----------
2,001,711
CHEMICALS--SPECIALTY--4.14%
RPM Incorporated 09/21/00 6.850 1,114,000 1,109,757
COMMUNICATION EQUIPMENT--3.33%
Cox Enterprises Incorporated 09/07/00 6.730 893,000 891,992
ELECTRIC POWER--8.88%
GPU Incorporated 09/20/00 6.850 1,200,000 1,195,655
Nevada Power Company 10/11/00 6.800 1,193,000 1,183,983
-----------
2,379,638
ELECTRONICS--3.68%
AVNET Incorporated 10/06/00 6.720 992,000 985,505
FINANCIAL SERVICES--15.72%
Comdisco Incorporated 10/10/00 6.830 1,156,000 1,147,398
Houston Industries FinanceCo L.P. 09/05/00 6.800 974,000 973,261
PP&L Capital Funding Incorporated 09/06/00 6.750 1,092,000 1,090,972
Xerox Credit Corporation 09/01/00 6.930 1,000,000 1,000,000
-----------
4,211,631
FOOD PRODUCERS--3.71%
McCormick & Company Incorporated 09/25/00 6.670 1,000,000 995,551
FURNITURE/APPLIANCES/TOOLS--4.54%
Maytag Corporation 09/11/00 6.700 1,218,000 1,215,726
LEISURE TIME/GAMING--3.77%
Mattel Incorporated 09/12/00 6.760 1,012,000 1,009,889
MACHINERY/EQUIPMENT--3.20%
Ingersoll-Rand Company 09/14/00 6.700 860,000 857,913
MANUFACTURING-SPECIALITY--5.91%
Goodyear Tire & Rubber Company (The) 10/19/00 6.750 1,009,000 999,904
Pentair, Incorporated 09/19/00 6.720 585,000 583,033
-----------
1,582,937
MEDICAL SERVICES--2.08%
PerkinElmer, Incorporated 09/19/00 6.750 560,000 558,104
NATURAL GAS--1.80%
Sierra Pacific Power Company 09/18/00 6.700 483,000 481,469
OIL SERVICES--2.48%
UOP 09/18/00 6.720 667,000 664,881
PAPER/FOREST PRODUCTS--4.34%
International Paper Company 10/05/00 6.750 1,171,000 1,163,533
PHOTOGRAPHY/IMAGING--3.68%
Xerox Corporation 09/13/00 6.930 988,000 985,711
-----------
TOTAL COMMERCIAL PAPER--81.75%
(Cost $21,904,829) 21,904,829
-----------
CORPORATE BONDS
BUILDING SUPPLIES--1.69%
Armstrong World Industries, Incorporated 08/15/03 6.350 500,000 452,966
ELECTRIC POWER--1.82%
West Penn Power Company 06/01/04 6.375 500,000 488,281
</TABLE>
13
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
PRIMARY FUND, CONTINUED
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C>
CORPORATE BONDS
FINANCIAL SERVICES--4.00%
Finova Capital Corporation 03/15/04 6.125 $ 500,000 $ 335,864
Household Finance Corporation 08/15/03 6.250 265,000 256,895
Transamerica Financial Corporation 05/14/04 6.370 500,000 480,319
-----------
1,073,078
LEISURE TIME/GAMING--1.42%
Carnival Cruise Lines 10/01/03 6.150 400,000 381,026
MEDIA-TV/RADIO/CABLE--1.83%
TCI Communications, Incorporated 05/01/03 6.375 500,000 489,124
TELECOM--LONG DISTANCE--1.85%
WorldCom, Incorporated 08/15/01 6.125 500,000 495,484
-----------
TOTAL CORPORATE BONDS--12.61%
(Cost $3,623,119) 3,379,959
-----------
MUNICIPAL BONDS
WATER & SEWER--1.85%
Lower Colorado River Authority, Texas Revenue
Bonds,
Refunding and Improvement Series C
(Rating(a) Aaa/AAA) 05/15/04 6.820 500,000 496,555
-----------
TOTAL MUNICIPAL BONDS--1.85%
(Cost $500,892) 496,555
-----------
U S GOVERNMENT AGENCY AND
U S GOVERNMENT SECURITIES
U S GOVERNMENT AGENCY SECURITIES--0.73%
Federal Home Loan Bank 11/10/03 5.750 200,000 194,622
U S GOVERNMENT SECURITIES--3.44%
U S Treasury Bonds 02/15/29 5.250 1,000,000 921,563
-----------
TOTAL U S GOVERNMENT AGENCY and U S GOVERNMENT SECURITIES--4.17%
(Cost $1,077,493) 1,116,185
-----------
TOTAL INVESTMENTS--100.38%
(Cost $27,106,333) 26,897,528
LIABILITIES IN EXCESS OF OTHER ASSETS--(0.38%) (102,882)
-----------
TOTAL NET ASSETS--100.00% $26,794,646
===========
</TABLE>
Notes to Schedule of Investments
(a) Ratings assigned by Moody's Investor's Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P"). Ratings are unaudited.
See notes to financial statements.
14
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2000
--------------------------------------------------------------------------------
PRIMARY FUND
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value $26,897,528
Cash 3,232
Prepaid expenses 3,832
Receivable for:
Capital stock sold 883
Interest 82,551
Expense reimbursement 2,139
Other assets 2,782
-----------
TOTAL ASSETS 26,992,947
-----------
LIABILITIES
Distribution payable 11,224
Capital stock reacquired 163,898
Accrued:
Investment advisory fee 10,846
Service fee 5,423
Other liabilities 6,910
-----------
TOTAL LIABILITIES 198,301
-----------
NET ASSETS $26,794,646
===========
Shares of capital stock outstanding, (1,176,000,000 shares
authorized, $.01 par value per share) 27,055,977
===========
Net asset value $ 0.99
===========
</TABLE>
STATEMENT OF OPERATIONS For Year Ended August 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Interest $1,767,747
EXPENSES
Investment advisory fees 138,844
Service fees 69,422
Professional fees 7,222
Custody and transaction fees 23,383
Directors' fees 5,448
Qualification fees 17,471
Shareholder reporting expenses 25,470
Other 2,476
----------
TOTAL EXPENSES 289,736
LESS EXPENSES REIMBURSED (67,009)
----------
NET EXPENSES 222,727
----------
INVESTMENT INCOME--NET 1,545,020
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (23,912)
Change in unrealized depreciation of investments for the year (157,804)
----------
NET LOSS ON INVESTMENTS (181,716)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,363,304
==========
</TABLE>
See notes to financial statements.
