<PAGE>
As filed with the Securities and Exchange Commission on August 30, 2000
REGISTRATION NOS. 33-44021; 811-6477
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 17 /X/
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 17 /X/
[Check appropriate box or boxes.]
------------------------
SM&R INVESTMENTS, 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
It is proposed that this filing will become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/X/ on September 1, 2000 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:
/ / this Post-Effective Amendment designates a new effective date for a
previously filed Post-Effective Amendment.
Title of Securities Being Registered: Common Stock, par value $.01 per share.
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<PAGE>
SM&R INVESTMENTS, INC.
Prospectuses for Class A, Class B, Class C, and Class T dated December 31, 1999
for the SM&R Government Bond Fund and SM&R Tax Free Fund and for the SM&R
Money Market Fund and SM&R Primary Fund Single Class Funds are incorporated
herein by reference.
Class J and Class Y for the SM&R Government Bond Fund and SM&R Tax Free Fund
are being eliminated.
<PAGE>
[LOGO]
SM&R INVESTMENTS, INC.
THE SM&R ALGER FUNDS
CLASSES A AND B
SM&R ALGER GROWTH FUND
SM&R ALGER SMALL-CAP FUND
SM&R ALGER AGGRESSIVE GROWTH FUND
SM&R ALGER TECHNOLOGY FUND
Prospectus, September 1, 2000
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of
this prospectus. Any representation to the contrary is a
criminal offense.
An investment in the Fund is not a deposit of the bank and
is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.
(Both classes may not be available in all states)
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
FUND SUMMARIES............................. 1
SM&R Alger Growth Fund..................... 1
SM&R Alger Small-Cap Fund.................. 3
SM&R Alger Aggressive Growth Fund.......... 5
SM&R Alger Technology Fund................. 7
PERFORMANCE................................ 9
EXPENSES OF THE SM&R ALGER FUNDS .......... 9
ADDITIONAL EXPLANATION OF RISK FACTORS..... 11
CHOOSING A SHARE CLASS THAT BEST SUITS
YOU........................................ 13
SALES CHARGE REDUCTIONS AND WAIVERS........ 14
Class A Sales Charges...................... 14
Class B Sales Charges...................... 16
Class B Waivers of Contingent Deferred
Sales Charges.............................. 16
Distribution and Shareholder
Service (12b-1) Fee........................ 17
THE SM&R ALGER FUNDS AND THEIR MANAGEMENT.. 18
Investment Adviser and Sub-Adviser......... 18
Portfolio Management....................... 18
SHAREHOLDER'S GUIDE TO INVESTING WITH THE
SM&R ALGER FUNDS........................... 20
</TABLE>
WHY READING THIS PROSPECTUS IS IMPORTANT TO YOU
This prospectus explains the investment objectives, risks and strategies of
each of the following portfolios of SM&R Investments, Inc. (the "Fund"): the
SM&R Alger Growth Fund, SM&R Alger Small-Cap Fund, SM&R Alger Aggressive
Growth Fund, and SM&R Alger Technology Fund (collectively, the "SM&R Alger
Funds," each an "SM&R Alger Fund" ). Reading the prospectus will help you to
decide which SM&R Alger Fund, if any, is the right investment for you. We
suggest that you keep this prospectus for future reference.
<PAGE>
FUND SUMMARY THE SM&R ALGER GROWTH FUND
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INVESTMENT OBJECTIVE
The SM&R Alger Growth Fund seeks to achieve long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The SM&R Alger Growth Fund normally invests at least 65% of its total assets in
the equity securities, such as common or preferred stocks, of large companies
listed on U.S. exchanges or in the over-the-counter market. The SM&R Alger
Growth Fund focuses on the stock of growing companies that generally have broad
product lines, markets, financial resources and depth of management. The fund
considers a large company to have a market capitalization of $10 billion or
greater. The fund's investment sub-adviser, Fred Alger Management, Inc.,
believes that these growth companies tend to fall into one of two categories:
HIGH UNIT VOLUME GROWTH
Vital, creative companies which offer goods or services to a rapidly expanding
marketplace. They include both established firms and emerging firms that have
achieved large capitalizations early in their life cycles, offering new or
improved products, or firms simply fulfilling an increasing demand for an
existing line.
POSITIVE LIFE CYCLE CHANGES
Companies experiencing a major change which is expected to produce
advantageous results. These changes may be as varied as new management,
products or technologies; restructuring or reorganization; or merger and
acquisition.
PRINCIPAL RISK FACTORS
The SM&R Alger Growth Fund is subject to the risks common to all mutual funds
that invest in equity securities, and you could lose money investing in this
fund. In addition, the SM&R Alger Growth Fund could underperform other
investments. The principal risk factors of investing in the SM&R Alger Growth
Fund are as follows:
- The market value of the fund's securities could decline (market risk).
- The investment decisions of the fund's investment sub-adviser could fail to
achieve the desired results (investment style or management risk).
- Growth stocks can have relatively wide price swings as a result of the high
valuations they carry (growth stock risk).
- Your investment may not grow as fast as the rate of inflation (inflation
risk).
- Trading in some stocks may be relatively short-term, meaning the fund may
buy a security and sell it a short time later to take advantage of current
gains if it is believed that an alternative investment may provide greater
future growth. This activity may create higher transaction costs due to
commissions and other expenses. Frequent short-term trading may increase the
portion of a fund's capital gains that are realized for tax purposes in any
given year. This may increase the fund's taxable dividends in that year.
Frequent trading also may increase the portion of a fund's realized capital
gains that are considered "short-term" for tax purposes. Shareholders will
pay higher taxes on dividends that represent short-term gains than they
would pay on dividends that represent long-term gains.
1
<PAGE>
FUND SUMMARY THE SM&R ALGER GROWTH FUND
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WHO MAY WANT TO INVEST IN THE FUND
This SM&R Alger Growth Fund may be appropriate if you:
- have long-term investment goals (ten years or more)
- are willing to accept higher short-term risk
- want to diversify your portfolio
WHO MAY NOT WANT TO INVEST IN THE FUND
The SM&R Alger Growth Fund may NOT be appropriate if you:
- are investing with a shorter term horizon (less than ten
years)
- are uncomfortable with an investment that may go down in
value
- are investing in the SM&R Alger Growth Fund as your
complete portfolio
2
<PAGE>
FUND SUMMARY THE SM&R ALGER SMALL-CAP FUND
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INVESTMENT OBJECTIVE
The SM&R Alger Small-Cap Fund seeks to achieve long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The SM&R Alger Small-Cap Fund normally invests at least 65% of its total assets
in the equity securities, such as common or preferred stocks, of
small-capitalization companies listed on U.S. exchanges or in the
over-the-counter market. A small capitalization company is one that has a market
capitalization within the range of companies in the Russell-Registered
Trademark- 2000 Growth Index ($36 million to $3.44 billion, as of June 30, 2000)
or the S&P-Registered Trademark- SmallCap 600 Index ($80 million to
$3.85 billion, as of June 30, 2000), both of which are indexes of common stocks
designed to track performance of small capitalization companies. The ranges of
these indexes are adjusted quarterly, based on changes in the market
capitalization of the companies comprising the indexes.
The SM&R Alger Small-Cap Fund focuses on small, fast-growing companies that
offer innovative products, services or technologies to a rapidly expanding
marketplace. The fund's investment sub-adviser, Fred Alger Management, Inc.,
believes that these growth companies tend to fall into one of two categories:
HIGH UNIT VOLUME GROWTH
Vital, creative companies which offer goods or services to a rapidly expanding
marketplace. They include both established and emerging firms, offering new or
improved products, or firms simply fulfilling an increasing demand for an
existing line.
POSITIVE LIFE CYCLE CHANGES
Companies experiencing a major change which is expected to produce
advantageous results. These changes may be as varied as new management,
products or technologies; restructuring or reorganization; or merger and
acquisition.
PRINCIPAL RISK FACTORS
The SM&R Alger Small-Cap Fund is subject to the risks common to all mutual funds
that invest in equity securities, and you could lose money investing in this
fund. In addition, the SM&R Alger Small-Cap Fund could underperform other
investments. The principal risks of investing in the SM&R Alger Small-Cap Fund
are as follows:
- The market value of the fund's securities could decline (market risk).
- The investment decisions of the fund's investment sub-adviser could fail to
achieve the desired results (investment style or management risk).
- Growth stocks can have relatively wide price swings as a result of the high
valuations they carry (growth stock risk).
- Your investment may not grow as fast as the rate of inflation (inflation
risk).
- Trading in some stocks may be relatively short-term, meaning the fund may
buy a security and sell it a short time later to take advantage of current
gains if it is believed that an alternative investment may provide greater
future growth. This activity may create higher transaction costs due to
commissions and other expenses.
In addition, investing in small companies generally involves more risks than
investing in more established larger companies. Stocks of small companies are
subject to more abrupt or erratic price movements than larger-company stocks.
Small companies often have limited product lines, markets, or financial
resources, and their management may lack depth and experience. Such companies
usually do not pay significant dividends that could cushion returns in a falling
market.
3
<PAGE>
FUND SUMMARY THE SM&R ALGER SMALL-CAP FUND
--------------------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE FUND
The SM&R Alger Small-Cap Fund may be appropriate if you:
- have long-term investment goals (ten years or more)
- have an aggressive investment style and are willing to
accept higher risk
- can tolerate significant price fluctuations inherent in
small company stock investing
- want to diversify your portfolio
WHO MAY NOT WANT TO INVEST IN THE FUND
The SM&R Alger Small-Cap Fund may NOT be appropriate if
you:
- are investing with a shorter term horizon (less than ten
years)
- are uncomfortable with an investment that may go down in
value
- are investing in the SM&R Alger Small-Cap Fund as your
complete portfolio
4
<PAGE>
FUND SUMMARY THE SM&R ALGER AGGRESSIVE GROWTH FUND
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The SM&R Alger Aggressive Growth Fund seeks to achieve long-term capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The SM&R Alger Aggressive Growth Fund normally invests at least 85% of its total
assets in the equity securities, such as common or preferred stocks, of
companies listed on U.S. exchanges or in the over-the-counter market. The SM&R
Alger Aggressive Growth Fund focuses on the equity securities of companies of
any size that demonstrate promising growth potential. The fund's investment
sub-adviser, Fred Alger Management, Inc., believes that these growth companies
tend to fall into one of two categories:
HIGH UNIT VOLUME GROWTH
Vital, creative companies which offer goods or services to a rapidly expanding
marketplace. They include both established and emerging firms, offering new or
improved products, or firms simply fulfilling an increasing demand for an
existing line.
POSITIVE LIFE CYCLE CHANGES
Companies experiencing a major change which is expected to produce
advantageous results. These changes may be as varied as new management,
products or technologies; restructuring or reorganization; or merger and
acquisition.
The SM&R Alger Aggressive Growth Fund can leverage, that is, borrow money, up to
one third of its total assets to buy additional securities.
PRINCIPAL RISK FACTORS
The SM&R Alger Aggressive Growth Fund is subject to the risks common to all
mutual funds that invest in equity securities, and you could lose money
investing in this fund. In addition, the SM&R Alger Aggressive Growth Fund could
underperform other investments. The principal risks of investing in the SM&R
Alger Aggressive Growth Fund are as follows:
- The market value of the fund's securities could decline (market risk).
- The investment decisions of the fund's investment sub-adviser could fail to
achieve the desired results (investment style or management risk).
- Growth stocks can have relatively wide price swings as a result of the high
valuations they carry (growth stock risk).
- Your investment may not grow as fast as the rate of inflation (inflation
risk).
- Trading in some stocks may be relatively short-term, meaning the fund may
buy a security and sell it a short time later to take advantage of current
gains if it is believed that an alternative investment may provide greater
future growth. This activity may create higher transaction costs due to
commissions and other expenses.
- The cost of borrowing money to leverage may exceed the returns for the
securities purchased with borrowed money, or securities purchased may go
down in value. Thus, the fund's net asset value can decrease more quickly
than if the fund had not borrowed (leverage risk).
To the extent that the fund invests in small and mid-sized companies, the fund
will be subject to more abrupt or erratic price movements than if the fund
invested only in more established larger companies. Small and mid-sized
companies often have limited product lines, markets, or financial resources, and
their management may lack depth and experience. Such companies usually do not
pay significant dividends that could cushion returns in a falling market.
5
<PAGE>
FUND SUMMARY THE SM&R ALGER AGGRESSIVE GROWTH FUND
--------------------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE FUND
The SM&R Alger Aggressive Growth Fund may be appropriate if
you:
- have long-term investment goals (ten years or more)
- have an aggressive investment style and are willing to
accept higher risk
- can tolerate wide swings in the value of your investment
- want an aggressive, long-term approach to capital growth
through stocks of growing companies
- want to diversify your portfolio
WHO MAY NOT WANT TO INVEST IN THE FUND
The SM&R Alger Aggressive Growth Fund may NOT be
appropriate if you:
- are investing with a shorter term horizon (less than ten
years)
- are uncomfortable with an investment that may go down in
value
- are investing in the SM&R Alger Aggressive Growth Fund
as your complete portfolio
6
<PAGE>
FUND SUMMARY THE SM&R ALGER TECHNOLOGY FUND
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The SM&R Alger Technology Fund seeks to achieve long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The SM&R Alger Technology Fund normally invests at least 85% of its total assets
in the equity securities, such as common or preferred stock principally of
companies listed on U.S. exchanges or in the over-the-counter market, and at
least 65% of its total assets in the equity securities of companies principally
engaged in offering, using, or developing products, processes, or services that
will provide or will benefit significantly from technological advances and
improvements.
The SM&R Alger Technology Fund focuses on technology companies of all sizes that
demonstrate promising growth potential. The fund's investment sub-adviser, Fred
Alger Management, Inc., attempts to identify companies falling into one of two
categories:
HIGH UNIT VOLUME GROWTH
Vital, creative companies which offer goods or services to a rapidly expanding
marketplace. They include both established and emerging firms, offering new or
improved products, or firms simply fulfilling an increasing demand for an
existing line.
POSITIVE LIFE CYCLE CHANGES
Companies experiencing a major change which is expected to produce
advantageous results. These changes may be as varied as new management,
products or technologies; restructuring or reorganization; or merger and
acquisition.
The SM&R Alger Technology Fund can leverage, that is, borrow money, up to one
third of its total assets to buy additional securities.
PRINCIPAL RISK FACTORS
The SM&R Alger Technology Fund is subject to the risks common to all mutual
funds that invest in equity securities, and you could lose money investing in
this fund. In addition, the SM&R Alger Technology Fund could underperform other
investments. The principal risks of investing in the fund are as follows:
- The market value of the fund's securities could decline (market risk).
- The investment decisions of the fund's investment sub-adviser could fail to
achieve the desired results (investment style or management risk).
- Growth stocks can have relatively wide price swings as a result of the high
valuations they carry (growth stock risk).
- Your investment may not grow as fast as the rate of inflation (inflation
risk).
- Trading in some stocks may be relatively short-term, meaning the fund may
buy a security and sell it a short time later to take advantage of current
gains if it is believed that an alternative investment may provide greater
future growth. This activity may create higher transaction costs due to
commissions and other expenses.
- The cost of borrowing money to leverage may exceed the returns for the
securities purchased with borrowed money, or securities purchased may go
down in value. Thus, the fund's net asset value can decrease more quickly
than if the fund had not borrowed (leverage risk).
Since the fund is aggressive in its search for capital appreciation through
technology-specific investment, share price may vary significantly with changing
market and industry conditions. In addition, the fund may be more volatile than
a fund that diversifies across many industry sectors and companies.
7
<PAGE>
FUND SUMMARY THE SM&R ALGER TECHNOLOGY FUND
--------------------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE FUND
The SM&R Alger Technology Fund may be appropriate if you:
- have long-term investment goals (ten years or more)
- have an aggressive investment style and are willing to
accept higher risk
- can tolerate wide swings in the value of your investment
- want an aggressive, long-term approach to capital growth
though stocks of growing companies
- want to diversify your portfolio
WHO MAY NOT WANT TO INVEST IN THE FUND
The SM&R Alger Technology Fund may NOT be appropriate if
you:
- are investing with a shorter term horizon (less than ten
years)
- are uncomfortable with an investment that may go down in
value
- are investing in the SM&R Alger Technology Fund as your
complete portfolio
8
<PAGE>
PERFORMANCE AND EXPENSES OF THE FUNDS
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PERFORMANCE
Because the SM&R Alger Funds were not in existence during the fiscal year ended
August 31, 2000, nor in any prior years, there is no performance record for the
SM&R Alger Funds.
EXPENSES OF THE SM&R ALGER FUNDS
Investors incur certain fees and expenses in connection with an investment in
the SM&R Alger Funds. The following table shows the fees and expenses that you
may incur if you buy and hold shares of the SM&R Alger Funds.
SHAREHOLDER FEES
(Fees paid directly from your investments)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
<S> <C> <C>
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price) 5.00%(1) 5.00%
Maximum Deferred Sales Charge (as
a percentage of the lesser of the
offering price or redemption
value)(2) (3) 5.00%(4)
Maximum Sales Charge Imposed on
Reinvested Dividends and other
Distributions (as a percentage of
offering price) None None
Redemption Fees (2) (2)
Exchange Fees None None
Maximum Account Fee (custodian fee
applicable to tax deferred
accounts only) $7.50 $7.50
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
SM&R ALGER
GROWTH FUND
CLASS A CLASS B
<S> <C> <C>
Management Fees 0.85 0.85
Distribution and/or Service (12b-1) Fees 0.35 1.00
Other Expenses(5) 0.45 0.46
Total Annual Fund Operating Expenses 1.65 2.31
</TABLE>
<TABLE>
<CAPTION>
SM&R ALGER
SMALL-CAP FUND
CLASS A CLASS B
<S> <C> <C>
Management Fees 1.00 1.00
Distribution and/or Service (12b-1) Fees 0.35 1.00
Other Expenses(5) 0.47 0.42
Total Annual Fund Operating Expenses 1.82 2.42
</TABLE>
<TABLE>
<CAPTION>
SM&R ALGER
AGGRESSIVE
GROWTH FUND
CLASS A CLASS B
<S> <C> <C>
Management Fees 1.05 1.05
Distribution and/or Service (12b-1) Fees 0.35 1.00
Other Expenses(5) 0.42 0.40
Total Annual Fund Operating Expenses 1.82 2.45
</TABLE>
<TABLE>
<CAPTION>
SM&R ALGER
TECHNOLOGY
GROWTH FUND
CLASS A CLASS B
<S> <C> <C>
Management Fees 1.35 1.35
Distribution and/or Service (12b-1) Fees 0.35 1.00
Other Expenses(5) 0.40 0.40
Total Annual Fund Operating Expenses 2.10 2.75
</TABLE>
FOOTNOTES TO FEES AND EXPENSES
<TABLE>
<C> <S>
(1) You pay a sales charge of 5.00% 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 $500,000 but less than $1 million; and zero on initial
investments of $1 million or more.
(2) You pay a $10.00 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 5.00% contingent deferred sales charge on
Class B shares applies to redemptions during the first year
after purchase. The charge declines to 4.00% during the
second year, 3.00% during the third year, 2.00% during the
fourth year, 1.00% during the fifth year, and zero during
the sixth year and thereafter.
(5) "Other expenses" are based on estimated amounts for the
current fiscal year. These expenses include administrative
services fees, audit fees, directors fees, shareholder
reporting and miscellaneous expenses.
</TABLE>
9
<PAGE>
PERFORMANCE AND EXPENSES OF THE FUNDS
--------------------------------------------------------------------------
EXPENSES OF THE SM&R ALGER FUNDS
The tables below show the total expenses you would pay on a $10,000 investment
over one and three year periods. These examples are intended to help you compare
the cost of investing in the SM&R Alger Funds with the cost of investing in
other mutual funds and are for illustration only. These examples assume that
your investment has a 5% return each year, that you reinvest all of your
dividends and that the funds' operating expenses remain the same. YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER THAN SHOWN.
EXAMPLES OF SM&R ALGER FUND EXPENSES:
SM&R ALGER GROWTH FUND
<TABLE>
<CAPTION>
ASSUMING ASSUMING
REDEMPTION NO REDEMPTION
AT END OF PERIOD AT END OF PERIOD
CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C>
1 year $ 659 $ 734 $ 659 $ 234
3 years 994 1,021 994 721
</TABLE>
SM&R ALGER SMALL-CAP FUND
<TABLE>
<CAPTION>
ASSUMING ASSUMING
REDEMPTION NO REDEMPTION
AT END OF PERIOD AT END OF PERIOD
CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C>
1 year $ 676 $ 745 $ 676 $ 245
3 years 1,044 1,055 1,044 755
</TABLE>
SM&R ALGER AGGRESSIVE GROWTH FUND
<TABLE>
<CAPTION>
ASSUMING ASSUMING
REDEMPTION NO REDEMPTION
AT END OF PERIOD AT END OF PERIOD
CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C>
1 year $ 676 $ 748 $ 676 $ 248
3 years 1,044 1,064 1,044 764
</TABLE>
SM&R ALGER TECHNOLOGY FUND
<TABLE>
<CAPTION>
ASSUMING ASSUMING
REDEMPTION NO REDEMPTION
AT END OF PERIOD AT END OF PERIOD
CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C>
1 year $ 702 $ 778 $ 702 $ 278
3 years 1,125 1,153 1,125 853
</TABLE>
10
<PAGE>
ADDITIONAL EXPLANATION OF RISK FACTORS
--------------------------------------------------------------------------
COMMON RISK FACTORS FOR
ALL OF THE SM&R ALGER FUNDS
Please remember that shares of the SM&R Alger Funds are:
- Not guaranteed to achieve their investment goal
- Not insured, endorsed or guaranteed by the FDIC, a bank or any government
agency
- Subject to investment risks, including possible loss of your original
investment.
Like most investments, your investment in an SM&R Alger Fund could fluctuate in
value over time and could result in a loss of money.
--------------------------------------------------------
PRINCIPAL RISK FACTORS SPECIFIC TO
ONE OR MORE OF THE SM&R ALGER FUNDS
IMPORTANT
The following factors may affect the value of your investment in one or more
of the SM&R Alger Funds.
MARKET RISK
Market risk is the risk that the market value of a security may move up and
down, sometimes rapidly and unpredictably. The fluctuations may cause a
security to be worth less than the price originally paid for it, or less than
it was worth at an earlier time. 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. You can lose money by investing in the SM&R
Alger Funds, especially if you sell your shares during a period of market
volatility. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. A security's market value may fluctuate in
response to events affecting an issuer's profitability or viability. The SM&R
Alger Funds cannot always predict the factors that will affect a stock's
price. The funds, however, do attempt to limit market risk by diversifying
their investments. MARKET RISK IS COMMON TO ALL STOCKS AND BONDS AND THE
MUTUAL FUNDS THAT INVEST IN THEM AND APPLIES TO ALL OF THE SM&R ALGER FUNDS.
INVESTMENT STYLE OR MANAGEMENT RISK
Investment style or management risk is the risk that the investment strategy
of the SM&R Alger Funds' investment sub-adviser may not produce the intended
results or that securities that fit the desired investment style do worse
than securities that fit other investment manager's investment styles. This
risk also involves the possibility that the investment sub-adviser will fail
to execute an investment strategy effectively. Portfolio managers may decide
to overweight or underweight certain industry sectors and to purchase
individual stocks based on their assessments of the future growth prospects
of an industry sector or particular stock. If certain industries or
investments do not perform as a fund expects (I.E., do not grow in value),
that fund could underperform its peers or lose money. INVESTMENT STYLE OR
MANAGEMENT RISK IS COMMON TO ALL MUTUAL FUNDS AND APPLIES TO ALL OF THE SM&R
ALGER FUNDS.
GROWTH STOCK RISK
The returns of a fund concentrating on growth stocks tend to vary more widely
over time than those of funds that focus on value stocks. Prices of growth
stocks tend to be higher in relation to their companies' earnings and may be
more sensitive to market, political and economic developments than other
stocks, making their prices more volatile. GROWTH STOCK RISK APPLIES TO ALL
OF THE SM&R ALGER FUNDS.
LEVERAGE RISK
Leveraging practices may make the SM&R Alger Aggressive Growth Fund and the
SM&R Alger Technology Fund more volatile. Leveraging may exaggerate the
effect on net asset value of any increase or decrease in the market value of
a fund's securities. Money borrowed for leveraging is subject to interest
costs. Minimum average balances may need to be maintained or a line of credit
with connection to borrowing may be necessary, resulting in an increased cost
of borrowing.
CONVERTIBLE SECURITIES
The SM&R Alger Funds may invest in convertible securities. Convertible
securities may include corporate notes or preferred stock, but ordinarily are
a long-term debt obligation of the issuer convertible at a stated exchange
rate into common stock of the issuer. As with all debt securities, the market
value of convertible securities tends to decline as interest rates increase
and, conversely, to increase as interest rates decline. Convertible
securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality.
11
<PAGE>
ADDITIONAL EXPLANATION OF RISK FACTORS
--------------------------------------------------------------------------
PREFERRED STOCKS
Because these stocks come with a promise to pay a stated dividend, their
price depends more on the size of the dividend than on the company's
performance. But if a company fails to pay the dividend, its preferred stock
is likely to drop in price. Changes in interest rates can also affect their
price. Some companies issue preferred stocks that are convertible into their
common stocks. Linked to the common stock in this way, convertible preferred
stocks go up and down in price as the common stock does, adding to their
market risk.
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
SM&R Alger Funds' management.
ADDITIONAL INFORMATION ABOUT THE FUNDS' INVESTMENTS
Each SM&R Alger Fund may invest up to 100% of its assets in cash, commercial
paper, high-grade bonds, or cash equivalents for temporary defensive reasons
if the fund's investment sub-adviser believes that adverse market or other
conditions warrant. This is to attempt to protect the fund's assets from a
temporary unacceptable risk of loss, rather then directly to promote the
fund's investment objective. When a fund takes such temporary defensive
positions, it may not achieve its investment objective.
Other securities that each of the SM&R Alger Funds may invest in are
discussed in the Fund's Statement of Additional Information for the SM&R
Alger Funds (see back cover).
12
<PAGE>
CHOOSING A SHARE CLASS THAT BEST SUITS YOU
--------------------------------------------------------------------------
The Fund offers four separate funds in this prospectus, each of which offers two
different classes of shares. Such classes are called Class A and Class B. Each
class has its own sales charge and distribution and service (12b-1) fee
structures. Each class represents an interest in the same fund. In addition to
choosing an SM&R Alger Fund, you should select a share class that best suits
your needs. You need to pay particularly close attention to this fee structure
when selecting the class best suited for your needs. You should consider the
factors below before investing. Your representative can help you decide.
<TABLE>
<CAPTION>
CLASS A CLASS B
(FRONT-END LOAD) (BACK-END LOAD)
<S> <C>
-Front-end sales charges as -No front-end sales charge; all
described below. There are your money goes to work for you
several ways to reduce these right away
charges as described below
-Lower annual expenses than -Higher annual expenses than
Class B shares Class A shares
-A deferred sales charge on -A deferred sales charge on
shares you sell within thirteen shares you sell within 6 years
months as described below. of purchase, as described below.
-12b-1 fee of .35% of average net -12b-1 fee of 1.00% of average
assets net assets
-Automatic conversion to Class A
shares after 8 years, thus
reducing future annual expenses.
-Purchase amounts limited to
amounts less than $500,000.
-Generally more appropriate for -Generally appropriate for
long term investors. investors who may be adverse to
an up front sales charge and are
willing to pay a back-end sales
charge and a higher 12b-1 fee
for the first 8 years.
</TABLE>
(Both classes may not be available in all states)
FOR EXPENSES OF CLASS A AND CLASS B SHARES, SEE THE EXPENSES OF THE SM&R ALGER
FUNDS EARLIER IN THIS PROSPECTUS.
13
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
--------------------------------------------------------------------------
CLASS A SALES CHARGES
If you select Class A shares you pay a "front-end" sales charge of up to 5%. The
sales charge is a percentage of the offering price, as shown in the following
table:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AS A % OF AS A % OF
AMOUNT INVESTED OFFERING PRICE AMOUNT INVESTED
<S> <C> <C>
Less than $50,000 5.00% 5.30%
$50,000 but less than
$100,000 4.50% 4.70%
$100,000 but less than
$250,000 3.50% 3.60%
$250,000 but less than
$500,000 2.50% 2.60%
$500,000 but less than
$1,000,000 1.50% 1.50%
$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
(CDSC) of 1.00% of the offering price if you redeem shares purchased without a
"front-end" sales charge, within 13 months after you bought them. The CDSC will
be calculated in the same manner as for class B shares as described below.
