<PAGE>
As filed with the Securities and Exchange Commission on December 21, 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. 19 /X/
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 19 /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 December 31, 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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[LOGO]
SM&R INVESTMENTS, INC.
SM&R EQUITY FUNDS
SM&R FIXED INCOME FUNDS
SM&R EQUITY FUNDS:
CLASS A AND CLASS B
SM&R GROWTH FUND
SM&R ALGER GROWTH FUND
SM&R ALGER AGGRESSIVE GROWTH FUND
SM&R EQUITY INCOME FUND
SM&R BALANCED FUND
SM&R ALGER SMALL-CAP FUND
SM&R ALGER TECHNOLOGY FUND
SM&R FIXED INCOME FUNDS:
CLASS A AND CLASS B
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R MONEY MARKET FUND
SINGLE CLASS
SM&R PRIMARY FUND
Prospectus, December 31, 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 in a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation
or any other government agency.
(All classes may not be available in all states)
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
FUND SUMMARIES............................. 1
SM&R Growth Fund........................... 1
SM&R Alger Growth Fund..................... 3
SM&R Alger Aggressive Growth Fund.......... 5
SM&R Equity Income Fund.................... 7
SM&R Balanced Fund......................... 9
SM&R Alger Small-Cap Fund.................. 11
SM&R Alger Technology Fund................. 13
SM&R Government Bond Fund.................. 15
SM&R Tax Free Fund......................... 16
SM&R Money Market Fund..................... 18
SM&R Primary Fund.......................... 19
PERFORMANCE................................ 20
Bar Charts and Performance Tables.......... 21
EXPENSES OF THE FUNDS...................... 28
Fees and Expenses of the Funds............. 28
ADDITIONAL EXPLANATION OF RISK FACTORS..... 32
CHOOSING A SHARE CLASS THAT BEST SUITS
YOU........................................ 35
SALES CHARGE REDUCTION AND WAIVERS......... 36
Class A Sales Charges...................... 36
Investments of $1 Million or More.......... 36
Ways to Reduce Your Class A Sales Charge .. 36
Class B Sales Charges...................... 38
Class B Waivers of Contingent Deferred
Sales Charges.............................. 39
Distribution and Shareholder
Service (12b-1) Fee........................ 39
THE SM&R FUNDS AND THEIR MANAGEMENT........ 41
Investment Adviser......................... 41
Portfolio Manager.......................... 43
FINANCIAL HIGHLIGHTS....................... 45
SM&R Growth Fund........................... 46
SM&R Equity Income Fund.................... 47
SM&R Balanced Fund......................... 48
SM&R Government Bond Fund.................. 49
SM&R Tax Free Fund......................... 50
SM&R Money Market Fund..................... 51
SM&R Primary Fund.......................... 52
SHAREHOLDER'S GUIDE TO INVESTING WITH
SM&R'S MUTUAL FUNDS........................ 53
APPENDIX................................... A-1
</TABLE>
WHY READING THIS PROSPECTUS IS IMPORTANT TO YOU
This prospectus explains the investment objectives, risks and strategies of
each of the SM&R funds. Reading the prospectus will help you to decide which
SM&R fund, if any, is the right investment for you. We suggest that you keep
this prospectus for future reference.
<PAGE>
FUND SUMMARY SM&R Growth Fund
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FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class A-Fund #121
Class B-Fund #221
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Managers:
Andre J. Hodlewsky
Gordon D. Dixon
Fund Portfolio Turnover:
10.42%
Dividend Payment
Schedule:
Semi-Annually
INVESTMENT OBJECTIVE
The SM&R Growth Fund (the "Growth Fund") seeks to achieve long-term capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Growth Fund normally invests at least 85% of its total assets in common
stock. In selecting stocks, Securities Management and Research, Inc. ("SM&R"),
the Growth Fund's investment adviser:
- chooses stocks of financially sound companies that have a proven ability to
make and sustain a profit over time
- places an emphasis on companies with growth potential.
SM&R identifies candidate stock investments based on (1) low equity valuation or
low relative equity valuation and (2) improving earnings. SM&R evaluates each
candidate stock on a fundamental basis by examining past and expected financial
performance, managerial skill and foresight, and relative valuation to industry
peers and the market as a whole.
The Growth Fund generally purchases a higher proportion of stocks (relative to
their market weight) from those sectors of the market with higher growth
prospects, referred to as "sector overweighting." Examples of sectors with
higher growth prospects currently include technology, healthcare, and consumer
staples.
On the other hand, the portfolio generally purchases a smaller proportion of
stocks (relative to their market weight) from sectors of the market with below
average growth characteristics (for example, utilities and basic
materials),referred to as "sector underweighting." SM&R generally believes in
never having less than half or more than double the market weighting in any one
sector. As a result of such strategic overweighting and underweighting, the
Growth Fund's performance may differ substantially from broad market indexes
like the S&P 500 and tend to incur more price volatility than these indexes.
PRINCIPAL RISK FACTORS
The 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. The
principal risks of investing in the Growth Fund are as follows:
- The market value of the fund's securities could decline (market risk).
- SM&R's investment decisions (such as sector overweighting and underweighting
and individual stock selection) 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).
1
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FUND SUMMARY SM&R GROWTH FUND
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WHO MAY WANT TO INVEST IN THE FUND
This 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
This fund may NOT be appropriate:
- if you are investing with a shorter time horizon (less
than ten years)
- if you are uncomfortable with an investment that will go
up and down in value
- as your complete portfolio
2
<PAGE>
FUND SUMMARY SM&R ALGER GROWTH FUND
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FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class A-Fund #150
Class B-Fund #250
Investment Adviser:
Securities
Management and
Research, Inc.
Sub-Adviser:
Fred Alger
Management, Inc.
Portfolio Managers:
David D. Alger
Ronald Tartaro
Dividend Payment
Schedule:
Annually
INVESTMENT OBJECTIVE
The SM&R Alger Growth Fund (the "Alger Growth Fund") seeks to achieve long-term
capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The 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 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 market 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 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 Alger Growth Fund could underperform other investments. The
principal risk factors of investing in the 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
3
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FUND SUMMARY SM&R ALGER GROWTH FUND
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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.
(short-term trading risks)
WHO MAY WANT TO INVEST IN THE FUND
This 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
This 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 Alger Growth Fund as your complete
portfolio
4
<PAGE>
FUND SUMMARY SM&R ALGER AGGRESSIVE GROWTH FUND
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FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class A-Fund #152
Class B-Fund #252
Investment Adviser:
Securities
Management and
Research, Inc.
Sub-Adviser:
Fred Alger
Management, Inc.
Portfolio Managers:
David D. Alger
Seilai Khoo
Dividend Payment
Schedule:
Annually
INVESTMENT OBJECTIVE
The SM&R Alger Aggressive Growth Fund (the "Alger Aggressive Growth Fund") seeks
to achieve long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The 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 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 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 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 Alger Aggressive Growth Fund could underperform
other investments. The principal risks of investing in the 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. 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
5
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FUND SUMMARY SM&R ALGER AGGRESSIVE GROWTH FUND
--------------------------------------------------------------------------------
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.
(short-term trading risks)
- 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.
WHO MAY WANT TO INVEST IN THE FUND
This 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
This 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 Alger Aggressive Growth Fund as
your complete portfolio
6
<PAGE>
FUND SUMMARY SM&R EQUITY INCOME FUND
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FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class A-Fund #122
Class B-Fund #222
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Managers:
Andrew R. Duncan
Gordon D. Dixon
Fund Portfolio Turnover:
14.90%
Dividend Payment
Schedule:
Quarterly
INVESTMENT OBJECTIVE
The SM&R Equity Income Fund (the "Equity Income Fund") seeks current income with
a secondary objective of long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Securities Management and Research, Inc. ("SM&R"), the fund's investment
adviser, normally invests at least 75% of the Equity Income Fund's assets in
common stocks (primarily income producing). This fund may also invest in
preferred stocks and investment grade debt securities (such as publicly traded
corporate bonds, debentures,notes, commercial paper, repurchase agreements, and
certificates of deposit in domestic banks and savings institutions having at
least $1 billion of total assets). Corporate debt obligations purchased by the
Equity Income Fund will consist only of obligations rated either Baa or better
by Moody's or BBB or better by S&P. Commercial paper and notes will consist only
of direct obligations of corporations whose bonds and/ or debentures are rated
as set forth above.
The fixed income portion of the fund will generally invest in medium and
long-term securities. The average maturity for the fixed income portion
generally is expected to be in the six to fifteen year range (some securities
may have a longer or shorter duration). The average portfolio maturity may be
shorter when management anticipates that interest rates will increase, and
longer when management anticipates interest rates will decrease. Corporate debt
obligations purchased by the Balanced Fund will consist only of obligations
rated either Baa or better by Moody's or BBB or better by S&P. Commercial paper
and notes will consist only of direct obligations of corporations whose bonds
and/ or debentures are rated as set forth above.
In selecting common and preferred stocks, the fund focuses on companies with
consistent and increasing dividend payment histories and future earnings
potential sufficient to continue such dividend payments. This fund's goal is to
maintain a portfolio dividend yield (before fees and expenses) at least 50%
greater than that of the S&P 500 Index.
SM&R identifies candidate stock investments based on (1) low equity valuation
and (2) improving earnings. Then, SM&R evaluates each candidate stock on a
fundamental basis by examining past and expected financial performance,
managerial skill and foresight, and relative valuation to industry peers and the
market as a whole.
The Equity Income Fund generally purchases a higher proportion of stocks
(relative to their market weight) from those sectors of the market with greater
dividend prospects, referred to as "overweighting." Examples of sectors with
greater dividend prospects currently include financial companies like banks,
insurance companies, and real estate investment trusts. On the other hand, the
fund generally purchases a smaller proportion of stocks (relative to their
market weight) from sectors of the market with below average dividend yields
(such as technology and consumer staples), referred to as "underweighting." As a
result of such strategic overweighting and underweighting, the Growth Fund's
performance may differ substantially from broad market indexes like the S&P 500.
7
<PAGE>
FUND SUMMARY SM&R EQUITY INCOME FUND
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PRINCIPAL RISK FACTORS
The Equity Income 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. The principal
risks of investing in the Equity Income Fund are as
follows:
- The market value of the fund's securities could decline
(market risk).
- SM&R's investment decisions (such as sector
overweighting and underweighting and individual stock
selection) 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).
- Interest rates could rise, causing a decline in the
market value of debt securities (interest rate risk).
This risk will increase as average portfolio securities
maturities increase (maturity risk).
- Issuers of debt obligations could default or be unable
to pay amounts due (credit risk).
WHO MAY WANT TO INVEST IN THE FUND
This fund may be appropriate if you:
- have medium-term investment goals (five years or more)
- are comfortable with moderate to aggressive risk
- are looking for a fund with both growth and income
components
- are seeking to participate in the equity market
- are willing to accept higher short-term risk
WHO MAY NOT WANT TO INVEST IN THE FUND
This fund may NOT be appropriate if you:
- are investing with a shorter-time horizon (less than
five years)
- are investing for maximum return
- require a high degree of stability of your principal
8
<PAGE>
FUND SUMMARY SM&R BALANCED FUND
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FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class A-Fund #123
Class B-Fund #223
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Managers:
Andrew R. Duncan
Gordon D. Dixon
Fund Portfolio Turnover:
8.6%
Dividend Payment
Schedule:
Quarterly
INVESTMENT OBJECTIVE
The SM&R Balanced Fund (the "Balanced Fund") seeks to conserve principal,
produce current income, and achieve long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Securities Management and Research, Inc. ("SM&R"), the Balanced Fund's
investment adviser, uses a "balanced" approach by investing part of the assets
in common stocks and the remainder in a combination of U.S. Government bonds,
investment-grade corporate bonds, collateralized mortgage obligations,
mortgage-backed securities, convertible bonds, cash, and money market
instruments. The proportion invested in stocks, bonds and money market
instruments changes in response to changing economic conditions. This
flexibility may help to reduce price volatility.
SM&R will generally select stocks based on certain growth and value
considerations. A growth stock would include a company whose underlying earnings
growth rate is greater than the market. An example of a value stock would be one
where the stock price appears undervalued in relation to earnings, projected
cash flow, or asset value per share. The stocks in this fund are diversified and
are selected based upon two models. One model is based on profitability
measurements and the other model is based on the corporation's return on
invested cash. SM&R then evaluates each candidate stock on a fundamental basis
by examining past and expected financial performance, managerial skill and
foresight, and relative valuation to industry peers and the market as a whole.
The bonds, meanwhile, may serve as a stabilizing force during times of eroding
stock market value, as well as provide a fixed income payment stream. The fund
invests at least 25% of assets in fixed income securities, all of which are
rated BBB or better (investment grade). The fixed income portion of the fund
will generally invest in medium and long-term securities. The average maturity
for the fixed income portion generally is expected to be in the six to fifteen
year range (some securities may have a longer or shorter duration). The average
portfolio maturity may be shorter when management anticipates that interest
rates will increase, and longer when management anticipates interest rates will
decrease. Corporate debt obligations purchased by the Balanced Fund will consist
only of obligations rated either Baa or better by Moody's or BBB or better by
S&P. Commercial paper and notes will consist only of direct obligations of
corporations whose bonds and/ or debentures are rated as set forth above. The
Balanced Fund may also invest in repurchase agreements.
The Balanced Fund will sometimes be more heavily invested in equity securities,
and at other times it will be more heavily invested in fixed-income securities.
SM&R, through an ongoing program of asset allocation, will determine the
appropriate level of equity and debt holdings consistent with SM&R's outlook and
evaluation of trends in the economy and the financial markets.
9
<PAGE>
FUND SUMMARY SM&R BALANCED FUND
--------------------------------------------------------------------------------
PRINCIPAL RISK FACTORS
The Balanced 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. The principal risks of
investing in the Balance Fund are as follows:
- The market value of the fund's securities could decline
(market risk).
- SM&R's investment decisions (such as determining the
ratio of stock to bonds and individual stock selection)
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).
- Interest rates could increase which can cause the value
of debt securities to decline (interest rate risk).
- Issuers of debt obligations could default or be unable
to pay amounts due (credit risk).
- The fund could be unable to find a buyer for its
securities (liquidity risk).
- The income you receive from the portfolio is based
primarily on interest rates, which can vary widely over
the short- and long-term. If interest rates drop, your
income from the portfolio may drop as well (income
risk).
- Interest rates could fall enough to prompt an unexpected
number of people to refinance (or prepay) their
mortgages before their maturity (call risk).
WHO MAY WANT TO INVEST IN THE FUND
This fund may be appropriate if you:
- are seeking conservation of the purchasing power of your
capital, but also want to participate in equity
investments
- are looking for a more conservative alternative to a
growth-oriented portfolio
- want a well-diversified and relatively stable investment
allocation
- need a core investment
WHO MAY NOT WANT TO INVEST IN THE FUND
This fund may NOT be appropriate if you:
- are investing for a maximum return over a long time
horizon
- require a high degree of stability of your principal
10
<PAGE>
FUND SUMMARY SM&R ALGER SMALL-CAP FUND
--------------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class A-Fund #151
Class B-Fund #251
Investment Adviser:
Securities
Management and
Research, Inc.
Sub-Adviser:
Fred Alger
Management, Inc.
Portfolio Managers:
David D. Alger
Bonnie Smithwick
Dividend Payment
Schedule:
Annually
INVESTMENT OBJECTIVE
The SM&R Alger Small-Cap Fund (the "Alger Small-Cap Fund") seeks to achieve
long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The 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 SmallCap-Registered Trademark- 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 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 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 Alger Small-Cap Fund could underperform other investments. The
principal risks of investing in the 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.
11
<PAGE>
FUND SUMMARY SM&R ALGER SMALL-CAP FUND
--------------------------------------------------------------------------------
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. (short-term
trading risks)
- In addition, investing in small companies generally
involves more risks than investing in more established
larger companies (small-cap risk). 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.
WHO MAY WANT TO INVEST IN THE FUND
This 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
This 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 Alger Small-Cap Fund as your
complete portfolio
12
<PAGE>
FUND SUMMARY SM&R ALGER TECHNOLOGY FUND
--------------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class A-Fund #153
Class B-Fund #253
Investment Adviser:
Securities
Management and
Research, Inc.
Sub-Adviser:
Fred Alger
Management, Inc.
Portfolio Managers:
David D. Alger
Seilai Khoo
Dividend Payment
Schedule:
Annually
INVESTMENT OBJECTIVE
The SM&R Alger Technology Fund (the "Alger Technology Fund") seeks to achieve
long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Alger Technology Fund normally invests at least 85% of its total assets in
the equity securities 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. These companies may include for
example, companies that develop, produce, or distribute products or services in
the computer, semi-conductor, electronic, communications, health care, and
biotechnology sectors.
The 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 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 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 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).
- In addition, investing in small companies generally involves more risks than
investing in more established larger companies (small-cap risk). 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.
13
<PAGE>
FUND SUMMARY SM&R ALGER TECHNOLOGY FUND
--------------------------------------------------------------------------------
- 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. (short-term
trading risks)
- 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. Furthermore, the
technology industries can be significantly affected by
obsolescence of existing technology, short product
cycles, falling prices and profits, and competition from
new market entrants.
WHO MAY WANT TO INVEST IN THE FUND
This 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
This 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
14
<PAGE>
FUND SUMMARY SM&R GOVERNMENT BOND FUND
--------------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class A-Fund #126
Class B-Fund #226
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Manager:
Gordon D. Dixon
Asst. Portfolio Manager:
Anne M. LeMire
Fund Portfolio
Turnover:
30.87%
Dividend Payment
Schedule:
Monthly
INVESTMENT OBJECTIVE
The SM&R Government Bond Fund (the "Government Bond Fund") seeks to provide as
high a level of current income, liquidity, and safety of principal as is
consistent with prudent investment risks.
PRINCIPAL INVESTMENT STRATEGIES
The Government Bond Fund normally invests at least 65% of its total assets in
securities issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities. These may include Treasuries and mortgage-backed securities,
such as Ginnie Maes (issued by the Government National Mortgage Association),
Freddie Macs (issued by the Federal Home Loan Mortgage Corporation), and Fannie
Maes (issued by the Federal National Mortgage Association). This fund may also
invest assets in collateralized mortgage obligations, or "CMOs," which are debt
obligations collateralized by a portfolio or pool of mortgages, mortgage-backed
securities, or U.S. Government securities.
The Government Bond Fund generally invests primarily in medium and long term
securities. The weighted average portfolio maturity generally is expected to be
in the six to fifteen year range (some securities may have longer or shorter
maturities). The average portfolio maturity may be shorter when management
anticipates that interest rates will increase, and longer when management
anticipates that interest rates will decrease.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government are backed by the full faith and credit of the United States
(such as Ginnie Maes); others, by the agency or instrumentality with limited
rights to borrow from the U.S. Treasury (such as Fannie Maes); and others, only
by the credit of the issuer. No assurance can be given that the U.S. Government
would lend money or otherwise provide financial support to U.S. Government
sponsored instrumentalities; it is not obligated by law to do so.
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Government Bond Fund, or it could
underperform other investments, if any of the following occurs:
- interest rates rise, causing a decline in the market value of debt
securities (interest rate risk). This risk will increase as average
portfolio securities maturities increase (maturity risk).
- the worldwide demand for U.S. government securities falls.
- interest rates fall enough to prompt an unexpected number of people to
refinance (or prepay) their mortgages.
- interest rates rise enough to cause fewer people than expected to repay
their mortgages early if any bonds the fund owns are downgraded in credit
rating or into default.
- issuers of debt obligations could default or be unable to pay amounts due
(credit risk).
WHO MAY WANT TO INVEST IN THE FUND
This fund may be appropriate if you:
- are seeking income to meet current needs
- are willing to accept moderate risk of volatility
- are retired or nearing retirement
This fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require absolute stability of your principal
15
<PAGE>
FUND SUMMARY SM&R TAX FREE FUND
--------------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class A-Fund #128
Class B-Fund #228
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Manager:
Gordon D. Dixon
Asst. Portfolio Manager:
Anne M. LeMire
Fund Portfolio Turnover:
7.61%
Dividend Payment
Schedule:
Monthly
INVESTMENT OBJECTIVE
The SM&R Tax Free Fund (the "Tax Free Fund") seeks to provide as high a level of
interest income largely exempt from federal income taxes as is consistent with
preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Tax Free Fund invests primarily in tax-exempt securities. During normal
market conditions, this fund invests at least 80% of its net assets in municipal
securities that pay interest exempt from federal income taxes. Municipal
securities are obligations issued by or on behalf of states, territories, and
possessions of the U.S. and the District of Columbia and their political
subdivisions, agencies, and instrumentalities. The Tax Free Fund generally
invests in securities rated Baa or better by Moody's or BBB or better by
Standard and Poor's and Fitch.
The weighted average portfolio maturity of the Tax Free Fund generally is
expected to be in the six to fifteen year range (some securities have longer or
shorter maturities). The average portfolio maturity may be shorter when
management anticipates that interest rates will increase, and longer when
management anticipates that interest rates will decrease.
Under normal market conditions up to 20% of the Tax Free Fund's net assets, and
as a temporary defensive measure during abnormal market conditions, up to 50% of
its net assets may be invested in the following types of taxable fixed income
obligations: (1) obligations issued or guaranteed by the U.S. Government, its
agencies, instrumentalities or authorities; (2) corporate debt obligations which
at the date of the investment are rated A or higher by Moody's, S&P, or Fitch;
(3) commercial paper which at the date of the investment is rated in one of the
two top categories by Moody's or S&P, or if not rated, is issued by a company
which at the date of the investment has an outstanding debt issue rated A or
higher by Moody's or S&P; (4) certificates of deposit issued by U.S. banks which
at the date of the investment have capital surplus and undivided profits of $1
billion as of the date of their most recently published financial statements;
and (5) repurchase agreements secured by U.S. Government securities, provided
that no more than 15% of the Tax Free Fund's net assets will be invested in
illiquid securities including repurchase agreements with maturities in excess of
seven days. When temporary defensive measures are employed, the Tax Free Fund
may not achieve its investment objective.
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Tax Free Fund, or it could
underperform other investments, if any of the following occurs:
- interest rates rise (thus causing a decline in the market value of debt
securities). This risk will increase as average portfolio securities
maturities increase (interest rate risk).
- if any bonds the fund owns are downgraded in credit rating or go into
default these bonds may become harder to value or to sell at a fair price
(credit risk).
- if any of the bonds are Baa or BBB rated securities they may be less liquid
and involve somewhat greater risk (liquidity risk).
ALSO, SOME OF YOUR DIVIDEND INCOME MAY BE TAXABLE.
16
<PAGE>
FUND SUMMARY SM&R TAX FREE FUND
--------------------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE FUND
This fund may be appropriate if you:
- are willing to sacrifice some investment return for income exempt from
federal income tax and, under certain conditions, exempt from state and
local taxes
- are in a high tax bracket
- are seeking income to meet current needs
- are willing to accept moderate risk of volatility
This fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- prefer capital gains over ordinary income
17
<PAGE>
FUND SUMMARY SM&R MONEY MARKET FUND
--------------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class A-Fund #620
Class B-Fund #220
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Manager:
John S. Maidlow
Asst. Portfolio Manager:
Anne M. LeMire
Dividend Payment
Schedule:
Monthly
INVESTMENT OBJECTIVE
The SM&R Money Market Fund (the "Money Market Fund") seeks the highest current
income consistent with the stability of principal and maintenance of liquidity.
PRINCIPAL INVESTMENT STRATEGIES
The Money Market Fund seeks to achieve its objective by investing in
high-quality short-term money market instruments, including the following types
of debt obligations: (1) U.S. Government obligations, which are securities
issued or guaranteed by the U.S. Government or by its agencies and
instrumentalities; (2) certificates of deposit, which are negotiable
certificates issued against funds deposited in a commercial bank for a definite
period of time and earning a specified return; (3) banker's acceptances, which
are short-term instruments issued by banks, generally for the purpose of
financing imports or exports; (4) commercial paper, which is short-term
unsecured promissory notes issued by corporations to finance short-term credit
needs; (5) collateralized mortgage obligations, which are debt obligations
collateralized by a portfolio of mortgages, mortgage-backed securities, or U.S.
Government securities; and (6) corporate bonds and notes. This fund limits its
investments to those short-term securities that it determines present minimal
credit risk and meet certain rating requirements (rated in the two highest
short-term rating categories by one or more of the nationally recognized
statistical rating organizations).
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Money Market Fund if any of the
following occurs:
- interest rates rise (thus causing a decline in the market value of debt
securities). This risk will increase as average portfolio securities
maturities increase.
- if any of the fund's investments are downgraded in credit rating or go into
default.
By limiting its investments as described above, this fund may not achieve as
high a level of current income as a fund investing in lower-rated securities.
You should keep in mind that an investment in the Money Market Fund is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. Although the Money Market Fund seeks to preserve the value of
your investment at $1.00 per share, it is possible to lose money by investing in
the Money Market Fund.
WHO MAY WANT TO INVEST IN THE FUND
This fund may be appropriate if you:
- require stability of principal
- are seeking a mutual fund for the cash portion of an asset allocation
program
- need to "park" your money temporarily
- are more concerned with safety of principal than with investment returns
- are investing emergency reserves
This fund may NOT be appropriate if you:
- want federal deposit insurance
- are seeking an investment that is likely to outpace inflation
- are investing for retirement or other goals that are many years in the
future
- are investing for growth or maximum current income
18
<PAGE>
FUND SUMMARY SM&R PRIMARY FUND
--------------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Single Class:
Fund #627
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Manager:
John S. Maidlow
Asst. Portfolio Manager:
Anne M. LeMire
Fund Portfolio Turnover:
18.46%
NASDAQ Symbol:
SMRPX
Dividend Payment
Schedule:
Monthly
INVESTMENT OBJECTIVE
The SM&R Primary Fund (the "Primary Fund") seeks maximum current income
consistent with capital preservation and liquidity.
PRINCIPAL INVESTMENT STRATEGIES
The Primary Fund invests primarily in commercial paper. Commercial paper is
short-term unsecured promissory notes issued by corporations to finance
short-term credit needs. Commercial paper is usually sold on a discount basis
and has a maturity at the time of issuance not exceeding nine months. This fund
will only invest in commercial paper rated in one of the two highest rating
categories by one or more of the nationally recognized statistical rating
organizations.
The Primary Fund, consistent with its investment objective, will attempt to
maximize yield by trying to take advantage of changing conditions and trends. It
may also attempt to take advantage of what are believed to be disparities in
yield relationships between different instruments. This procedure may increase
or decrease the portfolio yield depending upon the Primary Fund's ability to
correctly time and execute such transactions.
The Primary Fund may also invest in:
- U.S. Government obligations;
- corporate debt obligations maturing in five years or less and rated "A" or
higher;
- certificates of deposit generally maturing in 3 years or less; and
- repurchase agreements.
The weighted average portfolio maturity generally is expected to be in a range
of two to five years (some securities may be shorter or longer maturities). The
average portfolio maturity will likely be shorter when management anticipates
that interest rates will increase and longer when interest rate are expected to
decrease.
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Primary Fund, or it could
underperform other investments, if any of the following occurs:
- interest rates rise, causing a decline in the market value of debt
securities (interest rate risk). This risk will increase as average
portfolio securities maturities increase (maturity risk).
- if any of the fund's investments are downgraded in credit rating or go into
default.
By limiting its investments as described above, the Primary Fund may not achieve
as high a level of current income as a fund investing in lower-rated securities
or longer-term securities.
WHO MAY WANT TO INVEST IN THE FUND
This fund may be appropriate if you:
- are seeking income to meet current needs
- are willing to accept moderate risk of volatility
- are more concerned with safety of principal than with investment returns
- are retired or nearing retirement
This fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- are investing for goals that are many years in the future
- prefer capital gains over ordinary income
19
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
PERFORMANCE
The bar charts and average annual total return tables shown below provide some
indication of the risks of investing in the funds (other than the SM&R Alger
Funds*) and the difference in returns for such funds by:
- showing performance since inception and
- showing how average annual returns compare to those of a broad measure of
market performance.
*The SM&R Alger Funds were not in existence during the Fund's fiscal year ending
August 31, 2000.
SPECIAL MATTER AFFECTING THE GROWTH FUND, EQUITY INCOME FUND AND BALANCED FUND
Such funds, which commenced operations on December 31, 2000, are "clones" of and
successors to the SM&R Growth Fund, Inc., SM&R Equity Income Fund, Inc., and
SM&R Balanced Fund, Inc. (the "Predecessor Funds"). Accordingly, performance
information for periods prior to December 31, 2000 is given for such Predecessor
Funds.
PERFORMANCE OF THE PREDECESSOR FUNDS IS
NO GUARANTEE OF THE FUTURE PERFORMANCE
OF THE NEW "CLONE" FUNDS.
SPECIAL MATTER AFFECTING ONLY THE GROWTH FUND
Prior to the Growth Fund's succession to the business of SM&R Growth
Fund, Inc., SM&R Growth Fund, Inc.'s shareholders approved a new investment
advisory agreement eliminating a performance fee adjustment component.
Accordingly, keep in mind when reviewing the performance information for the
Growth Fund that such information is for periods prior to elimination of such
performance fee adjustment. Such performance would have been less if the
performance fee adjustment had not been in effect. The future impact of
eliminating the performance fee adjustment cannot be determined.
SPECIAL MATTERS AFFECTING THE MONEY MARKET FUND
Note that the Money Market Fund adopted a multiple-class plan and 12b-1 plan
effective December 31, 2000. The performance information shown below for the
Money Market Fund relates to performance prior to such date. If the 12b-1 plan
had been in effect, the Money Market Fund's performance would have been
diminished.
These bar charts include the effects of fund expenses, but not sales charges and
account fees. The returns shown would be lower if such sales charges were
included.
PRIOR PERFORMANCE
The performance information shown for the Growth Fund, Equity Income Fund,
Balanced Fund, Government Bond Fund and Tax Free Fund starts on January 1, 1999,
the inception date of multiple classes for such funds. If you are interested in
performance information for such funds prior to such dates see Appendix A to the
Fund's Statement of Additional Information, which as indicated below, is
available free, upon request. In reviewing such Appendix A, which contains
performance information for the Funds' Class T (not available in this
prospectus), keep in mind that Class T is not subject to 12b-1 expenses.
Accordingly, the performance of Class T will be greater than Class A and
Class B which are subject to 12b-1 expenses.
PAST PERFORMANCE IS NOT NECESSARILY
AN INDICATION OF HOW THE FUNDS
WILL PERFORM IN THE FUTURE.
20
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
GROWTH FUND
As indicated above, the Growth Fund commenced operations on December 31, 2000.
Accordingly, the following bar chart shows the annual total return (%) for SM&R
Growth Fund, Inc., the Growth Fund's Predecessor Fund, for the last calendar
year.
TOTAL RETURN FOR CLASS A SHARES (%)
(PREDECESSOR FUND)
For Period 1/1/99-12/31/99
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1999 23.45%
</TABLE>
The Growth Fund's fiscal year ends on August 31st. Its Predecessor Fund's
unannualized return (Class A) for the period from January 1, 2000 through
September 30, 2000 is 1.97%.
CLASS A (PREDECESSOR FUND)
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: Dec. 31, 1999 18.25%
Worst Quarter: Sept. 30, 1999 (5.56)%
</TABLE>
The next table lists the Growth Fund's Predecessor Fund's average annual total
returns by class since inception of class (1/1/99), and the return of the
S&P 500-Registered Trademark- index and Lipper Growth Fund Index for the same
period. This table is intended to provide you with some indication of the risks
of investing in the Growth Fund. At the bottom of the table you can compare this
performance with the S&P 500-Registered Trademark- and Lipper Growth Fund Index.
The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices.
Standard & Poor's, S&P, and S&P 500-Registered Trademark-are registered
trademarks of Standard & Poor's Corporation. The Lipper Growth Fund Index is a
widely recognized, equally weighted performance index (adjusted for capital
gains distributions and income dividends) of the 30 largest open-end funds which
invest in companies whose long term earnings are expected to grow significantly
faster than the earnings of the stock represented in the major unmanaged stock
indices.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ending 12/31/99)
<TABLE>
<CAPTION>
SINCE
INCEPTION OF
CLASS (1/1/99)
<S> <C>
Class A (Predecessor Fund) 17.27%
Class B (Predecessor Fund) 15.93%
S&P 500-Registered Trademark- 21.03%
Lipper Growth Fund Index 50.93%
</TABLE>
21
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
EQUITY INCOME FUND
As indicated above, the Equity Income Fund commenced operations on December 31,
2000. Accordingly, the following bar chart shows the annual total return (%) for
SM&R Equity Income Fund, Inc., the Equity Income Fund's Predecessor Fund, for
the last calendar year.
TOTAL RETURN FOR CLASS A SHARES (%)
(PREDECESSOR FUND)
For Period 1/1/99-12/31/99
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1999 (3.01)%
</TABLE>
The Equity Income Fund's fiscal year ends on August 31st. Its Predecessor Fund's
unannualized return (Class A) for the period from January 1, 2000 through
September 30, 2000 is 7.49%.
CLASS A (PREDECESSOR FUND)
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: June 30, 1999 9.03%
Worst Quarter: Sept. 30, 1999 (8.98)%
</TABLE>
The next table lists the Equity Income Fund's Predecessor Fund's average annual
total returns by class since inception of class (1/1/99), and the return of the
S&P 500-Registered Trademark- and the Lipper Equity Income Fund Index for the
same period. This table is intended to provide you with some indication of the
risks of investing in the Equity Income Fund. At the bottom of the table you can
compare this performance with the S&P 500-Registered Trademark- and the Lipper
Equity Income Fund Index. The S&P 500-Registered Trademark- is the Standard &
Poor's Composite Index of 500 Stocks, a widely recognized, unmanaged index of
common stock prices. Standard & Poor's, S&P, and S&P 500-Registered Trademark-
are registered trademarks of Standard & Poor's Corporation. The Lipper Equity
Income Fund Index is a widely recognized, equally weighted performance index
(adjusted for capital gains distributions and income dividends) of the 10
largest open-end funds which seek relatively high current income and growth of
income through investing 60% or more of their portfolio in equities.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ending 12/31/99)
<TABLE>
<CAPTION>
SINCE
INCEPTION OF
CLASS (1/1/99)
<S> <C>
Class A (Predecessor Fund) (7.84)%
Class B (Predecessor Fund) (9.60)%
S&P 500-Registered Trademark- 21.03%
Lipper Equity Income Fund Index 4.20%
</TABLE>
22
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
BALANCED FUND
As indicated above, the Balanced Fund commenced operations on December 31, 2000.
Accordingly, the following bar chart shows the annual total return (%) for SM&R
Balanced Fund, Inc., the Balanced Fund's Predecessor Fund, for the last calendar
year.
TOTAL RETURN FOR CLASS A SHARES (%)
(PREDECESSOR FUND)
For Period 1/1/99-12/31/99
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1999 10.13%
</TABLE>
The Balanced Fund's fiscal year ends on August 31st. Its Predecessor Fund's
unannualized return (Class A) for the period from January 1, 2000 through
September 30, 2000 is 7.20%.
CLASS A (PREDECESSOR FUND)
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: Dec. 31, 1999 10.01%
Worst Quarter: Sept. 30, 1999 (2.76)%
</TABLE>
The next table lists the Balanced Fund's Predecessor Fund's average annual total
returns by class since inception of class (1/1/99), and the return of the Lipper
Balanced Fund Index for the same period. This table is intended to provide you
with some indication of the risks of investing in the Balanced Fund. At the
bottom of the table you can compare this performance with the Lipper Balanced
Fund Index. The Lipper Balanced Fund Index is a widely recognized, equally
weighted performance index (adjusted for capital gains distributions and income
dividends) of the 30 largest open-end funds whose primary objective is to
conserve principal by maintaining a balanced portfolio of stocks and bonds. The
stock/bond ratio typically ranges around 60%/40%.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ending 12/31/99)
<TABLE>
<CAPTION>
SINCE
INCEPTION OF
CLASS (1/1/99)
<S> <C>
Class A (Predecessor Fund) 4.64%
Class B (Predecessor Fund) 5.97%
S&P 500-Registered Trademark- 21.03%
Lehman Brothers Intermediate Government/Corporate
Index 0.38%
Lipper Balanced Fund Index 8.96%
</TABLE>
23
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
GOVERNMENT BOND FUND
The following bar chart for Class A (inception of class 1/1/99) shows the annual
total return (%) for such class of the Government Bond Fund for the last
calendar year.
TOTAL RETURN FOR CLASS A SHARES (%)
For Period 1/1/99-12/31/99
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1999 (0.34)%
</TABLE>
The Government Bond Fund's fiscal year ends on August 31st. The Government Bond
Fund's unannualized return (Class A) for the period from January 1, 2000 through
September 30, 2000 is 5.26%.
CLASS A (INCEPTION OF CLASS 1/1/99)
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: Sept. 30, 2000 3.00%
Worst Quarter: June 30, 1999 (0.90)%
</TABLE>
The next table lists the Government Bond Fund's average annual total returns by
class since inception (1/1/99), and the return of the Lehman Brothers
Government/Mortgage-Backed Securities Index for the same period. This table is
intended to provide you with some indication of the risks of investing in the
Government Bond Fund. At the bottom of the table you can compare this
performance with the Lehman Brothers Government/Mortgage-Backed Securities
Index. This index includes all public obligations of the U.S. treasury and all
publicly issued debt of U.S. Government agencies, quasi-federal corporations and
corporate debt guaranteed by the U.S. Government as well as 15 and 30 year fixed
rate securities backed by mortgage pools of the GNMA, FHLMA, and FNMA.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ending 12/31/99)
<TABLE>
<CAPTION>
SINCE
INCEPTION OF
CLASS (1/1/99)
<S> <C>
Class A (5.08)%
Class B (3.67)%
Lehman Brothers Government/Mortgage-Backed
Securities Index %
</TABLE>
24
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
TAX FREE FUND
The following bar chart for Class A (inception of class 1/1/99) shows the annual
total return (%) for such class of the Tax Free Fund for the last calendar year.
TOTAL RETURN FOR CLASS A SHARES (%)
For Period 1/1/99-12/31/99
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1999 (3.50)%
</TABLE>
The Tax Free Fund's fiscal year ends on August 31st. The Tax Free Fund's
unannualized return (Class A) for the period from January 1, 2000 through
September 30, 2000 is 6.45%.
CLASS A (INCEPTION OF CLASS 1/1/99)
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: March 31, 2000 3.20%
Worst Quarter: June 30, 1999 (2.16)%
</TABLE>
The next table lists the Tax Free Fund's average annual total return by class
since inception (1/1/99), and the return of the Lehman Brothers Municipal Index
for the same period. This table is intended to provide you with some indication
of the risks of investing in the fund. At the bottom of the table you can
compare this performance with the Lehman Brothers Municipal Index. This is an
index of investment grade tax exempt bonds classified into four major sections:
General Obligations, Revenue, Insured and Preferred.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ending 12/31/99)
<TABLE>
<CAPTION>
SINCE
INCEPTION OF
CLASS (1/1/99)
<S> <C>
Class A (8.06)%
Class B (6.99)%
Lehman Brothers Municipal Index (2.06)%
</TABLE>
25
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
MONEY MARKET FUND
The following bar chart shows the annual total return (%) for the Money Market
Fund since inception (1/1/99). As noted above, such information is for periods
prior to the Money Market Fund's adoption, effective December 31, 2000, of a
multiple class plan and a 12b-1 plan.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1999 4.61%
</TABLE>
The Money Market Fund's fiscal year ends on August 31st. The Money Market Fund's
annualized return (prior to adoption of multiple class plan and 12b-1 plan) for
the period from January 1, 2000 through September 30, 2000 is 4.36%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: Sept. 30, 2000 1.52%
Worst Quarter: March 31, 1999 1.01%
</TABLE>
As indicated above, Classes A and B have not been in existence for a full
calendar year. Accordingly, annual total returns for those classes cannot be
provided. Instead, the following table reflects the annual total return for the
Money Market Fund's "single-class" shares which existed prior to the Money
Market Fund's adoption of a multi-class plan and 12b-1 plan and includes only
such "single-class" shares' fees and expenses. If Class B had been in existence
for a full calendar year, the financial performance for such Class B would have
been lower because of different fees and expenses resulting from the imposition
of 12b-1 fees on such Class B. This table is intended to provide you with some
indication of the risks of investing in the Money Market Fund. At the bottom of
the table you can compare this performance with the Lipper Money Market Fund
Index. The Lipper Money Market Fund Index is a widely recognized performance
index of high quality financial instruments rated in top two grades with dollar
weighted average maturities of less than 90 days that intend to keep constant
net asset value.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ending 12/31/99)
<TABLE>
<CAPTION>
SINCE
INCEPTION OF
CLASS (1/1/99)
<S> <C>
Money Market Fund ("single-class") 4.61%
</TABLE>
26
<PAGE>
PERFORMANCE
--------------------------------------------------------------------------
PRIMARY FUND
The following bar chart shows the annual total returns (%) for the Primary Fund
for each calendar year since inception (3/16/92).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 2.48%
1994 3.58%
1995 5.26%
1996 4.92%
1997 5.08%
1998 5.13%
1999 3.77%
</TABLE>
The Primary Fund's fiscal year ends on August 31st. The Primary Fund's
unannualized return for the period from January 1, 2000 through September 30,
2000 is 4.43%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: Sept. 30, 2000 1.49%
Worst Quarter: Dec. 31, 1999 0.31%
</TABLE>
The next table lists the Primary Fund's average annual total return for the past
one and five years and since inception, and the returns of the Lehman
Government/Corporate Index for the same periods. This table is intended to
provide you with some indication of the risks of investing in the Primary Fund.
At the bottom of the table you can compare this performance with the Lehman
Government/Corporate Index. This index represents all public obligations of the
U.S. Treasury as well as all publicly issued debt of U.S. Government agencies
with maturities of one to three years.
AVERAGE ANNUAL TOTAL RETURN
(for the period ending 12/31/99)
<TABLE>
<CAPTION>
SINCE
PAST PAST INCEPTION
1 YEAR 5 YEARS 3/16/92
<S> <C> <C> <C>
Primary Fund 3.77% 4.83% 4.19%
Lehman Government/Corporate Index 3.15% 6.55% 5.79%
</TABLE>
27
<PAGE>
EXPENSES OF THE FUNDS
--------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM DEFERRED MAXIMUM
SALES CHARGE SALES CHARGE ACCOUNT FEES
IMPOSED ON (AS A PERCENTAGE WIRE (CUSTODIAN FEE
PURCHASES OF THE LESSER OF REDEMPTION APPLICABLE TO
(AS A PERCENTAGE THE OFFERING PRICE FEES TAX DEFERRED
OF OFFERING OR REDEMPTION ON REDEMPTIONS EXCHANGE ACCOUNTS
PRICE) VALUE) LESS THAN $10,000 FEES ONLY)
<S> <C> <C> <C> <C> <C>
SM&R EQUITY FUNDS:
Growth Fund
Class A 5.00%(1) (3) $10.00 NONE $7.50
Class B NONE 5.00%(5) $10.00 NONE $7.50
Alger Growth Fund
Class A 5.00%(1) (3) $10.00 NONE $7.50
Class B NONE 5.00%(5) $10.00 NONE $7.50
Alger Aggressive Growth
Fund
Class A 5.00%(1) (3) $10.00 NONE $7.50
Class B NONE 5.00%(5) $10.00 NONE $7.50
Equity Income Fund
Class A 5.00%(1) (3) $10.00 NONE $7.50
Class B NONE 5.00%(5) $10.00 NONE $7.50
Balanced Fund
Class A 5.00%(1) (3) $10.00 NONE $7.50
Class B NONE 5.00%(5) $10.00 NONE $7.50
Alger Small-Cap Fund
Class A 5.00%(1) (3) $10.00 NONE $7.50
Class B NONE 5.00%(5) $10.00 NONE $7.50
Alger Technology Fund
Class A 5.00%(1) (3) $10.00 NONE $7.50
Class B NONE 5.00%(5) $10.00 NONE $7.50
SM&R FIXED INCOME FUNDS:
Government Bond Fund
Class A 4.75%(2) (3) $10.00 NONE $7.50
Class B NONE 3.00%(4) $10.00 NONE $7.50
Tax Free Fund
Class A 4.75%(2) (3) $10.00 NONE $7.50
Class B NONE 3.00%(4) $10.00 NONE $7.50
Money Market Fund
Class A NONE NONE $10.00 NONE $7.50
Class B NONE NONE $10.00 NONE $7.50
Primary Fund NONE NONE $10.00 NONE $7.50
</TABLE>
28
<PAGE>
EXPENSES OF THE FUNDS
--------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from fund assets)(6)
<TABLE>
<CAPTION>
TOTAL ANNUAL
DISTRIBUTION AND/OR FUND
MANAGEMENT SERVICE (12B-1) OTHER OPERATING
FEES FEES EXPENSES(7) EXPENSES(8)
<S> <C> <C> <C> <C>
SM&R EQUITY FUNDS:
Growth Fund
Class A 0.48% 0.25% 0.48% 1.21%
Class B 0.48% 0.75% 0.59% 1.82%
Alger Growth Fund
Class A 0.85% 0.35% 0.45% 1.65%
Class B 0.85% 1.00% 0.46% 2.31%
Alger Aggressive Growth Fund
Class A 1.05% 0.35% 0.42% 1.82%
Class B 1.05% 1.00% 0.40% 2.45%
Equity Income Fund
Class A 0.71% 0.25% 0.46% 1.42%
Class B 0.71% 0.75% 0.49% 1.95%
Balanced Fund
Class A 0.49% 0.25% 0.76% 1.50%
Class B 0.62% 0.75% 0.63% 2.00%
Alger Small-Cap Fund
Class A 1.00% 0.35% 0.47% 1.82%
Class B 1.00% 1.00% 0.42% 2.42%
Alger Technology Fund
Class A 1.35% 0.35% 0.40% 2.10%
Class B 1.35% 1.00% 0.40% 2.75%
SM&R FIXED INCOME FUNDS:
Government Bond Fund
Class A 0.50% 0.25% 0.54% 1.29%
Class B 0.50% 0.75% 0.59% 1.84%
Tax Free Fund
Class A 0.50% 0.25% 0.60% 1.35%
Class B 0.50% 0.75% 0.62% 1.87%
Money Market Fund
Class A 0.23% -- 0.26% 0.49%
Class B 0.25% 0.50% 0.25% 1.00%
Primary Fund 0.50% -- 0.54% 1.04%
</TABLE>
29
<PAGE>
EXPENSES OF THE FUNDS
--------------------------------------------------------------------------
FOOTNOTES TO FEES AND EXPENSES
(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 $250,000
but less than $500,000; 1.50% on initial investments of at least $500,000
but less than $1 million; and zero on initial investments of $1 million or
more.
(2) You pay a sales charge of 4.75% on initial investments in Class A shares
of less than $50,000. You pay a reduced sales charge at certain
breakpoints, as follows: 4.50% on initial investments of at least $50,000
but less than $100,000; 3.50% on initial investments of at least $100,000
but less than $250,000; 2.50% on initial investments of at least $250,000
but less than $500,000; 1.50% on initial investments of at least $500,000
but less than $1 million; and zero on initial investments of $1 million or
more.
(3) Purchases of $1 million or more of Class A shares may be made without an
initial sales charge. Redemptions of such shares within the first thirteen
months after purchase, however, will be subject to a contingent deferred
sales charge of 1.00%.
(4) The maximum 3.00% contingent deferred sales charge on Class B shares
applies to redemptions during the first year after purchase. The charge
declines to 2.00% during the second year, 1.00% during the third year, and
zero during the fourth year and thereafter.
(5) 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.
(6) The "Management Fees" and "Other Expenses" shown for the Growth Fund,
Equity Income Fund, and Balanced Fund are for the six month period ended
June 30, 2000; for the Alger Growth Fund, Alger Aggressive Growth Fund,
Alger Small-Cap Fund, and Alger Technology Fund are based on estimated
amounts for the current fiscal year; and for the Government Bond Fund,
Primary Fund, Tax Free Fund and Money Market Fund Class A are for the
fiscal year ended August 31, 2000. Money Market Fund Class B is estimated
for current fiscal year.
(7) These expenses include administrative services fees, audit fees, directors
fees, shareholder reporting and miscellaneous expenses. For the Growth
Fund, Equity Income Fund, Balanced Fund, and the SM&R Alger Funds, "other
expenses" are based on estimates for the current fiscal year.
(8) The Fund's manager, Securities Management and Research, Inc. ("SM&R"), has
contractually agreed to reimburse the Growth Fund, Equity Income Fund,
Balanced Fund, Government Bond Fund, Tax Free Fund, Money Market Fund, and
the Primary Fund regular operating expenses in excess of 1.25% (0.50% for
the Money Market Fund) per year of such funds' average daily net assets.
Regular operating expenses include the advisory fee and administrative fee
but do not include the 12b-1 fee or class-specific expenses. The Fee Table
does not reflect fees waived or expenses assumed by SM&R on a voluntary
basis. During the fiscal year ended August 31, 2000, SM&R voluntarily
waived fees of 0.04% and 0.09% for the Government Bond Fund Class A and
Class B, respectively, 0.24% for the Primary Fund and 0.35% and 0.37% for
the Tax Free Fund Class A and Class B, respectively. Refer to
"Reimbursements and Waivers" on page 42 of this prospectus for details.
30
<PAGE>
EXPENSES OF THE FUNDS
--------------------------------------------------------------------------
EXPENSES
The tables below show the total expenses you would pay on a $10,000 investment
over one, three-, five-, and ten-year periods. These examples are intended to
help you compare the cost of investing in the funds with the cost of investing
in other mutual funds and are for illustration only. These examples also 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 FUND EXPENSES:
<TABLE>
<CAPTION>
ASSUMING REDEMPTION ASSUMING NO REDEMPTION
AT END OF PERIOD AT END OF PERIOD
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SM&R EQUITY FUNDS:
Growth Fund(1)
Class A $617 $ 865 $1,132 $1,893 $617 $ 865 $1,132 $1,893
Class B 685 873 1,085 1,977 185 573 985 1,977
Alger Growth Fund(2)
Class A 659 994 -- -- 659 994 -- --
Class B 734 1,021 -- -- 234 721 -- --
Alger Aggressive Growth
Fund(2)
Class A 676 1,044 -- -- 676 1,044 -- --
Class B 748 1,064 -- -- 248 764 -- --
Equity Income Fund(1)
Class A 637 927 1,238 2,117 637 927 1,238 2,117
Class B 698 912 1,152 2,158 198 612 1,052 2,138
Balanced Fund(1)
Class A 645 950 1,278 2,201 645 950 1,278 2,201
Class B 703 927 1,178 2,199 203 627 1,078 2,199
Alger Small-Cap Fund(2)
Class A 676 1,044 -- -- 676 1,044 -- --
Class B 745 1,055 -- -- 245 755 -- --
Alger Technology
Fund(2)
Class A 702 1,125 -- -- 702 1,125 -- --
Class B 778 1,153 -- -- 278 853 -- --
SM&R FIXED INCOME FUNDS:
Government Bond Fund
Class A 600 865 1,149 1,958 600 865 1,149 1,958
Class B 487 679 996 2,015 187 579 996 2,015
Tax Free Fund
Class A 606 882 1,179 2,022 606 882 1,179 2,022
Class B 490 688 1,011 2,055 190 588 1,011 2,055
Money Market Fund
Class A 50 157 274 616 50 157 274 616
Class B 102 318 552 1,225 102 318 552 1,225
Primary Fund 106 331 574 1,271 106 331 574 1,271
</TABLE>
(1) These funds began operations as series of the Fund on December 31, 2000.
However, because these funds are "clones" of and successors to the
"stand-alone" Predecessor Funds which operated prior to such time, expenses
are shown for the Predecessor Funds for one, three, five and ten year
periods.
(2) Because these funds began operations on September 1, 2000, expenses are
only shown for one and three year periods.
31
<PAGE>
ADDITIONAL EXPLANATION OF RISK FACTORS
--------------------------------------------------------------------------
COMMON RISK FACTORS
OF THE SM&R FUNDS
Please remember that mutual fund shares 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 fund could fluctuate in value
over time and could result in a loss of money.
--------------------------------------------------------
RISK FACTORS SPECIFIC TO ONE OR MORE
OF THE SM&R FUNDS
IMPORTANT
The following factors may affect the value of your investment in one or more
of the SM&R 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 a fund's net
asset value per share, which will fluctuate as the values of such fund's
portfolio securities change. You can lose money by investing in the 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 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 FUNDS.
INVESTMENT STYLE OR MANAGEMENT RISK
Investment style or management risk is the risk that the investment strategy
of the SM&R funds' investment adviser or 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 adviser or
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 FUNDS.
CREDIT RISK
Credit risk is the risk that the issuer of a security, or a party to a
contract, will default or otherwise not honor a financial obligation. THIS
RISK APPLIES TO ALL OF THE FUNDS, BUT MAY HAVE A GREATER IMPACT ON THE
BALANCED FUND, EQUITY INCOME FUND, TAX FREE FUND, PRIMARY FUND, AND MONEY
MARKET Fund. The Growth Fund is permitted to invest in "junk" bonds. Junk
bonds have additional risks, including limitations on the Growth Fund's
ability to resell the lower-rated debt securities and less readily available
market quotations for such securities.
INTEREST RATE RISK
Interest rate risk is the risk that the market value of an income-bearing
investment will decline due to changes in prevailing interest rates. With
fixed-rate securities, a rise in interest rates typically causes a decline in
market values. THIS RISK APPLIES TO ALL OF THE FUNDS, BUT MAY HAVE A GREATER
IMPACT ON THE GOVERNMENT BOND FUND, TAX FREE FUND, MONEY MARKET FUND, PRIMARY
FUND (COLLECTIVELY THE "SM&R FIXED INCOME FUNDS"), BALANCED FUND, AND EQUITY
INCOME FUND.
32
<PAGE>
ADDITIONAL EXPLANATION OF RISK FACTORS
--------------------------------------------------------------------------
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 THE
GROWTH FUND, ALGER GROWTH FUND, ALGER AGGRESSIVE GROWTH FUND, EQUITY INCOME
FUND, BALANCED FUND, ALGER SMALL-CAP FUND, AND ALGER TECHNOLOGY FUND
(COLLECTIVELY THE "SM&R EQUITY FUNDS").
LIQUIDITY RISK
Liquidity risk is the risk that certain securities or other investments may
be difficult or impossible to sell at the time the fund would like to sell
them or at the price the fund values them. The fund may have to sell at a
lower price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance. THIS RISK APPLIES PRIMARILY TO THE SM&R EQUITY FUNDS, TAX FREE
FUND, PRIMARY FUND, AND MONEY MARKET FUND.
CALL RISK
Call risk is the risk that an unexpected fall in prevailing interest rates
will shorten the life of an outstanding obligation by increasing the actual
or expected number of prepayments, thereby reducing the obligation's value.
THIS RISK APPLIES PRIMARILY TO THE BALANCED FUND AND THE TAX FREE FUND.
MATURITY RISK
Maturity risk is the risk that if the general level of interest rates rises
subsequent to the time an investment commitment is made in a fixed-income
security or portfolio, the market price of that security or portfolio will
decline until its yield becomes competitive with new, higher interest rate
securities. It is virtually certain that fluctuations in the general level of
interest rates cause long-term maturity bonds to fluctuate more in price than
shorter-term bonds. As the maturity increases, the price discount is being
amortized over an increasing number of years. Therefore, in order for the
discount to produce say an extra 1 percent per annum; it must be
progressively larger in dollar amounts as maturity increases. Long maturity
increases risk not only because of the interest rate factor but also because
it increases the time available for unexpected occurrences. THIS RISK APPLIES
PRIMARILY TO THE BALANCED FUND, PRIMARY FUND, THE GOVERNMENT BOND FUND, THE
MONEY MARKET FUND, AND THE EQUITY INCOME FUND.
LEVERAGE RISK
Leveraging practices may make the Alger Aggressive Growth Fund and the 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
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. RISKS ASSOCIATED
WITH CONVERTIBLE SECURITIES APPLY TO THE GROWTH FUND, EQUITY INCOME FUND,
ALGER GROWTH FUND, ALGER AGGRESSIVE GROWTH FUND, BALANCED FUND, ALGER
SMALL-CAP FUND AND ALGER TECHNOLOGY FUND.
PREFERRED STOCKS
Because preferred 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. RISKS ASSOCIATED WITH PREFERRED STOCKS APPLY PRIMARILY TO THE
GROWTH FUND, ALGER GROWTH FUND, ALGER AGGRESSIVE GROWTH FUND, EQUITY INCOME
FUND, ALGER SMALL-CAP FUND, AND ALGER TECHNOLOGY FUND.
33
<PAGE>
ADDITIONAL EXPLANATION OF RISK FACTORS
--------------------------------------------------------------------------
PREPAYMENT AND EXTENSION RISK
Prepayment risk is the risk that an unexpected fall in prevailing interest
rates will shorten the life of an outstanding mortgage-backed security by
increasing the actual or expected number of mortgage prepayments, thereby
reducing the security's value. EXTENSION RISK is the risk that an unexpected
rise in prevailing interest rates will extend the life of an outstanding
mortgage-backed security by reducing the actual or expected number of
mortgage prepayments, thereby reducing the security's value. THESE RISKS
APPLY PRIMARILY TO THE GOVERNMENT BOND FUND.
SMALLER COMPANY RISKS
Smaller companies in which some of the funds may invest may involve greater
risks than large established companies. Such smaller companies may have
limited product lines, markets, financial resources, and management depth.
Their securities may trade less frequently and in more limited volume than
the securities of larger or more established companies. Smaller companies may
also be more vulnerable than larger companies to adverse business or market
developments. As a result, the prices of smaller companies may fluctuate to a
greater degree than the prices of securities of larger companies. THIS RISK
APPLIES TO THE GROWTH FUND, BALANCED FUND, EQUITY INCOME FUND, ALGER
AGGRESSIVE GROWTH FUND, AND ALGER SMALL-CAP FUND.
REPURCHASE AGREEMENT RISK
In a repurchase agreement, a fund buys a security and simultaneously sells it
to the vendor for delivery at a future date. These agreements are used
primarily for cash purposes. A fund entering into a repurchase agreement may
lose money if the other party to the transaction fails to pay the resale
price on the delivery date. Such a default may delay or prevent the fund from
disposing of the underlying securities. The value of the underlying
securities may go down during the period in which the fund seeks to dispose
of them. Also, the fund may incur expenses while trying to sell the
underlying securities. Finally, the fund risks losing all or a part of the
income from the agreement. THIS RISK APPLIES PRIMARILY TO THE TAX FREE FUND
AND THE PRIMARY FUND.