15
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
PRIMARY FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,545,020 $ 1,549,925
Net realized loss on investments (23,912) (12,564)
Change in unrealized depreciation (157,804) (51,001)
----------- -----------
Net increase in net assets resulting from operations 1,363,304 1,486,360
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (1,545,020) (1,549,925)
CAPITAL SHARE TRANSACTION--NET (3,861,935) (3,675,020)
----------- -----------
TOTAL DECREASE (4,043,651) (3,738,585)
NET ASSETS
Beginning of Year 30,838,297 34,576,882
----------- -----------
End of Year $26,794,646 $30,838,297
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the year.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- ------------ ------------ ------------ ------------
<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 0.06 0.05 0.05 0.05 0.05
Net realized and unrealized gain (loss) on
investments (0.01) -- -- -- --
------- ------- ------- ------- -------
Total from Investment Operations 0.05 0.05 0.05 0.05 0.05
Less distributions from
Investment income--net (0.06) (0.05) (0.05) (0.05) (0.05)
------- ------- ------- ------- -------
Total Distributions (0.06) (0.05) (0.05) (0.05) (0.05)
------- ------- ------- ------- -------
Net Asset Value, End of Year $ 0.99 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total Return 4.68 % 4.75 % 5.15 % 4.98 % 5.07 %
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $26,795 $30,838 $34,577 $33,045 $37,465
Ratio of expenses with reimbursement to average
net assets 0.80 % 0.80 % 0.80 % 0.80 % 0.81 %
Ratio of expenses without reimbursement to
average net assets 1.04 % 1.06 % 0.98 % 1.01 % 1.15 %
Ratio of net investment income to average net
assets 5.55 % 4.66 % 5.02 % 4.86 % 4.93 %
Portfolio turnover rate 18.46 % 30.47 % -- -- --
</TABLE>
See notes to financial statements.
16
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
TAX FREE FUND
<TABLE>
<CAPTION>
INTEREST/
MUNICIPAL BONDS MATURITY STATED FACE
RATING(a) DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
CALIFORNIA--4.29%
Aa3/AA- California State General Obligation Bonds Unlimited 06/01/11 5.250 $ 25,000 $ 26,145
Aaa/AAA Sacramento, California Municipal Utility District Electric
Revenue Bonds, Series I 01/01/15 5.750 200,000 208,642
Aaa/AAA San Francisco, California City and County Sewer Revenue
Refunding Bonds 10/01/16 5.375 250,000 252,585
------------
487,372
------------
FLORIDA--11.92%
Aaa/AAA Dade County, Florida Water & Sewer System Revenue Bonds 10/01/16 5.375 400,000 403,268
Aaa/AAA Miami-Dade County Solid Waste System Revenue Bonds 10/01/18 4.375 400,000 364,176
Aaa/AAA Miami-Dade County, Florida Expressway Authority Toll
System Revenue Bonds 07/01/29 6.375 400,000 439,176
Aa2/AA+ State of Florida-State Board of Education, Public
Education Capital Outlay Bonds, 1992 Series E 06/01/19 5.750 145,000 147,635
------------
1,354,255
------------
GEORGIA--1.58%
A3/A Municipal Electric Authority of Georgia-Power Revenue
Bonds, Series AA 01/01/07 5.400 175,000 179,121
------------
ILLINOIS--13.69%
Aaa/AAA Chicago, Illinois-General Obligation Bonds Unlimited 01/01/25 5.125 100,000 93,345
Aaa/AAA Chicago, Illinois-Park District General Obligation Bonds
Unlimited, Series C 01/01/16 4.850 230,000 213,415
Aa2/AA Illinois Health Facilities Authority-Revenue Bonds,
Series A, (Northwestern Memorial Hospital) 08/15/24 6.000 100,000 100,642
Aa2/AA Illinois Health Facilities Authority-Revenue Bonds,
Series 1994A, (Northwestern Memorial Hospital) 08/15/14 6.100 200,000 206,100
Aaa/AAA Illinois State Toll Highway Authority-Highway Priority
Revenue Bonds, Series A-FGIC 01/01/17 5.750 175,000 183,375
Aaa/AAA Regional Transportation Authority of Illinois Revenue
Bonds, Refunding MBIA 06/01/18 5.500 200,000 200,204
Aaa/NR Rockford, Illinois-General Obligation Bonds Unlimited 12/15/18 4.500 180,000 156,573
Aa2/AAA State of Illinois-Build Illinois Bonds, Sales Tax Revenue
Bonds, Series V 06/15/17 6.375 200,000 212,258
Aaa/AAA State of Illinois-General Obligation Bonds Unlimited 03/01/19 5.000 200,000 188,926
------------
1,554,838
------------
LOUISIANA--5.77%
Aaa/AAA Louisiana Public Facilities Authority Hospital Revenue
Bonds, Series C 07/01/19 5.000 400,000 371,380
Aaa/AAA New Orleans, Louisiana Sewer Service Revenue Bonds 06/01/18 5.000 300,000 284,742
------------
656,122
------------
MASSACHUSETTS--4.21%
Aaa/AAA Massachusetts State Water Revenues Authority, General
Purpose-Series A 11/01/21 5.500 450,000 478,139
------------
</TABLE>
17
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
TAX FREE FUND, CONTINUED
<TABLE>
<CAPTION>
INTEREST/
MUNICIPAL BONDS MATURITY STATED FACE
RATING(a) DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
NEW MEXICO--0.90%
Aaa/AAA Central Consolidated School District No.22 San Juan
County, New Mexico General Obligation School Building
Bonds 08/15/09 5.300 $ 100,000 $ 102,578
------------
NEW YORK--7.53%
A3/A- New York City, New York-General Obligation Bonds
Unlimited, Series J 08/01/18 5.000 200,000 186,742
Aaa/AAA New York City, New York-General Obligation Bonds
Unlimited, Series J 02/15/07 5.000 100,000 102,378
Aa3/AA New York City, New York-Transititional Financial Authority
Revenue Bonds, Series C 05/01/19 5.000 250,000 236,625