WAYS TO REDUCE YOUR CLASS A SALES CHARGE
1. Rights of Accumulation (ROA) may allow you to combine your current
investment with the current net asset value of shares held in all of your
Class A mutual fund accounts managed by SM&R, on which you paid a front-end
sales charge, when determining whether you meet the threshold for a reduced
Class A sales charge. Contact SM&R or your registered representative for a
list of the funds managed by SM&R.
2. Letter of Intent (LOI). If you agree to purchase at least $50,000 over a
13-month period, you pay the same sales charge as if you had invested the
full amount all at once. The Fund will hold 5% of the LOI amount in escrow
shares registered in your name until your LOI commitment is met. Escrow
shares are not eligible for exchange until the LOI is met or cancelled. An
LOI is not a binding obligation on your part to purchase the full amount of
the LOI shares or the funds to sell the full amount of the LOI shares
specified. An LOI may be implemented by --
- Completing the "Reduced Sales Charge" portion of the application
- Making an initial investment equal to 10% of the LOI amount
3. Class A Purchases in funds managed by SM&R. You may combine purchases made
at the same time in Class A shares of the funds managed by SM&R on which a
front-end sales charge is paid, if you are:
(a) An individual;
(b) An individual, his or her spouse and trusts or custodial accounts for
their minor children;
(c) A trustee or fiduciary of a single trust estate or single fiduciary
account;
(d) 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; or (e) Employees (or employers on behalf of employees)
under any employee benefit plan not qualified under Section 401 of the
Internal Revenue Code.
Purchases by employee benefit plans not qualified under Section 401 of the
Internal Revenue Code will qualify for 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
participants, forwarding investments by participants to the funds or the
like.
Contact your representative or SM&R at 1-800-231-4639 if you think you may
qualify for these services.
14
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
--------------------------------------------------------------------------
ELIGIBLE NET ASSET VALUE PURCHASERS
If you qualify under one of the categories below, you may purchase Class A
shares without a "front-end" sales charge (at net asset value):
(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, insurance agents and full-time
employees (and their spouses) of: (1) American National Insurance
Company ("American National"), (2) American National subsidiaries, and
(3) any corporation or partnership 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) members of the immediate family (any parent, spouse of a parent, child,
spouse of a child, spouse, brother, or sister, including step and
adoptive relationships), grandchildren, grandparents and in-laws of any
person named in (a), (b), (c), or (d) above;
(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;
(h) 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;
(i) persons purchasing shares for a federal or state sponsored
post-secondary education funding program;
(j) 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 Fund's Money Market and Primary Funds, which
are not offered in this prospectus);
(k) policyholders of American National Insurance Company subsidiaries that
have entered into a net asset value agreement with SM&R;
(l) members of any non-profit business, trade, professional, charitable,
civic or similar associations and clubs with an active membership of at
least 100 persons;
(m) 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
(n) 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 SM&R Alger Funds.
YOU HAVE THE SOLE RESPONSIBILITY OF NOTIFYING SM&R THAT YOU INTEND TO QUALIFY
UNDER ONE OF THESE CATEGORIES.
You will be eligible for net asset value purchases ONLY if you purchase shares
directly from SM&R. If you purchase such shares through a registered
representative of SM&R or another financial securities representative, you will
have to pay the full "front-end" sales charge on your initial purchase. You will
also pay such sales charge on all subsequent purchases unless you notify SM&R
that you wish to purchase shares directly from SM&R rather than through your
registered representative or your financial services representative for services
provided.
Each of the SM&R Alger Funds may terminate or change the terms of any waiver of
sales charges at any time.
15
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
--------------------------------------------------------------------------
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 five 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
THE LESSER OF THE
OFFERING PRICE OR
YEARS SINCE PURCHASE REDEMPTION FEE)
<S> <C>
Year 1 5.00%
Year 2 4.00%
Year 3 3.00%
Year 4 2.00%
Year 5 1.00%
Year 6 None
</TABLE>
COMPUTING CDSC
If the net asset value of shares being redeemed has increased since you bought
them, we do not impose a CDSC on the increase in net asset value. We do not
impose a CDSC on shares bought with reinvested dividends or capital gains
distributions.
We will minimize an 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 B WAIVERS OF CONTINGENT DEFERRED SALES CHARGE
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 the 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 DISABILITY. We waive the CDSC on redemptions of Class B shares
following the shareholder's death or disability, so long as:
(a) the disability began after shares were purchased
(b) SM&R is notified of such death or disability at the time of the
redemption request and receives satisfactory evidence of such death or
disability;
(c) the redemptions are made within one year following the death or initial
determination of disability; and
(d) the shares were held at the time of death or initial determination of
disability.
For purposes of this waiver, the death or 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 will waive the CDSC on redemptions of
Class B shares in connection with certain distributions from four types of
qualified retirement plans: IRAs, custodial account maintained pursuant to
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 redemption must meet 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 SM&R Alger Funds of
small accounts (accounts with a value less than $500)
16
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
--------------------------------------------------------------------------
(5) THE FUND. 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 and B pay SM&R, the Funds 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, 12b-1
FEES WILL, OVER TIME, INCREASE THE COST OF YOUR INVESTMENT IN AN SM&R ALGER FUND
AND BE MORE EXPENSIVE THAN A HIGHER "FRONT-END" LOAD.
These fees are computed as an annual percentage of the average daily net assets
of each class of shares in 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)(CDSC) 0.35 0 0.35
Class B Shares
(BACK-END LOAD) 1.00 0 1.00
</TABLE>
The distribution fee is for services that are primarily intended to result in or
are primarily attributable to the distribution of Class A and B shares. The fee
compensates SM&R, or enables SM&R to compensate other persons (including
distributors of the shares), for providing such services.
17
<PAGE>
THE SM&R ALGER FUNDS AND THEIR MANAGEMENT
--------------------------------------------------------------------------
INVESTMENT ADVISER
AND SUB-ADVISER
The Board of Directors of the Fund has delegated to SM&R, the SM&R Alger Funds'
investment adviser, the management of the SM&R Alger Funds' day to day business
and affairs.
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 banks, employee benefit plans, other
investment companies, foundations, and endowment funds.
Through an investment sub-advisory agreement, SM&R has delegated the day to day
investment management of the SM&R Alger Funds to Alger Management, One World
Trade Center, Suite 9333, New York, NY 10048. Alger Management has been an
investment adviser since 1964, and manages investments totaling (at 12/31/99)
$10.69 billion in mutual fund assets as well as $6.75 billion in other assets.
Alger Management makes investment decisions for each SM&R Alger Fund and
continuously reviews and administers the SM&R Alger Funds' investment programs.
SM&R monitors Alger Management's buying and selling of securities and
administration of the SM&R Alger Funds' investment programs. For these services,
the SM&R Alger Funds pay SM&R an investment advisory fee, which is calculated
daily for each fund and paid monthly.
The advisory agreement between the Fund, on behalf of the SM&R Alger Funds, and
SM&R spells out the investment advisory fee and other expenses that each of the
SM&R Alger Funds must pay. The investment advisory fee is expressed as a
percentage of each fund's average daily net asset value. Each of the SM&R Alger
Funds pays an investment advisory fee based on the following schedule:
<TABLE>
<CAPTION>
ANNUAL PERCENTAGE
FUND RATE
<S> <C>
SM&R Alger Growth Fund 0.85%
SM&R Alger Small-Cap Fund 1.00%
SM&R Alger Aggressive Growth Fund 1.05%
SM&R Alger Technology Fund 1.35%
</TABLE>
Because the SM&R Alger Funds were not in existence during the fiscal year ended
August 31, 1999, no advisory fees were paid to SM&R during that time.
Pursuant to the sub-advisory agreement, SM&R will be responsible for paying a
sub-advisory fee to Alger Management for each of the SM&R Alger Funds. The SM&R
Alger Funds are not responsible for paying a subadvisory fee directly.
ADMINISTRATIVE SERVICES
The SM&R Alger Funds pay SM&R an administration fee under a Fund Administration
Agreement between the Fund, on behalf of the SM&R Alger Funds, and SM&R. The
Fund Administration Agreement states that the Fund will pay SM&R for providing
non-investment related management, executive, administrative, transfer agent,
and operation services to the SM&R Alger Funds. Pursuant to the Fund
Administration Agreement, each of the SM&R Alger Funds is subject to an
administration fee at the annual rate of 0.25% of its average daily net asset
value.
PORTFOLIO MANAGEMENT
SM&R ALGER GROWTH FUND
David D. Alger has been employed by Alger Management as Executive Vice President
and Director of Research since 1971, and as President since 1995.
Ronald Tartaro has been employed by Alger Management since 1990 as a senior
research analyst until 1995 when he assumed the position of Senior Vice
President and Portfolio Manager. He serves as a co-manager of this fund.
SM&R ALGER SMALL-CAP FUND
David D. Alger has been employed by Alger Management as Executive Vice President
and Director of Research since 1971, and as President since 1995.
Bonnie Smithwick has been employed by Alger Management as a portfolio manager
since June 2000, prior to which she was a Senior Vice President and financial
analyst for Bramwell Capital Management from 1996 to 2000, and Sales Director,
Worldwide Security Services, for Citibank N.A. from 1993 to 1996. She serves as
a co-manager of this fund.
18
<PAGE>
THE SM&R ALGER FUNDS AND THEIR MANAGEMENT
--------------------------------------------------------------------------
SM&R ALGER AGGRESSIVE GROWTH FUND
David D. Alger has been employed by Alger Management as Executive Vice President
and Director of Research since 1971, and as President since 1995.
Seilai Khoo has been employed by Alger Management since 1989 as a senior
research analyst until 1995 when she assumed the position of Senior Vice
President and Portfolio Manager. She serves as a co-manager of this fund.
SM&R TECHNOLOGY FUND
David D. Alger has been employed by Alger Management as Executive Vice President
and Director of Research since 1971, and as President since 1995.
Seilai Khoo has been employed by Alger Management since 1989 as a senior
research analyst until 1995 when she assumed the position of Senior Vice
President and Portfolio Manager. She serves as a co-manager of this fund.
19
<PAGE>
SHAREHOLDER'S GUIDE TO INVESTING WITH THE SM&R ALGER FUNDS
--------------------------------------------------------------------------
IMPORTANT SHAREHOLDER FACTS AND INFORMATION
THIS SECTION OF THE PROSPECTUS IS PROVIDED TO HELP YOU BECOME FAMILIAR WITH THE
TYPES OF ACCOUNTS AND SERVICES AVAILABLE IN THE SM&R ALGER FUNDS. IT EXPLAINS
THE VARIOUS SERVICES AND FEATURES YOU CAN ESTABLISH AS PART OF YOUR ACCOUNT IN
THE "FUNDS" AS WELL AS ACCOUNT POLICIES AND FEES THAT MAY APPLY TO YOUR ACCOUNT.
WEB SITE: www.smrinvest.com
BUSINESS HOURS:
8:00 A.M. TO 4:30 P.M. CENTRAL TIME
EACH DAY THE NEW YORK STOCK EXCHANGE IS OPEN FOR TRADING ("REGULAR
TRADING DAY")
24-HOUR ACCESS TO ACCOUNT INFORMATION. SEE "VOICE RESPONSE UNIT" UNDER
"OTHER SERVICES"
MAILING ADDRESS:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
OVERNIGHT MAILING ADDRESS AND STREET ADDRESS:
SECURITIES MANAGEMENT AND RESEARCH, INC.
2450 SOUTH SHORE BOULEVARD, SUITE 400
LEAGUE CITY, TEXAS 77573
IMPORTANT PHONE NUMBERS:
INVESTOR HOTLINE/VOICE RESPONSE:
1-877-239-2049
INVESTOR SERVICES DEPARTMENT:
1-800-231-4639
FAX NUMBERS:
TRANSFER AGENCY:
1-281-538-4983
WIRING INSTRUCTIONS:
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 SM&R ALGER GROWTH FUND)
FUND ACCOUNT NUMBER (NUMBER APPEARS ON YOUR CONFIRMATION STATEMENT)
YOUR NAME (E.G., MARY SMITH)
THIRD PARTY CHECKS
To prevent fraud, SM&R will not accept checks made payable to third parties to
open new accounts. Tax-deferred rollover checks, properly endorsed, will be
accepted.
MINIMUM INVESTMENT AMOUNTS:
The SM&R Alger Funds' low investment minimums make investing easy. Once you
decide on a fund, an investment amount, and a share class simply talk to your
representative or broker-dealer, or fill out an application and send in your
investment.
The SM&R Alger Funds reserve the right to change the amount of these minimums
from time to time or to waive them in whole or in part for certain types of
accounts.
<TABLE>
<CAPTION>
INITIAL ADDITIONAL
<S> <C> <C>
Regular Accounts $500 $50
Automatic Investment Plan $500 $50
Retirement Plans $500 $50
</TABLE>
CERTIFICATES
Share certificates are not issued by the SM&R Alger Funds. Your purchases are
maintained on the records of the SM&R Alger Funds in book shares. This
provides you with easy access to your shares. You have the same rights of
share ownership as you would if certificates had been issued.
SPECIAL FEES:
- Tax-deferred: $7.50 per account custodian fee deducted annually
- Wiring fee: $10.00 for wire redemption proceeds under $10,000
SIGNATURE GUARANTEE REQUIREMENTS:
Required on all redemptions in amounts of $50,000 or more. Other requirements
apply, see page 24.
CHECK WRITING OPTION:
Check writing is not available on the SM&R Alger Funds. Refer to "Important
Facts About Redeeming."
TELEPHONE SERVICES:
SM&R will automatically establish a telephone redemption/exchange option for
all non-qualified and non-tax deferred accounts, unless you instruct us not to
do so. These services are not available to participants of post-secondary
education programs. Refer to "Telephone Services"
PLEASE KEEP IN MIND THAT THE ACCOUNT POLICIES (INCLUDING FEES), SERVICES AND
FEATURES MAY BE MODIFIED OR DISCONTINUED WITHOUT SHAREHOLDER APPROVAL OR PRIOR
NOTICE. DURING TIMES OF ECONOMIC TURMOIL OR MARKET VOLATILITY, SEVERE WEATHER,
OR NATURAL DISASTER YOU MAY NOT BE ABLE TO REACH SM&R BY TELEPHONE TO INSTITUTE
A REDEMPTION OR EXCHANGE.
20
<PAGE>
SHAREHOLDER'S GUIDE TO INVESTING WITH THE SM&R ALGER FUNDS
--------------------------------------------------------------------------
TYPES OF ACCOUNTS AVAILABLE
BELOW IS A BRIEF EXPLANATION OF THE DIFFERENT ACCOUNTS AVAILABLE IN THE SM&R
ALGER FUNDS.
INDIVIDUAL OR JOINT OWNERSHIP
Individual accounts are owned by one person. Joint accounts have two or more
owners.
A UNIFORM GIFT OR TRANSFER TO MINOR (UGMA OR UTMA)
An UGMA/UTMA account is a custodial account managed for the benefit of a
minor. To open an UGMA or UTMA account, you must include the minor's Social
Security number on the application.
TRUST
An established trust can open an account. The names of each trustee, the
name of the trust and the date of the trust agreement must be included on
the application.
BUSINESS ACCOUNTS
Corporations, partnerships, and sole proprietorships may also open an
account. The application must be signed by an authorized officer of the
corporation or a general partner or owner of the business.
TAX-DEFERRED ACCOUNTS
If you are eligible, you may set up one or more tax-deferred accounts. A
tax-deferred account allows you to shelter your investment income and capital
gains from current income taxes, while saving for retirement. A contribution
to certain types of these plans may also be tax deductible. Tax-deferred
accounts include retirement plans described below and the Education IRA.
Distributions from these plans are generally subject to income tax and may be
subject to an additional tax if withdrawn prior to age 59 1/2 or used for a
non-qualifying purpose. Information concerning IRAs and TSAs, and the forms
necessary to adopt such plans, can be obtained by contacting your registered
representative, your broker-dealer, or by calling SM&R. Investors should
consult their tax adviser or legal counsel before selecting a tax-deferred
account.
SM&R serves as custodian for the tax-deferred accounts offered by the SM&R
Alger Funds. You will be charged an annual account maintenance fee of $7.50
for each tax-deferred account you have. The fee will be automatically deducted
from your account (usually in the last quarter). The custodian reserves the
right to change the amount of this fee or to waive it in whole or in part for
certain types of accounts.
TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNTS
Traditional IRAs allow most individuals with earned income to contribute up
to the lesser of $2000 or 100% of compensation annually.
ROTH INDIVIDUAL RETIREMENT ACCOUNTS
Roth IRAs allow most individuals with earned income to contribute up to the
lesser of $2000 or 100% of compensation annually.
EDUCATION IRA
This plan allows individuals, subject to certain income limitations, to
contribute up to $500 annually per child under the age of 18.
SIMPLIFIED EMPLOYEE PENSION PLAN
This plan allows small business owners (including sole proprietors) to make
tax-deductible contributions for themselves and any eligible employee(s). A
SEP requires an IRA (a SEP-IRA) to be set up for each SEP participant.
SIMPLE
This plan allows employee pre-tax contributions up to $6,000 annually and
may be matched by the employer up to a maximum of 3% of employees'
compensations.
PROFIT SHARING OR MONEY PURCHASE PLAN
These plans are open to corporations, partnerships and sole proprietors to
benefit their employees and themselves.
SECTION 403(b)(7) PLAN
Employees of educational organizations or other qualifying, tax-exempt
organizations may be eligible to participate in a Section 403(b)(7) Plan.
21
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SHAREHOLDER'S GUIDE TO INVESTING WITH THE SM&R ALGER FUNDS
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PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). Each SM&R Alger Fund's offering price is
calculated 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 "Sales Charge Reductions and Waivers.") Although
the legal rights of the Class A and Class B 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 shares
generally will be lower than the Class A shares as a result of differences in
service and distribution (12b-1) fees charged.
A NOTE ON PRICING. Each SM&R Alger Fund's investments will be priced at their
market value when market quotations are readily available. When these
quotations are not readily available, investments will be priced at their fair
value, calculated according to procedures adopted by the Fund's Board of
Directors. The SM&R Alger Funds may also use fair value pricing if the value
of a security held by a fund is materially affected by events occurring after
the close of regular trading of the primary markets or exchanges on which the
security is traded. In these situations, prices used by an SM&R Alger Fund to
calculate its net asset value may differ from quoted or published prices for
the underlying securities.
SHARE PRICE -- EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS. Each SM&R Alger
Fund's share price, called its net asset value, or NAV, is calculated once
each day at the close of regular trading (currently 3:00 p.m. Central Time).
NAV is not calculated on holidays or other days the Exchange is closed. In the
event the Exchange closes early on a particular day, we will determine the net
asset value of the SM&R Alger Funds as of such earlier closing time. Below is
the method used by the SM&R Alger Funds to calculate the NAV on any given day.
<TABLE>
<S> <C> <C>
Total Assets - Liabilities
Net Asset Value = --------------------------
Number of Shares Outstanding
</TABLE>
Knowing the daily net asset value is useful to you as a shareholder because it
indicates the current value of your investment. Each SM&R Alger Fund's NAV,
multiplied by the number of shares you own, gives you the dollar amount you
would have received had you sold all of your shares back to the fund that day,
less any applicable transaction fee or redemption charge. 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. Purchases and redemptions will be executed on each day
the Exchange is open for regular trading at the next NAV determined THAT DAY if:
- SM&R receives your request in good order prior to the close of the regular
trading day;
- a securities dealer having a dealer contract with SM&R receives your order
prior to the close of the regular trading day 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
- SM&R is advised of bank wire purchases received by Moody National Bank
before 3 p.m. Central Time.
If we receive your order after the close of the regular trading day or on any
day that the Exchange is closed, we will execute your purchase or redemption
at the price determined on the next regular trading day. In unusual
circumstances, the SM&R Alger Funds may temporarily suspend the processing of
sale requests, or may postpone payment of proceeds for up to three business
days or longer, as allowed by federal securities laws.
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HOW TO PURCHASE SHARES
YOU SHOULD REFER TO THE FIRST PAGE OF THIS SHAREHOLDER'S GUIDE "IMPORTANT
SHAREHOLDER FACTS AND INFORMATION" FOR THE APPROPRIATE ADDRESSES AND TELEPHONE
NUMBERS.
<TABLE>
<CAPTION>
METHOD OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
BY MAIL OR THROUGH A - Determine the SM&R Alger Fund and the Class - Make your check payable to SM&R.
REGISTERED in which you want to invest. - Use the investment slip on your
REPRESENTATIVE - Complete and sign the account application confirmation, or
- Make the check payable to SM&R. - Write a note specifying:
- Mail the application and your check to SM&R -- Your account number
at the address on the first page of this -- The fund name
guide. -- Share class
- Or deliver the information to your -- The name(s) in which the account is
representative (provided he or she has a registered.
broker-dealer arrangement with SM&R). - Mail to the address indicated on the cover
page of this guide.
-------------------------------------------------------------------------------------------------------------------
BY PHONE WIRE - Call Investors Services to obtain a - Call Investors Services at the number on
reference number (call by noon, Central the first page of this guide, on any
Time, if you want wired funds to be credited business day.
that day). - You can send your investment either by:
Instruct your bank to wire or transfer -- Federal Funds Wire (offers immediate
your purchase (your bank may charge a access to funds), or
wiring fee) using the information on the -- Electronic transfer via ACH which
first page of this guide. avoids wiring fees, if your bank
- Complete the account application and mail account is set up on file.
to the appropriate address.
- Wires received before 3:00 p.m. Central
Time on regular trading days will receive
that day's closing price (if not, you will
receive the next trading day's closing
price).
-------------------------------------------------------------------------------------------------------------------
BY EXCHANGE - You can make an additional investment by exchange from a fund managed by SM&R to an
existing account by calling Investors Services.
- You can only exchange shares in the same class with identical registrations.
- There is no sales charge or redemption fee when exchanging funds managed by SM&R.
- Orders placed before 3 p.m. Central Time on regular trading days will receive that day's
closing price (if not, you will receive the next regular trading day's closing price).
- Exchanges are limited to three per calendar quarter, and twelve per calendar year.
- Exchanges between accounts that do not have identical ownership registration must be made
in writing.
- Be sure you read the prospectus for the fund into which you are exchanging.
KEY POINT: AN EXCHANGE REPRESENTS THE SALE OF SHARES OF ONE FUND AND THE PURCHASE OF SHARES
OF ANOTHER FUND. THIS TRANSACTION MAY PRODUCE A TAXABLE GAIN OR LOSS IN A NON-TAX DEFERRED
ACCOUNT.
-------------------------------------------------------------------------------------------------------------------
AUTOMATIC INVESTMENT - You can transfer money automatically from - To establish automatic investing for an
PLAN THROUGH THE your bank account into your SM&R Alger Fund existing account, call Investor Services for
AUTOMATED CLEARING account on a monthly basis. an application.
HOUSE (ACH) - Initial investment minimum is $500 if you - The minimum is $50.
invest at least $50 per month with this
service.
- To enroll, check off the box on the account
application and provide:
1. Your bank account information,
2. The amount and date of your monthly
investment, and
3. A voided check.
-------------------------------------------------------------------------------------------------------------------
</TABLE>
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HOW TO REDEEM SHARES
You have several convenient ways for you to redeem your shares in any of the
SM&R Alger Funds. Redemptions will be at net asset value, less any applicable
CDSC, which is determined on the date your request is received by SM&R in good
order.
<TABLE>
<CAPTION>
METHODS REQUIREMENTS
<S> <C>
-----------------------------------------------------------------------------------
CALL US - Call Investors Services during normal business hours on
any business day.
- This service is only available for those accounts which
are non-qualified and non-tax deferred:
1. The amount requested is $500 or more per account.
2. The amount is less than $50,000 in aggregate.
3. The proceeds are to be mailed to the address of
record or electronically transferred to the bank
account indicated on your fund account.
4. There has been no change of address for either you or
your bank for 30 days
5. Telephone services have not been declined.
6. The security procedures discussed on page 36 of this
guide have been met.
7. There are no outstanding certificate shares on the
account.
- All authorized requests received before 3:00 p.m. Central
Time on regular trading days will be processed at that
day's closing price. Requests received after 3:00 p.m. will
be processed the following regular trading day.
- We can either:
-- wire the proceeds the next business day into your
bank account of record (service charges may apply)
-- electronically transmit the proceeds to your bank
account of record via the ACH service
-- mail you a check
- All telephone calls are recorded for your protection. We
are not responsible for acting on telephone orders we
believe to be genuine. (Refer to "Security Procedures")
- See exceptions below for requests that must be made in
writing.
- A $10.00 fee is charged for redemptions by wire under
$10,000.
- To redeem from a tax-deferred account, call Investor
Services for a special withdrawal form.
-----------------------------------------------------------------------------------
WRITE US - You can mail a redemption request to the appropriate
address listed on the first page of this guide.
- Your letter of instruction must:
-- list your account number and the fund name
-- indicate the number of shares or dollar value you
wish to redeem
-- be signed by the registered owner(s)
-- include special withdrawal forms for tax deferred
accounts
- Refer to "Signature Guarantee" below for requests that
must be signature guaranteed.
-----------------------------------------------------------------------------------
FAX US You may fax your request for redemption from a non-qualified
and non-tax deferred account, if your request meets
requirements stated under "Call Us" above. Your fax requests
must be received by SM&R before 3:00 p.m. Central Time on
regular trading days to receive that day's price.
-----------------------------------------------------------------------------------
SELL YOUR SHARES IN You may also redeem your shares by coming to SM&R's home
PERSON office, and deliver your request in person prior to
3:00 p.m. Central Time on regular trading days to receive
that day's price.
-----------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL You can withdraw money automatically from your SM&R Alger
PLAN (SWP) Fund account on a monthly, quarterly, semi-annual, and
annual basis -- without redemption fees -- on or about the
20th of the month and if:
- Your account value is $5,000 or more
- You complete the relevant section of the application
- The withdrawal can be mailed to you at your address of
record, or deposited directly to your bank account via
ACH
The minimum withdrawal is $50 per month.
The maximum amount is 1% of your account per month or 12%
annually.
To obtain proper forms, contact Investor Services.
See "Important Facts About Redeeming" for more information.
-----------------------------------------------------------------------------------
</TABLE>
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PAYMENT OF REDEMPTION PROCEEDS
Normally, redemption proceeds of shares you purchased by wire, certified check,
money order, or other immediately available funds will be mailed no later than
the 7th calendar day following receipt of your redemption request. Mailing of
redemption proceeds of shares recently purchased by a personal check or ACH
transfer will generally be delayed for up to ten (10) business days to allow the
check or transfer to clear.
We reserve the right to redeem "in kind" by paying you the proceeds of a
redemption in securities rather than in cash.
SIGNATURE REQUIREMENTS BASED ON ACCOUNT TYPE
<TABLE>
<S> <C>
INDIVIDUAL OR JOINT TENANTS Written instructions must be signed by each shareholder,
exactly as the names appear in the account registration.
UGMA OR UTMA Written instructions must be signed by the custodian in
his/her capacity as it appears in the account registration
until the minor reaches the age of majority as defined by
the state in which the UGMA or UTMA was established.
SOLE PROPRIETOR, GENERAL Written instructions must be signed by an authorized
PARTNER individual in his/her capacity as it appears on the account
registration.
CORPORATION, ASSOCIATION Written instructions must be signed by the person(s)
authorized to act on the account. In addition, a certified
copy of the corporate resolution authorizing the signer to
act must accompany the request.
TRUST Written instructions must be signed by the trustee(s). If
the name of the current trustee(s) does not appear on the
account application, a current certificate of incumbency
dated within 60 days must also be submitted.
IRA OR TSA A special withdrawal form must be signed by the account
(INCLUDES ALL TYPES OF IRAS) owner, and you may obtain this form by contacting Investor
Services at the number on the first page of this guide. If
you do not want federal income tax withheld from your
redemption, you must state that you elect not to have such
withholding apply. In addition, your instructions must state
whether the distribution is normal (after age 59 1/2) or
premature (before age 59 1/2) and, if premature, whether any
exceptions such as death or disability apply with regard to
the 10% additional tax on early distributions. In addition,
TSA's will have a 20% mandatory withholding tax applied to
all distributions if the account owner is under 70 1/2.
EXECUTORS OF SHAREHOLDER Written instructions must be signed by the executor. A copy
ESTATES of the order appointing the executor, certified within the
past 12 months must accompany the letter of instructions. A
signature guarantee must be provided as discussed below.
</TABLE>
SIGNATURE GUARANTEE
To protect you and the SM&R Alger Funds against fraud, certain redemption
requests must be made in writing with your signature guaranteed. A signature
guarantee can be obtained at most banks and securities dealers. A notary public
is not authorized to provide a signature guarantee.