OTHER RISKS
Each investor will be subject to all the risks normally attendant to business
operations, changes in general economic conditions, governmental rules and
fiscal policies, acts of God, and other factors beyond the control of the
funds management.
SM&R EQUITY FUNDS'
TEMPORARY DEFENSIVE MEASURES
During unfavorable market conditions, each of the SM&R Equity Funds may, but
is not required to, make temporary investments that are not consistent with
such fund's investment objectives and principal strategies. Such defensive
measures may include increasing cash, investing more assets in bonds,
repurchase agreements, or money market instruments, and where permitted by
this prospectus and the statement of additional information, investing in
derivatives or other instruments. If a fund takes such defensive measures, it
may not achieve its investment objectives.
Other securities that each of such funds may invest in are discussed in the
Fund's Statement of Additional Information (see back cover).
SM&R Investments, Inc. offers eleven separate funds in this prospectus. One of
such funds, the Primary Fund, is a single-class fund. The other ten of such
funds offer two different retail share classes, each with 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 fund with multiple
classes, you should also select a share class of such fund 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.
EQUITY FUNDS AND FIXED INCOME FUNDS (EXCLUDING MONEY MARKET AND PRIMARY FUNDS)
<TABLE>
<CAPTION>
CLASS A CLASS B
(FRONT-END LOAD) (BACK-END LOAD)
<S> <C> <C>
Front-End Sales Charge -Front-end sales charges, as described -No front-end sales charge; all your
below. There are several ways to reduce money goes to work for you right away
these charges, also described below.
Annual Expenses -Lower annual expenses than Class B -Higher annual expenses than Class A
shares shares
</TABLE>
34
<PAGE>
CHOOSING A SHARE CLASS THAT BEST SUITS YOU
--------------------------------------------------------------------------
<TABLE>
Deferred Sales Charge $1 million and over, on which there is sales charge on any shares of the SM&R
no "front-end" load, a contingent Equity Funds you sell within five
deferred sales charge on any of such (5) years of purchase, as described
shares you sell within thirteen months below
of purchase as described below. -A contingent deferred sales charge on
any shares of the SM&R Fixed Income
Funds you sell within three (3) years
of purchase, as described below
<CAPTION>
CLASS A CLASS B
(FRONT-END LOAD) (BACK-END LOAD)
Contingent -On shares purchases of -A contingent deferred
<S> <C> <C>
12b-1 Fee -12b-1 fee of 0.25% of average net -12b-1 fee of 0.75% of average net
assets for the Growth Fund, Equity assets for the Growth Fund, Equity
Income Fund, Balanced Fund, Government Income Fund, Balanced Fund, Government
Bond Fund and Tax Free Fund Bond Fund and Tax Free Fund
-12b-1 fee of 0.35% of average net -12b-1 fee of 1.0% of average net
assets for Alger Growth Fund, Alger assets for Alger Growth Fund, Alger
Aggressive Growth Fund, Alger Small-Cap Aggressive Growth Fund, Alger Small-Cap
Fund and Alger Technology Fund Fund and Alger Technology Fund
Conversion of Shares -Class B shares of the Equity and Fixed
Income funds are automatically
converted to Class A shares after
eight (8) years, thus reducing future
annual expenses.
Maximum Purchase Amounts -Purchase amounts for Class B shares are
limited to amounts less than $500,000
Appropriateness -Generally more appropriate for -Class B shares with a "back-end" load
long-term investors are generally appropriate for investors
who may be averse to an up-front sales
charge and are willing to pay
<CAPTION>
CLASS A CLASS B
(FRONT-END LOAD) (BACK-END LOAD)
<S> <C> <C>
</TABLE>
MONEY MARKET FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
<C> <S> <C>
Front-End Sales Charge -None -None
Annual Expenses -Lower annual expenses than Class B -Higher annual expenses than Class A
shares shares
12b-1 Fee -12b-1 fee of 0.50% of average net
assets
Conversion of Shares -Class B shares automatically convert to
Class A shares after eight (8) years,
thus reducing future annual expenses.
Method of Purchase -Direct Investments -Exchange from existing Class B Equity
and Fixed Income Funds only
</TABLE>
(All classes may not be available in all states)
FOR EXPENSES OF CLASS A AND B SHARES, SEE THE FEES AND EXPENSES OF THE FUNDS
EARLIER IN THIS PROSPECTUS.
The Primary Fund consists of a single class of shares offered at net asset value
and does not impose any sales charges or distribution and service (12b-1) fees.
35
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
--------------------------------------------------------------------------
CLASS A SALES CHARGES
- GROWTH FUND, ALGER GROWTH FUND, ALGER AGGRESSIVE GROWTH FUND, EQUITY INCOME
FUND, BALANCED FUND, ALGER SMALL-CAP FUND, OR ALGER TECHNOLOGY FUND -- If you
select Class A shares of these funds, you pay a "front-end" sales charge of up
to 5.00%. The sales charge is a percentage of the offering price, as shown in
the following table:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGES
AS A % OF AS A % OF
AMOUNT INVESTED OFFERING PRICE NET AMOUNT INVESTED
<S> <C> <C>
Less than $50,000 5.00% 5.3%
$50,000 but less than $100,000 4.5% 4.7%
$100,000 but less than $250,000 3.5% 3.6%
$250,000 but less than $500,000 2.5% 2.6%
$500,000 but less than $1,000,000 1.5% 1.5%
$1,000,000 and over See below None
</TABLE>
- GOVERNMENT BOND FUND OR TAX FREE FUND -- If you select Class A shares of these
funds, you pay a "front-end" sales charge of up to 4.75%. The sales charge is
a percentage of the offering price, as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGES
AS A % OF AS A % OF
AMOUNT INVESTED OFFERING PRICE NET AMOUNT INVESTED
<S> <C> <C>
Less than $50,000 4.75% 4.9%
$50,000 but less than $100,000 4.5% 4.7%
$100,000 but less than $250,000 3.5% 3.6%
$250,000 but less than $500,000 2.5% 2.6%
$500,000 but less than $1,000,000 1.5% 1.5%
$1,000,000 and over See below None
</TABLE>
- MONEY MARKET FUND -- No sales charge is applicable to purchases of either the
Class A or Class B shares of the Money Market Fund. The Class A shares of the
Money Market Fund are not subject to 12b-1 fees.
INVESTMENTS OF $1 MILLION OR MORE
Although no "front-end" sales charge applies to purchases of $1 million and
over, you will pay a contingent deferred sales charge (CDSC) of 1.00% of the net
asset value if you redeem your shares within 13 months after you bought them.
The CDSC will be calculated in the same manner as for Class B shares, as
described under "CLASS B SALES CHARGES" below.
WAYS TO REDUCE YOUR CLASS A SALES CHARGE
YOU CAN REDUCE YOUR SALES CHARGE ON PURCHASES OF CLASS A OF THE FUNDS, THROUGH
ONE OR MORE OF THE FOLLOWING PROGRAMS. YOU HAVE THE SOLE RESPONSIBILITY OF
NOTIFYING SM&R THAT YOU INTEND TO QUALIFY UNDER ONE OF THESE CATEGORIES.
1. DISCOUNTS THROUGH CONCURRENT PURCHASES. To qualify for a reduced sales
charge on Class A and Class T shares, you may combine concurrent purchases
of Class T shares of funds managed by SM&R that impose a front-end sales
charge. Investors that are eligible to combine concurrent purchases to
qualify for a reduced sales charge include:
(1) Any individual;
(2) Any individual, his or her spouse, and trusts or custodial accounts for
their minor children;
(3) A trustee or fiduciary of a single trust estate or single fiduciary
account;
(4) Tax-exempt organizations specified in 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
36
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
--------------------------------------------------------------------------
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.
(2) DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class A or
Class T shares of a fund managed by SM&R on which you paid a front-end sales
charge, you may be able to receive a discount when you buy additional
shares. The current net asset value for the shares you already own may be
"accumulated" -- I.E., combined together with the dollar amount being
invested -- to achieve quantities eligible for discount.
(3) LETTER OF INTENT (LOI). You may qualify for a reduced sales charge on
purchases of Class T shares of funds managed by SM&R by completing the
Letter of Intent section of the account application. Under a Letter of
Intent, an investor expresses an intention to purchase, within 13 months of
the initial investment, a specified amount of Class A and Class T shares of
funds managed by SM&R which, if made concurrently, would qualify for a
reduced sales charge. Upon execution of a Letter of Intent, the investor
must make a minimum initial investment equal to ten percent (10%) of the
amount necessary to qualify for the applicable reduced sales charge. To
assure that the full applicable sales charge will be paid if the intended
purchase is not completed, five percent (5%) of the total intended purchase
amount will be held in escrow in shares registered in the investor's name.
Shares held in escrow under a Letter of Intent are not eligible for the
exchange privilege until the Letter of Intent is completed or canceled. A
Letter of Intent does not represent a binding obligation of the part of the
investor to purchase or the funds to sell the full amount of shares
specified.
Contact your representative or SM&R at 1-800-231-4639 if you think you may
qualify for these services.
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):
APPLICABLE TO ALL FUNDS
(a) persons purchasing shares for a federal or state sponsored
post-secondary education funding program;
(b) persons who have received a distribution from a pension, profit-sharing,
or other benefit plan, to the extent such distribution represents the
proceeds of a redemption of shares of any fund managed by SM&R (other
than the Money Market and Primary Funds);
(c) policyholders of American National subsidiaries that have entered into a
net asset value agreement with SM&R;
(d) members of any non-profit business, trade, professional, charitable,
civic or similar associations and clubs with an active membership of at
least 100 persons;
(e) 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;
(f) any other persons that have been determined by the Board of Directors
(or by the distributor based on guidelines established by the Board) to
have acquired shares under circumstances not involving any sales expense
to the funds.
EXCLUSIVE TO CLASS A SHARES OF THE SM&R ALGER FUNDS ONLY
(a) Present and retired directors, officers, and full-time employees of the
Fund;
(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
37
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
--------------------------------------------------------------------------
(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 or 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);
(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 (other
than the SM&R Money Market Fund and Primary Fund);
YOU HAVE THE SOLE RESPONSIBILITY OF NOTIFYING THE FUND THAT YOU INTEND TO
QUALIFY UNDER ONE OF THESE CATEGORIES.
You will be eligible for net asset value purchases ONLY if you qualify in one of
the above sections and 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 funds may terminate or change the terms of any waiver of sales
charges at any time.
CLASS B SALES CHARGES
You can purchase Class B shares at net asset value, without any initial sales
charge. However, there is a CDSC on shares you sell, the amount of which depends
on the number of years since such purchase.
- GROWTH FUND, ALGER GROWTH FUND, ALGER AGGRESSIVE GROWTH FUND, EQUITY INCOME
FUND, BALANCED FUND, ALGER SMALL-CAP FUND, OR ALGER TECHNOLOGY FUND -- If you
sell Class B shares of these funds within five years after buying them, you
will pay the CDSC shown in the following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
(AS A % OF
OFFERING PRICE AT THE
YEARS SINCE PURCHASE TIME OF PURCHASE)
<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>
- GOVERNMENT BOND FUND OR TAX FREE FUND -- If you sell Class B shares of these
funds within three years after buying them, you will pay the CDSC shown in the
following table:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
(AS A % OF
OFFERING PRICE AT THE
YEARS SINCE PURCHASE TIME OF PURCHASE)
<S> <C>
Year 1 3.00%
Year 2 2.00%
Year 3 1.00%
Year 4 None
</TABLE>
- MONEY MARKET FUND -- No sales charge is applicable to purchases of either the
Class A or Class B shares of the Money Market Fund.
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 also do not
impose a CDSC on shares bought with reinvested dividends or capital gain
distributions.
38
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
--------------------------------------------------------------------------
We will minimize any applicable CDSC by assuming that an investor --
(i) first redeems Class B shares bought through reinvested dividends and
capital gains distributions, and
(ii) next redeems Class B shares held the longest.
CLASS B WAIVERS OF CONTINGENT DEFERRED SALES CHARGES
The CDSC will be waived on the following redemptions of Class B shares:
(1) 12% FREE AMOUNT. We waive the CDSC on redemptions pursuant to a systematic
withdrawal plan of up to 12% of 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 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
post-purchase 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. We waive the CDSC on redemptions of Class B
shares in connection with certain distributions from four types of qualified
retirement plans: IRAs, custodial accounts maintained pursuant to Code
Section 403(b), deferred compensation plans qualified under Code
Section 457 and plans qualified under Code Section 401. To qualify for the
waiver, the redemptions must result from one of the following:
(a) required minimum distributions to plan participants or beneficiaries who
are age 70 1/2 or older to the extent it does not exceed 12% annually of
the participant's or beneficiary's account value;
(b) tax-free rollovers or transfers of assets to another IRA,
Section 403(b) plan, Section 457 plan or Section 401 plan invested in
Class B shares of one or more funds;
(c) tax-free returns of excess contributions or returns of excess deferral
amounts; and
(d) distributions upon the death or disability (as defined in the Code) of
the participant or beneficiary.
(4) SMALL ACCOUNTS. We waive the CDSC on redemptions by the funds of small
accounts (accounts with a value less than $500).
(5) THE ADVISER. 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 of funds (other than Class A of the Money Market Fund) pay SM&R,
the principal underwriter, a distribution and/or shareholder servicing (12b-1)
fee. BECAUSE DISTRIBUTION AND/OR SHAREHOLDER SERVICING (12B-1) FEES ARE PAID OUT
OF FUND ASSETS ON AN ONGOING BASIS, 12B-1 FEES MAY, OVER TIME, INCREASE THE COST
OF YOUR INVESTMENT IN A FUND AND BE MORE EXPENSIVE THAN A HIGHER "FRONT-END
LOAD."
39
<PAGE>
SALES CHARGE REDUCTIONS AND WAIVERS
--------------------------------------------------------------------------
These fees are computed as an annual percentage of the average daily net assets
of each class of shares of a fund, as follows:
- For the GROWTH FUND, EQUITY INCOME FUND, BALANCED FUND, GOVERNMENT BOND FUND
AND TAX FREE FUND:
<TABLE>
<CAPTION>
DISTRIBUTION SERVICE TOTAL 12B-1
CLASS FEE FEE FEE
<S> <C> <C> <C>
Class A Shares
(FRONT-END LOAD) 0.25% -0- 0.25%
Class B Shares
(BACK-END LOAD (CDSC)) 0.50% 0.25% 0.75%
</TABLE>
- For the MONEY MARKET FUND:
<TABLE>
<CAPTION>
DISTRIBUTION SERVICE TOTAL 12B-1
CLASS FEE FEE FEE
<S> <C> <C> <C>
Class A Shares -0- -0- -0-
Class B Shares 0.50% -0- 0.50%
</TABLE>
- For the ALGER GROWTH FUND, ALGER AGGRESSIVE GROWTH FUND, ALGER SMALL-CAP FUND
AND ALGER TECHNOLOGY FUND:
<TABLE>
<CAPTION>
DISTRIBUTION SERVICE TOTAL 12B-1
CLASS FEE FEE FEE
<S> <C> <C> <C>
Class A Shares
(FRONT-END LOAD) 0.35% -0- 0.35%
Class B Shares
(BACK-END LOAD (CDSC)) 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 the Class A and B shares. The
service fee is for providing ongoing servicing to shareholders of the Class B
shares. These fees compensate SM&R, or enable SM&R to compensate other persons
(including distributors of the shares), for providing such services.
40
<PAGE>
THE SM&R FUNDS AND THEIR MANAGEMENT
--------------------------------------------------------------------------
INVESTMENT ADVISER
The Fund's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the funds' investment adviser, the management of the
funds' day-to-day business and affairs. In addition, SM&R invests the funds'
assets, provides administrative services, and serves as transfer agent,
custodian, dividend paying agent, and underwriter.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). SM&R was incorporated in 1964 and has managed mutual
funds since 1966. SM&R does and may, from time to time, serve as investment
adviser to other clients including banks, employee benefit plans, other
investment companies, foundations and endowment funds.
The funds pay SM&R an investment advisory fee, which is calculated daily for
each fund and paid monthly. The advisory agreements between SM&R and the funds
spell out the management fee and other expenses that the funds must pay.
The GROWTH FUND, EQUITY INCOME FUND AND BALANCED FUND each pay an advisory fee
to SM&R calculated as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF SUCH FUNDS' ADVISORY FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
<S> <C>
Not exceeding $100,000,000 0.750%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.625%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.500%
Exceeding $300,000,000 0.400%
</TABLE>
The ALGER GROWTH FUND, ALGER AGGRESSIVE GROWTH FUND, ALGER SMALL-CAP FUND AND
ALGER TECHNOLOGY FUND (the "Alger Funds") each pay an advisory fee to SM&R equal
to the following annual percentage rates of such funds' average daily net
assets:
<TABLE>
<CAPTION>
ADVISORY FEE
ALGER FUND ANNUAL RATE
<S> <C>
Alger Growth Fund 0.85%
Alger Aggressive Growth Fund 1.05%
Alger Small-Cap Fund 1.00%
Alger Technology Fund 1.35%
</TABLE>
Through an investment sub-advisory agreement, SM&R has delegated the day-to-day
investment management of the Alger Funds to Fred Alger Management, Inc. One
World Trade Center, Suite 9333, New York, NY 10048. Fred 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. Fred Alger Management makes investment decisions for each of the Alger
Funds and continuously reviews and administers the Alger Funds' investment
programs. SM&R monitors Fred Alger Management's buying and selling of securities
and administration of the Alger Funds' investment programs.
Pursuant to the sub-advisory agreement, SM&R is responsible for paying a
sub-advisory fee to Fred Alger Management for each of the Alger Funds. The Alger
Funds are not responsible for paying the sub-advisory fee directly.
The GOVERNMENT BOND FUND AND TAX FREE FUND each pay an advisory fee to SM&R
calculated as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY ANNUAL
NET ASSETS OF EACH FUND PERCENTAGE 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>
The MONEY MARKET FUND AND PRIMARY FUND each pay an advisory fee to SM&R equal to
the following annual percentage rates of such funds' average daily net assets:
<TABLE>
<CAPTION>
ADVISORY FEE
FUND ANNUAL RATE
<S> <C>
Money Market Fund 0.25%
Primary Fund 0.50%
</TABLE>
41
<PAGE>
THE SM&R FUNDS AND THEIR MANAGEMENT
--------------------------------------------------------------------------
After applicable fee waivers, SM&R received total advisory fees as follows:
<TABLE>
<CAPTION>
ADVISORY
FEES
AS A % OF
AVERAGE DAILY
FUND NET ASSETS
<S> <C>
SM&R EQUITY FUNDS:
Growth Fund(1)(2)
Class A 0.48%
Class B 0.48%
Alger Growth Fund(3)
Class A --
Class B --
Alger Aggressive Growth Fund(3)
Class A --
Class B --
Equity Income Fund(1)
Class A 0.71%
Class B 0.71%
Balanced Fund(1)
Class A 0.49%
Class B 0.62%
Alger Small-Cap Fund(3)
Class A --
Class B --
Alger Technology Fund(3)
Class A --
Class B --
SM&R FIXED INCOME FUNDS:
Government Bond Fund(4)
Class A 0.46%
Class B 0.41%
Tax Free Fund(4)
Class A 0.15%
Class B 0.13%
Money Market Fund(4)
Class A 0.23%
Class B --
Primary Fund(4) 0.26%
</TABLE>
(1) The totals given for these funds are those of the corresponding Predecessor
Funds, and for the period ended June 30, 2000.
(2) See "Special Matter Affecting Only the Growth Fund" in the "PERFORMANCE"
section above for a discussion of the methodology for calculating the
Growth Fund advisory fee prior to December 31, 1999.
(3) Because the Alger Funds were not in existence during the fiscal year ended
August 31, 2000, no advisory fees were paid to SM&R by the Alger Funds
during such time.
(4) The totals given for these funds are for the fiscal year ended August 31,
2000, except for the Money Market Fund Class B because it was not in
existence until December 31, 2000.
ADMINISTRATIVE SERVICES
Each of the funds pay SM&R an administrative service fee under administrative
service agreements between the Fund and SM&R. These agreements state that each
of the funds will pay SM&R for non-investment related management, executive,
administrative, transfer agent, and operation services to the funds. The
administrative service fee for all funds other than the Alger Funds is
calculated as follows:
<TABLE>
<CAPTION>
ADMINISTRATIVE
ON THE PORTION OF THE FUNDS' SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.20%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
Each of the ALGER FUNDS pays SM&R an administrative fee at the annual rate of
0.25% of its average daily net asset value.
REIMBURSEMENTS AND WAIVERS
In the administrative service agreements with the GROWTH FUND, EQUITY INCOME
FUND, BALANCED FUND, GOVERNMENT BOND FUND, TAX FREE FUND, MONEY MARKET FUND AND
PRIMARY FUND, SM&R has agreed to pay (or to reimburse each such fund for) each
such fund's regular operating expenses in excess of 1.25% (0.50% for the Money
Market Fund) per year of each such fund's average daily net assets. Regular
operating expenses include the advisory fee and administrative service fee, if
any, paid to SM&R, but do not include 12b-1 fees, class-specific expenses,
interest, taxes, commissions, and other expenses incidental to portfolio
transactions.
In order to improve the yield and total return of one or more of the funds, SM&R
may from time to time VOLUNTARILY waive or reduce all or any portion of its
advisory fee, administrative fee, and/or assume certain or all expenses of any
fund, while retaining its ability to be reimbursed for such fees prior to the
end of the fiscal year. Fee waivers and/or reductions, other than those stated
in an administrative service agreement, may be rescinded by SM&R at any time
without notice to investors. SM&R has agreed to reimburse expenses incurred by
the Tax Free, Government Bond and Primary Funds to the extent that regular
operating
42
<PAGE>
THE SM&R FUNDS AND THEIR MANAGEMENT
--------------------------------------------------------------------------
expenses exceed average daily net assets as follows: 0.75% for the Tax Free
Fund, 0.80% for the Primary Fund and 1.00% for the Government Bond Fund.
PORTFOLIO MANAGEMENT
While the following individuals are primarily responsible for the day-to-day
portfolio management of their respective funds, all accounts are reviewed on a
regular basis by SM&R's Investment Committee to ensure that they are being
invested in accordance with investment policies.
GROWTH FUND, EQUITY INCOME FUND, AND BALANCED FUND
GORDON D. DIXON, DIRECTOR, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER OF
SECURITIES MANAGEMENT AND RESEARCH, INC., VICE PRESIDENT, CO-MANAGER.
Mr. Dixon joined SM&R in 1993. Mr. Dixon serves as Co-Manager of the Growth
Fund, Equity Income Fund and the Balanced Fund. He was previously Portfolio
Manager of such funds. Mr. Dixon also serves as Vice President of American
National Investment Accounts, Inc. ("ANIA"), another fund managed by SM&R
which is used exclusively for variable contracts issued by American National
Insurance Company. He is also the portfolio manager of ANIA's Government Bond
Portfolio and High Yield Bond Portfolio and co-manager of ANIA's Growth
Portfolio, Equity Income Portfolio, Balanced Portfolio and International Stock
Portfolio. Mr. Dixon also serves as portfolio manager of the Fund's Government
Bond Fund and Tax Free Fund. Mr. Dixon graduated from the University of South
Dakota with a B.A. in Finance and Accounting and from Northwestern University
in 1972 with an M.B.A in Finance and Accounting. He began his investment
career in 1972 as an Administrative and Research Manager with Penmark
Investments. In 1979, he began working for American Airlines in the management
of the $600 million American Airlines Pension Portfolio, of which
approximately $100 million was equities. In 1984, he was employed by
C&S/Sovran Bank in Atlanta, Georgia as Director of Equity Strategy where he
had responsibility for all research, equity trading and quantitative services
groups as well as investment policy input of a portfolio of approximately $7
billion, of which $3.5 billion was equities.
ANDREW R. DUNCAN, SR. SECURITIES ANALYST/ PORTFOLIO MANAGER. Mr. Duncan joined
SM&R's staff in 1997 as Sr. Securities Analyst/Portfolio Manager. Mr. Duncan
serves as Portfolio Manager of the Equity Income Fund and the Balanced Fund.
He also serves as the portfolio manager of ANIA'S Equity Income Portfolio,
Balanced Portfolio, and International Stock Portfolio. He graduated from West
Virginia University in 1995 with a BS/BA degree in Finance and from Texas A&M
University in 1996 with an MS in Finance.
ANDRE J. HODLEWSKY, SR. SECURITIES ANALYST/ PORTFOLIO MANAGER. Mr. Hodlewsky
joined SM&R in 1998 as Securities Analyst. Mr. Hodlewsky serves as Portfolio
Manager of the Growth Fund. He also serves as portfolio manager for ANIA's
Growth Portfolio and Small-Cap/Mid-Cap Portfolio. He graduated from the
University of Wisconsin in 1990 with a BA in Graphic Design and Industrial
Design and from the University of Wisconsin in 1999 with an MBA in Marketing
and Finance. Prior to joining SM&R's staff, he held a position at Rockwell
from 1995 to 1997 in their Internet and Multi-Media Design Group and Mandel
Company in Milwaukee, Wisconsin, from 1993 to 1995 in the Prepress Technology
Division.
GOVERNMENT BOND FUND, TAX FREE FUND, MONEY MARKET FUND, AND PRIMARY FUND
GORDON D. DIXON (See above.)
ANNE M. LEMIRE, SENIOR SECURITIES ANALYST/ PORTFOLIO MANAGER. Ms. LeMire has
served as Assistant Portfolio Manager of the Government Bond Fund, Primary
Fund, Tax Free Fund, and Money Market Fund since March 2000. Ms. LeMire
assumed the role of Assistant Portfolio Manager of the ANIA Money Market
Portfolio in March 2000. She also has served as Assistant Portfolio Manager of
the ANIA Government Bond Portfolio and High Yield Bond Portfolio since their
inception in May 2000. Ms. LeMire joined SM&R in 1990 and held the position of
Assistant Vice President and Controller prior to joining the investment staff
in February 1999. She holds an accounting degree from the University of
Houston and earned the Certified
43
<PAGE>
THE SM&R FUNDS AND THEIR MANAGEMENT
--------------------------------------------------------------------------
Public Accountant designation in 1990. Before joining SM&R, she held an
auditing position at the University of Texas Medical Branch.
JOHN S. MAIDLOW, PORTFOLIO MANAGER. Mr. Maidlow assumed the role of Portfolio
Manage of the Primary Fund and Money Market Fund in March 2000. He had
previously served as Assistant Portfolio Manager of the Primary Fund since
1998 and the Money Market Fund since its inception in January 1999.
Mr. Maidlow assumed the role of Portfolio Manager of the Money Market
Portfolio of ANIA in March 2000; he had previously served as Assistant
Portfolio Manager of the ANIA Money Market Portfolio since November 1998. He
joined SM&R's staff in 1998 and prior to that time he held positions with
American Industries Trust Companies as a trust officer, Texas Department of
Insurance and the Texas Department of Banking as an examiner, Landmark Group
as Vice President of Investments, MBank as a trust officer and
Rotan-Mosle, Inc. and Eppler, Guerin & Turner as an investment broker.
SM&R ALGER FUNDS
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.
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.
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.
ALGER 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.
44
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS
The following Financial Highlights tables are intended to help you understand
the performance of the Class A and Class B shares of each of the multiple-class
funds (other than the SM&R Alger Funds) and the performance of the Primary Fund,
a single-class fund. The information in the tables for the multiple class funds
begins on January 1, 1999, the date multiple classes were created.
The information in the tables for the Primary Fund is for such fund's past five
fiscal years.
The SM&R Alger Funds were not in existence during the Fund's fiscal year ending
August 31, 2000.
Certain information reflects financial results for a single share of the fund.
The total returns in the tables represent the rate that an investor would have
earned (or lost) on an investment in the fund (assuming reinvestment of all
dividends and distributions). The returns do not reflect any sales loads or
account fees, but do include 12b-1 fees for the multiple class funds.
The tables itemize what contributed to the changes in the share price during the
period. It also shows the changes in share price for this period in comparison
to changes over the last five fiscal years or less, if the class of shares is
not five years old.
On a per-share basis, the tables include as appropriate
- share price at the beginning of the period
- investment income and capital gains or losses
- distributions of income and capital gains paid to shareholders
- share price at the end of the period
The tables also include some key statistics for the period as appropriate
- Total Return -- the overall percentage of return of the fund, assuming the
reinvestment of all distributions
- Expense Ratio -- operating expenses as a percentage of average net assets
- Net Income Ratio -- net investment income as a percentage of average net
assets
- Portfolio Turnover -- the percentage of the fund's buying and selling
activity
With the exception of the information presented for the Primary Fund's 1996 and
1997 fiscal years, and the Growth Fund's, Equity Income Fund's, and Balanced
Fund's June 30, 2000 semi-annual period, the information contained in the
Financial Highlights has been audited by the Fund's independent auditors, Tait,
Weller & Baker. Their Independent Auditor's Report is included in the fund's
annual report for the year ended August 31, 2000, which is incorporated by
reference into the Statement of Additional Information and is available upon
request. The information for the Primary Fund's fiscal years ending August 31,
1997 and 1996 is derived from the financial statements of the Primary Fund,
which for such fiscal years were audited by the Fund's former independent
auditors.
45
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
GROWTH FUND(1)
The following financial highlights table is intended to help you understand the
Growth Fund's financial performance since inception. Certain information
reflects financial results for a single share outstanding throughout the period
shown. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Growth Fund (assuming reinvestment
of all dividends and distributions) since the addition of multiple classes of
shares, but do not reflect any sales loads that would be imposed on the purchase
or sale of any shares. This information is derived from the financial statements
of the Growth Fund, Class A and B Shares, which for the year ended December 31,
1999 has been audited by Tait, Weller & Baker, and the six-month period ended
June 30, 2000 is unaudited. The independent auditor's report, along with the
Growth Fund's financial statements, are incorporated by reference into the
Statement of Additional Information, which is available upon request.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
PERIOD FROM
JANUARY 1, 2000
TO FISCAL YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999(3)
-------------------------------- --------------------------------
CLASS A SHARES CLASS B SHARES CLASS A SHARES CLASS B SHARES
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 6.73 $ 6.66 $ 5.69 $ 5.69
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
INVESTMENT INCOME--NET 0.01 -- 0.01 --
--------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (0.16) (0.14) 1.30 1.24
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
Total from Investment
Operations (0.15) (0.14) 1.31 1.24
--------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Investment income--net (0.01) -- -- --
--------------------------------------------------------------------------------------------------
Capital gains (0.05) (0.05) (0.27) (0.27)
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
Total Distributions (0.06) (0.05) (0.27) (0.27)
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 6.52 $ 6.47 $ 6.73 $ 6.66
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
TOTAL RETURN* (2.22)% (2.12)% 23.45% 22.04%
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
RATIOS (IN
PERCENTAGES)/SUPPLEMENTAL
DATA(2)
NET ASSETS, END OF PERIOD
(000'S OMITTED) $5,792 $2,899 $3,776 $1,547
--------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets 1.21% 1.82% 1.51% 2.01%
--------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets 0.20% (0.42)% (0.19)% (0.64)%
--------------------------------------------------------------------------------------------------
Portfolio turnover rate 10.42% 10.42% 16.13% 16.13%
--------------------------------------------------------------------------------------------------
</TABLE>
(1) The information shown here is for the Predecessor Fund, SM&R Growth
Fund, Inc.
(2) The ratios are annualized.
(3) Inception date of class January 1, 1999. The SM&R Growth Fund, Inc. had a
fiscal year ending December 31.
* Returns are not annualized, and do not include the effect of sales charges.
46
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
EQUITY INCOME FUND(1)
The following financial highlights table is intended to help you understand the
Equity Income Fund's financial performance since inception. Certain information
reflects financial results for a single Equity Income Fund share outstanding
throughout the period shown. The total returns in the table represent the rate
that an investor would have earned (or lost) on an investment in the Equity
Income Fund (assuming reinvestment of all dividends and distributions) since the
addition of multiple classes of shares, but do not reflect any sales loads that
would be imposed on the purchase or sale of any shares. This information is
derived from the financial statements of the Equity Income Fund, Class A and B
Shares, which for the year ended December 31, 1999 has been audited by Tait,
Weller & Baker, and the six-month period ended June 30, 2000 is unaudited. The
independent auditor's report, along with the Equity Income Fund's financial
statements, are incorporated by reference into the Statement of Additional
Information, which is available upon request.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
PERIOD FROM
JANUARY 1, 2000
TO FISCAL YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999(3)
-------------------------------- --------------------------------
CLASS A SHARES CLASS B SHARES CLASS A SHARES CLASS B SHARES
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $24.79 $24.38 $28.02 $28.02
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
INVESTMENT INCOME--NET 0.24 0.16 0.58 0.47
--------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 0.08 0.09 (1.47) (1.88)
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
Total from Investment
Operations 0.32 0.25 (0.89) (1.41)
--------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Investment income--net (0.24) (0.18) (0.58) (0.47)
--------------------------------------------------------------------------------------------------
Capital gains (0.20) (0.20) (1.76) (1.76)
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
Total Distributions (0.44) (0.38) (2.34) (2.23)
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $24.67 $24.25 $24.79 $24.38
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
TOTAL RETURN* 1.30% 1.04% (3.01)% (4.86)%
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
RATIOS (IN
PERCENTAGES)/SUPPLEMENTAL
DATA(2)
NET ASSETS, END OF PERIOD
(000'S OMITTED) $5,536 $4,770 $4,802 $4,343
--------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets 1.42% 1.95% 1.51% 2.01%
--------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets 1.70% 1.19% 1.53% 1.03%
--------------------------------------------------------------------------------------------------
Portfolio turnover rate 14.90% 14.90% 9.81% 9.81%
--------------------------------------------------------------------------------------------------
</TABLE>
(1) The information shown here is for the Predecessor Fund, SM&R Equity Income
Fund, Inc.
(2) The ratios are annualized.
(3) Inception date of class January 1, 1999. The SM&R Equity Income Fund, Inc.
had a fiscal year ending December 31.
* Returns are not annualized, and do not include the effect of sales charges.
47
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
BALANCED FUND(1)
The following financial highlights table is intended to help you understand the
Balanced Fund's financial performance since inception. Certain information
reflects financial results for a single Balanced Fund share outstanding
throughout the period shown. The total returns in the table represent the rate
that an investor would have earned (or lost) on an investment in the Balanced
Fund (assuming reinvestment of all dividends and distributions) since the
addition of multiple classes of shares, but do not reflect any sales loads that
would be imposed on the purchase or sale of any shares. This information is
derived from the financial statements of the Balanced Fund, Class A and B
Shares, which for the year ended December 31, 1999 has been audited by Tait,
Weller & Baker, and the six-month period ended June 30, 2000 is unaudited. The
independent auditor's report, along with the Balanced Fund's financial
statements, are incorporated by reference into the Statement of Additional
Information, which is available upon request.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
PERIOD FROM
JANUARY 1, 2000
TO FISCAL YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999(3)
-------------------------------- --------------------------------
CLASS A SHARES CLASS B SHARES CLASS A SHARES CLASS B SHARES
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $20.30 $20.64 $19.63 $19.63
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
INVESTMENT INCOME--NET 0.26 0.23 0.47 0.40
--------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 0.48 0.46 1.47 1.81
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
Total from Investment
Operations 0.74 0.69 1.94 2.21
--------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Investment income--net (0.25) (0.22) (0.47) (0.40)
--------------------------------------------------------------------------------------------------
Capital gains (0.17) (0.17) (0.80) (0.80)
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
Total Distributions (0.42) (0.39) (1.27) (1.20)
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $20.62 $20.94 $20.30 $20.64
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
TOTAL RETURN* 3.63% 3.35% 10.13% 11.52%
====== ====== ====== ======
--------------------------------------------------------------------------------------------------
RATIOS (IN
PERCENTAGES)/SUPPLEMENTAL
DATA(2)
NET ASSETS, END OF PERIOD
(000'S OMITTED) $2,102 $1,766 $1,777 $1,119
--------------------------------------------------------------------------------------------------
Ratio of expenses with
reimbursement to average net
assets 1.50% 2.00% 1.51% 2.01%
--------------------------------------------------------------------------------------------------
Ratio of expenses without
reimbursement to average net
assets 1.76% 2.13% -- --
--------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets 2.35% 1.86% 1.87% 1.36%
--------------------------------------------------------------------------------------------------
Portfolio turnover rate 8.60% 8.60% 18.01% 18.01%
--------------------------------------------------------------------------------------------------
</TABLE>
(1) The information shown here if for the SM&R Balanced Fund, Inc.
(2) The ratios are annualized.
(3) Inception date of class January 1, 1999. The SM&R Balanced Fund, Inc. had a
fiscal year ending December 31.
* Returns are not annualized, and do not include the effect of sales charges.
48
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
GOVERNMENT BOND FUND
The following financial highlights table is intended to help you understand the
Government Bond Fund's financial performance for the past five years. Certain
information reflects financial results for a single share outstanding throughout
each period shown. The total returns in the table represent the rate that an
investor would have earned (or lost) on an investment in the Government Bond
Fund (assuming reinvestment of all dividends and distributions) prior to
addition of multiple classes of shares, but do not reflect any sales loads that
would be imposed on the purchase or sale of any shares. This information is
derived from the financial statements of the Government Bond Fund, Class A and B
Shares, which for the year ended August 31, 2000 and period shown below has been
audited by Tait, Weller & Baker, CPA. The independent auditor's report, along
with the Government Bond Fund's financial statements, are incorporated by
reference into the Statement of Additional Information, which is available upon
request.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
FISCAL YEAR ENDED TO
AUGUST 31, 2000 AUGUST 31, 1999
-------------------------------- --------------------------------
CLASS A SHARES CLASS B SHARES CLASS A SHARES CLASS B SHARES
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.20 $ 10.16 $ 10.62 $10.62
======== ======= ======= ======
--------------------------------------------------------------------------------------------------
INVESTMENT INCOME--NET 0.57 0.49 0.30 0.33
--------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (0.06) (0.02) (0.42) (0.46)
======== ======= ======= ======
--------------------------------------------------------------------------------------------------
Total from Investment
Operations 0.51 0.47 (0.12) (0.13)
--------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Investment income--net (0.57) (0.49) (0.30) (0.33)
--------------------------------------------------------------------------------------------------
Capital gains -- -- -- --
======== ======= ======= ======
--------------------------------------------------------------------------------------------------
Total Distributions (0.57) (0.49) (0.30) (0.33)
======== ======= ======= ======
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.14 $ 10.14 $ 10.20 $10.16
======== ======= ======= ======
--------------------------------------------------------------------------------------------------
TOTAL RETURN* 5.15% 4.74% (1.17)% (1.30)%
======== ======= ======= ======
--------------------------------------------------------------------------------------------------
RATIOS (IN
PERCENTAGES)/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD $127,344 $78,137 $68,792 $7,743
--------------------------------------------------------------------------------------------------
Ratio of expenses with
reimbursement to average net
assets** 1.25% 1.75% 1.25% 1.75%
--------------------------------------------------------------------------------------------------
Ratio of expenses without
reimbursement to average net
assets** 1.29% 1.84% 1.42% 1.77%
--------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets** 5.68% 5.12% 5.25% 4.86%
--------------------------------------------------------------------------------------------------
Portfolio turnover rate 30.87% 30.87% 22.86% 22.86%
--------------------------------------------------------------------------------------------------
</TABLE>
* Return not annualized
** Ratios annualized
49
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
TAX FREE FUND
The following financial highlights table is intended to help you understand the
Tax Free Fund's financial performance since inception. Certain information
reflects financial results for a single share outstanding throughout each period
shown. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Tax Free Fund (assuming
reinvestment of all dividends and distributions) prior to addition of multiple
classes of shares, but do not reflect any sales loads that would be imposed on
the purchase or sale of any shares. This information is derived from the
financial statements of the Tax Free Fund, Class A and B Shares, which for the
year ended August 31, 2000 and period shown below has been audited by Tait,
Weller & Baker, CPA. The independent auditor's report, along with the Tax Free
Fund's financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
FISCAL YEAR ENDED TO
AUGUST 31, 2000 AUGUST 31, 1999
-------------------------------- --------------------------------
CLASS A SHARES CLASS B SHARES CLASS A SHARES CLASS B SHARES
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.22 $ 10.20 $ 10.68 $ 10.68
======== ======== ======== ========
--------------------------------------------------------------------------------------------------
INVESTMENT INCOME--NET 0.46 0.41 0.21 0.18
--------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 0.12 0.13 (0.46) (0.48)
======== ======== ======== ========
--------------------------------------------------------------------------------------------------
Total from Investment
Operations 0.58 0.54 (0.25) (0.30)
--------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Investment income--net (0.46) (0.41) (0.21) (0.18)
--------------------------------------------------------------------------------------------------
Capital gains (0.01) (0.01) -- --
======== ======== ======== ========
--------------------------------------------------------------------------------------------------
Total Distributions (0.47) (0.42) (0.21) (0.18)
======== ======== ======== ========
--------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.33 $ 10.32 $ 10.22 $ 10.20
======== ======== ======== ========
--------------------------------------------------------------------------------------------------
TOTAL RETURN* 5.86% 5.47% (2.37)% (2.85)%
======== ======== ======== ========
--------------------------------------------------------------------------------------------------
RATIOS (IN
PERCENTAGES)/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD $211,755 $115,025 $194,917 $113,143
--------------------------------------------------------------------------------------------------
Ratio of expenses with
reimbursement to average net
assets** 1.00% 1.50% 1.51% 2.01%
--------------------------------------------------------------------------------------------------
Ratio of expenses without
reimbursement to average net
assets** 1.35% 1.87% 2.02% 2.52%
--------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets** 4.59% 4.12% 3.69% 3.20%
--------------------------------------------------------------------------------------------------
Portfolio turnover rate 7.61% 7.61% 5.09% 5.09%
--------------------------------------------------------------------------------------------------
</TABLE>
* Return not annualized
** Ratios annualized
50
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
MONEY MARKET FUND
The following financial highlights table is intended to help you understand the
Money Market Fund's financial performance for the periods shown since its
inception. Certain information reflects financial results for a single Money
Market Fund share outstanding throughout each period shown. The total returns in
the table represent the rate that an investor would have earned (or lost) on an
investment in the Money Market Fund (assuming reinvestment of all dividends and
distributions). This information is derived from the financial statements of the
Money Market Fund which has been audited by Tait, Weller & Baker, CPA. The
independent auditor's report, along with the Money Market Fund's financial
statements, are incorporated by reference into the Statement of Additional
Information, which is available upon request.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
YEAR ENDED TO
AUGUST 31, 2000 AUGUST 31, 1999
<S> <C> <C>
----------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00
======= =======
----------------------------------------------------------------------------
INVESTMENT INCOME--NET 0.05 0.03
----------------------------------------------------------------------------
Total from Investment Operations 0.05 0.03
======= =======
----------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Investment income--net (0.05) (0.03)
----------------------------------------------------------------------------
Total Distributions (0.05) (0.03)
======= =======
----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00
======= =======
----------------------------------------------------------------------------
TOTAL RETURN** 5.56% 2.89%
======= =======
----------------------------------------------------------------------------
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL
DATA
NET ASSETS, END OF PERIOD (000'S
OMITTED) $54,258 $10,681
----------------------------------------------------------------------------
Ratio of expenses with reimbursement to
average net assets* 0.49% 0.50%
----------------------------------------------------------------------------
Ratio of expenses without reimbursement
to average net assets* 0.66% 1.22%
----------------------------------------------------------------------------
Ratio of net investment income to
average net assets* 5.58% 4.45%
----------------------------------------------------------------------------
</TABLE>
* Ratios annualized
** Returns are not annualized
51
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------
PRIMARY FUND
The following financial highlights table is intended to help you understand the
Primary Fund's financial performance for the past five years. Certain
information reflects financial results for a single Primary Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Primary Fund (assuming reinvestment of all dividends and distributions).
This information is derived from the financial statements of the Primary Fund
which for the years ended through August 31, 1997 have been audited by the
Fund's former independent auditors and for the years ended August 31, 1998, 1999
and 2000 has been audited by Tait, Weller & Baker, CPA. Each independent
auditor's report, along with the Primary Fund's financial statements, are
incorporated by reference into the Statement of Additional Information, which is
available upon request.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
---------------------------------------------------------------------------
INVESTMENT INCOME--NET 0.06 0.05 0.05 0.05 0.05
---------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investments (0.01) -- -- -- --
======= ======= ======= ======= =======
---------------------------------------------------------------------------
Total from Investment
Operations 0.05 0.05 0.05 0.05 0.05
---------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Investment income--net (0.06) (0.05) (0.05) (0.05) (0.05)
---------------------------------------------------------------------------
Total Distributions (0.06) (0.05) (0.05) (0.05) (0.05)
======= ======= ======= ======= =======
---------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $ 0.99 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
---------------------------------------------------------------------------
TOTAL RETURN* 4.68% 4.75% 5.15% 4.98% 5.07%
======= ======= ======= ======= =======
---------------------------------------------------------------------------
RATIOS (IN PERCENTAGES)/
SUPPLEMENTAL DATA
NET ASSETS, END OF YEAR
(000'S OMITTED) $26,795 $30,838 $34,577 $33,045 $37,465
---------------------------------------------------------------------------
Ratio of expenses with
reimbursement to average
net assets 0.80% 0.80% 0.80% 0.80% 0.81%
---------------------------------------------------------------------------
Ratio of expenses without
reimbursement to average
net assets 1.04% 1.06% 0.98% 1.01% 1.15%
---------------------------------------------------------------------------
Ratio of net investment
income to average net
assets 5.55% 4.66% 5.02% 4.86% 4.93%
---------------------------------------------------------------------------
Portfolio turnover rate 18.46% 30.47% -- -- --
---------------------------------------------------------------------------
</TABLE>
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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 FUNDS. IT EXPLAINS THE
VARIOUS SERVICES AVAILABLE TO YOU AND FEATURES YOU CAN ESTABLISH AS PART OF YOUR
ACCOUNT IN SUCH "FUNDS" AS WELL AS ACCOUNT POLICIES AND FEES THAT MAY APPLY TO
YOUR ACCOUNT.
SM&R'S 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" IN THIS GUIDE
TRANSFER AGENCY 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 120
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 GOVERNMENT BOND 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 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 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 $ 100 $ 20
Automatic Investment Plan $ 100 $ 20
Retirement Plans $ 100 $ 20
Primary and Money Market Funds $1,000 $100
Alger Funds $ 500 $ 50
</TABLE>
CERTIFICATES
Share certificates are not issued by the funds. Your purchases are maintained
on the records of the 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 and are discussed later in this guide.
CHECK WRITING OPTION:
Available in the SM&R Money Market Fund Class A only. 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" later in this guide.
PLEASE KEEP IN MIND THAT 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.
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TYPES OF ACCOUNTS AVAILABLE
BELOW IS A BRIEF EXPLANATION OF THE DIFFERENT ACCOUNTS AVAILABLE IN THE 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.
Because IRAs, SEPs, TSAs, and other tax-deferred accounts are deferred from
federal income tax, they will not benefit from the tax-exempt nature of the
Tax Free Fund. Accordingly, the Tax Free Fund is not considered to be suited
for these types of accounts.
Comprehensive Investment Services, Inc. ("CIS") serves as custodian for the
applicable tax-deferred accounts offered by the 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 PENSION 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.
SECTION 529 PLAN
This plan allows individuals and 501(c)(3) organizations to establish and
contribute to an account(s) to be used for postsecondary educational
expenses of designated beneficiaries.
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PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). Each 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" in the prospectus.)
You may purchase shares of the SM&R Primary Fund and SM&R Money Market Fund
without a sales charge. Accordingly, the offering price for shares of these
funds is net asset value. Although the legal rights of the Class A and 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. With the exception of the Money Market Fund, the funds'
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 Funds' Board of Directors. The funds also may use
fair value pricing if the value of a security held by the 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 the fund to calculate its net asset value may differ from
quoted or published prices for the underlying securities. The Money Market
Fund uses the amortized cost method for valuing its securities.
SHARE PRICE -- EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS. Each 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 funds as of such earlier closing time. Below is the method used
by the 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 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 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 fund and the Class in which you - Make your check payable to SM&R MUTUAL FUNDS
REGISTERED want to invest. - Use the investment slip on your confirmation, or
REPRESENTATIVE - Complete and sign the account application - Write a note specifying:
- Make the check payable to SM&R MUTUAL FUNDS. -- Your account number
- Mail the application and your check to SM&R at -- The fund name
the address on the first page of this 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 reference - Call Investors Services at the number on the
number (call by noon, Central Time, if you want first page of this guide, on any business day.
wired funds to be credited that day) - You can send your investment either by:
Instruct your bank to wire or transfer your -- Federal Funds Wire (offers immediate access
purchase (your bank may charge a wiring fee) to funds), or
using the information on the first page of -- Electronic transfer via ACH which avoids
this guide. wiring fees, if your bank account is set up
- Complete the account application and mail to the on file
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 an existing fund to an existing account in
another fund by calling Investor Services.
- You can only exchange shares in the same class with identical registrations.
- There is no sales charge or redemption fee when exchanging from one fund to another.
- 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 your - To establish automatic investing for an existing
PLAN THROUGH THE bank account into your fund account on a monthly account, call Investor Services for an
AUTOMATED CLEARING basis. application.
HOUSE (ACH) - Initial investment minimum is $100 ($500 for the - The minimum is $20 ($50 for the Alger Funds).
Alger Funds) if you invest at least $20 ($50 for
the Alger Funds) 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 of the 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 Investor 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 in 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" later in this guide.)
- 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 any outstanding share certificates issued prior to January 1, 1999
-- 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 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.
--------------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUND You can receive same day redemptions by wire if SM&R receives a redemption order prior to 11:00 a.m.
EXPEDITED REDEMPTION Central Time for the Money Market Fund. If we receive your request after 11:00 a.m. Central Time and
before 3:00 p.m. Central Time, we generally will transmit payment on the next day. (Refer to "CALL
US" section above.)
--------------------------------------------------------------------------------------------------------------------------
SELL YOUR SHARES IN You may also redeem your shares by coming to SM&R's home office, and deliver your request in person
PERSON prior to 3:00 p.m. Central Time on regular trading days to receive that day's price.
--------------------------------------------------------------------------------------------------------------------------
SYSTEMATIC You can withdraw money automatically from your fund account on a monthly, quarterly, semi-annual,
WITHDRAWAL PLAN and annual basis -- without redemption fees -- on or about the 20th of the month and if:
(SWP) - 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" later in this guide 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
redemptions of shares recently purchased by a personal check or ACH transfer
(discussed later in this guide) 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 PARTNER Written instructions must be signed by an
authorized 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
(INCLUDES ALL TYPES OF IRAS) account 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 ESTATES Written instructions must be signed by the
executor. A copy 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 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 funds total $50,000 or - Commercial Bank
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 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 fund
because of the sales charge or CDSC (as applicable) involved in additional
purchases. See "Class B Waivers of Contingent Deferred Sales Charges" in the
prospectus 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 or Class T shares of a fund, a shareholder may
reinvest all or part of the proceeds in the same class of the same 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 adviser to determine any possible tax
ramifications of such a transaction. Each fund 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 fund,
account number, and number of shares or dollar amount to be redeemed.
The letter of instruction and stock powers must be signed and executed
exactly as the fund shares are registered and any
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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.
TEXAS OPTIONAL RETIREMENT PROGRAM. You may not redeem shares in any account
established under the Texas Optional Retirement Program, unless SM&R receives
satisfactory evidence from the state that one of the following conditions
exist:
(1) death of the employee;
(2) termination of service with the employer; or
(3) retirement of employee.
CHECK WRITING OPTION. Check writing is available in the Money Market Fund
("Class A Only") to investors having an account value of $1,000 or more. $250
is the minimum check amount under the check writing option. This option is not
available on any tax-deferred accounts (IRAs, TSAs, etc.). Shareholders
desiring this option must complete the check writing option signature card on
the application. After obtaining specimen signatures and the fully executed
card, SM&R will order checks and forward to you at the address of record.
Investments made by personal check or third party check will be held for
fifteen (15) business days following the investment during which time checks
may not be drawn on the amount of such investment.
When a check is presented for payment, SM&R as the shareholder's agent, will
cause each fund to redeem a sufficient number of full and fractional shares to
cover the amount of the check. Shareholders will continue to be entitled to
dividends on their shares up to the time the check is presented to SM&R for
payment. If the amount of the check is greater than the value of shares held
in the shareholder's account for more than fifteen (15) business days at the
time the check is presented for payment, the check will not be honored and
returned to the payee and the shareholder may be subject to extra charges as a
result.
Primary Fund shareholders with check writing privileges prior to December 31,
1998 will be permitted to continue writing checks on the Primary Fund subject
to the terms applicable to the Money Market Fund described above. SHAREHOLDERS
USING THE PRIMARY FUND CHECK WRITING OPTION SHOULD BE AWARE THAT WRITING A
CHECK IS A REDEMPTION OF SHARES. THOSE SHARES MAY BE WORTH LESS WHEN THE CHECK
IS PRESENTED FOR PAYMENT THAN WHEN THE CHECK WAS WRITTEN.
This service may be terminated or suspended or additional charges may be
imposed for this service. Shareholders will be provided the initial checkbook
free of charge. There will be a $5 fee for reorders. Shareholders will be
allowed to write ten (10) checks free each calendar quarter. You may be
charged $1.00 for each check written over the 10 check limit.
REDEMPTION OF SMALL ACCOUNTS. The 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 funds may,
from time to time, change such required minimum investment.
TRANSACTIONS THROUGH PROCESSING ORGANIZATIONS
You may also purchase or sell shares of the 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 funds. Processing Organizations may also impose other
charges or restrictions different from those applicable to shareholders who
invest in the funds directly. If you utilize a Processing Organization the funds
are not
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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 FUNDS. YOU SHOULD KEEP THIS IN MIND WHEN
ESTABLISHING AN ACCOUNT IN ANY 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 funds offer other services and plans described
below. At this time, there is no charge to you for these services. The 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
adviser.
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
between $500 and $50,000. Through this service, you will be able to purchase
additional shares for a 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 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 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 funds now have available to shareholders a means by which they can access
account information, fund prices, and take advantage of other features
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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 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 at net asset value. Unless you specify otherwise,
your dividends and distributions will automatically be reinvested in the same
fund. You may invest your dividends and distributions into another fund in the
same class of shares.
You must comply with the following requirements to invest your dividends and
distributions in shares of another fund:
(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.
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from your bank account and invested
monthly, bi-monthly, quarterly, or annually into the designated fund(s) at the
applicable offering price determined on the date of the electronic transfer.
GROUP SYSTEMATIC INVESTMENT PLAN. SM&R can establish a Group Systematic
Investment Plan with an employer having 5 or more participants under a single
payroll deduction arrangement. Under this investment plan there is a minimum
investment of $20 ($50 for the Alger Funds) 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 funds, you may be permitted to
exchange shares that you own for shares of another fund without the payment of
an exchange fee, subject to certain conditions. EXCHANGES BETWEEN A FUND AND
ANOTHER FUND MANAGED BY SM&R ARE AVAILABLE ONLY IN STATES WHERE THE APPLICABLE
FUNDS ARE REGISTERED AND THE EXCHANGE MAY BE LEGALLY MADE. YOU SHOULD CONTACT
SM&R TO DETERMINE WHETHER A FUND AND A PARTICULAR CLASS IS REGISTERED IN A
PARTICULAR STATE AND WHETHER AN EXCHANGE IS PERMITTED.
WE RESERVE THE RIGHT TO TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE
PRIVILEGE AT ANY TIME.
You may exchange Class A and Class B shares that you own in the SM&R Funds,
without an exchange fee or sales charge, for shares of the corresponding class
of another fund. You also may exchange your Class A or Class B shares for
shares of the Primary 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 share purchases of $1 million or
more, and 6 years in the case of Class B share purchases of the SM&R
Equity Funds, and 4 years in the case of Class B share purchases of the
SM&R Fixed Income Funds), and
- you meet any minimum investment requirement for the shares you wish to
acquire.
We waive any sales charges on Class A and Class T shares acquired through an
exchange if you previously paid a sales charge on amounts invested in those
shares. For example, assume you purchase
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Class A shares of the Growth Fund. You then exchange such Class A shares for
Class A shares of the Money Market Fund. Later, you re-exchange those shares
of the Money Market Fund for Class A shares of the Tax Free Fund. We would not
impose any sales charge upon the re-exchange into Class A shares of the Tax
Free 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 held in escrow under a Letter of Intent are not eligible
for the exchange privilege. Such shares will not be released from escrow until
the balance invested during the period specified in the Letter of Intent
equals or exceeds the amount required to be invested under the Letter of
Intent or the shareholder requests, in writing, that the Letter of Intent be
canceled and pays any adjustments in sales charge. After release from escrow,
shares may be exchanged, provided all other applicable conditions are met.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met:
(a) the exchange must be made between accounts that are registered in the
same name, address and, if applicable, taxpayer identification number;
(b) the shares of the fund acquired through exchange must be qualified for
sale in the state in which you reside;
(c) the dollar amount of a written exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(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.
You may exchange shares you own in the Primary Fund for Class A or Class T
shares of another fund, provided you meet any eligibility requirements and pay
any sales charge applicable to the acquired shares. You CANNOT exchange shares
of the Primary Fund for Class B shares of another fund.
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 ADVISER 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 a fund for Class B shares of another
fund, 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
fund performance. To minimize harm to the Fund and its 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
judgment, has been or may be disruptive to a fund. In making this judgment, we
may consider trading done in multiple accounts under common ownership or
control.
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DISTRIBUTIONS AND TAXES
DISTRIBUTIONS AND TAXABILITY. To avoid taxation of the funds, the IRS Code
requires each fund to distribute net income and any capital gains realized on
its investments annually. A 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 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.
The Tax Free Fund intends to distribute tax-exempt dividends that shareholders
may exclude from their gross income for federal income tax purposes. However,
the Tax Free Fund may invest a portion of its assets in securities that
generate income that is not exempt from federal or state income tax. Income
exempt from federal tax may be subject to state and local income tax. Any
capital gains distributed by the Tax Free Fund may be taxable. Also, you
should keep in mind that certain income from the Tax Free Fund may be subject
to the federal alternative minimum tax.