Aa3/A+ Triborough Bridge & Tunnel Authority, New York, Revenue
Bonds, General Purpose-Series B 01/01/27 5.200 350,000 329,434
------------
855,179
------------
NORTH CAROLINA--0.93%
Aaa/AAA City of Charlotte, North Carolina-General Obligation
Public Improvement Bonds, Series 1994 02/01/08 5.700 100,000 105,835
------------
OHIO--3.64%
Aaa/AAA Franklin County, Ohio-General Obligation Bonds Limited 12/01/08 5.100 300,000 309,885
Aaa/AAA Franklin County, Ohio-General Obligation Bonds Limited 12/01/11 5.300 100,000 103,233
------------
413,118
------------
OKLAHOMA--0.76%
Aaa/NR Oklahoma Housing Finance Agency-Single Family Mortgage
Revenue Bonds (Homeownership Loan Program), 1994
Series A-1 (b) 09/01/07 6.250 85,000 85,845
------------
OREGON--1.89%
A1/A+ City of Portland, Oregon-Sewer System Revenue Bonds, 1994
Series A 06/01/15 6.250 200,000 214,274
------------
PENNSYLVANIA--0.90%
Aa3/AA Pennsylvania State General Obligation Bonds Unlimited,
Refunding & Projects-First Series 04/15/06 5.000 100,000 102,205
------------
PUERTO RICO--2.07%
Baa1/A Commonwealth of Puerto Rico-Public Improvement Refunding
Bonds, Series 1992A, General Obligation Bonds 07/01/14 6.000 100,000 103,307
Baa1/BBB+ Puerto Rico Electric Power Authority-Power Revenue Bonds,
Series R 07/01/17 6.250 125,000 131,569
------------
234,876
------------
RHODE ISLAND--0.89%
Aa2/AA+ Rhode Island Housing & Mortgage Financial Corporation,
Homeownership Opportunity, Series 20-A 04/01/17 6.150 100,000 101,340
------------
TENNESSEE--1.77%
A1/AA Tennessee Housing Development Agency-Mortgage Finance
Program Bonds, 1994 Series B (b) 01/01/09 6.200 200,000 200,580
------------
</TABLE>
18
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
TAX FREE FUND, CONTINUED
<TABLE>
<CAPTION>
INTEREST/
MUNICIPAL BONDS MATURITY STATED FACE
RATING(a) DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
TEXAS--16.99%
Aaa/AAA Baytown, Texas-Water and Sewer Revenue Bonds 02/01/14 5.950 $ 100,000 $ 103,135
Aaa/AAA Board of Regents of The University of Texas
System-Permanent University Fund, Refunding Bonds,
Series 1992A 07/01/13 6.250 200,000 205,794
Aaa/AAA City of Austin, Texas-Combined Utility Systems Revenue
Refunding Bonds, Series 1994 05/15/16 6.250 80,000 85,636
Aaa/AAA Collin County, Texas-Community College District,
Consolidated Fund, Revenue Bonds 02/01/15 5.250 400,000 398,380
Aaa/AAA Dallas-Fort Worth International Airport-Dallas-Fort Worth
Regional Airport, Joint Revenue Refunding Bonds,
Series 1994A 11/01/10 6.000 100,000 104,744
Aaa/A+ Flower Mound, Texas-Refunding and Improvement, General
Obligation Bonds Unlimited 03/01/17 5.500 200,000 200,976
Aa1/AA+ Harris County, Texas-Tax and Revenue Certificates of
Obligation, Series 1994 10/01/13 6.100 125,000 132,617
Aaa/AAA Mission Texas Consolidated Independent School
District-General Obligation Bonds Unlimited 02/15/18 4.500 200,000 175,082
AAA/NR Tarrant County Health Facilities Development
Corporation-Health System Revenue Bonds, (Harris
Methodist Health System), Series 1994 (c) 09/01/14 6.000 200,000 217,712
Aaa/AAA Texas Turnpike Authority-Dallas North Tollway System
Revenue Bonds, Series 1995 (President George Bush
Turnpike) 01/01/15 5.400 100,000 100,388
Aaa/NR Weslaco, Texas Independent School District General
Obligation Bonds 02/15/13 5.650 100,000 102,712
Aaa/AAA West University Place, Texas-General Obligation Bonds
Limited, Permanent Improvement 02/01/14 5.650 100,000 102,039
------------
1,929,215
------------
UTAH--1.65%
Aa1/AAA Utah Housing Finance Agency-Single Family Mortgage Bonds,
1995 Issue A, (Federally Insured or Guaranteed Mortgage
Loans) (b) 07/01/12 7.150 30,000 31,011
Aa1/NR Utah State Housing Financial Agency-Single Family Mortgage
Bonds, Series F1 07/01/13 6.000 55,000 56,635
Aa2/AA Utah State Housing Financial Agency-Single Family Revenue
Bonds (b) 07/01/21 6.000 100,000 100,306
------------
187,952
------------
VIRGINIA--0.90%
Aaa/AAA Virginia State Housing Development Authority Commonwealth
Mortgage Bonds, Series A, Subseries A-4 (b) 07/01/15 6.300 100,000 102,284
------------
</TABLE>
19
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
TAX FREE FUND, CONTINUED
<TABLE>
<CAPTION>
INTEREST/
MUNICIPAL BONDS MATURITY STATED FACE
RATING(a) DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
WASHINGTON--12.85%
Aaa/AAA City of Richland, Washington-Water and Sewer Improvement
Revenue Bonds, 1993 04/01/07 5.550 $ 300,000 $ 311,082
NR/AAA King County, Washington-Department of Metropolitan
Services, Limited Tax General Obligation Bonds, 1994
Series A 01/01/08 5.800 200,000 211,080
Aa1/AA+ King County, Washington-Limited Tax General Obligation and
Refunding Bonds, 1993 Series A 12/01/10 6.000 100,000 104,757
Aaa/AAA Municipality of Metropolitan Seattle Sewer Refunding
Revenue Bonds, Series X 01/01/15 5.400 100,000 100,244
Aa1/AA+ Port of Seattle, Washington-General Obligation Bonds (b) 05/01/14 5.750 100,000 102,023
Aaa/AAA Seattle, Washington-Municipal Light & Power Revenue Bonds,
Series B 06/01/24 5.000 100,000 91,917
Aa1/AA+ State of Washington-General Obligation Bonds,
Series 1994B 05/01/09 5.750 100,000 103,390
Aa1/AA+ State of Washington-General Obligation Bonds,
Series 1994B 09/01/16 6.000 100,000 102,602
Aa1/AA+ State of Washington-General Obligation Bonds Unlimited,
Series B 05/01/18 5.500 300,000 306,459