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<TABLE>
<S> <C>
The following circumstances require a signature guarantee: WHO CAN PROVIDE A SIGNATURE GUARANTEE:
- Redemptions from one or more of the SM&R Alger Funds total - Commercial Bank
$50,000 or more - Trust Company
- You want the proceeds sent to an address other than the - Savings Association
address currently appearing on your account - Credit Union
- You want the proceeds sent to a bank account not listed on - Member of Medallion Program
your account - Member of a U.S. Stock Exchange
- You want the proceeds payable to anyone other than the - Authorized SM&R Representatives
registered owner(s) of the account NOTARY PUBLIC NOT ACCEPTABLE
- Either your address or the address of your bank account
has been changed within 30 days
- The account is registered in the name of a fiduciary,
corporation or any other organization. In these cases,
additional documentation is required:
Corporate accounts: certified copy of corporate
resolution
Fiduciary accounts: copy of the power of attorney or
other governing document
- The SM&R Alger Funds or their transfer agent believe a
signature guarantee would protect against claims based on
transfer instructions
</TABLE>
IMPORTANT FACTS ABOUT REDEEMING
SYSTEMATIC WITHDRAWAL PLAN. It may not be advisable for shareholders to
maintain a Withdrawal Account while concurrently purchasing shares of the SM&R
Alger Funds 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 representative regarding their
advisability. While you are participating in a Systematic Withdrawal Plan
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. Retirement Plan Accounts are subject to
special withdrawal requirements. Call Investor Services for assistance.
REINVESTMENT PRIVILEGE. Within ninety (90) days of a redemption (60 days for
tax-deferred plans) of Class A shares of an SM&R Alger Fund, a shareholder may
reinvest all or part of the proceeds in the same class of the same SM&R Alger
Fund from which the redemption was processed 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 of the SM&R Alger
Funds 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 your registered representative, your broker-dealer or
SM&R.
"GOOD ORDER" means the request for redemption must include:
(1) your letter of instruction or a stock assignment specifying the SM&R
Alger Fund, account number, and number of shares or dollar amount to be
redeemed. The letter of
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instruction and stock powers must be signed and executed exactly as the
SM&R Alger Fund shares are registered and any outstanding share
certificates returned. It is suggested that certificates be returned by
certified mail for your protection;
(2) any required signature guarantees (see "Signature Guarantees" above);
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 it is your responsibility to ensure that all requests
are submitted to the Fund's transfer agent in good order for processing.
REDEMPTION OF SMALL ACCOUNTS. The SM&R Alger Funds reserve 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. 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 SM&R
Alger Funds may, from time to time, change such required minimum investment.
TRANSACTIONS THROUGH PROCESSING ORGANIZATIONS:
You may also purchase or sell shares of the SM&R Alger Funds through a
broker-dealer, bank or other financial institution, or an organization that
provides recordkeeping and consulting services to 401(k) plans or other employee
benefit plans (a "Processing Organization"). Processing Organizations may charge
you a fee for this service and may require different minimum initial and
subsequent investments than the SM&R Alger Funds. Processing Organizations may
also impose other charges or restrictions different from those applicable to
shareholders who invest in the SM&R Alger Funds directly. If you utilize a
Processing Organization the SM&R Alger Funds are not responsible for failure of
any Processing Organization to carry out its obligations to its customers. YOU
MAY NOT BE CONSIDERED THE SHAREHOLDER OF RECORD OF YOUR SHARES. THEREFORE, YOU
MAY NOT BE ABLE TO UTILIZE SERVICES AVAILABLE ONLY TO SHAREHOLDERS OF THE SM&R
ALGER FUNDS. YOU SHOULD KEEP THIS IN MIND WHEN ESTABLISHING AN ACCOUNT IN ANY
SM&R ALGER FUND.
OTHER SERVICES
In addition to the plans described under "Sales Charge Reductions and Waivers,"
that permit you to reduce the initial sales charge assessed on Class A shares or
the CDSC on Class B shares, the SM&R Alger Funds offer other services and plans
described below. At this time, there is no charge to you for these services. The
SM&R Alger Funds may impose fees for such services in the future. Be aware,
however, that if you elect to participate in the electronic transfers (ACH) plan
described below, you should check with your financial institution for any
additional charges imposed by them for this service. For additional information
on these plans and services you should contact your registered representative,
broker-dealer or SM&R. Before beginning any of the plans or services described
below you should consult a tax advisor.
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 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 bank, savings and loan, or credit union account. YOUR
FINANCIAL INSTITUTION MUST BE A MEMBER OF THE AUTOMATED CLEARING HOUSE (ACH)
NETWORK FOR YOU TO TAKE ADVANTAGE OF THIS SERVICE.
TELEPHONE SERVICES. You can only use telephone services for transaction amounts
of $500 or more. 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. For example, we permit
exchanges by telephone from a joint account only to another joint account
registered in the identical
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names. There may be additional restrictions on telephone transactions by joint
account owners. If you initially choose not to have this option and wish to
establish it at a later date, it would be necessary for you to complete the
required form requesting this option. Contact your registered representative
for more information. PLEASE NOTE THAT THE TELEPHONE REDEMPTION OPTION IS NOT
AVAILABLE FOR QUALIFIED AND TAX-DEFERRED ACCOUNTS.
While telephone redemption is easy and convenient, this account feature involves
risk of loss from unauthorized or fraudulent transactions. SM&R will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private, and by immediately reviewing
any account statements that we send to you. Make sure to contact SM&R's
Investors Services Department immediately about any transaction you believe to
be unauthorized.
SECURITY PROCEDURES
TELEPHONE TRANSACTIONS
The SM&R Alger 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).
Anyone with the required account information indicated above (including your
broker) can request a telephone transaction in your account. All calls are
recorded and/or monitored for verification, record keeping and
quality-assurance purposes. Requested proceeds will be forwarded only to an
address or bank account designated on the account at the time of the
transaction.
VOICE RESPONSE UNITS
The SM&R Alger Funds now have available to shareholders a means by which they
can access account information, fund prices, and take advantage of other
features 24-hours a day. To obtain account information you will be required to
know your fund number, account number, and your PIN number. As indicated under
"Telephone Services" above, you should keep your account information private.
We also suggest that you change your PIN number periodically and not provide
the number to anyone.
Neither the SM&R Alger Funds nor SM&R will be responsible for the authenticity
of transaction instructions received by telephone or through the voice
response unit that comply with the current security procedures and other
requirements. SM&R believes that such security procedures and other
requirements are reasonable.
During times of economic turmoil or market volatility, severe weather, or
natural disaster you may not be able to reach SM&R by telephone to institute a
redemption or exchange.
For additional restrictions refer to "Exchange Privilege" below.
AUTOMATIC DIVIDEND INVESTMENT. Your dividends and distributions may be paid in
cash or invested in any fund managed by SM&R at net asset value. Unless you
specify otherwise, your dividends and distributions will automatically be
reinvested in the same SM&R Alger Fund. You may invest your dividends and
distributions (1) into another fund managed by SM&R in the same class of
shares; or (2) from Class A shares into the Fund's Money Market Fund (not
offered in this prospectus), or vise versa.
You must comply with the following requirements to invest your dividends and
distributions in shares of another fund managed by SM&R:
(1) Your account balance (a) in the fund paying the dividend must be at
least $5,000; and (b) the fund receiving the dividend must have an
account balance of at least $500.
(2) Both accounts must have identical registration information, that is they
cannot be in different names; and
(3) You must have elected, in writing, to reinvest dividends into another
fund managed by SM&R.
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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 SM&R Alger
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. Under this investment plan there is a minimum
investment of $50 per individual. Any such plan may be terminated by SM&R or
the shareholder at any time upon sixty (60) days written notice. However, all
other investment amount minimums apply. Contact SM&R for further information
regarding these plans.
EXCHANGE PRIVILEGE. As an investor in the SM&R Alger Funds, you may be
permitted to exchange shares that you own for shares of other funds managed by
SM&R without the payment of an exchange fee, subject to certain conditions.
EXCHANGES BETWEEN AN SM&R ALGER 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,
AND WHAT THE CONDITIONS OF SUCH EXCHANGE ARE.
WE RESERVE THE RIGHT TO TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE
PRIVILEGE AT ANY TIME.
You may exchange Class A or Class B shares that you own in the SM&R Alger
Funds, 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 Fund's Primary Fund or Money
Market Fund (both of which are not offered in this Prospectus), 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 share purchases of $1 million or
more and 6 years in the case of Class B share purchases), and
- you meet any minimum investment requirement for the shares you wish to
acquire.
We waive any sales charges on Class A shares acquired through an exchange if
you previously paid a sales charge on amounts invested in those shares. For
example, assume you purchase Class A shares of the SM&R Alger Growth Fund. You
then exchange your Class A shares for shares of the Fund's Money Market Fund
(not offered in this prospectus). Later, you re-exchange those shares of the
Money Market Fund for Class A shares of the SM&R Alger Small-Cap Fund. We
would not impose any sales charge upon the re-exchange into Class A shares of
the SM&R Alger Small-Cap Fund because 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 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;
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(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; and
(h) you have received a prospectus for the fund 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 exchanges Class B shares of an SM&R Alger 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.
ABUSIVE TRADING PRACTICES. Excessive, short-term (market-timing) or other
abusive trading practices may disrupt portfolio management strategies and harm
SM&R Alger Fund performance. To minimize harm to the SM&R Alger Funds and
their shareholders, we reserve the right to reject any purchase order
(including exchanges) from any investor we believe has a history of abusive
trading or whose trading, in our judgement, has been or may be disruptive to
an SM&R Alger fund. In making this judgement, we may consider trading done in
multiple accounts under common ownership or control.
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DISTRIBUTIONS AND TAXABILITY. To avoid taxation of the SM&R Alger Funds, the
IRS Code requires each SM&R Alger Fund to distribute net income and any
capital gains realized on its investments annually. Each SM&R Alger Fund's
income from dividends and interest and any net realized short-term gains are
paid to shareholders as ordinary income dividends. Net realized long-term
gains are paid to shareholders as capital gains distributions.
Dividends you receive from the SM&R Alger Funds, whether reinvested or taken
as cash, are generally considered taxable. 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.
DISTRIBUTION SCHEDULE. The following schedule of distributions is provided to
let you know when you can expect to receive a distribution from the SM&R Alger
Funds you own. These distributions, under normal circumstances and if earned,
will be declared and paid in the months indicated in the following chart.
<TABLE>
<CAPTION>
DIVIDENDS CAPITAL GAINS
DECLARED PAID
<S> <C> <C>
SM&R ALGER GROWTH Annually December
FUND
-----------------------------------------------------
SM&R ALGER SMALL-CAP Annually December
FUND
-----------------------------------------------------
SM&R ALGER AGGRESSIVE Annually December
GROWTH FUND
-----------------------------------------------------
SM&R ALGER TECHNOLOGY Annually December
FUND
-----------------------------------------------------
</TABLE>
DISTRIBUTIONS EFFECT ON NAV. In order to be entitled to a dividend, an investor
must have acquired shares of an SM&R Alger Fund prior to the close of business
on the distribution record date. A shareholder should be cautioned, however,
before purchasing shares of an SM&R Alger Fund immediately prior to a
distribution. Dividends and distributions paid by the SM&R Alger 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 a shareholder represents, in substance, a
return of capital.
DIVIDEND REINVESTMENTS. Dividends and Capital Gains 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 SM&R Alger 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 SM&R Alger Fund(s). Dividends on
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 day after SM&R has received the shareholder's written
request.
BACKUP WITHHOLDING. Backup withholding for federal income tax may be applied,
where required by current IRS requirements, at the rate of 31% from taxable
dividends, distributions, and redemption proceeds (including exchanges) if you
fail to furnish the SM&R Alger Funds 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 REDEMPTIONS AND EXCHANGES. You should consult with a tax advisor
concerning the tax effect on the redemption or exchange of such shares. Any
time you sell or exchange shares, it is considered a taxable event for you.
Depending on
31
<PAGE>
SHAREHOLDER'S GUIDE TO INVESTING WITH THE SM&R ALGER FUNDS
--------------------------------------------------------------------------
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.
RIGHTS RESERVED BY THE FUND. The Fund, acting through its transfer agent,
reserves the right:
- to waive, lower, or raise 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, or has
occurred;
- 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 not act on instructions believed not to be genuine;
- to eliminate duplicate mailings of fund material to shareholders who
reside at the same address; or
- to otherwise modify the conditions of purchase and any services at any
time.
32
<PAGE>
FOR MORE INFORMATION ABOUT THE SM&R ALGER FUNDS
--------------------------------------------------------------------------
The following documents contain more information about the SM&R Alger Funds and
are available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains additional information about all aspects of the SM&R Alger
Funds. A current SAI has been filed with the Securities and Exchange Commission
and is incorporated herein by reference.
REQUESTING DOCUMENTS
You may request a free copy of the SAI and these reports, make shareholder
inquiries, or request further information about the SM&R Alger Funds either by
contacting your broker or by contacting the SM&R Alger 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 SM&R Alger 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 202-942-8090 or by sending an e-mail
to [email protected]. Reports and other information about the SM&R Alger 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. 20549-0102.
SM&R ALGER GROWTH FUND
SM&R ALGER SMALL-CAP FUND
SM&R ALGER AGGRESSIVE GROWTH FUND
SM&R ALGER TECHNOLOGY FUND
Investment Company
Form 9094A (9/00) File No. 811- 6477
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1999
(as amended September 1, 2000)
SM&R INVESTMENTS, INC.
CLASSES A, B, C, AND T
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SINGLE CLASS FUNDS
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
League City, Texas 77573
This Statement is NOT a prospectus, but should be read in conjunction with
the funds' current prospectus or prospectuses dated December 31, 1999 (as
amended September 1, 2000) that is relevant to the class or classes of shares
you own or wish to purchase (each such prospectus is referred to herein as a
"Prospectus" and collectively as the "Prospectuses"). To obtain a Prospectus
contact your registered representative, broker-dealer, financial intermediary,
or Securities Management and Research, Inc. ("SM&R"), at the address noted
above, or by calling:
Investor Services
Telephone Number: (281) 334-2469
Toll Free 1-(800) 231-4639
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.
Terms not defined herein have the same meaning as given to them in the
Prospectuses.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE COMPANY................................................. 1
INVESTMENT OBJECTIVES AND POLICIES.......................... 2
PORTFOLIO TURNOVER.......................................... 17
MANAGEMENT OF THE COMPANY................................... 18
REMUNERATION OF DIRECTORS................................... 21
POLICY REGARDING PERSONAL INVESTING......................... 22
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES..... 22
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES......... 23
CONTROL AND MANAGEMENT OF SM&R.............................. 23
INVESTMENT ADVISORY AGREEMENT............................... 24
ADMINISTRATIVE SERVICE AGREEMENT............................ 26
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION............. 28
DESCRIPTION OF FUND SHARES.................................. 29
PURCHASE, REDEMPTION, AND PRICING OF SHARES................. 31
DETERMINATION OF NET ASSET VALUE........................ 31
DETERMINATION OF OFFERING PRICE......................... 33
REDUCTION AND/OR WAIVER OF INITIAL SALES CHARGES
(CLASS A AND CLASS T SHARES).......................... 36
REDUCTION AND/OR WAIVER OF CONTINGENT DEFERRED SALES
CHARGES (CLASS B SHARES).............................. 38
FUND AND CLASS EXPENSES................................. 39
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN................. 39
SPECIAL PURCHASE PLANS...................................... 42
REDEMPTION.................................................. 45
TAXES....................................................... 46
SYSTEMATIC WITHDRAWAL PLAN.................................. 49
THE UNDERWRITER............................................. 50
CUSTODIAN................................................... 52
TRANSFER AGENT AND DIVIDEND PAYING AGENT.................... 52
COUNSEL..................................................... 52
AUDITORS AND FINANCIAL STATEMENTS........................... 52
PERFORMANCE AND ADVERTISING DATA............................ 53
PERFORMANCE MEASURES........................................ 57
</TABLE>
ii
<PAGE>
THE COMPANY
SM&R Investments, Inc. (the "Company") was 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. It currently
offers the following funds:
- SM&R GOVERNMENT BOND FUND ("Government Bond Fund");
- SM&R TAX FREE FUND (the "Tax Free Fund");
- SM&R PRIMARY FUND (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)
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").
The Company also offers four other series: The SM&R Alger Growth Fund, SM&R
Alger Small-Cap Fund, SM&R Alger Aggressive Growth and SM&R Alger Technology
Fund (collectively the "SM&R Alger Funds"). The SM&R Alger Funds are offered in
a separate prospectus and SAI.
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 fundamental investment
limitations can not be changed in any material way without the approval of a
majority of the Fund's shares. For these purposes, a "majority" means the lesser
of (i) 67% or more of the voting securities present at a meeting if the holders
of more than 50% of voting securities are represented at that meeting or
(ii) more than 50% of the outstanding voting securities of the Fund.
DIVERSIFICATION. With respect to 75% of the Fund's total assets, the Fund
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.
INDUSTRY CONCENTRATION. A Fund may not invest 25% or more of its total
assets in the securities of one or more issuers conducting their principal
business activities in the same industry (excluding the U.S. Government or any
of its agencies or instrumentalities).
BORROWING. A Fund 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.
LOANS. A Fund 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.
UNDERWRITING. A Fund 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.
2
<PAGE>
REAL ESTATE. A Fund 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.
COMMODITIES. A Fund 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.
SENIOR SECURITIES. A Fund may not issue senior securities to the extent
such issuance would violate applicable law.
The above mentioned investment limitations are considered at the time
investment securities are purchased.
INVESTMENT TECHNIQUES
LENDING PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Government Bond Fund may lend its portfolio securities to
broker-dealers and other financial institutions, to a maximum of 10% of the
value of its net assets at the time of the most recent loan. Such loans must be
callable at any time and continuously secured by cash collateral equal at all
times to at least 102% of the market value of the securities loaned, including
accrued interest.
The market value of the securities loaned shall be monitored daily, and the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral. Cash collateral shall
be invested in short-term instruments that are sufficiently liquid to provide
for repayment upon demand (such as bank letters of credit, U.S. Government
Obligations, or other cash equivalents). Cash or instruments collateralizing the
Fund's loans of securities will be segregated and maintained at all times with
SM&R, the Fund's custodian, in an amount at least equal to the current market
value of the loaned securities. The Government Bond Fund will receive amounts
equal to earned income for having made the loan.
The Government Bond Fund will be the beneficial owner of the loaned
securities in that any gain or loss in the market price during the loan inures
to the Government Bond Fund and its shareholders. Thus, when a loan is
terminated, the value of the securities may be more or less than their value at
the beginning of the loan. In determining whether to lend its portfolio
securities to a broker-dealer or other financial institution, the Government
Bond Fund will take into account the creditworthiness of such borrower and will
monitor such creditworthiness on an ongoing basis inasmuch as default by the
other party may cause delays or other collection difficulties. The Government
Bond Fund may pay placing brokers' fees in connection with loans of its
portfolio securities.
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
3
<PAGE>
while the cash collateral is insufficient to purchase the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage; but the Government
Bond Fund would be an unsecured creditor with respect to such shortage and might
not be able to recover any of it. However, this risk may be minimized by a
careful selection of borrowers and securities to be lent and by monitoring
collateral.
The Government Bond Fund will not lend securities to broker-dealers
affiliated with SM&R. This restriction will not affect the ability of the Fund
to maximize its securities lending opportunities.
U.S. TREASURY SECURITIES. Each Fund may invest in U.S. Treasury securities,
including bills, notes and bonds issued by the U.S. Treasury. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
full faith and credit of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.
U.S. GOVERNMENT OBLIGATIONS. Each Fund may invest in direct or implied
obligations of the U.S. Government, its agencies or instrumentalities ("U.S.
Government Obligations"). These U.S. Government Obligations, including those
that are guaranteed by federal agencies or instrumentalities, may or may not be
backed by the full faith and credit of the United States. Obligations of the
Government National Mortgage Association ("GNMA" or "Ginnie Mae"), the Farmers
Home Administration and the Export-Import Bank are backed by the full faith and
credit of the United States. Securities that are not backed by the full faith
and credit of the United States include, among others, obligations issued by the
Tennessee Valley Authority, the Resolution Trust Corporation, the Federal
National Mortgage Association ("FNMA" or "Fannie Mae"), the Federal Home Loan
Mortgage Corporation ("FHLMC" or "Freddie Mac") and the United States Postal
Service, each of which has the right to borrow from the United States Treasury
to meet its obligations. In addition, obligations of the Federal Farm Credit
Bank and the Federal Home Loan Bank may be satisfied only by the individual
credit of the issuing agency. Investments in Freddie Mac, and Fannie Mae and
other obligations may include collateralized mortgage obligations ("CMOs") and
real estate mortgage investment conduits issued or guaranteed by such entities.
In the case of U.S. Government Obligations not backed by the full faith and
credit of the United States, the Company must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the U.S. if the agency or instrumentality does
not meet its commitments. There is no guarantee that the U.S. Government will
support securities not backed by its full faith and credit. Accordingly,
although these securities have historically involved little risk of loss of
principal if held to maturity, they may involve more risk than securities backed
by the U.S. Government's full faith and credit.
MORTGAGE-BACKED U.S. GOVERNMENT OBLIGATIONS. The Government Bond Fund may
invest in mortgage-backed securities issued or guaranteed by U.S. Government
agencies
4
<PAGE>
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. 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
5
<PAGE>
bond, however, interest will be paid based on a principal value that is adjusted
for inflation. Inflation-indexed securities issued by the U.S. Treasury will
initially have maturities of five or ten years, although it is anticipated that
securities with other maturities will be issued in the future. The securities
will pay interest on a semi-annual basis, equal to a fixed percentage of the
inflation-adjusted principal amount.
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation falls, the principal value of inflation-indexed bonds will be
adjusted downward, and consequently the interest payable on these securities
(calculated with respect to a smaller principal amount) will be reduced.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed and will fluctuate.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although 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 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
6
<PAGE>
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 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
7
<PAGE>
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 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
8
<PAGE>
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.
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.
9
<PAGE>
Variable or Floating Rate Demand Notes ("VRDNs") are tax-exempt obligations
which contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest upon a short notice period (generally up to 30 days) prior
to specified dates, either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument. The
interest rates are adjustable at intervals ranging from daily to up to six
months to some prevailing market rate for similar investments, such adjustment
formula being calculated to maintain the market value of the VRDN at
approximately the par value of the VRDN upon the adjustment date. The
adjustments are typically based upon the prime rate of a bank or some other
appropriate interest rate adjustment index. The Tax Free Fund will decide which
variable or floating rate demand instruments it will purchase in accordance with
procedures prescribed by the Board to minimize credit risks. Any VRDN must be of
high quality as determined by SM&R and subject to review by the Board with
respect to both its long-term and short-term aspects, except where credit
support for the instrument is provided even in the event of default on the
underlying security, the Fund may rely only on the high quality character of the
short-term aspect of the demand instrument.
Defeased bonds or escrow secured bonds are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of principal
and interest of the advance refunded bond. Escrow secured bonds will often
receive a triple A rating from Moody's and S&P. The Tax Free Fund will purchase
escrow secured bonds without additional insurance only when the escrow is
invested in U.S. government securities backed by the full faith and credit of
the U.S. government.
Insured bonds are secured by the issuer's revenues and also are backed by
insurance policies written by commercial insurance companies. Issuers of
municipal bonds enter into a contractual agreement with an insurance company to
pay the bondholder any principal and interest that is due on a stated maturity
date which has not been paid by the issuer. Once issued, this default insurance
usually extends for the term of the issue and cannot be canceled by the
insurance company. The bondholder who has not received payments for principal or
interest on the stated due dates for the insured bond must notify the insurance
company and surrender any unpaid bonds and coupons for payment of the face
amount of the insured principal and interest. The commercial insurance companies
represent some of the largest and financially strongest insurance companies in
the United States.
Although insured municipal bonds sell at yields lower than they would
without the insurance, they tend to have yields higher than Aaa/AAA-rated
noninsured municipal bonds.
10
<PAGE>
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.
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.
11
<PAGE>
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 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
12
<PAGE>
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 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
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<PAGE>
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 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
14
<PAGE>
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 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
15
<PAGE>
Primary Fund does not presently invest in obligations of foreign branches of
United States banks, it may do so in the future. Investments in such obligations
will not be made in excess of 10% of the Primary Fund's total assets and will be
made only when SM&R believes the risks described above are minimal.
MONEY MARKET FUND INVESTMENTS. Pursuant to the 1940 Act, the Money Market
Fund may invest only in United States dollar-denominated instruments that
present minimal credit risks, have a remaining maturity of 397 calendar days or
less, and which are at the time of acquisition "eligible securities" as defined
in Rule 2a-7 under the 1940 Act. Generally, an eligible security is:
- A security with a remaining maturity of 397 calendar days or less
("Short-term") that has received a rating from two nationally recognized
statistical rating organizations ("NRSROs"), or if rated by only one
NRSRO, from that NRSRO, in one of the two highest rating categories
("Acceptable Rating") for debt obligations; or
- A security with a remaining maturity of 397 calendar days or less issued
by an issuer that has received an Acceptable Rating from at least two
NRSROs, or if rated by only one NRSRO, from that NRSRO, with respect to a
class of debt obligations (or any debt obligation within that class) that
is comparable in priority and security with the security (a "Comparable
Security").
If a security is acquired based on the rating of only one NRSRO, such
acquisition must be ratified by the Board. While Rule 2a-7 permits money market
funds to invest in certain unrated securities of comparable quality to eligible
rated securities, the Money Market Fund currently does not intend to invest in
unrated securities.
SM&R has the responsibility of determining that each investment by the Money
Market Fund presents minimal credit risks. SM&R's determination of minimal
credit risk will be based on an analysis of the issuer's (and, if applicable,
any guarantor's) capacity to repay its Short-term debt obligations. The analysis
cannot rely on ratings alone, but must be made on factors pertaining to credit
quality in addition to any rating that the security or the issuer may have been
assigned. The extensiveness of the evaluation may vary with the type and
maturity of the instrument involved and the SM&R's familiarity with the issuer.
The Money Market Fund will maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable net asset value
per share, provided, however, that the Fund will not (1) purchase any instrument
with a remaining maturity at the date of acquisition of greater than 397
calendar days, or (2) maintain a dollar-weighted average portfolio Maturity that
exceeds 90 days. The "maturity" of a portfolio instrument is the period
remaining (calculated from the trade date or such other date on which the Fund's
interest in the security is subject to market action) until the date on which,
in accordance with the terms of the security, the principal amount must
unconditionally be paid, or in the case of a security called for redemption, the
date on which the redemption must be made.
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<PAGE>
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.
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, 1997 AUGUST 31, 1998 AUGUST 31, 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Government Bond Fund................ 9.06% 32.71% 22.86%
Tax Free Fund....................... 22.15% 12.77% 5.09%
Primary Fund........................ 0% 0% 30.47%
</TABLE>
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.
17
<PAGE>
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(*).
18
<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 Marie B. Gale Centennial Professor in
Age 74 Psychiatry Professor and Chief,
Department of Psychiatry Psychodiagnostic Service and Cognitive
and Behavioral Sciences, Neuroscopic Laboratory, Department of
University of Texas Medical Psychiatry and Behavioral Sciences,
Branch, University of Texas Medical Branch, a
Galveston, Texas 77555-0189 medical school and hospital system, 1962
to present; Director of American National
Investment Accounts, Inc. ("Investment
Accounts"), another investment company
advised by SM&R, 1990 to present.
Michael W. McCroskey* Director and President President, Chief Executive Officer,
Age 56 Director and member of the Executive
Committee of SM&R, June 1994 to present;
President and Director of the 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;
President and Director, ANREM Corporation,
1977 to present; President and Director of
ANTAC Corporation, 1995 to present;
Director, Comprehensive Investment
Services, Inc. since 1997.
Lea McLeod Matthews*(2) Director Communications Consultant, Texas
Age 37 Association of School Boards, 1999 to
#8 Kern Ramble present; Publications Editor, National
Austin, Texas 78722 Western Life Insurance Co., 1990 to 1999;
Associate in Customer Service Designation
(ACS); Director of Investment Accounts,
1994 to present; Director of Garden State
Life Insurance Company, 1993 to present;
Director of Kids Exchange of Austin (a
non-profit corporation), 1996 to 1998;
Consultant to Austin Writers League.