DISTRIBUTION SCHEDULE. The following schedule of distributions is provided to
let you know when you can expect to receive a distribution from the 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>
GROWTH FUND June and December
December
-------------------------------------------------------
ALGER GROWTH FUND Annually December
-------------------------------------------------------
ALGER AGGRESSIVE Annually December
GROWTH FUND
-------------------------------------------------------
EQUITY INCOME FUND March, June, December
September,
December
-------------------------------------------------------
BALANCED FUND March, June, December
September,
December
-------------------------------------------------------
ALGER SMALL-CAP FUND Annually December
-------------------------------------------------------
ALGER TECHNOLOGY FUND Annually December
-------------------------------------------------------
GOVERNMENT BOND FUND Monthly December
-------------------------------------------------------
TAX FREE FUND Monthly December
-------------------------------------------------------
MONEY MARKET FUND Daily paid --
Monthly (Same
day dividends
are earned on a
purchase in the
Money Market
Fund if SM&R
receives
payment before
11:00 a.m.
Central Time on
that date.
Purchases after
that time, but
before
3:00 p.m.
Central Time,
will begin to
earn dividends
on the next
day.)
-------------------------------------------------------
PRIMARY FUND Daily paid December
Monthly
-------------------------------------------------------
</TABLE>
DISTRIBUTIONS EFFECT ON NAV. In order to be entitled to a dividend, an investor
must have acquired shares of a fund prior to the close of
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business on the distribution record date. A shareholder should be cautioned,
however, before purchasing shares of a fund immediately prior to a
distribution. Dividends and distributions paid by the funds have the effect of
reducing net asset value per share on the record date by the amount of the
payment. Therefore, a dividend or distribution of record shortly after the
purchase of shares by 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 funds reserve the right
to reinvest your distribution check in your account at the net asset value on
the business day of the reinvestment and to reinvest all future distributions
in shares of the applicable fund(s). Dividends 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 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 adviser
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 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.
HOUSEHOLD MAILINGS. Each year you are automatically sent an updated prospectus,
and annual and semi-annual reports for the funds. In order to reduce the
volume of mail you receive, when possible, only one copy of these documents
will be sent to shareholders that are part of the same family and share the
same residential address.
RIGHTS RESERVED BY THE FUND. The Fund 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; or
- to otherwise modify the conditions of purchase and any services at any
time.
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APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUSES)
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BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND (BONDS THAT EXTEND
LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S LONG-TERM BOND (BONDS THAT
EXTEND LONGER THAN ONE YEAR) RATINGS:
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities, fluctuation
of protective elements may be of greater amplitude, or there may be other
elements present which make the long-term risks appear somewhat larger than
the Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated "Baa" are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
A-1
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUSES)
--------------------------------------------------------------------------
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
DESCRIPTION OF FITCH IBCA BOND RATINGS:
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
MUNICIPAL NOTE RATINGS
DESCRIPTION OF MOODY'S INVESTOR SERVICE INC.'S SHORT-TERM MUNICIPAL NOTE (NOTES
THAT MATURE IN LESS THAN ONE YEAR) RATINGS:
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well
established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
DESCRIPTION OF STANDARD AND POOR'S SHORT-TERM MUNICIPAL NOTE RATINGS:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
A-2
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUSES)
--------------------------------------------------------------------------
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF FITCH IBCA SHORT-TERM DEBT RATINGS (INCLUDING COMMERCIAL PAPER):
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
DESCRIPTION OF DUFF & PHELP'S HIGHEST COMMERCIAL RATINGS:
HIGH GRADE
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
A-3
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUSES)
--------------------------------------------------------------------------
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
TBW-1 The highest category; indicates a very high likelihood that principal and
interest will be paid on a timely basis.
TBW-2 The second-highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
FEDERAL FUNDS
As used in this Prospectus and in the Fund's Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.
A-4
<PAGE>
FOR MORE INFORMATION ABOUT THE FUNDS
--------------------------------------------------------------------------
The following documents contain more information about the funds and are
available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains additional information about all aspects of the funds. A
current SAI has been filed with the Securities and Exchange Commission and is
incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS
The funds' annual and semi-annual reports provide additional information about
the funds' investments. The annual report contains a discussion of the market
conditions and investment strategies that significantly affected each fund's
performance during the last fiscal year.
REQUESTING DOCUMENTS
You may request a free copy of the SAI and these reports, make shareholder
inquiries, or request further information about the funds either by contacting
your broker or by contacting the funds at:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE: 1-800-231-4639 (TOLL FREE) OR
1-281-334-2469 (COLLECT)
PUBLIC INFORMATION
You can review and copy information about the funds, including the SAI, at the
Securities and Exchange Commission's Public Reference Room in Washington D.C.
You may obtain information on the operation of the public reference room by
calling the Commission at 202-942-8090 or by sending an e-mail to
[email protected]. Reports and other information about the funds also are
available on the Commission's Internet site at http://www.sec.gov. You may
obtain copies of this information, upon payment of a duplicating fee, by writing
the Public Reference Section of the Securities and Exchange Commission,
Washington, D.C. 20549-0102 or by sending an electronic request to
[email protected].
SM&R EQUITY FUNDS:
SM&R GROWTH FUND
SM&R ALGER GROWTH FUND
SM&R ALGER AGGRESSIVE GROWTH FUND
SM&R EQUITY INCOME FUND
SM&R BALANCED FUND
SM&R ALGER SMALL-CAP FUND
SM&R ALGER TECHNOLOGY FUND
SM&R FIXED INCOME FUNDS:
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND
Investment Company
Form 9094 (12/00) File No. 811- 6477
<PAGE>
[LOGO]
SM&R INVESTMENTS, INC.
FIXED INCOME FUNDS
EQUITY FUNDS
"CLASS T SHARES"
SM&R EQUITY FUNDS:
CLASS T
SM&R GROWTH FUND
SM&R EQUITY INCOME FUND
SM&R BALANCED FUND
SM&R FIXED INCOME FUNDS:
CLASS T
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
SINGLE CLASS FUND
SM&R PRIMARY FUND
Prospectus, December 31, 2000
<TABLE>
<S> <C>
The Securities and Exchange An investment in the Fund is not a
Commission has not approved or deposit in a bank and is not
disapproved these securities or insured or guaranteed by the
passed upon the adequacy of this Federal Deposit Insurance
prospectus. Any representation to Corporation or any other government
the contrary is a criminal offense. agency.
</TABLE>
<PAGE>
TABLE OF CONTENTS
-------------------------------------------------------------------
<TABLE>
<S> <C>
FUND SUMMARIES.......................... 1
SM&R Growth Fund........................ 1
SM&R Equity Income Fund................. 3
SM&R Balanced Fund...................... 5
SM&R Government Bond Fund............... 7
SM&R Tax Free Fund...................... 8
SM&R Primary Fund....................... 9
PERFORMANCE............................. 10
Bar Charts and Performance Tables....... 11
EXPENSES OF THE FUNDS................... 15
Fees and Expenses of the Funds.......... 15
ADDITIONAL EXPLANATION OF RISK FACTORS.. 18
SHARES OF THE FUNDS..................... 21
Eligible Purchasers of Class T Shares... 21
Class T Sales Charges................... 22
Sales Charge Reductions & Waivers....... 22
THE SM&R FUNDS AND THEIR MANAGEMENT..... 24
Investment Adviser...................... 24
Portfolio Management.................... 25
FINANCIAL HIGHLIGHTS.................... 27
SM&R Growth Fund........................ 28
SM&R Equity Income Fund................. 29
SM&R Balanced Fund...................... 30
SM&R Government Bond Fund............... 31
SM&R Tax Free Fund...................... 32
SM&R Primary Fund....................... 33
SHAREHOLDER'S GUIDE TO INVESTING WITH
SM&R'S MUTUAL FUNDS..................... 34
APPENDIX................................ A-1
</TABLE>
WHY READING THIS PROSPECTUS IS IMPORTANT TO YOU
This prospectus explains the investment objectives, risks and strategies of
each of the SM&R funds. Reading the prospectus will help you to decide which
SM&R fund, if any, is the right investment for you. We suggest that you keep
this prospectus for future reference.
<PAGE>
FUND SUMMARY SM&R GROWTH FUND
------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class T-Fund #021
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Managers:
Andre J. Hodlewsky
Gordon D. Dixon
Fund Portfolio Turnover:
10.42%
NASDAQ Symbol:
AMRNX Class T
Dividend Payment
Schedule:
Semi-Annually
INVESTMENT OBJECTIVE
The SM&R Growth Fund (the "Growth Fund") seeks to achieve long-term capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Growth Fund normally invests at least 85% of its total assets in common
stock. In selecting stocks, Securities Management and Research, Inc. ("SM&R"),
the Growth Fund's investment adviser:
- chooses stocks of financially sound companies that have a proven ability to
make and sustain a profit over time
- places an emphasis on companies with growth potential.
SM&R identifies candidate stock investments based on (1) low equity valuation or
low relative equity valuation and (2) improving earnings. SM&R evaluates each
candidate stock on a fundamental basis by examining past and expected financial
performance, managerial skill and foresight, and relative valuation to industry
peers and the market as a whole.
The Growth Fund generally purchases a higher proportion of stocks (relative to
their market weight) from those sectors of the market with higher growth
prospects, referred to as "sector overweighting." Examples of sectors with
higher growth prospects currently include technology, healthcare, and consumer
staples. On the other hand, the portfolio generally purchases a smaller
proportion of stocks (relative to their market weight) from sectors of the
market with below average growth characteristics (for example, utilities and
basic materials), referred to as "sector underweighting." SM&R generally
believes in never having less than half or more than double the market weighting
in any one sector. As a result of such strategic overweighting and
underweighting, the Growth Fund's performance may differ substantially from
broad market indexes like the S&P 500 and tend to incur more price volatility
than these indexes.
PRINCIPAL RISK FACTORS
The 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. The
principal risks of investing in the Growth Fund are as follows:
- The market value of the fund's securities could decline (market risk).
- SM&R's investment decisions (such as sector overweighting and underweighting
and individual stock selection) 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).
1
<PAGE>
FUND SUMMARY SM&R GROWTH FUND
------------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE FUND
This 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
This fund may NOT be appropriate:
- if you are investing with a shorter time horizon (less than ten years)
- if you are uncomfortable with an investment that will go up and down in
value
- as your complete portfolio
2
<PAGE>
FUND SUMMARY SM&R EQUITY INCOME FUND
------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class T-Fund #022
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Managers:
Andrew R. Duncan
Gordon D. Dixon
Fund Portfolio Turnover:
14.90%
NASDAQ Symbol:
AMNIX Class T
Dividend Payment
Schedule:
Quarterly
INVESTMENT OBJECTIVE
The SM&R Equity Income Fund (the "Equity Income Fund") seeks current income with
a secondary objective of long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Securities Management and Research, Inc. ("SM&R"), the fund's investment
adviser, normally invests at least 75% of the Equity Income Fund's assets in
common stocks (primarily income producing). This fund may also invest in
preferred stocks and investment grade debt securities (such as publicly traded
corporate bonds, debentures, notes, commercial paper, repurchase agreements, and
certificates of deposit in domestic banks and savings institutions having at
least $1 billion of total assets). Corporate debt obligations purchased by the
Equity Income Fund will consist only of obligations rated either Baa or better
by Moody's or BBB or better by S&P. Commercial paper and notes will consist only
of direct obligations of corporations whose bonds and/or debentures are rated as
set forth above.
The fixed income portion of the fund will generally invest in medium and long-
term securities. The average maturity for the fixed income portion generally is
expected to be in the six to fifteen year range (some securities may have a
longer or shorter duration). The average portfolio maturity may be shorter when
management anticipates that interest rates will increase, and longer when
management anticipates interest rates will decrease. Corporate debt obligations
purchased by the Balanced Fund will consist only of obligations rated either Baa
or better by Moody's or BBB or better by S&P. Commercial paper and notes will
consist only of direct obligations of corporations whose bonds and/or debentures
are rated as set forth above.
In selecting common and preferred stocks, the fund focuses on companies with
consistent and increasing dividend payment histories and future earnings
potential sufficient to continue such dividend payments. This fund's goal is to
maintain a portfolio dividend yield (before fees and expenses) at least 50%
greater than that of the S&P 500 Index.
SM&R identifies candidate stock investments based on (1) low equity valuation
and (2) improving earnings. SM&R evaluates each candidate stock on a fundamental
basis by examining past and expected financial performance, managerial skill and
foresight, and relative valuation to industry peers and the market as a whole.
The Equity Income Fund generally purchases a higher proportion of stocks
(relative to their market weight) from those sectors of the market with greater
dividend prospects, referred to as "sector overweighting." Examples of sectors
with greater dividend prospects currently include financial companies like
banks, insurance companies, and real estate investment trusts. On the other
hand, the fund generally purchases a smaller proportion of stocks (relative to
their market weight) from sectors of the market with below average dividend
yields (such as technology and consumer staples), referred to as "sector
underweighting." As a result of such strategic overweighting and underweighting,
the Growth Fund's performance may differ substantially from broad market indexes
like the S&P 500.
PRINCIPAL RISK FACTORS
The Equity Income 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. The
principal risks of investing in the Equity Income Fund are as follows:
- The market value of the fund's securities could decline (market risk).
- SM&R's investment decisions (such as sector overweighting and underweighting
and individual stock selection) 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).
- Interest rates could rise, causing a decline in the market value of debt
securities (interest rate risk). This risk will increase as average
portfolio securities maturities increase (maturity risk).
- Issuers of debt obligations could default or be unable to pay amounts due
(credit risk).
3
<PAGE>
FUND SUMMARY SM&R EQUITY INCOME FUND
------------------------------------------------------------------------
WHO MAY WANT TO INVEST IN THE FUND
This fund may be appropriate if you:
- have medium-term investment goals (five years or more)
- are comfortable with moderate to aggressive risk
- are looking for a fund with both growth and income components
- are seeking to participate in the equity market
- are willing to accept higher short-term risk
WHO MAY NOT WANT TO INVEST IN THE FUND
This fund may NOT be appropriate if you:
- are investing with a shorter-time horizon (less than five years)
- are investing for maximum return
- require a high degree of stability of your principal
4
<PAGE>
FUND SUMMARY SM&R BALANCED FUND
------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class T-Fund #023
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Managers:
Andrew R. Duncan
Gordon D. Dixon
Fund Portfolio Turnover:
8.6%
NASDAQ Symbol:
ANTRX Class T
Dividend Payment
Schedule:
Quarterly
INVESTMENT OBJECTIVE
The SM&R Balanced Fund (the "Balanced Fund") seeks to conserve principal,
produce current income, and achieve long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Securities Management and Research, Inc. ("SM&R"), the Balanced Fund's
investment adviser, uses a "balanced" approach by investing part of the assets
in common stocks and the remainder in a combination of U.S. Government bonds,
investment-grade corporate bonds, collateralized mortgage obligations, mortgage-
backed securities, convertible bonds, cash, and money market instruments. The
proportion invested in stocks, bonds and money market instruments changes in
response to changing economic conditions. This flexibility may help to reduce
price volatility.
SM&R will generally select stocks based on certain growth and value
considerations. A growth stock would include a company whose underlying earnings
growth rate is greater than the market. An example of a value stock would be one
where the stock price appears undervalued in relation to earnings, projected
cash flow, or asset value per share. The stocks in this fund are diversified and
are selected based upon two models. One model is based on profitability
measurements and the other model is based on the corporation's return on
invested cash. SM&R then evaluates each candidate stock on a fundamental basis
by examining past and expected financial performance, managerial skill and
foresight, and relative valuation to industry peers and the market as a whole.
The bonds, meanwhile, may serve as a stabilizing force during times of eroding
stock market value, as well as provide a fixed income payment stream. The fund
invests at least 25% of assets in fixed income securities, all of which are
rated BBB or better (investment grade). The fixed income portion of the fund
will generally invest in medium and long-term securities. The average maturity
for the fixed income portion generally is expected to be in the six to fifteen
year range (some securities may have a longer or shorter duration). The average
portfolio maturity may be shorter when management anticipates that interest
rates will increase, and longer when management anticipates interest rates will
decrease. Corporate debt obligations purchased by the Balanced Fund will consist
only of obligations rated either Baa or better by Moody's or BBB or better by
S&P. Commercial paper and notes will consist only of direct obligations of
corporations whose bonds and/or debentures are rated as set forth above. The
Balanced Fund may also invest in repurchase agreements.
The Balanced Fund will sometimes be more heavily invested in equity securities,
and at other times it will be more heavily invested in fixed-income securities.
SM&R, through an ongoing program of asset allocation, will determine the
appropriate level of equity and debt holdings consistent with SM&R's outlook and
evaluation of trends in the economy and the financial markets.
PRINCIPAL RISK FACTORS
The Balanced 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. The
principal risks of investing in the Balance Fund are as follows:
- The market value of the fund's securities could decline (market risk).
- SM&R's investment decisions (such as determining the ratio of stock to bonds
and individual stock selection) 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).
5
<PAGE>
FUND SUMMARY SM&R BALANCED FUND
------------------------------------------------------------------------
- Interest rates could increase which can cause the value of debt securities
to decline (interest rate risk).
- Issuers of debt obligations could default or be unable to pay amounts due
(credit risk).
- The fund could be unable to find a buyer for its securities (liquidity
risk).
- The income you receive from the portfolio is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest
rates drop, your income from the portfolio may drop as well (income risk).
- Interest rates could fall enough to prompt an unexpected number of people to
refinance (or prepay) their mortgages before their maturity (call risk).
WHO MAY WANT TO INVEST IN THE FUND
This fund may be appropriate if you:
- are seeking conservation of the purchasing power of your capital, but also
want to participate in equity investments
- are looking for a more conservative alternative to a growth-oriented
portfolio
- want a well-diversified and relatively stable investment allocation
- need a core investment
WHO MAY NOT WANT TO INVEST IN THE FUND
This fund may NOT be appropriate if you:
- are investing for a maximum return over a long time horizon
- require a high degree of stability of your principal
6
<PAGE>
FUND SUMMARY SM&R GOVERNMENT BOND FUND
------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class T-Fund #026
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Manager:
Gordon D. Dixon
Asst. Portfolio Manager:
Anne M. Lemire
Fund Portfolio Turnover:
30.87%
NASDAQ Symbol:
SMRGX Class T
Dividend Payment
Schedule:
Monthly
INVESTMENT OBJECTIVE
The SM&R Government Bond Fund (the "Government Bond Fund") seeks to provide as
high a level of current income, liquidity, and safety of principal as is
consistent with prudent investment risks.
PRINCIPAL INVESTMENT STRATEGIES
The Government Bond Fund normally invests at least 65% of its total assets in
securities issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities. These may include Treasuries and mortgage-backed securities,
such as Ginnie Maes (issued by the Government National Mortgage Association),
Freddie Macs (issued by the Federal Home Loan Mortgage Corporation), and Fannie
Maes (issued by the Federal National Mortgage Association). This fund may also
invest assets in collateralized mortgage obligations, or "CMOs," which are debt
obligations collateralized by a portfolio or pool of mortgages, mortgage-backed
securities, or U.S. Government securities.
The Government Bond Fund generally invests primarily in medium and long term
securities. The weighted average portfolio maturity generally is expected to be
in the six to fifteen year range (some securities may have longer or shorter
maturities). The average portfolio maturity may be shorter when management
anticipates that interest rates will increase, and longer when management
anticipates that interest rates will decrease.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government are backed by the full faith and credit of the United States
(such as Ginnie Maes); others, by the agency or instrumentality with limited
rights to borrow from the U.S. Treasury (such as Fannie Maes); and others, only
by the credit of the issuer. No assurance can be given that the U.S. Government
would lend money or otherwise provide financial support to U.S. Government
sponsored instrumentalities; it is not obligated by law to do so.
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Government Bond Fund, or it could
underperform other investments, if any of the following occurs:
- interest rates rise, causing a decline in the market value of debt
securities (interest rate risk). This risk will increase as average
portfolio securities maturities increase (maturity risk).
- the worldwide demand for U.S. government securities falls.
- interest rates fall enough to prompt an unexpected number of people to
refinance (or prepay) their mortgages.
- interest rates rise enough to cause fewer people than expected to repay
their mortgages early if any bonds the fund owns are downgraded in credit
rating or into default.
- issuers of debt obligations could default or be unable to pay amounts due
(credit risk).
WHO MAY WANT TO INVEST IN THE FUND
This fund may be appropriate if you:
- are seeking income to meet current needs
- are willing to accept moderate risk of volatility
- are retired or nearing retirement
This fund may NOT be appropriate if you:
- are investing for maximum return over a long time horizon
- require absolute stability of your principal
7
<PAGE>
FUND SUMMARY SM&R TAX FREE FUND
------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Classes of Shares
Offered in this
Prospectus:
Class T-Fund #028
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Manager:
Gordon D. Dixon
Asst. Portfolio Manager:
Anne M. Lemire
Fund Portfolio Turnover:
7.61%
NASDAQ Symbol:
SMRTX Class T
Dividend Payment
Schedule:
Monthly
INVESTMENT OBJECTIVE
The SM&R Tax Free Fund (the "Tax Free Fund") seeks to provide as high a level of
interest income largely exempt from federal income taxes as is consistent with
preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES
The Tax Free Fund invests primarily in tax-exempt securities. During normal
market conditions, this fund invests at least 80% of its net assets in municipal
securities that pay interest exempt from federal income taxes. Municipal
securities are obligations issued by or on behalf of states, territories, and
possessions of the U.S. and the District of Columbia and their political
subdivisions, agencies, and instrumentalities. The Tax Free Fund generally
invests in securities rated Baa or better by Moody's or BBB or better by
Standard and Poor's and Fitch.
The weighted average portfolio maturity of the Tax Free Fund generally is
expected to be in the six to fifteen year range (some securities have longer or
shorter maturities). The average portfolio maturity may be shorter when
management anticipates that interest rates will increase, and longer when
management anticipates that interest rates will decrease.
Under normal market conditions up to 20% of the Tax Free Fund's net assets, and
as a temporary defensive measure during abnormal market conditions, up to 50% of
its net assets may be invested in the following types of taxable fixed income
obligations: (1) obligations issued or guaranteed by the U.S. Government, its
agencies, instrumentalities or authorities; (2) corporate debt obligations which
at the date of the investment are rated A or higher by Moody's, S&P, or Fitch;
(3) commercial paper which at the date of the investment is rated in one of the
two top categories by Moody's or S&P, or if not rated, is issued by a company
which at the date of the investment has an outstanding debt issue rated A or
higher by Moody's or S&P; (4) certificates of deposit issued by U.S. banks which
at the date of the investment have capital surplus and undivided profits of $1
billion as of the date of their most recently published financial statements;
and (5) repurchase agreements secured by U.S. Government securities, provided
that no more than 15% of the Tax Free Fund's net assets will be invested in
illiquid securities including repurchase agreements with maturities in excess of
seven days. When temporary defensive measures are employed, the Tax Free Fund
may not achieve its investment objective.
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Tax Free Fund, or it could
underperform other investments, if any of the following occurs:
- interest rates rise (thus causing a decline in the market value of debt
securities). This risk will increase as average portfolio securities
maturities increase (interest rate risk).
- if any bonds the fund owns are downgraded in credit rating or go into
default, these bonds may become harder to value or to sell at a fair price
(credit risk).
- if any of the bonds are Baa or BBB rated securities they may be less liquid
and involve somewhat greater risk (liquidity risk).
ALSO, SOME OF YOUR DIVIDEND INCOME MAY BE TAXABLE.
WHO MAY WANT TO INVEST IN THE FUND
This fund may be appropriate if you:
- are willing to sacrifice some investment return for income exempt from
federal income tax and, under certain conditions, exempt from state and
local taxes
- are in a high tax bracket (28% and up)
- are seeking income to meet current needs
- are willing to accept moderate risk of volatility
This fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- prefer capital gains over ordinary income
8
<PAGE>
FUND SUMMARY SM&R PRIMARY FUND
------------------------------------------------------------------------
FUND FACTS
YOU MAY FIND
HELPFUL
Single Class
Fund #627
Investment Adviser:
Securities
Management and
Research, Inc.
Portfolio Manager:
John S. Maidlow
Asst. Portfolio Manager:
Anne M. LeMire
Fund Portfolio Turnover:
18.46%
NASDAQ Symbol:
SMRPX
Dividend Payment
Schedule:
Monthly
INVESTMENT OBJECTIVE
The SM&R Primary Fund (the "Primary Fund") seeks maximum current income
consistent with capital preservation and liquidity.
PRINCIPAL INVESTMENT STRATEGIES
The Primary Fund invests primarily in commercial paper. Commercial paper is
short-term unsecured promissory notes issued by corporations to finance short-
term credit needs. Commercial paper is usually sold on a discount basis and has
a maturity at the time of issuance not exceeding nine months. This fund will
only invest in commercial paper rated in one of the two highest rating
categories by one or more of the nationally recognized statistical rating
organizations.
The Primary Fund, consistent with its investment objective, will attempt to
maximize yield by trying to take advantage of changing conditions and trends. It
may also attempt to take advantage of what are believed to be disparities in
yield relationships between different instruments. This procedure may increase
or decrease the portfolio yield depending upon the Primary Fund's ability to
correctly time and execute such transactions.
The Primary Fund may also invest in:
- U.S. Government obligations;
- corporate debt obligations maturing in five years or less and rated "A" or
higher;
- certificates of deposit generally maturing in 3 years or less; and
- repurchase agreements.
The weighted average portfolio maturity generally is expected to be in a range
of two to five years (some securities may be shorter or longer maturities). The
average portfolio maturity will likely be shorter when management anticipates
that interest rates will increase and longer when interest rates are expected to
decrease.
PRINCIPAL RISK FACTORS
You could lose money on your investment in the Primary Fund, or it could
underperform other investments, if any of the following occurs:
- interest rates rise, causing a decline in the market value of debt
securities (interest rate risk). This risk will increase as average
portfolio securities maturities increase (maturity risk).
- if any of the fund's investments are downgraded in credit rating or go into
default.
By limiting its investments as described above, the Primary Fund may not achieve
as high a level of current income as a fund investing in lower-rated securities
or longer-term securities.
WHO MAY WANT TO INVEST IN THE FUND
This fund may be appropriate if you:
- are seeking income to meet current needs
- are willing to accept moderate risk of volatility
- are more concerned with safety of principal than with investment returns
- are retired or nearing retirement
This fund may NOT be appropriate if you:
- are investing for maximum return
- require absolute stability of your principal
- are investing for goals that are many years in the future
- prefer capital gains over ordinary income
9
<PAGE>
PERFORMANCE
-------------------------------------------------------------------
PERFORMANCE
The bar charts and average annual total return tables shown below provide some
indication of the risks of investing in the funds and the difference in returns
for such funds by:
- showing performance for each of the last 10 calendar years or since inception
if less than 10 years and
- showing how average annual returns compare to those of a broad measure of
market performance.
SPECIAL MATTER AFFECTING THE GROWTH FUND, EQUITY INCOME FUND AND BALANCED FUND
Such funds, which commenced operations on December 31, 2000, are "clones" of and
successors to the SM&R Growth Fund, Inc., SM&R Equity Income Fund, Inc., and
SM&R Balanced Fund, Inc. (the "Predecessor Funds"). ACCORDINGLY, MOST OF THE
INFORMATION BELOW FOR THE GROWTH FUND, BALANCED FUND, AND EQUITY INCOME FUND
WILL BE INFORMATION FROM THE PREDECESSOR FUNDS.
PERFORMANCE OF THE PREDECESSOR FUNDS IS NO GUARANTEE OF THE FUTURE PERFORMANCE
OF THE NEW "CLONE" FUNDS.
SPECIAL MATTER AFFECTING ONLY THE GROWTH FUND
In addition to the changes discussed above which affect all three of the funds,
in reviewing the information for the Growth Fund, you should also keep in mind
another matter affecting only the Growth Fund. Prior to the conversion of the
SM&R Growth Fund, Inc. into the Growth Fund, SM&R Growth Fund, Inc.'s
shareholders approved a new investment advisory agreement eliminating the
performance fee adjustment component. Keep in mind when reviewing the
performance information for the Growth Fund that all of such information is for
periods during which the SM&R Growth Fund, Inc.'s investment advisory agreement
provided for increases or decreases to the advisory fee paid under such
agreement based upon performance. During the last six fiscal years of the SM&R
Growth Fund, Inc. there were 72 monthly performance calculations. During 11 of
those 72 months, SM&R, the investment adviser, benefited from the performance
adjustment because such adjustment increased the advisory fee. During the
remaining 61 of those months, application of the performance adjustment resulted
in a decrease in the advisory fee, which benefited SM&R Growth Fund, Inc. During
the 11 months the investment adviser benefited from the adjustment, the SM&R
Growth Fund, Inc.'s performance would have been reduced. During the 61 months
the SM&R Growth Fund, Inc. benefited from the adjustment, performance would have
been improved. The future impact of eliminating the performance adjustment will
depend on many factors and may result in an increase in the Growth Fund's
aggregate advisory fee. To the extent such fees are increased, the Growth Fund's
performance will be reduced.
These bar charts include the effects of fundexpenses, but not sales charges and
account fees. The returns shown would be lower if such sales charges were
included As also noted above, much of the performance information is for periods
prior to adoption of multiple-plans and 12b-1 plans. If multiple classes had
been in existence, the financial performance would have been lower than depicted
because of the imposition of distribution and/or service fees pursuant to the
12b-1 plans.
PRIOR PERFORMANCE
When reviewing the information for the Growth Fund, Equity Income Fund, Balanced
Fund, Government Bond Fund, Tax Free Fund and Primary Fund, note that such funds
adopted a multiple-class plan and 12b-1 plan effective January 1, 1999. Upon the
adoption of the multiple-class plan by these funds, the existing single-class
shares of these funds were renamed as Class T shares. Accordingly, the
performance information presented below for the Class T shares for periods prior
to January 1, 1999 is the performance information of the single-class shares
that existed prior to such date.
PAST PERFORMANCE IS NOT NECESSARILY
AN INDICATION OF HOW THE FUNDS
WILL PERFORM IN THE FUTURE.
10
<PAGE>
PERFORMANCE
-------------------------------------------------------------------
GROWTH FUND
The following bar chart shows the annual total returns (%) for Class T of the
Growth Fund or, as noted above, of the SM&R Growth Fund, Inc., for each of the
last 10 calendar years.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 (2.94)%
1991 36.98%
1992 (2.50)%
1993 8.17%
1994 4.98%
1995 25.20%
1996 17.64%
1997 22.24%
1998 18.35%
1999 24.49%
</TABLE>
The SM&R Growth Fund, Inc.'s Class T unannualized return for the period from
January 1, 2000 through September 30, 2000 is 2.39%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: December 31, 1998 19.41%
Worst Quarter: September 30, 1990 (13.16)%
</TABLE>
The next table lists the SM&R Growth Fund, Inc.'s Class T average annual total
returns for the past one, five and ten calendar years, and the returns of the
S&P 500-Registered Trademark- index and Lipper Growth Fund Index for the same
periods. This table is intended to provide you with some indication of the risks
of investing in the Growth Fund. At the bottom of the table you can compare this
performance with the S&P 500-Registered Trademark- and Lipper Growth Fund Index.
The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices.
Standard & Poor's, S&P, and S&P 500-Registered Trademark-are registered
trademarks of Standard & Poor's Corporation. The Lipper Growth Fund Index is a
widely recognized, equally weighted performance index (adjusted for capital
gains distributions and income dividends) of the 30 largest open-end funds which
invest in companies whose long term earnings are expected to grow significantly
faster than the earnings of the stock represented in the major unmanaged stock
indices.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 12/31/99)
<TABLE>
<CAPTION>
PAST PAST PAST
ONE YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
SM&R Growth Fund 17.28% 20.14% 13.91%
S&P 500-Registered Trademark- 21.03% 28.55% 18.19%
Lipper Growth Fund Index 50.93% 30.51% 19.20%
</TABLE>
11
<PAGE>
PERFORMANCE
-------------------------------------------------------------------
EQUITY INCOME FUND
The following bar chart shows the annual total returns (%) for Class T of the
Equity Income Fund or, as noted above, of the SM&R Equity Income Fund, Inc., for
each of the last 10 calendar years.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 0.75%
1991 29.06%
1992 3.31%
1993 10.63%
1994 (0.61)%
1995 29.12%
1996 16.46%
1997 22.72%
1998 12.11%
1999 (1.39)%
</TABLE>
The SM&R Equity Income Fund, Inc.'s Class T unannualized return for the period
from January 1, 2000 through September 30, 2000 is 7.75%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: December 31, 1991 11.12%
Worst Quarter: September 30, 1999 (8.72)%
</TABLE>
The next table lists the SM&R Equity Income Fund, Inc.'s Class T average annual
total returns for the past one, five and ten calendar years, and the returns of
the S&P 500-Registered Trademark- and the Lipper Equity Income Fund Index for
the same periods. This table is intended to provide you with some indication of
the risks of investing in the Equity Income Fund. At the bottom of the table you
can compare this performance with the S&P 500-Registered Trademark- and the
Lipper Equity Income Fund Index. The S&P 500-Registered Trademark- is the
Standard & Poor's Composite Index of 500 Stocks, a widely recognized, unmanaged
index of common stock prices. Standard & Poor's, S&P, and S&P
500-Registered Trademark- are registered trademarks of Standard & Poor's
Corporation. The Lipper Equity Income Fund Index is a widely recognized, equally
weighted performance index (adjusted for capital gains distributions and income
dividends) of the 10 largest open-end funds which seek relatively high current
income and growth of income through investing 60% or more of their portfolio in
equities.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 12/31/99)
<TABLE>
<CAPTION>
PAST PAST PAST
ONE YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
SM&R Equity Income Fund (7.06)% 13.97% 11.00%
S&P 500-Registered Trademark- 21.03% 28.55% 18.19%
Lipper Equity Income Fund Index 4.20% 17.80% 13.04%
</TABLE>
BALANCED FUND
The following bar chart shows the annual total returns (%) for Class T of the
Balanced Fund or, as noted above, of the SM&R Balanced Fund, Inc., for each of
the last 10 calendar years.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 1.37%
1991 24.53%
1992 3.00%
1993 6.31%
1994 1.49%
1995 22.29%
1996 11.86%
1997 17.46%
1998 13.83%
1999 11.87%
</TABLE>
The SM&R Balanced Fund, Inc.'s Class T unannualized return for the period from
January 1, 2000 through September 30, 2000 is 7.44%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: December 31, 1998 10.19%
Worst Quarter: September 30, 1990 (7.64)%
</TABLE>
The next table lists the SM&R Balanced Fund, Inc.'s Class T average annual total
returns for the past one, five and ten calendar years, and the returns of the
Lipper Balanced Fund Index for the same periods. This table is intended to
provide you with some indication of the risks of investing in the Balanced Fund.
At the bottom of the table you can compare this performance with the Lipper
Balanced Fund Index. The Lipper Balanced Fund Index is a widely recognized,
equally weighted performance index (adjusted for capital gains distributions and
income dividends) of the 30 largest open-end funds whose primary objective is to
conserve principal by maintaining a balanced portfolio of stocks and bonds. The
stock/bond ratio typically ranges around 60%/40%.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 12/31/99)
<TABLE>
<CAPTION>
PAST PAST PAST
ONE YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
SM&R Balanced Fund 5.43% 14.04% 10.47%
S&P 500-Registered Trademark- 21.03% 28.55% 18.19%
Lehman Brothers Intermediate
Government/Corporate Index 0.38% 7.10% 7.26%
Lipper Balanced Fund Index 8.96% 16.33% 12.26%
</TABLE>
12
<PAGE>
PERFORMANCE
-------------------------------------------------------------------
GOVERNMENT BOND FUND
The following bar chart shows the annual total returns (%) for Class T of the
Government Bond Fund since inception.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 9.31%
1994 (4.65)%
1995 18.57%
1996 3.43%
1997 8.14%
1998 6.87%
1999 (0.34)%
</TABLE>
The Government Bond Fund's fiscal year ends on August 31st. The Government Bond
Fund's unannualized Class T return for the period from January 1, 2000 through
September 30, 2000 is 5.62%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: June 30, 1995 6.44%
Worst Quarter: September 30, 1994 (1.77)%
</TABLE>
The next table lists the Government Bond Fund's Class T average annual total
returns for the past one and five calendar years, and for the period since
inception of the Government Bond Fund, and the returns of the Lehman Brothers
Government/Mortgage-Backed Securities Index for the same periods. This table is
intended to provide you with some indication of the risks of investing in the
Government Bond Fund. At the bottom of the table you can compare this
performance with the Lehman Brothers Government/Mortgage-Backed Securities
Index. This index includes all public obligations of the U.S. treasury and all
publicly issued debt of U.S. Government agencies, quasi-federal corporations and
corporate debt guaranteed by the U.S. Government as well as 15 and 30 year fixed
rate securities backed by mortgage pools of the GNMA, FHLMA, and FNMA.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 12/31/99)
<TABLE>
<CAPTION>
SINCE
PAST PAST INCEPTION
ONE YEAR 5 YEARS (3/16/92)
<S> <C> <C> <C>
Government Bond Fund (4.81)% 6.18% 5.64%
Lehman Brothers Government
Mortgage-Backed Securities Index (0.54)% 7.67% 6.84%
</TABLE>
TAX FREE FUND
The following bar chart shows the annual total returns (%) for Class T of the
Tax Free Fund since inception.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1994 (5.49)%
1995 17.87%
1996 4.48%
1997 8.98%
1998 6.33%
1999 (5.20)%
</TABLE>
The Tax Free Fund's fiscal year ends on August 31st. The Tax Free Fund's
Class T unannualized return for the period from January 1, 2000 through
September 30, 2000 is 6.58%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: March 31, 1995 7.41%
Worst Quarter: March 31, 1994 (3.94)%
</TABLE>
The next table lists the Tax Free Fund's Class T average annual total return for
the past one and five calendar years, and for the period since inception of the
Tax Free Fund, and the returns of the Lehman Brothers Municipal Index for the
same periods. This table is intended to provide you with some indication of the
risks of investing in the fund. At the bottom of the table you can compare this
performance with the Lehman Brothers Municipal Index. This is an index of
investment grade tax exempt bonds classified into four major sections: General
Obligations, Revenue, Insured and Preferred.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 12/31/99)
<TABLE>
<CAPTION>
SINCE
PAST PAST INCEPTION
ONE YEAR 5 YEARS (9/9/93)
<S> <C> <C> <C>
Tax Free Fund (7.53)% 5.70% 3.69%
Lehman Brothers Municipal Index (2.06)% 6.91% 4.83%
</TABLE>
13
<PAGE>
PERFORMANCE
-------------------------------------------------------------------
PRIMARY FUND
The following bar chart shows the annual total returns (%) for the Primary Fund
since inception (March 16, 1992).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 2.48%
1994 3.58%
1995 5.26%
1996 4.92%
1997 5.08%
1998 5.13%
1999 3.77%
</TABLE>
The Primary Fund's fiscal year ends on August 31st. The Primary Fund's
unannualized return for the period from January 1, 2000 through September 30,
2000 is 4.43%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: September 30, 2000 1.49%
Worst Quarter: December 31, 1999 0.31%
</TABLE>
The next table lists the Primary Fund's average annual total return for the past
one and five years and since inception, and the returns of the Lehman
Government/Corporate Index for the same periods. This table is intended to
provide you with some indication of the risks of investing in the Primary Fund.
At the bottom of the table you can compare this performance with the Lehman
Government/ Corporate Index. This index represents all public obligations of the
U.S. Treasury as well as all publicly issued debt of U.S. Government agencies
with maturities of one to three years.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 12/31/99)
<TABLE>
<CAPTION>
SINCE
PAST PAST INCEPTION
ONE YEAR 5 YEARS (3/16/92)
<S> <C> <C> <C>
Primary Fund 3.77% 4.83% 4.19%
Lehman Government/Corporate Index 3.15% 6.55% 5.79%
</TABLE>
14
<PAGE>
EXPENSES OF THE FUNDS
-------------------------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
SHAREHOLDER FEES
(fees paid directly from your investment)
SM&R EQUITY FUNDS
<TABLE>
<CAPTION>
EQUITY
GROWTH INCOME BALANCED
FUND FUND FUND
CLASS T CLASS T CLASS T
<S> <C> <C> <C>
Maximum Sales Charge Imposed on
Purchases
(as a percentage of offering price) 5.75%(1) 5.75%(1) 5.75%(1)
Maximum Account Fees
(custodian fee applicable to tax
deferred accounts only) $ 7.50 $ 7.50 $ 7.50
Wire Redemption Fees on Redemptions
less than $10,000 $10.00 $10.00 $10.00
</TABLE>
SM&R FIXED INCOME FUNDS
<TABLE>
<CAPTION>
GOVERNMENT TAX
BOND FREE PRIMARY
FUND FUND FUND
CLASS T CLASS T CLASS T
<S> <C> <C> <C>
Maximum Sales Charge Imposed
on Purchases (as a percentage of
offering price) 4.50%(2) 4.50%(2) None
Maximum Account Fees
(custodian fee applicable to tax
deferred accounts only) $ 7.50 $ 7.50 $ 7.50
Wire Redemption Fees on Redemptions
less than $10,000 $10.00 $10.00 $10.00
</TABLE>
ANNUAL FUND OPERATING EXPENSES(3)
(expenses that are deducted from fund assets)
SM&R EQUITY FUNDS
<TABLE>
<CAPTION>
EQUITY
GROWTH INCOME BALANCED
FUND FUND FUND
CLASS T CLASS T CLASS T
<S> <C> <C> <C>
Management Fees 0.48% 0.71% 0.67%
Distribution and/or Service (12b-1)
Fees -- -- --
Other Expenses(4) 0.33% 0.34% 0.58%
Total Annual Fund Operating
Expenses(5) 0.81% 1.05% 1.25%
------- ------- ------
</TABLE>
SM&R FIXED INCOME FUNDS
<TABLE>
<CAPTION>
GOVERNMENT TAX
BOND FREE
FUND FUND PRIMARY
CLASS T CLASS T FUND
<S> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50%
Distribution and/or Service (12b-1)
Fees -- -- --
Other Expenses(4) 0.48% 0.61% 0.54%
Total Annual Fund Operating
Expenses(5) 0.98% 1.11% 1.04%
------- ------- -----
</TABLE>
FOOTNOTES TO FEES AND EXPENSES
(1) You pay a sales charge of 5.75% on initial investments in shares of less
than $50,000. You pay a reduced sales charge at certain breakpoints, as
follows: 4.50% on initial investments of at least $50,000 but less than
$100,000; 3.50% on initial investments of at least $100,000 but less than
$250,000; 2.50% on initial investments of at least $250,000 but less than
$500,000; and zero on initial investments of $500,000 or more.
(2) You pay a sales charge of 4.5% on initial investments in shares of less
than $100,000. You pay a reduced sales charge at certain breakpoints, as
follows: 3.50% on initial investments of at least $100,000 but less than
$250,000; 2.50% on initial investments of at least $250,000 but less than
$500,000; and zero on initial investments of $500,000 or more.
(3) The "Management Fees" and "Other Expenses" shown for the Growth Fund,
Equity Income Fund, and Balanced Fund are for the six month period ended
June 30, 2000; and for the Government Bond Fund and Tax Free Fund are for
the fiscal year ended August 31, 2000. No Distribution and Service (12b-1
fees) are imposed on any shares offered in this prospectus.
(4) These expenses include administrative services fees, audit fees, directors
fees, shareholder reporting and miscellaneous expenses. For the Government
Bond Fund, Tax Free Fund, and Primary Fund, the "Management Fees" and
"Other Expenses" are for the year ended August 31, 2000. For the Growth
Fund, Equity Income Fund, and Balanced Fund, these fees and expenses are
for the six month period ended June 30, 2000.
(5) The Fund's manager, Securities Management and Research, Inc. ("SM&R"), has
contractually agreed to reimburse the Growth Fund, Equity Income Fund,
Balanced Fund, Government Bond Fund, Tax Free Fund, and the Primary Fund
regular operating expenses in excess of 1.25% per year of such funds'
average daily net assets. Regular operating expenses include the advisory
fee and administrative fee but do not include class-specific expenses. The
Fee Table does not reflect fees waived or expenses assumed by SM&R on a
voluntary basis. During the fiscal year ended August 31, 2000, SM&R
voluntarily waived fees of 0.24% for the Primary Fund and 0.36% for the Tax
Free Fund. Refer to "Reimbursements and Waivers" on page 25 of this
prospectus for details.
15
<PAGE>
EXPENSES OF THE FUNDS
-------------------------------------------------------------------
EXPENSES
The tables below show the total expenses you would pay on a $10,000 investment
over one, three-, five-, and ten-year periods. These examples are intended to
help you compare the cost of investing in the funds with the cost of investing
in other mutual funds and are for illustration only. These examples also assume
that your investment has a 5% return each year, include the effect of a sales
load, 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 FUND EXPENSES:
<TABLE>
<CAPTION>
SM&R EQUITY FUNDS
GROWTH FUND*
ASSUMING NO REDEMPTION
AT END OF PERIOD
CLASS T
<S> <C>
1 Year $ 653
3 Years $ 819
5 Years $ 999
10 Years $1,519
</TABLE>
<TABLE>
<CAPTION>
EQUITY INCOME FUND*
ASSUMING NO REDEMPTION
AT END OF PERIOD
CLASS T
<S> <C>
1 Year $ 676
3 Years $ 890
5 Years $1,121
10 Years $1,784
</TABLE>
<TABLE>
<CAPTION>
BALANCED FUND*
ASSUMING NO REDEMPTION
AT END OF PERIOD
CLASS T
<S> <C>
1 Year $ 695
3 Years $ 949
5 Years $1,222
10 Years $1,999
</TABLE>
*These funds began operations as series of the Fund on December 31, 2000.
However, because these funds are "clones" of and successors to the "stand-alone"
Predecessor Funds which operated prior to such time, expenses are shown for the
Predecessor Funds for one, three, five and ten year periods.
16
<PAGE>
EXPENSES OF THE FUNDS
-------------------------------------------------------------------
<TABLE>
<CAPTION>
SM&R FIXED INCOME FUNDS
GOVERNMENT BOND FUND
ASSUMING NO REDEMPTION
AT END OF PERIOD
CLASS T
<S> <C>
1 Year $ 545
3 Years $ 748
5 Years $ 967
10 Years $1,597
</TABLE>
<TABLE>
<CAPTION>
TAX FREE FUND
ASSUMING NO REDEMPTION
AT END OF PERIOD
CLASS T
<S> <C>
1 Year $ 558
3 Years $ 787
5 Years $1,034
10 Years $1,741
</TABLE>
<TABLE>
<CAPTION>
PRIMARY FUND
ASSUMING NO REDEMPTION
AT END OF PERIOD
<S> <C>
1 Year $ 106
3 Years $ 331
5 Years $ 574
10 Years $1,271
</TABLE>
17
<PAGE>
ADDITIONAL EXPLANATION OF RISK FACTORS
-------------------------------------------------------------------
COMMON RISK FACTORS FOR
ALL OF SM&R'S FUNDS
Please remember that mutual fund shares 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 fund could fluctuate in value
over time and could result in a loss of money.
---------------------------------------------------
RISK FACTORS SPECIFIC TO
ONE OR MORE OF THE SM&R FUNDS
IMPORTANT
The following factors may affect the value of your investment in one or more of
the SM&R 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 a fund's net asset value
per share, which will fluctuate as the values of such fund's portfolio
securities change. You can lose money by investing in the 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 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 FUNDS.
INVESTMENT STYLE OR MANAGEMENT RISK
Investment style or management risk is the risk that the investment strategy of
the SM&R funds' investment adviser or 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 adviser or 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 FUNDS.
CREDIT RISK
Credit risk is the risk that the issuer of a security, or a party to a contract,
will default or otherwise not honor a financial obligation. THIS RISK APPLIES TO
ALL OF THE FUNDS, BUT MAY HAVE A GREATER IMPACT ON THE BALANCED FUND, EQUITY
INCOME FUND, TAX FREE FUND, AND PRIMARY FUND. The Growth Fund is permitted to
invest in "junk" bonds. Junk bonds have additional risks, including limitations
on the Growth Fund's ability to resell the lower-rated debt securities and less
readily available market quotations for such securities.
INTEREST RATE RISK
Interest rate risk is the risk that the market value of an income-bearing
investment will decline due to changes in prevailing interest rates. With
fixed-rate securities, a rise in interest rates typically causes a decline in
market values. THIS
18
<PAGE>
ADDITIONAL EXPLANATION OF RISK FACTORS
-------------------------------------------------------------------
RISK APPLIES TO ALL OF THE FUNDS, BUT MAY HAVE A GREATER IMPACT ON THE
GOVERNMENT BOND FUND, TAX FREE FUND, PRIMARY FUND (COLLECTIVELY THE "SM&R FIXED
INCOME FUNDS"), BALANCED FUND, AND EQUITY INCOME FUND.
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 THE GROWTH FUND,
EQUITY INCOME FUND, AND BALANCED FUND (COLLECTIVELY THE "SM&R EQUITY FUNDS").
LIQUIDITY RISK
Liquidity risk is the risk that certain securities or other investments may be
difficult or impossible to sell at the time the fund would like to sell them or
at the price the fund values them. The fund may have to sell at a lower price,
sell other securities instead, or forego an investment opportunity, any of which
could have a negative effect on fund management or performance. THIS RISK
APPLIES PRIMARILY TO THE SM&R EQUITY FUNDS, TAX FREE FUND, AND PRIMARY FUND.
CALL RISK
Call risk is the risk that an unexpected fall in prevailing interest rates will
shorten the life of an outstanding obligation by increasing the actual or
expected number of prepayments, thereby reducing the obligation's value. THIS
RISK APPLIES PRIMARILY TO THE BALANCED FUND AND THE TAX FREE FUND.
MATURITY RISK
Maturity risk is the risk that if the general level of interest rates rises
subsequent to the time an investment commitment is made in a fixed-income
security or portfolio, the market price of that security or portfolio will
decline until its yield becomes competitive with new, higher interest rate
securities. It is virtually certain that fluctuations in the general level of
interest rates cause long-term maturity bonds to fluctuate more in price than
shorter-term bonds. As the maturity increases, the price discount is being
amortized over an increasing number of years. Therefore, in order for the
discount to produce say an extra 1 percent per annum; it must be progressively
larger in dollar amounts as maturity increases. Long maturity increases risk not
only because of the interest rate factor but also because it increases the time
available for unexpected occurrences. THIS RISK APPLIES PRIMARILY TO THE
BALANCED FUND, PRIMARY FUND, THE GOVERNMENT BOND FUND, AND THE EQUITY INCOME
FUND.
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. RISKS ASSOCIATED WITH CONVERTIBLE
SECURITIES APPLY TO THE GROWTH FUND, EQUITY INCOME FUND AND BALANCED FUND.
PREFERRED STOCKS
Because preferred 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
19
<PAGE>
ADDITIONAL EXPLANATION OF RISK FACTORS
-------------------------------------------------------------------
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. RISKS ASSOCIATED WITH PREFERRED STOCKS
APPLY TO THE GROWTH FUND AND EQUITY INCOME FUND
PREPAYMENT AND EXTENSION RISK
Prepayment risk is the risk that an unexpected fall in prevailing interest rates
will shorten the life of an outstanding mortgage-backed security by increasing
the actual or expected number of mortgage prepayments, thereby reducing the
security's value. Extension risk is the risk that an unexpected rise in
prevailing interest rates will extend the life of an outstanding mortgage-backed
security by reducing the actual or expected number of mortgage prepayments,
thereby reducing the security's value. THESE RISKS APPLY PRIMARILY TO THE
GOVERNMENT BOND FUND.
SMALLER COMPANY RISKS
Smaller companies in which some of the funds may invest may involve greater
risks than large established companies. Such smaller companies may have limited
product lines, markets, financial resources, and management depth. Their
securities may trade less frequently and in more limited volume than the
securities of larger or more established companies. Smaller companies may also
be more vulnerable than larger companies to adverse business or market
developments. As a result, the prices of smaller companies may fluctuate to a
greater degree than the prices of securities of larger companies. THIS RISK
APPLIES TO THE SM&R EQUITY FUNDS.
REPURCHASE AGREEMENT RISK
In a repurchase agreement, a fund buys a security and simultaneously sells it to
the vendor for delivery at a future date. These agreements are used primarily
for cash purposes. A fund entering into a repurchase agreement may lose money if
the other party to the transaction fails to pay the resale price on the delivery
date. Such a default may delay or prevent the fund from disposing of the
underlying securities. The value of the underlying securities may go down during
the period in which the fund seeks to dispose of them. Also, the fund may incur
expenses while trying to sell the underlying securities. Finally, the fund risks
losing all or a part of the income from the agreement. THIS RISK APPLIES
PRIMARILY TO THE TAX FREE FUND AND THE PRIMARY FUND.
OTHER RISKS
Each investor will be subject to all the risks normally attendant to business
operations, changes in general economic conditions, governmental rules and
fiscal policies, acts of God, and other factors beyond the control of the funds
management.
SM&R EQUITY FUNDS'
TEMPORARY DEFENSIVE MEASURES
During unfavorable market conditions, each of the SM&R Equity Funds may, but is
not required to, make temporary investments that are not consistent with such
fund's investment objectives and principal strategies. Such defensive measures
may include increasing cash, investing more assets in bonds, repurchase
agreements, or money market instruments, and where permitted by this prospectus
and the statement of additional information, investing in derivatives or other
instruments. If a fund takes such defensive measures, it may not achieve its
investment objectives.
Other securities that each of such funds may invest in are discussed in the
Fund's Statement of Additional Information (see back cover).
20
<PAGE>
SHARES OF THE FUNDS
-------------------------------------------------------------------
SM&R Investments, Inc. (the "Fund") offers six separate investment portfolios in
this prospectus. The Primary Fund consists of a single class of shares offered
at net asset value and does not impose any sales charges or distribution and
service (12b-1) fees. The Growth Fund, Equity Income Fund, Balanced Fund,
Government Bond Fund, and Tax Free Fund offer Class T shares at net asset value
plus an initial sales charge. Class T shares do not impose any distribution and
service (12b-2) fees.
Through a separate prospectus, the Fund also offers Class A (front-end load) and
Class B (back-end load) shares of the following funds:
- SM&R Growth Fund
- SM&R Equity Income Fund
- SM&R Balanced Fund
- SM&R Alger Growth Fund
- SM&R Alger Aggressive Growth Fund
- SM&R Alger Small-Cap Fund
- SM&R Alger Technology Fund
- SM&R Government Bond Fund
- SM&R Tax Free Fund
- SM&R Money Market Fund
Class A and Class B shares are subject to different sales charges and other
expenses, and, accordingly, may have expense ratios and performance that differs
from those of Class T shares. You are encouraged to consider all of the Fund's
class alternatives and choose the one that fits your individual circumstances at
the lowest level of fees. FOR MORE INFORMATION ON THE OTHER CLASSES OF SHARES OR
TO REQUEST A PROSPECTUS FOR ANOTHER CLASS, INVESTORS MAY CONTACT INVESTOR
SERVICES AT (800) 231-4639.
ELIGIBLE PURCHASERS OF
CLASS T SHARES
In general, Class T shares may only be purchased by existing shareholders that
owned shares of the Growth Fund, Equity Income Fund, Balanced Fund, Government
Bond Fund or Tax Free Fund on December 31, 1998 and certain other designated
persons. The other designated persons that can purchase Class T shares include:
(a) Present and retired directors, officers, and full-time employees of the
Fund;
(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 or 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);
(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
21
<PAGE>
SHARES OF THE FUNDS
-------------------------------------------------------------------
shares of any fund managed by SM&R (other than the SM&R Money Market Fund
(the "Money Market Fund," not offered in this prospectus) and Primary
Fund);
(i) Persons purchasing shares for a federal or state sponsored post-secondary
education funding program;
YOU HAVE THE SOLE RESPONSIBILITY OF NOTIFYING THE FUND THAT YOU INTEND TO
QUALIFY UNDER ONE OF THESE CATEGORIES.
OPENING AN ACCOUNT. Your ability to open a new account depends on the basis of
your eligibility to purchase Class T shares, as follows:
- If you are eligible to purchase Class T shares because you are an existing
shareholder of a fund (and owned shares on December 31, 1998) you can
purchase additional Class T shares of the fund in which you are invested,
but cannot open a new account in another fund. For example, if you own
shares of the Growth Fund only (and you owned shares of that fund on
December 31, 1998), you may purchase additional Class T shares of that
fund. However, you cannot purchase Class T shares of the Equity Income
Fund.
- If you are a designated person listed in
(a)-(i) above, you can open a new account in Class T shares and may
purchase Class T shares of any fund managed by SM&R. YOU ARE ALSO ELIGIBLE
FOR WAIVER OF THE INITIAL SALES CHARGE AS DESCRIBED BELOW.
CLASS T SALES CHARGES
The offering price of Class T shares is the net asset value plus a "front-end"
sales charge. The sales charge is a percentage of the offering price, as shown
in the following tables:
FIXED INCOME FUNDS
<TABLE>
<CAPTION>
SALES CHARGES
SALES CHARGE AS A % OF
AS A % OF NET AMOUNT
AMOUNT INVESTED OFFERING PRICE INVESTED
<S> <C> <C>
Less than $100,000 4.50% 4.7%
$100,000 but less than $250,000 3.5% 3.6%
$250,000 but less than $500,000 2.5% 2.6%
$500,000 and over None None
</TABLE>
SM&R EQUITY FUNDS
<TABLE>
<CAPTION>
SALES CHARGES
SALES CHARGE AS A % OF
AS A % OF NET AMOUNT
AMOUNT INVESTED OFFERING PRICE INVESTED
<S> <C> <C>
Less than $50,000 5.75% 6.1%
$50,000 but less than $100,000 4.5% 4.7%
$100,000 but less than $250,000 3.5% 3.6%
$250,000 but less than $500,000 2.5% 2.6%
$500,000 and over None None
</TABLE>
SALES CHARGE REDUCTIONS AND WAIVERS
DISCOUNTS THROUGH CONCURRENT PURCHASES. To qualify for a reduced sales charge on
Class T shares, you may combine concurrent purchases of Class T and Class A
shares of funds managed by SM&R that impose a front-end sales charge. Investors
that are eligible to combine concurrent purchases to qualify for a reduced sales
charge include:
(1) Any individual;
(2) Any individual, his or her spouse, and trusts or custodial accounts for
their minor children;
(3) A trustee or fiduciary of a single trust estate or single fiduciary
account;
22
<PAGE>
SHARES OF THE FUNDS
-------------------------------------------------------------------
(4) Tax-exempt organizations specified in Sections 501(c)(3) or (13) of the
Internal Revenue Code, or employees' trusts, pension, profit-sharing, or
other employee benefit plans qualified under Section 401 of the Internal
Revenue Code; and
(5) Employees (or employers on behalf of employees) under any employee benefit
plan not qualified under Section 401 of the Internal Revenue Code.