Aaa/AAA Washington State Public Power Supply System Nuclear
Project Number 1 Refunding Revenue Bonds, Series C 07/01/10 5.500 25,000 25,948
------------
1,459,502
------------
WISCONSIN--1.82%
Aa2/AA City of Green Bay-General Obligation Refunding Bonds,
Series 1994B 04/01/09 5.900 200,000 206,552
------------
TOTAL MUNICIPAL BONDS--96.95%
(Cost $10,805,394) 11,011,182
------------
<CAPTION>
COMMERCIAL PAPER
<S> <C> <C> <C> <C> <C>
GOVERNMENT AGENCIES--1.32%
Federal Home Loan Bank 09/01/00 6.400 150,000 150,000
------------
TOTAL COMMERCIAL PAPER--1.32%
(Cost $150,000) 150,000
------------
TOTAL INVESTMENTS--98.27%
(Cost $10,955,394) 11,161,182
CASH AND OTHER ASSETS, LESS LIABILITIES--1.73% 196,367
------------
TOTAL NET ASSETS--100.00% $ 11,357,549
============
</TABLE>
Notes to Schedule of Investments
(a) Ratings assigned by Moody's Investor's Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P"). Ratings are unaudited.
(b) Security subject to the alternative minimum tax.
(c) Issuer has defeased these bonds, collateral for such defeasance is U.S.
Government obligations.
See notes to financial statements.
20
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2000
--------------------------------------------------------------------------------
TAX FREE FUND
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value $ 11,161,182
Cash 29,780
Prepaid expenses 25,291
Receivable for:
Capital stock sold 200
Interest 151,488
Expense reimbursement 2,383
Other assets 3,211
------------
TOTAL ASSETS 11,373,535
------------
LIABILITIES
Distribution payable 2,366
Accrued:
Investment advisory fee 4,784
Service fee 2,392
Other liabilities 6,444
------------
TOTAL LIABILITIES 15,986
------------
NET ASSETS (applicable to shares outstanding) $ 11,357,549
============
NET ASSETS:
Class A $ 211,755
--------------------------------------------------------------------------
Class B $ 115,025
--------------------------------------------------------------------------
Class C $ 1,029
--------------------------------------------------------------------------
Class T $ 11,029,740
--------------------------------------------------------------------------
TOTAL NET ASSETS $ 11,357,549
--------------------------------------------------------------------------
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 20,493
--------------------------------------------------------------------------
Class B:
Authorized 100,000,000
Outstanding 11,143
--------------------------------------------------------------------------
Class C:
Authorized 100,000,000
Outstanding 100
--------------------------------------------------------------------------
Class T:
Authorized 21,000,000
Outstanding 1,075,977
--------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 10.33
Offering price per share: (Net Assets value of $10.33 /
95.25%) $ 10.85
--------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 10.32
--------------------------------------------------------------------------
Class C:
Net asset value and redemption price per share $ 10.27
Offering price per share: (Net Assets value of $10.27 /
99.00%) $ 10.37
--------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 10.25
Offering price per share: (Net Assets value of $10.25 /
95.5%) $ 10.73
--------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
21
<PAGE>
STATEMENT OF OPERATIONS For Year Ended August 31, 2000
--------------------------------------------------------------------------------
TAX FREE FUND
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $ 629,833
EXPENSES
Investment advisory fees 56,294
Service fees 28,147
Professional fees 7,212
Custody and transaction fees 10,367
Directors' fees 5,448
Qualification fees 14,830
Shareholder reporting expenses 1,411
Insurance expenses 1,511
Distribution fees 1,367
---------
TOTAL EXPENSES 126,587
LESS EXPENSES REIMBURSED (40,785)
---------
NET EXPENSES 85,802
---------
INVESTMENT INCOME--NET 544,031
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 18,893
Change in unrealized appreciation of investments for the
year 111,378
---------
NET GAIN ON INVESTMENTS 130,271
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 674,302
=========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
2000 1999
------------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 544,031 $ 526,797
Net realized gain on investments 18,893 26,918
Change in unrealized appreciation (depreciation) 111,378 (608,365)
----------- -----------
Net increase (decrease) in net assets resulting from
operations 674,302 (54,650)
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (9,117) (2,378)
Class B (4,530) (1,020)
Class C (168) (333)
Class T (530,234) (523,038)
Capital Gains
Class A (87) --
Class B (33) --
Class C (3) --
Class T (4,932) --
----------- -----------
Total distributions from shareholders (549,104) (526,769)
CAPITAL SHARE TRANSACTIONS--NET
Class A 14,295 202,353
Class B 433 116,889
Class C (4,580) 6,889
Class T (309,997) 729,824
----------- -----------
Total net capital share transactions (299,849) 1,055,955
----------- -----------
TOTAL INCREASE (DECREASE) (174,651) 474,536
NET ASSETS
Beginning of Year 11,532,200 11,057,664
----------- -----------
End of Year $11,357,549 $11,532,200
=========== ===========
</TABLE>
See notes to financial statements.