</TABLE>
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<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
Age 62 present; Director of Bank of Galveston,
5 Colony Park Drive National Association, 1989 to present;
Galveston, Texas 77551 Director of The Westcap Corporation, 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,
Age 56 Edwin K. Nolan, P. C., Canyon Lake,
1271 Jonas Drive Texas, 1977 to present; Director/Owner,
Canyon Lake, Texas 78133 Canyon Lake Aviation, Inc. (Aviation
Service), Canyon Lake, Texas, 1986 to
present; Director/Owner, Canyon Lake
Airport, Inc. (Airport), Canyon Lake,
Texas, 1985 to 1995; Director, Hancock
Mini Mart, Inc., 1995 to present; Director
of Investments Accounts, 1997 to present.
Robert V. Shattuck, Jr. Director Attorney, Law Offices of Robert V.
Age 58 Shattuck, Jr., Galveston, Texas, 1986 to
1013 23rd Street present; Director of Investments Accounts,
Galveston, Texas 77550 1997 to present.
Jamie G. Williams Director Academic Language Therapist and
Age 53 Educational Consultant, 1974 to present;
3328 Stanford Director of The Learning Therapist
Dallas, Texas 75225 Graduate Certificate Program, 1986 to
1995; Adult Assessment Clinic and
Adolescent Academic Development Programs,
Division of Evening, Summer and Continuing
Studies, Southern Methodist University,
1994 to 1995; Adjunct Instructor in
Department of Psychology, Dedman College,
Southern Methodist University, 1988 to
1995; Director of Investments Accounts,
1997 to present.
Frank P. Williamson Director Retired Owner of Professional Pharmacy,
Age 67 1964 to 1998; Director of Investments
301 Barracuda Accounts, 1997 to present.
Galveston, Texas 77550
Emerson V. Unger, C.L.U. Vice President Vice President of SM&R and the SM&R Equity
Age 53 Funds 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
President and Treasurer Treasurer SM&R Equity Funds, and Investment Accounts
Age 45 since 1992; Treasurer of Comprehensive
Investment Services, Inc. since 1997;
Senior Manager, KPMG Peat Marwick LLP,
July 1980 to April 1992.
Teresa E. Axelson Vice President and Vice President and Secretary of SM&R and
Age 52 Secretary the SM&R Equity Funds since 1983; Vice
President and Secretary of the Investment
Accounts since 1991.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE COMPANY DURING PAST 5 YEARS
---------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Terry E. Frank Vice President and Vice President and Portfolio Manager of
Age 44 Portfolio Manager the Government Bond Fund, Tax Free Fund,
Primary Fund and Money Market Fund and
member of the Fixed Income Investment
Committee of SM&R since 1991; Former
research analyst, Equitable Investment
Services, Des Moines, Iowa; Former
securities analyst, Gibraltar Savings
Association, Houston, Texas; Former Senior
Money Market Trader, American Capital
Asset Management, Houston, Texas.
</TABLE>
------------------------
* "Interested persons" as defined by the 1940 Act.
(1) Member of the Company's audit committee.
(2) Ms. Matthews is the daughter 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, 1999 for each director of the Company.
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUNDS
BENEFITS ESTIMATED MANAGED BY
AGGREGATE ACCRUED AS ANNUAL SM&R (INCL.
COMPENSATION PART OF FUND BENEFITS UPON ONE OTHER
DIRECTOR FROM COMPANY EXPENSES RETIREMENT FUND)
-------- -------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Ernest S. Barratt, Ph.D........ $4,000 None None $8,000
Allan W. Matthews(*)........... $4,000 None None $8,000
Lea McLeod Matthews............ $4,000 None None $8,000
Michael W. McCroskey........... $ 0 None None $ 0
Ann McLeod Moody............... $4,000 None None $8,000
Edwin K. Nolan................. $4,000 None None $8,000
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>
(*) Mr. Matthews resigned from the Board on August 17, 2000.
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.
21
<PAGE>
During the year ended August 31, 1999, the Company paid or accrued approximately
$36,356 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 "Sales Charge Reductions and Waivers" 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
Each Fund, its investment adviser and principal underwriter have adopted
codes of ethics under Rule 17j-1 of the Investment Company Act of 1940.
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 managed by the adviser. 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
22
<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, 1999, 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, 1999, 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 % OF % OF
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
SHARES OF THE SHARES OF THE SHARES OF THE SHARES OF THE SHARES OF THE
GOVERNMENT TAX FREE PRIMARY MONEY COMPANY (AS
BOND FUND FUND FUND MARKET FUND A WHOLE)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
American National.... 32.32% 60.54% 71.88% 2.29% 51.76%
SM&R................. 22.56% 11.77% 0.05% 9.10% 3.75%
</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, 1999, 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
23
<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, 1999, 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
24
<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.
25
<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 ENDED ENDED
AUGUST 31, 1997 AUGUST 31, 1998 AUGUST 31, 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Government Bond Fund................ $113,231 $120,397 $120,644
Tax Free Fund....................... $ 50,224 $ 53,102 $ 57,794
Primary Fund........................ $176,167 $174,328 $167,289
Money Market Fund................... N/A N/A $ 7,237
--------
Company Total....................... $339,622 $347,827 $352,964
</TABLE>
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 interest, taxes, commissions and other expenses incidental to
portfolio transactions, Securities and Exchange Commission fees, Service Fees,
Distribution Fees, fees of the Custodian (see "The Custodian" herein), auditing
and legal expenses, fees and expenses of qualifying Company shares for sale and
maintaining such qualifications under the various state securities laws where
Company shares are offered for sale, fees and expenses of directors not
affiliated with SM&R, costs of maintaining corporate existence, costs of
printing and mailing prospectuses and shareholder reports to existing
shareholders and expenses of shareholders' meetings.
26
<PAGE>
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 reimburse expenses incurred by the Government
Bond, Primary and Tax Free 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% and Tax Free--0.75%.
During the years ended August 31, 1999, 1998, and 1997, SM&R reimbursed the
Company a total of $191,425, $116,461, and $162,949, 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: $25,950, $0, and $15,547, respectively, for the Government Bond Fund;
$57,794, $53,102, and $73,202, respectively for the Tax Free Fund; $85,317,
$63,359, and $74,200, respectively, for the Primary Fund. During these periods,
and $22,364 for the Money Market Fund which commenced operations on January 1,
1999.
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
27
<PAGE>
of such fee. For the years ended August 31, 1999, 1998, and 1997, SM&R received
administrative service fees as follows.
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Administrative Service Fees for the Company..... $169,811 $173,914 $178,880
Administrative Service Fees for each Fund:
Government Bond Fund.......................... $ 56,616 $ 60,199 $ 60,332
Tax Free Fund................................. $ 25,112 $ 26,551 $ 28,666
Primary Fund.................................. $ 88,083 $ 87,164 $ 83,645
Money Market Fund............................. N/A N/A $ 7,237
</TABLE>
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
28
<PAGE>
such broker-dealer. Generally, the Funds pay higher than the lowest commission
rates available.
During the years ended August 31, 1999, 1998, and 1997, 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. The Company consists of four fixed income series
and four other series offered in a separate prospectus and SAI. 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)
29
<PAGE>
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, 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,
30
<PAGE>
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.
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
31
<PAGE>
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.
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
32
<PAGE>
the amortized cost method only for valuing debt securities having maturities of
60 days or less.
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 able to maintain a continuous $1.00 net asset value per
share. These procedures include a review of the extent of any deviation of net
asset value per share as a result of fluctuating interest rates, based on
available market rates, from the Fund's $1.00 per share amortized cost price per
share. Should that deviation exceed 1/2 of 1%, the Board will consider whether
any action shall be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Where the Board believes the extent of any
deviation from the Fund's $1.00 amortized cost price per share may result in
material dilution or other unfair results to investors or existing shareholders,
it shall cause the Money Market Fund to take such action as it deems appropriate
to eliminate or to reduce to the 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
33
<PAGE>
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.
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 Class T Prospectuses. If you invest $500,000 or
more in Class T shares, there is no initial sales charge.
The offering price of Class T shares is the next determined net asset value
plus a sales charge, if applicable, (expressed as a percentage of the offering
price) shown in the following table:
<TABLE>
<CAPTION>
DISCOUNT TO SELECTED
SALES CHARGE AS A SALES CHARGE AS A DEALERS AS A
PERCENTAGE OF PERCENTAGE OF NET PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE*
-------------------- ----------------- ----------------- --------------------
<S> <C> <C> <C>
Less than $100,000........... 4.5% 4.7% 4.0%
$100,000 but less than
$250,000................... 3.5% 3.6% 3.0%
$250,000 but less than
$500,000................... 2.5% 2.6% 2.25%
$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 net asset value on
redemptions within 13 months of purchase.
34
<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 SELECTED
SALES CHARGE AS A SALES CHARGE AS A DEALERS AS A
PERCENTAGE OF PERCENTAGE OF NET PERCENTAGE OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
-------------------- ----------------- ----------------- --------------------
<S> <C> <C> <C>
Less than $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% of the net asset value 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 net asset value) shown in the
following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
(AS A PERCENTAGE OF NET ASSET VALUE AT
YEARS SINCE PURCHASE THE TIME OF PURCHASE, WHICHEVER IS 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.
35
<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.
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
(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
(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
36
<PAGE>
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.
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.
37
<PAGE>
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 DISABILITY. The CDSC will be waived on redemptions of Class B
shares following the shareholder's death or disability, so long as:
(a) the disability began after the shares were purchased;
(b) SM&R is notified of such death or disability at the time of the
redemption request and receives satisfactory evidence of such death
or disability;
(c) the redemptions are made within one year following death or initial
determination of disability; and
(d) the shares were held at the time of death or initial determination of
disability.
For purposes of this waiver, the death or 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. 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, 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).
38
<PAGE>
(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 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
and Class C 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
39
<PAGE>
and/or shareholder services to the Class A, Class B and Class C shares of the
Multi-Class Funds (the "12b-1 Classes").
For each 12b-1 Class 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%
</TABLE>
(1) The Distribution Fee and/or Service Fee, as applicable, to be paid under the
12b-1 Plan will be calculated daily (as a percentage of average daily net
assets) and paid periodically.
The purpose of the Distribution Fee is to compensate SM&R, or enable SM&R to
compensate other persons, including any distributor of shares of the 12b-1
Classes, for services that are primarily intended to result in or primarily
attributable to the sale of the 12b-1 Classes ("Selling Services"). The purpose
of the Service Fee is to compensate SM&R, or enable SM&R to compensate other
persons, for providing ongoing servicing to shareholders of the Funds
("Shareholder Services").
"Selling Services" include the training and supervision of sales personnel;
advertising, marketing, and other promotional expenses, including the costs of
preparing and printing sales literature; printing prospectuses and statements of
additional information and distributing them to prospective investors in 12b-1
Classes; and distributing shares of the 12b-1 Classes. Payments for Selling
Services may include payment for overhead and other office expenses that are
related to the distribution of the 12b-1 Classes. SM&R also may reimburse the
expenses of persons who provide support services in connection with the
distribution of the 12b-1 Classes, and may make payments to financial
intermediaries that sell shares of the 12b-1 Classes. "Shareholder Services"
include all forms of shareholder liaison services that SM&R deems appropriate,
including maintaining shareholder accounts, providing shareholder liaison
services, responding to customer inquiries, and providing shareholders with
information on their investments and about the 12b-1 Classes.
The 12b-1 Plan, and any related agreement, continues in effect with respect
to a 12b-1 Class only if such continuance is specifically approved at least
annually by either the Board or the shareholders of that 12b-1 Class and, in
either case, by a majority vote of those directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of this Plan or in such agreement (the "Independent Directors"), cast
in person at a meeting called for the purpose of voting on
40
<PAGE>
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 Class of a Multi-Class Fund, any distribution and shareholder
services agreement related to that 12b-1 Class may be terminated at any time,
without the payment of any penalty, (1) by the Board or by a vote of the 12b-1
Class' outstanding shareholders, on 60 days written notice to SM&R, or (2) by
SM&R, on 60 days written notice to the Company.
The 12b-1 Plan provides that it may not be amended with respect to any
12b-1 Class of a Multi-Class Fund to increase materially the amount of the fees
described in such Plan without approval of the shareholders of the relevant
Class. All material amendments to the Plan also must be approved by the Board in
the manner described above and in the 12b-1 Plan.
In each year during which this Plan remains in effect with respect to a
12b-1 Class, SM&R (and any other person authorized to direct the disposition of
monies paid or payable by the relevant Fund pursuant to the Plan or any related
agreement) will prepare and furnish to the Board, and the Board will review, at
least quarterly, written reports complying with the requirements of Rule 12b-1,
which set out the amounts expended under this Plan and the purposes for which
those expenditures were made. The obligations of the Company and each Fund under
the 12b-1 Plan will not be binding upon any of the directors, shareholders,
nominees, officers, employees or agents, whether past, present or future, of the
Company, individually, but are binding only upon the assets and property of the
Company and the relevant Funds or Funds, as provided in the Company's Articles
of Incorporation.
For the period from January 1, 1999 to August 31, 1999, the various classes
of the Funds paid 12b-1 fees as follows:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Government Bond....................... $ 30 $ 28 $28
Tax Free Fund......................... 155 229 97
</TABLE>
An estimate by category of the allocation of actual fees paid by the Funds
under the Class A Plan for the period January 1, 1999 to August 31, 1999, was as
follows:
<TABLE>
<CAPTION>
PRINTING AND COMPENSATION TO
MAILING SALES PERSONNEL
------------ ---------------
<S> <C> <C>
Government Bond.................................... $ 30 $0
Tax Free Fund...................................... 155 0
</TABLE>
41
<PAGE>
An estimate by category of the allocation of actual fees paid by the Funds
under the Class B Plan for the period January 1, 1999 to August 31, 1999, was as
follows:
<TABLE>
<CAPTION>
PRINTING AND COMPENSATION TO
MAILING SALES PERSONNEL
------------ ---------------
<S> <C> <C>
Government Bond.................................... $ 24 $ 4
Tax Free Fund...................................... 179 50
</TABLE>
An estimate by category of the allocation of actual fees paid by the Funds
under the Class C Plan for the period January 1, 1999 to August 31, 1999, was as
follows:
<TABLE>
<CAPTION>
PRINTING AND COMPENSATION TO
MAILING SALES PERSONNEL
------------ ---------------
<S> <C> <C>
Government Bond.................................... $25 $ 3
Tax Free Fund...................................... 69 28
</TABLE>
The Primary Fund and Money Market Fund shares do not pay 12b-1 fees.
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 and T 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.
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<PAGE>
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 $500 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 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, 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 vice versa.
You also may exchange your Class A, B, and T 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
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- 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, and T 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 amounts invested in those shares to
have previously paid a sales charge for purposes of the exchange privilege.
For example, assume you purchase Class T shares of the Government Bond Fund.
You then exchange all your Class T shares (including shares acquired through
reinvestment of 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 amounts invested in those 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 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.
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<PAGE>
REDEMPTION
Any shareholder may redeem all or any part of his shares by submitting a
written request to SM&R as the Company's agent for such purpose. Such requests
must be duly executed by each registered owner, 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.
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 $50,000 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 Shareholder's Guide. 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 issued prior to January 1, 1999, if any, are received
in "Good Order" as set forth above. Any applicable CDSC must be paid at the time
of redemption. (See "Important Facts About Redeeming" in the Shareholder's
Guide). 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
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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.
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
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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 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
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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.
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
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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.
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 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
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specified and increasing fraction of shares held at monthly or quarterly
intervals. To illustrate the latter option, if an investor wanted quarterly
payments for a ten-year period, the first withdrawal payment would be the
proceeds from redemption of 1/40th of the shares held in the account. The second
payment would be 1/39th of the remaining shares; the third payment would be
1/38th of the remaining shares, etc. Under this option, all shares would be
redeemed over the ten-year period, and the payment amount would vary each
quarter, depending upon the number of shares redeemed and the redemption price.
No charge is made for a non-qualified Systematic Withdrawal Plan, and the
account investor may change the option or payment amount at any time upon
written request received by SM&R no later than the month prior to the month of a
scheduled redemption for a withdrawal payment. A Systematic Withdrawal Plan may
also be terminated at any time by the account investor or the Fund without
penalty.
Occasionally certain limited types of qualified retirement plans are
involved in making investments and withdrawals during the same year. Under such
an arrangement, it is possible for the plan to be, in effect, charged duplicate
sales charges. In order to eliminate this possibility, each Fund of the Company
will permit additional investments, without sales charge, equal to all sums
withdrawn, providing the additional investments are made during the next twelve
months following the withdrawal or redemption, and providing that all funds
withdrawn were for the specific purpose of satisfying plan benefits of
participants who have retired, become disabled or left the plan. Furthermore,
for a qualified plan to qualify under this provision, the plan must include at
least one participant who is a non-owner employee. The Company and SM&R
discourage shareholders from maintaining a withdrawal account while concurrently
and regularly purchasing shares of the Company although such practice is not
prohibited.
THE UNDERWRITER
SM&R serves as principal underwriter of the shares of all Funds of the
Company pursuant to an Underwriting Agreement dated July 1, 1993, as amended on
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
August 19, 1999. 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).
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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 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 for those classes with a
front-end sales charge is as follows:
<TABLE>
<CAPTION>
PERCENTAGE CLASS T CLASS A CLASS C
---------- -------- -------- --------
<S> <C> <C> <C>
Net Amount Invested
Maximum............................................. 4.7% 4.9% 1.01%
Minimum............................................. 0.0% 0.0% 0.0%
Public Offering Price
Maximum............................................. 4.0% 4.25% 0.99%
Minimum............................................. 0.0% 0.0% 0.0%
</TABLE>
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 for periods ending
August 31st:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Total Amount Sales Charge
Received..................... $29,337 $30,387 $37,262
Amount Retained by SM&R........ $3,000 $2,038 $2,390
Amount Reallowed to Dealers.... Less than $500 Less than $500 Less than $500
</TABLE>
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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.
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").
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. Due to a
concern over a potential conflict of interest, KPMG resigned as auditors to the
Company on December 15, 1997. For the year ended August 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.
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The Company's audited financial statements for the year ended August 31,
1999, and the Independent Auditors' Report of TWB dated October 1, 1999, 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 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.
The Company's annual report contains additional performance information and
will be made available to you upon request and without charge.
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
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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.
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 September 30, 1999, the standardized yield for
the Primary Fund is 4.99%. 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:
<TABLE>
<S> <C> <C>
Yield = 2[(a-b + 1)TO THE POWER OF 6-1]
------
cd
</TABLE>
Where:
a = dividends and interest earned during the period.
54
<PAGE>
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.
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.
55
<PAGE>
The average annual total returns for the Funds for the periods ended
August 31, 1999 are:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING
AUGUST 31, 1999) PAST ONE YEAR PAST 5 YEARS 7-DAY YIELD
---------------------------- ------------- ------------ -----------
<S> <C> <C> <C>
SM&R Government Bond Fund (Class T)........ (3.78)% 5.54% --
SM&R Primary Fund.......................... 4.75% 4.99% --
SM&R Tax Free Fund (Class T)............... (4.75)% 5.22% --
SM&R Money Market Fund..................... -- -- 4.92%
</TABLE>
The average annual total return figures for the Funds are computed for a class
according to a formula prescribed by the SEC. The formula can be expressed as
follows:
P(1 + T)TO THE POWER OF n = ERV
<TABLE>
<S> <C> <C>
Where P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of the 1-, 5- or 10-year periods at
the end of a 1-, 5- or 10-year period (or fractional portion
thereof), assuming the maximum sales load and reinvestment
of all dividends and distributions.
</TABLE>
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 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
56
<PAGE>
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.
PERFORMANCE MEASURES
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements and other materials regarding the
Company or any of its Funds may discuss various measures of the Fund's
performance as reported by various financial publications. Materials may also
compare performance (as calculated above) to performance as reported by other
investments, indices, and averages. The following publications, indices, and
averages may be used:
DOW JONES COMPOSITE AVERAGE OR ITS COMPONENT AVERAGES--an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
STANDARD & POOR'S 500 STOCK INDEX OR ITS COMPONENT INDICES--an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
THE NEW YORK STOCK EXCHANGE COMPOSITE OR COMPONENT INDICES--unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
LIPPER--MUTUAL FUND PERFORMANCE ANALYSIS AND LIPPER--FIXED INCOME FUND
PERFORMANCE ANALYSIS--measure total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
CDA MUTUAL FUND REPORT, PUBLISHED BY CDA INVESTMENT
TECHNOLOGIES, INC.--analyzes price, current yield, risk, total return, and
average rate of return (average annual compounded growth rate) over specified
time periods for the mutual fund industry.
MUTUAL FUND SOURCE BOOK, PUBLISHED BY MORNINGSTAR, INC.--analyzes price,
yield, risk and total return for equity funds.
FINANCIAL PUBLICATIONS: THE WALL STREET JOURNAL AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES--provide
performance statistics over specified time periods.
CONSUMER PRICE INDEX (OR COST OF LIVING INDEX), PUBLISHED BY THE U.S. BUREAU
OF LABOR STATISTICS--a statistical measure of change, over time, in the price of
goods and services in major expenditure groups.
57
<PAGE>
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, Lehman Bros. 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.
58
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1999
--------------------------------------------------------------------------------
GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
COMMERCIAL PAPER DATE RATE(%) AMOUNT VALUE
<S> <C> <C> <C> <C>
GOVERNMENT AGENCIES--3.79%
Federal Home Loan Bank 09/10/99 4.920 $ 222,000 $ 221,724
Federal Home Loan Mortgage Corporation 09/03/99 5.170 181,000 180,948
Federal Home Loan Mortgage Corporation 10/08/99 5.120 100,000 99,472
Federal National Mortgage Association 09/27/99 5.150 119,000 118,555
Federal National Mortgage Association 10/15/99 5.130 100,000 99,371
Federal National Mortgage Association 10/25/99 5.350 169,000 167,643
-----------
TOTAL COMMERCIAL PAPER--3.79%
(Cost $887,713) 887,713
-----------
<CAPTION>
CORPORATE BONDS
AUTO & TRUCK MANUFACTURERS--4.02%
<S> <C> <C> <C> <C>
General Motors Corporation 05/01/08 6.375 1,000,000 942,172
BANKS--4.00%
Chase Manhattan Corporation 02/15/08 6.375 1,000,000 939,102
COMMUNICATION EQUIPMENT--2.22%
Tele-Communications, Incorporated 01/15/03 8.250 500,000 521,010
FINANCIAL SERVICES--17.04%
Bear Stearns Companies, Incorporated 03/30/03 6.200 175,000 169,033
CNA Financial Corporation 01/15/08 6.450 1,000,000 923,180
Household Finance Corporation 06/17/08 6.400 1,000,000 931,264
Morgan Stanley, Dean Witter & Discover 03/01/07 6.875 1,000,000 970,139
Salomon, Incorporated 03/01/00 6.500 1,000,000 1,002,653
-----------
3,996,269
MEDICAL SERVICES--4.28%
Aetna Services, Incorporated 08/15/36 6.970 1,000,000 1,004,748
-----------
TOTAL CORPORATE BONDS--31.56%
(Cost $7,814,826) 7,403,301
-----------
<CAPTION>
U S GOVERNMENT AGENCY AND
U S GOVERNMENT SECURITIES
U S GOVERNMENT AGENCY SECURITIES--60.77%
<S> <C> <C> <C> <C>
Federal Home Loan Bank 08/05/04 7.380 1,000,000 1,031,576
Federal Home Loan Bank 08/19/04 7.570 1,000,000 1,039,798
Federal Home Loan Bank 10/25/05 6.230 150,000 146,907
Federal Home Loan Mortgage Corporation 08/01/05 6.750 165,000 165,976
Federal Home Loan Mortgage Corporation 09/15/06 7.000 162,289 163,370
Federal Home Loan Mortgage Corporation 03/15/07 7.000 861,999 864,784
Federal Home Loan Mortgage Corporation 09/15/07 7.000 1,000,000 999,420
Federal Home Loan Mortgage Corporation 08/15/08 7.000 1,600,000 1,601,600
Federal National Mortgage Association 02/11/02 7.500 1,585,000 1,627,846
Federal National Mortgage Association 04/22/02 7.550 200,000 205,891
Federal National Mortgage Association 09/12/05 6.550 100,000 99,596
Federal National Mortgage Association 02/02/07 7.500 500,000 489,126
Federal National Mortgage Association 04/10/07 7.700 300,000 296,549
</TABLE>
59
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1999
--------------------------------------------------------------------------------
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 National Mortgage Association 07/25/07 7.000 $1,000,000 $ 1,001,340
Federal National Mortgage Association 03/16/09 6.320 250,000 235,437
Federal National Mortgage Association 04/29/09 6.500 1,000,000 945,894
Federal National Mortgage Association 05/18/09 6.500 1,500,000 1,454,820
Federal National Mortgage Association 11/18/15 6.350 706,187 706,053
Tennessee Valley Authority 12/15/17 6.250 300,000 278,648
Vende 09/15/15 6.500 906,285 898,472
-----------
14,253,103
U S GOVERNMENT SECURITIES--2.50%
U S Treasury Bonds 02/15/26 6.000 500,000 475,312
U S Treasury Bonds 08/15/28 5.500 125,000 111,680
-----------
586,992
-----------
TOTAL U S GOVERNMENT AGENCY and U S GOVERNMENT SECURITIES--63.27%
(Cost $14,786,143) 14,840,095
-----------
TOTAL INVESTMENTS--98.62%
(Cost $23,488,682) 23,131,109
CASH AND OTHER ASSETS, LESS LIABILITIES--1.38% 324,579
-----------
TOTAL NET ASSETS--100.00% $23,455,688
===========
</TABLE>
See notes to financial statements.
60
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES August 31, 1999
--------------------------------------------------------------------------------
GOVERNMENT BOND FUND
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value $ 23,131,109
Cash 31,853
Prepaid expenses 22,887
Receivable from investment advisor 10,931
Receivable for:
Capital stock sold 18,571
Interest 238,602
Expense reimbursement 29,076
Other assets 2,782
------------
TOTAL ASSETS 23,485,811
------------
LIABILITIES
Capital stock reacquired 1,290
Distribution payable 4,139
Accrued:
Investment advisory fee 10,286
Service fee 5,143
Other liabilities 9,265
------------
TOTAL LIABILITIES 30,123
------------
NET ASSETS (applicable to shares outstanding) $ 23,455,688
============
NET ASSETS:
Class A $ 68,792
--------------------------------------------------------------------------
Class B $ 7,743
--------------------------------------------------------------------------
Class C $ 11,022
--------------------------------------------------------------------------
Class T $ 23,368,131
--------------------------------------------------------------------------
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 6,747
--------------------------------------------------------------------------
Class B:
Authorized 100,000,000
Outstanding 762
--------------------------------------------------------------------------
Class C:
Authorized 100,000,000
Outstanding 1,086
--------------------------------------------------------------------------
Class T:
Authorized 23,000,000
Outstanding 2,313,314
--------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 10.20
Offering price per share: (Net Assets value of $10.20 /
95.25%) $ 10.71
--------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 10.16
--------------------------------------------------------------------------
Class C:
Net asset value and redemption price per share $ 10.15
Offering price per share: (Net Assets value of $10.15 /
99.00%) $ 10.25
--------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 10.10
Offering price per share: (Net Assets value of $10.10 /
95.5%) $ 10.58
--------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
61
<PAGE>
STATEMENT OF OPERATIONS For Year Ended August 31, 1999
--------------------------------------------------------------------------------
GOVERNMENT BOND FUND
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $ 1,589,424
EXPENSES
Investment advisory fees 120,664
Service fees 60,332
Professional fees 12,586
Custody and transaction fees 15,707
Directors' fees 9,828
Qualification fees 17,315
Shareholder reporting expenses 28,828
Insurance expenses 2,159
Distribution Fees 86
Other 167
-----------
TOTAL EXPENSES 267,672
LESS EXPENSES REIMBURSED (25,950)
-----------
NET EXPENSES 241,722
-----------
INVESTMENT INCOME--NET 1,347,702
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 45,700
Change in unrealized depreciation of investments for the
year (1,198,180)
-----------
NET LOSS ON INVESTMENTS (1,152,480)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 195,222
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,347,702 $ 1,457,183
Net realized gain on investments 45,700 103,599
Change in unrealized appreciation (depreciation) (1,198,180) 340,609
----------- -----------
Net increase in net assets resulting from operations 195,222 1,901,391
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (651) --
Class B (209) --
Class C (131) --
Class T (1,346,738) (1,500,708)
----------- -----------
Total distributions to shareholders (1,347,729) (1,500,708)
CAPITAL SHARE TRANSACTIONS - NET
Class A 69,763 --
Class B 8,079 --
Class C 11,131 --
Class T 537,687 (102,449)
----------- -----------
Total net capital share transactions 626,660 (102,449)
----------- -----------
TOTAL INCREASE (DECREASE) (525,847) 298,234
NET ASSETS
Beginning of Year 23,981,535 23,683,301
----------- -----------
End of Year $23,455,688 $23,981,535
=========== ===========
</TABLE>
See notes to financial statements.