Purchases in connection with employee benefit plans not qualified under
Section 401 of the Internal Revenue Code will qualify for the above quantity
discounts only if the fund will realize economies of scale in sales effort and
sales related expenses as a result of the employer's or the plan's bearing the
expense of any payroll deduction plan, making the fund's prospectus available to
individual investors or employees, forwarding investments by such employees to
the funds, and the like.
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class A or
Class T shares of a fund managed by SM&R on which you paid a front-end sales
charge, you may be able to receive a discount when you buy additional shares.
The current net asset value for the shares you already own may be "accumulated"
-- I.E. , combined together with the dollar amount being invested -- to achieve
quantities eligible for discount.
LETTER OF INTENT. You may qualify for a reduced sales charge on purchases of
Class T shares of funds managed by SM&R by completing the Letter of Intent
section of the account application. Under a Letter of Intent, an investor
expresses an intention to purchase, within 13 months of the initial investment,
a specified amount of Class T and Class A shares of funds managed by SM&R which,
if made concurrently, would qualify for a reduced sales charge. Upon execution
of a Letter of Intent, the investor must make a minimum initial investment equal
to ten percent (10%) of the amount necessary to qualify for the applicable
reduced sales charge. To assure that the full applicable sales charge will be
paid if the intended purchase is not completed, five percent (5%) of the total
intended purchase amount will be held in escrow in shares registered in the
investor's name. Shares held in escrow under a Letter of Intent are not eligible
for the exchange privilege until the Letter of Intent is completed or canceled.
A Letter of Intent does not represent a binding obligation of the part of the
investor to purchase or the funds to sell the full amount of shares specified.
WAIVER OF INITIAL SALES CHARGE FOR CERTAIN PURCHASERS. After SM&R receives a
written request, those designated persons listed in
(a)-(i) above may purchase Class T shares of the funds at net asset value per
share without the imposition of any sales charge.
23
<PAGE>
THE SM&R FUNDS AND THEIR MANAGEMENT
-------------------------------------------------------------------
INVESTMENT ADVISER
The Fund's Board of Directors has delegated to Securities Management and
Research, Inc. ("SM&R"), the funds' investment adviser, the management of the
funds' day-to-day business and affairs. In addition, SM&R invests the funds'
assets, provides administrative services, and serves as transfer agent,
custodian, dividend paying agent, and underwriter.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). SM&R was incorporated in 1964 and has managed mutual
funds since 1966. SM&R does and may, from time to time, serve as investment
adviser to other clients including banks, employee benefit plans, other
investment companies, foundations and endowment funds.
The funds pay SM&R an investment advisory fee, which is calculated daily for
each fund and paid monthly. The advisory agreements between SM&R and the funds
spell out the management fee and other expenses that the funds must pay.
- THE GROWTH FUND, EQUITY INCOME FUND AND BALANCED FUND each pay an advisory
fee to SM&R calculated as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF SUCH FUNDS' ADVISORY
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
<S> <C>
Not exceeding $100,000,000 0.750%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.625%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.500%
Exceeding $300,000,000 0.400%
</TABLE>
- THE GOVERNMENT BOND FUND AND TAX FREE FUND each pay an advisory fee to
SM&R calculated as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ANNUAL
ASSETS OF EACH FUND PERCENTAGE 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>
- The Primary Fund pays an advisory fee to SM&R at annual rate of 0.50% of
its average daily net assets.
After applicable fee waivers, SM&R received total advisory fees as follows:
<TABLE>
<CAPTION>
ADVISORY FEES AS A % OF
FUND AVERAGE DAILY NET ASSETS
<S> <C>
SM&R EQUITY FUNDS(1):
Growth Fund (2)
Class T 0.48%
Equity Income Fund
Class T 0.71%
Balanced Fund
Class T 0.67%
SM&R FIXED INCOME FUNDS(3):
Government Bond Fund
Class T 0.50%
Tax Free Fund
Class T 0.14%
Primary Fund 0.26%
</TABLE>
(1) The totals given for these funds are those of the corresponding Predecessor
Funds and for the period ended June 30, 2000.
(2) See "Special Matter Affecting Only the Growth Fund" in the "PERFORMANCE"
section for a discussion of the methodology for calculating the Growth Fund
advisory fee prior to December 31, 1999.
(3) The totals given for these funds are for the fiscal year ended August 31,
2000.
ADMINISTRATIVE SERVICES
Each of the funds pays SM&R an administrative service fee under administrative
service agreements between the Fund and SM&R. These agreements state that each
of the funds will pay SM&R for non-investment related management, executive,
administrative, transfer agent, and operation services to the funds. The
administrative service fee for all funds is calculated as follows:
<TABLE>
<CAPTION>
ON THE PORTION OF THE FUNDS' ADMINISTRATIVE SERVICE FEE
AVERAGE DAILY NET ASSETS ANNUAL RATE
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding
$200,000,000 0.20%
Exceeding $200,000,000 but not exceeding
$300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
In each fund's administrative service agreement, SM&R has agreed to pay (or to
reimburse each such fund for) each such fund's regular operating expenses in
excess of 1.25% per year of each such
24
<PAGE>
THE SM&R FUNDS AND THEIR MANAGEMENT
-------------------------------------------------------------------
fund's average daily net assets. Regular operating expenses include the advisory
fee and administrative service fee, if any, paid to SM&R, but do not include
class-specific expenses, interest, taxes, commissions, and other expenses
incidental to portfolio transactions.
In order to improve the yield and total return of one or more of the funds, SM&R
may from time to time voluntarily waive or reduce all or any portion of its
advisory fee, administrative fee, and/or assume certain or all expenses of any
fund, while retaining its ability to be reimbursed for such fees prior to the
end of the fiscal year. Fee waivers and/or reductions, other than those stated
in an administrative service agreement, may be rescinded by SM&R at any time
without notice to investors. SM&R has agreed to reimburse expenses incurred by
the Tax Free, Government Bond and Primary Funds to the extent that regular
operating expenses exceed average daily net assets as follows: 0.75% for the Tax
Free Fund, 0.80% for the Primary Fund and 1.00% for the Government Bond Fund.
PORTFOLIO MANAGEMENT
While the following individuals are primarily responsible for the day-to-day
portfolio management of their respective funds, all accounts are reviewed on a
regular basis by SM&R's Investment Committee to ensure that they are being
invested in accordance with investment policies.
- Growth Fund, Equity Income Fund, and Balanced Fund
GORDON D. DIXON, DIRECTOR, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER OF
SECURITIES MANAGEMENT AND RESEARCH, INC., VICE PRESIDENT, CO-MANAGER.
Mr. Dixon joined SM&R in 1993. Mr. Dixon serves as Co-Manager of the Growth
Fund, Equity Income Fund and the Balanced Fund. He was previously Portfolio
Manager of such funds. Mr. Dixon also serves as Vice President of American
National Investment Accounts, Inc. ("ANIA"), another fund managed by SM&R
which is used exclusively for variable contracts issued by American National
Insurance Company. He is also the portfolio manager of ANIA's Government Bond
Portfolio and High Yield Bond Portfolio and co-manager of ANIA's Growth
Portfolio, Equity Income Portfolio, Balanced Portfolio and International Stock
Portfolio. Mr. Dixon also serves as portfolio manager of the Fund's Government
Bond Fund and Tax Free Fund. Mr. Dixon graduated from the University of South
Dakota with a B.A. in Finance and Accounting and from Northwestern University
in 1972 with an M.B.A in Finance and Accounting. He began his investment
career in 1972 as an Administrative and Research Manager with Penmark
Investments. In 1979, he began working for American Airlines in the management
of the $600 million American Airlines Pension Portfolio, of which
approximately $100 million was equities. In 1984, he was employed by
C&S/Sovran Bank in Atlanta, Georgia as Director of Equity Strategy where he
had responsibility for all research, equity trading and quantitative services
groups as well as investment policy input of a portfolio of approximately $7
billion, of which $3.5 billion was equities.
ANDREW R. DUNCAN, SR. SECURITIES ANALYST/ PORTFOLIO MANAGER. Mr. Duncan joined
SM&R's staff in 1997 as Sr. Securities Analyst/ Portfolio Manager. Mr. Duncan
serves as Portfolio Manager of the Equity Income Fund and the Balanced Fund.
He also serves as the portfolio manager of ANIA'S Equity Income Portfolio,
Balanced Portfolio, and International Stock Portfolio. He graduated from West
Virginia
25
<PAGE>
THE SM&R FUNDS AND THEIR MANAGEMENT
-------------------------------------------------------------------
University in 1995 with a BS/BA degree in Finance and from Texas A&M
University in 1996 with an MS in Finance.
ANDRE J. HODLEWSKY, SR. SECURITIES ANALYST/ PORTFOLIO MANAGER. Mr. Hodlewsky
joined SM&R in 1998 as Securities Analyst. Mr. Hodlewsky serves as Portfolio
Manager of the Growth Fund. He also serves as portfolio manager for ANIA's
Growth Portfolio and Small-Cap/Mid-Cap Portfolio. He graduated from the
University of Wisconsin in 1990 with a BA in Graphic Design and Industrial
Design and from the University of Wisconsin in 1999 with an MBA in Marketing
and Finance. Prior to joining SM&R's staff, he held a position at Rockwell
from 1995 to 1997 in their Internet and Multi-Media Design Group and Mandel
Company in Milwaukee, Wisconsin, from 1993 to 1995 in the Prepress Technology
Division.
- Government Bond Fund, Tax Free Fund, and Primary Fund
GORDON D. DIXON (SEE ABOVE.)
ANNE M. LEMIRE, SENIOR SECURITIES ANALYST/ PORTFOLIO MANAGER. Ms. LeMire has
served as Assistant Portfolio Manager of the Government Bond Fund, Primary
Fund, Tax Free Fund, and Money Market Fund since March 2000. Ms. LeMire
assumed the role of Assistant Portfolio Manager of the ANIA Money Market
Portfolio in March 2000. She also has served as Assistant Portfolio Manager of
the ANIA Government Bond Portfolio and High Yield Bond Portfolio since their
inception in May 2000. Ms. LeMire joined SM&R in 1990 and held the position of
Assistant Vice President and Controller prior to joining the investment staff
in February 1999. She holds an accounting degree from the University of
Houston and earned the Certified Public Accountant designation in 1990. Before
joining SM&R, she held an auditing position at the University of Texas Medical
Branch.
JOHN S. MAIDLOW, PORTFOLIO MANAGER. Mr. Maidlow assumed the role of Portfolio
Manage of the Primary Fund and Money Market Fund in March 2000. He had
previously served as Assistant Portfolio Manager of the Primary Fund since
1998 and the Money Market Fund since its inception in January 1999.
Mr. Maidlow assumed the role of Portfolio Manager of the Money Market
Portfolio of ANIA in March 2000; he had previously served as Assistant
Portfolio Manager of the ANIA Money Market Portfolio since November 1998. He
joined SM&R's staff in 1998 and prior to that time he held positions with
American Industries Trust Companies as a trust officer, Texas Department of
Insurance and the Texas Department of Banking as an examiner, Landmark Group
as Vice President of Investments, MBank as a trust officer and Rotan-
Mosle, Inc. and Eppler, Guerin & Turner as an investment broker.
26
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------
UNDERSTANDING THE FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the funds' financial performance for the past five years. Certain information
reflects financial results for a single share of the funds. The total returns in
the tables represent the rate that an investor would have earned (or lost) on an
investment in the funds (assuming reinvestment of all dividends and
distributions). The returns do not reflect any sales loads or account fees that
would be imposed on the purchase or sale of any shares.
The tables itemize what contributed to the changes in share prices during the
period. They also show the changes in share prices for this period in comparison
to changes over the last five fiscal years.
On a per-share basis, the tables include as appropriate
- share price at the beginning of the period
- investment income and capital gains or losses
- distributions of income and capital gains paid to shareholders
- share price at the end of the period
The tables also include some key statistics for the period as appropriate
- Total Return -- the overall percentage of return of a fund, assuming the
reinvestment of all distributions
- Expense Ratio -- operating expenses as a percentage of average net assets
- Net Income Ratio -- net investment income as a percentage of average net
assets
- Portfolio Turnover -- the percentage of a fund's buying and selling
activity
With the exception of the information presented for the Primary Fund's 1996 and
1997 fiscal years and for the Growth Fund's, Equity Income Fund's, and Balanced
Fund's 1995 and 1996 fiscal years and June 30, 2000 semi-annual period, the
information contained in the Financial Highlights has been audited by the Fund's
independent auditors, Tait, Weller & Baker. Their Independent Auditor's Report
is included in the fund's annual report for the year ended August 31, 2000,
which is incorporated by reference into the Statement of Additional Information
and is available upon request. The information for the Primary Fund's fiscal
years ending August 31, 1997 and 1996 is derived from the financial statements
of the Primary Fund, along with the information for the Growth Fund's, Equity
Income Fund's, and Balanced Fund's fiscal years ending December 31, 1996 and
1995 from their financial statements, which for such fiscal years were audited
by the Fund's former independent Auditors.
27
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------
GROWTH FUND
The following financial highlights table is intended to help you understand the
Growth Fund's financial performance for the past five years. Certain information
reflects financial results for a single share outstanding throughout each period
shown. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Growth Fund (assuming reinvestment
of all dividends and distributions), but do not reflect any sales loads that
would be imposed on the purchase or sale of any shares. This information is
derived from the financial statements of the Growth Fund, which for the years
ended December 31, 1997, 1998 and 1999 have been audited by Tait, Weller &
Baker, independent auditors, whose report, along with the Growth Fund's
financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request, and the six month
period ended June 30, 2000 is unaudited. The information for years ending
December 31, 1996 and prior, has been audited by the Growth Fund's former
independent auditors.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
UNAUDITED ----------------------------------------------------
PERIOD FROM
1/1/00 TO
6/30/00 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 6.77 $ 5.69 $ 5.24 $ 4.95 $ 4.39 $ 3.83
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
INVESTMENT INCOME -- NET 0.02 0.03 0.04 0.06 0.05 0.08
--------------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investments (0.14) 1.35 0.85 1.03 0.73 0.88
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
Total from Investment
Operations (0.12) 1.38 0.89 1.09 0.78 0.96
--------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Investment income -- net (0.02) (0.03) (0.04) (0.06) (0.05) (0.08)
--------------------------------------------------------------------------------------------
Capital gains (0.05) (0.27) (0.40) (0.74) (0.17) (0.32)
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
Total Distributions (0.07) (0.30) (0.44) (0.80) (0.22) (0.40)
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 6.58 $ 6.77 $ 5.69 $ 5.24 $ 4.95 $ 4.39
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
TOTAL RETURN (1.79)%* 24.49% 18.35% 22.24% 17.64% 25.20%
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
RATIOS (IN
PERCENTAGES)/SUPPLEMENTAL
DATA(2)
NET ASSETS, END OF PERIOD
(000'S OMITTED) $217,078 $230,203 $203,109 $178,344 $152,758 $134,821
--------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets 0.81% 0.87% 0.85% 0.96% 1.15% 0.98%
--------------------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets 0.62% 0.44% 0.69% 1.03% 1.02% 1.67%
--------------------------------------------------------------------------------------------
Portfolio turnover rate 10.42% 16.13% 27.31% 46.79% 18.72% 37.00%
--------------------------------------------------------------------------------------------
</TABLE>
(1) The information shown here is for the Predecessor Fund, SM&R Growth
Fund, Inc., which had a fiscal year ending December 31.
(2) The ratios are annualized.
* Returns are not annualized, and do not include the effect of sales charges.
28
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------
EQUITY INCOME FUND
The following financial highlights table is intended to help you understand the
Equity Income Fund's financial performance for the past five years. Certain
information reflects financial results for a single Equity Income Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Equity Income Fund (assuming reinvestment of all dividends and
distributions), but do not reflect any sales loads that would be imposed on the
purchase or sale of any shares. This information is derived from the financial
statements of the Equity Income Fund, which for the years ended December 31,
1997, 1998 and 1999 have been audited by Tait, Weller & Baker, independent
auditors, whose report, along with the Equity Income Fund's financial
statements, are incorporated by reference into the Statement of Additional
Information, which is available upon request, and the six month period ended
June 30, 2000 is unaudited. The information for years ending December 31, 1996
and prior, has been audited by the Equity Income Fund's former independent
auditors.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
-----------------------------------------------------------------
UNAUDITED
PERIOD FROM
1/1/00 TO
6/30/00 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $25.30 $28.02 $26.99 $25.05 $22.59 $18.90
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
INVESTMENT INCOME -- NET 0.27 0.54 0.62 0.63 0.58 0.62
--------------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investments 0.11 (0.96) 2.50 4.96 3.10 4.82
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
Total from Investment
Operations 0.38 (0.42) 3.12 5.59 3.68 5.44
--------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Investment income -- net (0.26) (0.54) (0.62) (0.64) (0.58) (0.63)
--------------------------------------------------------------------------------------------
Capital gains (0.20) (1.76) (1.47) (3.01) (0.64) (1.12)
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
Total Distributions (0.46) (2.30) (2.09) (3.65) (1.22) (1.75)
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $25.22 $25.30 $28.02 $26.99 $25.05 $22.59
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
TOTAL RETURN 1.53%* (1.39)% 12.11% 22.72% 16.46% 29.12%
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
RATIOS (IN
PERCENTAGES)/SUPPLEMENTAL
DATA(2)
NET ASSETS, END OF PERIOD
(000'S OMITTED) $163,133 $187,988 $218,980 $198,687 $165,786 $141,058
--------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets 1.05% 1.05% 1.01% 1.05% 1.10% 1.12%
--------------------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets 2.11% 1.94% 2.22% 2.28% 2.42% 2.89%
--------------------------------------------------------------------------------------------
Portfolio turnover rate 14.90% 9.81% 19.29% 39.14% 27.07% 44.00%
--------------------------------------------------------------------------------------------
</TABLE>
(1) The information shown here is for the Predecessor Fund, SM&R Equity Income
Fund, Inc., which had a fiscal year ending December 31.
(2) The ratios are annualized.
* Ratios are annualized, and do not include the effect of sales charges.
29
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------
BALANCED FUND
The following financial highlights table is intended to help you understand the
Balanced Fund's financial performance for the past five years. Certain
information reflects financial results for a single Balanced Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Balanced Fund (assuming reinvestment of all dividends and distributions),
but do not reflect any sales loads that would be imposed on the purchase or sale
of any shares. This information is derived from the financial statements of the
Balanced Fund, which for the years ended December 31, 1997, 1998 and 1999 have
been audited by Tait, Weller & Baker, independent auditors, whose report, along
with the Balanced Fund's financial statements, are incorporated by reference
into the Statement of Additional Information, which is available upon request,
and the six month period ended June 30, 2000 is unaudited. The information for
years ending December 31, 1996 and prior, has been audited by the Balanced
Fund's former independent auditors.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
-----------------------------------------------------------------
UNAUDITED
PERIOD FROM
1/1/00 TO
6/30/00 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $20.67 $19.63 $18.32 $17.90 $16.85 $14.32
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income 0.27 0.42 0.48 0.57 0.49 0.49
--------------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain (Loss) on
Securities 0.51 1.84 1.96 2.50 1.48 2.67
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
Total from investment
operations 0.78 2.26 2.44 3.07 1.97 3.16
--------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.26) (0.42) (0.47) (0.59) (0.49) (0.49)
--------------------------------------------------------------------------------------------
Distributions from
Capital Gains (0.17) (0.80) (0.66) (2.06) (0.43) (0.14)
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
Total distributions (0.43) (1.22) (1.13) (2.65) (0.92) (0.63)
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $21.02 $20.67 $19.63 $18.32 $17.90 $16.85
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
TOTAL RETURN 3.76%* 11.87% 13.83% 17.46% 11.86% 22.29%
====== ====== ====== ====== ====== ======
--------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA(2)
NET ASSETS, END OF YEAR
(000'S OMITTED) $29,726 $30,146 $29,367 $25,838 $23,188 $21,757
--------------------------------------------------------------------------------------------
Ratio of Expenses with
reimbursement to Average
Net Assets 1.25% 1.25% 1.25% 1.26% 1.21% 1.26%
--------------------------------------------------------------------------------------------
Ratio of Expenses without
reimbursement to Average
Net Assets 1.33% 1.41% 1.37% 1.36% 1.34% 1.46%
--------------------------------------------------------------------------------------------
Ratio of Net Income to
Average Net Assets 2.60% 2.15% 2.55% 3.02% 2.83% 2.99%
--------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 8.60% 18.01% 16.01% 27.52% 23.78% 16.39%
--------------------------------------------------------------------------------------------
</TABLE>
(1) The information shown here is for the Predecessor Fund, SM&R Balanced
Fund, Inc., which had a fiscal year ending December 31.
(2) The ratios are annualized.
* Returns are not annualized, and do not include the effect of sales charges.
30
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------
GOVERNMENT BOND FUND
The following financial highlights table is intended to help you understand the
Government Bond Fund's financial performance for the past five years. Certain
information reflects financial results for a single share outstanding throughout
each period shown. The total returns in the table represent the rate that an
investor would have earned (or lost) on an investment in the Government Bond
Fund (assuming reinvestment of all dividends and distributions) prior to
addition of multiple classes of shares, but do not reflect any sales loads that
would be imposed on the purchase or sale of any shares. This information is
derived from the financial statements of the Government Bond Fund which for the
years ended through August 31, 1997 have been audited by the Fund's former
independent Auditors and for the years ended August 31, 1998, 1999 and 2000 has
been audited by Tait, Weller & Baker, CPA. Each independent auditor's report,
along with the Government Bond Fund's financial statements, are incorporated by
reference into the Statement of Additional Information, which is available upon
request.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $10.10 $10.60 $10.42 $10.14 $10.51
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
INVESTMENT INCOME -- NET 0.59 0.59 0.64 0.67 0.65
-------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investments (0.05) (0.50) 0.20 0.26 (0.37)
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
Total from Investment
Operations 0.54 0.09 0.84 0.93 0.28
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Investment income -- net (0.59) (0.59) (0.66) (0.65) (0.65)
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
Total Distributions (0.59) (0.59) (0.66) (0.65) (0.65)
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $10.05 $10.10 $10.60 $10.42 $10.14
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
TOTAL RETURN 5.58% 0.76% 8.31% 9.37% 2.63%
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
RATIOS (IN
PERCENTAGES)/SUPPLEMENTAL
DATA
NET ASSETS, END OF PERIOD
(000'S OMITTED) $22,928 $23,363 $23,982 $23,683 $21,127
-------------------------------------------------------------------------------
Ratio of expenses with
reimbursement to average
net assets 0.98% 1.00% 1.00% 1.00% 1.00%
-------------------------------------------------------------------------------
Ratio of expenses without
reimbursement to average
net assets 0.98% 1.11% 1.00% 1.07% 1.20%
-------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets 5.91% 5.58% 6.08% 6.46% 6.17%
-------------------------------------------------------------------------------
Portfolio turnover rate 30.87% 22.86% 32.71% 9.06% 30.17%
-------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------
TAX FREE FUND
The following financial highlights table is intended to help you understand the
Tax Free Fund's financial performance since inception. Certain information
reflects financial results for a single share outstanding throughout each period
shown. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Tax Free Fund (assuming
reinvestment of all dividends and distributions) prior to addition of multiple
classes of shares, but do not reflect any sales loads that would be imposed on
the purchase or sale of any shares. This information is derived from the
financial statements of the Tax Free Fund which for the years ended August 31,
1997 have been audited by the Fund's former independent Auditors and for the
years ended August 31, 1998, 1999 and 2000 has been audited by Tait, Weller &
Baker, CPA. Each independent auditor's report, along with the Tax Free Fund's
financial statements, are incorporated by reference into the Statement of
Additional Information, which is available upon request.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF ENDING $10.14 $10.64 $10.27 $ 9.93 $ 9.95
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
INVESTMENT INCOME -- NET 0.49 0.48 0.49 0.51 0.53
-------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investments 0.12 (0.50) 0.37 0.33 (0.02)
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
Total from Investment
Operations 0.61 (0.02) 0.86 0.84 0.51
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Investment income -- net (0.49) (0.48) (0.49) (0.50) (0.53)
-------------------------------------------------------------------------------
Capital gains (0.01) -- -- -- --
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
Total Distributions (0.50) (0.48) (0.49) (0.50) (0.53)
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $10.25 $10.14 $10.64 $10.27 $ 9.93
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
TOTAL RETURN 6.16% (0.28)% 8.58% 8.61% 5.18%
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
RATIOS (IN
PERCENTAGES)/SUPPLEMENTAL
DATA
NET ASSETS, END OF PERIOD
(000'S OMITTED) $11,030 $11,218 $11,058 $10,700 $9,148
-------------------------------------------------------------------------------
Ratio of expenses with
reimbursement to average
net assets 0.75% 0.73% 0.75% 0.54% --
-------------------------------------------------------------------------------
Ratio of expenses without
reimbursement to average
net assets 1.11% 1.23% 1.25% 1.27% 1.18%
-------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets 4.84% 4.53% 4.60% 4.97% 5.27%
-------------------------------------------------------------------------------
Portfolio turnover rate 7.61% 5.09% 12.77% 22.15% 18.44%
-------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------
PRIMARY FUND
The following financial highlights table is intended to help you understand the
Primary Fund's financial performance for the past five years. Certain
information reflects financial results for a single Primary Fund share
outstanding throughout each period shown. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Primary Fund (assuming reinvestment of all dividends and distributions).
This information is derived from the financial statements of the Primary Fund
which for the years ended through August 31, 1997 have been audited by the
Fund's former independent Auditors and for the years ended August 31, 1998, 1999
and 2000 has been audited by Tait, Weller & Baker, CPA. Each independent
auditor's report, along with the Primary Fund's financial statements, are
incorporated by reference into the Statement of Additional Information, which is
available upon request.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
INVESTMENT INCOME -- NET 0.06 0.05 0.05 0.05 0.05
-------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investments (0.01) -- -- -- --
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
Total from Investment
Operations 0.05 0.05 0.05 0.05 0.05
-------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Investment income -- net (0.06) (0.05) (0.05) (0.05) (0.05)
-------------------------------------------------------------------------------
Total Distributions (0.06) (0.05) (0.05) (0.05) (0.05)
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 0.99 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
TOTAL RETURN 4.68% 4.75% 5.15% 4.98% 5.07%
====== ====== ====== ====== ======
-------------------------------------------------------------------------------
RATIOS (IN
PERCENTAGES)/SUPPLEMENTAL
DATA
NET ASSETS, END OF PERIOD
(000'S OMITTED) $26,795 $30,838 $34,577 $33,045 $37,465
-------------------------------------------------------------------------------
Ratio of expenses with
reimbursement to average
net assets 0.80% 0.80% 0.80% 0.80% 0.81%
-------------------------------------------------------------------------------
Ratio of expenses without
reimbursement to average
net assets 1.04% 1.06% 0.98% 1.01% 1.15%
-------------------------------------------------------------------------------
Ratio of net investment
income to average net
assets 5.55% 4.66% 5.02% 4.86% 4.93%
-------------------------------------------------------------------------------
Portfolio turnover rate 18.46% 30.47% -- -- --
-------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
SHAREHOLDER'S GUIDE TO INVESTING WITH SM&R'S MUTUAL 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 FUNDS. IT EXPLAINS THE
VARIOUS SERVICES AVAILABLE TO YOU 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.
SM&R'S 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" IN THIS GUIDE
TRANSFER AGENCY 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 120
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 GOVERNMENT BOND 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 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 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 $ 100 $ 20
Automatic Investment Plan $ 100 $ 20
Retirement Plans $ 100 $ 20
Primary and Money Market Funds $1,000 $100
</TABLE>
CERTIFICATES
Share certificates are not issued by the funds. Your purchases are maintained
on the records of the 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 and are discussed later in this guide.
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" later in this guide.
CHECK WRITING OPTION:
Available in the SM&R Money Market Fund Class A only. Refer to "Important
Facts About Redeeming".
PLEASE KEEP IN MIND THAT 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.
34
<PAGE>
SHAREHOLDER'S GUIDE TO INVESTING WITH SM&R'S MUTUAL FUNDS
-------------------------------------------------------------------
TYPES OF ACCOUNTS AVAILABLE
BELOW IS A BRIEF EXPLANATION OF THE DIFFERENT ACCOUNTS AVAILABLE IN THE 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.
Because IRAs, SEPs, TSAs, and other tax-deferred accounts are deferred from
federal income tax, they will not benefit from the tax-exempt nature of the
Tax Free Fund. Accordingly, the Tax Free Fund is not considered to be suited
for these types of accounts. Comprehensive Investment Services, Inc. ("CIS")
serves as custodian for the tax-deferred accounts offered by the funds. You
will be charged an annual account maintenance fee of $7.50 for each applicable
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 PENSION 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.
SECTION 529 PLAN
This plan allows individuals and 501(c)(3) organizations to establish and
contribute to an account(s) to be used for postsecondary educational
expenses of designated beneficiaries.
35
<PAGE>
SHAREHOLDER'S GUIDE TO INVESTING WITH SM&R'S MUTUAL FUNDS
-------------------------------------------------------------------
PRICING OF FUND SHARES
GENERAL (HOW SHARES ARE PRICED). Each 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" in the prospectus.)
You may purchase shares of the SM&R Primary Fund and SM&R Money Market Fund
without a sales charge. Accordingly, the offering price for shares of these
funds is net asset value. Although the legal rights of the Class A and 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. With the exception of the Money Market Fund, the funds'
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 Funds' Board of Directors. The funds also may use
fair value pricing if the value of a security held by the 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 the fund to calculate its net asset value may differ from
quoted or published prices for the underlying securities. The Money Market
Fund uses the amortized cost method for valuing its securities.
SHARE PRICE -- EFFECTIVE DATE OF PURCHASES AND REDEMPTIONS. Each 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 funds as of such earlier closing time. Below is the method used
by the 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 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 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.
36
<PAGE>
SHAREHOLDER'S GUIDE TO INVESTING WITH SM&R'S MUTUAL FUNDS
-------------------------------------------------------------------
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>
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BY MAIL OR THROUGH A - Determine the fund and the Class in which you - Make your check payable to SM&R MUTUAL FUNDS.
REGISTERED want to invest. - Use the investment slip on your confirmation, or
REPRESENTATIVE - Complete and sign the account application - Write a note specifying:
- Make the check payable to SM&R MUTUAL FUNDS. -- Your account number
- Mail the application and your check to SM&R at -- The Fund name
the address on the first page of this 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 reference - Call Investors Services at the number on the
number (call by noon, Central Time, if you want first page of this guide, on any business day.
wired funds to be credited that day). - You can send your investment either by:
Instruct your bank to wire or transfer your -- Federal Funds Wire (offers immediate access
purchase (your bank may charge a wiring fee) to funds), or
using the information on the first page of -- Electronic transfer via ACH which avoids
this guide. wiring fees, if your bank account is set up
- Complete the account application and mail to the on file
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).
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BY EXCHANGE - You can make an additional investment by exchange from an existing Fund in the SM&R Mutual Funds to an
existing account by calling Investor Services.
- You can only exchange shares in the same class with identical registrations.
- There is no sales charge or redemption fee when exchanging funds within the SM&R Mutual Funds.
- 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.
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AUTOMATIC INVESTMENT - You can transfer money automatically from your - To establish automatic investing for an existing
PLAN THROUGH THE bank account into your Fund account on a monthly account, call Investor Services for an
AUTOMATED CLEARING basis. application.
HOUSE (ACH) - Initial investment minimum is $100 if you invest - The minimum is $20.
at least $20 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.
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</TABLE>
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HOW TO REDEEM SHARES
You have several convenient ways for you to redeem your shares of the 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>
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CALL US - Call Investor 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 in 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" later in this guide)
- 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.
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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 any outstanding share certificates issued prior to January 1, 1999
-- include special withdrawal forms for tax deferred accounts
- Refer to "Signature Guarantee" below for requests that must be signature guaranteed.
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FAX US You may fax your request for redemption from a non-qualified and non-tax deferred account, if your
request meets requirements 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.
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SELL YOUR SHARES IN You may also redeem your shares by coming to SM&R's home office, and deliver your request in person
PERSON prior to 3:00 p.m. Central Time on regular trading days to receive that day's price.
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SYSTEMATIC You can withdraw money automatically from your fund account on a monthly, quarterly, semi-annual,
WITHDRAWAL PLAN and annual basis -- without redemption fees -- on or about the 20th of the month and if:
(SWP) - 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" later in this guide for more information.
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</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
redemptions of shares recently purchased by a personal check or ACH transfer
(discussed later in this guide) 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 PARTNER Written instructions must be signed by an
authorized 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 (INCLUDES ALL TYPES OF IRAS) A special withdrawal form must be signed by the
account 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 ESTATES Written instructions must be signed by the
executor. A copy 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 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 WHO CAN PROVIDE A SIGNATURE GUARANTEE:
guarantee: - Commercial Bank
- Redemptions from one or more of the Funds total - Trust Company
$50,000 or more - Savings Association
- You want the proceeds sent to an address other than - Credit Union
the address currently appearing on your account - Member of Medallion Program
- You want the proceeds sent to a bank account not - Member of a U.S. Stock Exchange
listed on your account - Authorized SM&R Representatives
- You want the proceeds payable to anyone other than
the registered owner(s) of the account
- Either your address or the address of your bank NOTARY PUBLIC NOT ACCEPTABLE
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 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 fund
because of the sales charge or CDSC (as applicable) involved in additional
purchases. See "Class B Waivers of Contingent Deferred Sales Charges" in the
prospectus 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 or Class T shares of a fund, a shareholder may
reinvest all or part of the proceeds in the same class of the same 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
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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 adviser to determine any possible tax ramifications of such
a transaction. Each fund 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 fund,
account number, and number of shares or dollar amount to be redeemed.
The letter of instruction and stock powers must be signed and executed
exactly as the 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.
TEXAS OPTIONAL RETIREMENT PROGRAM. You may not redeem shares in any account
established under the Texas Optional Retirement Program, unless SM&R receives
satisfactory evidence from the state that one of the following conditions
exist:
(1) death of the employee;
(2) termination of service with the employer; or
(3) retirement of employee.
CHECK WRITING OPTION. Check writing is available in the Money Market Fund
(Class A only) to investors having an account value of $1,000 or more. $250 is
the minimum check amount under the check writing option. This option is not
available on any tax-deferred accounts (IRAs, TSAs, etc.). Shareholders
desiring this option must complete the check writing option signature card on
the application. After obtaining specimen signatures and the fully executed
card, SM&R will order checks and forward to you at the address of record.
Investments made by personal check or third party check will be held for
fifteen (15) business days following the investment during which time checks
may not be drawn on the amount of such investment.
When a check is presented for payment, SM&R as the shareholder's agent, will
cause each fund to redeem a sufficient number of full and fractional shares to
cover the amount of the check. Shareholders will continue to be entitled to
dividends on their shares up to the time the check is presented to SM&R for
payment. If the amount of the check is greater than the value of shares held in
the shareholder's account for more than fifteen (15) business days at the time
the check is presented for payment, the check will not be honored and returned
to the payee and the shareholder may be subject to extra charges as a result.
Primary Fund shareholders with check writing privileges prior to December 31,
1998 will be permitted to continue writing checks on the Primary Fund subject to
the terms applicable to the
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Money Market Fund described above. SHAREHOLDERS USING THE PRIMARY FUND CHECK
WRITING OPTION SHOULD BE AWARE THAT WRITING A CHECK IS A REDEMPTION OF SHARES.
THOSE SHARES MAY BE WORTH LESS WHEN THE CHECK IS PRESENTED FOR PAYMENT THAN WHEN
THE CHECK WAS WRITTEN.
This service may be terminated or suspended or additional charges may be imposed
for this service. Shareholders will be provided the initial checkbook free of
charge. There will be a $5 fee for reorders. Shareholders will be allowed to
write ten (10) checks free each calendar quarter. You may be charged $1.00 for
each check written over the 10 check limit.
REDEMPTION OF SMALL ACCOUNTS. The 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 funds may,
from time to time, change such required minimum investment.
TRANSACTIONS THROUGH PROCESSING ORGANIZATIONS:
You may also purchase or sell shares of the 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 funds. Processing Organizations may also impose other
charges or restrictions different from those applicable to shareholders who
invest in the funds directly. If you utilize a Processing Organization the 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 FUNDS. YOU SHOULD KEEP THIS IN MIND WHEN
ESTABLISHING AN ACCOUNT IN ANY 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 funds offer other services and plans described
below. At this time, there is no charge to you for these services. The 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
adviser.
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
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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
between $500 and $50,000. Through this service, you will be able to purchase
additional shares for a 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 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 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 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 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.
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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 at net asset value. Unless you specify otherwise,
your dividends and distributions will automatically be reinvested in the same
fund. You may invest your dividends and distributions into another fund in the
same class of shares.
You must comply with the following requirements to invest your dividends and
distributions in shares of another fund:
(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.
AUTOMATIC INVESTMENT PLAN. Through this plan, a specified amount is
electronically transferred (via ACH) from your bank account and invested
monthly, bi-monthly, quarterly, or annually into the designated fund(s) at the
applicable offering price determined on the date of the electronic transfer.
GROUP SYSTEMATIC INVESTMENT PLAN. SM&R can establish a Group Systematic
Investment Plan with an employer having 5 or more participants under a single
payroll deduction arrangement. Under this investment plan there is a minimum
investment of $20 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 funds, you may be permitted to
exchange shares that you own for shares of another fund without the payment of
an exchange fee, subject to certain conditions. EXCHANGES BETWEEN A FUND AND
ANOTHER FUND MANAGED BY SM&R ARE AVAILABLE ONLY IN STATES WHERE THE APPLICABLE
FUNDS ARE REGISTERED AND THE EXCHANGE MAY BE LEGALLY MADE. YOU SHOULD CONTACT
SM&R TO DETERMINE WHETHER A FUND AND A PARTICULAR CLASS IS REGISTERED IN A
PARTICULAR STATE AND WHETHER AN EXCHANGE IS PERMITTED.
WE RESERVE THE RIGHT TO TERMINATE OR CHANGE THE TERMS OF ANY EXCHANGE
PRIVILEGE AT ANY TIME.
You may exchange Class A and Class B shares that you own in the SM&R Funds,
without an exchange fee or sales charge, for shares of the corresponding class
of another fund. You also may exchange your Class A or Class B shares for
shares of the Primary 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 share purchases of $1 million or
more, and 6 years in the case of Class B share purchases of the SM&R
Equity Funds, and 4 years in the case of Class B share purchases of the
SM&R Fixed Income Funds, and
- you meet any minimum investment requirement for the shares you wish to
acquire.
We waive any sales charges on Class A and Class T shares acquired through an
exchange if
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you previously paid a sales charge on amounts invested in those shares. For
example, assume you purchase Class A shares of the Growth Fund. You then
exchange such Class A shares for Class A shares of the Money Market Fund.
Later, you re-exchange those shares of the Money Market Fund for Class A
shares of the Tax Free Fund. We would not impose any sales charge upon the
re-exchange into Class A shares of the Tax Free 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 held in escrow under a Letter of Intent are not eligible
for the exchange privilege. Such shares will not be released from escrow until
the balance invested during the period specified in the Letter of Intent
equals or exceeds the amount required to be invested under the Letter of
Intent or the shareholder requests, in writing, that the Letter of Intent be
canceled and pays any adjustments in sales charge. After release from escrow,
shares may be exchanged, provided all other applicable conditions are met.
You may request an exchange by telephone or in writing. In order to exchange
shares, the following requirements must be met:
(a) the exchange must be made between accounts that are registered in the
same name, address and, if applicable, taxpayer identification number;
(b) the shares of the fund acquired through exchange must be qualified for
sale in the state in which you reside;
(c) the dollar amount of a written exchange must meet the minimum investment
requirement applicable to the shares of the fund that you would acquire
through the exchange;
(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.
You may exchange shares you own in the Primary Fund for Class A or Class T
shares of another fund, provided you meet any eligibility requirements and pay
any sales charge applicable to the acquired shares. You CANNOT exchange shares
of the Primary Fund for Class B shares of another fund.
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 ADVISER 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
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because Class A shares are subject to a lower ongoing 12b-1 fee. If an
investor exchanges Class B shares of a fund for Class B shares of another
fund, 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
fund performance. To minimize harm to the Fund and its 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
judgment, has been or may be disruptive to a fund. In making this judgment, we
may consider trading done in multiple accounts under common ownership or
control.
DISTRIBUTIONS AND TAXABILITY. To avoid taxation of the funds, the IRS Code
requires each fund to distribute net income and any capital gains realized on
its investments annually. A 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 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.
The Tax Free Fund intends to distribute tax-exempt dividends that shareholders
may exclude from their gross income for federal income tax purposes. However,
the Tax Free Fund may invest a portion of its assets in securities that
generate income that is not exempt from federal or state income tax. Income
exempt from federal tax may be subject to state and local income tax. Any
capital gains distributed by the Tax Free Fund may be taxable. Also, you
should keep in mind that certain income from the Tax Free Fund may be subject
to the federal alternative minimum tax.
DISTRIBUTION SCHEDULE. The following schedule of distributions is provided to
let you know when you can expect to receive a distribution from the 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>
GROWTH FUND June and December
December
---------------------------------------------------
EQUITY INCOME FUND March, June, December
September,
December
---------------------------------------------------
BALANCED FUND March, June, December
September,
December
---------------------------------------------------
GOVERNMENT BOND FUND Monthly December
---------------------------------------------------
TAX FREE FUND Monthly December
---------------------------------------------------
PRIMARY FUND Daily paid December
Monthly
---------------------------------------------------
</TABLE>
DISTRIBUTIONS EFFECT ON NAV. In order to be entitled to a dividend, an investor
must have acquired shares of a fund prior to the close of business on the
distribution record date. A shareholder should be cautioned, however,
46
<PAGE>
SHAREHOLDER'S GUIDE TO INVESTING WITH SM&R'S MUTUAL FUNDS
-------------------------------------------------------------------
before purchasing shares of a fund immediately prior to a distribution.
Dividends and distributions paid by the funds have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution of record shortly after the purchase of
shares by 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 funds reserve the right
to reinvest your distribution check in your account at the net asset value on
the business day of the reinvestment and to reinvest all future distributions
in shares of the applicable fund(s). Dividends 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 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 adviser
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 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.
HOUSEHOLD MAILINGS. Each year you are automatically sent an updated prospectus,
and annual and semi-annual reports for the funds. In order to reduce the
volume of mail you receive, when possible, only one copy of these documents
will be sent to shareholders that are part of the same family and share the
same residential address.
RIGHTS RESERVED BY THE FUND. The Fund 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;
47
<PAGE>
SHAREHOLDER'S GUIDE TO INVESTING WITH SM&R'S MUTUAL FUNDS
-------------------------------------------------------------------
- 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; or
- to otherwise modify the conditions of purchase and any services at any
time.
48
<PAGE>
APPENDIX
(Description of Ratings Used in Prospectuses)
--------------------------------------------------------------------------------
BOND RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S LONG-TERM BOND
(BONDS THAT EXTEND LONGER THAN ONE YEAR) RATING:
AAA An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
DESCRIPTION OF MOODY'S INVESTOR'S SERVICE, INC.'S LONG-TERM BOND
(BONDS THAT EXTEND LONGER THAN ONE YEAR) RATINGS:
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
A-1
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUSES)
--------------------------------------------------------------------------------
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities, fluctuation
of protective elements may be of greater amplitude, or there may be other
elements present which make the long-term risks appear somewhat larger than
the Aaa securities.
A Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated "Baa" are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
DESCRIPTION OF FITCH IBCA BOND RATINGS:
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
A-2
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUSES)
--------------------------------------------------------------------------------
MUNICIPAL NOTE RATINGS
DESCRIPTION OF MOODY'S INVESTOR SERVICE INC.'S SHORT-TERM MUNICIPAL NOTE
(NOTES THAT MATURE IN LESS THAN ONE YEAR) RATINGS:
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less
well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
DESCRIPTION OF STANDARD AND POOR'S SHORT-TERM MUNICIPAL NOTE RATINGS:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
A-3
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUSES)
--------------------------------------------------------------------------------
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER
RATINGS:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF FITCH IBCA SHORT-TERM DEBT RATINGS (INCLUDING COMMERCIAL PAPER):
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
DESCRIPTION OF DUFF & PHELP'S HIGHEST COMMERCIAL RATINGS:
HIGH GRADE
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds,
is outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
A-4
<PAGE>
APPENDIX
(DESCRIPTION OF RATINGS USED IN PROSPECTUSES)
--------------------------------------------------------------------------------
D-1 High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
DESCRIPTION OF THOMSON BANKWATCH, INC.'S TWO HIGHEST COMMERCIAL RATINGS:
TBW-1 The highest category; indicates a very high likelihood that principal and
interest will be paid on a timely basis.
TBW-2 The second-highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
FEDERAL FUNDS
As used in this Prospectus and in the Fund's Statement of Additional
Information, "Federal Funds" means a commercial bank's deposits in a Federal
Reserve Bank which can be transferred from one member bank's account to that of
another member bank on the same day. Federal Funds are considered to be
immediately available funds.
A-5
<PAGE>
FOR MORE INFORMATION ABOUT THE FUNDS
-------------------------------------------------------------------
The following documents contain more information about the funds and are
available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI).
The SAI contains additional information about all aspects of the funds. A
current SAI has been filed with the Securities and Exchange Commission and is
incorporated herein by reference.
ANNUAL AND SEMI-ANNUAL REPORTS.
The funds' annual and semi-annual reports provide additional information about
the funds' investments. The annual report contains a discussion of the market
conditions and investment strategies that significantly affected each fund's
performance during the last fiscal year.
REQUESTING DOCUMENTS.
You may request a free copy of the SAI and these reports, make shareholder
inquiries, or request further information about the funds either by contacting
your broker or by contacting the funds at:
SECURITIES MANAGEMENT AND RESEARCH, INC.
P.O. BOX 58969
HOUSTON, TEXAS 77258-8969
TELEPHONE: 1-800-231-4639 (TOLL FREE) OR
1-281-334-2469 (COLLECT)
PUBLIC INFORMATION
You can review and copy information about the funds, including the SAI, at the
Securities and Exchange Commission's Public Reference Room in Washington D.C.
You may obtain information on the operation of the public reference room by
calling the Commission at 202-942-8090. Reports and other information about the
funds also are available on the Commission's Internet site at
http://www.sec.gov. You may obtain copies of this information, upon payment of a
duplicating fee, by writing the Public Reference Section of the Securities and
Exchange Commission, Washington, D.C. 20549-0102 or by sending an electronic
request to [email protected].
SM&R Equity Funds:
SM&R GROWTH FUND
SM&R ALGER GROWTH FUND*
SM&R ALGER AGGRESSIVE GROWTH FUND*
SM&R EQUITY INCOME FUND
SM&R BALANCED FUND
SM&R ALGER SMALL-CAP FUND*
SM&R ALGER TECHNOLOGY FUND*
SM&R Fixed
Income Funds:
SM&R GOVERNMENT
BOND FUND
SM&R TAX FREE FUND
SM&R PRIMARY FUND
SM&R MONEY MARKET FUND*
*Not offered in this prospectus.
Investment Company
Form 9099 (12/00) File No. 811-6477
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
December 31, 2000
SM&R INVESTMENTS, INC.
FIXED INCOME FUNDS
EQUITY FUNDS
SM&R EQUITY FUNDS:
CLASS A, CLASS B, AND CLASS T
SM&R GROWTH FUND
SM&R EQUITY INCOME FUND
SM&R BALANCED FUND
CLASS A AND CLASS B
SM&R ALGER GROWTH FUND
SM&R ALGER AGGRESSIVE GROWTH FUND
SM&R ALGER SMALL-CAP FUND
SM&R ALGER TECHNOLOGY FUND
SM&R FIXED INCOME FUNDS:
CLASS A, CLASS B, AND CLASS T
SM&R GOVERNMENT BOND FUND
SM&R TAX FREE FUND
CLASS A AND CLASS B
SM&R MONEY MARKET FUND
SINGLE CLASS
SM&R PRIMARY FUND
<TABLE>
<S> <C>
Mailing Address: P.O. Box 58969
Houston, Texas 77258-8969
Street Address: 2450 South Shore Boulevard, Suite 400
League City, Texas 77573
</TABLE>
This Statement is NOT a prospectus, but should be read in conjunction with
the funds' current prospectus or prospectuses dated December 31, 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.......................... 3
INVESTMENT TECHNIQUES APPLICABLE TO ONE OR MORE OF THE
FIXED INCOME FUNDS.................................... 4
INVESTMENT TECHNIQUES APPLICABLE TO ONE OR MORE OF THE
EQUITY FUNDS.......................................... 21
PORTFOLIO TURNOVER.......................................... 33
MANAGEMENT OF THE COMPANY................................... 35
REMUNERATION OF DIRECTORS................................... 40
POLICY REGARDING PERSONAL INVESTING......................... 41
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES..... 42
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES......... 42
CONTROL AND MANAGEMENT OF SM&R.............................. 43
INVESTMENT ADVISORY AGREEMENTS.............................. 44
ADMINISTRATIVE SERVICE AGREEMENTS........................... 48
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION............. 51
DESCRIPTION OF FUND SHARES.................................. 55
PURCHASE, REDEMPTION, AND PRICING OF SHARES................. 57
DETERMINATION OF NET ASSET VALUE........................ 57
DETERMINATION OF OFFERING PRICE......................... 60
REDUCTION AND/OR WAIVER OF INITIAL SALES CHARGES
(CLASS A AND CLASS T SHARES).......................... 63
REDUCTION AND/OR WAIVER OF CONTINGENT DEFERRED SALES
CHARGES (CLASS B SHARES).............................. 66
FUND AND CLASS EXPENSES................................. 67
SHAREHOLDER SERVICING AND DISTRIBUTION PLANS................ 68
SPECIAL PURCHASE PLANS...................................... 70
REDEMPTION.................................................. 72
TAXES....................................................... 73
SYSTEMATIC WITHDRAWAL PLAN.................................. 77
THE UNDERWRITER............................................. 78
CUSTODIAN................................................... 80
TRANSFER AGENT AND DIVIDEND PAYING AGENT.................... 81
COUNSEL..................................................... 81
AUDITORS AND FINANCIAL STATEMENTS........................... 81
PERFORMANCE AND ADVERTISING DATA............................ 82
PERFORMANCE MEASURES........................................ 87
</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 (each a "Fund," collectively the "Funds"):
- SM&R GROWTH FUND (the "Growth Fund");
- SM&R ALGER GROWTH FUND (the "Alger Growth Fund");
- SM&R ALGER AGGRESSIVE GROWTH FUND (the "Alger Aggressive Growth Fund");
- SM&R EQUITY INCOME FUND (the "Equity Income Fund");
- SM&R BALANCED FUND (the "Balanced Fund");
- SM&R ALGER SMALL-CAP FUND (the "Alger Small-Cap Fund");
- SM&R ALGER TECHNOLOGY FUND (the "Alger Technology Fund");
- SM&R GOVERNMENT BOND FUND (the "Government Bond Fund");
- SM&R TAX FREE FUND (the "Tax Free Fund");
- SM&R MONEY MARKET FUND (the "Money Market Fund"); and
- SM&R PRIMARY FUND (the "Primary Fund").
The Government Bond Fund, the Tax Free Fund, the Primary Fund, and the Money
Market Fund are collectively referred to as the "Fixed Income Funds."
The Growth Fund, the Alger Growth Fund, the Alger Aggressive Growth Fund,
the Equity Income Fund, the Balanced Fund, the Alger Small-Cap Fund, and the
Alger Technology Fund are collectively referred to as the "Equity Funds."
The Growth Fund, Equity Income Fund, and Balanced Fund were added as
separate series of the Company effective December 31, 2000. Previously, these
Funds existed as stand-alone mutual funds, organized and operated as separate
legal entities, Maryland corporations. These Funds are "clones" of and
successors to the SM&R Growth Fund, Inc., SM&R Equity Income Fund, Inc., and
SM&R Balanced Fund, Inc. (the "Predecessor Funds"). On December 31, 2000, the
Predecessor Funds became series of the Company (the "Conversion"). At such time,
the SM&R Growth Fund, Inc. became the Growth Fund; the SM&R Equity Income
Fund, Inc. became the Equity Income Fund; and the SM&R Balanced Fund, Inc.
became the Balanced Fund. These Funds will carry on the business of and have
investment objectives, investment strategies, techniques and restrictions
materially the same as their corresponding Predecessor Funds.
1
<PAGE>
Company management believes that the Conversion will result in a structure more
in line with other mutual funds in the industry and will result in reduction of
costs, administrative complexities, and redundancies. Keep in mind when reading
this Statement of Additional Information that data shown for the Growth Fund,
Equity Income Fund, and Balanced Fund prior to December 31, 2000 are data of the
corresponding Predecessor Funds.
The Alger Growth Fund, the Alger Small-Cap Fund, the Alger Aggressive Growth
Fund, and the Alger Technology Fund (collectively the "Alger Funds") were added
as new series of the Company on September 1, 2000.
The Government Bond Fund, the Tax Free Fund, the Growth Fund, the Equity
Income Fund, and the Balanced Fund are each divided into three 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)
These classes of shares have different sales charges and distribution and
service (12b-1) fee structures. Multiple Class Plans were adopted for these
Funds pursuant to Rule 18f-3.
Each of the Alger Funds and the Money Market Fund are divided into two
Classes: Class A (front-end load) and Class B (back-end load). These classes
have different sales charges and distribution fee structures. Multi-Class Plans
were adopted for both the Alger Funds and the Money Market Fund pursuant to
Rule 18f-3.
The Primary Fund does not have separate classes; it is a single-class fund.
2
<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 its total assets, a 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). This restriction does not apply to the
Alger Technology Fund.
The Alger Technology Fund may not purchase or sell the securities of any
issuer, if as a result of such purchase or sale, less than 25% of the assets of
the Fund would be invested in the securities of issuers principally engaged in
offering, using, or developing products, processes, or services that will
provide or will benefit significantly from technological advances and
improvements.
BORROWING. A Fund may not borrow money, except (a) a 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) a Fund may, to the extent permitted by applicable law, borrow up to an
additional 5% of its total assets for temporary purposes, (c) a Fund may obtain
such short-term credits as may be necessary for the clearance of purchases and
sales of portfolio securities, (d) a Fund may purchase securities on margin to
the extent permitted by applicable law, and (e) a 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.
3
<PAGE>
UNDERWRITING. A Fund may not underwrite securities issued by others, except
to the extent that the sale of portfolio securities by a Fund may be deemed to
be an underwriting.
REAL ESTATE. A Fund may not purchase, hold or deal in real estate, although
a 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 a 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 APPLICABLE TO ONE OR MORE OF THE FIXED INCOME FUNDS
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 Funds' 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.
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In lending its portfolio securities, the Government Bond Fund is subject to
the risk that the borrower may become insolvent on a day on which the loaned
security is rapidly advancing in price. In that event, the borrower may fail to
return the loaned securities while the cash collateral is insufficient to
purchase the full amount of the security loaned, and the borrower would be
unable to furnish additional collateral. The borrower would be liable for any
shortage; but the Government Bond Fund would be an unsecured creditor with
respect to such shortage and might not be able to recover any of it. However,
this risk may be minimized by a careful selection of borrowers and securities to
be lent and by monitoring collateral.
The Government Bond Fund will not lend securities to broker-dealers
affiliated with SM&R. This restriction will not affect the ability of the Fund
to maximize its securities lending opportunities.
U.S. TREASURY SECURITIES. Each of the Fixed Income Funds 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 of the Fixed Income Funds 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, 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
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loss of principal if held to maturity, they may involve more risk than
securities backed by the U.S. Government's full faith and credit.
MORTGAGE-BACKED U.S. GOVERNMENT OBLIGATIONS. The Government Bond Fund may
invest in mortgage-backed securities issued or guaranteed by U.S. Government
agencies such as GNMA, FNMA or FHLMC and representing undivided ownership
interests in pools of mortgages. The mortgages backing these securities may
include conventional 30-year fixed rate mortgages, 15-year fixed rate mortgages,
graduated payment mortgages, and adjustable rate mortgages.
The U.S. Government or the issuing agency guarantees the payment of the
interest on and principal of these securities. However, the guarantees do not
extend to the securities' yield or value, which are likely to vary inversely
with fluctuations in interest rates, nor do the guarantees extend to the yield
or value of the Government Bond Fund's shares. These securities are in most
cases "pass-through" instruments, through which the holders receive a share of
all interest and principal payments from the mortgages underlying the
securities, net of certain fees. Because the principal amounts of such
underlying mortgages may generally be prepaid in whole or in part by the
mortgagors 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.
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The Government Bond Fund will not purchase interest-only or principal-only
mortgage-backed securities.
INFLATION-INDEXED BONDS. The Government Bond Fund may invest in inflation-
indexed bonds, which are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. The interest rate on
these bonds is generally fixed at issuance at a rate lower than typical bonds.
Over the life of an inflation-indexed bond, however, interest will be paid based
on a principal value that is adjusted for inflation. Inflation-indexed
securities issued by the U.S. Treasury will initially have maturities of five or
ten years, although it is anticipated that securities with other maturities will
be issued in the future. The securities will pay interest on a semi-annual
basis, equal to a fixed percentage of the inflation-adjusted principal amount.
If the periodic adjustment rate measuring inflation 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. One should keep in mind that during periods of rapid interest rate
fluctuation, the price of a security, such as a CMO, could either increase or
decrease based on inherent interest rate risk. Additionally, the risk of
maturities shortening or lengthening in conjunction with interest rate movement,
could magnify the overall effect of the price fluctuation.