22
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the year.
TAX FREE FUND
<TABLE>
<CAPTION>
CLASS T
------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.14 $ 10.64 $ 10.27 $ 9.93 $ 9.95
Investment income--net 0.49 0.48 0.49 0.51 0.53
Net realized and unrealized gain (loss) on
investments 0.12 (0.50) 0.37 0.33 (0.02)
------- ------- ------- ------- -------
Total from Investment Operations 0.61 (0.02) 0.86 0.84 0.51
Less distributions from
Investment income--net (0.49) (0.48) (0.49) (0.50) (0.53)
Capital gains (0.01) -- -- -- --
------- ------- ------- ------- -------
Total Distributions (0.50) (0.48) (0.49) (0.50) (0.53)
------- ------- ------- ------- -------
Net Asset Value, End of Year $ 10.25 $ 10.14 $ 10.64 $ 10.27 $ 9.93
======= ======= ======= ======= =======
Total Return 6.16 % (0.28)% 8.58 % 8.61 % 5.18 %
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $11,030 $11,218 $11,058 $10,700 $ 9,148
Ratio of expenses with reimbursement to average
net assets 0.75 % 0.73 % 0.75 % 0.54 % --
Ratio of expenses without reimbursement to
average net assets 1.11 % 1.23 % 1.25 % 1.27 % 1.18 %
Ratio of net investment income to average net
assets 4.84 % 4.53 % 4.60 % 4.97 % 5.27 %
Portfolio turnover rate 7.61 % 5.09 % 12.77 % 22.15 % 18.44 %
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------------------------- -------------------------------- ------------
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1, 1999 YEAR ENDED JANUARY 1, 1999 YEAR ENDED
AUGUST 31, TO AUGUST 31, AUGUST 31, TO AUGUST 31, AUGUST 31,
------------- ---------------- ------------- ---------------- ------------
2000 1999 2000 1999 2000
------------- ---------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 10.22 $ 10.68 $ 10.20 $ 10.68 $ 10.14
Investment income--net 0.46 0.21 0.41 0.18 0.42
Net realized and unrealized
gain (loss) on investments 0.12 (0.46) 0.13 (0.48) 0.14
-------- -------- -------- -------- -------
Total from Investment
Operations 0.58 (0.25) 0.54 (0.30) 0.56
Less distributions from
Investment income--net (0.46) (0.21) (0.41) (0.18) (0.42)
Capital gains (0.01) -- (0.01) -- (0.01)
-------- -------- -------- -------- -------
Total Distributions (0.47) (0.21) (0.42) (0.18) (0.43)
-------- -------- -------- -------- -------
Net Asset Value, End of Period $ 10.33 $ 10.22 $ 10.32 $ 10.20 $ 10.27
======== ======== ======== ======== =======
Total Return 5.86 % (2.37)%** 5.47 % (2.85)%** 5.72 %
======== ======== ======== ======== =======
RATIOS (IN PERCENTAGES)/
SUPPLEMENTAL DATA
Net Assets, end of period $211,755 $194,917 $115,025 $113,143 $ 1,029
Ratio of expenses with
reimbursement to average net
assets 1.00 % 1.51 %* 1.50 % 2.01 %* 1.75 %
Ratio of expenses without
reimbursement to average net
assets 1.35 % 2.02 %* 1.87 % 2.52 %* 3.77 %
Ratio of net investment income
to average net assets 4.59 % 3.69 %* 4.12 % 3.20 %* 3.89 %
Portfolio turnover rate 7.61 % 5.09 % 7.61 % 5.09 % 7.61 %
<CAPTION>
CLASS C SHARES
----------------
PERIOD FROM
JANUARY 1, 1999
TO AUGUST 31,
----------------
1999
----------------
<S> <C>
Net Asset Value, Beginning of
Period $ 10.68
Investment income--net 0.25
Net realized and unrealized
gain (loss) on investments (0.54)
-------
Total from Investment
Operations (0.29)
Less distributions from
Investment income--net (0.25)
Capital gains
-------
Total Distributions (0.25)
-------
Net Asset Value, End of Period $ 10.14
=======
Total Return (2.72)%**
=======
RATIOS (IN PERCENTAGES)/
SUPPLEMENTAL DATA
Net Assets, end of period $ 5,657
Ratio of expenses with
reimbursement to average net
assets 2.28 %*
Ratio of expenses without
reimbursement to average net
assets 2.78 %*
Ratio of net investment income
to average net assets 2.92 %*
Portfolio turnover rate 5.09 %
</TABLE>
* Ratios annualized
** Returns are not annualized
See notes to financial statements.
23
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
COMMERCIAL PAPER DATE RATE(%) AMOUNT VALUE
<S> <C> <C> <C> <C>
COMPUTER RELATED--2.63%
Hewlett-Packard Company 09/05/00 6.46 $ 1,429,000 $ 1,427,972
ELECTRIC POWER--2.49%
Georgia Power Company 09/07/00 6.52 1,353,000 1,351,522
FINANCIAL SERVICES--4.17%
CSW Credit Incorporated 09/07/00 6.49 2,265,000 2,262,548
GOVERNMENT AGENCIES--84.94%
Federal Farm Credit Bank 09/29/00 6.36 14,312,000 14,240,738
Federal Home Loan Bank 09/01/00 6.40 4,207,000 4,207,000
Federal Home Loan Bank 09/06/00 6.39 3,544,000 3,540,850
Federal Home Loan Bank 09/08/00 6.41 5,400,000 5,393,265
Federal Home Loan Mortgage Corporation 09/05/00 6.40 4,380,000 4,376,882
Federal Home Loan Mortgage Corporation 09/12/00 6.41 4,244,000 4,235,674
Federal Home Loan Mortgage Corporation 09/19/00 6.42 6,168,000 6,148,166
Federal National Mortgage Association 09/15/00 6.46 3,954,000 3,944,063
-----------
46,086,638
RETAIL--GENERAL--5.75%
Nordstrom Incorporated 09/11/00 6.50 3,123,000 3,117,358
-----------
TOTAL INVESTMENTS--99.98%
(Cost $54,246,038) 54,246,038
CASH AND OTHER ASSETS, LESS LIABILITIES--0.02% 11,548
-----------
TOTAL NET ASSETS--100.00% $54,257,586
===========
</TABLE>
See notes to financial statements.