62
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
CLASS T SHARES
------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.60 $ 10.42 $ 10.14 $ 10.51 $ 10.07
Investment income--net 0.59 0.64 0.67 0.65 0.70
Net realized and unrealized gain (loss) on
investments (0.50) 0.20 0.26 (0.37) 0.44
------- ------- ------- ------- -------
Total from Investment Operations 0.09 0.84 0.93 0.28 1.14
Less distributions from
Investment income--net (0.59) (0.66) (0.65) (0.65) (0.70)
------- ------- ------- ------- -------
Total Distributions (0.59) (0.66) (0.65) (0.65) (0.70)
------- ------- ------- ------- -------
Net Asset Value, End of Year $ 10.10 $ 10.60 $ 10.42 $ 10.14 $ 10.51
======= ======= ======= ======= =======
Total Return 0.76 % 8.31 % 9.37 % 2.63 % 11.85 %
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $23,368 $23,982 $23,683 $21,127 $20,466
Ratio of expenses with reimbursement to
average net assets 1.00 % 1.00 % 1.00 % 1.00 % 0.70 %
Ratio of expenses without reimbursement to
average net assets 1.11 % 1.00 % 1.07 % 1.20 % 1.06 %
Ratio of net investment income to average
net assets 5.58 % 6.08 % 6.46 % 6.17 % 6.90 %
Portfolio turnover rate 22.86 % 32.71 % 9.06 % 30.17 % 2.20 %
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
---------------- ---------------- ----------------
PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 1, 1999 JANUARY 1, 1999 JANUARY 1, 1999
TO TO TO
AUGUST 31, AUGUST 31, AUGUST 31,
---------------- ---------------- ----------------
1999 1999 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.62 $ 10.62 $ 10.62
Investment income--net 0.30 0.33 0.30
Net realized and unrealized gain (loss) on
investments (0.42) (0.46) (0.47)
------- ------- -------
Total from Investment Operations (0.12) (0.13) (0.17)
Less distributions from
Investment income--net (0.30) (0.33) (0.30)
------- ------- -------
Total Distributions (0.30) (0.33) (0.30)
------- ------- -------
Net Asset Value, End of Period $ 10.20 $ 10.16 $ 10.15
======= ======= =======
Total Return ** (1.17)% (1.30)% (1.64)%
======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period $68,792 $ 7,743 $11,022
Ratio of expenses with reimbursement to average net
assets * 1.25 % 1.75 % 2.00 %
Ratio of expenses without reimbursement to average
net assets * 1.42 % 1.77 % 2.25 %
Ratio of net investment income to average net assets
* 5.25 % 4.86 % 4.54 %
Portfolio turnover rate 22.86 % 22.86 % 22.86 %
</TABLE>
* Ratios annualized
** Returns are not annualized
See notes to financial statements.
63
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1999
--------------------------------------------------------------------------------
PRIMARY FUND
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C>
COMMERCIAL PAPER
AEROSPACE/DEFENSE--4.95%
Litton Industries, Incorporated 09/16/99 5.450 $1,168,000 $ 1,165,345
Lockheed Martin Corporation 09/01/99 5.300 360,000 360,000
-----------
1,525,345
APPAREL--2.42%
VF Corporation 09/01/99 5.270 747,000 747,000
AUTO PARTS MANUFACTURERS--8.14%
Goodyear Tire & Rubber Company (The) 09/24/99 5.410 1,118,000 1,114,132
TRW Incorporated 09/23/99 5.400 1,400,000 1,395,365
-----------
2,509,497
CHEMICALS--4.84%
Engelhard Corporation 10/12/99 5.500 1,501,000 1,491,586
CONSTRUCTION--4.54%
Centex Corporation 09/03/99 5.320 1,400,000 1,399,584
CONTAINERS--3.78%
Crown Cork & Seal Company, Incorporated 09/09/99 5.320 1,169,000 1,167,613
COSMETICS/TOILETRIES--4.43%
Rite Aid Corporation 09/14/99 5.430 1,370,000 1,367,308
ELECTRIC POWER--4.56%
Public Service Company of Colorado 10/14/99 5.450 1,417,000 1,407,753
FINANCIAL SERVICES--23.10%
Case Credit 09/13/99 5.400 490,000 489,116
Comdisco Incorporated 09/08/99 5.280 1,416,000 1,414,541
Dana Corporation 09/17/99 5.440 1,393,000 1,389,631
Penney (J.C.) Company, Incorporated 09/08/99 5.320 1,309,000 1,307,641
Kerr-McGee Credit Corporation 09/07/99 5.350 1,206,000 1,204,921
Penn Power & Light Energy Trust 01/18/00 6.200 1,350,000 1,317,632
-----------
7,123,482
LODGING/HOTELS--2.97%
Marriott International, Incorporated 10/07/99 5.500 920,000 914,931
MEDICAL SERVICES--3.74%
Humana, Incorporated 09/02/99 5.350 1,154,000 1,153,827
OIL SERVICES--3.59%
UOP 09/20/99 5.500 1,110,000 1,106,778
RETAIL--SPECIALTY--7.33%
Mattel, Incorporated 10/18/99 5.470 1,047,000 1,039,508
Toys 'R' Us, Incorporated 09/15/99 5.400 1,224,000 1,221,428
-----------
2,260,936
TRUCKING & SHIPPING--4.86%
Ryder Systems, Incorporated 09/10/99 5.340 1,500,000 1,497,989
-----------
TOTAL COMMERCIAL PAPER--83.25%
(Cost $25,673,629) 25,673,629
-----------
CORPORATE BONDS
APPAREL/TEXTILES--1.61%
Hoechst Cel Corporation 02/01/04 6.125 500,000 496,587
BUILDING SUPPLIES--1.58%
Armstrong World Industries, Incorporated 08/15/03 6.350 500,000 487,611
</TABLE>
64
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1999
--------------------------------------------------------------------------------
PRIMARY FUND, CONTINUED
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C>
CORPORATE BONDS
ELECTRIC POWER--1.58%
West Penn Power Company 06/01/04 6.375 $ 500,000 $ 485,840
ENVIRONMENTAL--1.50%
Browning-Ferris Industries, Incorporated 01/15/03 6.100 500,000 464,044
FINANCIAL SERVICES--2.40%
Finova Capital Corporation 03/15/04 6.125 500,000 482,096
Household Finance Corporation 08/15/03 6.250 265,000 257,383
-----------
739,479
LEISURE TIME/GAMING--1.27%
Carnival Cruise Lines 10/01/03 6.150 400,000 390,302
MEDIA-TV/RADIO/CABLE--1.59%
TCI Communications, Incorporated 05/01/03 6.375 500,000 491,661
TELECOM--LONG DISTANCE--1.61%
WorldCom, Incorporated 08/15/01 6.125 500,000 496,141
-----------
TOTAL CORPORATE BONDS--13.14%
(Cost $4,095,184) 4,051,665
-----------
U S GOVERNMENT AGENCY AND
U S GOVERNMENT SECURITIES
U S GOVERNMENT AGENCY SECURITIES--0.63%
Federal Home Loan Bank 11/10/03 5.750 200,000 194,071
U S GOVERNMENT SECURITIES--2.83%
U S Treasury Bonds 02/15/29 5.250 1,000,000 873,438
-----------
TOTAL U S GOVERNMENT AGENCY and U S GOVERNMENT SECURITIES--3.46%
(Cost $1,074,991) 1,067,509
-----------
TOTAL INVESTMENTS--99.85%
(Cost $30,843,804) 30,792,803
CASH AND OTHER ASSETS, LESS LIABILITIES--0.15% 45,494
-----------
TOTAL NET ASSETS--100.00% $30,838,297
===========
</TABLE>
See notes to financial statements.
65
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES August 31, 1999
--------------------------------------------------------------------------------
PRIMARY FUND
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value $30,792,803
Cash 4,596
Prepaid expenses 23,833
Receivable for:
Capital stock sold 5,209
Interest 62,950
Expense reimbursement 15,617
Other assets 2,782
-----------
TOTAL ASSETS 30,907,790
-----------
LIABILITIES
Distribution payable 10,457
Capital stock reacquired 34,995
Accrued:
Investment advisory fee 12,845
Service fee 6,423
Other liabilities 4,773
-----------
TOTAL LIABILITIES 69,493
-----------
NET ASSETS $30,838,297
===========
Shares of capital stock outstanding, (1,176,000,000 shares
authorized, $.01 par value per share) 30,907,621
===========
Net asset value $ 1.00
===========
</TABLE>
STATEMENT OF OPERATIONS For Year Ended August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Interest $1,816,144
EXPENSES
Investment advisory fees 167,289
Service fees 83,645
Professional fees 5,690
Custody and transaction fees 24,568
Directors' fees 9,826
Qualification fees 30,577
Shareholder reporting expenses 26,136
Insurance expenses 2,519
Other 1,286
----------
TOTAL EXPENSES 351,536
LESS EXPENSES REIMBURSED (85,317)
----------
NET EXPENSES 266,219
----------
INVESTMENT INCOME--NET 1,549,925
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (12,564)
Change in unrealized depreciation of investments for the
year (51,001)
----------
NET LOSS ON INVESTMENTS (63,565)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,486,360
==========
</TABLE>
See notes to financial statements.
66
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
PRIMARY FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,549,925 $ 1,767,808
Net realized loss on investments (12,564) --
Change in unrealized appreciation (depreciation) (51,001) --
----------- -----------
Net increase in net assets resulting from operations 1,486,360 1,767,808
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (1,549,925) (1,767,808)
CAPITAL SHARE TRANSACTIONS--NET (3,675,020) 1,532,007
----------- -----------
TOTAL INCREASE (DECREASE) (3,738,585) 1,532,007
NET ASSETS
Beginning of Year 34,576,882 33,044,875
----------- -----------
End of Year $30,838,297 $34,576,882
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
<TABLE>
<CAPTION>
CLASS T SHARES
--------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ------------ ------------ ------------ ------------
<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 0.05
------- ------- ------- ------- -------
Total from Investment Operations 0.05 0.05 0.05 0.05 0.05
Less distributions from
Investment income--net (0.05) (0.05) (0.05) (0.05) (0.05)
------- ------- ------- ------- -------
Total Distributions (0.05) (0.05) (0.05) (0.05) (0.05)
------- ------- ------- ------- -------
Net Asset Value, End of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total Return 4.75 % 5.15 % 4.98 % 5.07 % 5.01 %
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $30,838 $34,577 $33,045 $37,465 $20,984
Ratio of expenses with reimbursement to
average net assets 0.80 % 0.80 % 0.80 % 0.81 % 0.84 %
Ratio of expenses without reimbursement
to average net assets 1.06 % 0.98 % 1.01 % 1.15 % 1.21 %
Ratio of net investment income to average
net assets 4.66 % 5.02 % 4.86 % 4.93 % 4.91 %
Portfolio turnover rate 30.47 % -- -- -- --
</TABLE>
See notes to financial statements.
67
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1999
--------------------------------------------------------------------------------
TAX FREE FUND
<TABLE>
<CAPTION>
INTEREST/
MUNICIPAL BONDS MATURITY STATED FACE
RATING(a) DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
CALIFORNIA--4.78%
Aa3/AA- California State General Obligation Bonds Unlimited 06/01/11 5.250 $ 100,000 $ 101,322
Aaa/AAA Sacramento, California Municipal Utility District
Electric Revenue Bonds, Series I 01/01/15 5.750 200,000 204,018
Aaa/AAA San Francisco, California City and County Sewer
Revenue Refunding Bonds 10/01/16 5.375 250,000 245,740
------------
551,080
------------
FLORIDA--7.79%
Aaa/AAA Dade County, Florida Water & Sewer System Revenue
Bonds 10/01/16 5.375 400,000 396,232
Aaa/AAA Miami Dade County Solid Waste System Revenue Bonds 10/01/18 4.375 400,000 356,124
Aa2/AA+ State of Florida-State Board of Education, Public
Education Capital Outlay Bonds, 1992 Series E 06/01/19 5.750 145,000 145,689
------------
898,045
------------
GEORGIA--1.54%
A3/A Municipal Electric Authority of Georgia-Power
Revenue Bonds, Series AA 01/01/07 5.400 175,000 177,886
------------
ILLINOIS--13.31%
Aaa/AAA Chicago, Illinois-General Obligation Bonds Unlimited 01/01/25 5.125 100,000 90,719
Aaa/AAA Chicago, Illinois-Park District General Obligation
Bonds Unlimited, Series C 01/01/16 4.850 230,000 207,028
Aa2/AA Illinois Health Facilities Authority-Revenue Bonds,
Series A, (Northwestern Memorial Hospital) 08/15/24 6.000 100,000 100,334
Aa2/AA Illinois Health Facilities Authority-Revenue Bonds,
Series 1994A, (Northwestern Memorial Hospital) 08/15/14 6.100 200,000 204,534
Aaa/AAA Illinois State Toll Highway Authority-Highway
Prioity Revenue Bonds, Series A-FGIC 01/01/17 5.750 175,000 185,377
Aaa/AAA Regional Transportation Authority of Illinois
Revenue Bonds, Refunding MBIA 06/01/18 5.500 200,000 196,766
Aaa/NR Rockford, Illinois-General Obligation Bonds
Unlimited 12/15/18 4.500 180,000 151,555
Aa2/AAA State of Illinois-Build Illinois Bonds, Sales Tax
Revenue Bonds, Series V 06/15/17 6.375 200,000 214,466
Aaa/AAA State of Illinois-General Obligation Bonds Unlimited 03/01/19 5.000 200,000 183,648
------------
1,534,427
------------
LOUISIANA--5.56%
Aaa/AAA Louisiana Public Facilities Authority Hospital
Revenue Bonds, Series C 07/01/19 5.000 400,000 362,984
Aaa/AAA New Orleans, Louisiana Sewer Service Revenue Bonds 06/01/18 5.000 300,000 278,586
------------
641,570
------------
MASSACHUSETTS--4.13%
Aaa/AAA Massachusetts State Water Revenues Authority,
General Purpose-Series A 11/01/21 5.500 450,000 475,731
------------
NEW MEXICO--0.88%
Aaa/AAA Central Consolidated School District No.22 San Juan
County, New Mexico General Obligation School
Building Bonds 08/15/09 5.300 100,000 101,423
------------
</TABLE>
68
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1999
--------------------------------------------------------------------------------
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 YORK--7.25%
A3/A- New York City, New York-General Obligation Bonds
Unlimited, Series J 08/01/18 5.000 $ 200,000 $ 181,972
Aaa/AAA New York City, New York-General Obligation Bonds
Unlimited, Series J 02/15/07 5.000 100,000 100,989
Aa3/AA New York City, New York-Transititional Financial
Authority Revenue Bonds, Series C 05/01/19 5.000 250,000 229,997
Aa3/A+ Triborough Bridge & Tunnel Authority, New York,
Revenue Bonds, General Purpose-Series B 01/01/27 5.200 350,000 323,151
------------
836,109
------------
NORTH CAROLINA--1.79%
Aaa/AAA City of Charlotte, North Carolina-General Obligation
Public Improvement Bonds, Series 1994 02/01/08 5.700 100,000 106,563
Baa3/BBB North Carolina Eastern Municipal Power Agency-Power
System Revenue Bonds, Refunding Series 1993 B 01/01/12 6.250 100,000 100,393
------------
206,956
------------
OHIO--3.53%
Aaa/AAA Franklin County, Ohio-General Obligation Bonds
Limited 12/01/08 5.100 300,000 305,844
Aaa/AAA Franklin County, Ohio-General Obligation Bonds
Limited 12/01/11 5.300 100,000 101,258
------------
407,102
------------
OKLAHOMA--0.93%
Aaa/NR Oklahoma Housing Finance Agency-Single Family
Mortgage Revenue Bonds (Homeownership Loan
Program), 1994 Series A-1 (b) 09/01/07 6.250 105,000 107,022
------------
OREGON--1.88%
A1/A+ City of Portland, Oregon-Sewer System Revenue Bonds,
1994 Series A 06/01/15 6.250 200,000 216,242
------------
PENNSYLVANIA--0.88%
Aa3/AA Pennsylvania State General Obligation Bonds
Unlimited, Refunding & Projects-First Series 04/15/06 5.000 100,000 101,799
------------
PUERTO RICO--2.05%
Baa1/A Commonwealth of Puerto Rico-Public Improvement
Refunding Bonds, Series 1992A, General Obligation
Bonds 07/01/14 6.000 100,000 103,157
Baa1/BBB+ Puerto Rico Electric Power Authority-Power Revenue
Bonds, Series R 07/01/17 6.250 125,000 133,644
------------
236,801
------------
RHODE ISLAND--0.89%
Aa2/AA+ Rhode Island Housing & Mortgage Financial
Corporation, Homeownership Opportunity,
Series 20-A 04/01/17 6.150 100,000 102,709
------------
TENNESSEE--1.75%
A1/A+ Tennessee Housing Development Agency-Mortgage
Finance Program Bonds, 1994 Series B (b) 01/01/09 6.200 200,000 202,330
------------
</TABLE>
69
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1999
--------------------------------------------------------------------------------
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--21.94%
Aaa/AAA Baytown, Texas-Water and Sewer Revenue Bonds 02/01/14 5.950 $ 100,000 $ 102,162
Aaa/AAA Board of Regents of The University of Texas System-
Permanent University Fund, Refunding Bonds
Series 1992A 07/01/13 6.250 200,000 208,118
Aaa/AAA City of Austin, Texas-Combined Utility Systems
Revenue Refunding Bonds, Series 1994 05/15/16 6.250 100,000 103,561
Aa2/AA City of Dallas, Texas-Waterworks and Sewer System
Revenue Bonds, Series 1994 04/01/07 5.600 100,000 102,562
Aaa/AAA Collin County, Texas-Community College District,
Consolidated Fund, Revenue Bonds 02/01/15 5.250 400,000 390,488
Aaa/AAA Dallas-Fort Worth International Airport-Dallas-Fort
Worth Regional Airport, Joint Revenue Refunding
Bonds, Series 1994A 11/01/10 6.000 100,000 105,146
Aaa/AAA Denton, Texas-General Obligation Bonds Limited 02/15/08 5.500 130,000 134,051
Aaa/AAA Denton, Texas-General Obligation Bonds Limited 02/15/09 5.600 120,000 123,727
Aaa/A+ Flower Mound, Texas-Refunding and Improvement,
General Obligation Bonds Unlimited 03/01/17 5.500 200,000 198,006
Aa1/AA Harris County, Texas-Tax and Revenue Certificates of
Obligation, Series 1994 10/01/12 6.100 135,000 144,585
Aa1/AA Harris County, Texas-Tax and Revenue Certificates of
Obligation, Series 1994 10/01/13 6.100 125,000 133,875
Aaa/AAA Laredo, Texas-General Obligation Bonds Unlimited 02/15/11 5.250 100,000 99,997
Aaa/AAA Mission Texas Consolidated Independent School
District-General Obligation Bonds Unlimited 02/15/18 4.500 200,000 169,564
AAA/NR Tarrant County Health Facilities Development
Corporation-Health System Revenue Bonds, (Harris
Methodist Health System), Series 1994 (c ) 09/01/14 6.000 200,000 213,218
Aaa/AAA Texas Turnpike Authority-Dallas North Tollway System
Revenue Bonds, Series 1995 (President George Bush
Turnpike) 01/01/15 5.400 100,000 98,924
Aaa/NR Weslaco, Texas Independent School District General
Obligation Bonds 02/15/13 5.650 100,000 101,301
Aaa/AAA West University Place, Texas-General Obligation
Bonds Limited, Permanent Improvement 02/01/14 5.650 100,000 100,754
------------
2,530,039
------------
UTAH--0.85%
Aa2/AA Utah Housing Finance Agency-Single Family Mortgage
Bonds, 1995 Issue A, (Federally Insured or
Guaranteed Mortgage Loans) (b) 07/01/12 7.150 35,000 36,701
Aa2/NR Utah State Housing Financial Agency-Single Family
Mortgage Bonds, Series F1 07/01/13 6.000 60,000 61,355
------------
98,056
------------
VIRGINIA--0.90%
Aaa/AAA Virginia State Housing Development Authority
Commonwealth Mortgage Bonds, Series A, Subseries
A-4 (b) 07/01/15 6.300 100,000 103,658
------------
</TABLE>
70
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1999
--------------------------------------------------------------------------------
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--9.79%
Aaa/AAA City of Richland, Washington-Water and Sewer
Improvement Revenue Bonds, 1993 04/01/07 5.550 $ 300,000 $ 314,079
Aa1/AA+ King County, Washington-Department of Metropolitan
Services, Limited Tax General Obligation Bonds,
1994 Series A 01/01/08 5.800 200,000 213,580
Aa1/AA+ King County, Washington-Limited Tax General
Obligation and Refunding Bonds, 1993 Series A 12/01/10 6.000 100,000 106,212
Aaa/AAA Municipality of Metropolitan Seattle Sewer Refunding
Revenue Bonds, Series X 01/01/15 5.400 100,000 99,128
Aa1/AA+ Port of Seattle, Washington-General Obligation Bonds
(b) 05/01/14 5.750 100,000 101,594
Aaa/AAA Seattle, Washington-Municipal Light & Power Revnue
Bonds, Series B 06/01/24 5.000 100,000 89,068
Aa1/AA+ State of Washington-General Obligation Bonds,
Series 1994B 05/01/09 5.750 100,000 102,996
Aa1/AA+ State of Washington-General Obligation Bonds,
Series 1994B 09/01/16 6.000 100,000 102,160
------------
1,128,817
------------
WISCONSIN--2.71%
Aa2/AA City of Green Bay-General Obligation Refunding
Bonds, Series 1994B 04/01/09 5.900 200,000 208,330
AAA/AA State of Wisconsin-General Obligation Bonds
Unlimited, Series C 05/01/09 5.400 100,000 103,869
------------
312,199
------------
TOTAL MUNICIPAL BONDS--95.13%
(Cost $10,875,591) 10,970,001
------------
<CAPTION>
COMMERCIAL PAPER
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES--0.87%
Ford Motor Credit Company 09/03/99 5.330 100,000 99,970
------------
TRANSPORTATION-MISCELLANEOUS--2.05%
Hertz Corporation 09/07/99 5.350 237,000 236,789
------------
TOTAL COMMERCIAL PAPER--2.92%
(Cost $336,759) 336,759
------------
TOTAL INVESTMENTS--98.05%
(Cost $11,212,350) 11,306,760
CASH AND OTHER ASSETS, LESS LIABILITIES--1.95% 225,440
------------
TOTAL NET ASSETS--100.00% $ 11,532,200
============
</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.
71
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES August 31, 1999
--------------------------------------------------------------------------------
TAX FREE FUND
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value $ 11,306,760
Cash 42,072
Prepaid expenses 21,993
Receivable from investment advisor 10,477
Receivable for:
Capital stock sold 750
Interest 154,335
Expense reimbursement 7,094
Other assets 3,211
------------
TOTAL ASSETS 11,546,692
------------
LIABILITIES
Distribution payable 1,504
Accrued:
Investment advisory fee 5,187
Service fee 2,528
Other liabilities 5,273
------------
TOTAL LIABILITIES 14,492
------------
NET ASSETS (applicable to shares outstanding) $ 11,532,200
============
NET ASSETS:
Class A $ 194,917
--------------------------------------------------------------------------
Class B $ 113,143
--------------------------------------------------------------------------
Class C $ 5,657
--------------------------------------------------------------------------
Class T $ 11,218,483
--------------------------------------------------------------------------
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 19,072
--------------------------------------------------------------------------
Class B:
Authorized 100,000,000
Outstanding 11,092
--------------------------------------------------------------------------
Class C:
Authorized 100,000,000
Outstanding 558
--------------------------------------------------------------------------
Class T:
Authorized 21,000,000
Outstanding 1,106,222
--------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 10.22
Offering price per share: (Net Assets value of $10.22 /
95.25%) $ 10.73
--------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 10.20
--------------------------------------------------------------------------
Class C:
Net asset value and redemption price per share $ 10.14
Offering price per share: (Net Assets value of $10.14 /
99.00%) $ 10.24
--------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 10.14
Offering price per share: (Net Assets value of $10.14 /
95.5%) $ 10.62
--------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
72
<PAGE>
STATEMENT OF OPERATIONS For Year Ended August 31, 1999
--------------------------------------------------------------------------------
TAX FREE FUND
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $ 613,232
EXPENSES
Investment advisory fees 57,794
Service fees 28,666
Professional fees 5,202
Custody and transaction fees 12,660
Directors' fees 9,828
Qualification fees 14,833
Shareholder reporting expenses 13,145
Insurance expenses 1,620
Distribution Fees 481
---------
TOTAL EXPENSES 144,229
LESS EXPENSES REIMBURSED (57,794)
---------
NET EXPENSES 86,435
---------
INVESTMENT INCOME--NET 526,797
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 26,918
Change in unrealized depreciation of investments for the
year (608,365)
---------
NET LOSS ON INVESTMENTS (581,447)
---------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (54,650)
=========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 526,797 $ 491,640
Net realized gain on investments 26,918 28,603
Change in unrealized appreciation (depreciation) (608,365) 363,642
----------- -----------
Net increase (decrease) in net assets resulting from
operations (54,650) 883,885
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (2,378) --
Class B (1,020) --
Class C (333) --
Class T (523,038) (499,989)
----------- -----------
Total distributions from shareholders (526,769) (499,989)
CAPITAL SHARE TRANSACTIONS--NET
Class A 202,353 --
Class B 116,889 --
Class C 6,889 --
Class T 729,824 (26,401)
----------- -----------
Total net capital share transactions 1,055,955 (26,401)
----------- -----------
TOTAL INCREASE 474,536 357,495
NET ASSETS
Beginning of Year 11,057,664 10,700,169
----------- -----------
End of Year $11,532,200 $11,057,664
=========== ===========
</TABLE>
See notes to financial statements.
73
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
TAX FREE FUND
<TABLE>
<CAPTION>
CLASS T SHARES
------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.64 $ 10.27 $ 9.93 $ 9.95 $ 9.62
Investment income--net 0.48 0.49 0.51 0.53 0.51
Net realized and unrealized gain (loss) on
investments (0.50) 0.37 0.33 (0.02) 0.33
------- ------- ------- ------- -------
Total from Investment Operations (0.02) 0.86 0.84 0.51 0.84
Less distributions from
Investment income--net (0.48) (0.49) (0.50) (0.53) (0.51)
------- ------- ------- ------- -------
Total Distributions (0.48) (0.49) (0.50) (0.53) (0.51)
------- ------- ------- ------- -------
Net Asset Value, End of Year $ 10.14 $ 10.64 $ 10.27 $ 9.93 $ 9.95
======= ======= ======= ======= =======
Total Return (0.28)% 8.58 % 8.61 % 5.18 % 9.15 %
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $11,218 $11,058 $10,700 $ 9,148 $ 8,399
Ratio of expenses with reimbursement to
average net assets 0.73 % 0.75 % 0.54 % -- --
Ratio of expenses without reimbursement to
average net assets 1.23 % 1.25 % 1.27 % 1.18 % 1.25 %
Ratio of net investment income to average
net assets 4.53 % 4.60 % 4.97 % 5.27 % 5.43 %
Portfolio turnover rate 5.09 % 12.77 % 22.15 % 18.44 % 12.63 %
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
---------------- ---------------- ----------------
PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 1, 1999 JANUARY 1, 1999 JANUARY 1, 1999
TO TO TO
AUGUST 31, AUGUST 31, AUGUST 31,
---------------- ---------------- ----------------
1999 1999 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.68 $ 10.68 $10.68
Investment income--net 0.21 0.18 0.25
Net realized and unrealized gain (loss) on investments (0.46) (0.48) (0.54)
-------- -------- ------
Total from Investment Operations (0.25) (0.30) (0.29)
Less distributions from
Investment income--net (0.21) (0.18) (0.25)
-------- -------- ------
Total Distributions (0.21) (0.18) (0.25)
-------- -------- ------
Net Asset Value, End of Period $ 10.22 $ 10.20 $10.14
======== ======== ======
Total Return** (2.37)% (2.85)% (2.72)%
======== ======== ======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period $194,917 $113,143 $5,657
Ratio of expenses with reimbursement to average net assets
* 1.51 % 2.01 % 2.28 %
Ratio of expenses without reimbursement to average net
assets * 2.02 % 2.52 % 2.78 %
Ratio of net investment income to average net assets * 3.69 % 3.20 % 2.92 %
Portfolio turnover rate 5.09 % 5.09 % 5.09 %
</TABLE>
* Ratios annualized
** Returns are not annualized
See notes to financial statements.