The Government Bond Fund and the Money Market Fund will not invest in any
CMOs that are not fully collateralized obligations. "Fully collateralized" means
that the
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collateral will generate cash flows sufficient to meet obligations to holders of
the collateralized obligations under even the most conservative prepayment and
interest rate projections. Thus, the collateralized obligations are structured
to anticipate a worst case prepayment condition and to minimize the reinvestment
rate risk for cash flows between coupon dates for the collateralized
obligations. A worst case prepayment condition generally assumes immediate
prepayment of all securities purchased at a premium and zero prepayment of all
securities purchased at a discount. Reinvestment rate risk may be minimized by
assuming very conservative reinvestment rates and by other means such as by
maintaining the flexibility to increase principal distributions in a low
interest rate environment. The requirements as to collateralization are
determined by the issuer or sponsor of the collateralized obligation in order to
satisfy the U.S. Government agency or instrumentality guaranteeing the
obligation.
A CMO is often issued in multiple classes with varying maturities and
interest rates. As a result the investor may obtain greater predictability of
maturity than with direct investments in mortgage-backed securities. Thus,
classes with shorter maturities may have lower volatility and lower yields while
those with longer maturities may have higher volatility and higher yields. This
provides the investor with greater control over the characteristics of the
investment in a changing interest rate environment.
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.
The Government Bond Fund may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
Bonds generally require payments of a specified amount of principal on each
payment date. PAC Bonds are always parallel pay CMOs with the required principal
payment on such securities having the highest priority after interest has been
paid to all classes.
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
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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 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 the
interest on which is exempt from federal income taxes.
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
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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.
The Tax Free Fund has no restrictions on the maturity of municipal
securities in which it may invest. Accordingly, it will seek to invest in
municipal securities of such maturities which, in the judgment of SM&R will
provide a high level of current income consistent with prudent investment, with
consideration given to market conditions.
The Tax Free Fund will invest, without percentage limitations, in municipal
securities having at the time of purchase one of the four highest municipal
ratings by Moody's Investor Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), or Fitch IBCA ("Fitch") or in securities which are not
rated, provided that, in the opinion of SM&R, such securities are comparable in
quality to those within the four highest ratings. Such implied investment grade
rating will be determined by SM&R upon its performance of a credit analysis of
the issue and the issuer. Such credit analysis may consist of a review of such
items as the issuer's debt characteristics, financial information, structure of
the issue, liquidity of the issue, quality of the issuer, current economic
climate, financial adviser, and underwriter. The rating agencies consider that
bonds rated in the fourth highest category may have some speculative
characteristics and that changes in economic conditions or other circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments on those bonds than is the case with higher grade bonds. SM&R will only
purchase bonds rated in such fourth category if it believes that the purchase of
such bonds is consistent with the Tax Free Fund's investment objective. In the
event the rating of an issue held by the Tax Free Fund is changed by the rating
service, such change will be considered by the Tax Free Fund in its evaluation
of the overall investment merits of that security but such change will not
necessarily result in an automatic sale of the security. Any security 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.
Purchasing unrated municipal securities, which may be less liquid than
comparably rated municipal securities, involves somewhat greater risk and
consequently the Tax Free Fund may not invest more than 20% of its net assets in
unrated municipal securities. To attempt to minimize the risk of such
investments, SM&R will, prior to acquiring unrated securities, consider the
terms of the offering and various other factors to determine the issuer's
comparative credit rating and whether the securities are consistent with the Tax
Free Fund's investment objective and policies.
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.
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GENERAL OBLIGATION BONDS -- Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith and credit and taxing power for the payment of
principal and interest. The taxes that can be levied for the payment of debt
service may be limited or unlimited as to the rate or amount of special
assessments.
REVENUE BONDS -- The principal security for a revenue bond is generally the
net revenues derived from a particular facility, group of facilities, or, in
some cases, the proceeds of a special excise or other specific revenue source.
Revenue bonds are issued to finance a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund whose money may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a state's ability (without obligation)
to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds are, in most cases, revenue bonds and are
issued for or on behalf of public authorities to raise money to finance various
privately operated facilities for business and manufacturing, housing, sports
and pollution control. These bonds are also used to finance public facilities
such as airports, mass transit systems, ports and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facilities user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment. The Tax
Free Fund will purchase Industrial Revenue Development Bonds only to the extent
the interest paid is tax-exempt pursuant to the Tax Reform Act of 1986, which
limited the types of facilities that may be financed with tax-exempt industrial
development and private activity bonds.
Municipal notes generally are used to provide for short-term working capital
needs and generally have maturities of one year or less. Municipal notes
include:
TAX ANTICIPATION NOTES ("TANS") -- TANS are issued to finance working
capital needs of municipalities and are issued in anticipation of various
seasonal tax revenue, such as income, sales, use and business taxes, and are
payable from these specific future taxes.
REVENUE ANTICIPATION NOTES ("RANS") -- RANS are in expectation of receipt of
other types of revenue, such as federal revenues available under federal revenue
sharing programs.
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BOND ANTICIPATION NOTES ("BANS") -- BANS are issued to provide interim
financing until long-term financing can be arranged. In most cases, the
long-term bonds then provide the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES -- Construction Loan Notes are sold to provide
construction financing. After successful completion and acceptance, many
projects receive permanent financing through the Federal Housing Administration
under "Fannie Mae" (the Federal National Mortgage Association) or "Ginnie Mae"
(the Government National Mortgage Association).
TAX-EXEMPT COMMERCIAL PAPER (SHORT-TERM DISCOUNT NOTES) -- Tax Exempt
Commercial Paper is a short-term obligation with a stated maturity of 365 days
or less. It is issued by state and local governments or their agencies to
finance seasonal working capital needs or as short-term financing in
anticipation of longer-term financing.
Variable or Floating Rate Demand Notes ("VRDNs") are tax-exempt obligations
which contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest upon a short notice period (generally up to 30 days) prior
to specified dates, either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument. The
interest rates are adjustable at intervals ranging from daily to up to six
months to some prevailing market rate for similar investments, such adjustment
formula being calculated to maintain the market value of the VRDN at
approximately the par value of the VRDN upon the adjustment date. The
adjustments are typically based upon the prime rate of a bank or some other
appropriate interest rate adjustment index. The Tax Free Fund will decide which
variable or floating rate demand instruments it will purchase in accordance with
procedures prescribed by the Board to minimize credit risks. Any VRDN must be of
high quality as determined by SM&R and subject to review by the Board with
respect to both its long-term and short-term aspects, except where credit
support for the instrument is provided even in the event of default on the
underlying security, the Fund may rely only on the high quality character of the
short-term aspect of the demand instrument.
Defeased bonds or escrow secured bonds are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of principal
and interest of the advance refunded bond. Escrow secured bonds will often
receive a triple A rating from Moody's and S&P. The Tax Free Fund will purchase
escrow secured bonds without additional insurance only when the escrow is
invested in U.S. government securities backed by the full faith and credit of
the U.S. government.
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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. The Tax Free Fund may purchase insured municipal bonds as
long as the underlying credit is investment grade (BBB or better by S&P and
Fitch and Baa or better by Moody's).
Although insured municipal bonds sell at yields lower than they would
without the insurance, they tend to have yields higher than Aaa/AAA-rated
noninsured municipal bonds.
In addition, other types of municipal securities similar to the above
described municipal bonds and municipal notes are, or may become available. For
the purpose of the Company's investment restrictions set forth in this Statement
of Additional Information, the identification of the "issuer" of a municipal
security which is not a general obligation bond is made by the adviser on the
basis of the characteristics of the obligation, the most significant of which is
the source of funds for the payment of principal and interest on such security.
RISKS RELATING TO MUNICIPAL SECURITIES. There can be no assurance that the
Tax Free Fund will achieve its investment objective. Yields on municipal
securities are dependent on a variety of factors, including the general
conditions of the money market and the municipal bond market, the size of a
particular offering, the maturity of the obligations and the rating of the
issue. Municipal securities with longer maturities tend to produce higher yields
and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities. The market prices of
municipal securities usually vary, depending upon available yields. An increase
in interest rates will generally reduce the value of portfolio investments, and
a decline in interest rates will generally increase the value of portfolio
investments.
The ability of the Fund to achieve its investment objective is also
dependent on the continuing ability of the issuers of municipal securities in
which the Fund invests to meet their obligations for the payment of interest and
principal when due. A moratorium, default, or other non-payment of interest or
principal when due could, in addition to affecting the market value and
liquidity of the particular security, affect the market value and liquidity of
other municipal securities. Additionally, the market for municipal securities is
often thin and can be temporarily affected by large purchases and sales. As a
result, the Tax Free Fund will attempt to minimize risk by diversifying its
investments by investing no more than 5% of its net assets in the securities of
any one issuer (this
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limitation does not apply to investments issued or guaranteed by the U.S.
Government or its instrumentalities) and by investing no more than 25% of its
net assets in municipal securities issued in any one state or territory. Each
political subdivision, agency, instrumentality, and each multi-state agency of
which a state is a member will be regarded as a separate issuer for the purpose
of determining diversification. In general, defeased bonds and insured bonds
will not be treated as an obligation of the original municipality for purposes
of determining diversification.
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.
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 of the Fixed Income Funds, 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:
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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 of the Fixed Income Funds 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, a 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 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 Fixed Income 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 Fixed Income Fund is
subsequently reduced below the minimum rating required for purchase or a
security purchased
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by one of the Fixed Income Funds 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
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
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remittance of amounts due the Government Bond 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 of the Funds 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 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
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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 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:
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- A security with a remaining maturity of 397 calendar days or less
("Short-term") that has received a rating from two nationally recognized
statistical rating organizations ("NRSROs"), or if rated by only one
NRSRO, from that NRSRO, in one of the two highest rating categories
("Acceptable Rating") for debt obligations; or
- A security with a remaining maturity of 397 calendar days or less issued
by an issuer that has received an Acceptable Rating from at least two
NRSROs, or if rated by only one NRSRO, from that NRSRO, with respect to a
class of debt obligations (or any debt obligation within that class) that
is comparable in priority and security with the security (a "Comparable
Security").
If a security is acquired based on the rating of only one NRSRO, such
acquisition must be ratified by the Board. While Rule 2a-7 permits money market
funds to invest in certain unrated securities of comparable quality to eligible
rated securities, the Money Market Fund currently does not intend to invest in
unrated securities.
SM&R has the responsibility of determining that each investment by the Money
Market Fund presents minimal credit risks. SM&R's determination of minimal
credit risk will be based on an analysis of the issuer's (and, if applicable,
any guarantor's) capacity to repay its Short-term debt obligations. The analysis
cannot rely on ratings alone, but must be made on factors pertaining to credit
quality in addition to any rating that the security or the issuer may have been
assigned. The extensiveness of the evaluation may vary with the type and
maturity of the instrument involved and the SM&R's familiarity with the issuer.
The Money Market Fund will maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable net asset value
per share, provided, however, that the Fund will not (1) purchase any instrument
with a remaining maturity at the date of acquisition of greater than 397
calendar days, or (2) maintain a dollar-weighted average portfolio Maturity that
exceeds 90 days. The "maturity" of a portfolio instrument is the period
remaining (calculated from the trade date or such other date on which the Fund's
interest in the security is subject to market action) until the date on which,
in accordance with the terms of the security, the principal amount must
unconditionally be paid, or in the case of a security called for redemption, the
date on which the redemption must be made.
The Money Market Fund will maintain a diversified portfolio in accordance
with the provisions of Rule 2a-7. In meeting diversification requirements of the
Rule, SM&R classifies securities into First and Second Tier Securities, as
defined in the 1940 Act. A "First Tier Security" is an Eligible Security that
(1) has been rated by at least two NRSROs (or if rated by only one NRSRO, by
that NRSRO) in the highest rating category for Short-term debt obligations;
(2) has been issued by an issuer that is rated with respect to a Comparable
Security, by at least two NRSROs (or if rated by only one NRSRO, by that NRSRO)
in the highest rating category for Short-term debt obligations; (3) has been
issued by a registered investment company that is a money market fund; or
(4) is a "Government Security," as defined in Section 2(a)(16) of the 1940 Act.
A
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"Second Tier Security" is an Eligible Security that is not a First Tier
Security. By limiting its investments to Eligible Securities, the Money Market
Fund may not achieve as high a level of current income as a fund investing in
lower-rated securities.
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.
The Money Market Fund does not currently intend to invest in unrated
securities, securities subject to demand features, floating rate instruments,
securities subject to guarantees, and variable rate instruments.
ZERO COUPON BONDS. The Government Bond Fund may invest in zero coupon
bonds, which are debt obligations issued or purchased at a significant discount
from face value. The Government Bond Fund will only purchase zero coupon bonds
which are U.S. Government Obligations. The discount approximates the total
amount of interest the bonds will accrue and compound over the period until
maturity or the first interest payment date at a rate of interest reflecting the
market rate of the security at the time of issuance. Zero coupon bonds do not
entitle the holder to any periodic payments of interest prior to maturity. Their
value as investments consists of the difference between their face value at the
time of maturity and the price for which they are acquired, which is generally
an amount significantly less than face value (sometimes referred to as a "deep
discount" price). Zero coupon bonds require a higher rate of return to attract
investors who are willing to defer receipt of cash. Accordingly, although not
providing current income, SM&R believes that zero coupon bonds can be
effectively used to lock in a higher rate of return in a declining interest
environment. Such investments may experience greater volatility in market value
than debt obligations which make regular payments of interest. The Government
Bond Fund will accrue income on such investments for tax and accounting
purposes, as required, which is distributable to shareholders and which, because
no cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations.
PRIMARY FUND INVESTMENTS. In addition to its investment in commercial
paper, as described in the Prospectus, the Primary Fund may also invest in
(i) U.S. Government Obligations; (ii) other corporate obligations, such as
bonds, debentures or notes maturing in five (5) years or less at the time of
purchase which at the date of investment are rated "A" or higher by a nationally
recognized statistical rating organization;
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(iii) negotiable certificates of deposit of banks (including U.S. dollar
denominated obligations of foreign branches of U.S. banks and U.S. branches of
foreign banks and savings and loan associations and banker's acceptances of U.S.
banks, which banks and savings and loan associations have total assets at the
date of investment (as of the date of their most recent published financial
statements) of at least $1 billion; and (iv) repurchase agreements with respect
to any type of instrument in which the Primary Fund is authorized to invest even
though the underlying instrument may mature in more than two (2) years.
INVESTMENT TECHNIQUES APPLICABLE TO ONE OR MORE OF THE EQUITY FUNDS
U.S. GOVERNMENT OBLIGATIONS. The Equity Funds may invest in United States
Government obligations. These instruments are debt obligations issued by
agencies or authorities controlled or supervised by and acting as
instrumentalities of the U.S. Government established under authority granted by
Congress. Such obligations include, but are not limited to, Government National
Mortgage Association, The Tennessee Valley Authority, The Bank for Cooperatives,
Federal Intermediate Credit Banks, Federal Home Loan Banks, Federal Land Banks
and The Federal National Mortgage Association. Some obligations of U.S.
Government agencies, authorities and other instrumentalities are supported by
the full faith and credit of the U.S. Treasury; others by the rights of the
issuer to borrow from the Treasury; and others only by the credit of the issuer.
No assurance can be given that the U.S. Government would lend money to or
otherwise provide financial support to U.S. Government sponsored
instrumentalities.
The Funds' adviser will invest in U.S. obligations not backed by the "full
faith and credit" of the U.S. government only when, in its opinion, the credit
risk is minimal. SM&R does not presently intend to invest any significant amount
in such obligations and would do so in the future only to increase a Fund's
liquidity on a short-term basis during adverse and unusual market conditions.
INVESTMENT IN COVERED CALL OPTIONS. Although there is no present intent to
do so, the Balanced Fund may write covered call option contracts provided that
the option is listed on a domestic securities exchange and that no option will
be written if, as a result, more than 25% of the Balanced Fund's assets are
subject to call options. A covered call option is an option on a security which
the Balanced Fund owns or can acquire by converting a convertible security it
owns. The purchaser of the option acquires the right to buy the security from
the Balanced Fund at a fixed exercise price at any time prior to the expiration
of the option, regardless of the market price of the security at that time. A
security on which an option has been written will be held in escrow by the
Balanced Fund's custodian until the option expires, is exercised, or a closing
purchase transaction is made. The Balanced Fund thus foregoes the opportunity to
profit from an increase in the market price in the underlying security above the
exercise price, in return for the premium it receives from the purchaser of the
option. The Balanced Fund's management believes that such premiums will maximize
the Balanced Fund's return without subjecting it to substantial risks.
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The Balanced Fund will purchase call options only to close out a position in
an option written by it. In order to close out a position the Balanced Fund will
make a "closing purchase transaction" if such is available. In such a
transaction, the Balanced Fund will purchase a call option on the same security
with the same exercise price and expiration date as the call option which it has
previously written. When a security is sold from the Balanced Fund's portfolio
against which a call option has been written, the Balanced Fund will effect a
closing purchase transaction so as to close out any existing call option on that
security. The Balanced Fund will realize a profit or loss from a closing
purchase transaction if the amount paid to purchase a call option is less or
more than the amount received as a premium from the writing thereof. A closing
purchase transactions cannot be made if trading in the option has been
suspended.
The premium received by the Balanced Fund upon writing a call option will
increase the Balanced Fund's assets, and a corresponding liability will be
recorded and subsequently adjusted from day to day to the current value of the
option written. For example, if the current value of the option exceeds the
premium received, the excess would be an unrealized loss and, conversely, if the
premium exceeds the current value, such excess would be an unrealized gain. The
current value of the option will be the last sales price on the principal
exchange on which the option is traded or, in the absence of any transactions,
the mean between the closing bid and asked price.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Balanced Fund may invest a portion
of its assets in collateralized mortgage obligations or "CMOs," which are debt
obligations collateralized by a portfolio or pool of mortgages, mortgage-backed
securities or U.S. Government securities. Collateralized obligations in which
the Balanced Fund may invest are issued or guaranteed by a U.S. Government
agency or instrumentality, such as the FHLMC. A variety of types of
collateralized obligations are currently available and others may become
available in the future. One should keep in mind that during periods of rapid
interest rate fluctuation, the price of a security, such as a CMO, could either
increase or decrease based on inherent interest rate risk. Additionally, the
risk of maturities shortening or lengthening in conjunction with interest rate
movement, could magnify the overall effect of the price fluctuation.
A CMO is often issued in multiple classes with varying maturities and
interest rates. As a result the investor may obtain greater predictability of
maturity than with direct investments in mortgage-backed securities. Thus,
classes with shorter maturities may have lower volatility and lower yield while
those with longer maturities may have higher volatility and higher yields. This
provides the investor with greater control over the characteristics of the
investment in a changing interest rate environment.
REPURCHASE AGREEMENTS. Each of the Equity Funds may purchase repurchase
agreements either for defensive purposes due to market conditions or to generate
income from its excess cash balances. Under the terms of a repurchase agreement,
a Fund would acquire a high quality money market instrument or U.S. Government
security for a relatively short period (usually not more than one week) subject
to an obligation of the
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seller, generally a bank or dealer, 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. During the
holding period, the seller must provide additional collateral if the market
value of the obligation falls below the repurchase price. 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. A Fund might also incur disposition costs in liquidating the
collateral. SM&R, or Fred Alger Management, Inc. ("Alger Management", the Alger
Funds' investment sub-advisor) in the case of the Alger Funds, reviews the
credit worthiness of those banks and dealers with which the Funds enter into
repurchase 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. The Growth Fund, Equity Income Fund,
and the Balanced Fund will purchase only repurchase agreements maturing in seven
(7) days or less.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligations to repurchase the
underlying security at a time when the value of the security has declined, a
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by a Fund not within the control of
that Fund and therefore the realization by that Fund on such collateral may be
automatically stayed. Finally, it is possible that a Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Funds'
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES. Although there is no present intent to do so, the
Balanced Fund may lend its portfolio securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its portfolio
securities, the Balanced Fund attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the
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Balanced Fund. The Balanced Fund may lend its portfolio securities to qualified
brokers, dealers, banks or other financial institutions, so long as the terms
the structure and the aggregate amount of such loans are not inconsistent with
the 1940 Act, or the Rules and Regulations or interpretations of the SEC
thereunder, which currently require that (a) the borrower pledge and maintain
with the Balanced Fund collateral consisting of cash, a letter of credit issued
by a domestic United States bank, or securities issued or guaranteed by the
United States Government having a value at all times not less than 100% of the
value of the securities loans, (b) the borrower add to such collateral whenever
the price of the securities loaned rises (i.e., the borrower "marks to the
market" on a daily basis), (c) the loans be made subject to termination by the
Balanced Fund at any time, and (d) the Balanced Fund receive reasonable interest
on the loans (which may include the Balanced Fund's investing any cash
collateral in interest bearing short-term investments), any distribution on the
loaned securities and any increase in their market value.
Each Alger Fund may lend securities to brokers, dealers and other financial
organizations. The 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 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 Company'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.
The principal risk of lending is the potential insolvency of the borrower.
In this event, the Balanced Fund or Alger Funds could experience delays in
recovering their securities and possible capital loss.
COMMERCIAL PAPER. Commercial paper is short-term unsecured promissory notes
issued by corporations to finance short-term credit needs. Commercial paper is
usually
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sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months.
ILLIQUID SECURITIES. The Growth Fund, the Equity Income Fund, the Balanced
Fund, the Alger Aggressive Growth Fund, and the Alger Technology Fund may each
invest up to 15% of its net assets in illiquid securities, including domestic or
foreign securities not listed on domestic or foreign exchanges and repurchase
agreements. 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 these 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 SM&R deems representative of their value, the value of
the Fund's net assets could be adversely affected. The Alger Growth Fund and
Alger Small-Cap Fund will not invest more than 10% of their net assets in
illiquid securities. Restricted securities that are determined by the Company's
Board of Directors to be liquid are not subject to this limitation.
144A SECURITIES AND SECTION 4(2) COMMERCIAL PAPER. If otherwise consistent
with its investment objective and policies, the Equity Funds 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. The Board has delegated to SM&R (and SM&R has delegated to Alger
Management for the Alger Funds) the responsibility to determine the liquidity of
restricted securities pursuant to Rule 144A. These procedures consider trading
activity, availability of reliable price information, and other relevant
information to determine whether an adequate trading market exists for that
security. To the extent that, for a period of time, qualified institutional or
other buyers may cease purchasing such restricted securities, the level of
illiquidity of a Fund holding such securities may increase.
CERTIFICATES OF DEPOSIT 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
25
<PAGE>
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 Alger Growth Fund, Alger Small-Cap Fund, and 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 Alger
Management, the Alger Funds' investment sub-adviser, of an investment quality
comparable to other debt securities which may be purchased by the 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.
AMERICAN DEPOSITORY RECEIPTS ("ADRS"). ADRs are U.S. dollar-denominated
securities of foreign corporations which are traded in the U.S. on national
securities exchanges or over-the-counter and are issued by domestic banks. The
banks act as custodian of the shares of the foreign stock and collect dividends
on the stock which are either reinvested or distributed to the ADR holder in
U.S. dollars. While ADRs are not considered foreign securities, they may entail
certain political, economic and regulatory risks. Such risks may include
political or social instability, excessive taxation and limitations on the
removal of funds or other assets which could adversely affect the value of a
Fund's investments. The economies of many countries in which a Fund may invest
may not be as developed as the U.S. economy and may be subject to significantly
different forces. Foreign companies are not registered with the SEC and are not
generally subject to the regulatory controls imposed on U.S. issuers.
Consequently, there is generally less public information available on foreign
securities. Foreign companies are not subject to uniform accounting, auditing,
and financial reporting standards. Income from foreign securities owned may be
reduced by a withholding tax at the source, which tax would reduce income
payable to a Fund's shareholders.
FOREIGN BANK OBLIGATIONS. Investments by the 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
26
<PAGE>
principal and interest on these obligations. In addition, there may be less
publicly 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.
VARIABLE RATE MASTER DEMAND NOTES. The Alger Funds may invest in 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.
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. Such transactions may be employed by the
Alger Funds.
WARRANTS AND RIGHTS. Each 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.
27
<PAGE>
PORTFOLIO DEPOSITARY RECEIPTS. To the extent otherwise consistent with its
investment policies and applicable law, the 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 Alger Technology Fund may invest in Standard & Poor's Depositary
Receipts(R) (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(R) (MidCap SPDRs), similarly linked to the S&P MidCap 400
Index.
SHORT SALES. Each 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.
OPTIONS (ALGER AGGRESSIVE GROWTH FUND AND 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
28
<PAGE>
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 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.
29
<PAGE>
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 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 Alger Technology Fund will not purchase options if, as a result, the
aggregate 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 (ALGER AGGRESSIVE
GROWTH FUND AND ALGER 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.
30
<PAGE>
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.
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-
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<PAGE>
money at the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation.
BORROWING (ALGER AGGRESSIVE GROWTH FUND AND 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. 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.
FOREIGN SECURITIES. Each of the 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 of 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 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 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
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<PAGE>
foreign securities they represent, may of the risks associated with foreign
securities may also apply to ADRs and ADSs.
MONEY MARKET INSTRUMENTS. In order to afford the 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 issued 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 mutual funds with similar investment objectives.
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. A 100% portfolio turnover rate would occur,
for example, if all of a Fund's portfolio securities were replaced within one
year. In general, it is intended that portfolio changes in the Funds, with the
exception of the Primary Fund and the Money Market Funds, 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. However, purchases and sales of portfolio securities for the Balanced
Fund are made at such times and in such amounts as are deemed advisable in light
of market, economic and other conditions, irrespective of the volume of
portfolio turnover. 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.
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, 1998 AUGUST 31, 1999 AUGUST 31, 2000
---------------- ---------------- ----------------
<S> <C> <C> <C>
Government Bond Fund...... 32.71% 22.86% 30.87%
Tax Free Fund............. 12.77% 5.09% 7.61%
Primary Fund.............. 0% 30.47% 18.46%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31*, 1997 DECEMBER 31*, 1998 DECEMBER 31*, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Growth Fund................ 46.79% 27.31% 16.13%
Equity Income Fund......... 39.14% 19.29% 9.81%
Balanced Fund.............. 27.52% 16.01% 18.01%
</TABLE>
* The Predecessor Funds had a December 31 fiscal year end. As explained in the
section "THE COMPANY" at the beginning of this Statement of Additional
Information, the data shown herein for the Growth Fund, Equity Income Fund,
and Balanced Fund are the data from the corresponding Predecessor Funds.
33
<PAGE>
The Alger Funds were not in existence during the fiscal year ended August
31, 2000.
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.
No brokerage commissions have been paid during the Funds' three most recent
periods to any broker which is an affiliated person of the Funds, which is an
affiliated person of a broker which is an affiliated person of the Funds or an
affiliated person of which is an affiliated person of the Funds or SM&R.
34
<PAGE>
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(*).
<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 Director of the Company since 1997; Marie
Age 75 B. Gale Centennial Professor in
Department of Psychiatry Psychiatry, Professor and Chief,
and Behavioral Sciences, Psychodiagnostic Service and Cognitive
University of Texas Neuroscopic Laboratory, Department of
Medical Branch, Psychiatry and Behavioral Sciences,
Galveston, Texas 77555-0189 University of Texas Medical Branch, a
medical school and hospital system, since
1962; Director of American National
Investment Accounts, Inc. ("Investment
Accounts"), another investment company
advised by SM&R, since 1990.
Jack T. Currie(1) Director Director of the Company since
Age 72 September 21, 2000; Director of SM&R
515 Post Oak Boulevard Growth Fund, Inc., SM&R Equity Income
Suite 750 Fund, Inc., and SM&R Balanced Fund, Inc.
Houston, Texas 77027 from 1971 until the Conversion; Personal
Investments; Director of American
Indemnity Financial Corporation 1978 to
1999, holding company for casualty
insurance company; Director of Stewart &
Stevenson Services, Inc. 1990 to 1999,
designs and constructs power generating
systems.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE COMPANY DURING PAST 5 YEARS
---------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Michael W. McCroskey* Director and President President, Chief Executive Officer,
Age 57 Director and member of the Executive
Committee of SM&R since June 1994;
President and Director of the Company
since June 1994; President and Director of
SM&R Growth Fund, Inc., SM&R Equity Income
Fund, Inc., and SM&R Balanced Fund, Inc.
from June 1994 until the Conversion;
President and Director of Investment
Accounts since June 1994; Executive Vice
President, American National since 1971;
Vice President of Standard Life and
Accident Insurance Company since 1988;
Assistant Secretary of American National
Life Insurance Company of Texas since
1986; Vice President, Investments of
American National Property and Casualty
Company since 1994; Vice President,
Pacific Property and Casualty since 1996,
life, health and accident insurance
companies in the American National Family
of Companies; Vice President, Garden State
Life Insurance Company since 1994;
President and Director, ANREM Corporation
since 1977, real estate investment;
President and Director of ANTAC
Corporation since 1995; Director,
Comprehensive Investment Services, Inc.
since 1997, investments.
Lea McLeod Matthews*(3) Director Director of the Company since 1994; Tivoli
Age 38 Systems, Inc., software and communications
#8 Kern Ramble company, since April 2000; Communications
Austin, Texas 78722 Consultant, Texas Association of School
Boards, 1999 to 2000; Publications Editor,
National Western Life Insurance Co., 1990
to 1999; Director of Investment Accounts
since 1994; Director of Garden State Life
Insurance Company since 1993; Director of
Kids Exchange of Austin (a non-profit
corporation), 1996 to 1998; Consultant to
Austin Writers League.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE COMPANY DURING PAST 5 YEARS
---------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Ann McLeod Moody*(3) Director Director of the Company since 1997;
Age 63 Director of Moody Gardens, Inc. since
5 Colony Park Drive 1994, non-profit corporation; Director of
Galveston, Texas 77551 Bank of Galveston, National Association,
1983 to 1988; Director of The Westcap
Corporation, 1990 to January 1999,
formerly a government bond trader;
Director and Corporate Secretary of Seal
Fleet, Inc., 1972 to 1996, formerly
offshore service company; Director of
Investments Accounts since 1997; Director
of Gal-Tex Hotel Corporation since 1998,
hotel management company.
Edwin K. Nolan(2) Director Director of the Company since 1991;
Age 57 Investor and Attorney, Law Offices, Edwin
1271 Jonas Drive K. Nolan, P. C., Canyon Lake, Texas, since
Canyon Lake, Texas 78133 1977; Director/Owner, Canyon Lake
Aviation, Inc. since 1986, aviation
service; Director, Hancock Mini Mart, Inc.
since 1995; Director of Investments
Accounts since 1997.
Robert V. Shattuck, Jr.(2) Director Director of the Company since 1997;
Age 59 Attorney, Law Offices of Robert V.
1018 23rd Street Shattuck, Jr., Galveston, Texas, since
Galveston, Texas 77550 1986; Director of Investments Accounts
since 1997.
Donald P. Stevens(2) Director Director of the Company since
Age 53 September 21, 2000; Director of SM&R
University of Texas Growth Fund, Inc., SM&R Equity Income
Medical Branch Fund, Inc., and SM&R Balanced Fund, Inc.
Box 25041 from 1985 until the Conversion; Assistant
Galveston, Texas 77555 to the President for Governmental
Relations of The University of Texas
Medical Branch, a medical school and
hospital system, since 1975; Vice
President of Jamail Galveston Foundation
since 1993.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE COMPANY DURING PAST 5 YEARS
---------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Steven H. Stubbs, C.F.A. Director Director of the Company since
Age 62 September 21, 2000; Director of SM&R
514 Poplar Avenue Growth Fund, Inc., SM&R Equity Income
Philadelphia, Fund, Inc., and SM&R Balanced Fund, Inc.
Mississippi 39350 from 1989 until the Conversion; Former
Director, President and Chief Executive
Officer of The Westcap Corporation,
formerly a government bond trader, 1994 to
1995; Former President and Chief Executive
Officer of SM&R, 1987 to 1994; Former
President and Chief Executive Officer of
each of SM&R Growth Fund, Inc., SM&R
Equity Income Fund, Inc., and SM&R
Balanced Fund, Inc.; President and
Director of Dancing Rabbit Press, Inc.,
private book publishing company, since
1999; Director of Neshoba County
Philadelphia Historical Museum, Inc. since
1999.
Jamie G. Williams(1) Director Director of the Company since 1997;
Age 54 Academic Language Therapist and
3328 Stanford Educational Consultant since 1974;
Dallas, Texas 75225 Director of The Learning Therapist
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 the Center for Computer
Assistance to the Disabled since April
2000; Director of Investments Accounts,
1997 to present.
Frank P. Williamson Director Director of the Company since 1997;
Age 68 Retired Owner of Professional Pharmacy,
301 Barracuda 1964 to 1998; Director of Investments
Galveston, Texas 77550 Accounts since 1997.
Brenda T. Koelemay Vice President and Vice President and Treasurer of the
Age 46 Treasurer Company since 1992; Vice President and
Treasurer of SM&R since 1992; Vice
President of SM&R Growth Fund, Inc., SM&R
Equity Income Fund, Inc., and SM&R
Balanced Fund, Inc. from 1992 until the
Conversion; Vice President of Investment
Accounts since 1992; Treasurer of
Comprehensive Investment Services, Inc.
since 1997; Senior Manager, KPMG Peat
Marwick LLP, July 1980 to April 1992.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS, AND AGE WITH THE COMPANY DURING PAST 5 YEARS
---------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Teresa E. Axelson Vice President and Vice President and Secretary of the
Age 53 Secretary Company since 1983; Vice President and
Secretary of SM&R since 1983; Vice
President of SM&R Growth Fund, Inc., SM&R
Equity Income Fund, Inc., and SM&R
Balanced Fund, Inc. from 1983 until the
Conversion; Vice President and Secretary
of the Investment Accounts since 1991.
</TABLE>
------------------------
* "Interested persons" as defined by the 1940 Act.
(1) Member of the Company's audit committee.
(2) Member of the Company's nominating committee.
(3) Ms. Matthews is the daughter of Mrs. Ann McLeod Moody.
39
<PAGE>
REMUNERATION OF DIRECTORS
The directors who are "Interested Persons" and the officers of the Fund
receive remuneration, directors' fees and expense reimbursements only from SM&R
and not from the Fund. Directors who are not "Interested Persons" of the Fund
are paid directors' fees by and receive expense reimbursements from the Fund.
The director's fee 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, 2000 for each director of the Company.
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ESTIMATED FROM FUNDS
AGGREGATE ACCRUED AS ANNUAL MANAGED BY
COMPENSATION PART OF FUND BENEFITS UPON SM&R (INCL.
DIRECTOR FROM COMPANY EXPENSES RETIREMENT ONE OTHER FUND)
-------- -------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Ernest S. Barratt, Ph.D. ...... $ 4000 None None $ 8,000
Ralph S. Clifford(1)(3) ....... $ 0 None None $10,000
Paul D. Cummings(1)(3)......... $ 0 None None $10,000
Jack T. Currie(1).............. $ 0 None None $10,000
Allan W. Matthews(2)*.......... $ 0 None None $ 0
Lea McLeod Matthews*........... $ 0 None None $ 0
Michael W. McCroskey*.......... $ 0 None None $ 0
Ann McLeod Moody*.............. $ 0 None None $ 0
Edwin K. Nolan................. $4,000 None None $ 8,000
Ira W. Painton(1)(3)........... $ 0 None None $14,000
Robert V. Shattuck, Jr. ....... $4,000 None None $ 8,000
Donald P. Stevens(1)........... $ 0 None None $10,000
Steven H. Stubbs(1)............ $ 0 None None $10,000
Jamie G. Williams.............. $4,000 None None $ 8,000
Frank P. Williamson............ $4,000 None None $ 8,000
</TABLE>
---------------------
(1) Messrs. Clifford, Cummings, Currie, Painton, Stevens, and Stubbs became
directors of the Company on September 21, 2000, and therefore they received
no compensation from the Company for the fiscal year ended August 31, 2000.
Prior to that time, each of these individuals served as directors of the
SM&R Growth Fund, Inc., the SM&R Balanced Fund, Inc., and the SM&R Equity
Income Fund, Inc., which funds existed as stand-alone funds prior to the
Conversion.
(2) Mr. Matthews resigned as director of the Company on August 17, 2000.
(3) Messrs. Clifford, Cummings and Painton resigned as directors of the Company
on December 31, 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.
* "Interested persons" as defined by the 1940 Act.
40
<PAGE>
During the year ended August 31, 2000, the Company paid or accrued approximately
$21,793 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
Growth Fund, the Equity Income Fund, the Balanced Fund, the Government Bond
Fund, and the Tax Free Fund 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. 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.
41
<PAGE>
PERSONAL INVESTING BY OTHER SM&R OFFICERS AND EMPLOYEES
Officers and employees of the Company other than portfolio managers may
trade in (or otherwise acquire) or hold any security for his own account (or an
account in which he has beneficial interest). However, the trade must not occur
within 24 hours of a trade in the Funds for the same or related security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of December 1, 2000, 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, 2000, 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 % OF
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
SHARES OF THE SHARES OF THE SHARES OF THE SHARES OF THE SHARES OF THE SHARES OF THE
COMPANY GOVERNMENT TAX FREE PRIMARY MONEY GROWTH
(AS A WHOLE) BOND FUND FUND FUND MARKET FUND FUND
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
American National.... 48.13% 34.24% 62.02% 24.89% 82.31% 5.62%
SM&R................. 2.00% 23.55% 12.62% 0.08% 0.90% 0.66%
</TABLE>
<TABLE>
<CAPTION>
% OF
% OF OUTSTANDING % OF % OF
% OF % OF OUTSTANDING SHARES OF THE OUTSTANDING OUTSTANDING
OUTSTANDING OUTSTANDING SHARES OF THE ALGER SHARES OF THE SHARES OF THE
SHARES OF THE SHARES OF THE ALGER AGGRESSIVE ALGER ALGER
EQUITY BALANCED GROWTH GROWTH SMALL-CAP TECHNOLOGY
INCOME FUND FUND FUND FUND FUND FUND
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
American National.... 0% 16.81% 0% 0% 0% 0%
SM&R................. 0.30% 8.72% 0% 0% 0% 0%
</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 operations of the Government Bond, Tax Free and Money
Market Funds, including the ability to make changes in the fundamental
investment objectives and restrictions of these Funds, as well as the ability to
increase investment advisory fees, notwithstanding other shareholders' votes to
the contrary. Because American National and SM&R were the only shareholders of
the Balanced Fund to own more than 5% or more of its outstanding shares, such
ownership gives American National and SM&R a strong voice in the Balanced Fund's
affairs, though not directly affecting other shareholders' voting rights. As a
practical matter, such ownership in the Balanced Fund means that passage of a
shareholder proposal is unlikely without American National's or SM&R's vote
therefore. As of December 1, 2000, Fred
42
<PAGE>
Alger Management, Inc. 30 Montgomery Street, Jersey City, NJ 07302, a party
unrelated to American National and SM&R, owned 63.82% of the outstanding shares
of the SM&R Alger Growth Fund, 61.72% of the outstanding shares of the
SM&R Alger Small Cap Fund, 61.52% of the outstanding shares of the SM&R Alger
Aggressive Growth Fund, and 63.39% of the outstanding shares of the SM&R Alger
Technology Fund.
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 written
agreements periodically approved by the directors or shareholders of the
Company. 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 31, 1999, the Moody Foundation (the "Foundation"), a charitable
foundation established for charitable and educational purposes, owned
approximately 23.63% of American National's common stock and the Libbie S. Moody
Trust, a private trust, owned approximately 37.46% of such shares. The trustees
of the Moody Foundation are Robert L. Moody ("RLM"), Chairman of the Board of
Directors and Chief Executive Officer 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 and underwriter to
American National Investment Accounts, Inc. ("Investment Accounts"), which is an
investment company used to fund benefits under contracts issued by American
National, and an investment adviser 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 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 31, 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
49.6% 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.
43
<PAGE>
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 Investment Accounts;
- Gordon D. Dixon, Director, Senior Vice President, Chief Investment Officer
and a member of the investment and executive committees of SM&R, Vice
President of the Company, and a Co-Portfolio Manager of the Growth Fund,
Equity Income Fund, and Balanced Fund, and Vice President and Portfolio
Manager of the American National Investment Accounts, Inc.--Growth,
Balanced, Equity Income, Government Bond, High Yield Bond, and
International Stock Portfolios.
- Teresa E. Axelson, Vice President, Secretary of the Company, is also Vice
President and Secretary of SM&R and Investment Accounts;
- Brenda T. Koelemay, Vice President and Treasurer of the Company, is also
Vice President and Treasurer of SM&R and Investment Accounts;
INVESTMENT ADVISORY AGREEMENTS
Under the Investment Advisory Agreements (each, an "Advisory Agreement")
listed below between SM&R and the Company, on behalf of the Funds, SM&R acts as
investment adviser for and provides certain investment-related administrative
services to the Funds:
- February 19, 1992 between SM&R and the Government Bond Fund and Primary
Fund;
- July 1, 1993 between SM&R and the Tax Free Fund;
- November 19, 1998 between SM&R and the Money Market Fund;
- September 1, 2000 between SM&R and the Alger Funds;
- December 31, 2000 between SM&R and the Growth Fund, Equity Income Fund,
and Balanced Fund.
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
44
<PAGE>
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.
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, 1998 AUGUST 31, 1999 AUGUST 31, 2000
---------------- ---------------- ----------------
<S> <C> <C> <C>
Government Bond Fund................ $120,397 $120,644 $114,520
Tax Free Fund....................... $ 53,102 $ 57,794 $ 56,294
Primary Fund........................ $174,328 $167,289 $138,844
Money Market Fund................... N/A $ 7,237 $ 86,927
Company Total....................... $347,827 $352,964 $396,585
</TABLE>
SM&R waived all advisory fees for the Tax Free Fund Class A and Class B and
Money Market Fund for the period ended August 31, 2000.
GROWTH FUND, EQUITY INCOME FUND, AND BALANCED FUND--A monthly investment
advisory fee computed by applying to the average daily net asset value of the
Growth
45
<PAGE>
Fund, the Equity Income Fund, and the Balanced 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.................................. 0.750%
Exceeding $100,000,000 but not exceeding $200,000,000....... 0.625%
Exceeding $200,000,000 but not exceeding $300,000,000....... 0.500%
Exceeding $300,000,000...................................... 0.400%
</TABLE>
For the past three fiscal years, SM&R received investment advisory fees from the
Growth Fund, Equity Income Fund, and Balanced Fund as follows:
<TABLE>
<CAPTION>
ADVISORY FEES ADVISORY FEES ADVISORY FEES
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31*, 1997 DECEMBER 31*, 1998 DECEMBER 31*, 1999
------------------- ------------------- -------------------
<S> <C> <C> <C>
Growth Fund................ $1,011,542 $ 922,010 $1,005,753
Equity Income Fund......... $1,270,994 $1,426,042 $1,468,951
Balanced Fund.............. $ 186,693 $ 198,438 $ 222,265
</TABLE>
* The Predecessor Funds had a December 31 fiscal year end. As explained in the
section "THE COMPANY" at the beginning of this Statement of Additional
Information, the data shown herein for the Growth Fund, Equity Income Fund,
and Balanced Fund are the data from the corresponding Predecessor Funds.
On October 31, 2000, prior to the Conversion, shareholders of the SM&R
Growth Fund, Inc., the corresponding Predecessor Fund of the Growth Fund,
approved a new investment advisory agreement. Such new agreement eliminated the
performance fee adjustment component which had been contained in the SM&R Growth
Fund, Inc.'s advisory agreement since 1989. The performance fee adjustment
component was in addition to the basic advisory fee, which was identical to the
rates shown above. The performance adjustment was added or subtracted to the
basic advisory fee each month, depending on the extent to which the investment
performance of the SM&R Growth Fund, Inc. exceeded, or was exceeded by, the
Lipper Growth Fund Index published by Lipper Inc. The total advisory fees paid
by the SM&R Growth Fund, Inc. as shown in the table above, were determined using
the basic advisory fee and the performance adjustment. During the last six
fiscal years of the SM&R Growth Fund, Inc., there were 72 monthly performance
calculations. During 11 of those 72 months, SM&R benefited from the performance
fee adjustment because such adjustment increased the advisory fee. During 61 of
those months, application of the performance adjustment resulted in a decrease
in the basic advisory fee. The monthly advisory fee had been decreased by as
little as $22,287 in April 1999 and by as much as $38,359 in December 1999. The
monthly fee had been increased by as much as $25,073 in October 1996. The future
impact of eliminating the performance adjustment will depend on many different
factors and may represent an increase or decrease in the Growth Fund's aggregate
advisory fee, depending on the Fund's performance relative to the applicable
performance index.
46
<PAGE>
ALGER FUNDS--Through an investment sub-advisory agreement dated as of
September 1, 2000 (the "Sub-advisory Agreement"), SM&R has delegated its
investment advisory responsibilities to Fred Alger Management, Inc., One World
Trade Center, Suite 9333, New York, NY 10048. Fred Alger Management has been an
investment adviser since 1964, and manages investments (at 12/31/99) totaling
$10.69 billion in mutual fund assets as well as $6.75 billion in other assets.
Fred Alger Management makes investment decisions for each Alger Fund and
continuously reviews and administers the Alger Funds' investment programs. SM&R
monitors Fred Alger Management's buying and selling of securities and
administration of the Alger Funds' investment programs. For these services, the
Alger Funds pay SM&R an investment advisory fee.
Under the Advisory Agreement with the Company, SM&R receives the following
investment advisory fees, expressed as a percentage of each Alger Fund's average
daily net asset value:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY
ALGER FUND FEE ANNUAL RATE
---------- -------------------
<S> <C>
Alger Growth Fund........................................... 0.85%
Alger Small-Cap Fund........................................ 1.00%
Alger Aggressive Growth Fund................................ 1.05%
Alger Technology Fund....................................... 1.35%
</TABLE>
Because the 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 is responsible for paying a
sub-advisory fee to Alger Management for each of the Alger Funds. No 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
Alger Fund's average daily net asset value. SM&R pays Alger Management a
sub-advisory fee based on the following schedule:
<TABLE>
<CAPTION>
INVESTMENT ADVISORY
ALGER FUND FEE ANNUAL RATE
---------- -------------------
<S> <C>
Alger Growth Fund........................................... 0.50%
Alger Small-Cap Fund........................................ 0.60%
Alger Aggressive Growth Fund................................ 0.60%
Alger Technology Fund....................................... 0.60%
</TABLE>
Because the 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.
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 a majority of the outstanding voting securities of the Alger Funds,
and in either case by the specific approval of a majority of directors who are
not parties to such Agreement or
47
<PAGE>
"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 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 Alger Funds, or by SM&R,
upon 60 days written notice to the other party. The Sub-Advisory Agreement will
terminate automatically in the event of its assignment, as such term is defined
in the 1940 Act.
ADMINISTRATIVE SERVICE AGREEMENTS
Under the Administrative Service Agreements (each, an "Administrative
Agreement") listed below between SM&R and the Company, on behalf of the Funds,
SM&R provides all non-investment related management, executive, administrative
and operational services to the Company:
- July 1, 1993, as amended on November 19, 1998, between SM&R and the Fixed
Income Funds;
- December 31, 2000 between SM&R and the Growth Fund, Equity Income Fund,
and Balanced Fund;
- September 1, 2000 between SM&R and the Alger Funds.
Pursuant to the Administrative Agreements, 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 Agreements, 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 furnishing the services of all persons necessary for the 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 Agreements, 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.
ADMINISTRATIVE SERVICE FEE
Under the Administrative Agreements between SM&R and the Company on behalf
of the Fixed Income Funds, the Growth Fund, the Equity Income Fund, and the
Balanced Fund, SM&R receives a management and administrative service fee from
each
48
<PAGE>
Fund, which is computed by applying to the aggregate average daily net asset
value of each Fund, each month one-twelfth (1/12th) of the annual rate as
follows:
<TABLE>
<CAPTION>
ON THE PORTION OF EACH FUND'S ADMINISTRATIVE SERVICE
AVERAGE DAILY NET ASSETS FEE ANNUAL RATE
----------------------------- ----------------------
<S> <C>
Not exceeding $100,000,000............................... 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000.... 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000.... 0.15%
Exceeding $300,000,000................................... 0.10%
</TABLE>
The administrative service fee is payable to SM&R whether or not the actual
expenses to SM&R for providing administrative services is more or less than the
amount of such fee.
FIXED INCOME FUNDS--For the years ended August 31, 2000, 1999, and 1998,
SM&R received administrative service fees from the Fixed Income Funds as
follows.
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Government Bond Fund............................... $60,199 $60,332 $57,261
Tax Free Fund...................................... $26,551 $28,666 $28,147
Primary Fund....................................... $87,164 $83,645 $69,422
Money Market Fund.................................. N/A $ 7,237 $86,927
</TABLE>
GROWTH FUND, EQUITY INCOME FUND, BALANCED FUND--For the fiscal years ended
December 31*, 1999, 1998, and 1997, SM&R received administrative service fees
from the Growth Fund, Equity Income Fund, and Balanced Fund, which existed as
separate "stand-alone" mutual funds prior to being converted into series of the
Company on December 31, 2000, as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Growth Fund..................................... $387,654 $423,595 $464,872
Equity Income Fund.............................. $416,699 $465,270 $479,149
Balanced Fund................................... $ 62,231 $ 66,146 $ 74,100
</TABLE>
* The Predecessor Funds had a December 31 fiscal year end. As explained in the
section "THE COMPANY" at the beginning of this Statement of Additional
Information, the data shown herein for the Growth Fund, Equity Income Fund,
and Balanced Fund are the data from the corresponding Predecessor Funds.
ALGER FUNDS--Under the Administrative Agreement between SM&R and the Company
on behalf of the Alger Funds, SM&R receives from each 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 Alger Fund each
month one-twelfth (1/12) of the annual rate of 0.25%. Because the 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 by the Alger Funds.
49
<PAGE>
EXPENSES BORNE BY THE COMPANY
Pursuant to the Administrative Agreements, 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.
SM&R has agreed in its Administrative Agreements with the Fixed Income
Funds, the Growth Fund, Equity Income Fund, and Balanced Fund to pay (or to
reimburse each of these Funds) for each of these Fund's regular operating
expenses of any kind, exclusive of interest, taxes, commissions, Class Specific
Expenses, other expenses incidental to portfolio transactions, and extraordinary
expenses beyond SM&R's control, but including the basic advisory fee, in excess
of 1.25% (0.50% for the Money Market Fund) per year of each of such Fund's
average daily net assets. Such reimbursements, when required, will be made
monthly. No reimbursement to the Equity Income and Growth Funds, as they existed
prior to the Conversion, under the 1.25% expense limitation was required for the
fiscal years ended December 31, 1997, 1998, and 1999. During the fiscal years
ended December 31, 1997, 1998, and 1999, SM&R reimbursed $24,234, $33,454, and
$45,768, respectively, in excess expenses to the Balanced Fund, as it existed
prior to the Conversion.
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, 2000, 1999, and 1998, SM&R reimbursed the
Company a total of $171,979, $191,425, and $116,461, 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: $102, $25,950, and $0, respectively, for the Government Bond Fund;
$40,875, $57,794, and $53,102, respectively for the Tax Free Fund; $67,009,
$85,317, and $63,359, respectively, for the Primary Fund. SM&R reimbursed the
Company $22,364 and $63,993 for the
50
<PAGE>
Money Market Fund for the period ending August 31, 1999 and the year ending
August 31, 2000, respectively.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
FIXED INCOME FUNDS, GROWTH FUND, EQUITY INCOME FUND, AND BALANCED FUND--
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 Investment
Accounts and to American National and its other accounts.
SM&R will authorize each Fund to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another
broker-dealer would have charged only if it determines in good faith that such
amount of commission is reasonable in relation to the value of the brokerage and
research services provided by such broker-dealer. Generally, the Funds pay
higher than the lowest commission rates available.
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.
51
<PAGE>
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.
For the past three fiscal years, SM&R paid brokerage fees on the purchase
and sale of portfolio securities for the Growth Fund, Equity Income Fund, and
Balanced Fund, prior to their Conversion into the Company, of the following
approximate amounts:
<TABLE>
<CAPTION>
BROKERAGE FEES PAID BROKERAGE FEES PAID BROKERAGE FEES PAID
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31*, 1997 DECEMBER 31*, 1998 DECEMBER 31*, 1999
------------------- ------------------- -------------------
<S> <C> <C> <C>
Growth Fund............... $416,000 $196,000 $123,792
Equity Income Fund........ $345,000 $147,000 $ 11,309
Balanced Fund............. $ 33,000 $ 16,000 $ 3,942
</TABLE>
* The Predecessor Funds had a December 31 fiscal year end. As explained in the
section "THE COMPANY" at the beginning of this Statement of Additional
Information, the data shown herein for the Growth Fund, Equity Income Fund,
and Balanced Fund are the data from the predecessor corresponding
Predecessor Funds.
For the Fixed Income Funds, the Company paid no brokerage fees for
transactions in portfolio securities during the fiscal years ended August 31,
1998, 1999, and 2000.
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.
ALGER FUNDS--Decisions to buy and sell securities and other financial
instruments for an Alger Fund are made by Fred Alger Management, Inc., which
also is responsible for placing these transactions, subject to the overall
review of the Company's Board of Directors. Although investment requirements for
each Alger Fund are reviewed independently from those of the other accounts
managed by Fred Alger Management and those of the other Alger Funds, investments
of the type the Alger Funds may make may also be made by these other accounts or
Alger Funds. When an Alger Fund and one or more other Alger Funds or accounts
managed by Fred 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 Fred Alger
Management to be equitable to each. In some cases, this procedure may
52
<PAGE>
affect adversely the price paid or received by an Alger Fund or the size of the
position obtained or disposed of by an 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 Company'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 Alger Fund involved a rate
consistent with that charged to comparable unaffiliated customers in similar
transactions. Such transactions will be fair and reasonable to the 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 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 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 Alger Fund
involved, the other Alger Funds and/or other accounts over which Alger
Management or its affiliates exercise investment discretion. The Company 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 Alger Funds
are not reduced by reason of its receiving brokerage and research
53
<PAGE>
service. The Company's Board of Directors will periodically review the
commissions paid by the Alger Funds to determine if the commissions paid over
representative periods of time are reasonable in relation to the benefits
inuring to the Alger Funds.
Because the Alger Funds have an inception date of September 1, 2000, the
Company paid no brokerage fees on behalf of the Alger Funds for the fiscal year
ended August 31, 2000 or prior to such date.
54
<PAGE>
DESCRIPTION OF FUND SHARES
SHARES OF BENEFICIAL INTEREST
The Company's authorized capital stock consists of six billion
(6,000,000,000) shares of common stock with a par value of $0.01 per share,
issuable in separate series. Currently eleven such series have been established.
Four of such series are referred to herein as the Fixed Income Funds (the
Government Bond Fund, Tax Free Fund, Primary Fund, and the Money Market Fund).
Seven of such series are referred to as the Equity Funds (the Growth Fund, the
Equity Income Fund, the Balanced Fund, the Alger Growth Fund, the Alger
Small-Cap Fund, the Alger Aggressive Growth Fund, and the Alger Technology
Fund).
The Government Bond Fund, Tax Free Fund, Growth Fund, Equity Income Fund,
and Balanced Fund are each divided into three 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)
Each of the Alger Funds and the Money Market Fund are divided into two
Classes: Class A (front-end load) and Class B (back-end load).
The Primary Fund is a single class Fund. Each Fund other than the Primary
Fund is a "Multi-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 shares are subject to higher distribution fees,
which will cause such Class to have a higher expense ratio and pay lower
dividends than the Class A shares.
55
<PAGE>
Each Fund bears its proportionate share of the Company's general expenses
not susceptible of direct allocation. Such general expenses include the
Company's organizational expenses, directors' fees and joint fidelity bonds,
which are pro-rated based on the relative amount of each Fund's assets, and
prospectus and shareholder report expenses, which are pro-rated based on the
relative number of each Fund's shareholders. Organizational expenses for the Tax
Free Fund and the Money Market Fund were paid by the adviser.
VOTING RIGHTS
Within the respective Funds, all shares have equal voting, participation,
and liquidation rights, but do not have cumulative voting rights. With respect
to election of directors, non-cumulative voting means that the holders of more
than 50% of the shares voting for the election of directors can elect 100% of
the directors if they so choose, and in such event, holders of the remaining
shares will not be able to elect any directors.
On certain matters, such as the election of directors, all shares of each
Fund vote together, with each share having one vote. On other matters affecting
a particular Fund, such as the Investment Advisory Contract or fundamental
investment policies, only shares of that Fund are entitled to vote, and a
majority of the shares of that Fund are required for approval of the proposal.
On matters affecting a particular Class of a Fund, only shares of that Class of
the Fund are entitled to vote, and a majority of the shares of that Class are
required for approval of the proposal.
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.
56
<PAGE>
PURCHASE, REDEMPTION, AND PRICING OF SHARES
Shares of each Fund may be purchased at a public offering price which is
based on the net asset value of each share of the Fund next determined plus a
sales charge, if any. Remittances for additional investments may be submitted
directly to SM&R. Except for certain systematic investment programs (see
"Special Purchase Plans" below), the minimum initial investment and minimum
additional investments in each Fund are as follows:
<TABLE>
<CAPTION>
MINIMUM MINIMUM
INITIAL ADDITIONAL
FUND INVESTMENT INVESTMENT
---- ---------- ----------
<S> <C> <C>
Government Bond Fund, Tax Free Fund, Growth Fund,
Equity Income Fund, and Balanced Fund................. $ 100 $ 20
Primary Fund and Money Market Fund...................... $1000 $100
Alger Funds............................................. $ 500 $ 50
</TABLE>
Certificates representing shares purchased are not issued. Investors have
the same ownership rights with respect to shares purchased as if certificates
had been issued. A confirmation will be sent to the investor promptly after each
share purchase.
All purchases must be in (or payable in) U.S. dollars. All checks must be
drawn in U.S. dollars on a U.S. bank. Investors will be subject to a service
charge on dishonored checks. The Company reserves the right to reject any order
for the purchase of its shares when in the judgment of management such rejection
is in the best interests of the Company.