24
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2000
--------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value $54,246,038
Cash 14,082
Prepaid expenses 5,457
Receivable for:
Distributions 9,407
Capital stock sold 3,778
-----------
TOTAL ASSETS 54,278,762
-----------
LIABILITIES
Accrued:
Investment advisory fee 7,868
Service fee 7,868
Other liabilities 5,440
-----------
TOTAL LIABILITIES 21,176
-----------
NET ASSETS $54,257,586
===========
Shares of capital stock standing, (1,000,000,000 shares
authorized, $.01 par value per share) 54,257,586
===========
Net asset value $ 1.00
===========
</TABLE>
STATEMENT OF OPERATIONS For Year Ended August 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $2,311,217
EXPENSES
Investment advisory fees 86,927
Service fees 86,927
Professional fees 7,382
Custody and transaction fees 26,939
Directors' fees 5,447
Qualification fees 32,359
Shareholder reporting expenses 2,755
Insurance expenses 1,677
Other 625
----------
TOTAL EXPENSES 251,038
LESS EXPENSES REIMBURSED (63,993)
----------
NET EXPENSES 187,045
----------
INVESTMENT INCOME--NET $2,124,172
==========
</TABLE>
See notes to financial statements.
25
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1999
AUGUST 31, TO
2000 AUGUST 31,1999
----------- ----------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 2,124,172 $ 137,393
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (2,124,172) (137,393)
CAPITAL SHARE TRANSACTIONS--NET 43,576,105 10,681,481
----------- -----------
TOTAL INCREASE 43,576,105 10,681,481
NET ASSETS
Beginning of Period 10,681,481 --
----------- -----------
End of Period $54,257,586 $10,681,481
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the year.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1999
AUGUST 31, TO AUGUST 31,
------------ ----------------
2000 1999
------------ ----------------
<S> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00
Investment income--net 0.05 0.03
------- -------
Total from Investment Operations 0.05 0.03
Less distributions from
Investment income--net (0.05) (0.03)
------- -------
Total Distributions (0.05) (0.03)
------- -------
Net Asset Value, End of Period $ 1.00 $ 1.00
======= =======
Total Return 5.56 % 2.89 %**
======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $54,258 $10,681
Ratio of expenses with reimbursement to average net assets 0.49 % 0.50 %*
Ratio of expenses without reimbursement to average net
assets 0.66 % 1.22 %*
Ratio of net investment income to average net assets 5.58 % 4.45 %*
</TABLE>
* Ratios annualized
** Returns are not annualized
See notes to financial statements.
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS August 31, 2000
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The SM&R Investments, 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' name change and the names of each of Funds'
series became effective January 1, 1999. The Funds are comprised of the SM&R
Government Bond Fund ("Government Bond Fund"), SM&R Primary Fund ("Primary
Fund"), SM&R Tax Free Fund ("Tax Free Fund"), and SM&R Money Market Fund ("Money
Market Fund"). Operations commenced March 16, 1992, for the Government Bond Fund
and Primary Fund. The Tax Free Fund began operations September 9, 1993 and the
Money Market Fund commenced operations January 1, 1999.
The Funds adopted the Multiple Class Plan for two of the Funds' series: the
Government Bond Fund and the Tax Free Fund. Each had a single class of shares,
and are offering three new classes as of January 1, 1999. The existing shares
are the Class T shares, and the newly offered classes are: the Class A shares
subject to an initial sales charge of up to 4.75% and a distribution and
shareholder servicing plan ("12b-1 Plan"); the Class B shares subject to a
contingent deferred sales charge and a 12b-1 Plan; and the Class C shares
subject to an initial sales charge of 1.00%, a contingent deferred sales charge,
and a 12b-1 Plan. The Primary Fund and Money Market Fund have one class of
shares, subject to no sales charge and no 12b-1 Plan.
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, 1999, the funds' tax year-end, the Government Bond
Fund and the Primary Fund had capital loss carryforwards that will expire in
2004 of approximately $247,000 and $42,000, 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.
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
SM&R GOVERNMENT BOND FUND
The Government Bond Fund invest primarily in the agencies or
instrumentalities of the U.S. Government. Dividends to shareholders from
net investment income are declared and paid monthly.
SM&R PRIMARY FUND
The Primary Fund's 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.
SM&R TAX FREE FUND
The Tax Free Fund's objective is to provide as high a level of interest
income largely exempt from federal income taxes as is consistent with
preservation of capital through investment of at least 80% of its net
assets in tax-exempt securities during normal market conditions. Dividends
to shareholders from net investment income are declared and paid monthly.
SM&R MONEY MARKET FUND
The Money Market Fund's objective is to seek the highest current income
consistent with the stability of principal and maintenance of liquidity.
All capital stock transactions are made at net asset value. Distributions
are computed daily and distributed monthly.
EXPENSES:
Distribution and qualification fees directly attributable to a series' class of
shares are charged to that series' class operations. All other operating
expenses not directly attributable to a series are prorated among the series
based on the relative amount of each series' net assets or shareholders, and
then allocated among the classes of that series.
The organizational cost for the Money Market Fund and the Government Bond and
Tax Free Funds' Class A, Class B and Class C shares were paid by Securities
Management and Research, Inc.