74
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 1999
--------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
COMMERCIAL PAPER DATE RATE(%) AMOUNT VALUE
<S> <C> <C> <C> <C>
CHEMICAL--SPECIALTY--5.00%
Eastman Kodak Company 09/08/99 5.30 $ 535,000 $ 534,448
ELECTRIC POWER--4.67%
Northern Indiana Public Service Company 09/16/99 5.30 500,000 498,894
FINANCIAL SERVICES--4.52%
American Honda Finance Corporation 10/06/99 5.30 485,000 482,501
GOVERNMENT AGENCIES--69.05%
Federal Agricultural Mortgage Corporation 09/02/99 5.03 553,000 552,922
Federal Home Loan Mortgage Corporation 09/01/99 5.20 300,000 300,000
Federal Home Loan Mortgage Corporation 09/09/99 5.12 1,000,000 998,860
Federal Home Loan Mortgage Corporation 09/20/99 5.01 358,000 357,050
Federal Home Loan Mortgage Corporation 10/14/99 5.20 1,040,000 1,033,534
Federal Home Loan Mortgage Corporation 10/28/99 5.11 631,000 625,873
Federal National Mortgage Association 09/15/99 5.07 804,000 802,410
Federal National Mortgage Association 09/27/99 5.15 1,175,000 1,170,621
Federal National Mortgage Association 10/25/99 5.10 1,546,000 1,534,126
-----------
7,375,396
MEDICAL PRODUCTS/SUPPLIES--4.66%
Becton Dickinson & Company 11/05/99 5.33 502,000 497,160
MEDIA-TV/RADIO/CABLE--1.72%
Walt Disney Company 09/03/99 5.25 184,000 183,946
NATURAL GAS--9.65%
Consolidated Natural Gas Company 10/15/99 5.32 500,000 496,742
Laclede Gas Company 09/14/99 5.35 535,000 533,966
-----------
1,030,708
RETAIL--DISCOUNT--2.80%
Wal-Mart Stores Incorporated 09/13/99 5.13 300,000 299,484
TRANSPORTATION--MISCELLANEOUS--3.37%
Hertz Corporation 09/07/99 5.17 360,000 359,689
-----------
TOTAL INVESTMENTS--105.44%
(Cost $11,262,226) 11,262,226
LIABILITIES IN EXCESS OF OTHER ASSETS--(5.44%) (580,745)
-----------
TOTAL NET ASSETS--100.00% $10,681,481
===========
</TABLE>
See notes to financial statements.
75
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES August 31, 1999
--------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value $11,262,226
Cash 6,548
Prepaid expenses 868
Receivable from investment advisor 10,927
Receivable for:
Interest 13
Capital stock sold 2,056
-----------
TOTAL ASSETS 11,282,638
-----------
LIABILITIES
Capital stock reacquired 588,053
Accrued:
Investment advisory fee 1,978
Service fee 1,978
Other liabilities 9,148
-----------
TOTAL LIABILITIES 601,157
-----------
NET ASSETS $10,681,481
===========
Shares of capital stock outstanding, (1,000,000,000 shares
authorized, $.01 par value per share) 10,681,481
===========
Net asset value $ 1.00
===========
</TABLE>
STATEMENT OF OPERATIONS For Period from January 1, 1999
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $152,787
EXPENSES
Investment advisory fees 7,237
Service fees 7,237
Professional fees 4,263
Custody and transaction fees 7,677
Directors' fees 6,874
Qualification fees 693
Shareholder reporting expenses 2,895
Insurance expenses 506
Other 376
--------
TOTAL EXPENSES 37,758
LESS EXPENSES REIMBURSED (22,364)
--------
NET EXPENSES 15,394
--------
INVESTMENT INCOME--NET $137,393
========
</TABLE>
See notes to financial statements.
76
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
TO
AUGUST 31,
1999
----------------
<S> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 137,393
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (137,393)
CAPITAL SHARE TRANSACTIONS--NET 10,681,481
-----------
TOTAL INCREASE 10,681,481
NET ASSETS
Beginning of Period --
-----------
End of Period $10,681,481
===========
</TABLE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
TO
AUGUST 31,
----------------
1999
----------------
<S> <C>
Net Asset Value, Beginning of Period $ 1.00
Investment income--net 0.03
-------
Total from Investment Operations 0.03
Less distributions from
Investment income--net (0.03)
-------
Total Distributions (0.03)
-------
Net Asset Value, End of Period $ 1.00
=======
Total Return** 2.89 %
=======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $10,681
Ratio of expenses with reimbursement to average net assets * 0.50 %
Ratio of expenses without reimbursement to average net
assets * 1.22 %
Ratio of net investment income to average net assets * 4.45 %
</TABLE>
* Ratios annualized
** Returns are not annualized
See notes to financial statements.
77
<PAGE>
NOTES TO FINANCIAL STATEMENTS August 31, 1999
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The SM&R Investments, Inc. (the "Funds"), formerly the SM&R Capital Funds, Inc.,
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"), formerly American National Government Income Fund Series, SM&R Primary
Fund ("Primary Fund"), formerly American National Primary Fund Series, SM&R Tax
Free Fund ("Tax Free Fund"), formerly American National Tax Free Fund Series,
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 five 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; the Class C shares subject to
an initial sales charge of 1.00%, a contingent deferred sales charge, and a
12b-1 Plan; the Class J shares (Network class) subject to a 12b-1 Plan, only;
and the Class Y shares (Institutional class) subject to no charges. The Class J
and Y have not commenced operations. 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, 1998, the funds' tax year-end, the Government Bond
Fund and the Primary Fund had capital loss carryforwards that will expire in
2004 of approximately $267,000 and $6,000, 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.
78
<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 invests 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>
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>
79
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 2--OTHER TRANSACTIONS WITH AFFILIATES--CONTINUED
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 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, 1999.
SM&R has voluntarily agreed to waive investment advisory fees leaving the Tax
Free Fund responsible for all other expenses.
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 eight months ended August 31, 1999, the Government Bond Fund
and Tax Free Fund paid $86 and $481, respectively as compensation under the
Plans.
SALES CHARGES:
SM&R, as principal underwriter, received as sales charges on sales of Class T
shares, for the year ended August 31, 1999, and Class A and C shares, for the
eight months ended August 31, 1999, of capital stock of the Funds as follows:
<TABLE>
<CAPTION>
SALES
CHARGES
RECEIVED BY SM&R
<S> <C>
Government Bond Fund $11,297
Tax Free Fund $25,965
</TABLE>
For the eight months ended August 31, 1999, SM&R received $248 for contingent
deferred sales charges imposed on the redemptions of Class B and C shares of
capital stock of the Funds.
80
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 2--OTHER TRANSACTIONS WITH AFFILIATES--CONTINUED
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of August 31, 1999, 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 509,755 20% 698,751 30%
Primary -- -- 16,832,698 54%
Tax Free 131,508 12% 656,109 58%
Money Market 1,083,985 10% -- --
</TABLE>
The Funds pay directors' fees and expenses for all the disinterested directors
and three interested 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 $5,298,670 $5,328,570
Primary $6,345,829 $1,166,228
Tax Free $1,625,640 $ 557,400
</TABLE>
Gross unrealized appreciation and depreciation as of August 31, 1999, were as
follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION
------------ ------------
<S> <C> <C>
Government Bond $228,078 $585,651
Primary $ 5,182 $ 56,183
Tax Free $311,895 $217,485
</TABLE>
81
<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, 1999 AUGUST 31, 1998
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Sale of capital shares:
Class T 85,399 $ 902,135 107,893 $ 1,143,207
Class A 6,805 70,359 -- --
Class B 742 7,870 -- --
Class C 1,073 11,000 -- --
----------- ------------ ----------- ------------
Total sale of capital shares 94,019 991,364 107,893 1,143,207
Investment income dividends reinvested:
Class T 124,312 1,298,156 148,408 1,562,712
Class A 43 444 -- --
Class B 20 209 -- --
Class C 13 131 -- --
----------- ------------ ----------- ------------
Total investment income dividends reinvested 124,388 1,298,940 148,408 1,562,712
Redemptions of capital shares outstanding:
Class T (159,122) (1,662,604) (265,757) (2,808,368)
Class A (101) (1,040) -- --
Class B -- -- -- --
Class C -- -- -- --
----------- ------------ ----------- ------------
Total redemptions of capital shares outstanding (159,223) (1,663,644) (265,757) (2,808,368)
----------- ------------ ----------- ------------
Net increase (decrease) in capital shares outstanding 59,184 $ 626,660 (9,456) $ (102,449)
============ ============
Shares outstanding at beginning of year 2,262,725 2,272,181
----------- -----------
Shares outstanding at end of year 2,321,909 2,262,725
=========== ===========
Net assets as of August 31, 1999 are comprised of the following:
Capital (par value and additional paid-in) $ 24,037,070
Accumulated net realized loss on investments (223,809)
Net unrealized depreciation of investments (357,573)
------------
Net Assets $ 23,455,688
============
<CAPTION>
PRIMARY FUND
YEAR ENDED YEAR ENDED
AUGUST 31, 1999 AUGUST 31, 1998
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Sale of capital shares 33,873,860 $ 33,873,860 35,251,969 $ 35,251,969
Investment income dividends reinvested 1,473,935 1,473,949 1,891,922 1,891,922
Redemptions of capital shares outstanding (39,022,829) (39,022,829) (35,611,884) (35,611,884)
----------- ------------ ----------- ------------
Net increase (decrease) in capital shares outstanding (3,675,034) $ (3,675,020) 1,532,007 $ 1,532,007
============ ============
Shares outstanding at beginning of year 34,582,655 33,050,648
----------- -----------
Shares outstanding at end of year 30,907,621 34,582,655
=========== ===========
Net assets as of August 31, 1999 are comprised of the following:
Capital (par value and additional paid-in) $ 30,907,617
Accumulated net realized loss on investments (18,319)
Net unrealized depreciation of investments (51,001)
------------
Net Assets $ 30,838,297
============
</TABLE>
82
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 4--CAPITAL STOCK--CONTINUED
<TABLE>
<CAPTION>
TAX FREE FUND
YEAR ENDED YEAR ENDED
AUGUST 31, 1999 AUGUST 31, 1998
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Sale of capital shares:
Class T 72,514 $ 769,888 59,089 $ 621,304
Class A 19,748 209,198 -- --
Class B 11,098 116,931 -- --
Class C 2,475 26,359 -- --
----------- ------------ ----------- ------------
Total sales of capital shares 105,835 1,122,376 59,089 621,304
Investment income dividends reinvested:
Class T 48,162 507,956 51,288 536,758
Class A 226 2,345 -- --
Class B 98 1,019 -- --
Class C 32 333 -- --
----------- ------------ ----------- ------------
Total investment income dividends reinvested 48,518 511,653 51,288 536,758
Redemptions of capital shares outstanding:
Class T (53,448) (548,020) (113,023) (1,184,463)
Class A (902) (9,190) -- --
Class B (104) (1,061) -- --
Class C (1,949) (19,803) -- --
----------- ------------ ----------- ------------
Total redemptions of capital shares outstanding (56,403) (578,074) (113,023) (1,184,463)
----------- ------------ ----------- ------------
Net increase (decrease) in capital shares outstanding 97,950 $ 1,055,955 (2,646) $ (26,401)
============ ============
Shares outstanding at beginning of year 1,038,994 1,041,640
----------- -----------
Shares outstanding at end of year 1,136,944 1,038,994
=========== ===========
Net assets as of August 31, 1999 are comprised of the following:
Capital (par value and additional paid-in) $ 11,432,282
Accumulated net realized gain on investments 5,508
Net unrealized appreciation of investments 94,410
------------
Net Assets $ 11,532,200
============
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET
<S> <C> <C>
EIGHT MONTHS ENDED
AUGUST 31, 1999
-------------------------
SHARES AMOUNT
----------- -----------
Sale of capital shares 13,546,991 $13,546,991
Investment income dividends reinvested 138,407 138,407
Redemptions of capital shares outstanding (3,003,917) (3,003,917)
----------- -----------
Net increase in capital shares outstanding 10,681,481 $10,681,481
===========
Shares outstanding at beginning of period --
-----------
Shares outstanding at end of period 10,681,481
===========
Net assets as of August 31, 1999 are comprised of the following:
Capital (par value and additional paid-in) $10,681,481
-----------
Net Assets $10,681,481
===========
</TABLE>
83
<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. (formerly SM&R Capital Funds, Inc.) comprised of SM&R
Government Bond Fund (formerly American National Government Income Fund Series),
SM&R Primary Fund (formerly American National Primary Fund Series), SM&R Tax
Free Fund (formerly American National Tax Free Fund Series) and SM&R Money
Market Fund, including the schedule of investments as of August 31, 1999, the
related statements of operations for the year then ended (with respect to SM&R
Money Market Fund for the period January 1, 1999 to August 31, 1999), the
statements of changes in net assets and the financial highlights for each of the
two years in the period then ended (with respect to SM&R Money Market Fund for
the period January 1, 1999 to August 31, 1999). These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the three years in the period ended August 31, 1997 were audited by other
auditors whose report dated October 10, 1997, expressed 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, 1999, 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, 1999, the results of its operations for the
year then ended (with respect to SM&R Money Market Fund for the period
January 1, 1999 to August 31, 1999), the changes in its net assets and the
financial highlights for each of the two years in the periods then ended (with
respect to SM&R Money Market Fund for the period January 1, 1999 to August 31,
1999), in conformity with generally accepted accounting principles.
Tait, Weller & Baker, CPA
Philadelphia, Pennsylvania
October 1, 1999
84
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
September 1, 2000
SM&R INVESTMENTS, INC.
SM&R ALGER FUNDS
SM&R ALGER GROWTH FUND
SM&R ALGER SMALL-CAP FUND
SM&R ALGER AGGRESSIVE GROWTH FUND
SM&R ALGER TECHNOLOGY FUND
CLASSES A AND B
Mailing Address: P.O. Box 58969
Houston, Texas 77258-8969
Street Address: 2450 South Shore Boulevard
League City, Texas 77573
This Statement is NOT a prospectus, but should be read in conjunction with
the SM&R Investments, Inc. "SM&R Alger Funds" current prospectus dated September
1, 2000 (the "Prospectus"). To obtain a Prospectus contact your registered
representative, broker-dealer, financial intermediary, or Securities Management
and Research, Inc. ("SM&R"), at the address noted above, or by calling:
Investor Services
Telephone Number: (281) 334-2469
Toll Free 1-(800) 231-4639
No dealer, sales representative, or other person has been authorized to give
any information or to make any representations other than those contained in
this Statement of Additional Information (and/or the Prospectus referred to
above), and if given or made, such information or representations must not be
relied upon as having been authorized by the Fund or SM&R. No Prospectus or
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.
Terms not defined herein have the same meaning as given to them in the
Prospectus.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND.................................................... 1
INVESTMENT OBJECTIVES AND POLICIES.......................... 2
MANAGEMENT OF THE COMPANY................................... 13
REMUNERATION OF DIRECTORS................................... 16
POLICY REGARDING PERSONAL INVESTING......................... 17
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES..... 18
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES......... 18
CONTROL AND MANAGEMENT OF SM&R.............................. 18
INVESTMENT ADVISORY AND SUB-ADVISORY AGREEMENTS............. 19
FUND ADMINISTRATION AGREEMENT............................... 21
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION............. 22
DESCRIPTION OF FUND SHARES.................................. 23
PURCHASE, REDEMPTION, AND PRICING OF SHARES................. 25
DETERMINATION OF NET ASSET VALUE........................ 25
DETERMINATION OF OFFERING PRICE......................... 25
REDUCTION AND/OR WAIVER OF CLASS A SALES CHARGES........ 26
CLASS B WAIVERS OF CONTINGENT DEFERRED SALES CHARGE..... 28
FUND AND CLASS EXPENSES................................. 29
DISTRIBUTION AND SHAREHOLDER SERVICE (12b-1) FEE............ 30
SPECIAL PURCHASE PLANS...................................... 31
REDEMPTION.................................................. 33
TAXES....................................................... 35
SYSTEMATIC WITHDRAWAL PLAN.................................. 37
THE UNDERWRITER............................................. 39
CUSTODIAN................................................... 40
TRANSFER AGENT AND DIVIDEND PAYING AGENT.................... 40
COUNSEL..................................................... 40
AUDITORS AND FINANCIAL STATEMENTS........................... 40
PERFORMANCE AND ADVERTISING DATA............................ 40
PERFORMANCE MEASURES........................................ 41
</TABLE>
ii
<PAGE>
THE FUND
SM&R Investments, Inc. (the "Fund") was incorporated under the laws of
Maryland on November 6, 1991. The Fund changed its name from SM&R Capital Funds,
Inc. to SM&R Investments, Inc. on December 31, 1998.
The Fund 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 Fund's management or its investment policies or practices. This statement
describes the following funds, collectively referred to as the "SM&R Alger
Funds":
- SM&R ALGER GROWTH FUND
- SM&R ALGER SMALL-CAP FUND
- SM&R ALGER AGGRESSIVE GROWTH FUND
- SM&R ALGER TECHNOLOGY FUND
Shares of each of the SM&R Alger Funds are divided into two classes:
- Class A (front-end load)
- Class B (back-end load)
These classes of shares have different sales charges and distribution and
service (12b-1) fee structures. A Multiple Class Plan was adopted for the SM&R
Alger Funds pursuant to Rule 18f-3.
The SM&R Alger Funds are four separate series of the Fund. The Fund also has
four previously existing series: SM&R Government Bond Fund, SM&R Tax Free Fund,
SM&R Primary Fund, and SM&R Money Market Fund. These four existing series are
not offered in the Prospectus or this Statement of Additional Information. They
are described in a separate prospectus and a separate statement of additional
information.
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INVESTMENT OBJECTIVES AND POLICIES
As noted in the Prospectus under the "Fund Summary" sections, each SM&R
Alger Fund has its own investment objective and follows policies and techniques
designed to achieve those objectives.
FUNDAMENTAL INVESTMENT RESTRICTIONS
Each SM&R Alger Fund's investment objective and the following fundamental
investment limitations can not be changed in any material way without the
approval of a majority of the relevant SM&R Alger Fund's shares. For these
purposes, a "majority" means the lesser of (i) 67% or more of the voting
securities present at a meeting if the holders of more than 50% of voting
securities are represented at that meeting or (ii) more than 50% of the
outstanding voting securities of the fund.
DIVERSIFICATION. With respect to 75% of each SM&R Alger Fund's total
assets, each such fund 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.
INDUSTRY CONCENTRATION. Each SM&R Alger Fund 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). This restriction does
not apply to the SM&R Alger Technology Fund.
BORROWING. Each SM&R Alger Fund may not borrow money, except (a) each 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) each fund may, to the extent permitted by applicable law, borrow
up to an additional 5% of its total assets for temporary purposes, (c) each fund
may obtain such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities, (d) each fund may purchase
securities on margin to the extent permitted by applicable law, and (e) each
fund may engage in transactions in mortgage dollar rolls which are accounted for
as financings.
LOANS. Each SM&R Alger Fund may not make loans, except through (a) the
purchase of debt obligations in accordance with each 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.
UNDERWRITING. Each SM&R Alger Fund 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.
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REAL ESTATE. Each SM&R Alger Fund may not purchase, hold or deal in real
estate, although each 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
each fund as a result of the ownership of securities.
COMMODITIES. Each SM&R Alger Fund may not invest in commodities or
commodity contracts, except that each fund may invest in currency and financial
instruments and contracts that are commodities or commodity contracts.
SENIOR SECURITIES. Each SM&R Alger Fund may not issue senior securities to
the extent such issuance would violate applicable law.
The above mentioned investment limitations are considered at the time
investment securities are purchased.
THE SM&R ALGER FUNDS
The Prospectus discusses the investment objectives of each SM&R Alger Fund
and the primary strategies to be employed to achieve those objectives. This
section contains supplemental information concerning the types of securities and
other instruments in which the SM&R Alger Funds may invest, the investment
policies and portfolio strategies that the SM&R Alger Funds may utilize and
certain risks attendant to those investments, policies and strategies.
IN GENERAL. The SM&R Alger Growth Fund, SM&R Alger Small-Cap Fund, SM&R
Alger Aggressive Growth Fund, and SM&R Alger Technology Fund seek to achieve
their objectives by investing in equity securities, such as common or preferred
stocks, or securities convertible into or exchangeable for equity securities,
including warrants and rights. The SM&R Alger Funds will invest primarily in
companies whose securities are traded on domestic stock exchanges or in the
over-the-counter market. These companies may be in the developmental stage, may
be older companies that appear to be entering a new stage of growth progress
owing to factors such as management changes or development of new technology,
products or markets or may be companies providing products or services with a
high unit volume growth rate. In order to afford the SM&R Alger Funds the
flexibility to take advantage of new opportunities for investments in accordance
with their investment objectives and to meet redemptions, they may hold up to
15% of their net assets in money market instruments (including, but not limited
to, certificates of deposit, time deposits and bankers' acceptances issues by
domestic bank and thrift institutions, U.S. Government securities, commercial
paper, and repurchase agreements) and in excess of that amount (up to 100% of
their assets) during temporary defensive periods. This amount may be higher than
that maintained by other funds with similar investment objectives.
There is no guarantee that any SM&R Alger Fund's objectives will be
achieved.
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SM&R ALGER GROWTH FUND. Except during temporary defensive periods, the fund
invests at least 65% of its total assets in equity securities of companies that,
at the time of purchase of the securities, have total market
capitalization--present market value per share multiplied by the total number of
shares outstanding--of $1 billion or greater. Accordingly, the fund may invest
up to 35% of its total assets in equity securities of companies that, at the
time of purchase, have total market capitalization of less than $1 billion.
SM&R ALGER SMALL-CAP FUND. Except during temporary defensive periods, the
fund invests at least 65% of its total assets in equity securities of companies
that, at the time of purchase of the securities, have total market
capitalization within the range of companies included in the Russell 2000 Growth
Index or the S&P SmallCap 600 Index, updated quarterly. Both indexes are broad
indexes of small capitalization stocks. The fund may invest up to 35% of its
total assets in equity securities of companies that, at the time of purchase,
have total market capitalization outside this combined range, and in excess of
that amount (up to 100% of its assets) during temporary defensive periods.
SM&R ALGER AGGRESSIVE GROWTH FUND. Except during temporary defensive
periods, the fund invests at least 85% of its net assets in equity securities of
companies of any size.
The fund may purchase put and call options and sell (write) covered call and
put options on securities and securities indexes in attempt to increase gain and
in attempt to hedge against the risk of unfavorable price movements, and may
enter into futures contracts on securities indexes and purchase and sell call
and put options on these futures contracts. The fund may also borrow money
(leverage) for the purchase of additional securities. The fund may borrow only
from banks and may not borrow in excess of one-third of the market value of its
total assets, less liabilities other than such borrowing. These practices are
deemed to be speculative and may cause the fund's net asset value to be more
volatile than the net asset value of a fund that does not engage in these
activities.
SM&R ALGER TECHNOLOGY FUND. Except during temporary defensive periods, the
fund invests at least 85% of its net assets in equity securities of companies of
any size.
The fund may purchase put and call options and sell (write) covered call and
put options on securities and securities indexes in attempt to increase gain and
in attempt to hedge against the risk of unfavorable price movements, and may
enter into futures contracts on securities indexes and purchase and sell call
and put options on these futures contracts. The fund may also borrow money
(leverage) for the purchase of additional securities. The fund may borrow only
from banks and may not borrow in excess of one-third of the market value of its
total assets, less liabilities other than such borrowing. These practices are
deemed to be speculative and may cause the fund's net asset value to be more
volatile than the net asset value of a fund that does not engage in these
activities.
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INVESTMENT TECHNIQUES
Except where otherwise noted, each of the SM&R Alger Funds may invest in the
following types of securities or pursue the following techniques.
U.S. GOVERNMENT OBLIGATIONS. Bills, notes, bonds, and other debt securities
issued by the U.S. Treasury are direct obligations of the U.S. Government and
differ mainly in the length of their maturities.
U.S. GOVERNMENT AGENCY SECURITIES. These securities are issued or
guaranteed by U.S. Government sponsored enterprises and federal agencies. These
include securities issued by the Federal National Mortgage Association,
Government National Mortgage Association, Federal Home Loan Bank, Federal Land
Banks, Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Administration, Federal Housing Administration and Maritime Administration. Some
of these securities are supported by the full faith and credit of the U.S.
Treasury; and the remainder are supported only by the credit of the
instrumentality, which may or may not include the right of the issuer to borrow
from the Treasury.
BANK OBLIGATIONS. These are certificates of deposit, bankers' acceptances,
and other short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn on
a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates.
The SM&R Alger Growth Fund, SM&R Alger Small-Cap Fund, and SM&R Alger
Aggressive Growth Fund will not invest in any debt security issued by a
commercial bank unless (i) the bank has total assets of at least $1 billion, or
the equivalent in other currencies, or, in the case of domestic banks which do
not have total assets of at least $1 billion, the aggregate investment made in
any one such bank is limited to $100,000 and the principal amount of such
investment is insured in full by the Federal Deposit Insurance Corporation,
(ii) in the case of U.S. banks, it is a member of the Federal Deposit Insurance
Corporation, and (iii) in the case of foreign banks, the security is, in the
opinion of Fred Alger Management, Inc. ("Alger Management"), the SM&R Alger
Funds' investment sub-adviser, of an investment quality comparable to other debt
securities which may be purchased by the SM&R Alger Funds. These limitations do
not prohibit investments in securities issued by foreign branches of U.S. banks,
provided such U.S. banks meet the foregoing requirements.
FOREIGN BANK OBLIGATIONS. Investments by the SM&R Alger Funds in foreign
bank obligations and obligations of foreign branches of domestic banks present
certain risks, including the impact of future political and economic
developments, the possible imposition of withholding taxes on interest income,
the possible seizure or nationalization of foreign deposits, the possible
establishment of exchange controls and/or the addition of other foreign
governmental restrictions that might affect adversely the payment of principal
and interest on these obligations. In addition, there may be less publicly
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available and reliable information about a foreign bank than about domestic
banks owing to different accounting, auditing, reporting and recordkeeping
standards. In view of these risks, Alger Management will carefully evaluate
these investments on a case-by-case basis.
SHORT-TERM CORPORATE DEBT SECURITIES. These are outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
COMMERCIAL PAPER. These are short-term promissory notes issued by
corporations primarily to finance short-term credit needs.
VARIABLE RATE MASTER DEMAND NOTES. These are unsecured instruments that
permit the indebtedness thereunder to vary and provide for periodic adjustments
in the interest rate. Because these notes are direct lending arrangements
between a fund and the issuer, they are not normally traded. Although no active
secondary market may exist for these notes, a fund may demand payment of
principal and accrued interest at any time or may resell the note to a third
party. While the notes are not typically rated by credit rating agencies,
issuers of variable rate master demand notes must satisfy Alger Management that
the same criteria for issuers of commercial paper are met. In addition, when
purchasing variable rate master demand notes, Alger Management will consider the
earning power, cash flows and other liquidity ratios of the issuers of the notes
and will continuously monitor their financial status and ability to meet payment
on demand. In the event an issuer of a variable rate master demand note were to
default on its payment obligations, a fund might be unable to dispose of the
note because of the absence of a secondary market and could, for this or other
reasons, suffer a loss to the extent of the default.
REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, a fund
would acquire a high quality money market instrument for a relatively short
period (usually not more than one week) subject to an obligation of the seller
to repurchase, and the fund to resell, the instrument at an agreed price
(including accrued interest) and time, thereby determining the yield during the
fund's holding period. Repurchase agreements may be seen to be loans by the fund
collateralized by the underlying instrument. This arrangement results in a fixed
rate of return that is not subject to market fluctuations during the fund's
holding period and not necessarily related to the rate of return on the
underlying instrument. The value of the underlying securities, including accrued
interest, will be at least equal at all times to the total amount of the
repurchase obligation, including interest. A fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
and the fund is delayed in or prevented from exercising its rights to dispose of
the collateral securities, including the risk of a possible decline in the value
of the underlying securities during the period in which the fund seeks to assert
these rights, the risk of incurring expenses associated with asserting these
rights and the risk of losing all or part of the income from the agreement.