DETERMINATION OF NET ASSET VALUE
GOVERNMENT BOND FUND AND TAX FREE FUND. The net asset value per share for
each Class of the Government Bond and Tax Free Funds is determined by adding the
market value of the portfolio securities and other assets of that
Class (including dividends accrued but not collected), subtracting liabilities
of that Class (including accrued expenses), and dividing the result by the
number of shares outstanding of the relevant Class. Net asset value is currently
determined as of 3:00 p.m. Central Time on each day that the New York Stock
Exchange is open for trading. Although the legal rights of the Classes of a Fund
are substantially identical, the different expenses borne by each Class will
result in different net asset values and dividends for each Class.
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
57
<PAGE>
an independent pricing service. Prices provided by the pricing service may be
determined without exclusive reliance on quoted prices, and may reflect
appropriate factors such as yield, type of issue, coupon rate, maturity and
seasoning differential. Securities in corporate short-term notes are valued at
cost plus amortized discount, which approximates market value. If no quotations
are available for a security or other property, it is valued at fair value as
determined in good faith by the Board on a consistent basis.
PRIMARY FUND. The net asset value per share of the Primary Fund is
determined by adding the market value of its portfolio securities and other
assets, subtracting liabilities, and dividing the result by the number of such
Fund's shares outstanding. Expenses of the Primary Fund, if any, are accrued
daily and taken into account in determining the net asset value. The portfolio
securities of the Primary Fund are valued as of 3:00 p.m. Central Time on each
day that the New York Exchange is open for trading. Securities listed on
national exchanges are valued at the last sales price on such day, or if there
is no sale, then at the closing bid price therefor on such day on such exchange.
The value of unlisted securities is determined on the basis of the latest bid
prices therefor on such day. Securities in corporate short-term notes are valued
at cost plus amortized discount, which approximates market value. Debt
securities with maturities in excess of 60 days are valued on the basis of
prices provided by an independent pricing service or brokers. If no quotations
are available for a security or other property, it is valued at fair value as
determined in good faith by the Board of Directors of the Company on a
consistent basis.
Securities subject to floating or variable interest rates with demand
features in compliance with applicable Rules of the Securities and Exchange
Commission may have stated maturities in excess of one year.
MONEY MARKET FUND. The Money Market Fund values all of its securities using
the amortized cost valuation method, which does not take into account unrealized
capital gains or losses. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. The other Funds use the amortized cost method only for
valuing debt securities having maturities of 60 days or less.
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.
58
<PAGE>
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.
EQUITY FUNDS. The net asset value per share for each Class of the Equity
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. Although
the legal rights of the Classes of an Equity 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 Equity 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 Equity
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,
59
<PAGE>
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
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, Tax Free Fund, and
the Equity 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, 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.
SM&R is not in receipt of purchase (and redemption or transfer) orders given
to a dealer until the dealer transmits the order to SM&R and SM&R actually
receives the order at its League City office. It is the responsibility of any
such dealer and not SM&R to establish procedures to assure that orders received
before the close of the Exchange on an SM&R business day will be reported to
SM&R before SM&R's close of business on that same day.
CLASS T SHARES (EXISTING SHAREHOLDERS AND CERTAIN DESIGNATED
PERSONS)--GOVERNMENT BOND FUND AND TAX FREE FUND. 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.
60
<PAGE>
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 of the Government Bond Fund and Tax Free Fund (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 T SHARES (EXISTING SHAREHOLDERS AND CERTAIN DESIGNATED
PERSONS)--GROWTH FUND, EQUITY INCOME FUND, AND BALANCED FUND. The offering
price of the Class T Shares of the Growth Fund, Equity Income Fund, and Balanced
Fund is the net asset value per share plus an initial sales charge of up to
5.75% of the public offering price. For amounts invested over certain levels, or
"breakpoints" (beginning at $50,000), 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 $50,000............ 5.75% 6.1% 4.75%
$50,000 but less than
$100,000................... 4.5% 4.7% 4.0%
$100,000 but less than
$250,000................... 3.5% 3.6% 3.0%
$250,000 but less than
$500,000................... 2.5% 2.6% 2.0%
$500,000 and over............ None None None
</TABLE>
* For Class T shares, 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)--GOVERNMENT BOND FUND AND TAX FREE FUND.
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
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<PAGE>
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.
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 of the Government Bond Fund and Tax Free Fund (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 A SHARES--MONEY MARKET FUND. Class A shares of the Money Market Fund
are not subject to any sales charge or 12b-1 fee.
CLASS A SHARES (FRONT-END LOAD)--EQUITY FUNDS. 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% (for the Alger Funds) or 0.25% (for the Growth Fund,
Equity Income Fund, and Balanced Fund) 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.
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<PAGE>
The offering price of Class A shares is the next determined net asset value
plus a sales charge (expressed as a percentage of the offering price) shown in
the following table:
<TABLE>
<CAPTION>
DISCOUNT TO
SELECTED DEALERS
SALES CHARGE AS A PERCENTAGE
SALES CHARGE AS A % OF OF OFFERING PRICE
AS A % OF AMOUNT (NOT APPLICABLE
AMOUNT OF INVESTMENT OFFERING PRICE INVESTED TO ALGER FUNDS)
-------------------- -------------- ------------ -----------------
<S> <C> <C> <C>
Less than $50,000.................... 5.00% 5.30% 4.50%
$50,000 but less than $100,000....... 4.50% 4.70% 4.0%
$100,000 but less than $250,000...... 3.50% 3.60% 3.0%
$250,000 but less than $500,000...... 2.50% 2.60% 2.0%
$500,000 but less than $1,000,000.... 1.50% 1.50% 1.0%
$1,000,000 and over.................. None* None None
</TABLE>
* Subject to a CDSC of 1.00% on shares redeemed within 13 months of purchase.
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.
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<PAGE>
DISCOUNTS THROUGH A RIGHT OF ACCUMULATION. If you already own Class T or
Class A shares of a fund managed by SM&R, on which you paid a front-end sales
load, you may be able to receive a discount when you buy additional shares. The
current net asset value of the shares you already own may be
"accumulated"--I.E., combined together with the dollar amount being invested to
achieve quantities eligible for discount.
LETTER OF INTENT. You may qualify immediately for a reduced sales charge on
purchases of Class A or Class T Shares by completing the Letter of Intent
section of the Account Application. 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 Funds 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.
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<PAGE>
CLASS B SHARES (BACK-END LOAD)--GOVERNMENT BOND FUND AND TAX FREE FUND. 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
THE TIME OF PURCHASE,
YEARS SINCE PURCHASE WHICHEVER IS LESS)
-------------------- ---------------------
<S> <C>
Year 1..................................................... 3%
Year 2..................................................... 2%
Year 3..................................................... 1%
Year 4+.................................................... 0%
</TABLE>
CLASS B SHARES--MONEY MARKET FUND. Class B shares of the Money Market Fund
are not subject to an initial sales charge and are not subject to a CDSC;
however, Class B shares of the Money Market Fund are subject to an annual 12b-1
fee of 0.50% of the average daily net asset value of the Class B shares.
CLASS B SHARES (BACK-END LOAD)--EQUITY FUNDS. 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 six years of
purchase. Class B shares are subject to an annual 12b-1 fee of 0.75% (for the
Growth Fund, Equity Income Fund, and Balanced Fund) or 1.00% (for the Alger
Funds) 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
OFFERING PRICE AT THE
YEARS SINCE PURCHASE TIME OF PURCHASE)
-------------------- ---------------------
<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>
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<PAGE>
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.
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.
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
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<PAGE>
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).
(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.
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<PAGE>
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 PLANS
The Company has adopted Distribution and Shareholder Servicing Plans (the
"12b-1 Plans," each a "12b-1 Plan") pursuant to Rule 12b-1 under the 1940 Act
for the Class A and Class B shares of the Government Bond Fund, Tax Free Fund,
Money Market Fund, and Equity Funds (as defined above, the
"Multi-Class Funds"). The 12b-1 Plans provide that SM&R will provide
distribution and/or shareholder services to the Class A and Class B 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
CLASS FEE FEE 12B-1 FEE
----- ------------ -------- ---------
<S> <C> <C> <C>
Class T Shares: Existing Shareholders
Government Bond Fund and Tax Free Fund........ -0- -0- -0-
Growth Fund, Equity Income Fund,
and Balanced Fund........................... -0- -0- -0-
Class A Shares: Front-End Load
Government Bond Fund and Tax Free Fund........ 0.25% -0- 0.25%
Money Market Fund............................. -0- -0- -0-
Alger Funds................................... 0.35% -0- 0.35%
Growth Fund, Equity Income Fund,
and Balanced Fund........................... 0.25% -0- 0.25%
Class B Shares: Back-End Load (CDSC)
Government Bond Fund and Tax Free Fund........ 0.50% 0.25% 0.75%
Money Market Fund............................. 0.50% -0- 0.50%
Alger Funds................................... 1.00% -0- 1.00%
Growth Fund, Equity Income Fund,
and Balanced Fund........................... 0.50% 0.25% 0.75%
</TABLE>
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<PAGE>
The Distribution Fee and/or Service Fee, as applicable, to be paid under the
12b-1 Plans 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.
A 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 the 12b-1 Plan or in such agreement (the "Independent Directors"),
cast in person at a meeting called for the purpose of voting on the 12b-1 Plan
and/or the related agreement. A 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
Plans 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 Plans provide that they 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 12b-1 Plan without approval of the shareholders of the
relevant Class. All material
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<PAGE>
amendments to the 12b-1 Plans also must be approved by the Board in the manner
described above and in the 12b-1 Plan.
In each year during which a 12b-1 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 12b-1 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 the 12b-1 Plans and the
purposes for which those expenditures were made. The obligations of the Company
and each Fund under the 12b-1 Plans 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.
SPECIAL PURCHASE PLANS
AUTOMATIC INVESTMENT PLAN AND ELECTRONIC TRANSFERS
Classes A and B of the Government Bond Fund, the Tax Free Fund, the Money
Market Fund, the Alger Funds and the Equity Funds provide a convenient,
voluntary method of purchasing their shares through the "Automatic Investment
Plan." These same Classes, as well as Class T of the Government Bond Fund, Tax
Free Fund, Growth Fund, Equity Income Fund, and Balanced Fund, also allow for
the use of the "Electronic Transfers" Plan. The Primary Fund also provides these
plans. 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 by some Funds, 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 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.
After the initial minimum investment has been met, a Plan may be opened by
indicating an intention to invest $20 or more per individual ($50 or more in the
Alger Funds and $100 or more in the Primary Fund or Money Market Fund) monthly
for at
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<PAGE>
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 (i) $100 in the Growth Fund,
Equity Income Fund, or Balanced Fund; (ii) $500 in the Government Bond Fund, Tax
Free Fund, or Alger Funds; or (iii) $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 or
Class B 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 for a group consisting of five or more participants with
an initial cash investment of (i) $100 ($20 per individual) in the Government
Bond Fund, Tax Free Fund, Growth Fund, Equity Income Fund, or Balanced Fund;
(ii) $500 ($50 per individual) in the Alger Funds; or (iii) $1,000 ($100 per
individual) in the Primary Fund or Money Market Fund. 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 or more ($50 or more for the Alger Funds) 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.
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 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 in the Shareholder's Guide. 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.
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The right of redemption is subject to suspension and payment postponed
during any period when the New York Stock Exchange is closed other than
customary weekend or holiday closings, or during which trading on such Exchange
is restricted; for any period during which an emergency exists, as a result of
which disposal by the Company of its securities is not reasonably practicable or
it is not reasonably practicable for the Company to fairly determine the value
of its net assets; or for such other periods as the Commission has by order
permitted such suspension for the protection of the Company's security holders.
The Company has made an election under the 1940 Act to pay in cash all
requests for redemption by any shareholder of record, limited in amount with
respect to each shareholder during any ninety-day period to the lesser of
(i) $250,000 or (ii) 1% of the net asset value of the Company at the beginning
of such period. The Company may pay the redemption price, if any, in excess of
the amounts described above in whole or in part in portfolio securities, at the
market value thereof determined as of the close of business next following
receipt of the request in proper form, if deemed advisable by the Board of
Directors. In such case a shareholder would incur brokerage costs if he sold the
securities received.
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.
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In addition, each Fund must distribute to its shareholders at least 90% of
its net investment income and net tax-exempt income for each of its taxable
years. If a Fund fails to qualify as a regulated investment company, the Fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to its shareholders will be taxed as
ordinary dividend income to the extent of such Fund's available earnings and
profits.
EXCISE TAX
In order to avoid federal excise taxes, each Fund is required to distribute
to its shareholders at least 98% of its taxable ordinary income earned during
the calendar year and 98% of its capital gain net income earned during the
twelve month period ending on October 31 (in addition to undistributed amounts
from the prior year). The Funds intend to declare and pay sufficient dividends
in a manner that will comply with such distribution requirements but can give no
assurances that their distributions will be sufficient to eliminate all such
excise taxes.
DISTRIBUTIONS OF INVESTMENT INCOME AND CAPITAL GAINS
For federal income tax purposes, any income dividends derived from taxable
investments which the shareholder receives from a Fund, as well as any
distributions derived 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.
A percentage of the dividends paid by each Fund to corporate shareholders
may in certain circumstances qualify for the dividends received deduction
available to corporations. The dividends received deduction will be available
only with respect to dividends designated by the Company as eligible for such
treatment. Dividends so designated must be attributable to dividends earned by
the Funds from U.S. corporations and must not have been earned from investments
that were debt-financed or held by a Fund for less than the requisite period.
Similarly, the deduction may be reduced or eliminated if the investment in the
Funds by the corporate shareholder was debt-financed or held for less than the
requisite period. All dividends from the Funds, including dividends eligible for
the dividends received deduction are included in a corporation's alternative
minimum taxable income calculation.
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At the end of each calendar year, the Company will advise shareholders about
the tax status of all distributions made during each taxable year, including the
portion of the dividends which comprise taxable income, exempt income and
interest income that is a tax preference item under the alternative minimum tax.
Shareholders should consult a tax advisor about the application of state and
local tax laws to these distributions and redemption proceeds received from the
Company.
Many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by the fund from direct obligations of
the U.S. Government, subject in some states to minimum investment requirements
that must be met within the fund. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of the distributions may be exempt from
corporate income or franchise taxes.
Dividends paid by the Tax Free Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be "exempt-interest" dividends
that shareholders may exclude from their gross income for federal income tax
purposes if the Fund satisfies certain quarterly asset percentage requirements.
To the extent that the Tax Free Fund invests in bonds, the interest on which is
a specific tax preference item for federal income tax purposes ("AMT-Subject
Bonds"), any exempt-interest dividends derived from interest on AMT-Subject
bonds will be a specific tax preference item for purposes of the federal
individual and corporate alternative minimum taxes. All exempt-interest
dividends will be a component of the "current earnings" adjustment item for
purposes of the federal corporate alternative minimum income tax. Current
federal tax law limits the types and volume of securities qualifying for the
federal income tax exemption of interest and may also affect the availability of
municipal obligations for investment by the Fund and the value of the Fund's
portfolio.
Shareholders who are not U.S. persons for purposes of federal income
taxation should consult with their financial or tax advisors regarding the
applicability of U.S. withholding taxes to distributions received by them from
the Company.
Shareholders are reminded that dividends are taxable whether received in
cash or reinvested and received in the form of additional shares. Furthermore,
any distributions received shortly after a purchase of shares by an investor
will have the effect of reducing the per share net asset value of his or her
shares by the amount of the distributions. Such distributions, although in
effect a return of capital, are subject to taxes. Furthermore, if the net asset
value of each share is reduced below the shareholder's cost as a result of a
distribution, such distribution would be a return of capital although taxed at
applicable rates.
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
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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 should consult with their tax advisor concerning the tax
reporting requirements in effect on the redemption or exchange of such shares.
Shareholders of the Tax Free Fund should be careful about redeeming shares
immediately prior to the record date of an exempt-interest dividend because the
redemption may cause the shareholder to realize a taxable gain even though a
portion of the redemption proceeds may represent a pro rata share of tax exempt
interest earned by the Fund. In addition, a loss on the sale or redemption of
shares held by the shareholder of the Tax Free Fund for six months or less will
be disallowed to the extent of any exempt-interest dividend received by the
shareholder with respect to those shares.
BACKUP WITHHOLDING
The Company may be required to report to the Internal Revenue Service
("IRS") any taxable dividends or other reportable payment (including share
redemption proceeds) and withhold 31% of any such payments made to individuals
and other non-exempt shareholders who have not provided a correct taxpayer
identification number and made certain required certifications that appear in
the account application. A shareholder may also be subject to backup withholding
if the IRS or a broker notifies the Company that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
NON-U.S. INVESTORS
Ordinary dividends generally will be subject to U.S. income tax withholding.
The non-U.S. investor's home country may also tax ordinary dividends, capital
gain distributions and gains arising from redemptions and exchanges of Fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. Non-U.S. investors may wish to contact their tax advisors to
determine the U.S. and non-U.S. tax consequences of an investment in the Funds.
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,
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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
Funds have a Systematic Withdrawal Plan pursuant to which shareholders having an
account value of $5,000 or more are permitted 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 Funds
because of the sales charge or CDSC (as applicable) involved in additional
purchases. A shareholder should carefully consider such purchases and contact
his or her financial adviser regarding their advisability.
A Systematic Withdrawal Plan provides for regular monthly or quarterly
payments to the account investor or his designee through redemption of a portion
of the shares held in the account. Some portion of each withdrawal may be
taxable gain or loss to the account investor at the time of the withdrawal, the
amount of the gain or loss being determined by the investment in the Fund's
shares. The minimum, though not necessarily recommended, withdrawal amount is
$50. Shares sufficient to provide the designated withdrawal payment are redeemed
each month or quarterly on the 20th, or the next succeeding business day, and
checks are mailed to reach the investor on or about the 1st of the following
month. All income dividends and capital gains distributions are automatically
reinvested at net asset value, without sales charge. Since each withdrawal check
represents proceeds from the sale of sufficient shares equal to the withdrawal,
there can be a reduction of invested capital, particularly in a declining
market. If redemptions are consistently in excess of shares added through
reinvestment of distributions, the withdrawals will ultimately exhaust the
capital.
The shareholder may designate withdrawal payments for a fixed dollar amount,
as stated in the preceding paragraph, or a variable dollar amount based on
(1) redemption of a fixed number of shares at monthly or quarterly intervals, or
(2) redemption of a specified and increasing fraction of shares held at monthly
or quarterly intervals. To illustrate the latter option, if an investor wanted
quarterly payments for a ten-year period, the first withdrawal payment would be
the proceeds from redemption of 1/40th of the shares held in the account. The
second payment would be 1/39th of the remaining shares; the third payment would
be 1/38th of the remaining shares, etc. Under this option, all shares would be
redeemed over the ten-year period, and the payment amount would vary each
quarter, depending upon the number of shares redeemed and the redemption price.
No charge is made for a non-qualified Systematic Withdrawal Plan, and the
account investor may change the option or payment amount at any time upon
written request 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.
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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 the following Underwriting Agreements:
- July 1, 1993, as amended on November 19, 1998 between SM&R and the Company
on behalf of the Fixed Income Funds.
- September 1, 2000 between SM&R and the Company on behalf of the Alger
Funds.
- December 31, 2000 between SM&R and the Company on behalf of the Growth
Fund, Equity Income Fund, and Balanced Fund.
Such Underwriting Agreements provides that they 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 the particular Funds covered by each
Underwriting Agreement, 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
Agreements 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 particular Funds covered by each Underwriting Agreement, or by SM&R, upon
sixty (60) days' written notice and will automatically terminate if assigned (as
provided in the 1940 Act).
As principal underwriter, SM&R continuously offers and sells shares of each
Fund of the Company through its own sales representatives and broker-dealers. As
compensation for such services, SM&R receives the sales charge, which is the
difference between the offering price at which shares are issued and the net
asset value thereof.
Broker-dealers or other securities dealers that have entered into selling
agreements with SM&R may receive compensation from SM&R or an affiliated company
in connection with selling shares of the SM&R Family of Funds. Compensation may
include financial assistance for conferences, shareholder services, automation,
sales and training
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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.
FIXED INCOME FUNDS. 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
---------- -------- --------
<S> <C> <C>
Net Amount Invested
Maximum................................................... 4.7% 4.9%
Minimum................................................... 0.0% 0.0%
Public Offering Price
Maximum................................................... 4.0% 4.25%
Minimum................................................... 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 the Fixed Income
Funds for periods ending August 31st is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Total Amount Sales Charge
Received..................... $30,387 $37,262 $10,564
Amount Retained by SM&R........ $ 2,038 $ 2,390 $ 5,565
Amount Reallowed to Dealers.... Less than $500 Less than $500 Less than $500
</TABLE>
GROWTH FUND, EQUITY INCOME FUND, AND BALANCED FUND. The sales charge allowances
to broker-dealers for these Funds ranges from a maximum of 6.1% to a minimum of
2.6% of the net amount invested and from a maximum of 4.75% to a minimum of 2.0%
of the public offering price. In connection with certain purchases of Class T
shares of $500,000 or more, SM&R may pay broker-dealers from its own profits and
resources a per annum percent of the amount invested as follows: Year 1 --
0.35%, Year 2 -- 0.25%, and, in the third and subsequent years, 0.075% per
annum, in quarterly installments, to those broker-dealers with accounts in the
aggregate totaling $1 million or more. Such allowances are the same for all
broker-dealers.
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The aggregate amounts of sales charge received by SM&R from the sale of
shares of the Growth Fund, Equity Income Fund, and Balanced Fund, prior to the
Conversion, for the periods ending December 31* is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Growth Fund
Total Amount Sales Charge Received............ $405,080 $441,976 $287,994
Amount Retained by SM&R....................... $ 54,000 $ 39,904 $ 73,142
Amount Reallowed to Dealers................... $ 5,433 $ 5,175 $ 5,106
Equity Income Fund
Total Amount Sales Charge Received............ $697,920 $830,130 $451,011
Amount Retained by SM&R....................... $ 48,000 $ (1,159) $ 77,587
Amount Reallowed to Dealers................... $ 9,704 $ 10,123 $ 6,203
Balanced Fund
Total Amount Sales Charge Received............ $ 54,962 $ 76,199 $ 72,599
Amount Retained by SM&R....................... $ 2,000 $ 732 $ 11,528
Amount Reallowed to Dealers................... $ 353 $ 346 $ 382
</TABLE>
* The Predecessor Funds had a fiscal year end of December 31. As explained in
the section "THE COMPANY" at the beginning of this Statement of Additional
Information, the data shown herein for the Growth Fund, Equity Income Fund,
and Balanced Fund are the data from the corresponding Predecessor Funds.
ALGER FUNDS--The sales charge allowance to broker-dealers for Class A shares
of the Alger Funds is 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>
Because the Alger Funds were not in existence during the fiscal year ended
August 31, 2000, or in prior years, no sales charge was received by SM&R from
the sale of shares of the Alger Funds during such time
CUSTODIAN
The cash and securities of the Company are held by SM&R, 2450 South Shore
Boulevard, Suite 400, League City, Texas, pursuant to the following Custodian
Agreements:
- July 1, 1993 between SM&R and the Company on behalf of the Fixed Income
Funds, as amended September 1, 2000 to include the Alger Funds.
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- December 31, 2000 between SM&R and the Company on behalf of the Growth
Fund, Equity Income Fund, and Balanced Fund.
The Custodian holds and administers the Company's cash and securities as
provided for in such Custodian Agreements. 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, 2000. 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, 2000. 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,
2000, and the Independent Auditors' Report of TWB dated September 29, 2000 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
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account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from shareholder
accounts, (2) dividing the difference by the value of the account at the
beginning of the base period to get the base period return, then
(3) multiplying the base period return by the dividend obtained by dividing 365
by 7. The resulting yield figure is carried to the nearest hundredth of one
percent.
The Money Market Fund's effective yield for a specified seven-calendar-day
period is computed by (1) determining the net change (exclusive of capital
changes) in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, (2) subtracting a hypothetical charge
reflecting deductions from shareholder accounts; (3) dividing the difference by
the value of the account at the beginning of the base period to get the base
period return, and then (4) compounding the base period return by adding 1,
raising the sum to a power equal to 365 divided by 7 and subtracting 1 from the
result according to the following formula: EFFECTIVE YIELD = [(BASE PERIOD
RETURN + 1) TO THE POWER OF 365/7]-1. The resulting yield figure is carried to
the nearest hundredth of one percent.
The calculations include (1) the value of additional shares purchased with
dividends declared on the original 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, 2000, the standardized yield for
the Primary Fund is 6.36%. 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
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<PAGE>
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.
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
84
<PAGE>
variations in a Fund's return, investors should recognize that such returns are
not the same as actual year-by-year results. To illustrate the components of
overall performance, a Fund may separate its cumulative and average annual
returns into income results and capital gain or loss.
The average annual total returns for the Fixed Income Funds for the periods
ended August 31, 2000 are as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST ONE PAST 5 SINCE 7-DAY
(FOR THE PERIODS ENDING AUGUST 31, 2000) YEAR YEARS INCEPTION* YIELD
------------------------------------------- -------- -------- ---------- --------
<S> <C> <C> <C> <C>
Government Bond Fund (Class T)............. 0.79% 4.31% 5.75% --
Primary Fund............................... 4.68% 4.93% 4.32% --
Tax Free Fund (Class T).................... 1.37% 4.63% 4.38% --
Money Market Fund (Class A)................ -- -- -- 6.11%
</TABLE>
* The inception dates of the Fixed Income Funds are as follows:
Government Bond Fund--March 16, 1992
Primary Fund--March 16, 1992
Tax Free Fund--September 9, 1993
Money Market Fund--January 1, 1999
The average annual total returns for the Growth Fund, Equity Income Fund,
and Balanced Fund prior to the Conversion for the periods ended December 31*,
1999 are as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING DECEMBER 31, 1999) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
------------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
Growth Fund (Class T).................... 17.28% 20.14% 13.91%
Equity Income Fund (Class T)............. (7.06%) 13.97% 11.00%
Balanced Fund (Class T).................. 5.43% 14.04% 10.47%
</TABLE>
* The Predecessor Funds had a fiscal year ending December 31. As explained in
the section "THE COMPANY" at the beginning of this Statement of Additional
Information, the data shown herein for the Growth Fund, Equity Income Fund,
and Balanced Fund are the data from the corresponding Predecessor Funds.
As discussed above in the explanation of the Growth Fund investment advisory
fee in the section "INVESTMENT ADVISORY AGREEMENTS," on October 31, 2000, prior
to the Conversion, shareholders of the stand-alone SM&R Growth Fund, Inc.
approved elimination of a performance adjustment to such fund's advisory fee.
The performance adjustment had resulted in a reduction of the advisory fee paid
by the SM&R Growth Fund, Inc. in 61 of the 72 monthly performance calculations
made during the previous six fiscal years. During the 61 months the SM&R Growth
Fund, Inc. benefited from the adjustment, performance would have been improved.
During the 11 months the investment adviser benefited from the adjustment, the
SM&R Growth Fund, Inc.'s performance would have been diminished.
85
<PAGE>
Because the 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 Alger Funds.
CALCULATION OF RETURN. 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>
<C> <C> <S>
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 Government Bond Fund and Tax Free Fund, and the Growth Fund, Equity
Income Fund, and Balanced Fund (as these latter three Funds existed prior to the
Conversion) 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 Government Bond Fund,
Tax Free Fund, Growth Fund, Equity Income Fund, and Balanced Fund, other than
the Class T Shares, and any classes that might be created after the Class T
Shares, may be stated so as to include the performance of the Fund's Class T
Shares. For these purposes, the inception of the Class T Shares is the inception
of the Fund. Generally, performance of the Class T Shares will not be restated
to reflect the expenses or expense ratio of another class.
86
<PAGE>
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.
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.
87
<PAGE>
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.
88
<PAGE>
APPENDIX
--------------------------------------------------------------------------
FUND PERFORMANCE PRIOR TO ADOPTION OF MULTIPLE CLASS PLANS (PERFORMANCE OF
CLASS T SHARES)
The performance information presented in the Class A and Class B Prospectus for
the Growth Fund, Equity Income Fund, and Balanced Fund begins on January 1,
1999, the inception date of multiple classes for such funds' Predecessor Funds.
Similarly, the performance information presented in the Class A and Class B
Prospectus for the Government Bond Fund and Tax Free Fund begins on January 1,
1999, the inception date of multiple classes for such funds. The information
provided below is for the single class shares of the Predecessor Funds, the
Government Bond Fund, and the Tax Free Fund that existed prior to January 1,
1999. Upon the inception of the multiple class plans on January 1, 1999, the
existing single class shares of the Predecessor Funds, the Government Bond Fund
and the Tax Free Fund were renamed Class T Shares. KEEP IN MIND THAT CLASS T IS
NOT SUBJECT TO 12b-1 EXPENSES. ACCORDINGLY, THE PERFORMANCE OF CLASS T, AS SHOWN
BELOW, WILL BE GREATER THAN CLASS A AND CLASS B OF THE FUNDS, WHICH ARE SUBJECT
TO SUCH 12b-1 EXPENSES. Class T Shares are offered only to certain existing
shareholders and designated persons, as described in the Class T Prospectus.
The bar charts and average annual total return tables shown below provide some
indication of the risks of investing in the funds (other than the Alger Funds*)
and the difference in returns for such funds by:
- showing performance for each of the last 10 calendar years or since inception
if less than 10 years and
- showing how average annual returns compare to those of a broad measure of
market performance.
* The SM&R Alger Funds were not in existence during the Fund's fiscal year
ending August 31, 2000.
SPECIAL MATTERS AFFECTING THE GROWTH FUND, EQUITY INCOME FUND AND BALANCED FUND
When reviewing the information below about the Growth Fund, Equity Income Fund
and Balanced Fund, you need to be aware of the following matters which affect
the way the information is presented:
- Such funds, which commenced operations on December 31, 2000, are "clones" of
and successors to the SM&R Growth Fund, Inc., SM&R Equity Income Fund, Inc.,
and SM&R Balanced Fund, Inc. (the "Predecessor Funds"). The funds will carry
on the business of and have investment objectives, investment strategies,
techniques and restrictions materially the same as their corresponding
Predecessor Fund.
Because of the funds' succession to the business of the Predecessor Funds on
December 31, 2000, performance information of the Predecessor Funds is given
below for periods prior to such date. ACCORDINGLY, MOST OF THE INFORMATION
BELOW FOR THE GROWTH FUND, BALANCED FUND, AND EQUITY INCOME FUND WILL BE
INFORMATION FROM THE PREDECESSOR FUNDS PRIOR TO THE CONVERSION.
- The funds have a fiscal year ending on August 31st, while the Predecessor
Funds had a fiscal year ending on December 31st.
PERFORMANCE OF THE PREDECESSOR FUNDS IS
NO GUARANTEE OF THE FUTURE PERFORMANCE
OF THE NEW "CLONE" FUNDS.
SPECIAL MATTER AFFECTING ONLY THE GROWTH FUND
In addition to the changes discussed above which affect all three of the funds,
in reviewing the information for the Growth Fund, you should also keep in mind
another matter affecting only the Growth Fund. Prior to the conversion of the
SM&R Growth Fund, Inc. into the Growth Fund, SM&R Growth Fund, Inc.'s
shareholders approved a new investment advisory agreement. Such new agreement
eliminated the performance fee adjustment component contained in SM&R Growth
Fund, Inc.'s investment advisory agreement since 1989. The Growth Fund, as part
of the conversion mentioned above, adopted the SM&R Growth Fund, Inc.'s new
investment advisory agreement not containing a performance fee adjustment
component. Keep in mind when reviewing the performance information for the
Growth Fund that all of such information is for periods during which the SM&R
Growth Fund, Inc.'s investment advisory agreement provided for increases or
decreases to the advisory fee paid under such agreement based upon performance.
During the last six fiscal years of the SM&R Growth Fund, Inc. there were 72
monthly performance calculations. During 11 of those 72 months, SM&R, the
investment adviser, benefited from the performance adjustment because such
adjustment increased the advisory fee. During the remaining 61 of
A-1
<PAGE>
APPENDIX
--------------------------------------------------------------------------
those months, application of the performance adjustment resulted in a decrease
in the advisory fee, which benefited SM&R Growth Fund, Inc. During the 11 months
the investment adviser benefited from the adjustment, the SM&R Growth
Fund, Inc.'s performance would have been reduced. During the 61 months the SM&R
Growth Fund, Inc. benefited from the adjustment, performance would have been
improved. The future impact of eliminating the performance adjustment will
depend on many factors and may result in an increase in the Growth Fund's
aggregate advisory fee. To the extent such fees are increased, the Growth Fund's
performance will be reduced.
These bar charts include the effects of fund expenses, but not sales charges and
account fees. The returns shown would be lower if such sales charges were
included. As also noted above, much of the performance information is for
periods prior to adoption of multiple-plans and 12b-1 plans. If multiple classes
had been in existence, the financial performance would have been lower than
depicted because of the imposition of distribution and/or service fees pursuant
to the 12b-1 plans.
PAST PERFORMANCE IS NOT NECESSARILY
AN INDICATION OF HOW THE FUNDS
WILL PERFORM IN THE FUTURE.
GROWTH FUND
The following bar chart shows the annual total returns (%) for Class T of the
Growth Fund or, as noted above, of the SM&R Growth Fund, Inc., for each of the
last 10 calendar years.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 (2.94)%
1991 36.98%
1992 (2.50)%
1993 8.17%
1994 4.98%
1995 25.20%
1996 17.64%
1997 22.24%
1998 18.35%
1999 24.49%
</TABLE>
The SM&R Growth Fund, Inc.'s Class T unannualized return for the period from
January 1, 2000 through September 30, 2000 is 2.39%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: December 31, 1998 19.41%
Worst Quarter: September 30, 1990 (13.16)%
</TABLE>
The next table lists the SM&R Growth Fund, Inc.'s Class T average annual total
returns for the past one, five and ten calendar years, and the returns of the
S&P 500-Registered Trademark- index and Lipper Growth Fund Index for the same
periods. This table is intended to provide you with some indication of the risks
of investing in the Growth Fund. At the bottom of the table you can compare this
performance with the S&P 500-Registered Trademark- and Lipper Growth Fund Index.
The S&P 500-Registered Trademark- is the Standard & Poor's Composite Index of
500 Stocks, a widely recognized, unmanaged index of common stock prices.
Standard & Poor's, S&P, and S&P 500-Registered Trademark- are registered
trademarks of Standard & Poor's Corporation. The Lipper Growth Fund Index is a
widely recognized, equally weighted performance index (adjusted for capital
gains distributions and income dividends) of the 30 largest open-end funds which
invest in companies whose long term earnings are expected to grow significantly
faster than the earnings of the stock represented in the major unmanaged stock
indices.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 12/31/99)
<TABLE>
<CAPTION>
PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
<S> <C> <C> <C>
SM&R Growth Fund, Inc. 17.28% 20.14% 13.91%
S&P 500-Registered Trademark- 21.03% 28.55% 18.19%
Lipper Growth Fund Index 50.93% 30.51% 19.20%
</TABLE>
A-2
<PAGE>
APPENDIX
--------------------------------------------------------------------------
EQUITY INCOME FUND
The following bar chart shows the annual total returns (%) for Class T of the
Equity Income Fund or, as noted above, of the SM&R Equity Income Fund, Inc., for
each of the last 10 calendar years.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 0.75%
1991 29.06%
1992 3.31%
1993 10.63%
1994 (0.61)%
1995 29.12%
1996 16.46%
1997 22.72%
1998 12.11%
1999 (1.39)%
</TABLE>
The SM&R Equity Income Fund, Inc.'s Class T unannualized return for the period
from January 1, 2000 through September 30, 2000 is 7.75%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: December 31, 1991 11.12%
Worst Quarter: September 30, 1999 (8.72)%
</TABLE>
The next table lists the SM&R Equity Income Fund, Inc.'s Class T average annual
total returns for the past one, five and ten calendar years, and the returns of
the S&P 500-Registered Trademark- and the Lipper Equity Income Fund Index for
the same periods. This table is intended to provide you with some indication of
the risks of investing in the Equity Income Fund. At the bottom of the table you
can compare this performance with the S&P 500-Registered Trademark- and the
Lipper Equity Income Fund Index. The S&P 500-Registered Trademark- is the
Standard & Poor's Composite Index of 500 Stocks, a widely recognized, unmanaged
index of common stock prices. Standard & Poor's, S&P, and S&P 500-Registered
Trademark- are registered trademarks of Standard & Poor's Corporation. The
Lipper Equity Income Fund Index is a widely recognized, equally weighted
performance index (adjusted for capital gains distributions and income
dividends) of the 10 largest open-end funds which seek relatively high current
income and growth of income through investing 60% or more of their portfolio in
equities.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 12/31/99)
<TABLE>
<CAPTION>
PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
<S> <C> <C> <C>
SM&R Equity Income Fund, Inc. (7.06)% 13.97% 11.00%
S&P 500-Registered Trademark- 21.03% 28.55% 18.19%
Lipper Equity Income Fund Index 4.20% 17.80% 13.04%
</TABLE>
BALANCED FUND
The following bar chart shows the annual total returns (%) for Class T of the
Balanced Fund or, as noted above, of the SM&R Balanced Fund, Inc., for each of
the last 10 calendar years.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 1.37%
1991 24.53%
1992 3.00%
1993 6.31%
1994 1.49%
1995 22.29%
1996 11.86%
1997 17.46%
1998 13.83%
1999 11.87%
</TABLE>
The SM&R Balanced Fund, Inc.'s Class T unannualized return for the period from
January 1, 2000 through September 30, 2000 is 7.44%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: December 31, 1998 10.19%
Worst Quarter: September 30, 1990 (7.64)%
</TABLE>
The next table lists the SM&R Balanced Fund, Inc.'s Class T average annual total
returns for the past one, five and ten calendar years, and the returns of the
Lipper Balanced Fund Index for the same periods. This table is intended to
provide you with some indication of the risks of investing in the Balanced Fund.
At the bottom of the table you can compare this performance with the Lipper
Balanced Fund Index. The Lipper Balanced Fund Index is a widely recognized,
equally weighted performance index (adjusted for capital gains distributions and
income dividends) of the 30 largest open-end funds whose primary objective is to
conserve principal by maintaining a balanced portfolio of stocks and bonds. The
stock/bond ratio typically ranges around 60%/40%.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 12/31/99)
<TABLE>
<CAPTION>
PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS
<S> <C> <C> <C>
SM&R Balanced Fund, Inc. 5.43% 14.04% 10.47%
Lipper Balanced Fund Index 8.96% 16.33% 12.26%
</TABLE>
A-3
<PAGE>
APPENDIX
--------------------------------------------------------------------------
GOVERNMENT BOND FUND
The following bar chart shows the annual total returns (%) for Class T of the
Government Bond Fund since inception.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 9.31%
1994 (4.65)%
1995 18.57%
1996 3.43%
1997 8.14%
1998 6.87%
1999 (0.34)%
</TABLE>
The Government Bond Fund's fiscal year ends on August 31st. The Government Bond
Fund's unannualized Class T return for the period from January 1, 2000 through
September 30, 2000 is 5.62%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: June 30, 1995 6.44%
Worst Quarter: September 30, 1994 (1.77)%
</TABLE>
The next table lists the Government Bond Fund's Class T average annual total
returns for the past one and five calendar years, and for the period since
inception of the Government Bond Fund, and the returns of the Lehman Brothers
Government/ Mortgage-Backed Securities Index for the same periods. This table is
intended to provide you with some indication of the risks of investing in the
Government Bond Fund. At the bottom of the table you can compare this
performance with the Lehman Brothers Government/Mortgage-Backed Securities
Index. This index includes all public obligations of the U.S. treasury and all
publicly issued debt of U.S. Government agencies, quasi-federal corporations and
corporate debt guaranteed by the U.S. Government as well as 15 and 30 year fixed
rate securities backed by mortgage pools of the GNMA, FHLMA, and FNMA.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 12/31/99)
<TABLE>
<CAPTION>
SINCE
PAST 1 PAST 5 INCEPTION
YEAR YEARS (3/16/92)
<S> <C> <C> <C>
Government Bond Fund (4.81)% 6.18% 5.64%
Lehman Brothers Government/Mortgage-
Backed Securities Index (0.54)% 7.67% 6.84%
</TABLE>
TAX FREE FUND
The following bar chart shows the annual total returns (%) for Class T of the
Tax Free Fund since inception.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1994 (5.49)%
1995 17.87%
1996 4.48%
1997 8.98%
1998 6.33%
1999 (5.70)%
</TABLE>
The Tax Free Fund's fiscal year ends on August 31st. The Tax Free Fund's
Class T unannualized return for the period from January 1, 2000 through
September 30, 2000 is 6.58%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: March 31, 1995 7.41%
Worst Quarter: March 31, 1994 (3.94)%
</TABLE>
The next table lists the Tax Free Fund's Class T average annual total return for
the past one and five calendar years, and for the period since inception of the
Tax Free Fund, and the returns of the Lehman Brothers Municipal Index for the
same periods. This table is intended to provide you with some indication of the
risks of investing in the fund. At the bottom of the table you can compare this
performance with the Lehman Brothers Municipal Index. This is an index of
investment grade tax exempt bonds classified into four major sections: General
Obligations, Revenue, Insured and Preferred.
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended 12/31/99)
<TABLE>
<CAPTION>
SINCE
PAST 1 PAST 5 INCEPTION
YEAR YEARS (9/9/93)
<S> <C> <C> <C>
Tax Free Fund (7.53)% 5.70% 3.69%
Lehman Brothers Municipal Index (2.06)% 6.91% 4.83%
</TABLE>
A-4
<PAGE>
APPENDIX
--------------------------------------------------------------------------
PRIMARY FUND
The following bar chart shows the annual total returns (%) for the Primary Fund
since inception (March 16, 1992).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 2.48%
1994 3.58%
1995 5.26%
1996 4.92%
1997 5.08%
1998 5.13%
1999 3.77%
</TABLE>
The Primary Fund's fiscal year ends on August 31st. The Primary Fund's
unannualized return for the period from January 1, 2000 through September 30,
2000 is 4.43%.
<TABLE>
<CAPTION>
QUARTER ENDED TOTAL RETURN
<S> <C> <C>
Best Quarter: September 30, 2000 1.49%
Worst Quarter: December 31, 1999 0.31%
</TABLE>
The next table lists the Primary Fund's average annual total return for the past
one and five years and since inception, and the returns of the Lehman
Government/Corporate Index for the same periods. This table is intended to
provide you with some indication of the risks of investing in the Primary Fund.
At the bottom of the table you can compare this performance with the Lehman
Government/Corporate Index. This index represents all public obligations of the
U.S. Treasury as well as all publicly issued debt of U.S. Government agencies
with maturities of one to three years.
AVERAGE ANNUAL TOTAL RETURN
(for the period ended 12/31/99)
<TABLE>
<CAPTION>
SINCE
PAST 1 PAST 5 INCEPTION
YEAR YEARS (3/16/92)
<S> <C> <C> <C>
Primary Fund 3.77% 4.83% 4.19%
Lehman Government/Corporate Index 3.15% 6.55% 5.79%
</TABLE>
A-5
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
COMMERCIAL PAPER DATE RATE(%) AMOUNT VALUE
<S> <C> <C> <C> <C>
GOVERNMENT AGENCIES--2.61%
Federal Home Loan Bank 09/01/00 6.400 $ 200,000 $ 200,000
Federal Home Loan Mortgage Corporation 09/05/00 6.400 116,000 115,917
Federal Home Loan Mortgage Corporation 09/21/00 6.500 150,000 149,457
Federal National Mortgage Corporation 09/28/00 6.440 139,000 138,327
-----------
TOTAL COMMERCIAL PAPER--2.61%
(Cost $603,701) 603,701
-----------
<CAPTION>
CORPORATE BONDS
AUTO & TRUCK MANUFACTURERS--4.10%
<S> <C> <C> <C> <C>
General Motors Corporation 05/01/08 6.375 1,000,000 948,534
BANKS--4.06%
Chase Manhattan Corporation 02/15/08 6.375 1,000,000 939,737
FINANCIAL SERVICES--12.68%
Bear Stearns Companies, Incorporated 03/30/03 6.200 175,000 170,258
CNA Financial Corporation 01/15/08 6.450 1,000,000 868,738
Household Finance Corporation 06/17/08 6.400 1,000,000 924,226
Morgan Stanley, Dean Witter & Discover 03/01/07 6.875 1,000,000 971,684
-----------
2,934,906
MEDICAL SERVICES--4.26%
Aetna Services, Incorporated 08/15/36 6.970 1,000,000 987,702
NATURAL GAS--2.18%
National Fuel Gas Company 02/01/04 7.750 500,000 504,604
TELECOM--CELLULAR--4.30%
GTE Corporation 04/01/09 7.510 1,000,000 994,730
-----------
TOTAL CORPORATE BONDS--31.58%
(Cost $7,767,346) 7,310,213
-----------
<CAPTION>
FOREIGN BONDS
U S DOLLAR DENOMINATED
FOREIGN GOVERNMENT BONDS--1.97%
<S> <C> <C> <C> <C>
Province of Quebec, Canada 02/15/09 5.750 500,000 455,674
-----------
TOTAL FOREIGN BONDS--1.97%
(Cost $452,628) 455,674
-----------
<CAPTION>
U S GOVERNMENT AGENCY AND
U S GOVERNMENT SECURITIES
U S GOVERNMENT AGENCY SECURITIES--60.60%
<S> <C> <C> <C> <C>
Federal Home Loan Bank 08/05/04 7.380 1,000,000 1,020,027
Federal Home Loan Bank 10/25/05 6.230 150,000 146,433
Federal Home Loan Mortgage Corporation 08/01/05 6.750 165,000 164,441
Federal Home Loan Mortgage Corporation 09/15/06 7.000 106,404 106,169
</TABLE>
1
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
GOVERNMENT BOND FUND, CONTINUED
<TABLE>
<CAPTION>
INTEREST/
U S GOVERNMENT AGENCY AND MATURITY STATED FACE
U S GOVERNMENT SECURITIES DATE RATE(%) AMOUNT VALUE
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation 03/15/07 7.000 $ 659,249 $ 656,909
Federal Home Loan Mortgage Corporation 09/15/07 7.000 1,000,000 997,090
Federal Home Loan Mortgage Corporation 04/15/23 7.000 1,000,000 992,270
Federal Home Loan Mortgage Corporation 06/15/27 7.500 1,000,000 1,004,240
Federal National Mortgage Association 02/11/02 7.500 1,585,000 1,602,089
Federal National Mortgage Association 09/12/05 6.550 100,000 99,030
Federal National Mortgage Association 04/10/07 7.700 300,000 297,665
Federal National Mortgage Association 07/25/07 7.000 864,621 860,281
Federal National Mortgage Association 03/16/09 6.320 250,000 237,595
Federal National Mortgage Association 04/29/09 6.500 1,000,000 946,300
Federal National Mortgage Association 05/18/09 6.500 1,500,000 1,438,020
Federal National Mortgage Association 11/18/15 6.350 420,470 417,535
Federal National Mortgage Association 08/01/30 8.000 1,000,000 1,009,526
Private Export Funding 01/15/10 7.200 1,000,000 1,020,028
Tennessee Valley Authority 12/15/17 6.250 300,000 278,786
Vende 09/15/15 6.500 736,330 730,491
-----------
14,024,925
U S GOVERNMENT SECURITIES--2.19%
U S Treasury Bonds 02/15/26 6.000 500,000 506,875
-----------
TOTAL U S GOVERNMENT AGENCY and U S GOVERNMENT SECURITIES--62.79%
(Cost $14,526,448) 14,531,800
-----------
TOTAL INVESTMENTS--98.95%
(Cost $23,350,123) 22,901,388
CASH AND OTHER ASSETS, LESS LIABILITIES--1.05% 243,290
-----------
TOTAL NET ASSETS--100.00% $23,144,678
===========
</TABLE>
See notes to financial statements.
2
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2000
--------------------------------------------------------------------------------
GOVERNMENT BOND FUND
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value $ 22,901,388
Cash 22,770
Prepaid expenses 25,642
Receivable for:
Capital stock sold 2,903
Interest 243,804
Expense reimbursement 2,828
Other assets 2,782
------------
TOTAL ASSETS 23,202,117
------------
LIABILITIES
Capital stock reacquired 27,423
Distribution payable 3,820
Accrued:
Investment advisory fee 9,759
Service fee 4,880
Other liabilities 11,557
------------
TOTAL LIABILITIES 57,439
------------
NET ASSETS (applicable to shares outstanding) $ 23,144,678
============
NET ASSETS:
Class A $ 127,344
--------------------------------------------------------------------------
Class B $ 78,137
--------------------------------------------------------------------------
Class C $ 11,514
--------------------------------------------------------------------------
Class T $ 22,927,683
--------------------------------------------------------------------------
Total Net Assets $ 23,144,678
============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 12,564
--------------------------------------------------------------------------
Class B:
Authorized 100,000,000
Outstanding 7,709
--------------------------------------------------------------------------
Class C:
Authorized 100,000,000
Outstanding 1,141
--------------------------------------------------------------------------
Class T:
Authorized 23,000,000
Outstanding 2,282,147
--------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 10.14
Offering price per share: (Net Assets value of $10.14 /
95.25%) $ 10.65
--------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 10.14
--------------------------------------------------------------------------
Class C:
Net asset value and redemption price per share $ 10.09
Offering price per share: (Net Assets value of $10.09 /
99.00%) $ 10.19
--------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 10.05
Offering price per share: (Net Assets value of $10.05 /
95.5%) $ 10.52
--------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
3
<PAGE>
STATEMENT OF OPERATIONS For Year Ended August 31, 2000
--------------------------------------------------------------------------------
GOVERNMENT BOND FUND
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $1,577,979
EXPENSES
Investment advisory fees 114,520
Service fees 57,261
Professional fees 11,731
Custody and transaction fees 13,966
Directors' fees 5,450
Qualification fees 14,796
Shareholder reporting expenses 4,702
Insurance expenses 1,848
Distribution Fees 786
----------
TOTAL EXPENSES 225,060
LESS EXPENSES REIMBURSED (102)
----------
NET EXPENSES 224,958
----------
INVESTMENT INCOME--NET 1,353,021
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (27,911)
Change in unrealized depreciation of investments for the
year (91,162)
----------
NET LOSS ON INVESTMENTS (119,073)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,233,948
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,353,021 $ 1,347,702
Net realized gain (loss) on investments (27,911) 45,700
Change in unrealized depreciation (91,162) (1,198,180)
----------- -----------
Net increase in net assets resulting from operations 1,233,948 195,222
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (5,129) (651)
Class B (3,094) (209)
Class C (547) (131)
Class T (1,344,156) (1,346,738)
----------- -----------
Total distributions to shareholders (1,352,926) (1,347,729)
CAPITAL SHARE TRANSACTIONS--NET
Class A 58,691 69,763
Class B 70,603 8,079
Class C 547 11,131
Class T (321,873) 537,687
----------- -----------
Total net capital share transactions (192,032) 626,660
----------- -----------
TOTAL DECREASE (311,010) (525,847)
NET ASSETS
Beginning of Year 23,455,688 23,981,535
----------- -----------
End of Year $23,144,678 $23,455,688
=========== ===========
</TABLE>
See notes to financial statements.
4
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the year.
GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
CLASS T
------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.10 $ 10.60 $ 10.42 $ 10.14 $ 10.51
Investment income--net 0.59 0.59 0.64 0.67 0.65
Net realized and unrealized gain (loss) on
investments (0.05) (0.50) 0.20 0.26 (0.37)
------- ------- ------- ------- -------
Total from Investment Operations 0.54 0.09 0.84 0.93 0.28
Less distributions from
Investment income--net (0.59) (0.59) (0.66) (0.65) (0.65)
------- ------- ------- ------- -------
Total Distributions (0.59) (0.59) (0.66) (0.65) (0.65)
------- ------- ------- ------- -------
Net Asset Value, End of Year $ 10.05 $ 10.10 $ 10.60 $ 10.42 $ 10.14
======= ======= ======= ======= =======
Total Return 5.58 % 0.76 % 8.31 % 9.37 % 2.63 %
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $22,928 $23,368 $23,982 $23,683 $21,127
Ratio of expenses with reimbursement to average
net assets 0.98 % 1.00 % 1.00 % 1.00 % 1.00 %
Ratio of expenses without reimbursement to
average net assets 0.98 % 1.11 % 1.00 % 1.07 % 1.20 %
Ratio of net investment income to average net
assets 5.91 % 5.58 % 6.08 % 6.46 % 6.17 %
Portfolio turnover rate 30.87 % 22.86 % 32.71 % 9.06 % 30.17 %
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
-------------------------------- ------------------------------- ------------
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1, 1999 YEAR ENDED JANUARY 1, 1999 YEAR ENDED
AUGUST 31, TO AUGUST 31, AUGUST 31, TO AUGUST 31, AUGUST 31,
------------- ---------------- ------------ ---------------- ------------
2000 1999 2000 1999 2000
------------- ---------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 10.20 $ 10.62 $ 10.16 $10.62 $ 10.15
Investment income--net 0.57 0.30 0.49 0.33 0.49
Net realized and unrealized
gain (loss) on investments (0.06) (0.42) (0.02) (0.46) (0.06)
-------- ------- ------- ------ -------
Total from Investment
Operations 0.51 (0.12) 0.47 (0.13) 0.43
Less distributions from
Investment income--net (0.57) (0.30) (0.49) (0.33) (0.49)
-------- ------- ------- ------ -------
Total Distributions (0.57) (0.30) (0.49) (0.33) (0.49)
-------- ------- ------- ------ -------
Net Asset Value, End of Period $ 10.14 $ 10.20 $ 10.14 $10.16 $ 10.09
======== ======= ======= ====== =======
Total Return 5.15 % (1.17)%** 4.74 % (1.30)%** 4.39 %
======== ======= ======= ====== =======
RATIOS (IN PERCENTAGES)/
SUPPLEMENTAL DATA
Net Assets, end of period $127,344 $68,792 $78,137 $7,743 $11,514
Ratio of expenses with
reimbursement to average net
assets 1.25 % 1.25 %* 1.75 % 1.75 %* 2.00 %
Ratio of expenses without
reimbursement to average net
assets 1.29 % 1.42 %* 1.84 % 1.77 %* 2.12 %
Ratio of net investment income
to average net assets 5.68 % 5.25 %* 5.12 % 4.86 %* 4.89 %
Portfolio turnover rate 30.87 % 22.86 % 30.87 % 22.86 % 30.87 %
<CAPTION>
CLASS C
SHARES
----------------
PERIOD FROM
JANUARY 1, 1999
TO AUGUST 31,
----------------
1999
----------------
<S> <C>
Net Asset Value, Beginning of
Period $ 10.62
Investment income--net 0.30
Net realized and unrealized
gain (loss) on investments (0.47)
-------
Total from Investment
Operations (0.17)
Less distributions from
Investment income--net (0.30)
-------
Total Distributions (0.30)
-------
Net Asset Value, End of Period $ 10.15
=======
Total Return (1.64)%**
=======
RATIOS (IN PERCENTAGES)/
SUPPLEMENTAL DATA
Net Assets, end of period $11,022
Ratio of expenses with
reimbursement to average net
assets 2.00 %*
Ratio of expenses without
reimbursement to average net
assets 2.25 %*
Ratio of net investment income
to average net assets 4.54 %*
Portfolio turnover rate 22.86 %
</TABLE>
* Ratios annualized
** Returns are not annualized
See notes to financial statements.
5
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
PRIMARY FUND
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C>
COMMERCIAL PAPER
AUTO PARTS MANUFACTURERS--3.02%
AutoZone Incorporated 09/15/00 6.700 $ 811,000 $ 808,881
CHEMICALS--7.47%
Eastman Chemical Company 09/08/00 6.700 1,007,000 1,005,683
Union Carbide Corporation 09/22/00 6.800 1,000,000 996,028
-----------
2,001,711
CHEMICALS--SPECIALTY--4.14%
RPM Incorporated 09/21/00 6.850 1,114,000 1,109,757
COMMUNICATION EQUIPMENT--3.33%
Cox Enterprises Incorporated 09/07/00 6.730 893,000 891,992
ELECTRIC POWER--8.88%
GPU Incorporated 09/20/00 6.850 1,200,000 1,195,655
Nevada Power Company 10/11/00 6.800 1,193,000 1,183,983
-----------
2,379,638
ELECTRONICS--3.68%
AVNET Incorporated 10/06/00 6.720 992,000 985,505
FINANCIAL SERVICES--15.72%
Comdisco Incorporated 10/10/00 6.830 1,156,000 1,147,398
Houston Industries FinanceCo L.P. 09/05/00 6.800 974,000 973,261
PP&L Capital Funding Incorporated 09/06/00 6.750 1,092,000 1,090,972
Xerox Credit Corporation 09/01/00 6.930 1,000,000 1,000,000
-----------
4,211,631
FOOD PRODUCERS--3.71%
McCormick & Company Incorporated 09/25/00 6.670 1,000,000 995,551
FURNITURE/APPLIANCES/TOOLS--4.54%
Maytag Corporation 09/11/00 6.700 1,218,000 1,215,726
LEISURE TIME/GAMING--3.77%
Mattel Incorporated 09/12/00 6.760 1,012,000 1,009,889
MACHINERY/EQUIPMENT--3.20%
Ingersoll-Rand Company 09/14/00 6.700 860,000 857,913
MANUFACTURING-SPECIALITY--5.91%
Goodyear Tire & Rubber Company (The) 10/19/00 6.750 1,009,000 999,904
Pentair, Incorporated 09/19/00 6.720 585,000 583,033
-----------
1,582,937
MEDICAL SERVICES--2.08%
PerkinElmer, Incorporated 09/19/00 6.750 560,000 558,104
NATURAL GAS--1.80%
Sierra Pacific Power Company 09/18/00 6.700 483,000 481,469
OIL SERVICES--2.48%
UOP 09/18/00 6.720 667,000 664,881
PAPER/FOREST PRODUCTS--4.34%
International Paper Company 10/05/00 6.750 1,171,000 1,163,533
PHOTOGRAPHY/IMAGING--3.68%
Xerox Corporation 09/13/00 6.930 988,000 985,711
-----------
TOTAL COMMERCIAL PAPER--81.75%
(Cost $21,904,829) 21,904,829
-----------
CORPORATE BONDS
BUILDING SUPPLIES--1.69%
Armstrong World Industries, Incorporated 08/15/03 6.350 500,000 452,966
ELECTRIC POWER--1.82%
West Penn Power Company 06/01/04 6.375 500,000 488,281
</TABLE>
6
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
PRIMARY FUND, CONTINUED
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C>
CORPORATE BONDS
FINANCIAL SERVICES--4.00%
Finova Capital Corporation 03/15/04 6.125 $ 500,000 $ 335,864
Household Finance Corporation 08/15/03 6.250 265,000 256,895
Transamerica Financial Corporation 05/14/04 6.370 500,000 480,319
-----------
1,073,078
LEISURE TIME/GAMING--1.42%
Carnival Cruise Lines 10/01/03 6.150 400,000 381,026
MEDIA-TV/RADIO/CABLE--1.83%
TCI Communications, Incorporated 05/01/03 6.375 500,000 489,124
TELECOM--LONG DISTANCE--1.85%
WorldCom, Incorporated 08/15/01 6.125 500,000 495,484
-----------
TOTAL CORPORATE BONDS--12.61%
(Cost $3,623,119) 3,379,959
-----------
MUNICIPAL BONDS
WATER & SEWER--1.85%
Lower Colorado River Authority, Texas Revenue
Bonds,
Refunding and Improvement Series C
(Rating(a) Aaa/AAA) 05/15/04 6.820 500,000 496,555
-----------
TOTAL MUNICIPAL BONDS--1.85%
(Cost $500,892) 496,555
-----------
U S GOVERNMENT AGENCY AND
U S GOVERNMENT SECURITIES
U S GOVERNMENT AGENCY SECURITIES--0.73%
Federal Home Loan Bank 11/10/03 5.750 200,000 194,622
U S GOVERNMENT SECURITIES--3.44%
U S Treasury Bonds 02/15/29 5.250 1,000,000 921,563
-----------
TOTAL U S GOVERNMENT AGENCY and U S GOVERNMENT SECURITIES--4.17%
(Cost $1,077,493) 1,116,185
-----------
TOTAL INVESTMENTS--100.38%
(Cost $27,106,333) 26,897,528
LIABILITIES IN EXCESS OF OTHER ASSETS--(0.38%) (102,882)
-----------
TOTAL NET ASSETS--100.00% $26,794,646
===========
</TABLE>
Notes to Schedule of Investments
(a) Ratings assigned by Moody's Investor's Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P"). Ratings are unaudited.