NOTE 2--OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEES:
Securities Management and 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 BOND FUND
TAX FREE FUND
<TABLE>
<CAPTION>
INVESTMENT
NET ASSETS ADVISORY 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>
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 2--OTHER TRANSACTIONS WITH AFFILIATES--CONTINUED
PRIMARY FUND
<TABLE>
<S> <C>
All average daily net assets 0.50%
</TABLE>
MONEY MARKET FUND
<TABLE>
<S> <C>
All average daily net assets 0.25%
</TABLE>
ADMINISTRATIVE SERVICE FEES:
Administrative fees paid to SM&R by the Funds are computed as a percentage of
average daily net assets as follows:
<TABLE>
<CAPTION>
NET ASSETS SERVICE 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 regular operating expenses in excess
of 1.25% per annum of the average daily net assets, except for the Money Market
Fund which is in excess of 0.50%. Regular operating expenses include the
advisory fee and administrative service fee, but does not include the
distribution and shareholder servicing fee. SM&R has voluntarily agreed to
reimburse the Primary Fund for regular operating expenses in excess of 0.80% per
annum of average daily net assets, the Tax Free Fund for regular operating
expenses in excess of 0.75% per annum of average daily net assets and the
Government Bond Fund for regular operating expenses in excess of 1.00% per annum
of average daily net assets for the year ended August 31, 2000.
DISTRIBUTION AND SHAREHOLDER SERVICING FEES:
The Funds have adopted a 12b-1 Plan, pursuant to Rule 12b-1 under the Investment
Company Act of 1940, for two of the Funds' series: the Government Bond Fund and
the Tax Free Fund, with respect to the Funds' Class A shares, Class B shares and
Class C shares (the "Class A Plan", the "Class B Plan" and the "Class C Plan",
respectively and collectively, the "Plans"). The Plans permit each class a
distribution fee to compensate SM&R, or enable SM&R to compensate other persons,
including Distributors, for distribution costs such as service fees paid to
dealers, printing and distribution of prospectuses to prospective investors,
sales literature and other sales and distribution related activities. The Funds
pay compensation for Class A shares at 0.25% per annum of the average daily net
assets, for Class B shares at 0.50% per annum of the average daily net assets
and for Class C shares at 0.75% per annum of the average daily net assets.
The Class B and Class C Plans also permit a shareholder servicing fee of 0.25%
per annum of the average daily net assets to compensate SM&R, or enable SM&R to
compensate Service Providers, for providing ongoing servicing to shareholders of
the Funds. For the year ended August 31, 2000, the Government Bond Fund and Tax
Free Fund paid $620 and $1,123, respectively as compensation under the Plans.
29
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 2--OTHER TRANSACTIONS WITH AFFILIATES--CONTINUED
SALES CHARGES:
SM&R, as principal underwriter, received as sales charges on sales of Class T, A
and C shares, for the year ended August 31, 2000, of capital stock of the Funds
as follows:
<TABLE>
<CAPTION>
SALES
CHARGES
RECEIVED BY SM&R
<S> <C>
Government Bond Fund $5,425
Tax Free Fund $5,139
</TABLE>
For the year ended August 31, 2000, SM&R received $2,005 for contingent deferred
sales charges imposed on the redemptions of Class B and C shares of capital
stock of the Funds.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of August 31, 2000, 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 Bond 540,895 23% 779,587 34%
Primary -- -- 18,652,277 69%
Tax Free 138,113 12% 689,069 62%
Money Market 621,937 1% 1,450,606 3%
</TABLE>
The Funds pay directors' fees and expenses for all the disinterested directors.
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 Bond $6,932,730 $6,755,415
Primary $ 986,260 $ 932,940
Tax Free $ 824,156 $ 909,465
</TABLE>
Gross unrealized appreciation and depreciation as of August 31, 2000, were as
follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION
------------ ------------
<S> <C> <C>
Government Bond $167,115 $615,850
Primary $ 40,542 $249,347
Tax Free $351,700 $145,912
</TABLE>
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 4--CAPITAL STOCK
GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 2000 AUGUST 31, 1999
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sale of capital shares:
Class T 33,153 $ 333,468 85,399 $ 902,135
Class A 7,359 74,194 6,805 70,359
Class B 6,844 69,573 742 7,870
Class C -- -- 1,073 11,000
----------- ------------ ----------- ------------
Total sale of capital shares 47,356 477,235 94,019 991,364
Investment income dividends reinvested:
Class T 130,341 1,301,759 124,312 1,298,156
Class A 424 4,274 43 444
Class B 119 1,194 20 209
Class C 55 547 13 131
----------- ------------ ----------- ------------
Total investment income dividends reinvested 130,939 1,307,774 124,388 1,298,940
Redemptions of capital shares outstanding:
Class T (194,661) (1,957,100) (159,122) (1,662,604)
Class A (1,966) (19,777) (101) (1,040)
Class B (16) (164) -- --
Class C -- -- -- --
----------- ------------ ----------- ------------
Total redemptions of capital shares outstanding (196,643) (1,977,041) (159,223) (1,663,644)
----------- ------------ ----------- ------------
Net increase (decrease) in capital shares outstanding (18,348) $ (192,032) 59,184 $ 626,660
============ ============
Shares outstanding at beginning of year 2,321,909 2,262,725
----------- -----------
Shares outstanding at end of year 2,303,561 2,321,909
=========== ===========
Net assets as of August 31, 2000 are comprised of the following:
Capital (par value and additional paid-in) $ 23,845,133
Accumulated net realized loss on investments (251,720)
Net unrealized depreciation of investments (448,735)
------------
Net Assets $ 23,144,678
============
</TABLE>
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 4--CAPITAL STOCK--CONTINUED
PRIMARY FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 2000 AUGUST 31, 1999
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sale of capital shares 21,140,119 $ 21,001,328 33,873,860 $ 33,873,860
Investment income dividends reinvested 1,449,798 1,438,972 1,473,935 1,473,949
Redemptions of capital shares outstanding (26,441,561) (26,302,235) (39,022,829) (39,022,829)