Alger Management, acting under the supervision of SM&R, the Funds' investment
adviser, reviews the credit worthiness of those banks and dealers with which the
funds enter into repurchase
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agreements to evaluate these risks and monitors on an ongoing basis the value of
the securities subject to repurchase agreements to ensure that the value is
maintained at the required level.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED PURCHASES. Firm commitment
agreements and "when-issued" purchases call for the purchase of securities at an
agreed price on a specified future date and would be used, for example, when a
decline in the yield of securities of a given issuer is anticipated and a more
advantageous yield may be obtained by committing currently to purchase
securities to be issued later. When a fund purchases a security under a firm
commitment agreement or on a when-issued basis it assumes the risk of any
decline in value of the security occurring between the date of the agreement or
purchase and the settlement date of the transaction. The funds will not use
these transactions for leveraging purposes and, accordingly, will segregate cash
or liquid securities in an amount sufficient at all times to meet its purchase
obligations under these agreements.
WARRANTS AND RIGHTS. Each SM&R Alger Fund may invest in warrants and
rights. A warrant is a type of security that entitles the holder to buy a
proportionate amount of common stock at a specified price, usually higher than
the market price at the time of issuance, for a period of years or to
perpetuity. In contrast, rights, which also represent the right to buy common
shares, normally have a subscription price lower than the current market value
of the common stock and a life of two to four weeks. Warrants are freely
transferable and are traded on the major securities exchanges.
PORTFOLIO DEPOSITARY RECEIPTS. To the extent otherwise consistent with its
investment policies and applicable law, the SM&R Alger Technology Fund may
invest up to 5% of its total assets in Portfolio Depositary Receipts,
exchange-traded shares issued by investment companies, typically unit investment
trusts, holding portfolios of common stocks designed to replicate and,
therefore, track the performance of various broad securities indexes or sectors
of such indexes. For example, the SM&R Alger Technology Fund may invest in
Standard & Poor's Depositary Receipts-Registered Trademark- (SPDRs), issued by a
unit investment trust whose portfolio tracks the S&P 500 Composite Stock Price
Index, or Standard & Poor's MidCap 400 Depositary Receipts-Registered Trademark-
(MidCap SPDRs), similarly linked to the S&P MidCap 400 Index.
ILLIQUID AND RESTRICTED SECURITIES. The SM&R Alger Growth Fund and SM&R
Alger Small-Cap Fund will not invest more than 10% of their net assets in
"illiquid" securities, which include restricted securities, securities for which
there is no readily available market and repurchase agreements with maturities
of greater than seven days. The SM&R Alger Aggressive Growth Fund and SM&R Alger
Technology Fund will not invest more than 15% of their net assets in restricted
securities. Restricted securities that are determined by the Fund's Board of
Directors to be liquid are not subject to this limitation.
Each SM&R Alger Fund may invest in restricted securities governed by Rule
144A under the Securities Act of 1933. In adopting Rule 144A, the Securities and
Exchange Commission specifically stated that restricted securities traded under
Rule 144A may be
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treated as liquid for purposes of investment limitations if the board of
directors (or the fund's adviser acting subject to the board's supervision)
determines that the securities are in fact liquid. The Fund's Board of Directors
has delegated its responsibility to SM&R, the Fund's investment adviser, and
SM&R has delegated its responsibility to Alger Management to determine the
liquidity of each restricted security purchased pursuant to the Rule, subject to
the Board of Directors' oversight and review. Examples of factors that will be
taken into account in evaluating the liquidity of a Rule 144A security, both
with respect to the initial purchase and on an ongoing basis, will include,
among others: (1) the frequency of trades and quotes for the security; (2) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). If institutional trading in
restricted securities were to decline to limited levels, the liquidity of the
Fund could be adversely affected.
SHORT SALES. Each SM&R Alger Fund may sell securities "short against the
box." While a short sale is the sale of a security the fund does not own, it is
"against the box" if at all times when the short position is open the fund owns
an equal amount of the securities or securities convertible into, or
exchangeable without further consideration for, securities of the same issue as
the securities sold short.
LENDING OF PORTFOLIO SECURITIES. Each SM&R Alger Fund may lend securities
to brokers, dealers and other financial organizations. The SM&R Alger Funds will
not lend securities to Alger Management or its affiliates or to SM&R or its
affiliates. By lending its securities, a fund can increase its income by
continuing to receive interest or dividends on the loaned securities as well as
by either investing the cash collateral in short-term securities or by earning
income in the form of interest paid by the borrower when U.S. Government
securities or letters of credit are used as collateral. Each SM&R Alger Fund
will adhere to the following conditions whenever its securities are loaned:
(a) the fund must receive at least 100 percent cash collateral or equivalent
securities from the borrower; (b) the borrower must increase this collateral
whenever the market value of the securities including accrued interest exceeds
the value of the collateral; (c) the fund must be able to terminate the loan at
any time; (d) the fund must receive reasonable interest on the loan, as well as
any dividends, interest or other distributions on the loaned securities and any
increase in market value; (e) the fund may pay only reasonable custodian fees in
connection with the loan; and (f) voting rights on the loaned securities may
pass to the borrower; provided, however, that if a material event adversely
affecting the investment occurs, the Fund's Board of Directors must terminate
the loan and regain the right to vote the securities. A fund bears a risk of
loss in the event that the other party to a stock loan transaction defaults on
its obligations and the fund is delayed in or prevented from exercising its
rights to dispose of the collateral including the risk of a possible decline in
the value of the collateral securities during the period in which the fund seeks
to assert these rights, the risk of incurring expenses associated with asserting
these rights and the risk of losing all or a part of the income from the
transaction.
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OPTIONS (SM&R ALGER AGGRESSIVE GROWTH FUND AND SM&R ALGER TECHNOLOGY FUND).
These funds may purchase put and call options and sell (write) covered put and
call options on securities and securities indexes in attempt to increase gain or
in attempt to hedge against the risk of unfavorable price movements, although,
these funds do not currently intend to rely on these strategies extensively, if
at all.
A call option on a security is a contract that gives the holder of the
option the right, in return for a premium paid, to buy from the writer (seller)
of the call option the security underlying the option at a specified exercise
price at any time during the term of the option. The writer of the call option
has the obligation upon exercise of the option to deliver the underlying
security upon payment of the exercise price during the option period. A put
option on a security is a contract that, in return for the premium, gives the
holder of the option the right to sell to the writer (seller) the underlying
security at a specified price during the term of the option. The writer of the
put, who receives the premium, has the obligation to buy the underlying security
upon exercise at the exercise price during the option period.
These funds will not sell options that are not covered. A call option
written by one of these funds on a security is "covered" if the fund owns the
underlying security covered by the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the fund holds a call on the same security as the call written where
the exercise price of the call held is (1) equal to or less than the exercise
price of the call written or (2) greater than the exercise price of the call
written if the difference is maintained by the fund in cash, U.S. Government
securities or other high grade short-term obligations in a segregated account. A
put option is "covered" if the fund maintains cash or other high grade
short-term obligations with a value equal to the exercise price in a segregated
account, or else holds a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written.
If one of these funds has written an option, it may terminate its obligation
by effecting a closing purchase transaction. This is accomplished by purchasing
an option of the same series as the option previously written. However, once the
fund has been assigned an exercise notice, the fund will be unable to effect a
closing purchase transaction. Similarly, if the fund is the holder of an option
it may liquidate its position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the option previously
purchased. There can be no assurance that either a closing purchase or sale
transaction can be effected when the fund so desires.
A fund would realize a profit from a closing transaction if the price of the
transaction were less than the premium received from writing the option or is
more than the premium paid to purchase the option; a fund would realize a loss
from a closing transaction if the price of the transaction were less than the
premium paid to purchase the option. Since call option prices generally reflect
increases in the price of the underlying security, any loss resulting from the
repurchase of a call option may also be
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wholly or partially offset by unrealized appreciation of the underlying
security. Other principal factors affecting the market value of a put or a call
option include supply and demand, interest rates, the current market price and
price volatility of the underlying security and the time remaining until the
expiration date.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. There is no assurance that a
liquid secondary market on an exchange will exist for any particular option. In
such event it might not be possible to effect closing transactions in particular
options, so that a fund would have to exercise its option in order to realize
any profit and would incur brokerage commissions upon the exercise of the
options. If a fund, as a covered call option writer, were unable to effect a
closing purchase transaction in a secondary market, it would not be able to sell
the underlying security until the option expired or it delivered the underlying
security upon exercise or otherwise covered the position.
In addition to options on securities, these funds may also purchase and sell
call and put options on securities indexes. A stock index reflects in a single
number the market value of many different stocks. Relative values are assigned
to the stocks included in an index, and the index fluctuates with changes in the
market values of the stocks. The options give the holder the right to receive a
cash settlement during the term of the option based on the difference between
the exercise price and the value of the index. By writing a put or call option
on a securities index, a fund is obligated, in return for the premium received,
to make delivery of this amount. A fund may offset its position in stock index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
Use of options on securities indexes entails the risk that trading in the
options may be interrupted if trading in certain securities included in the
index is interrupted. The funds will not purchase these options unless Alger
Management is satisfied with the development, depth and liquidity of the market
and Alger Management believes the options can be closed out.
Price movements in the funds' securities may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indexes
cannot serve as a complete hedge and would depend, in part, on the ability of
Alger Management to predict correctly movements in the direction of the stock
market generally or of a particular industry. Because options on securities
indexes require settlement in cash, Alger Management might be forced to
liquidate portfolio securities to meet settlement obligations.
Although Alger Management will attempt to take appropriate measures to
minimize the risks relating to any trading by these funds in put and call
options, there can be no assurance that the funds will succeed in any option
trading program they undertake.
The SM&R Alger Technology Fund may purchase and sell (write) put and call
options on securities and stock indexes only if such options are exchange-traded
or traded on an automated quotation system of a national securities association.
The SM&R Alger Technology Fund will not purchase options if, as a result, the
aggregate
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cost of all outstanding options exceeds 10% of the fund's total assets, although
no more than 5% will be committed to transactions entered into for non-hedging
(speculative) purposes.
STOCK INDEX FUTURES AND OPTIONS ON STOCK INDEX FUTURES (SM&R ALGER
AGGRESSIVE GROWTH FUND AND SM&R TECHNOLOGY FUND). If these funds utilize these
investments, they will do so only for hedging, not speculative, purposes.
Futures are generally bought and sold on the commodities exchanges where they
are listed with payment of initial and variation margin as described below. The
sale of a futures contract creates a firm obligation by a fund, as seller, to
deliver to the buyer the net cash amount called for in the contract at a
specific future time. Put options on futures might be purchased to protect
against declines in the market values of securities occasioned by a decline in
stock prices and securities index futures might be sold to protect against a
general decline in the value of securities of the type that comprise the index.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and obligates the seller
to deliver such position.
A stock index future obligates the seller to deliver (and the purchaser to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made. While incidental to its
securities activities, the funds may use index futures as a substitute for a
comparable market position in the underlying securities.
If a fund uses futures, or options thereon, for hedging, the risk of
imperfect correlation will increase as the composition of the fund varies from
the composition of the stock index. In an effort to compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the stock index futures, a fund may, if it uses a
hedging strategy, buy or sell stock index futures contracts in a greater or
lesser dollar amount than the dollar amount of the securities being hedged if
the historical volatility of the stock index futures has been less or greater
than that of the securities. Such "over hedging" or "under hedging" may
adversely affect the fund's net investment results if market movements are not
as anticipated when the hedge is established.
An option on a stock index futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser the right, in return for the
premium paid, to assume a position in a stock index futures contract at a
specified exercise price at any time prior to the expiration date of the option.
A fund would sell options on stock index futures contracts only as part of
closing purchase transactions to terminate its options positions. No assurance
can be given that such closing transactions could be effected or that there
would be correlation between price movements in the options on stock index
futures and price movements in the fund's securities which were the subject of
the hedge. In addition, any purchase by a fund of such options would be based
upon predictions as to anticipated market trends, which could prove to be
inaccurate.
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A fund's use, if any, of stock index futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only, if at all, for bona fide hedging, risk management or other
portfolio management purposes. Typically, maintaining a futures contract or
selling an option thereon will require a fund to deposit with a financial
intermediary as security for its obligations an amount of cash or other
specified assets (initial margin) which initially is typically 1% to 10% of the
face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on stock index futures involves payment of
a premium for the option without any further obligation on the part of a fund.
If a fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting transaction
but there can be no assurance that the position can be offset prior to
settlement at an advantageous price, nor that delivery will occur.
A fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation.
BORROWING (SM&R ALGER AGGRESSIVE GROWTH FUND AND SM&R ALGER TECHNOLOGY
FUND). These funds may borrow money from banks and use it to purchase additional
securities. This borrowing is known as leveraging. Leverage increases both
investment opportunity and investment risk. If the investment gains on
securities purchased with borrowed money exceed the interest paid on the
borrowing, the net asset value of a fund's shares will rise faster than would
otherwise be the case. On the other hand, if the investment gains fail to cover
the cost (including interest) of borrowings, or if there are losses, the net
asset value of a fund's shares will decrease faster than would otherwise be the
case. These funds may also borrow from banks for temporary or emergency
purposes.
FOREIGN SECURITIES. Each of the SM&R Alger Funds may invest up to 20% of
the value of its total assets in foreign securities (not including American
Depository Receipts, American Depository Shares, or U.S. dollar-denominated
securities of foreign issuers). Foreign securities investments may be affected
by changes in currency rates or exchange control regulations, changes in
governmental administration or economic or monetary policy (in the United States
and abroad) or changed circumstances in dealing between nations. Dividends paid
by foreign issuers may be subject to withholding and other foreign taxes that
may decrease the net return on these investments as compared to dividends paid
to a fund by domestic corporations. It should be noted that there may be less
publicly available information about foreign issuers than about domestic
issuers, and
12
<PAGE>
foreign issuers are not subject to uniform accounting, auditing and financial
reporting standards and requirements comparable to those of domestic issuers.
Securities of some foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers and foreign brokerage commissions are
generally higher than in the United States. Foreign securities markets may also
be less liquid, more volatile and less subject to government supervision than
those in the United States. Investments in foreign countries could be affected
by other factors not present in the United States, including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations. Securities purchased on foreign exchanges may be held in custody by
a foreign branch of a domestic bank.
The SM&R Alger Funds may purchase American Depositary Receipts ("ADRs"),
American Depositary Shares ("ADSs") or U.S. dollar-denominated securities of
foreign issuers which are not subject to the 20% foreign securities limitation.
ADRs and ADSs are traded in U.S. securities markets and represent the securities
of foreign issuers. While ADRs and ADSs may not necessarily be denominated in
the same currency as the foreign securities they represent, many of the risks
associated with foreign securities may also apply to ADRs and ADSs.
These funds are required to maintain continuous asset coverage (that is,
total assets including borrowings, less liabilities exclusive of borrowings) of
300% of the amount borrowed. If such asset coverage should decline below 300% as
a result of market fluctuations or other reasons, a fund may be required to sell
some of its portfolio holdings within three days to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time.
MANAGEMENT OF THE COMPANY
The Board of Directors has the responsibility for the overall management of
the Fund, including general supervision and review of its investment activities.
The directors, in turn, elect the officers of the Fund who are responsible for
administering day-to-day operations of the Fund.
Information about each of the officers and directors of the Fund 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
13
<PAGE>
"interested persons" of the Fund, as defined in the 1940 Act, are indicated by
an asterisk(*).
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE FUND DURING PAST 5 YEARS
---------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Ernest S. Barratt, Ph.D.(1) Director Marie B. Gale Centennial Professor in
Age 74 Psychiatry Professor and Chief,
Department of Psychiatry Psychodiagnostic Service and Cognitive
and Behavioral Sciences, Neuroscopic Laboratory, Department of
University of Texas Medical Psychiatry and Behavioral Sciences,
Branch, University of Texas Medical Branch, a
Galveston, Texas 77555-0189 medical school and hospital system, 1962
to present; Director of American National
Investment Accounts, Inc. (Investment
Accounts), another investment company
advised by SM&R, 1990 to present.
Michael W. McCroskey* Director and President President, Chief Executive Officer,
Age 56 Director and member of the Executive
Committee of SM&R, June 1994 to present;
President and Director of the Fund, June
1994 to present; President and Director of
SM&R Growth Fund, Inc., SM&R Equity Income
Fund, Inc., and SM&R Balanced Fund, Inc.
(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; President and
Director, ANREM Corporation, 1977 to
present; President and Director of ANTAC
Corporation, 1995 to present; Director,
Comprehensive Investment Services, Inc.
since 1997.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE FUND DURING PAST 5 YEARS
---------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Lea McLeod Matthews*(2) Director Communications Consultant, Texas
Age 37 Association of School Boards, 1999 to
#8 Kern Ramble present; Publications Editor, National
Austin, Texas 78722 Western Life Insurance Co., 1990 to 1999;
Associate in Customer Service Designation
(ACS); Director of Investment Accounts,
1994 to present; Director of Garden State
Life Insurance Company, 1993 to present;
Director of Kids Exchange of Austin (a
non-profit corporation), 1996 to 1998;
Consultant to Austin Writers League.
Ann McLeod Moody*(2) Director Director of Moody Gardens, Inc., 1994 to
Age 62 present; Director of Bank of Galveston,
5 Colony Park Drive National Association, 1989 to present;
Galveston, Texas 77551 Director of The Westcap Corporation, 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
Age 56 K. Nolan, P. C., Canyon Lake, Texas, 1977
1271 Jonas Drive to present; Director/Owner, Canyon Lake
Canyon Lake, Texas 78133 Aviation, Inc. (Aviation Service), Canyon
Lake, Texas, 1986 to present;
Director/Owner, Canyon Lake Airport, Inc.
(Airport), Canyon Lake, Texas, 1985 to
1995; Director, Hancock Mini Mart, Inc.,
1995 to present; Director of Investments
Accounts, 1997 to present.
Robert V. Shattuck, Jr. Director Attorney, Law Offices of Robert V.
Age 58 Shattuck, Jr., Galveston, Texas, 1986 to
1013 23rd Street present; Director of Investments Accounts,
Galveston, Texas 77550 1997 to present.
Jamie G. Williams Director Academic Language Therapist and
Age 53 Educational Consultant, 1974 to present;
3328 Stanford Director of The Learning Therapist
Dallas, Texas 75225 Graduate Certificate Program, 1986 to
1995; Adult Assessment Clinic and
Adolescent Academic Development Programs,
Division of Evening, Summer and Continuing
Studies, Southern Methodist University,
1994 to 1995; Adjunct Instructor in
Department of Psychology, Dedman College,
Southern Methodist University, 1988 to
1995; Director of Investments Accounts,
1997 to present.
Frank P. Williamson Director Retired Owner of Professional Pharmacy,
Age 67 1964 to 1998; Director of Investments
301 Barracuda Accounts, 1997 to present.
Galveston, Texas 77550
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE FUND DURING PAST 5 YEARS
---------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Emerson V. Unger, C.L.U. Vice President Vice President of SM&R and the SM&R Equity
Age 53 Funds 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
President and Treasurer Treasurer SM&R Equity Funds, and Investment Accounts
Age 45 since 1992; Treasurer of Comprehensive
Investment Services, Inc. since 1997;
Senior Manager, KPMG Peat Marwick LLP,
July 1980 to April 1992.
Teresa E. Axelson Vice President and Vice President and Secretary of SM&R and
Age 52 Secretary the SM&R Equity Funds since 1983; Vice
President and Secretary of the Investment
Accounts since 1991.
</TABLE>
------------------------
* "Interested persons" as defined by the 1940 Act.
(1) Member of the Fund's audit committee.
(2) Ms. Matthews is the daughter 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, 1999 for each director of the Fund. Though the
SM&R Alger Funds were not in existence during the fiscal year ended August 31,
1999, the
16
<PAGE>
directors received compensation from the Fund in connection with their
directorial services relating to the previously existing funds of the Fund.
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUNDS
BENEFITS ESTIMATED MANAGED BY
AGGREGATE ACCRUED AS ANNUAL SM&R (INCL.
COMPENSATION PART OF FUND BENEFITS UPON ONE OTHER
DIRECTOR FROM FUND EXPENSES RETIREMENT FUND)
-------- -------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Ernest S. Barratt, Ph.D........ $4,000 None None $8,000
Allan W. Matthews(*)........... $4,000 None None $8,000
Lea McLeod Matthews............ $4,000 None None $8,000
Michael W. McCroskey........... $ 0 None None $ 0
Ann McLeod Moody............... $4,000 None None $8,000
Edwin K. Nolan................. $4,000 None None $8,000
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>
(*) Mr. Matthews resigned from the Board on August 17, 2000.
Directors of the Fund who are affiliated with SM&R receive no compensation
for attendance at Board or committee meetings. No officer receives compensation
from the Fund. Officers and directors of the Fund affiliated with SM&R may,
however, receive indirect compensation from the Fund to the extent the Fund pays
underwriting commissions and investment advisory and service fees to SM&R.
During the year ended August 31, 1999, the Fund paid or accrued approximately
$36,356 to directors for fees and expenses in attending meetings of the Board.
POLICY REGARDING PERSONAL INVESTING
Each Fund, its investment adviser and principal underwriter have adopted
codes of ethics under rule 17j-1 of the Investment Company Act of 1940.
The following policies have been made a part of the Fund'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 managed by the adviser. 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;
17
<PAGE>
(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 Fund other than portfolio managers may trade
in (or otherwise acquire) or hold any security for their own account (or an
account in which he has beneficial interest). However, the trade must not occur
within 24 hours of a trade in the funds for the same or related security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of September 1, 2000, no officer of director of the Fund owned shares of
the SM&R Alger Funds.
CONTROL AND MANAGEMENT OF SM&R
SM&R has been the investment adviser, manager and underwriter of the Fund
since the Fund began business in 1992. SM&R acts pursuant to a written agreement
periodically approved by the directors or shareholders of the Fund. SM&R is also
the investment adviser and underwriter of the SM&R Equity Funds and American
National Investment Accounts, Inc. ("Investment Accounts"). SM&R's address is
that of the Fund.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"), a Texas life insurance company with its principal offices
in Galveston, Texas. As of December 1, 1999, 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 Funds, which are three other registered investment companies, Investment
Accounts, which is an investment company used to fund
18
<PAGE>
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, 1999, 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 Fund, the other American
National Funds, Investment Accounts and SM&R.
The following persons are affiliated with the Fund and SM&R in the specified
capacities:
- Michael W. McCroskey, President and Director of the Fund, is also
President, Chief Executive Officer, Director and a member of the Executive
Committee of SM&R, and President and Director of the SM&R Equity Funds and
Investment Accounts;
- Emerson V. Unger, Vice President of the Fund, is also Vice President of
SM&R and Vice President of the SM&R Equity Funds and Investment Accounts;
- Teresa E. Axelson, Vice President, Secretary of the Fund, 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 Fund, is also Vice
President and Treasurer of SM&R, the Investment Accounts and the SM&R
Equity Funds.
INVESTMENT ADVISORY AND SUB-ADVISORY AGREEMENTS
Pursuant to an Investment Advisory Agreement (the "Advisory Agreement")
between the Fund, on behalf of the SM&R Alger Funds, and SM&R dated
September 1, 2000, the Board delegated to SM&R the responsibility of managing
the investment and reinvestment of the SM&R Alger Funds' assets, including the
placing of orders for the purchase and sale of portfolio securities, and the
providing and evaluating of economic, statistical and financial information to
formulate and implement SM&R Alger Fund investment programs. Through an
investment sub-advisory agreement dated September 1, 2000 (the "Subadvisory
Agreement"), SM&R has delegated these responsibilities to Alger Management, One
World Trade Center, Suite 9333, New York, NY 10048. Alger Management has been an
investment adviser since 1964, and manages investments totaling (at 12/31/99)
$10.69 billion in mutual fund assets as well as $6.75 billion in other
19
<PAGE>
assets. Alger Management makes investment decisions for each SM&R Alger Fund and
continuously reviews and administers the SM&R Alger Funds' investment programs.
SM&R monitors Alger Management's buying and selling of securities and
administration of the SM&R Alger Funds' investment programs. For these services,
the SM&R Alger Funds pay SM&R and investment advisory fee.
INVESTMENT ADVISORY FEE AND SUB-ADVISORY FEE
Under the Advisory Agreement with the Fund, SM&R receives the following
investment advisory fees, expressed as a percentage of each SM&R Alger Fund's
average daily net asset value:
<TABLE>
<CAPTION>
ANNUAL
SM&R ALGER FUND PERCENTAGE RATE
--------------- ---------------
<S> <C>
SM&R Alger Growth Fund...................................... 0.85%
SM&R Alger Small-Cap Fund................................... 1.00%
SM&R Alger Aggressive Growth Fund........................... 1.05%
SM&R Alger Technology Fund.................................. 1.35%
</TABLE>
Because the SM&R Alger Funds were not in existence during the fiscal year
ended August 31, 2000, no advisory fees were paid to SM&R during that time.
Pursuant to the Sub-advisory Agreement, SM&R will be responsible for paying
a sub-advisory fee to Alger Management for each of the SM&R Alger Funds. No SM&R
Alger Fund is responsible for paying a sub-advisory fee directly. The
Sub-advisory Agreement spells out the sub-advisory fee and other expenses that
SM&R must pay to Alger Management. The sub-advisory fee is expressed as a
percentage of each SM&R Alger Fund's average daily net asset value. SM&R pays
Alger Management a sub-advisory fee based on the following schedule:
<TABLE>
<CAPTION>
ANNUAL
SM&R ALGER FUND PERCENTAGE RATE
--------------- ---------------
<S> <C>
SM&R Alger Growth Fund...................................... 0.50%
SM&R Alger Small-Cap Fund................................... 0.60%
SM&R Alger Aggressive Growth Fund........................... 0.60%
SM&R Alger Technology Fund.................................. 0.60%
</TABLE>
Because the SM&R Alger Funds were not in existence during the fiscal year
ended August 31, 2000, no sub-advisory fees were paid during that time.
The Advisory Agreement and the Sub-advisory Agreement will continue in
effect from year to year 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 SM&R Alger Funds, 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. The Advisory Agreement may be terminated at any time, without the
20
<PAGE>
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 SM&R Alger Funds, or by
SM&R, upon 60 days written notice to the other party. The Advisory Agreement
terminates automatically in the event of its assignment, as such term is defined
in the 1940 Act. The Sub-advisory Agreement may be terminated at any time,
without the payment of any penalty, by vote of the Board or by the vote of the
holders of a majority of the outstanding voting securities of the SM&R Alger
Funds, or by SM&R, upon 60 days written notice to the other party. The
Sub-advisory Agreement terminates automatically in the event of its assignment,
as such term is defined in the 1940 Act.
FUND ADMINISTRATION AGREEMENT
Under a Fund Administration Agreement between the Fund, on behalf of the
SM&R Alger Funds, and SM&R dated September 1, 2000 (the "Administration
Agreement"), SM&R provides all non-investment related management, executive,
administrative and operational services to the SM&R Alger Funds. Pursuant to the
Administration Agreement, SM&R also acts as transfer agent for the SM&R Alger
Funds' authorized and issued shares and as dividend disbursing agent.
In its capacity as administrator under the Administration 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
SM&R Alger Funds. SM&R's duties as administrator include, among other things:
administering the SM&R Alger Funds' affairs; maintaining office facilities;
processing purchase orders and redemption requests and providing clerical,
accounting, data processing, bookkeeping and certain other services required by
the SM&R Alger Funds.
In its capacity as transfer agent and dividend disbursing agent under the
Administration 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 FUND
Pursuant to the Administration Agreement, the Fund pays other SM&R Alger
Fund expenses, 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 SM&R Alger
Fund shares for sale and maintaining such qualifications under the various state
securities laws where SM&R Alger Fund shares are offered for sale, fees and
expenses of directors not affiliated with SM&R, costs of maintaining corporate
existence, costs of printing and mailing prospectuses and shareholder reports to
existing shareholders and expenses of shareholders' meetings.
21
<PAGE>
ADMINISTRATION FEE
Under the Administration Agreement, SM&R receives from each SM&R Alger Fund
an administration fee for providing fund administration. The fee is computed by
applying to the aggregate average daily net asset value of each SM&R Alger Fund
each month one-twelfth (1/12th) of the annual rate of 0.25%. Because the SM&R
Alger Funds were not in existence during the fiscal year ended August 31, 2000,
no administration fees were paid to SM&R during that time.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
Decisions to buy and sell securities and other financial instruments for an
SM&R Alger Fund are made by Alger Management, which also is responsible for
placing these transactions, subject to the overall review of the Fund's Board of
Directors. Although investment requirements for each SM&R Alger Fund are
reviewed independently from those of the other accounts managed by Alger
Management and those of the other SM&R Alger Funds, investments of the type the
SM&R Alger Funds may make may also be made by these other accounts or SM&R Alger
Funds. When an SM&R Alger Fund and one or more other SM&R Alger Funds or
accounts managed by Alger Management are prepared to invest in, or desire to
dispose of, the same security or other financial instrument, available
investments or opportunities for sales will be allocated in a manner believed by
Alger Management to be equitable to each. In some cases, this procedure may
affect adversely the price paid or received by an SM&R Alger Fund or the size of
the position obtained or disposed of by an SM&R Alger Fund.