See notes to financial statements.
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2000
--------------------------------------------------------------------------------
PRIMARY FUND
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value $26,897,528
Cash 3,232
Prepaid expenses 3,832
Receivable for:
Capital stock sold 883
Interest 82,551
Expense reimbursement 2,139
Other assets 2,782
-----------
TOTAL ASSETS 26,992,947
-----------
LIABILITIES
Distribution payable 11,224
Capital stock reacquired 163,898
Accrued:
Investment advisory fee 10,846
Service fee 5,423
Other liabilities 6,910
-----------
TOTAL LIABILITIES 198,301
-----------
NET ASSETS $26,794,646
===========
Shares of capital stock outstanding, (1,176,000,000 shares
authorized, $.01 par value per share) 27,055,977
===========
Net asset value $ 0.99
===========
</TABLE>
STATEMENT OF OPERATIONS For Year Ended August 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Interest $1,767,747
EXPENSES
Investment advisory fees 138,844
Service fees 69,422
Professional fees 7,222
Custody and transaction fees 23,383
Directors' fees 5,448
Qualification fees 17,471
Shareholder reporting expenses 25,470
Other 2,476
----------
TOTAL EXPENSES 289,736
LESS EXPENSES REIMBURSED (67,009)
----------
NET EXPENSES 222,727
----------
INVESTMENT INCOME--NET 1,545,020
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (23,912)
Change in unrealized depreciation of investments for the
year (157,804)
----------
NET LOSS ON INVESTMENTS (181,716)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,363,304
==========
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
PRIMARY FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 1,545,020 $ 1,549,925
Net realized loss on investments (23,912) (12,564)
Change in unrealized depreciation (157,804) (51,001)
----------- -----------
Net increase in net assets resulting from operations 1,363,304 1,486,360
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (1,545,020) (1,549,925)
CAPITAL SHARE TRANSACTION--NET (3,861,935) (3,675,020)
----------- -----------
TOTAL DECREASE (4,043,651) (3,738,585)
NET ASSETS
Beginning of Year 30,838,297 34,576,882
----------- -----------
End of Year $26,794,646 $30,838,297
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the year.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment income--net 0.06 0.05 0.05 0.05 0.05
Net realized and unrealized gain (loss) on
investments (0.01) -- -- -- --
------- ------- ------- ------- -------
Total from Investment Operations 0.05 0.05 0.05 0.05 0.05
Less distributions from
Investment income--net (0.06) (0.05) (0.05) (0.05) (0.05)
------- ------- ------- ------- -------
Total Distributions (0.06) (0.05) (0.05) (0.05) (0.05)
------- ------- ------- ------- -------
Net Asset Value, End of Year $ 0.99 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total Return 4.68 % 4.75 % 5.15 % 4.98 % 5.07 %
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $26,795 $30,838 $34,577 $33,045 $37,465
Ratio of expenses with reimbursement to average
net assets 0.80 % 0.80 % 0.80 % 0.80 % 0.81 %
Ratio of expenses without reimbursement to
average net assets 1.04 % 1.06 % 0.98 % 1.01 % 1.15 %
Ratio of net investment income to average net
assets 5.55 % 4.66 % 5.02 % 4.86 % 4.93 %
Portfolio turnover rate 18.46 % 30.47 % -- -- --
</TABLE>
See notes to financial statements.
9
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
TAX FREE FUND
<TABLE>
<CAPTION>
INTEREST/
MUNICIPAL BONDS MATURITY STATED FACE
RATING(A) DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
CALIFORNIA--4.29%
Aa3/AA- California State General Obligation Bonds Unlimited 06/01/11 5.250 $ 25,000 $ 26,145
Aaa/AAA Sacramento, California Municipal Utility District
Electric Revenue Bonds, Series I 01/01/15 5.750 200,000 208,642
Aaa/AAA San Francisco, California City and County Sewer
Revenue Refunding Bonds 10/01/16 5.375 250,000 252,585
-----------
487,372
-----------
FLORIDA--11.92%
Aaa/AAA Dade County, Florida Water & Sewer System Revenue
Bonds 10/01/16 5.375 400,000 403,268
Aaa/AAA Miami-Dade County Solid Waste System Revenue Bonds 10/01/18 4.375 400,000 364,176
Aaa/AAA Miami-Dade County, Florida Expressway Authority
Toll System Revenue Bonds 07/01/29 6.375 400,000 439,176
Aa2/AA+ State of Florida-State Board of Education, Public
Education Capital Outlay Bonds, 1992 Series E 06/01/19 5.750 145,000 147,635
-----------
1,354,255
-----------
GEORGIA--1.58%
A3/A Municipal Electric Authority of Georgia-Power
Revenue Bonds, Series AA 01/01/07 5.400 175,000 179,121
-----------
ILLINOIS--13.69%
Aaa/AAA Chicago, Illinois-General Obligation Bonds
Unlimited 01/01/25 5.125 100,000 93,345
Aaa/AAA Chicago, Illinois-Park District General Obligation
Bonds Unlimited, Series C 01/01/16 4.850 230,000 213,415
Aa2/AA Illinois Health Facilities Authority-Revenue Bonds,
Series A, (Northwestern Memorial Hospital) 08/15/24 6.000 100,000 100,642
Aa2/AA Illinois Health Facilities Authority-Revenue Bonds,
Series 1994A, (Northwestern Memorial Hospital) 08/15/14 6.100 200,000 206,100
Aaa/AAA Illinois State Toll Highway Authority-Highway
Priority Revenue Bonds, Series A-FGIC 01/01/17 5.750 175,000 183,375
Aaa/AAA Regional Transportation Authority of Illinois
Revenue Bonds, Refunding MBIA 06/01/18 5.500 200,000 200,204
Aaa/NR Rockford, Illinois-General Obligation Bonds
Unlimited 12/15/18 4.500 180,000 156,573
Aa2/AAA State of Illinois-Build Illinois Bonds, Sales Tax
Revenue Bonds, Series V 06/15/17 6.375 200,000 212,258
Aaa/AAA State of Illinois-General Obligation Bonds
Unlimited 03/01/19 5.000 200,000 188,926
-----------
1,554,838
-----------
LOUISIANA--5.77%
Aaa/AAA Louisiana Public Facilities Authority Hospital
Revenue Bonds, Series C 07/01/19 5.000 400,000 371,380
Aaa/AAA New Orleans, Louisiana Sewer Service Revenue Bonds 06/01/18 5.000 300,000 284,742
-----------
656,122
-----------
MASSACHUSETTS--4.21%
Aaa/AAA Massachusetts State Water Revenues Authority,
General Purpose-Series A 11/01/21 5.500 450,000 478,139
-----------
</TABLE>
10
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
TAX FREE FUND, CONTINUED
<TABLE>
NEW MEXICO--0.90%
<CAPTION>
INTEREST/
MUNICIPAL BONDS MATURITY STATED FACE
RATING(A) DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Aaa/AAA Central Consolidated School District No.22 San Juan
County, New Mexico General Obligation School
Building Bonds 08/15/09 5.300 $100,000 $ 102,578
-----------
NEW YORK--7.53%
A3/A- New York City, New York-General Obligation Bonds
Unlimited, Series J 08/01/18 5.000 200,000 186,742
Aaa/AAA New York City, New York-General Obligation Bonds
Unlimited, Series J 02/15/07 5.000 100,000 102,378
Aa3/AA New York City, New York-Transititional Financial
Authority Revenue Bonds, Series C 05/01/19 5.000 250,000 236,625
Aa3/A+ Triborough Bridge & Tunnel Authority, New York,
Revenue Bonds, General Purpose-Series B 01/01/27 5.200 350,000 329,434
-----------
855,179
-----------
NORTH CAROLINA--0.93%
Aaa/AAA City of Charlotte, North Carolina-General
Obligation Public Improvement Bonds, Series 1994 02/01/08 5.700 100,000 105,835
-----------
OHIO--3.64%
Aaa/AAA Franklin County, Ohio-General Obligation Bonds
Limited 12/01/08 5.100 300,000 309,885
Aaa/AAA Franklin County, Ohio-General Obligation Bonds
Limited 12/01/11 5.300 100,000 103,233
-----------
413,118
-----------
OKLAHOMA--0.76%
Aaa/NR Oklahoma Housing Finance Agency-Single Family
Mortgage Revenue Bonds (Homeownership Loan
Program), 1994 Series A-1 (b) 09/01/07 6.250 85,000 85,845
-----------
OREGON--1.89%
A1/A+ City of Portland, Oregon-Sewer System Revenue
Bonds, 1994 Series A 06/01/15 6.250 200,000 214,274
-----------
PENNSYLVANIA--0.90%
Aa3/AA Pennsylvania State General Obligation Bonds
Unlimited, Refunding & Projects-First Series 04/15/06 5.000 100,000 102,205
-----------
PUERTO RICO--2.07%
Baa1/A Commonwealth of Puerto Rico-Public Improvement
Refunding Bonds, Series 1992A, General Obligation
Bonds 07/01/14 6.000 100,000 103,307
Baa1/BBB+ Puerto Rico Electric Power Authority-Power Revenue
Bonds, Series R 07/01/17 6.250 125,000 131,569
-----------
234,876
-----------
RHODE ISLAND--0.89%
Aa2/AA+ Rhode Island Housing & Mortgage Financial
Corporation, Homeownership Opportunity,
Series 20-A 04/01/17 6.150 100,000 101,340
-----------
TENNESSEE--1.77%
A1/AA Tennessee Housing Development Agency-Mortgage
Finance Program Bonds, 1994 Series B (b) 01/01/09 6.200 200,000 200,580
-----------
</TABLE>
11
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
TAX FREE FUND, CONTINUED
<TABLE>
TEXAS--16.99%
<CAPTION>
INTEREST/
MUNICIPAL BONDS MATURITY STATED FACE
RATING(A) DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Aaa/AAA Baytown, Texas-Water and Sewer Revenue Bonds 02/01/14 5.950 $100,000 $ 103,135
Aaa/AAA Board of Regents of The University of Texas
System-Permanent University Fund, Refunding Bonds,
Series 1992A 07/01/13 6.250 200,000 205,794
Aaa/AAA City of Austin, Texas-Combined Utility Systems
Revenue Refunding Bonds, Series 1994 05/15/16 6.250 80,000 85,636
Aaa/AAA Collin County, Texas-Community College District,
Consolidated Fund, Revenue Bonds 02/01/15 5.250 400,000 398,380
Aaa/AAA Dallas-Fort Worth International Airport-Dallas-Fort
Worth Regional Airport, Joint Revenue Refunding
Bonds, Series 1994A 11/01/10 6.000 100,000 104,744
Aaa/A+ Flower Mound, Texas-Refunding and Improvement,
General Obligation Bonds Unlimited 03/01/17 5.500 200,000 200,976
Aa1/AA+ Harris County, Texas-Tax and Revenue Certificates
of Obligation, Series 1994 10/01/13 6.100 125,000 132,617
Aaa/AAA Mission Texas Consolidated Independent School
District-General Obligation Bonds Unlimited 02/15/18 4.500 200,000 175,082
AAA/NR Tarrant County Health Facilities Development
Corporation-Health System Revenue Bonds, (Harris
Methodist Health System), Series 1994 (c) 09/01/14 6.000 200,000 217,712
Aaa/AAA Texas Turnpike Authority-Dallas North Tollway
System Revenue Bonds, Series 1995 (President
George Bush Turnpike) 01/01/15 5.400 100,000 100,388
Aaa/NR Weslaco, Texas Independent School District General
Obligation Bonds 02/15/13 5.650 100,000 102,712
Aaa/AAA West University Place, Texas-General Obligation
Bonds Limited, Permanent Improvement 02/01/14 5.650 100,000 102,039
-----------
1,929,215
-----------
UTAH--1.65%
Aa1/AAA Utah Housing Finance Agency-Single Family Mortgage
Bonds, 1995 Issue A, (Federally Insured or
Guaranteed Mortgage Loans) (b) 07/01/12 7.150 30,000 31,011
Aa1/NR Utah State Housing Financial Agency-Single Family
Mortgage Bonds, Series F1 07/01/13 6.000 55,000 56,635
Aa2/AA Utah State Housing Financial Agency-Single Family
Revenue Bonds (b) 07/01/21 6.000 100,000 100,306
-----------
187,952
-----------
VIRGINIA--0.90%
Aaa/AAA Virginia State Housing Development Authority
Commonwealth Mortgage Bonds, Series A, Subseries
A-4 (b) 07/01/15 6.300 100,000 102,284
-----------
</TABLE>
12
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
TAX FREE FUND, CONTINUED
<TABLE>
WASHINGTON--12.85%
<CAPTION>
INTEREST/
MUNICIPAL BONDS MATURITY STATED FACE
RATING(A) DATE RATE (%) AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Aaa/AAA City of Richland, Washington-Water and Sewer
Improvement Revenue Bonds, 1993 04/01/07 5.550 $300,000 $ 311,082
NR/AAA King County, Washington-Department of Metropolitan
Services, Limited Tax General Obligation Bonds,
1994 Series A 01/01/08 5.800 200,000 211,080
Aa1/AA+ King County, Washington-Limited Tax General
Obligation and Refunding Bonds, 1993 Series A 12/01/10 6.000 100,000 104,757
Aaa/AAA Municipality of Metropolitan Seattle Sewer
Refunding Revenue Bonds, Series X 01/01/15 5.400 100,000 100,244
Aa1/AA+ Port of Seattle, Washington-General Obligation
Bonds (b) 05/01/14 5.750 100,000 102,023
Aaa/AAA Seattle, Washington-Municipal Light & Power Revenue
Bonds, Series B 06/01/24 5.000 100,000 91,917
Aa1/AA+ State of Washington-General Obligation Bonds,
Series 1994B 05/01/09 5.750 100,000 103,390
Aa1/AA+ State of Washington-General Obligation Bonds,
Series 1994B 09/01/16 6.000 100,000 102,602
Aa1/AA+ State of Washington-General Obligation Bonds
Unlimited, Series B 05/01/18 5.500 300,000 306,459
Aaa/AAA Washington State Public Power Supply System Nuclear
Project Number 1 Refunding Revenue Bonds,
Series C 07/01/10 5.500 25,000 25,948
-----------
1,459,502
-----------
WISCONSIN--1.82%
Aa2/AA City of Green Bay-General Obligation Refunding
Bonds, Series 1994B 04/01/09 5.900 200,000 206,552
-----------
TOTAL MUNICIPAL BONDS--96.95%
(Cost $10,805,394) 11,011,182
-----------
<CAPTION>
COMMERCIAL PAPER
GOVERNMENT AGENCIES--1.32%
<S> <C> <C> <C> <C> <C>
Federal Home Loan Bank 09/01/00 6.400 150,000 150,000
-----------
TOTAL COMMERCIAL PAPER--1.32%
(Cost $150,000) 150,000
-----------
TOTAL INVESTMENTS--98.27%
(Cost $10,955,394) 11,161,182
CASH AND OTHER ASSETS, LESS LIABILITIES--1.73% 196,367
-----------
TOTAL NET ASSETS--100.00% $11,357,549
===========
</TABLE>
Notes to Schedule of Investments
(a) Ratings assigned by Moody's Investor's Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P"). Ratings are unaudited.
(b) Security subject to the alternative minimum tax.
(c) Issuer has defeased these bonds, collateral for such defeasance is U.S.
Government obligations.
See notes to financial statements.
13
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2000
--------------------------------------------------------------------------------
TAX FREE FUND
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value $ 11,161,182
Cash 29,780
Prepaid expenses 25,291
Receivable for:
Capital stock sold 200
Interest 151,488
Expense reimbursement 2,383
Other assets 3,211
------------
TOTAL ASSETS 11,373,535
------------
LIABILITIES
Distribution payable 2,366
Accrued:
Investment advisory fee 4,784
Service fee 2,392
Other liabilities 6,444
------------
TOTAL LIABILITIES 15,986
------------
NET ASSETS (applicable to shares outstanding) $ 11,357,549
============
NET ASSETS:
Class A $ 211,755
--------------------------------------------------------------------------
Class B $ 115,025
--------------------------------------------------------------------------
Class C $ 1,029
--------------------------------------------------------------------------
Class T $ 11,029,740
--------------------------------------------------------------------------
TOTAL NET ASSETS $ 11,357,549
--------------------------------------------------------------------------
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 20,493
--------------------------------------------------------------------------
Class B:
Authorized 100,000,000
Outstanding 11,143
--------------------------------------------------------------------------
Class C:
Authorized 100,000,000
Outstanding 100
--------------------------------------------------------------------------
Class T:
Authorized 21,000,000
Outstanding 1,075,977
--------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 10.33
Offering price per share: (Net Assets value of $10.33 /
95.25%) $ 10.85
--------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 10.32
--------------------------------------------------------------------------
Class C:
Net asset value and redemption price per share $ 10.27
Offering price per share: (Net Assets value of $10.27 /
99.00%) $ 10.37
--------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 10.25
Offering price per share: (Net Assets value of $10.25 /
95.5%) $ 10.73
--------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
14
<PAGE>
STATEMENT OF OPERATIONS For Year Ended August 31, 2000
--------------------------------------------------------------------------------
TAX FREE FUND
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $ 629,833
EXPENSES
Investment advisory fees 56,294
Service fees 28,147
Professional fees 7,212
Custody and transaction fees 10,367
Directors' fees 5,448
Qualification fees 14,830
Shareholder reporting expenses 1,411
Insurance expenses 1,511
Distribution fees 1,367
---------
TOTAL EXPENSES 126,587
LESS EXPENSES REIMBURSED (40,785)
---------
NET EXPENSES 85,802
---------
INVESTMENT INCOME--NET 544,031
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 18,893
Change in unrealized appreciation of investments for the
year 111,378
---------
NET GAIN ON INVESTMENTS 130,271
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 674,302
=========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
2000 1999
------------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 544,031 $ 526,797
Net realized gain on investments 18,893 26,918
Change in unrealized appreciation (depreciation) 111,378 (608,365)
----------- -----------
Net increase (decrease) in net assets resulting from
operations 674,302 (54,650)
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (9,117) (2,378)
Class B (4,530) (1,020)
Class C (168) (333)
Class T (530,234) (523,038)
Capital Gains
Class A (87) --
Class B (33) --
Class C (3) --
Class T (4,932) --
----------- -----------
Total distributions from shareholders (549,104) (526,769)
CAPITAL SHARE TRANSACTIONS--NET
Class A 14,295 202,353
Class B 433 116,889
Class C (4,580) 6,889
Class T (309,997) 729,824
----------- -----------
Total net capital share transactions (299,849) 1,055,955
----------- -----------
TOTAL INCREASE (DECREASE) (174,651) 474,536
NET ASSETS
Beginning of Year 11,532,200 11,057,664
----------- -----------
End of Year $11,357,549 $11,532,200
=========== ===========
</TABLE>
See notes to financial statements.
15
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the year.
TAX FREE FUND
<TABLE>
<CAPTION>
CLASS T
------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.14 $ 10.64 $ 10.27 $ 9.93 $ 9.95
Investment income--net 0.49 0.48 0.49 0.51 0.53
Net realized and unrealized gain (loss) on
investments 0.12 (0.50) 0.37 0.33 (0.02)
------- ------- ------- ------- -------
Total from Investment Operations 0.61 (0.02) 0.86 0.84 0.51
Less distributions from
Investment income--net (0.49) (0.48) (0.49) (0.50) (0.53)
Capital gains (0.01) -- -- -- --
------- ------- ------- ------- -------
Total Distributions (0.50) (0.48) (0.49) (0.50) (0.53)
------- ------- ------- ------- -------
Net Asset Value, End of Year $ 10.25 $ 10.14 $ 10.64 $ 10.27 $ 9.93
======= ======= ======= ======= =======
Total Return 6.16 % (0.28)% 8.58 % 8.61 % 5.18 %
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $11,030 $11,218 $11,058 $10,700 $ 9,148
Ratio of expenses with reimbursement to average
net assets 0.75 % 0.73 % 0.75 % 0.54 % --
Ratio of expenses without reimbursement to
average net assets 1.11 % 1.23 % 1.25 % 1.27 % 1.18 %
Ratio of net investment income to average net
assets 4.84 % 4.53 % 4.60 % 4.97 % 5.27 %
Portfolio turnover rate 7.61 % 5.09 % 12.77 % 22.15 % 18.44 %
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------------------------- -------------------------------- ------------
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1, 1999 YEAR ENDED JANUARY 1, 1999 YEAR ENDED
AUGUST 31, TO AUGUST 31, AUGUST 31, TO AUGUST 31, AUGUST 31,
------------- ---------------- ------------- ---------------- ------------
2000 1999 2000 1999 2000
------------- ---------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 10.22 $ 10.68 $ 10.20 $ 10.68 $ 10.14
Investment income--net 0.46 0.21 0.41 0.18 0.42
Net realized and unrealized
gain (loss) on investments 0.12 (0.46) 0.13 (0.48) 0.14
-------- -------- -------- -------- -------
Total from Investment
Operations 0.58 (0.25) 0.54 (0.30) 0.56
Less distributions from
Investment income--net (0.46) (0.21) (0.41) (0.18) (0.42)
Capital gains (0.01) -- (0.01) -- (0.01)
-------- -------- -------- -------- -------
Total Distributions (0.47) (0.21) (0.42) (0.18) (0.43)
-------- -------- -------- -------- -------
Net Asset Value, End of Period $ 10.33 $ 10.22 $ 10.32 $ 10.20 $ 10.27
======== ======== ======== ======== =======
Total Return 5.86 % (2.37)%** 5.47 % (2.85)%** 5.72 %
======== ======== ======== ======== =======
RATIOS (IN PERCENTAGES)/
SUPPLEMENTAL DATA
Net Assets, end of period $211,755 $194,917 $115,025 $113,143 $ 1,029
Ratio of expenses with
reimbursement to average net
assets 1.00 % 1.51 %* 1.50 % 2.01 %* 1.75 %
Ratio of expenses without
reimbursement to average net
assets 1.35 % 2.02 %* 1.87 % 2.52 %* 3.77 %
Ratio of net investment income
to average net assets 4.59 % 3.69 %* 4.12 % 3.20 %* 3.89 %
Portfolio turnover rate 7.61 % 5.09 % 7.61 % 5.09 % 7.61 %
<CAPTION>
CLASS C SHARES
----------------
PERIOD FROM
JANUARY 1, 1999
TO AUGUST 31,
----------------
1999
----------------
<S> <C>
Net Asset Value, Beginning of
Period $ 10.68
Investment income--net 0.25
Net realized and unrealized
gain (loss) on investments (0.54)
-------
Total from Investment
Operations (0.29)
Less distributions from
Investment income--net (0.25)
Capital gains
-------
Total Distributions (0.25)
-------
Net Asset Value, End of Period $ 10.14
=======
Total Return (2.72)%**
=======
RATIOS (IN PERCENTAGES)/
SUPPLEMENTAL DATA
Net Assets, end of period $ 5,657
Ratio of expenses with
reimbursement to average net
assets 2.28 %*
Ratio of expenses without
reimbursement to average net
assets 2.78 %*
Ratio of net investment income
to average net assets 2.92 %*
Portfolio turnover rate 5.09 %
</TABLE>
* Ratios annualized
** Returns are not annualized
See notes to financial statements.
16
<PAGE>
SCHEDULE OF INVESTMENTS August 31, 2000
--------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
INTEREST/
MATURITY STATED FACE
COMMERCIAL PAPER DATE RATE(%) AMOUNT VALUE
<S> <C> <C> <C> <C>
COMPUTER RELATED--2.63%
Hewlett-Packard Company 09/05/00 6.46 $ 1,429,000 $ 1,427,972
ELECTRIC POWER--2.49%
Georgia Power Company 09/07/00 6.52 1,353,000 1,351,522
FINANCIAL SERVICES--4.17%
CSW Credit Incorporated 09/07/00 6.49 2,265,000 2,262,548
GOVERNMENT AGENCIES--84.94%
Federal Farm Credit Bank 09/29/00 6.36 14,312,000 14,240,738
Federal Home Loan Bank 09/01/00 6.40 4,207,000 4,207,000
Federal Home Loan Bank 09/06/00 6.39 3,544,000 3,540,850
Federal Home Loan Bank 09/08/00 6.41 5,400,000 5,393,265
Federal Home Loan Mortgage Corporation 09/05/00 6.40 4,380,000 4,376,882
Federal Home Loan Mortgage Corporation 09/12/00 6.41 4,244,000 4,235,674
Federal Home Loan Mortgage Corporation 09/19/00 6.42 6,168,000 6,148,166
Federal National Mortgage Association 09/15/00 6.46 3,954,000 3,944,063
-----------
46,086,638
RETAIL--GENERAL--5.75%
Nordstrom Incorporated 09/11/00 6.50 3,123,000 3,117,358
-----------
TOTAL INVESTMENTS--99.98%
(Cost $54,246,038) 54,246,038
CASH AND OTHER ASSETS, LESS LIABILITIES--0.02% 11,548
-----------
TOTAL NET ASSETS--100.00% $54,257,586
===========
</TABLE>
See notes to financial statements.
17
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES August 31, 2000
--------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value $54,246,038
Cash 14,082
Prepaid expenses 5,457
Receivable for:
Distributions 9,407
Capital stock sold 3,778
-----------
TOTAL ASSETS 54,278,762
-----------
LIABILITIES
Accrued:
Investment advisory fee 7,868
Service fee 7,868
Other liabilities 5,440
-----------
TOTAL LIABILITIES 21,176
-----------
NET ASSETS $54,257,586
===========
Shares of capital stock standing, (1,000,000,000 shares
authorized, $.01 par value per share) 54,257,586
===========
Net asset value $ 1.00
===========
</TABLE>
STATEMENT OF OPERATIONS For Year Ended August 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $2,311,217
EXPENSES
Investment advisory fees 86,927
Service fees 86,927
Professional fees 7,382
Custody and transaction fees 26,939
Directors' fees 5,447
Qualification fees 32,359
Shareholder reporting expenses 2,755
Insurance expenses 1,677
Other 625
----------
TOTAL EXPENSES 251,038
LESS EXPENSES REIMBURSED (63,993)
----------
NET EXPENSES 187,045
----------
INVESTMENT INCOME--NET $2,124,172
==========
</TABLE>
See notes to financial statements.
18
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1999
AUGUST 31, TO
2000 AUGUST 31,1999
----------- ----------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 2,124,172 $ 137,393
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net (2,124,172) (137,393)
CAPITAL SHARE TRANSACTIONS--NET 43,576,105 10,681,481
----------- -----------
TOTAL INCREASE 43,576,105 10,681,481
NET ASSETS
Beginning of Period 10,681,481 --
----------- -----------
End of Period $54,257,586 $10,681,481
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the year.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1999
AUGUST 31, TO AUGUST 31,
------------ ----------------
2000 1999
------------ ----------------
<S> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00
Investment income--net 0.05 0.03
------- -------
Total from Investment Operations 0.05 0.03
Less distributions from
Investment income--net (0.05) (0.03)
------- -------
Total Distributions (0.05) (0.03)
------- -------
Net Asset Value, End of Period $ 1.00 $ 1.00
======= =======
Total Return 5.56 % 2.89 %**
======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $54,258 $10,681
Ratio of expenses with reimbursement to average net assets 0.49 % 0.50 %*
Ratio of expenses without reimbursement to average net
assets 0.66 % 1.22 %*
Ratio of net investment income to average net assets 5.58 % 4.45 %*
</TABLE>
* Ratios annualized
** Returns are not annualized
See notes to financial statements.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS August 31, 2000
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The SM&R Investments, Inc. (the "Funds"), is a diversified open-end management
investment company registered as a series fund under the Investment Company Act
of 1940, as amended. The Funds' name change and the names of each of Funds'
series became effective January 1, 1999. The Funds are comprised of the SM&R
Government Bond Fund ("Government Bond Fund"), SM&R Primary Fund ("Primary
Fund"), SM&R Tax Free Fund ("Tax Free Fund"), and SM&R Money Market Fund ("Money
Market Fund"). Operations commenced March 16, 1992, for the Government Bond Fund
and Primary Fund. The Tax Free Fund began operations September 9, 1993 and the
Money Market Fund commenced operations January 1, 1999.
The Funds adopted the Multiple Class Plan for two of the Funds' series: the
Government Bond Fund and the Tax Free Fund. Each had a single class of shares,
and are offering three new classes as of January 1, 1999. The existing shares
are the Class T shares, and the newly offered classes are: the Class A shares
subject to an initial sales charge of up to 4.75% and a distribution and
shareholder servicing plan ("12b-1 Plan"); the Class B shares subject to a
contingent deferred sales charge and a 12b-1 Plan; and the Class C shares
subject to an initial sales charge of 1.00%, a contingent deferred sales charge,
and a 12b-1 Plan. The Primary Fund and Money Market Fund have one class of
shares, subject to no sales charge and no 12b-1 Plan.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
SECURITY VALUATION:
Investments in securities are valued based on market quotations or at fair value
as determined by a pricing service approved by the Board of Directors. Prices
provided by the pricing service represent valuations at bid prices or on a basis
determined without exclusive reliance on quoted prices and may reflect
appropriate factors such as institution-size trading in similar groups of
securities, yield quality, coupon rate, maturity, type of issue, individual
trading characteristics and other market data. Securities for which market
quotations are not readily available are valued as determined by the Board of
Directors. Commercial paper is stated at amortized cost, which is equivalent to
value.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME:
Investment transactions are accounted for on the trade date (date order to buy
or sell is executed). Dividend income is recognized on the ex-dividend date, and
interest income is recognized on an accrual basis. Realized gains and losses
from security transactions are reported on the basis of identified cost for
financial reporting and federal income tax purposes.
FEDERAL INCOME TAXES:
For federal income tax purposes, each series is treated as a separate entity.
The Funds intend to comply with requirements of the Internal Revenue Code
relating to regulated investment companies and intend to distribute
substantially all of its taxable income to its shareholders. Therefore, no
provision for federal income taxes is recorded in the accompanying financial
statements. At December 31, 1999, the funds' tax year-end, the Government Bond
Fund and the Primary Fund had capital loss carryforwards that will expire in
2004 of approximately $247,000 and $42,000, respectively.
CAPITAL STOCK TRANSACTIONS AND DISTRIBUTIONS TO SHAREHOLDERS:
Fund shares are sold in a continuous public offering and may be redeemed on any
business day.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
SM&R GOVERNMENT BOND FUND
The Government Bond Fund invest primarily in the agencies or
instrumentalities of the U.S. Government. Dividends to shareholders from
net investment income are declared and paid monthly.
SM&R PRIMARY FUND
The Primary Fund's objective is to seek maximum current income consistent
with capital preservation and liquidity through investment primarily in
commercial paper. All capital stock transactions are made at net asset
value. Distributions are computed daily and distributed monthly.
SM&R TAX FREE FUND
The Tax Free Fund's objective is to provide as high a level of interest
income largely exempt from federal income taxes as is consistent with
preservation of capital through investment of at least 80% of its net
assets in tax-exempt securities during normal market conditions. Dividends
to shareholders from net investment income are declared and paid monthly.
SM&R MONEY MARKET FUND
The Money Market Fund's objective is to seek the highest current income
consistent with the stability of principal and maintenance of liquidity.
All capital stock transactions are made at net asset value. Distributions
are computed daily and distributed monthly.
EXPENSES:
Distribution and qualification fees directly attributable to a series' class of
shares are charged to that series' class operations. All other operating
expenses not directly attributable to a series are prorated among the series
based on the relative amount of each series' net assets or shareholders, and
then allocated among the classes of that series.
The organizational cost for the Money Market Fund and the Government Bond and
Tax Free Funds' Class A, Class B and Class C shares were paid by Securities
Management and Research, Inc.
NOTE 2--OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEES:
Securities Management and Research, Inc. ("SM&R") is the investment advisor and
principal underwriter for the Funds. Investment advisory fees paid to SM&R are
computed as a percentage of the average daily net assets as follows:
GOVERNMENT BOND FUND
TAX FREE FUND
<TABLE>
<CAPTION>
INVESTMENT
NET ASSETS ADVISORY FEE
<S> <C>
Not exceeding $100,000,000 0.50%
Exceeding $100,000,000 but not exceeding $300,000,000 0.45%
Exceeding $300,000,000 0.40%
</TABLE>
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 2--OTHER TRANSACTIONS WITH AFFILIATES--CONTINUED
PRIMARY FUND
<TABLE>
<S> <C>
All average daily net assets 0.50%
</TABLE>
MONEY MARKET FUND
<TABLE>
<S> <C>
All average daily net assets 0.25%
</TABLE>
ADMINISTRATIVE SERVICE FEES:
Administrative fees paid to SM&R by the Funds are computed as a percentage of
average daily net assets as follows:
<TABLE>
<CAPTION>
NET ASSETS SERVICE FEES
<S> <C>
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 but not exceeding $200,000,000 0.20%
Exceeding $200,000,000 but not exceeding $300,000,000 0.15%
Exceeding $300,000,000 0.10%
</TABLE>
SM&R has agreed to reimburse the Funds for regular operating expenses in excess
of 1.25% per annum of the average daily net assets, except for the Money Market
Fund which is in excess of 0.50%. Regular operating expenses include the
advisory fee and administrative service fee, but does not include the
distribution and shareholder servicing fee. SM&R has voluntarily agreed to
reimburse the Primary Fund for regular operating expenses in excess of 0.80% per
annum of average daily net assets, the Tax Free Fund for regular operating
expenses in excess of 0.75% per annum of average daily net assets and the
Government Bond Fund for regular operating expenses in excess of 1.00% per annum
of average daily net assets for the year ended August 31, 2000.
DISTRIBUTION AND SHAREHOLDER SERVICING FEES:
The Funds have adopted a 12b-1 Plan, pursuant to Rule 12b-1 under the Investment
Company Act of 1940, for two of the Funds' series: the Government Bond Fund and
the Tax Free Fund, with respect to the Funds' Class A shares, Class B shares and
Class C shares (the "Class A Plan", the "Class B Plan" and the "Class C Plan",
respectively and collectively, the "Plans"). The Plans permit each class a
distribution fee to compensate SM&R, or enable SM&R to compensate other persons,
including Distributors, for distribution costs such as service fees paid to
dealers, printing and distribution of prospectuses to prospective investors,
sales literature and other sales and distribution related activities. The Funds
pay compensation for Class A shares at 0.25% per annum of the average daily net
assets, for Class B shares at 0.50% per annum of the average daily net assets
and for Class C shares at 0.75% per annum of the average daily net assets.
The Class B and Class C Plans also permit a shareholder servicing fee of 0.25%
per annum of the average daily net assets to compensate SM&R, or enable SM&R to
compensate Service Providers, for providing ongoing servicing to shareholders of
the Funds. For the year ended August 31, 2000, the Government Bond Fund and Tax
Free Fund paid $620 and $1,123, respectively as compensation under the Plans.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 2--OTHER TRANSACTIONS WITH AFFILIATES--CONTINUED
SALES CHARGES:
SM&R, as principal underwriter, received as sales charges on sales of Class T, A
and C shares, for the year ended August 31, 2000, of capital stock of the Funds
as follows:
<TABLE>
<CAPTION>
SALES
CHARGES
RECEIVED BY SM&R
<S> <C>
Government Bond Fund $5,425
Tax Free Fund $5,139
</TABLE>
For the year ended August 31, 2000, SM&R received $2,005 for contingent deferred
sales charges imposed on the redemptions of Class B and C shares of capital
stock of the Funds.
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of August 31, 2000, SM&R and American National had the
following ownership in the Funds:
<TABLE>
<CAPTION>
SM&R AMERICAN NATIONAL
----------------------------- ------------------------------
PERCENT OF SHARES PERCENT OF SHARES
SHARES OUTSTANDING SHARES OUTSTANDING
<S> <C> <C> <C> <C>
Government Bond 540,895 23% 779,587 34%
Primary -- -- 18,652,277 69%
Tax Free 138,113 12% 689,069 62%
Money Market 621,937 1% 1,450,606 3%
</TABLE>
The Funds pay directors' fees and expenses for all the disinterested directors.
NOTE 3--COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
Investments have the same cost for tax and financial statement purposes.
Aggregate purchases and sales of investments in securities, other than
commercial paper, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
---------- ----------
<S> <C> <C>
Government Bond $6,932,730 $6,755,415
Primary $ 986,260 $ 932,940
Tax Free $ 824,156 $ 909,465
</TABLE>
Gross unrealized appreciation and depreciation as of August 31, 2000, were as
follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION
------------ ------------
<S> <C> <C>
Government Bond $167,115 $615,850
Primary $ 40,542 $249,347
Tax Free $351,700 $145,912
</TABLE>
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 4--CAPITAL STOCK
GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 2000 AUGUST 31, 1999
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Sale of capital shares:
Class T 33,153 $ 333,468 85,399 $ 902,135
Class A 7,359 74,194 6,805 70,359
Class B 6,844 69,573 742 7,870
Class C -- -- 1,073 11,000
----------- ------------ ----------- ------------
Total sale of capital shares 47,356 477,235 94,019 991,364
Investment income dividends reinvested:
Class T 130,341 1,301,759 124,312 1,298,156
Class A 424 4,274 43 444
Class B 119 1,194 20 209
Class C 55 547 13 131
----------- ------------ ----------- ------------
Total investment income dividends reinvested 130,939 1,307,774 124,388 1,298,940
Redemptions of capital shares outstanding:
Class T (194,661) (1,957,100) (159,122) (1,662,604)
Class A (1,966) (19,777) (101) (1,040)
Class B (16) (164) -- --
Class C -- -- -- --
----------- ------------ ----------- ------------
Total redemptions of capital shares outstanding (196,643) (1,977,041) (159,223) (1,663,644)
----------- ------------ ----------- ------------
Net increase (decrease) in capital shares outstanding (18,348) $ (192,032) 59,184 $ 626,660
============ ============
Shares outstanding at beginning of year 2,321,909 2,262,725
----------- -----------
Shares outstanding at end of year 2,303,561 2,321,909
=========== ===========
Net assets as of August 31, 2000 are comprised of the following:
Capital (par value and additional paid-in) $ 23,845,133
Accumulated net realized loss on investments (251,720)
Net unrealized depreciation of investments (448,735)
------------
Net Assets $ 23,144,678
============
</TABLE>
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 4--CAPITAL STOCK--CONTINUED
PRIMARY FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 2000 AUGUST 31, 1999
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Sale of capital shares 21,140,119 $ 21,001,328 33,873,860 $ 33,873,860
Investment income dividends reinvested 1,449,798 1,438,972 1,473,935 1,473,949
Redemptions of capital shares outstanding (26,441,561) (26,302,235) (39,022,829) (39,022,829)
----------- ------------ ----------- ------------
Net decrease in capital shares outstanding (3,851,644) $ (3,861,935) (3,675,034) $ (3,675,020)
============ ============
Shares outstanding at beginning of year 30,907,621 34,582,655
----------- -----------
Shares outstanding at end of year 27,055,977 30,907,621
=========== ===========
Net assets as of August 31, 2000 are comprised of the following:
Capital (par value and additional paid-in) $ 27,045,682
Accumulated net realized loss on investments (42,231)
Net unrealized depreciation of investments (208,805)
------------
Net Assets $ 26,794,646
============
</TABLE>
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 4--CAPITAL STOCK--CONTINUED
TAX FREE FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 2000 AUGUST 31, 1999
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Sale of capital shares:
Class T 18,937 $ 187,768 72,51 $ 769,888
Class A 659 6,645 19,748 209,198
Class B 6,417 64,470 11,098 116,931
Class C -- -- 2,475 26,359
----------- ------------ ----------- ------------
Total sale of capital shares 26,013 258,883 105,835 1,122,376
Investment income dividends reinvested:
Class T 51,268 511,492 48,162 507,956
Class A 898 9,035 226 2,345
Class B 451 4,530 98 1,019
Class C 15 161 32 333
----------- ------------ ----------- ------------
Total investment income dividends reinvested 52,632 525,218 48,518 511,653
Distributions from net realized gain reinvested:
Class T 486 4,837 -- --
Class A 9 87 -- --
Class B 3 33 -- --
Class C 1 3 -- --
----------- ------------ ----------- ------------
Total distributions from net realized gain reinvested 499 4,960 -- --
----------- ------------ ----------- ------------
Redemptions of capital shares outstanding:
Class T (100,936) (1,014,094) (53,448) (548,020)
Class A (145) (1,472) (902) (9,190)
Class B (6,820) (68,600) (104) (1,061)
Class C (474) (4,744) (1,949) (19,803)
----------- ------------ ----------- ------------
Total redemptions of capital shares outstanding (108,375) (1,088,910) (56,403) (578,074)
----------- ------------ ----------- ------------
Net increase (decrease) in capital shares outstanding (29,231) $ (299,849) 97,950 $ 1,055,955
============ ============
Shares outstanding at beginning of year 1,136,944 1,038,994
----------- -----------
Shares outstanding at end of year 1,107,713 1,136,944
=========== ===========
Net assets as of August 31, 2000 are comprised of the following:
Capital (par value and additional paid-in) $ 11,132,433
Accumulated net realized gain on investments 19,328
Net unrealized appreciation of investments 205,788
------------
Net Assets $ 11,357,549
============
</TABLE>
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R INVESTMENTS, INC.
NOTE 4--CAPITAL STOCK--CONTINUED
MONEY MARKET
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED
AUGUST 31, 2000 AUGUST 31, 1999
---------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------- ---------- -----------
<S> <C> <C> <C> <C>
Sale of capital shares 220,566,832 $ 220,566,832 13,546,991 $13,546,991
Investment income dividends reinvested 2,127,625 2,127,625 138,407 138,407
Redemptions of capital shares outstanding (179,118,352) (179,118,352) (3,003,917) (3,003,917)
------------ ------------- ---------- -----------
Net increase in capital shares outstanding 43,576,105 $ 43,576,105 10,681,481 $10,681,481
=============
Shares outstanding at beginning of period 10,681,481 --
------------ ----------
Shares outstanding at end of period 54,257,586 10,681,481
============ ==========
Net assets as of August 31, 2000 are comprised of the following:
Capital (par value and additional paid-in) $ 54,257,586
-------------
Net Assets $ 54,257,586
=============
</TABLE>
SUBSEQUENT EVENTS
The Funds and SM&R have determined that it is in the best interest of the Funds
and the Class C Shareholders to eliminate Class C shares. Class C shares will be
automatically converted, at net asset value, to Class A shares of the Funds
effective November 1, 2000. On and after that date Class C shares will no longer
be available for sale and considered closed.
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
SM&R Investments, Inc.
We have audited the accompanying statements of assets and liabilities of SM&R
Investments, Inc. comprised of SM&R Government Bond Fund, SM&R Primary Fund,
SM&R Tax Free Fund and SM&R Money Market Fund, including the schedule of
investments as of August 31, 2000, the related statements of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended (with respect to SM&R Money Market Fund for the
year ended August 31, 2000 and the period January 1, 1999 to August 31, 1999)
and the financial highlights for each of the three years in the period then
ended (with respect to SM&R Money Market Fund for the year ended August 31, 2000
and the period January 1, 1999 to August 31, 1999). These financial statements
and financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the two years in the period ended August 31, 1997 were audited by other auditors
whose report dated October 10, 1997, issued an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 2000, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of SM&R
Investments, Inc. as of August 31, 2000, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended (with respect to SM&R Money Market Fund for the year ended
August 31, 2000 and the period January 1, 1999 to August 31, 1999) and the
financial highlights for each of the three years in the period then ended (with
respect to SM&R Money Market Fund for the year ended August 31, 2000 and the
period January 1, 1999 to August 31, 1999), in conformity with generally
accepted accounting principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
September 29, 2000
28
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1999
--------------------------------------------------------------------------------
SM&R GROWTH FUND
<TABLE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
AEROSPACE/DEFENSE--0.49%
Boeing Company 28,000 $ 1,163,750
AUTO & TRUCK MANUFACTURERS--1.30%
DaimlerChrysler AG 8,541 668,333
Ford Motor Company 24,800 1,325,250
General Motors Corporation 14,700 1,068,506
------------
3,062,089
AUTO PARTS MANUFACTURERS--0.30%
Dana Corporation 23,300 697,544
BANKS--4.32%
Bank of America
Corporation 40,000 2,007,500
Comerica, Incorporated 40,000 1,867,500
Morgan (J.P.) & Company 15,000 1,899,375
PNC Bank Corporation 30,000 1,335,000
U.S. Bancorp 60,700 1,445,419
Wells Fargo Company 40,000 1,617,500
------------
10,172,294
BEVERAGES--1.85%
Anheuser-Busch Companies,
Incorporated 37,000 2,622,375
Coca-Cola Company 30,000 1,747,500
------------
4,369,875
CHEMICALS--1.48%
B.F.Goodrich Company 22,400 616,000
Hercules, Incorporated 30,600 852,975
Praxair, Incorporated 40,000 2,012,500
------------
3,481,475
COMMUNICATIONS EQUIPMENT--5.87%
Lucent Technologies,
Incorporated 92,962 6,954,720
Nortel Networks
Corporation 68,000 6,868,000
------------
13,822,720
COMPUTER RELATED--11.09%
Apple Computer,
Incorporated* 24,200 2,488,063
Cisco Systems,
Incorporated* 75,000 8,034,375
EMC Corporation* 45,000 4,916,250
Sun Microsystems,
Incorporated* 138,200 10,701,862
------------
26,140,550
COMPUTER SOFTWARE--16.10%
BMC Software,
Incorporated* 80,000 6,395,000
Microsoft Corporation* 98,000 11,441,500
Novell, Incorporated* 166,000 6,629,625
VERITAS Software
Corporation* 92,400 13,224,750
ZipLink, Incorporated* 20,000 250,000
------------
37,940,875
COSMETICS & TOILETRIES--2.05%
Procter & Gamble Company 44,200 4,842,663
</TABLE>
<TABLE>
DIVERSIFIED--0.49%
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
Minnesota Mining and
Manufacturing Company 11,900 $ 1,164,712
DRUGS--1.14%
Merck & Company,
Incorporated 40,000 2,682,500
ELECTRICAL EQUIPMENT--5.08%
General Electric Company 63,000 9,749,250
Solectron Corporation* 23,300 2,216,413
------------
11,965,663
EXPLORATION & DRILLING--0.96%
Global Marine,
Incorporated* 32,000 532,000
Kerr-McGee Corporation 13,000 806,000
Tidewater, Incorporated 17,000 612,000
Union Pacific Resources
Group, Incorporated 25,408 323,952
------------
2,273,952
FINANCIAL SERVICES--2.02%
American General
Corporation 20,000 1,517,500
Countrywide Credit
Industries, Incorporated 44,000 1,111,000
Morgan Stanley, Dean
Witter, Discover and
Company 15,000 2,141,250
------------
4,769,750
FOOD PRODUCERS--3.50%
Bergen Brunswig
Corporation (Class A) 82,500 685,781
IBP, Incorporated 58,000 1,044,000
Interstate Bakeries
Corporation 66,000 1,196,250
McCormick & Company,
Incorporated 58,000 1,725,500
Smithfield Foods,
Incorporated* 65,000 1,560,000
Universal Foods
Corporation 100,000 2,037,500
------------
8,249,031
FOOD RETAILERS--1.35%
Albertson's, Incorporated 40,000 1,290,000
Safeway, Incorporated* 53,000 1,884,812
------------
3,174,812
FURNITURE/APPLIANCE/TOOLS--0.85%
Black & Decker Corporation 38,200 1,995,950
HOMEBUILDING/SUPPLIES--0.29%
Centex Corporation 27,700 683,844
INSURANCE COMPANIES--4.16%
CIGNA Corporation 33,000 2,658,563
Citigroup, Incorporated 119,250 6,625,828
Conseco, Incorporated 28,800 514,800
------------
9,799,191
</TABLE>
29
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1999
--------------------------------------------------------------------------------
SM&R GROWTH FUND, CONTINUED
<TABLE>
LEISURE TIME--0.54%
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
Brunswick Corporation 57,000 $ 1,268,250
MEDIA-TV/RADIO/CABLE--1.63%
MediaOne Group,
Incorporated* 50,000 3,840,625
MEDICAL PRODUCTS & SUPPLIES--1.57%
Beckman Coulter,
Incorporated 18,000 915,750
Johnson & Johnson 30,000 2,793,750
------------
3,709,500
MEDICAL SERVICES--0.54%
Aetna, Incorporated 23,000 1,283,687
MANUFACTURING-DIVERSIFIED--0.73%
Tyco International LTD 44,000 1,710,500
NATURAL GAS--1.73%
Enron Corporation 92,000 4,082,500
OIL DOMESTIC--1.42%
Unocal Corporation 100,000 3,356,250
OIL INTERNATIONAL--4.41%
BP Amoco p.l.c. ADR 60,000 3,558,750
Chevron Corporation 44,000 3,811,500
Royal Dutch Petroleum
Company ADR 50,000 3,021,875
------------
10,392,125
RETAIL DISCOUNT--1.76%
Wal-Mart Stores,
Incorporated 60,000 4,147,500
RETAIL GENERAL--1.07%
Federated Department
Stores, Incorporated* 37,000 1,870,812
J. C. Penney Company,
Incorporated 33,200 661,925
------------
2,532,737
RETAIL SPECIALTY--0.86%
Group 1 Automotive,
Incorporated* 70,000 975,625
Loew's Companies,
Incorporated 17,500 1,045,625
------------
2,021,250
SEMICONDUCTORS--2.34%
Intel Corporation 67,000 5,514,938
SPECIALTY PRINTING/SERVICES--0.56%
Banta Corporation 58,000 1,308,625
STEEL--1.16%
Allegheny Technologies,
Incorporated 26,500 594,594
LTV Corporation 180,000 742,500
USX-U. S. Steel Group 42,000 1,386,000
------------
2,723,094
</TABLE>
<TABLE>
TELECOM - LONG DISTANCE--3.06%
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
A T & T Corporation 62,100 $ 3,151,575
MCI WorldCom Incorporated* 76,500 4,059,281
------------
7,210,856
TELEPHONE--3.22%
Alltel Corporation 47,000 3,886,312
U S West, Incorporated New 51,365 3,698,280
------------
7,584,592
TRUCKING & SHIPPING--0.63%
USFreightways Corporation 31,000 1,484,125
------------
TOTAL COMMON STOCK--91.92%
(Cost $115,520,018) 216,624,394
------------
<CAPTION>
FACE
COMMERCIAL PAPER AMOUNT
CHEMICALS--1.68%
<S> <C> <C>
Nalco Chemical Company,
6.70%, 01/04/00 $3,968,000 3,965,783
FINANCIAL SERVICES--1.97%
Countrywide Home Loans
Incorporated, 5.25%,
01/07/00 4,009,000 4,005,492
Penn Power & Light Energy
Trust, 6.80%, 01/18/00 627,000 624,980
------------
4,630,472
FOOD PRODUCERS--1.06%
ConAgra Incorporated,
6.62%, 01/05/00 2,505,000 2,503,152
OIL SERVICES--1.51%
UOP, 7.50%, 01/06/00 3,570,000 3,566,274
UTILITY-MISCELLANEOUS--1.84%
Hawaiian Electric
Industries Incorporated,
7.50%, 01/12/00 2,384,000 2,378,532
Illinios Power Company,
4.35%, 01/03/00 1,945,000 1,944,530
------------
4,323,062
------------
TOTAL COMMERCIAL PAPER--8.06%
(Cost $18,988,743) 18,988,743
------------
TOTAL INVESTMENTS--99.98%
(Cost $134,508,761) 235,613,137
CASH AND OTHER ASSETS, LESS
LIABILITIES--0.02% 47,166
------------
NET ASSETS--100.00% $235,660,303
============
ABBREVIATIONS
ADR--American Depository Receipt
*--Non-income producing securities
</TABLE>
See notes to financial statements.
30
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES December 31, 1999
--------------------------------------------------------------------------------
SM&R GROWTH FUND
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value $235,613,137
Cash 14,405
Prepaid Expenses 53,640
Receivable for:
Capital stock sold 12,429
Dividends 155,203
Expense reimbursement 3,974
Other assets 93,341
------------
TOTAL ASSETS 235,946,129
------------
LIABILITIES
Capital stock reacquired 146,342
Accrued:
Investment advisory fee 90,456
Service fee 41,936
Distribution fee 4,592
Other liabilities 2,500
------------
TOTAL LIABILITIES 285,826
------------
NET ASSETS (applicable to shares outstanding) $235,660,303
============
NET ASSETS:
Class A $ 3,775,728
--------------------------------------------------------------------------
Class B $ 1,547,447
--------------------------------------------------------------------------
Class C $ 133,707
--------------------------------------------------------------------------
Class T $230,203,421
--------------------------------------------------------------------------
TOTAL NET ASSETS $235,660,303
============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 200,000,000
Outstanding 561,223
--------------------------------------------------------------------------
Class B:
Authorized 200,000,000
Outstanding 232,236
--------------------------------------------------------------------------
Class C:
Authorized 200,000,000
Outstanding 19,348
--------------------------------------------------------------------------
Class T:
Authorized 100,000,000
Outstanding 34,014,863
--------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 6.73
Offering price per share: (Net Assets value of $6.73 /
95.00%) $ 7.08
--------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 6.66
--------------------------------------------------------------------------
Class C:
Net asset value and redemption price per share $ 6.91
Offering price per share: (Net Assets value of $6.91 /
99.00%) $ 6.98
--------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 6.77
Offering price per share: (Net Assets value of $6.77 /
94.25%) $ 7.18
--------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
31
<PAGE>
STATEMENT OF OPERATIONS Year Ended December 31, 1999
--------------------------------------------------------------------------------
SM&R GROWTH FUND
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 2,294,099
Interest 409,683
-----------
TOTAL INVESTMENT INCOME 2,703,782
EXPENSES
Investment advisory fees 1,005,753
Service fees 464,872
Professional fees 33,321
Custodian and transactions fees 80,519
Directors' fees 22,657
Qualification fees 46,347
Shareholder reporting expenses 100,839
Insurance expenses 39,257
Distribution fees 9,664
-----------
NET EXPENSES 1,803,229
-----------
INVESTMENT INCOME--NET 900,553
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 10,640,352
Change in unrealized appreciation of investments for the
year 35,737,960
-----------
NET GAIN ON INVESTMENTS 46,378,312
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $47,278,865
===========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998
-------------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 900,553 $ 1,282,676
Net realized gain on investments 10,640,352 8,728,659
Change in unrealized appreciation 35,737,960 21,620,022
------------ ------------
Net increase in net assets resulting from operations 47,278,865 31,631,357
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (4,775) --
Class B -- --
Class C -- --
Class T (860,216) (1,255,603)
Capital gains
Class A (138,389) --
Class B (57,657) --
Class C (4,941) --
Class T (8,774,058) (13,647,821)
------------ ------------
Total distributions to shareholders (9,840,036) (14,903,424)
CAPITAL SHARE TRANSACTIONS--NET
Class A 3,388,463 --
Class B 1,388,166 --
Class C 115,090 --
Class T (9,779,453) 8,037,187
------------ ------------
Total net capital share transactions (4,887,734) 8,037,187
------------ ------------
TOTAL INCREASE 32,551,095 24,765,120
NET ASSETS
Beginning of year 203,109,208 178,344,088
------------ ------------
End of year $235,660,303 $203,109,208
============ ============
</TABLE>
See notes to financial statements.