----------- ------------ ----------- ------------
Net decrease in capital shares outstanding (3,851,644) $ (3,861,935) (3,675,034) $ (3,675,020)
============ ============
Shares outstanding at beginning of year 30,907,621 34,582,655
----------- -----------
Shares outstanding at end of year 27,055,977 30,907,621
=========== ===========
Net assets as of August 31, 2000 are comprised of the following:
Capital (par value and additional paid-in) $ 27,045,682
Accumulated net realized loss on investments (42,231)
Net unrealized depreciation of investments (208,805)
------------
Net Assets $ 26,794,646
============
</TABLE>
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 4--CAPITAL STOCK--CONTINUED
TAX FREE FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 2000 AUGUST 31, 1999
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sale of capital shares:
Class T 18,937 $ 187,768 72,51 $ 769,888
Class A 659 6,645 19,748 209,198
Class B 6,417 64,470 11,098 116,931
Class C -- -- 2,475 26,359
----------- ------------ ----------- ------------
Total sale of capital shares 26,013 258,883 105,835 1,122,376
Investment income dividends reinvested:
Class T 51,268 511,492 48,162 507,956
Class A 898 9,035 226 2,345
Class B 451 4,530 98 1,019
Class C 15 161 32 333
----------- ------------ ----------- ------------
Total investment income dividends reinvested 52,632 525,218 48,518 511,653
Distributions from net realized gain reinvested:
Class T 486 4,837 -- --
Class A 9 87 -- --
Class B 3 33 -- --
Class C 1 3 -- --
----------- ------------ ----------- ------------
Total distributions from net realized gain reinvested 499 4,960 -- --
----------- ------------ ----------- ------------
Redemptions of capital shares outstanding:
Class T (100,936) (1,014,094) (53,448) (548,020)
Class A (145) (1,472) (902) (9,190)
Class B (6,820) (68,600) (104) (1,061)
Class C (474) (4,744) (1,949) (19,803)
----------- ------------ ----------- ------------
Total redemptions of capital shares outstanding (108,375) (1,088,910) (56,403) (578,074)
----------- ------------ ----------- ------------
Net increase (decrease) in capital shares outstanding (29,231) $ (299,849) 97,950 $ 1,055,955
============ ============
Shares outstanding at beginning of year 1,136,944 1,038,994
----------- -----------
Shares outstanding at end of year 1,107,713 1,136,944
=========== ===========
Net assets as of August 31, 2000 are comprised of the following:
Capital (par value and additional paid-in) $ 11,132,433
Accumulated net realized gain on investments 19,328
Net unrealized appreciation of investments 205,788
------------
Net Assets $ 11,357,549
============
</TABLE>
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 4--CAPITAL STOCK--CONTINUED
MONEY MARKET
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED
AUGUST 31, 2000 AUGUST 31, 1999
--------------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------- ---------- -----------
<S> <C> <C> <C> <C>
Sale of capital
shares 220,566,832 $ 220,566,832 13,546,991 $13,546,991
Investment income
dividends
reinvested 2,127,625 2,127,625 138,407 138,407
Redemptions of
capital shares
outstanding (179,118,352) (179,118,352) (3,003,917) (3,003,917)
------------ ------------- ---------- -----------
Net increase in
capital shares
outstanding 43,576,105 $ 43,576,105 10,681,481 $10,681,481
=============
Shares outstanding
at beginning of
period 10,681,481 --
------------ ----------
Shares outstanding
at end of period 54,257,586 10,681,481
============ ==========
Net assets as of August 31, 2000
are comprised of the following:
Capital (par value
and additional
paid-in) $ 54,257,586
-------------
Net Assets $ 54,257,586
=============
</TABLE>
SUBSEQUENT EVENTS
The Funds and SM&R have determined that it is in the best interest of the Funds
and the Class C Shareholders to eliminate Class C shares. Class C shares will be
automatically converted, at net asset value, to Class A shares of the Funds
effective November 1, 2000. On and after that date Class C shares will no longer
be available for sale and considered closed.
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
SM&R Investments, Inc.
We have audited the accompanying statements of assets and liabilities of SM&R
Investments, Inc. comprised of SM&R Government Bond Fund, SM&R Primary Fund,
SM&R Tax Free Fund and SM&R Money Market Fund, including the schedule of
investments as of August 31, 2000, the related statements of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended (with respect to SM&R Money Market Fund for the
year ended August 31, 2000 and the period January 1, 1999 to August 31, 1999)
and the financial highlights for each of the three years in the period then
ended (with respect to SM&R Money Market Fund for the year ended August 31, 2000
and the period January 1, 1999 to August 31, 1999). These financial statements
and financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the two 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, 2000, 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
Investments, Inc. as of August 31, 2000, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended (with respect to SM&R Money Market Fund for the year ended
August 31, 2000 and the period January 1, 1999 to August 31, 1999) and the
financial highlights for each of the three years in the period then ended (with
respect to SM&R Money Market Fund for the year ended August 31, 2000 and the
period January 1, 1999 to August 31, 1999), in conformity with generally
accepted accounting principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
September 29, 2000
35
<PAGE>
SM&R EQUITY FUNDS
SM&R GROWTH FUND, INC.
SM&R EQUITY INCOME FUND, INC.
SM&R BALANCED FUND, INC.
SM&R INVESTMENTS, INC.
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
-------------------------------------------------------------------------------
HOW TO REACH US:
SHAREHOLDER SERVICES SALES AND MARKETING
(800) 231-4639 (800) 526-8346
FUND QUOTES AND INVESTOR HOTLINE TO REQUEST A PROSPECTUS
(877) 239-2049 (800) 231-4639
VISIT OUR WEBSITE AT: WWW.SMRINVEST.COM
-------------------------------------------------------------------------------
[LOGO SM&R] SECURITIES MANAGEMENT
AND RESEARCH, INC.
MANAGER & DISTRIBUTOR
----------------------
MEMBER NASD, SIPC
2450 South Shore Blvd. - League City, TX 77573
(281) 334-2469
Form 9202 - 10/00