Transactions in equity securities are in many cases effected on U. S. stock
exchanges and involve the payment of negotiated brokerage commissions. There is
generally no stated commission in the case of securities traded in the
over-the-counter markets, but the prices of those securities include undisclosed
commissions or mark-ups. Purchases and sales of money market instruments and
debt securities usually are principal transactions. These securities are
normally purchased directly from the issuer or from an underwriter or market
maker for the securities. The cost of securities purchased from underwriters
includes an underwriting commission or concession, and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-up or
mark-down. U. S. Government securities are generally purchased from underwriters
or dealers, although certain newly-issued U. S. Government securities may be
purchased directly from the U. S. Treasury or from the issuing agency or
instrumentality.
To the extent consistent with applicable provisions of the 1940 Act and the
rules and exemptions adopted by the Securities and Exchange Commission (the
"SEC") thereunder, as well as other regulatory requirements, the Fund's Board of
Directors has determined that portfolio transactions will be executed through
Fred Alger & Company, Incorporated ("Alger Inc.") if, in the judgment of Alger
Management, the use of Alger Inc. is likely to result in price and execution at
least as favorable as those of other qualified broker-dealers and if, in
particular transactions, Alger Inc. charges the SM&R Alger Fund involved a rate
consistent with that charged to comparable unaffiliated
22
<PAGE>
customers in similar transactions. Such transactions will be fair and reasonable
to the SM&R Alger Fund's shareholders. Over-the-counter purchases and sales are
transacted directly with principal market makers except in those cases in which
better prices and executions may be obtained elsewhere. Principal transactions
are not entered into with affiliates of the SM&R Alger Fund except pursuant to
exemptive rules or orders adopted by the SEC.
In selecting brokers or dealers to execute portfolio transactions on behalf
of an SM&R Alger Fund, Alger Management seeks the best overall terms available.
In assessing the best overall terms available for any transaction, Alger
Management will consider the factors it deems relevant, including the breadth of
the market in the investment, the price of the investment, the financial
condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis. In addition, Alger Management is authorized, in selecting
parties to execute a particular transaction and in evaluating the best overall
terms available, to consider the brokerage and research services, as those terms
are defined in section 28(e) of the Securities Exchange Act of 1934, provided to
the SM&R Alger Fund involved, the other SM&R Alger Funds and/or other accounts
over which Alger Management or its affiliates exercise investment discretion.
The Fund will consider sales of its shares as a factor in the selection of
broker-dealers to execute over-the-counter transactions, subject to the
requirements of best price and execution. Alger Management's fees under its
agreements with the SM&R Alger Funds are not reduced by reason of its receiving
brokerage and research service. The Fund's Board of Directors will periodically
review the commissions paid by the SM&R Alger Funds to determine if the
commissions paid over representative periods of time are reasonable in relation
to the benefits inuring to the SM&R Alger Funds.
DESCRIPTION OF FUND SHARES
CAPITAL STOCK
The SM&R Alger Funds are four separate series of the Fund. The Fund also has
four previously existing series: SM&R Government Bond Fund, SM&R Tax Free Fund,
SM&R Primary Fund, and SM&R Money Market Fund. These four existing series are
not offered in the Prospectus or this Statement of Additional information. They
are described in a separate prospectus and a separate statement of additional
information.
Each share of each SM&R Alger Fund has a par value of $0.01 per share. The
combined authorized capital stock for the SM&R Alger Funds is 800,000,000
shares, divided as follows: SM&R Alger Growth Fund, 200,000,000 shares, SM&R
Alger Small-Cap Fund, 200,000,000 shares; SM&R Alger Aggressive Growth Fund,
200,000,000 shares; and SM&R Alger Technology Fund, 200,000,000 shares. The SM&R
Alger Funds are each divided into two Classes of shares of common stock
designated as Class A (front-end load) and Class B (back-end load).
23
<PAGE>
Each SM&R Alger Fund is, for investment purposes, considered a separate
investment fund. The shares of each SM&R Alger Fund, 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 SM&R
Alger Fund bears its own liabilities and its proportionate share of the general
liabilities of the Fund.
Each share of capital stock represents an interest in the assets of a
particular SM&R Alger Fund and has no interest in the assets of any other SM&R
Alger Fund. Shares of an SM&R Alger 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 particular SM&R Alger Fund represents an interest
in the same portfolio of investments, and each Class has the same rights as the
other Class, except that each Class bears its own expenses and its proportionate
share of the general liabilities of each SM&R Alger 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 shares are subject to higher
distribution fees, which will cause Class B to have a higher expense ratio and
pay lower dividends than the Class A shares.
Each SM&R Alger Fund bears its proportionate share of the Fund's general
expenses not susceptible of direct allocation. Such general expenses include the
Fund's organizational expenses, directors' fees and joint fidelity bonds, which
are pro-rated based on the relative amount of each SM&R Alger Fund's assets, and
prospectus and shareholder report expenses, which are pro-rated based on the
relative number of each fund's shareholders.
VOTING RIGHTS
Within the respective SM&R Alger 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 the
Fund vote together, with each share having one vote. On other matters affecting
a particular SM&R Alger Fund, such as the Investment Advisory Contract or
fundamental investment policies, only shares of that SM&R Alger Fund are
entitled to vote, and a majority of the shares of that SM&R Alger Fund are
required for approval of the proposal. On matters affecting a particular Class
of an SM&R Alger Fund, only shares of that Class of the Fund are entitled to
vote, and a majority of the shares of that Class are required for approval of
the proposal.
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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 SM&R Alger Funds reserve the right to reject
any order for the purchase of their shares when in the judgment of management
such rejection is in the best interests of the SM&R Alger Funds.
DETERMINATION OF NET ASSET VALUE
The net asset value per share for each Class of the SM&R Alger 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 an SM&R Alger Fund are substantially identical, the different
expenses borne by each Class will result in different net asset values and
dividends for each Class.
Expenses and fees of each such SM&R Alger 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
SM&R Alger Funds 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.
DETERMINATION OF OFFERING PRICE
Full and fractional shares of the SM&R Alger Funds 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,
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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.
CLASS A SHARES (FRONT-END LOAD). Class A shares are subject to an initial
sales charge of up to 5.00% of the public offering price and an annual 12b-1 fee
of 0.35% 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 Prospectus. 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 net asset value on
redemptions within 13 months of purchase.
The offering price of Class A shares is the next determined net asset value
plus a sales charge (expressed as a percentage of the offering price) shown in
the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS A SALES CHARGE AS A
% OF OFFERING % OF AMOUNT
AMOUNT OF INVESTMENT PRICE INVESTED
-------------------- ----------------- -----------------
<S> <C> <C>
Less than $50,000............................. 5.00% 5.30%
$50,000 but less than $100,000................ 4.50% 4.70%
$100,000 but less than $250,000............... 3.50% 3.60%
$250,000 but less than $500,000............... 2.50% 2.60%
$500,000 but less than $1,000,000............. 1.50% 1.50%
$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
(CDSC) of 1.00% of the offering price if you redeem shares purchased without a
"front-end" sales charge, within 13 months after you bought them. The CDSC will
be calculated in the same manner as for Class B shares as described below.
REDUCTION AND/OR WAIVER OF CLASS A SALES CHARGES
You can reduce your sales charge on purchases of Class A shares of the SM&R
Alger Funds, through one or more of the following programs. YOU HAVE SOLE
RESPONSIBILITY OF NOTIFYING SM&R THAT YOU QUALIFY UNDER ONE OF THESE CATEGORIES.
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
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<PAGE>
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 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 funds prospectus available to
individual investors or employees, forwarding investments by such employees to
the funds and the like.
Contact SM&R or your registered representative for a list of the funds
managed by SM&R.
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class A or T
shares of a fund managed by SM&R, on which you paid a front-end sales charge,
you may 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 fund or 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 cancelled.
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 the shares
specified.
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<PAGE>
CLASS B SHARES (BACK-END LOAD). An investor pays no initial sales charge
upon the purchase of Class B shares, but such shares are subject to a CDSC that
declines from 5.00% 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 1.00% 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 net asset value) shown in the
following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
(AS A % OF THE LESSER OF THE
YEARS SINCE PURCHASE OFFERING PRICE OR REDEMPTION FEE)
-------------------- ---------------------------------
<S> <C>
Year 1........................................... 5.00%
Year 2........................................... 4.00%
Year 3........................................... 3.00%
Year 4........................................... 2.00%
Year 5........................................... 1.00%
Year 6........................................... None
</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 Fund will minimize
any applicable CDSC payable by assuming that an investor (i) first redeems Class
B shares owned through reinvested dividends and capital gains distributions, and
(ii) next redeems Class B shares held the longest.
CLASS B WAIVERS OF CONTINGENT DEFERRED SALES CHARGE
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 the 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 DISABILITY. We waive the CDSC on redemptions of Class B shares
following the shareholder's death or disability, so long as:
(a) the disability began after shares were purchased;
(b) SM&R is notified of such death or disability at the time of the
redemption request and receives satisfactory evidence of such death
or disability;
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(c) the redemptions are made within one year following the death or
initial determination of disability; and
(d) the shares were held at the time of death or initial determination of
disability.
For purposes of this waiver, the death or 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 will waive the CDSC on redemptions of
Class B shares in connection with certain distributions from four types
of qualified retirement plans: IRAs, custodial account 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 redemption must meet 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 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 DCSC 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;
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<PAGE>
(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 Fund's assets shall not be allocated
on a class-specific basis. Income, realized and unrealized capital gains and
losses, and expenses that are not allocated to a specific Class shall be
allocated to each Class on the basis of the proportionate net assets of that
Class in relation to the net assets of the Fund.
DISTRIBUTION AND SHAREHOLDER SERVICE (12b-1) FEE
The Fund, on behalf of the SM&R Alger Funds, adopted a Distribution and
Shareholder Servicing Plan (the "12b-1 Plan") pursuant to Rule 12b-1 under the
1940 Act. The 12b-1 Plan provides that SM&R will provide distribution and/or
shareholder services to the SM&R Alger Fund Classes.
<TABLE>
<CAPTION>
DISTRIBUTION SERVICE TOTAL 12B-1
CLASS FEE FEE FEE
----- ------------ -------- -----------
<S> <C> <C> <C>
Class A Shares (Front-End Load) (CDSC).......... 0.35 0.0 0.35
Class B Shares (Back-End Load).................. 1.00 0.0 1.00
</TABLE>
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 Classes,
for services that are primarily intended to result in or primarily attributable
to the sale of the Classes ("Selling Services").
"Selling Services" include the training and supervision of sales personnel;
advertising, marketing, and other promotional expenses, including the costs of
preparing and printing sales literature; printing prospectuses and statements of
additional information and distributing them to prospective investors in
Classes; and distributing shares of the Classes. Payments for Selling Services
may include payment for overhead and other office expenses that are related to
the distribution of the Classes. SM&R also may reimburse the expenses of persons
who provide support services in connection with the distribution of the Classes,
and may make payments to financial intermediaries that sell shares of the
Classes. "Shareholder Services" include all forms of shareholder liaison
services that SM&R deems appropriate, including maintaining shareholder
accounts,
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<PAGE>
providing shareholder liaison services, responding to customer inquiries, and
providing shareholders with information on their investments and about the
Classes.
The 12b-1 Plan, and any related agreement, continues in effect with respect
to a Class only if such continuance is specifically approved at least annually
by either the Board or the shareholders of that 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 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 Class, any distribution and shareholder services agreement related to that
Class may be terminated at any time, without the payment of any penalty, (1) by
the Board or by a vote of the Class' outstanding shareholders, on 60 days
written notice to SM&R, or (2) by SM&R, on 60 days written notice to the Fund.
The 12b-1 Plan provides that it may not be amended with respect to any Class
of an SM&R Alger 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
Class, SM&R (and any other person authorized to direct the disposition of monies
paid or payable by the relevant SM&R Alger 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 Fund and each
SM&R Alger 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 Fund, individually, but are binding only upon the
assets and property of the Fund and the relevant SM&R Alger Funds, as provided
in the Fund's Articles of Incorporation.
Because the SM&R Alger Funds were not in existence during the fiscal year
ended August 31, 2000, no 12b-1 fees were paid by the SM&R Alger Funds during
that time.
SPECIAL PURCHASE PLANS
AUTOMATIC INVESTMENT PLAN AND ELECTRONIC TRANSFERS
The SM&R Alger Funds provide a convenient, voluntary method of purchasing
their shares through an "Automatic Investment Plan" and through the use of the
"Electronic Transfers" Plan. These plans are referred to as a "Plan" or "Plans."
The
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<PAGE>
principal purposes of such Plans are to encourage thrift by enabling investors
to make regular purchases in amounts less than normally required, and 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 SM&R Alger Funds 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 $50 or more (per
individual) 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 $500.
GROUP SYSTEMATIC INVESTMENT PLAN
A Group Systematic Investment Plan is available for purchases of the SM&R
Alger Funds. This Plan provides employers and employees with a convenient means
for purchasing shares of the SM&R Alger Funds 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 $500 ($100 per
individual) 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 SM&R Alger 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 $50 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.
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<PAGE>
EXCHANGE PRIVILEGE
You may make exchanges, without charge, between corresponding classes of
shares of funds managed by SM&R on terms described in the Prospectus.
We waive any sales charges on Class A 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 amounts invested in those shares to have previously paid a sales
charge for purposes of the exchange privilege. For example, assume you purchase
Class A shares of the SM&R Alger Growth Fund. You then exchange your Class A
shares for shares of the Money Market Fund (not offered in the Prospectus or
this Statement of Additional Information) of the Fund. Later, you re-exchange
those shares of the Money Market Fund for Class A shares of the SM&R Alger
Small-Cap Fund. We would not impose any sales charge upon the re-exchange into
Class A shares of the SM&R Alger Small-Cap Fund because you previously paid a
sales charge on amounts invested in those 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 SM&R Alger 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 an SM&R Alger Fund that may be exchanged is
the number of shares of 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 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 Fund's agent for such purpose. Such requests must
be duly executed by each registered owner, 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
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<PAGE>
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.
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 $50,000 or less. In all other cases the signatures on the request
for redemption 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 Shareholder's Guide.
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 is received in "Good Order" as set forth above. Any applicable CDSC must
be paid at the time of redemption. (See "Important Facts About Redeeming" in the
Shareholder's Guide). 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 SM&R Alger 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 SM&R may be requested to redeem shares for which it has not
yet received good payment for prior purchases of SM&R Alger Fund shares.
Accordingly, proceeds of the SM&R Alger Funds 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 Fund of its securities is not reasonably
practicable or it is not reasonably practicable for the Fund 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 Fund's security
holders.
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The SM&R Alger Funds have 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 SM&R Alger Funds at the
beginning of such period. The SM&R Alger Funds 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.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY
Each SM&R Alger Fund is treated as a separate entity for federal income tax
purposes. The SM&R Alger Funds have elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code. The SM&R
Alger Funds intend to distribute all of their net investment income and net
realized capital gains to shareholders in a timely manner. Therefore, it is not
expected that the SM&R Alger Funds will be required to pay federal income taxes.
In order to qualify as a regulated investment company, the SM&R Alger Funds
must meet several requirements. These requirements include the following: (1) at
least 90% of each 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 each 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 each fund
and not more than 10% of the outstanding voting securities of such issuer) and
(b) not more than 25% of the value of each 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 SM&R Alger 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 SM&R Alger Fund is required to
distribute to its shareholders at least 98% of its taxable ordinary income
earned during
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<PAGE>
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 SM&R Alger 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 or dividends derived from
taxable investments which the shareholder receives from an SM&R Alger Fund, as
well as any distributions derived from net short-term capital gains, are treated
as ordinary income whether the shareholder has elected to receive them in cash
or in additional shares. Distributions derived from net long-term capital gains
will be taxable as long-term capital gains regardless of the length of time the
shareholder has owned such fund's shares and regardless of whether such
distributions are received in cash or in additional shares. In determining the
amount of capital gains, if any, available for distribution, net capital gains
are offset against available net capital losses, if any, carried forward from
previous years.
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 Fund 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
Fund.
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.
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 Fund.
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
36
<PAGE>
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.)
BACKUP WITHHOLDING
The Fund 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 Fund 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 SM&R
Alger Funds.
IMPORTANT: The Fund 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 Prospectus under "Systematic Withdrawal Plan," the SM&R
Alger Funds have a Systematic Withdrawal Plan pursuant to which shareholders
having an account value of $5,000 or more may 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 because of
the sales charge or CDSC (as
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<PAGE>
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 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 SM&R Alger Fund 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 Fund and SM&R discourage
shareholders
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from maintaining a withdrawal account while concurrently and regularly
purchasing shares of the Fund although such practice is not prohibited.
THE UNDERWRITER
SM&R serves as principal underwriter of the shares of all SM&R Alger Funds
pursuant to an Underwriting Agreement dated September 1, 2000 (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 Fund or by vote of a majority of the
outstanding voting securities of the SM&R Alger Funds, 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 Fund in accordance with such procedures at a meeting held on August 17,
2000. 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 SM&R Alger Funds, 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
SM&R Alger Fund 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 any fund for which SM&R serves as
investment adviser. Compensation may include financial assistance for
conferences, shareholder services, automation, sales and training programs, or
promotional activities. Registered representatives and their families may be
paid for travel expenses, including lodging, in connection with business
meetings or seminars. In some cases, this compensation may only be available to
securities dealers whose representatives have sold or are expected to sell
significant amounts of shares. Securities dealers may not use certain sales to
qualify for this compensation if prohibited by the laws of any state or
self-regulatory agency, such as the National Association of Securities Dealers,
Inc.
The Sales Charge allowance to broker-dealers for Class A shares are as
follows:
<TABLE>
<CAPTION>
PERCENTAGE CLASS A
---------- --------
<S> <C>
Net Amount Invested
Maximum................................................... 4.9%
Minimum................................................... 0.0%
Public Offering Price
Maximum................................................... 4.25%
Minimum................................................... 0.0%
</TABLE>
39
<PAGE>
CUSTODIAN
The cash and securities of the SM&R Alger Funds are held by SM&R, 2450 South
Shore Boulevard, Suite 400, League City, Texas, pursuant to a Custodian
Agreement dated September 1, 2000. The Custodian holds and administers the SM&R
Alger Funds' cash and securities as provided for in such Custodian Agreement.
The compensation paid to the Custodian is paid by the SM&R Alger Funds 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 SM&R Alger Funds' 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 Fund pursuant to the
Administration Agreement. A discussion of SM&R's duties as transfer agent is set
forth above under "Fund Administration Agreement."
COUNSEL
The Fund's General Counsel is Greer, Herz & Adams, L.L.P. 18th Floor, One
Moody Plaza, Galveston, Texas 77550.
AUDITORS AND FINANCIAL STATEMENTS
Tait, Weller & Baker ("TWB"), 8 Penn Center, Philadelphia, PA 19103, serves
as the Fund's independent auditors.
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 SM&R Alger 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.
Each SM&R Alger 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 an SM&R Alger Fund at net asset value, sales literature pertaining to
the fund may
40
<PAGE>
quote a current distribution rate, yield, total return, average annual total
return and other measures of performance as described elsewhere in this
Statement of Additional Information with the substitution of net asset value for
the public offering price.
Sales literature referring to the use of the Fund or any of the SM&R Alger
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.
Because the SM&R Alger Funds were not in existence during the fiscal year
ended August 31, 2000, nor in any prior years, there is no performance data
available for the SM&R Alger Funds.
PERFORMANCE MEASURES
To help investors better evaluate how an investment in an SM&R Alger Fund
might satisfy their investment objective, advertisements and other materials
regarding the Fund or any of the SM&R Alger Funds may discuss various measures
of fund performance, once that data becomes available, as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
The following publications, indices, and averages may be used:
DOW JONES COMPOSITE AVERAGE OR ITS COMPONENT AVERAGES--an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
STANDARD & POOR'S 500 STOCK INDEX OR ITS COMPONENT INDICES--an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
THE NEW YORK STOCK EXCHANGE COMPOSITE OR COMPONENT INDICES--unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
LIPPER--MUTUAL FUND PERFORMANCE ANALYSIS AND LIPPER--FIXED INCOME FUND
PERFORMANCE ANALYSIS--measure total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
CDA MUTUAL FUND REPORT, PUBLISHED BY CDA INVESTMENT
TECHNOLOGIES, INC.--analyzes price, current yield, risk, total return, and
average rate of return (average annual compounded growth rate) over specified
time periods for the mutual fund industry.
MUTUAL FUND SOURCE BOOK, PUBLISHED BY MORNINGSTAR, INC.--analyzes price,
yield, risk and total return for equity funds.
FINANCIAL PUBLICATIONS: THE WALL STREET JOURNAL AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES--provide
performance statistics over specified time periods.
41
<PAGE>
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, Lehman Bros. 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 of the SM&R Alger Funds, 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 of
the SM&R Alger Funds to calculate performance figures. In addition there can be
no assurance that any series of the Fund will continue this performance as
compared to such other averages.
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<PAGE>
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) 1.a. Registrant's Amended and Restated Articles of Incorporation are
incorporated herein by reference to Exhibit (a)1.a. to
Post-Effective Amendment No. 13 to this form N-1A Registration
Statement.
1.b. Registrant's Articles of Amendment dated December 7, 1998 are
incorporated herein by reference to Exhibit (a)1.b. to
Post-Effective Amendment No. 13 to this form N-1A Registration
Statement.
2.a. Registrant's Supplementary Articles of Incorporation dated
February 23, 1998, July 21, 1998 and August 6, 1998 are
incorporated herein by reference to Exhibit (a)2. to
Post-Effective Amendment No. 13 to this form N-1A Registration
Statement.
2.b. Registrant's Supplementary Articles of Incorporation dated
August 17, 2000 are filed herewith as Exhibit (a).2.b. to
Post-Effective Amendment No. 17 to this form N-1A Registration
Statement.
(b) Registrant's By-Laws (Revised November 18, 1999) are incorporated
herein by reference to Exhibit (b) to Post-Effective Amendment No. 15 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 incorporated herein by reference to Exhibit (d)2. to
Post-Effective Amendment No. 13 to this form N-1A Registration
Statement.
3. Registrant's Investment Advisory Agreement on behalf of SM&R
Alger Growth Fund, SM&R Alger Small-Cap Fund, SM&R Alger Aggressive
Growth Fund and SM&R Alger Technology Fund (collectively referred
to as the SM&R Alger Funds) is filed herewith as Exhibit (d)3. to
Post-Effective Amendment No. 17 to this form N-1A Registration
Statement.
4. Registrant's Sub-Advisory Agreement on behalf of SM&R Alger
Growth Fund, SM&R Alger Small-Cap Fund, SM&R Alger Aggressive
Growth Fund and SM&R Alger Technology Fund (collectively referred
to as the SM&R Alger Funds) is filed herewith as Exhibit (d)4. to
Post-Effective Amendment No. 17 to this form N-1A Registration
Statement.
(e) 1. Registrant's Underwriting Agreement is incorporated herein by
reference to Exhibit (e) to Post-Effective Amendment No. 13 to this
form N-1A Registration Statement.
2. Registrant's Underwriting Agreement on behalf of SM&R Alger
Growth Fund, SM&R Alger Small-Cap Fund, SM&R Alger Aggressive Growth
Fund and SM&R Alger Technology Fund (collectively referred to as the
SM&R Alger Funds) is filed herewith as Exhibit (e)2. to
Post-Effective Amendment No. 17 to this form N-1A Registration
Statement.
(f) Not Applicable.
(g) 1.a. 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.
1.b. Registrant's First Amendment to the Custodian Agreement on behalf of
SM&R Alger Growth Fund, SM&R Alger Small-Cap Fund, SM&R Alger
Aggressive Growth Fund and SM&R Alger Technology Fund (collectively
referred to as the SM&R Alger Funds) is filed herewith as
Exhibit (g)1.b. to Post-Effective Amendment No. 17 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) 1. Registrant's Distribution and Shareholder Servicing Plan is
incorporated herein by reference to Exhibit (m) to Post-Effective
Amendment No. 13 to this form N-1A Registration Statement.
2. Registrant's Distribution Plan on behalf of SM&R Alger Growth Fund,
SM&R Alger Small-Cap Fund, SM&R Alger Aggressive Growth Fund and
SM&R Alger Technology Fund (collectively referred to as the SM&R
Alger Funds) is filed herewith as Exhibit (m)2. to Post-Effective
Amendment No. 17 to this form N-1A Registration Statement.
(n) Financial Data Schedules incorporated by reference as filed with form
N-SAR-B on 10/28/99.
(o) 1. Registrant's Multiple Class Plan is incorporated herein by reference
to Exhibit (o) to Post-Effective Amendment No. 13 to this form N-1A
Registration Statement.
2. Registrant's Multiple Class Plan on behalf of SM&R Alger Growth
Fund, SM&R Alger Small-Cap Fund, SM&R Alger Aggressive Growth Fund
and SM&R Alger Technology Fund (collectively referred to as the SM&R
Alger Funds) is filed herewith as Exhibit (m)2. to Post-Effective
Amendment No. 17 to this form N-1A Registration Statement.
(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
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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
Equity 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
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;
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<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 of the Registrant and Portfolio Manager of its SM&R
Government Bond Fund and SM&R Tax Free Fund; Vice President of Investment
Accounts, Portfolio Manager of its American National Government Bond and High
Yield Bond Portfolios, Co-Manager of its Growth, Equity Income & Balanced
Portfolios; Co-Manager of the SM&R Growth Fund, SM&R Equity Income Fund and
SM&R Balanced Fund; 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; Vice President of Investments, Standard Life and Accident
Insurance Company, 201 Robert S. Kerr Avenue, Oklahoma City, Oklahoma; Former
Director of Equity Strategy Research and Trading for C&S/Sovran Bank (now
NationsBank) Atlanta, Georgia.
DAVID A. BEHRENS
Director of SM&R, 2450 South Shore Boulevard, League City, Texas;
Executive Vice President, Independent Marketing, American National Insurance
Company, One Moody Plaza, Galveston, Texas; Allstate Financial Distributors,
Inc., Lincoln, NE.
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.
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<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>
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
--------------------------------------------------------------------------------
David A. Behrens Director None
One Moody Plaza
Galveston, 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
--------------------------------------------------------------------------------
</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 INVESTMENTS, INC.,
certifies that it meets all of the requirements for effectiveness of this
POST-EFFECTIVE AMENDMENT NO. 17 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 30th day of August 2000.
SM&R INVESTMENTS, 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. 17 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: August 30, 2000 Date: August 30, 2000
---------------------------- -----------------------------
DIRECTORS
/s/ Ernest S. Barratt, Ph.D. Date: August 30, 2000
----------------------------------- -----------------------------
Ernest S. Barratt, Ph.D.
/s/ Lea McLeod Matthews Date: August 30, 2000
----------------------------------- -----------------------------
Lea McLeod Matthews
/s/ Michael W. McCroskey Date: August 30, 2000
----------------------------------- -----------------------------
Michael W. McCroskey
/s/ Ann McLeod Moody Date: August 30, 2000
----------------------------------- -----------------------------
Ann McLeod Moody
/s/ Edwin K. Nolan Date: August 30, 2000
----------------------------------- -----------------------------
Edwin K. Nolan
C-9
<PAGE>
/s/ Robert V. Shattuck, Jr. Date: August 30, 2000
----------------------------------- -----------------------------
Robert V. Shattuck, Jr.
/s/ Jamie G. Williams Date: August 30, 2000
----------------------------------- -----------------------------
Jamie G. Williams
/s/ Frank P. Williamson Date: August 30, 2000
----------------------------------- -----------------------------
Frank P. Williamson
C-10
<PAGE>
EXHIBIT INDEX
99.B(a)2.b. Registrant's Articles Supplementary dated August 17, 2000.
99.B(d)3. Registrant's Investment Advisory Agreement for the SM&R Alger
Funds.
99.B(d)4. Registrant's Sub-Advisory Agreement for the SM&R Alger Funds.
99.B(e)2. Registrant's Underwriting Agreement for the SM&R Alger Funds.
99.B(g)1.b. Registrant's First Amendment to the Custodian Contract for the
SM&R Alger Funds.
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)2. Registrant's Distribution and Shareholder Servicing Plan for the
SM&R Alger Funds.
99.B(o)2. Registrant's Multiple Class Plan for the SM&R Alger Funds.
99.B(p) List of persons controlled by or under common control with
Registrant.
C-11