32
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
SM&R GROWTH FUND
<TABLE>
<CAPTION>
CLASS T SHARES
-----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 5.69 $ 5.24 $ 4.95 $ 4.39 $ 3.83
Investment income--net 0.03 0.04 0.06 0.05 0.08
Net realized and unrealized gain (loss) on
investments 1.35 0.85 1.03 0.73 0.88
-------- -------- -------- -------- --------
Total from Investment Operations 1.38 0.89 1.09 0.78 0.96
Less distributions from
Investment income--net (0.03) (0.04) (0.06) (0.05) (0.08)
Capital gains (0.27) (0.40) (0.74) (0.17) (0.32)
-------- -------- -------- -------- --------
Total Distributions (0.30) (0.44) (0.80) (0.22) (0.40)
-------- -------- -------- -------- --------
Net Asset Value, End of Year $ 6.77 $ 5.69 $ 5.24 $ 4.95 $ 4.39
======== ======== ======== ======== ========
Total Return * 24.49 % 18.35 % 22.24 % 17.64 % 25.20 %
======== ======== ======== ======== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $230,203 $203,109 $178,344 $152,758 $134,821
Ratio of expenses to average net assets 0.87 % 0.85 % 0.96 % 1.15 % 0.98 %
Ratio of net investment income to average
net assets 0.44 % 0.69 % 1.03 % 1.02 % 1.67 %
Portfolio turnover rate 16.13 % 27.31 % 46.79 % 18.72 % 37.00 %
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
---------------- ---------------- ----------------
PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 1, 1999 JANUARY 1, 1999 JANUARY 1, 1999
TO TO TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------- ---------------- ----------------
1999 1999 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $ 5.69 $ 5.69 $ 5.69
Investment income--net 0.01 0.00 0.00
Net realized and unrealized gain (loss) on investments 1.30 1.24 1.49
------ ------ ------
Total from Investment Operations 1.31 1.24 1.49
Less distributions from
Investment income--net -- -- --
Capital gains (0.27) (0.27) (0.27)
------ ------ ------
Total Distributions (0.27) (0.27) (0.27)
------ ------ ------
Net Asset Value, End of Year $ 6.73 $ 6.66 $ 6.91
====== ====== ======
Total Return * 23.45 % 22.04 % 26.44 %
====== ====== ======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $3,776 $1,547 $ 134
Ratio of expenses to average net assets 1.51 % 2.01 % 2.26 %
Ratio of net investment income to average net assets (0.19)% (0.69)% (0.94)%
Portfolio turnover rate 16.13 % 16.13 % 16.13 %
</TABLE>
* Does not include the effect of sales charge.
See notes to financial statements.
33
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1999
--------------------------------------------------------------------------------
SM&R EQUITY INCOME FUND
<TABLE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
AEROSPACE/DEFENSE--0.39%
Boeing Company 18,600 $ 773,063
AUTO & TRUCK MANUFACTURERS--3.75%
Ford Motor Company 100,381 5,364,110
General Motors Corporation 28,000 2,035,250
------------
7,399,360
AUTO PARTS MANUFACTURERS--0.35%
Dana Corporation 23,000 688,562
BANKS--6.67%
Bank of America
Corporation 60,000 3,011,250
Comerica, Incorporated 34,500 1,610,719
Morgan (J.P.) & Company 9,500 1,202,938
PNC Bank Corporation 33,400 1,486,300
U.S. Bancorp 121,400 2,890,837
Wells Fargo Company 73,500 2,972,156
------------
13,174,200
BEVERAGES--1.80%
Anheuser-Busch Companies,
Incorporated 50,000 3,543,750
CHEMICALS--2.60%
B.F. Goodrich Company 75,000 2,062,500
Hercules, Incorporated 32,600 908,725
Praxair, Incorporated 43,000 2,163,438
------------
5,134,663
DIVERSIFIED--0.39%
Minnesota Mining and
Manufacturing Company* 7,900 773,212
DRUGS--2.57%
Schering-Plough
Corporation 120,000 5,062,500
ELECTRIC POWER--1.83%
Constellation Energy Group 26,300 762,700
DTE Energy Company 65,000 2,039,375
UtiliCorp United,
Incorporated 42,000 816,375
------------
3,618,450
ELECTRONICS/INSTRUMENTS--0.67%
Raytheon Company
(Class B) 50,000 1,328,125
EXPLORATION & DRILLING--2.17%
Kerr-McGee Corporation 27,200 1,686,400
Tidewater, Incorporated 40,000 1,440,000
Transocean Sedco Forex
Incorporated* 11,616 391,314
Union Pacific Resources
Group, Incorporated 60,000 765,000
------------
4,282,714
FINANCIAL SERVICES--3.25%
Morgan Stanley, Dean
Witter, Discover and
Company 45,000 6,423,750
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
FOODS PRODUCERS--3.68%
Bergen Brunswing
Corporation (Class A) 112,500 $ 935,156
ConAgra, Incorporated 40,000 902,500
Interstate Bakeries
Corporation 73,000 1,323,125
McCormick & Company,
Incorporated 70,000 2,082,500
Universal Foods
Corporation 99,600 2,029,350
------------
7,272,631
FOODS RETAILERS--0.90%
Albertson's, Incorporated 55,000 1,773,750
FURNITURE/APPLIANCES--3.04%
Black & Decker Corporation 40,000 2,090,000
Whirlpool Corporation 60,000 3,903,750
------------
5,993,750
INSURANCE--5.22%
CIGNA Corporation 36,600 2,948,588
Citigroup, Incorporated 122,250 6,792,516
Conseco, Incorporated 31,100 555,912
------------
10,297,016
LEISURE TIME--0.71%
Brunswick Corporation 63,200 1,406,200
MACHINERY & EQUIPMENT--2.20%
Deere & Company 100,000 4,337,500
MEDICAL PRODUCTS & SUPPLIES--2.39%
Abbott Laboratories 130,000 4,720,625
METALS & MINING--1.07%
Phelps Dodge Corporation 31,500 2,114,438
NATURAL GAS--2.20%
Enron Corporation 98,000 4,348,750
OIL INTERNATIONAL--9.44%
BP Amoco p.l.c. ADR 47,110 2,794,212
Chevron Corporation 30,000 2,598,750
Exxon Corporation 40,000 3,222,500
Royal Dutch Petroleum
Company ADR 66,700 4,031,181
Schlumberger Limited 60,000 3,375,000
Texaco, Incorporated 48,000 2,607,000
------------
18,628,643
PAPER/FOREST PRODUCTS--0.69%
Glatfelter (P.H.) Company 94,000 1,368,875
PHOTOGRAPHY/IMAGING--0.60%
Xerox Corporation 52,000 1,179,750
PRINTING & PUBLISHING--0.70%
Deluxe Corporation 50,000 1,371,875
</TABLE>
34
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1999
--------------------------------------------------------------------------------
SM&R EQUITY INCOME FUND, CONTINUED
<TABLE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
REAL ESTATE/REITS--3.15%
CenterPoint Properties
Corporation 63,000 $ 2,260,125
Crescent Real Estate
Equities Company 65,000 1,194,375
Hospitality Properties
Trust 50,000 953,125
Liberty Trust Properties 75,000 1,818,750
------------
6,226,375
RETAIL GENERAL--0.67%
J. C. Penney Company,
Incorporated 66,400 1,323,850
RETAIL SPECIALTY--0.39%
Loew's Companies,
Incorporated 13,000 776,750
SPECIALTY PRINTING/SERVICES--0.72%
Banta Corporation 63,000 1,421,437
STEEL--1.56%
Allegheny Technologies,
Incorporated 30,000 673,125
LTV Corporation 200,000 825,000
USX-U. S. Steel Group 48,000 1,584,000
------------
3,082,125
TELECOM - CELLULAR--2.15%
GTE Corporation 60,000 4,233,750
TELECOM - LONG DISTANCE--2.96%
A T & T Corporation 41,400 2,101,050
MCI WorldCom Incorporated* 70,650 3,748,866
------------
5,849,916
TELEPHONE UTILITY--3.96%
Alltel Corporation 51,000 4,217,062
US West, Incorporated New 50,000 3,600,000
------------
7,817,062
TOBACCO--1.17%
Nabisco Group Holdings
Corporation 41,248 438,260
R.J. Reynolds Tobacco
Holdings, Incorporated 13,749 242,326
UST, Incorporated 65,000 1,637,187
------------
2,317,773
TRANSPORT, TRUCKING & SHIPPING--0.83%
USFreightways Corporation 34,000 1,627,750
------------
TOTAL COMMON STOCK--76.84%
(Cost $112,125,558) 151,692,940
------------
<CAPTION>
FACE
COMMERCIAL PAPER AMOUNT VALUE
<S> <C> <C>
BEVERAGES--3.12%
Whitman Corporation,
6.60%, 01/03/00 $1,173,000 $ 1,172,568
Whitman Corporation,
7.00%, 01/21/00 5,000,000 4,980,495
------------
6,153,063
COMMUNICATION EQUIPMENT--1.09%
Cox Enterprises
Incorporated, 6.70%,
01/20/00 2,161,000 2,153,333
CONSTRUCTION--1.38%
Centex Corporation, 6.70%,
1/14/00 2,723,000 2,716,391
CONTAINERS--0.79%
Crown Cork & Seal Company,
Incorporated, 6.47%,
01/05/00 1,571,000 1,569,865
FINANCIAL SERVICES--9.10%
Countrywide Home Loans
Incorporated, 5.35%,
01/12/00 4,796,000 4,788,159
Kerr-McGee Credit
Corporation, 6.25%,
01/13/00 1,071,000 1,068,723
PS Colorado Credit
Corporation, 7.40%,
01/07/00 4,748,000 4,742,139
Penn Power & Light Energy
Trust, 6.20%, 01/18/00 2,775,000 2,766,682
SAFECO Credit Company
Incorporated, 6.00%,
02/11/00 4,632,000 4,600,337
------------
17,966,040
FOOD RETAILERS--1.49%
Safeway, Incorporated,
7.22%, 01/04/00 2,935,000 2,933,231
FURNITURE/APPLIANCES--0.34%
Maytag Corporation, 6.37%,
01/11/00 676,000 674,799
OIL SERVICES--3.40%
UOP, 7.50%, 01/06/00 6,719,000 6,711,988
RETAIL-SPECIALTY--0.10%
Mattel, Incorporated,
6.80%, 01/18/00 200,000 199,356
TRUCKING & SHIPPING--1.34%
Ryder System Incorporated,
6.40%, 01/10/00 2,649,000 2,644,732
</TABLE>
35
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1999
--------------------------------------------------------------------------------
SM&R EQUITY INCOME FUND, CONTINUED
<TABLE>
UTILITY - MISCELLANEOUS--0.93%
<CAPTION>
FACE
COMMERCIAL PAPER AMOUNT VALUE
<S> <C> <C>
Equitable Resources
Incorporated, 6.00%,
02/17/00 $1,844,000 $ 1,829,548
------------
TOTAL COMMERCIAL PAPER--23.08%
(Cost $45,552,346) 45,552,346
------------
TOTAL INVESTMENTS--99.92%
(Cost $157,677,904) 197,245,286
CASH AND OTHER ASSETS, LESS
LIABILITIES--0.08% 163,450
------------
NET ASSETS--100.00% $197,408,736
============
ABBREVIATIONS
ADR--American Depository Receipt
REIT--Real Estate Investment Trust
*--Non-income producing securities
</TABLE>
See notes to financial statements.
36
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES December 31, 1999
--------------------------------------------------------------------------------
SM&R EQUITY INCOME FUND
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value $197,245,286
Cash 16,747
Prepaid Expenses 55,738
Receivable for:
Capital stock sold 2,079
Dividends 296,411
Expense reimbursement 4,578
Other assets 62,725
------------
TOTAL ASSETS 197,683,564
------------
LIABILITIES
Capital stock reacquired 107,904
Accrued:
Investment advisory fee 115,673
Service fee 37,939
Distribution fee 10,812
Other liabilities 2,500
------------
TOTAL LIABILITIES 274,828
------------
NET ASSETS (applicable to shares outstanding) $197,408,736
============
NET ASSETS:
Class A $ 4,802,233
--------------------------------------------------------------------------
Class B $ 4,342,642
--------------------------------------------------------------------------
Class C $ 275,457
--------------------------------------------------------------------------
Class T $187,988,404
--------------------------------------------------------------------------
TOTAL NET ASSETS $197,408,736
============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 200,000,000
Outstanding 193,714
--------------------------------------------------------------------------
Class B:
Authorized 200,000,000
Outstanding 178,102
--------------------------------------------------------------------------
Class C:
Authorized 200,000,000
Outstanding 11,065
--------------------------------------------------------------------------
Class T:
Authorized 50,000,000
Outstanding 7,429,380
--------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 24.79
Offering price per share: (Net Assets value of $24.79 /
95.00%) $ 26.09
--------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 24.38
--------------------------------------------------------------------------
Class C:
Net asset value and redemption price per share $ 24.90
Offering price per share: (Net Assets value of $24.90 /
99.00%) $ 25.15
--------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 25.30
Offering price per share: (Net Assets value of $25.30 /
94.25%) $ 26.84
--------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
37
<PAGE>
STATEMENT OF OPERATIONS Year Ended December 31, 1999
--------------------------------------------------------------------------------
SM&R EQUITY INCOME FUND
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 5,104,491
Interest 1,309,618
------------
TOTAL INVESTMENT INCOME 6,414,109
EXPENSES
Investment advisory fees 1,468,951
Service fees 479,149
Professional fees 24,223
Custodian and transactions fees 81,957
Directors' fees 22,657
Qualification fees 47,892
Shareholder reporting expenses 57,593
Insurance expenses 44,628
Distribution fees 24,635
------------
NET EXPENSES 2,251,685
------------
INVESTMENT INCOME--NET 4,162,424
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 14,349,426
Change in unrealized depreciation of investments for the
year (21,207,921)
------------
NET GAIN (LOSS) ON INVESTMENTS (6,858,495)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (2,696,071)
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998
-------------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 4,162,424 $ 4,709,723
Net realized gain on investments 14,349,426 7,281,961
Change in unrealized appreciation (depreciation) (21,207,921) 11,740,055
------------ ------------
Net increase (decrease) in net assets resulting from
operations (2,696,071) 23,731,739
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (78,842) --
Class B (70,041) --
Class C (3,669) --
Class T (3,930,511) (4,712,876)
Capital gains
Class A (275,259) --
Class B (286,638) --
Class C (17,868) --
Class T (12,377,832) (10,909,343)
------------ ------------
Total distributions to shareholders (17,040,660) (15,622,219)
CAPITAL SHARE TRANSACTIONS--NET
Class A 5,364,444 --
Class B 4,939,043 --
Class C 313,991 --
Class T (12,451,982) 12,183,537
------------ ------------
Total net capital share transactions (1,834,504) 12,183,537
------------ ------------
TOTAL INCREASE (21,571,235) 20,293,057
NET ASSETS
Beginning of year 218,979,971 198,686,914
------------ ------------
End of year $197,408,736 $218,979,971
============ ============
</TABLE>
See notes to financial statements.
38
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
SM&R EQUITY INCOME FUND
<TABLE>
<CAPTION>
CLASS T SHARES
-----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 28.02 $ 26.99 $ 25.05 $ 22.59 $ 18.90
Investment income--net 0.54 0.62 0.63 0.58 0.62
Net realized and unrealized gain (loss) on
investments (0.96) 2.50 4.96 3.10 4.82
-------- -------- -------- -------- --------
Total from Investment Operations (0.42) 3.12 5.59 3.68 5.44
Less distributions from
Investment income--net (0.54) (0.62) (0.64) (0.58) (0.63)
Capital gains (1.76) (1.47) (3.01) (0.64) (1.12)
-------- -------- -------- -------- --------
Total Distributions (2.30) (2.09) (3.65) (1.22) (1.75)
-------- -------- -------- -------- --------
Net Asset Value, End of Year $ 25.30 $ 28.02 $ 26.99 $ 25.05 $ 22.59
======== ======== ======== ======== ========
Total Return * (1.39)% 12.11 % 22.72 % 16.46 % 29.12 %
======== ======== ======== ======== ========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $187,988 $218,980 $198,687 $165,786 $141,058
Ratio of expenses to average net assets 1.05 % 1.01 % 1.05 % 1.10 % 1.12 %
Ratio of net investment income to average
net assets 1.94 % 2.22 % 2.28 % 2.42 % 2.89 %
Portfolio turnover rate 9.81 % 19.29 % 39.14 % 27.07 % 44.00 %
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
---------------- ---------------- ----------------
PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 1, 1999 JANUARY 1, 1999 JANUARY 1, 1999
TO TO TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------- ---------------- ----------------
1999 1999 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $28.02 $28.02 $28.02
Investment income--net 0.58 0.47 0.38
Net realized and unrealized gain (loss) on investments (1.47) (1.88) (1.36)
------ ------ ------
Total from Investment Operations (0.89) (1.41) (0.98)
Less distributions from
Investment income--net (0.58) (0.47) (0.38)
Capital gains (1.76) (1.76) (1.76)
------ ------ ------
Total Distributions (2.34) (2.23) (2.14)
------ ------ ------
Net Asset Value, End of Year $24.79 $24.38 $24.90
====== ====== ======
Total Return * (3.01)% (4.86)% (3.32)%
====== ====== ======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $4,802 $4,343 $ 275
Ratio of expenses to average net assets 1.51 % 2.01 % 2.26 %
Ratio of net investment income to average net assets 1.53 % 1.03 % 0.78 %
Portfolio turnover rate 9.81 % 9.81 % 9.81 %
</TABLE>
* Does not include the effect of sales charge.
See notes to financial statements.
39
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1999
--------------------------------------------------------------------------------
SM&R BALANCED FUND
<TABLE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
AEROSPACE/DEFENSE--0.28%
Boeing Company 2,200 $ 91,437
AUTO & TRUCK MANUFACTURERS--1.19%
Ford Motor Company 3,300 176,344
General Motors Corporation 3,000 218,062
-----------
394,406
AUTO PARTS MANUFACTURERS--0.19%
Dana Corporation 2,100 62,869
BANKS--2.59%
Bank of America Corporation 5,000 250,937
Comerica, Incorporated 3,750 175,078
PNC Bank Corporation 3,200 142,400
U.S. Bancorp 5,300 126,206
Wells Fargo Company 4,000 161,750
-----------
856,371
BEVERAGES--0.64%
Anheuser-Busch Companies,
Incorporated 3,000 212,625
CHEMICALS--1.03%
B.F.Goodrich Company 3,136 86,240
Hercules, Incorporated 2,800 78,050
Praxair, Incorporated 3,500 176,094
-----------
340,384
COMMUNICATIONS EQUIPMENT--2.41%
Lucent Technologies,
Incorporated 6,600 493,762
Nortel Networks Corporation 3,000 303,000
-----------
796,762
COMPUTER RELATED--7.03%
Cisco Systems, Incorporated* 6,000 642,750
EMC Corporation* 6,600 721,050
Sun Microsystems,
Incorporated* 12,400 960,225
-----------
2,324,025
COMPUTER SOFTWARE--6.40%
Microsoft Corporation* 6,700 782,225
Novell, Incorporated* 7,200 287,550
VERITAS Software
Corporation* 7,300 1,044,813
-----------
2,114,588
COSMETICS & TOILETRIES--1.96%
Procter & Gamble Company 5,900 646,419
DIVERSIFIED--0.27%
Minnesota Mining and
Manufacturing Company 900 88,087
DRUGS--2.41%
Warner-Lambert Company 9,700 794,794
</TABLE>
<TABLE>
ELECTRICAL EQUIPMENT--3.48%
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
General Electric Company 5,400 $ 835,650
Solectron Corporation* 3,300 313,913
-----------
1,149,563
ELECTRIC POWER--0.75%
Allegheny Energy,
Incorporated 2,100 56,569
DTE Energy Company 4,000 125,500
UtiliCorp United,
Incorporated 3,450 67,059
-----------
249,128
EXPLORATION & DRILLING--0.85%
Global Marine, Incorporated* 2,800 46,550
Kerr-McGee Corporation 1,200 74,400
Tidewater, Incorporated 1,500 54,000
Union Pacific Resources
Group, Incorporated 8,393 107,011
-----------
281,961
FINANCIAL SERVICES--1.56%
American General Corporation 1,800 136,575
Countrywide Credit
Industries, Incorporated 6,000 151,500
Morgan Stanley, Dean Witter,
Discover and Company 1,600 228,400
-----------
516,475
FOOD PRODUCERS--1.94%
Bergen Brunswig Corporation
(Class A) 11,500 95,594
IBP, Incorporated 5,500 99,000
Interstate Bakeries
Corporation 9,000 163,125
Smithfield Foods,
Incorporated* 5,000 120,000
Universal Foods Corporation 8,000 163,000
-----------
640,719
FOOD RETAILERS--1.09%
Albertson's, Incorporated 3,100 99,975
Safeway, Incorporated* 7,300 259,606
-----------
359,581
HOMEBUILDING/SUPPLIES--0.16%
Centex Corporation 2,200 54,312
INSURANCE COMPANIES--2.72%
CIGNA Corporation 3,000 241,688
Citigroup, Incorporated 10,500 583,406
Conseco, Incorporated 4,200 75,075
-----------
900,169
LEISURE TIME--0.34%
Brunswick Corporation 5,000 111,250
MEDIA-TV/RADIO/CABLE--1.21%
MediaOne Group,
Incorporated* 5,200 399,425
</TABLE>
40
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1999
--------------------------------------------------------------------------------
SM&R BALANCED FUND, CONTINUED
<TABLE>
MEDICAL PRODUCTS & SUPPLIES--1.67%
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
Beckman Coulter,
Incorporated 1,700 $ 86,488
Johnson & Johnson 5,000 465,625
-----------
552,113
MEDICAL SERVICES--0.36%
Aetna, Incorporated 2,100 117,206
MANUFACTURING-DIVERSIFIED--0.67%
Tyco International LTD 5,700 221,587
NATURAL GAS--1.07%
Enron Corporation 8,000 355,000
OIL INTERNATIONAL--3.51%
BP Amoco p.l.c. ADR 5,292 313,882
Chevron Corporation 4,400 381,150
Royal Dutch Petroleum
Company ADR 7,700 465,369
-----------
1,160,401
RETAIL GENERAL--0.63%
Federated Department Stores,
Incorporated* 3,000 151,688
J. C. Penney Company,
Incorporated 2,800 55,825
-----------
207,513
RETAIL SPECIALTY--0.27%
Loew's Companies,
Incorporated 1,500 89,625
SEMICONDUCTORS--1.40%
Intel Corporation 5,600 460,950
SPECIALTY PRINTING/SERVICES--0.51%
Banta Corporation 5,500 124,094
Toys 'R' Us, Incorporated* 3,000 42,937
-----------
167,031
STEEL--0.73%
Allegheny Technologies,
Incorporated 2,000 44,875
LTV Corporation 16,000 66,000
USX-U. S. Steel Group 4,000 132,000
-----------
242,875
TELECOM - CELLULAR--0.85%
GTE Corporation 4,000 282,250
TELECOM - LONG DISTANCE--1.80%
A T & T Corporation 4,800 243,600
MCI WorldCom Incorporated* 6,600 350,213
-----------
593,813
TELEPHONE--2.26%
Alltel Corporation 4,400 363,825
US West, Incorporated New 5,342 384,624
-----------
748,449
</TABLE>
<TABLE>
TRUCKING & SHIPPING--0.39%
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
USFreightways Corporation 2,700 $ 129,262
-----------
TOTAL COMMON STOCK--56.62%
(Cost $10,614,193) 18,713,425
-----------
<CAPTION>
FACE
BONDS AND NOTES AMOUNT
<S> <C> <C>
AUTO & TRUCK MANUFACTURERS--1.49%
DaimlerChrysler North
America, 7.20%, 09/01/09 $ 500,000 490,903
BANKS--1.35%
Morgan (J.P.) & Company,
Incorporated, 6.00%,
01/15/09 500,000 447,087
GOVERNMENT AGENCIES--10.37%
Federal Home Loan Mortgage
Corporation, 7.00%,
09/15/07 1,000,000 991,970
Federal Home Loan Mortgage
Corporation, Pool #302886,
8.00%, 05/01/17 16,023 16,179
Federal Home Loan Mortgage
Corporation, Pool #298759,
8.00%, 08/01/17 98,493 99,454
Federal Home Loan Mortgage
Corporation, Pool #284839,
8.50%, 01/01/17 29,627 30,371
Federal National Mortgage
Association, 7.55%,
04/22/02 685,000 698,425
Federal National Mortgage
Association, 7.70%,
04/10/07 1,500,000 1,473,305
Federal National Mortgage
Association, Pool #041669,
8.00%, 02/01/17 17,334 17,543
Federal National Mortgage
Association, Pool #48974,
8.00%, 06/01/17 99,766 101,010
-----------
3,428,257
REAL ESTATE/REITS--1.42%
Weingarten Realty Investors,
7.35%, 07/20/09 500,000 469,293
U S TREASURY SECURITIES--9.48%
U S Treasury Bond, 6.000%,
02/15/26 2,350,000 2,149,517
U S Treasury Note, 5.875%,
02/15/04 1,000,000 983,438
-----------
3,132,955
-----------
TOTAL BONDS AND NOTES--24.11%
(Cost $7,896,541) 7,968,495
-----------
</TABLE>
41
<PAGE>
SCHEDULE OF INVESTMENTS December 31, 1999
--------------------------------------------------------------------------------
SM&R BALANCED FUND, CONTINUED
<TABLE>
AEROSPACE/DEFENSE--2.96%
<CAPTION>
FACE
COMMERCIAL PAPER AMOUNT VALUE
<S> <C> <C>
Litton Industries
Incorporated, 5.50%,
01/06/00 $ 980,000 $ 979,251
BEVERAGES--2.25%
Whitman Corporation, 6.60%,
01/03/00 745,000 744,726
CHEMICALS--2.55%
Nalco Chemical Company,
6.70%, 01/04/00 842,000 841,530
FINANCIAL SERVICES--7.96%
Countrywide Home Loans
Incorporated, 5.25%,
01/07/00 1,508,000 1,506,680
Penn Power & Light Energy
Trust, 6.80%, 01/18/00 1,128,000 1,124,366
-----------
2,631,046
FOOD PRODUCERS--2.49%
ConAgra, Incorporated,
6.62%, 01/05/00 822,000 821,393
-----------
TOTAL COMMERCIAL PAPER--18.21%
(Cost $6,017,946) 6,017,946
-----------
TOTAL INVESTMENTS--98.94%
(Cost $24,528,680) 32,699,866
CASH AND OTHER ASSETS, LESS
LIABILITIES--1.06% 349,733
-----------
NET ASSETS--100.00% $33,049,599
===========
ABBREVIATIONS
ADR--American Depository Receipt
REIT--Real Estate Investment Trust
*--Non-income producing securities
</TABLE>
See notes to financial statements.
42
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES December 31, 1999
--------------------------------------------------------------------------------
SM&R BALANCED FUND
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value $32,699,866
Cash 953
Prepaid Expenses 25,699
Receivable for:
Capital stock sold 162,773
Investment securities sold 1,643
Dividends 13,981
Interest 156,291
Expense reimbursement 2,940
Other assets 19,092
---------------
TOTAL ASSETS 33,083,238
---------------
LIABILITIES
Capital stock reacquired 2,500
Accrued:
Investment advisory fee 20,455
Service fee 6,818
Distribution fee 2,866
Other liabilities 1,000
---------------
TOTAL LIABILITIES 33,639
---------------
NET ASSETS (applicable to shares outstanding) $33,049,599
===============
NET ASSETS:
Class A $ 1,776,531
-----------------------------------------------------------------------------
Class B $ 1,118,515
-----------------------------------------------------------------------------
Class C $ 8,488
-----------------------------------------------------------------------------
Class T $30,146,065
-----------------------------------------------------------------------------
TOTAL NET ASSETS $33,049,599
===============
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 200,000,000
Outstanding 87,511
-----------------------------------------------------------------------------
Class B:
Authorized 200,000,000
Outstanding 54,193
-----------------------------------------------------------------------------
Class C:
Authorized 200,000,000
Outstanding 419
-----------------------------------------------------------------------------
Class T:
Authorized 50,000,000.000
Outstanding 1,458,601
-----------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share $ 20.30
Offering price per share: (Net Assets value of $20.30 /
95.00%) $ 21.37
-----------------------------------------------------------------------------
Class B:
Net asset value and offering price per share $ 20.64
-----------------------------------------------------------------------------
Class C:
Net asset value and redemption price per share $ 20.25
Offering price per share: (Net Assets value of $20.25 /
99.00%) $ 20.45
-----------------------------------------------------------------------------
Class T:
Net asset value and redemption price per share $ 20.67
Offering price per share: (Net Assets value of $20.67 /
94.25%) $ 21.93
-----------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
43
<PAGE>
STATEMENT OF OPERATIONS Year Ended December 31, 1999
--------------------------------------------------------------------------------
SM&R BALANCED FUND
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 249,571
Interest 764,019
----------
TOTAL INVESTMENT INCOME 1,013,590
EXPENSES
Investment advisory fees 222,265
Service fees 74,100
Professional fees 12,100
Custodian and transactions fees 27,171
Directors' fees 22,661
Qualification fees 34,729
Shareholder reporting expenses 15,990
Insurance expenses 7,669
Distribution fees 6,054
----------
TOTAL EXPENSES 422,739
LESS EXPENSES REIMBURSED (45,768)
----------
NET EXPENSES 376,971
----------
INVESTMENT INCOME--NET 636,619
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 1,497,455
Change in unrealized appreciation of investments for the
year 1,358,236
----------
NET GAIN ON INVESTMENTS 2,855,691
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,492,310
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998
-------------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income--net $ 636,619 $ 682,321
Net realized gain on investments 1,497,455 482,000
Change in unrealized appreciation 1,358,236 2,417,733
----------- -----------
Net increase in net assets resulting from operations 3,492,310 3,582,054
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income--net
Class A (33,803) --
Class B (17,701) --
Class C (82) --
Class T (597,705) (663,775)
Capital gains
Class A (65,054) --
Class B (39,133) --
Class C (200) --
Class T (1,121,320) (908,074)
----------- -----------
Total distributions to shareholders (1,874,998) (1,571,849)
CAPITAL SHARE TRANSACTIONS--NET
Class A 1,735,203 --
Class B 1,087,152 --
Class C 8,444 --
Class T (765,616) 1,518,827
----------- -----------
Total net capital share transactions 2,065,183 1,518,827
----------- -----------
TOTAL INCREASE 3,682,495 3,529,032
NET ASSETS
Beginning of year 29,367,104 25,838,072
----------- -----------
End of year $33,049,599 $29,367,104
=========== ===========
</TABLE>
See notes to financial statements.
44
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout the period.
SM&R BALANCED FUND
<TABLE>
<CAPTION>
CLASS T SHARES
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 19.63 $ 18.32 $ 17.90 $ 16.85 $ 14.32
Investment income--net 0.42 0.48 0.57 0.49 0.49
Net realized and unrealized gain (loss) on
investments 1.84 1.96 2.50 1.48 2.67
------- ------- ------- ------- -------
Total from Investment Operations 2.26 2.44 3.07 1.97 3.16
Less distributions from
Investment income--net (0.42) (0.47) (0.59) (0.49) (0.49)
Capital gains (0.80) (0.66) (2.06) (0.43) (0.14)
------- ------- ------- ------- -------
Total Distributions (1.22) (1.13) (2.65) (0.92) (0.63)
------- ------- ------- ------- -------
Net Asset Value, End of Year $ 20.67 $ 19.63 $ 18.32 $ 17.90 $ 16.85
======= ======= ======= ======= =======
Total Return * 11.87 % 13.83 % 17.46 % 11.86 % 22.29 %
======= ======= ======= ======= =======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $30,146 $29,367 $25,838 $23,188 $21,757
Ratio of expenses with reimbursement to average
net assets 1.25 % 1.25 % 1.26 % 1.21 % 1.26 %
Ratio of expenses without reimbursement to
average net assets 1.41 % 1.37 % 1.36 % 1.34 % 1.46 %
Ratio of net investment income to average net
assets 2.15 % 2.55 % 3.02 % 2.83 % 2.99 %
Portfolio turnover rate 18.01 % 16.01 % 27.52 % 23.78 % 16.39 %
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
---------------- ---------------- ----------------
PERIOD FROM PERIOD FROM PERIOD FROM
JANUARY 1, 1999 JANUARY 1, 1999 JANUARY 1, 1999
TO TO TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------- ---------------- ----------------
1999 1999 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $19.63 $19.63 $19.63
Investment income--net 0.47 0.40 0.41
Net realized and unrealized gain (loss) on investments 1.47 1.81 1.42
------ ------ ------
Total from Investment Operations 1.94 2.21 1.83
Less distributions from
Investment income--net (0.47) (0.40) (0.41)
Capital gains (0.80) (0.80) (0.80)
------ ------ ------
Total Distributions (1.27) (1.20) (1.21)
------ ------ ------
Net Asset Value, End of Year $20.30 $20.64 $20.25
====== ====== ======
Total Return * 10.13 % 11.52 % 9.58 %
====== ====== ======
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $1,777 $1,119 $ 8
Ratio of expenses to average net assets 1.51 % 2.01 % 2.26 %
Ratio of net investment income to average net assets 1.87 % 1.36 % 1.13 %
Portfolio turnover rate 18.01 % 18.01 % 18.01 %
</TABLE>
* Does not include the effect of sales charge.
See notes to financial statements.
45
<PAGE>
NOTES TO FINANCIAL STATEMENTS December 31, 1999
--------------------------------------------------------------------------------
SM&R EQUITY FUNDS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The SM&R Equity Funds (the "Funds") are diversified open-end management
investment companies registered under the Investment Company Act of 1940, as
amended. The Funds are comprised of the SM&R Growth Fund, Inc., SM&R Equity
Income Fund, Inc. and SM&R Balanced Fund, Inc. Operations commenced January 31,
1969 for the SM&R Growth Fund, May 1, 1970 for the SM&R Equity Income Fund and
November 20, 1987 for the SM&R Balanced Fund for performance and tracking
information.
The Funds have adopted a Multiple Class Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended. 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 5.00% 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 shares have not commenced operations.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of 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 listed on national exchanges are valued at the last
sales price of the day, or if there were no sales, then at the last bid price.
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 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 fund 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.
CAPITAL STOCK TRANSACTIONS AND DISTRIBUTIONS TO SHAREHOLDERS:
Fund shares are sold in a continuous public offering at net asset value plus a
sales charge. The Funds repurchase shares at net asset value. Dividends and
other distributions are recorded by the Funds on the ex-dividend date and may be
reinvested at net asset value.
46
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R EQUITY FUNDS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
EXPENSES:
Distribution, qualification fees or other fees directly attributable to the
funds' class of shares are charged to that funds class operations. All other
operating expenses not directly attributable to a Funds' operations are prorated
among the Funds based on the relative amount of each Funds' net assets or
shareholders, and then allocated among the classes of that fund.
NOTE 2--OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICE FEES:
Securities Management and Research, Inc. ("SM&R") is the investment advisor and
principal underwriter for the Funds. Investment advisory and service fees paid
to SM&R are computed as a percentage of the average daily net assets as follows:
<TABLE>
<CAPTION>
INVESTMENT SERVICE
NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
Not exceeding $100,000,000 0.750% 0.250%
Exceeding $100,000,000 but not exceeding $200,000,000 0.625% 0.200%
Exceeding $200,000,000 but not exceeding $300,000,000 0.500% 0.150%
Exceeding $300,000,000 0.400% 0.100%
</TABLE>
The investment advisory agreement for the Growth Fund provides for incentive
fees that will increase or decrease the basic investment advisory fee, based on
the performance of the fund in relation to a specified industry index for the
funds with similar objectives over a rolling 36-month period. For the year ended
December 31, 1999, the investment advisory fee was decreased by approximately
$417,135.
SM&R has agreed to reimburse the Funds for regular operating expenses, other
than taxes, interest, and expenses directly related to the purchase and sale of
investment securities, in excess of 1.25% per annum of the average daily net
assets. Regular operating expenses include the advisory fee and administrative
service fee, but does not include the distribution and shareholder servicing
fee.
DISTRIBUTION AND SHAREHOLDER SERVICING FEES:
The Funds have adopted a 12b-1 Plan, with respect to the Funds' Class A shares,
Class B shares and Class C shares (the "Class A Plan, the "Class B Plan" and the
"Class C Plan", respectively and collectively, the "Plans"). The Plans permit
each class a distribution fee to compensate SM&R, or enable SM&R to compensate
other persons, including Distributors, for distribution costs such as service
fees paid to dealers, printing and distribution of prospectuses to prospective
investors, sales literature and other sales and distribution related activities.
The Funds pay compensation for Class A shares at 0.25% per annum of the average
daily net assets, for Class B shares at 0.50% per annum of the average daily net
assets and for Class C shares at 0.75% per annum of the average daily net
assets.
The Class B and Class C Plans also permit a shareholder servicing fee of 0.25%
per annum of the average daily net assets to compensate SM&R, or enable SM&R to
compensate Service Providers, for providing ongoing servicing to shareholders of
the Funds. For the year ended December 31, 1999, the Growth Fund, Equity Income
Fund and Balanced Fund paid $5,072, $13,823 and $3,188, respectively as
compensation under the Plans.
47
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R EQUITY FUNDS
NOTE 2--OTHER TRANSACTIONS WITH AFFILIATES--CONTINUED
SALES CHARGES:
During the year ended December 31, 1999, SM&R, as principal underwriter,
received as sales charges on sale of shares of capital stock of the Funds and
made reallowances to dealers as follows:
<TABLE>
<CAPTION>
SALES SALES
CHARGES CHARGES
RECEIVED BY SM&R REALLOWED TO DEALERS
<S> <C> <C>
Growth $287,994 $5,106
Equity Income $451,011 $6,203
Balanced $ 72,599 $ 382
</TABLE>
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of December 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>
Growth 282,179 0.81% 1,320,628 3.79%
Equity Income 19,129 0.24% -- --
Balanced 128,985 8.06% 226,482 14.15%
</TABLE>
NOTE 3--COST, PURCHASES AND SALES OF INVESTMENTS
Investments have the same cost for tax and financial statement purposes.
Aggregate purchases and sales of investments in securities, other than
commercial paper and short-term bonds and notes, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
<S> <C> <C>
Growth $32,394,449 $59,754,114
Equity Income $18,691,604 $59,717,314
Balanced $ 4,824,462 $ 8,033,701
</TABLE>
Gross unrealized appreciation and depreciation as of December 31, 1999, were as
follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION
<S> <C> <C>
Growth $111,453,311 $10,348,935
Equity Income $ 51,528,644 $11,961,262
Balanced $ 9,343,394 $ 1,172,208
</TABLE>
48
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R EQUITY FUNDS
NOTE 4--CAPITAL STOCK
SM&R GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Sale of capital shares:
Class T 2,035,769 $ 12,211,276 3,216,790 $ 17,622,633
Class A 588,609 3,552,451 -- --
Class B 231,719 1,382,526 -- --
Class C 26,871 160,112 -- --
Investment income dividends reinvested:
Class T 135,539 838,061 218,060 1,223,816
Class A 737 4,653 -- --
Class B -- -- -- --
Class C -- -- -- --
Distributions from net realized gains reinvested:
Class T 1,351,172 8,566,392 2,698,983 13,324,090
Class A 21,368 134,830 -- --
Class B 9,225 57,657 -- --
Class C 762 4,941 -- --
Redemptions of capital shares outstanding:
Class T (5,230,280) (31,395,182) (4,442,745) (24,133,352)
Class A (49,491) (303,471) -- --
Class B (8,708) (52,017) -- --
Class C (8,285) (49,963) -- --
---------- ------------ ---------- ------------
Net increase (decrease) in capital shares outstanding (894,993) $ (4,887,734) 1,691,088 $ 8,037,187
============ ============
Shares outstanding at beginning of year 35,722,663 34,031,575
---------- ----------
Shares outstanding at end of year 34,827,670 35,722,663
========== ==========
Net assets as of December 31, 1999, are comprised of the following:
Capital (par value and additional paid-in) $132,803,933
Undistributed net investment income 35,562
Accumulated net realized gain on investments 1,716,432
Net unrealized appreciation of investments 101,104,376
------------
Net Assets $235,660,303
============
</TABLE>
49
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R EQUITY FUNDS
NOTE 4--CAPITAL STOCK--CONTINUED
SM&R EQUITY INCOME FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Sales of capital shares:
Class T 397,021 $ 11,261,285 1,059,139 $ 29,994,912
Class A 191,346 5,356,418 -- --
Class B 171,923 4,819,232 -- --
Class C 10,458 300,119 -- --
Investment income dividends reinvested:
Class T 138,309 3,781,416 161,711 4,549,911
Class A 3,176 78,839 -- --
Class B 2,803 68,163 -- --
Class C 147 3,669 -- --
Distributions from net realized gains reinvested:
Class T 486,492 11,987,183 -- --
Class A 11,388 275,259 -- --
Class B 12,064 286,638 -- --
Class C 737 17,868 404,882 10,559,672
Redemptions of capital shares outstanding:
Class T (1,406,392) (39,481,866) (1,172,234) (32,920,958)
Class A (12,196) (346,072) -- --
Class B (8,688) (234,990) -- --
Class C (277) (7,665) -- --
---------- ------------ ---------- ------------
Net increase (decrease) in capital shares outstanding (1,689) $ (1,834,504) 453,498 $ 12,183,537
============ ============
Shares outstanding at beginning of year 7,813,950 7,360,452
---------- ----------
Shares outstanding at end of year 7,812,261 7,813,950
========== ==========
Net assets as of December 31, 1999, are comprised of the following:
Capital (par value and additional paid-in) $156,308,955
Undistributed net investment income 79,361
Accumulated net realized gain on investments 1,453,038
Net unrealized appreciation of investments 39,567,382
------------
Net Assets $197,408,736
============
</TABLE>
50
<PAGE>
NOTES TO FINANCIAL STATEMENTS CONTINUED
--------------------------------------------------------------------------------
SM&R EQUITY FUNDS
NOTE 4--CAPITAL STOCK--CONTINUED
SM&R BALANCED FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Sales of capital shares:
Class T 82,302 $ 1,632,418 204,284 $ 3,794,519
Class A 85,863 1,702,510 -- --
Class B 51,561 1,034,545 -- --
Class C 406 8,177 -- --
Investment income dividends reinvested:
Class T 29,462 581,088 33,827 644,627
Class A 1,721 33,823 -- --
Class B 886 17,701 -- --
Class C 4 82 -- --
Distributions from net realized gains reinvested:
Class T 55,122 1,104,641 50,226 901,681
Class A 3,303 65,034
Class B 1,954 39,133
Class C 10 200
Redemptions of capital shares outstanding:
Class T (204,696) (4,083,763) (202,186) (3,822,000)
Class A (3,376) (66,164) -- --
Class B (208) (4,227) -- --
Class C (1) (15) -- --
--------- ----------- --------- -----------
Net increase in capital shares outstanding 104,313 $ 2,065,183 86,151 $ 1,518,827
=========== ===========
Shares outstanding at beginning of year 1,496,411 1,410,260
--------- ---------
Shares outstanding at end of year 1,600,724 1,496,411
========= =========
Net assets as of December 31, 1999, are comprised of the
following:
Capital (par value and additional paid in capital) $24,595,266
Accumulated net realized gain on investments 283,147
Net unrealized appreciation of investments 8,171,186
-----------
Net Assets $33,049,599
===========
</TABLE>
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
SM&R Equity Funds
We have audited the accompanying statements of assets and liabilities of SM&R
Equity Funds (comprised of SM&R Growth Fund, Inc., SM&R Equity Income Fund, Inc.
and SM&R Balanced Fund, Inc.), including the schedule of investments as of
December 31, 1999, the related statements of operations for the year then ended,
the statements of changes in net assets for each of the two years then ended,
and the financial highlights for each of the three years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the the two years in the period
ended December 31, 1996 were audited by other auditors whose report dated
February 7, 1997 issued an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required 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
December 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
Equity Funds as of December 31, 1999, the results of their operations for the
year then ended, the changes in their net assets for each of the two years then
ended, and the financial highlights for each of the three years in the period
then ended, in conformity with generally accepted accounting principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
January 28, 2000
52
<PAGE>
DISTRIBUTIONS
--------------------------------------------------------------------------------
Distributions per share for the year ended December 31, 1999.
<TABLE>
<CAPTION>
RECORD INVESTMENT LONG-TERM SHORT-TERM
DATE INCOME CAPITAL GAIN CAPITAL GAIN
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
SM&R Growth Fund, Inc. Class T 6/23/99 $0.01300
12/14/99 $0.01280 $0.2666
SM&R Growth Fund, Inc. Class A 6/23/99 N/A
12/14/99 $0.00920 $0.2666
SM&R Growth Fund, Inc. Class B 6/23/99 N/A
12/14/99 N/A $0.2666
SM&R Growth Fund, Inc. Class C 6/23/99 N/A
12/14/99 N/A $0.2666
SM&R Equity Income Fund, Inc.
Class T 3/17/99 $0.11200
6/23/99 $0.01500
9/22/99 $0.14500
12/14/99 $0.12900 $1.7568
SM&R Equity Income Fund, Inc.
Class A 3/17/99 $0.02400
6/23/99 $0.07000
9/22/99 $0.08600
12/14/99 $0.04000 $1.7568
SM&R Equity Income Fund, Inc.
Class B 3/17/99 $0.01200
6/23/99 $0.04500
9/22/99 $0.06100
12/14/99 $0.03520 $1.7568
SM&R Equity Income Fund, Inc.
Class C 3/17/99 $0.00500
6/23/99 $0.04100
9/22/99 $0.04600
12/14/99 $0.29000 $1.7568
SM&R Balanced Fund, Inc. Class T 3/17/99 $0.10600
6/23/99 $0.11200
9/22/99 $0.10600
12/14/99 $0.09800 $0.5027 $0.3020
SM&R Balanced Fund, Inc. Class A 3/17/99 $0.02200
6/23/99 $0.04500
9/22/99 $0.07500
12/14/99 $0.32300 $0.5027 $0.3020
SM&R Balanced Fund, Inc. Class B 3/17/99 $0.01100
6/23/99 $0.03700
9/22/99 $0.06100
12/14/99 $0.29400 $0.5027 $0.3020
SM&R Balanced Fund, Inc. Class C 3/17/99 $0.04800
6/23/99 $0.05500
9/22/99 $0.04500
12/14/99 $0.26200 $0.5027 $0.3020
</TABLE>
53
<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.
1.c Registrant's Articles of Amendment and Restatement dated
December 11, 2000 are incorporated herein by reference to Exhibit
(a)1.c. to Post-Effective Amendment No. 19 to this form N-1A
Registration Statement.
(a) 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 incorporation herein by reference to Exhibit
(a).2.b. to Post-Effective Amendment No. 17 to this form N-1A
Registration Statement.
2.c. Registrant's Supplementary Articles of Incorporation dated
December 1, 2000 are incorporated herein by reference to
Exhibit (a).2.c. to Post-Effective Amendment No. 19 to this
form N-1A Registration Statement.
(a) 3.a. Articles of Transfer for the SM&R Growth Fund, Inc. for transfer
to SM&R Investments, Inc., the Registrant, dated December 1, 2000
and incorporated herein by reference to Exhibit(a)3.a. to Post
Effective Amendment No. 19 to this form N-1A Registration
Statement.
3.b. Articles of Transfer for the SM&R Equity Income Fund, Inc. for
transfer to SM&R Investments, Inc,. the Registrant, dated
December 1, 2000 and incorporated herein by reference to
Exhibit(a)3.b. to Post-Effective Amendment No. 19 to this form N-1A
Registration Statement.
3.c. Articles of Transfer for the SM&R Balanced Fund, Inc. for
transfer to SM&R Investments, Inc., the Registrant, dated
December 1, 2000 and incorporated herein by reference to Exhibit
(a)3.c. to Post-Effective Amendment No. 19 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 incorporation herein by reference to
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 incorporation herein by reference to
Exhibit (d)4. to Post-Effective Amendment No. 17 to this form N-1A
Registration Statement.
5. Registrant's Investment Advisory Agreement on behalf of SM&R Growth
Fund, SM&R Equity Income Fund and SM&R Balanced Fund (collectively
referred to as the SM&R Equity Funds) is incorporated herein by
reference to Exhibit (d).5. to Post-Effective Amendment No. 19 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 incorporation herein by reference to Exhibit
(e)2. to Post-Effective Amendment No. 17 to this form N-1A
Registration Statement.
3. Registrant's Underwriting Agreement on behalf of SM&R Growth Fund,
SM&R Equity Income Fund and SM&R Balanced Fund (collectively
referred to as the Series or SM&R Equity Funds) is incorporated
herein by reference to Exhibit (e).3. to Post-Effective Amendment
No. 19 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 incorporated herein by
reference to Exhibit (g)1.b. to Post-Effective Amendment No. 17 to
this form N-1A Registration Statement.
1.c. Registrant's Custodian Agreement on behalf of SM&R Growth Fund, SM&R
Equity Income Fund and SM&R Balanced Fund (collectively referred to
as the Series or SM&R Equity Funds) is incorporated herein by
reference to Exhibit (g)1.c. to Post-Effective Amendment No. 19 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.,
are filed herewith as Exhibit (i) to Post-Effective Amendment No. 19 to
this form N-1A Registration Statement.
C-1
<PAGE>
(j) 1. Consent of Tait, Weller and Baker, independent accountant of
Registrant are filed herewith as Exhibit (j) to Post-Effective
Amendment No. 19 to this form N-1A Registration Statement.
2. Power of Attorney is incorporated herein by reference to
Exhibit (j).2. to Post-Effective Amendment No. 19 to this
form N-1A Registration Statement.
(k) 1. Financial Data Schedules for Registrant incorporated by reference
as filed with form N-SAR-B on 10/25/00.
2. Financial Data Schedules for SM&R Growth Fund, Inc. incorporated
by reference as filed with form N-SAR-A on 8/28/00 and N-SAR-B on
2/22/00.
3. Financial Data Schedules for SM&R Equity Income Fund, Inc.
incorporated by reference as filed with form N-SAR-A on 8/28/00 and
N-SAR-B on 2/22/00.
4. Financial Data Schedules for SM&R Balanced Fund, Inc.
incorporated by reference as filed with form N-SAR-A on 8/28/00 and
N-SAR-B on 2/22/00.
(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 incorporated herein by reference to Exhibit (m)2.
to Post-Effective Amendment No. 17 to this form N-1A Registration
Statement.
3. Registrant's Distribution and Shareholder Servicing Plan on behalf
of SM&R Growth Fund, SM&R Equity Income Fund and SM&R Balanced Fund
(collectively referred to as the Series or SM&R Equity Funds) is
incorporated herein by reference to Exhibit (m).3. to Post-Effective
Amendment No. 19 to this form N-1A Registration Statement.
4. Registrant's Distribution Plan on behalf of the SM&R Money Market
Fund (the "Money Market Series") is incorporated herein by reference
to Exhibit (m).4. to Post-Effective Amendment No. 19 to this
form N-1A Registration Statement.
(n) 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 incorporated herein by reference to Exhibit (o)2.
to Post-Effective Amendment No. 17 to this form N-1A Registration
Statement.
3. Registrant's Multiple Class Plan on behalf of SM&R Growth Fund, SM&R
Equity Income Fund, SM&R Balanced Fund (individually and
collectively, the "Series") is incorporated herein by reference to
Exhibit (n)3. to Post-Effective Amendment No. 19 to this form N-1A
Registration Statement.
4. Registrant's Multiple Class Plan on behalf of the SM&R Money Market
Fund (the "Money Market Series") is incorporated herein by reference
to Exhibit (n)4. to Post-Effective Amendment No. 19 to this
form N-1A Registration Statement.
(o) Not Applicable.
(p) 1. Registrant's Code of Ethics is incorporated herein by reference to
Exhibit (p)1. to Post-Effective Amendment No. 19 to this form N-1A
Registration Statement.
2. Registrant's Sub-Adviser's Code of Ethics (referred to as Alger Code
of Ethics) is incorporated herein by reference to Exhibit (p)2. to
Post-Effective Amendment No. 19 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 for Item 24.
ITEM 25. INDEMNIFICATION.
The Registrant has agreed to indemnify its directors to the maximum
extent permitted by applicable law against all costs and expenses (including,
but not limited to, counsel fees, amounts of judgments paid, and amounts paid in
settlement) reasonably incurred in connection with the defense of any actual or
threatened claim, action, suit or proceeding, whether civil, criminal,
administrative, or other, in which he or she may be involved by virtue of such
person being or having been such director. Such indemnification is pursuant to
Section 3.15 of the Registrant's By-Laws, a copy of which is attached as Exhibit
2 to Post-Effective Amendment No. 7 to this Form N-1A Registration Statement.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or
C-2
<PAGE>
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Securities Management and Research, Inc. ("SM&R") serves as investment
adviser to Registrant and SM&R Balanced Fund, Inc., SM&R Growth Fund, Inc., SM&R
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;
C-3
<PAGE>
all located at One Moody Plaza, Galveston, Texas; Vice President, American
National Property and Casualty; Vice President, American National General
Insurance Company; Vice President, Pacific Property and Casualty, Inc., all
located at 1949 East Sunshine, Springfield, Missouri. Vice President of
Standard Life and Accident Insurance Company, 201 Robert S. Kerr Avenue,
Oklahoma City, Oklahoma; Vice President of Garden State Life Insurance
Company, 2450 South Shore Blvd., League City, Texas.
G. RICHARD FERDINANDTSEN
DIRECTOR AND MEMBER OF EXECUTIVE COMMITTEE OF SM&R
--------------------------------------------------
Director, Senior Executive Vice President and Chief Operating Officer,
American National; Director, Chairman of the Board, President and Chief
Executive Officer, American National Life Insurance Company of Texas, all
located at One Moody Plaza, Galveston, Texas; Director, Comprehensive
Investment Services, 2450 South Shore Boulevard, Suite 400, League City,
Texas; Director, Vice Chairman of the Board, American National General
Insurance Company; Director, Vice Chairman of the Board, American National
Property and Casualty; Director and Vice Chairman of the Board, Pacific
Property & Casualty Company; Underwriter, American National Lloyds Insurance
Company, all located at 1949 East Sunshine, Springfield, Missouri. Director
and Chairman of the Board, Standard Life and Accident Insurance Company, 201
Robert S. Kerr Avenue, Oklahoma City, Oklahoma; Director, Garden State Life
Insurance Company, 2450 South Shore Boulevard, League City, Texas.
RONALD J. WELCH
DIRECTOR OF SM&R
----------------
Executive Vice President and Chief Actuary of American National; Senior
Vice President of American National Life Insurance Company of Texas, all located
at One Moody Plaza, Galveston, Texas; Director and Chairman of the Board of
Garden State Life Insurance Company, 2450 South Shore Boulevard, League City,
Texas; Director of Standard Life and Accident Insurance Company, 201 Robert S.
Kerr Avenue, Oklahoma City, Oklahoma; Director of American National Property and
Casualty Company; Director of American National General Insurance Company;
Director of American National Insurance Service Company; Director of Pacific
Property and Casualty Company, all located at 1949 East Sunshine Street,
Springfield, Missouri.
GORDON DIXON
DIRECTOR, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER AND
MEMBER OF INVESTMENT AND EXECUTIVE COMMITTEES OF SM&R
-------------------------------------------------------------
Vice President 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.
C-5
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) SM&R serves as the principal underwriter and investment adviser for
the Registrant, the other SM&R Equity Funds, and Investment Accounts. See "The
Funds and Management" in Part A.
(b)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
--------------------------------------------------------------------------------
<S> <C> <C>
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>
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<PAGE>
<TABLE>
<S> <C> <C>
--------------------------------------------------------------------------------
Emerson V. Unger Vice President None
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 Bond 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.
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<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.
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<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. 19 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 21st day of December 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. 19 has been signed below by the following persons
in the capacities and on the dates indicated:
PRINCIPAL EXECUTIVE AND PRINCIPAL ACCOUNTING OFFICER:
FINANCIAL OFFICER:
/s/ Michael W. McCroskey /s/ Brenda T. Koelemay
----------------------------------- -----------------------------------
Michael W. McCroskey, President Brenda T. Koelemay, Treasurer
Date: December 21, 2000 Date: December 21, 2000
---------------------------- -----------------------------
DIRECTORS
/s/ Ernest S. Barratt, Ph.D. Date: December 21, 2000
----------------------------------- -----------------------------
Ernest S. Barratt, Ph.D.
/s/ Jack T. Currie Date: December 21, 2000
----------------------------------- -----------------------------
Jack T. Currie
/s/ Lea McLeod Matthews Date: December 21, 2000
----------------------------------- -----------------------------
Lea McLeod Matthews
/s/ Michael W. McCroskey Date: December 21, 2000
----------------------------------- -----------------------------
Michael W. McCroskey
/s/ Ann McLeod Moody Date: December 21, 2000
----------------------------------- -----------------------------
Ann McLeod Moody
/s/ Edwin K. Nolan Date: December 21, 2000
----------------------------------- -----------------------------
Edwin K. Nolan
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<PAGE>
/s/ Robert V. Shattuck, Jr. Date: December 21, 2000
----------------------------------- -----------------------------
Robert V. Shattuck, Jr.
/s/ Donald P. Stevens Date: December 21, 2000
----------------------------------- -----------------------------
Donald P. Stevens
/s/ Steven H. Stubbs Date: December 21, 2000
----------------------------------- -----------------------------
Steven H. Stubbs
/s/ Jamie G. Williams Date: December 21, 2000
----------------------------------- -----------------------------
Jamie G. Williams
/s/ Frank P. Williamson Date: December 21, 2000
----------------------------------- -----------------------------
Frank P. Williamson
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<PAGE>
EXHIBIT INDEX
99.B(a)1.c Registrant's Articles of Amendment and Restatement dated
December 11, 2000.
99.B(a)2.c Registrant's Articles Supplementary dated December 1, 2000.
99.B(a)3.a. Articles of Transfer for the SM&R Growth Fund, Inc. for transfer
to Registrant dated December 1, 2000.
99.B(a)3.b. Articles of Transfer for the SM&R Equity Income Fund, Inc. for
transfer to Registrant dated December 1, 2000.
99.B(a)3.c. Articles of Transfer for the SM&R Balanced Fund, Inc. for
Transfer to Registrant dated December 1, 2000.
99.B(d)5. Registrant's Investment Advisory Agreement for the SM&R Equity
Funds.
99.B(e)3. Registrant's Underwriting Agreement for the SM&R Equity Funds.
99.B(g)1.c. Registrant's Custodian Contract for the SM&R Equity Funds.
99.B(i) Consent and Opinion of Registrant's Counsel, Greer, Herz & Adams,
L.L.P.
99.B(j)1. Consent of Tait, Weller and Baker, independent Account of
Registrant.
2. Registrant's Power of Attorney dated November 16, 2000.
99.B(m)3. Registrant's Distribution and Shareholder Servicing Plan for the
SM&R Equity Funds.
4. Registrant's Distribution Plan for the SM&R Money Market Fund.
99.B(n)3. Registrant's Multiple Class Plan for the SM&R Equity Funds.
4. Registrant's Multiple Class Plan for the SM&R Money Market Fund.
99.B(p)1. Registrant's Code of Ethics.
2. Registrant's Sub-Adviser's Code of Ethics.
99.B24 Registrant's Control list
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